<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
AIR SOUTH AIRLINES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3889681
- - - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 St. Julian Place, 4th Floor, Columbia, South Carolina 29204
----------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (803) 822-0502
-----------------------------------------------------------------
Securities to be registered pursuant to Section 12(b) of the Act:
None
----------------
(Title of Class)
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.001 per share
---------------------------------------
(Title of class)
<PAGE> 2
ITEM 1. BUSINESS.
A glossary of certain terms used in this Form 10 appears following Item
14.
ORGANIZATION AND OPERATIONS- Air South was incorporated in Illinois in
1993 as Travel Management Industry Services, Inc. for the purposes of providing
consulting services regarding travel industry marketing. On January 26, 1994,
an amendment to the Articles of Incorporation was filed whichchanged the name
of the Company to Air South, Inc. and the stated purpose to operation of an
airline and related services. The Company commenced airline operations on
August 22, 1994. Prior to commencement of airline operations, the Company was
essentially a development stage enterprise with activities consisting of
organizational and pre-operating activities. The Company's management
primarily spent the pre-operating period and the initial phase of operations
recruiting key personnel, developing strategies, obtaining Federal Aviation
Administration and Department of Transportation certification and negotiating
aircraft leases, debt agreements and grant agreements. During the period
ended August 31, 1993, the Company produced no revenues and incurred
development stage losses of approximately $300,000. On December 29, 1995, the
Company: was reincorporated in Delaware; changed its name from Air South, Inc.
to Air South Airlines, Inc.; changed its common shares authorized from
10,000,000 to 18,000,000 and from no par value shares to $.001 par value shares;
and authorized 2,000,000 shares of preferred stock with a $.001 par value. The
Company also changed its year end for financial reporting purposes from August
31 to December 31.
Air South Airlines, Inc., a Delaware corporation (the "Company" or "Air
South") seeks to provide low-cost, low-fare scheduled airline service to
passengers in the Southeastern, Eastern seaboard and Midwestern regions of the
United States. The Company began flight operations within the Southeast on
August 22, 1994 with two and currently has seven Boeing 737-200 aircraft. All
aircraft used by the Company are leased. In the first quarter of 1996 the
Company began implementing a linear, point-to-point route strategy. The
Company will provide passengers with non-stop and other direct flights from
cities in the Southeast to the high-density, high-volume markets in the
Northeast, Midwest and Florida, presently New York, Chicago and Miami. Cities
currently served are Jacksonville and Miami, Florida; Atlanta and Savannah,
Georgia; Chicago, Illinois; New York, New York; Charleston, Columbia,
Greenville/Spartanburg and Myrtle Beach, South Carolina; and Norfolk, Virginia.
Although all cities served by the Company can be reached from any other city
served, the Company does not schedule flights between certain cities.
BUSINESS STRATEGY
The Company's business strategy is focused on providing low-cost,
low-fare, profitable jet air service from the Southeastern and Eastern seaboard
regions to high population areas of the Northeast, Midwest and Florida, and is
based on the following key elements.
The Company believes its route structure provides air travelers to and
from the Southeast with an attractive alternative to the inconvenient, time
consuming hub-and-spoke system of air travel offered by the national full-fare
airlines. According to the latest data available from the Department of
Transportation ("DOT"), the Southeast currently is the largest and fastest
growing air travel market in the United States. There are a large number of
cities in the Southeast and along the Eastern seaboard that have little or no
direct airline service to the high-density, high-volume markets of the
Northeast, the Midwest, and Florida. Historically, the Southeastern and
Eastern seaboard regions were served by airlines such as Piedmont Airlines and
National Airlines which successfully provided direct air service within these
markets. In 1979, National was acquired by Pan American and in 1987 Piedmont
was acquired by USAir. Subsequently, direct air service was terminated in
favor of adopting the hub-and-spoke strategies of these acquirors. When
People Express Airlines initiated service to these markets in the mid-1980's,
there was a significant increase in traffic as more air travelers took
advantage of its low fares and direct jet service. With the acquisition of
People Express by Continental Air Lines and the further expansion of
hub-and-spoke systems, convenient and frequent direct jet service to these
markets was once again significantly reduced and for many cities eliminated.
The Company believes the resulting market environment is one of
consumer frustration because many Southeastern air travelers are forced to
endure added time and inconvenient connections at the busy Atlanta, Georgia and
Charlotte, North Carolina hubs instead of being able to fly directly to their
destinations. The Company views the markets that form the spokes of the
hub-and-spoke route system designed by the national full-fare carriers as key
cities for its strategy. Based on historical passenger traffic data, past
successes of other direct and low-fare airlines, and the dissatisfaction of air
travelers in the region, the Company believes the opportunity exists to provide
profitable air service which bypasses the hub-and-spoke system of the national
full-fare carriers.
The Company's policy is to offer fares which are at or below those
of other low-fare airlines in the region. These low fares are intended to
attract both value-conscious businesses and leisure travelers from competing
airlines, to increase the efficiency of travel and to stimulate demand by those
who might otherwise have used ground transportation or not traveled at all.
For example, the Company's 14-day advance, and walk-up one-way fares on its
Columbia to New York route are $69 and $179, respectively.
2
<PAGE> 3
The Company believes it can achieve and sustain a low operating cost
structure through lower labor costs, a highly productive work force, quick
turnaround times, efficient facilities utilization, and high utilization of its
aircraft. Additionally, through growth and greater market concentration, the
Company expects to experience significant economies in costs. Moreover, the
Company believes that by operating a single aircraft type, reductions in costs
can be achieved through commonality of training, maintenance and inventory.
This low operating cost structure is expected to be one of the Company's
principal competitive advantages. For the immediate future, the Company intends
to utilize only Boeing 737-200 aircraft. The Company is determined to maintain
the highest level of safety, productivity, and utilization with a low unit
cost.
The Company believes its highly trained and motivated non-union work
force is one of its competitive advantages. The Company seeks to select and
train only the most enthusiastic, polite, pleasant and professional employees
in order to provide its passengers with friendly southern hospitality in the
air. Management believes its employees generally have enthusiastically
embraced the lean, flat, friendly, entrepreneurial culture at the Company. In
addition, approximately 50% of its employees are stockholders in the Company.
Management believes the Company's payroll costs are considerably less per
comparable employee than the national full-fare carriers. The Company's flat
organization structure allows rapid decision making at all levels.
SOUTHEAST MARKET
Air travel in the Southeast primarily flows through two major hubs:
Atlanta, Georgia and Charlotte, North Carolina. Airline service to spoke
cities in this region has deteriorated as airlines have either merged with
larger carriers or have gone out of business. In addition, many of the major
carriers have withdrawn, reduced or eliminated non-stop and direct service, or
offered high-priced propeller-only service through affiliated commuter
airlines. The resulting market environment is one of frustrated passengers
without alternatives to the time-consuming, inconvenient hub connections and
high fares of the national full-fare carriers.
The Southeast region experienced the fastest economic growth among
major regions in the United States in 1995, and published accounts of
economists have forecasted that economic growth in the region can be expected
to continue during their forecast periods. According to statistics provided by
the DOT, the Southeast currently is the largest and fastest growing air
travel market in the nation. The aggressive economic development activities
undertaken by many Southeastern states have resulted in a significant number of
foreign and domestic companies relocating to and establishing new plants and
businesses within the region. Management believes this economic growth will
produce increased demand for the Company's service.
FARE STRUCTURE
The Company's low-fare service is designed to meet the needs of, and
stimulate increased demand among, leisure travelers and value-conscious
business travelers.
The Company also offers a tiered fare structure with discounts for
14-day and 7-day advance purchase as well as a peak/off peak structure. All
advance purchase fares are non-refundable and have a change fee. The Company
does not require a Saturday night stay or any other timing restrictions on any
of its tickets. All of the Company's published fares are sold and paid for by
the customer within 24 hours of the time when the reservation is made.
3
<PAGE> 4
ROUTE SYSTEM AND SCHEDULING
The Company's schedule presently provides for in most cases two or
three and up to four round-trip flights per day in markets that the Company
serves. The Company's objective is to provide sufficient capacity in each
market to satisfy demand for the Company's low-fare service, while maintaining
above break-even load factors.
The relatively small size of the Company's aircraft fleet (see
"AIRCRAFT," below) and the Company's objective of maintaining high utilization
of its aircraft, present challenges in scheduling convenient service on its
routes. The Company schedules its flights to facilitate non-stop and direct
service between city pairs to take advantage of connecting and segment
traveling passengers. It may be necessary in some cases to schedule departures
in certain markets at times that may not be considered optimal from the
perspective of travelers. The Company's operating experience to date
indicates, however, that travelers are often willing to forego a more desirable
departure time in exchange for low fares and the convenience of the Company's
air service.
The Company operated with only six of its seven aircraft for
substantially all of the period from September 1995, until June 1996. One of
the seven aircraft has been unavailable since the beginning of September 1995
as each aircraft in the fleet rotated through a Federal Aviation
Administration ("FAA") mandatory heavy "C-Check" inspection and maintenance.
The result has been an infrastructure and a route structure designed for high
utilization of seven or more aircraft while the Company has been able to
operate only six. Beginning in August 1996, the Company began operating only
five of its seven aircraft to improve schedule reliability and on-time
performance. The Company expects to operate six and seven aircraft in
April and May 1997, respectively, and continues to explore the possibility of
acquiring one or more additional aircraft (see "AIRCRAFT," below).
Typically, airlines experience reduced demand for services at various
times during the fall and winter. During these periods, an airline may
experience variations in passenger demand based on its particular routes and
passenger demographics. Due to the Company's limited history and the
implementation of the Company's linear, point-to-point strategy, the Company is
unable to predict whether, or to what extent, seasonal variations in its
operations will differ from those of the airline industry generally. If the
Company's demand patterns are similar to those of the airline industry
generally, the Company would experience reduced demand during the fall and
winter with adverse effects on revenues, operating results, and cash flow.
RESERVATIONS AND OTHER SYSTEMS
The Company operates local and wide area networks supporting a
computerized reservations system, a financial accounting system, and an airline
dispatch and crew scheduling/tracking system. The reservations system ("Open
Res") is in use at several airlines around the world, and provides the ability
to communicate with and accept reservations from other major airlines'
computerized reservations systems ("CRS"). Approximately 50% of the Company's
reservations are booked by travel agents through these CRS's. The system also
allows the Company to provide "ticketless" travel for passengers booking their
reservations directly with Air South. Open Res is a relational database which
provides manangement with real time information on a wide range of financial
and traffic indices.
The Company has a reservations center in Columbia, South Carolina
where it accepts nationwide calls from travel agents and passengers over its
toll free number (1-800-AIR SOUTH).
SALES AND MARKETING
The primary objectives of the Company's marketing activities are to
create product awareness and brand recognition, and to develop first time
customers and customer loyalty. Marketing is targeted at the general traveling
public, both leisure and value-conscious business travelers, and the travel
industry intermediaries, including travel agents, corporate travel arrangers,
and meeting planners in the Southeastern region, where the Company is portrayed
as an aggressive, innovative provider of high quality air transportation
services. The Company has applied to the Department of Defense to become
an approved carrier for official government travel.
4
<PAGE> 5
The Company markets its services through CRSs, mass media,
advertising, public relations, direct sales, and regional and local promotions.
In addition, the Company believes it has benefitted from generally favorable
regional and local media coverage of its growth and operations.
Computer Reservations Systems. The Company participates in the
airline industry's CRSs. The Company's flight schedules and inventory of seats
and fares are displayed prominently in every CRS. Passengers and travel agents
have instant and complete access to the Company's flight schedules,
availability and fares, including any special promotions. The Company has
installed a ticketless reservation system which reduces the cost of revenue
accounting functions and the direct and indirect costs of handling tickets.
Management believes its participation in the CRSs, the travel industry and
travel agent norm for making reservations, gives it a competitive advantage
over low-fare or charter airlines which do not participate in such systems.
Travel Agents. The Company markets its services to travel agents, who
account for approximately 50% of its passenger bookings, through direct sales
and promotion, and through CRSs. In addition to providing easy access to the
selling of the Company's flights through the industry CRSs, the Company
maintains a special toll-free number for travel agent use. The Company pays
travel agents a commission of 10% of the fare booked.
Advertising. Management is aware of the critical importance to a
start-up airline of the need to advertise and promote its service and create
brand awareness. Unfortunately, because of capital limitations, all elements
of marketing -- sales, advertising and promotion -- frequently have been scaled
back to barely a whisper. The Company believes that recent infusions of
capital will permit it to promote more aggressively its new routes and
attractive fares. The Company's advertising typically emphasizes the Company's
low fares, destinations served on a non-stop or one-stop basis, simplified fare
structure, and product features that distinguish the Company as a smart
low-fare choice. The Company's advertising consists of radio, newspaper,
magazine, billboards, and television.
Promotions. The Company augments its advertising and public relations
effort with innovative promotions that are fun, high profile, and newsworthy.
Radio promotions throughout the system are conducted on an ongoing basis, and
the Company reaches out to the communities it serves by participating in local,
civic, special interest, educational, and other non-profit events to gain
identity and support.
Frequent Flyer Program. The Company offers its customers the
opportunity to participate in a segment-based Frequent Flyer Program which is
simple to administer. A free trip is awarded to travelers who fly eight round
trips or the equivalent on Air South. Frequent Flyers receive additional
inducement to use the Company's service, including pre-boarding and special
fare promotions.
AIRCRAFT
The Company's fleet currently consists of seven Boeing 737-200 jet
aircraft. The Company's Boeing 737-200 aircraft are all twin-engine, two-pilot
crew, jet aircraft equipped with Pratt & Whitney JT8D engines. The Boeing 737-
200 aircraft is widely used throughout the world on medium-haul flights similar
to those flown by the Company. All of the Company's aircraft provide 122
passenger seats configured for all-coach service. The Company believes that
the use of a single type of modern aircraft reduces the cost of personnel
training and maintenance services, and contributes to its low-cost operating
structure. The Company intends, for the immediate future to use only Boeing
737-200 aircraft. The Company leases all of its aircraft under operating
leases with remaining terms from approximately one and one-half to three years.
Five of the Company's aircraft are leased from various owners through their
agent, GE Capital Aviation Services, Inc. and two are leased from Mimi
Leasing Corp.
The Company's additional growth is dependent upon its ability to
purchase or lease additional aircraft and spare engines. See "ITEM 2 --
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS". Depending on market conditions, the Company intends to continue
seeking aircraft to meet its additional capacity needs. The demand for, and
lease prices of, used aircraft has increased over the past 18 months, and may
increase further in the future. The Company cannot predict how long suitable
aircraft will continue to be available, whether it can lease such aircraft on
satisfactory terms, or whether such aircraft can be delivered on a timely
basis. Furthermore, because the precise timing of the acquisition and delivery
of
5
<PAGE> 6
additional aircraft in the future is uncertain, the Company may take delivery
of additional planes but be unable to put them into service until it hires and
trains additional personnel, acquires gate facilities, and completes the other
matters necessary to begin operating new routes. The Company also believes
that, as it expands its fleet of aircraft, it will require additional aircraft
engines, which are becoming increasingly difficult to obtain on favorable
economic terms. The Company currently has no spare engines, and there can be
no assurance that the Company will be able to obtain a sufficient number of
aircraft engines in the future on satisfactory terms.
AIRPORT OPERATIONS
The Company provides its own passenger service personnel at all
airports served other than Chicago Midway where it contracts such services to
another airline. Ramp service operations, including marshaling aircraft into
the gate, baggage and cargo loading and unloading, aircraft cleaning, and
lavatory and water servicing, are handled by Company employees at Jacksonville,
Florida, Atlanta, Georgia, and Columbia and Myrtle Beach, South Carolina. At
other airports served, certain of these services are provided by fixed-base
operators under contract with the Company. Required de-icing services are
contracted to fixed-base operators or other air carriers at all locations
except Columbia, South Carolina, where de-icing is accomplished by Company
personnel. Such ground handling, de-icing and other contracts are terminable
by either party; however, other providers of such services are available at
each location.
Ticket counters, gates, and airport office facilities at each of the
airports the Company serves are leased from the airport authority or subleased
from other airlines. In all cases, airport use fee agreements for landing fees
and other airport use related charges exist with airports the Company
serves. The Company has signatory agreements with the airport authorities
located in Columbia and Charleston, South Carolina. Signatory agreements offer
the Company various financial advantages in exchange for a long-term commitment
to maintain airport leaseholds. These leaseholds may be sublet to another
airline with the consent of the airport if the Company should reduce or
eliminate service at those locations in the future; however, there is no
assurance that a suitable subtenant can be found.
MAINTENANCE AND REPAIR
The Company's fleet consists of seven Boeing 737-200 jet aircraft
manufactured between 1968 and 1979. In general, the cost to maintain older
aircraft exceeds the cost to maintain newer aircraft. The FAA has promulgated
Airworthiness Directives ("ADs") with respect to aging aircraft, and there are
pending regulations that would require certain additional maintenance checks
and other maintenance requirements for aircraft operating beyond certain
operational limits. From time to time, the FAA also develops new requirements
which apply to all aircraft and which may require significant and costly
modifications or additions to the aircraft. It is likely that the ADs, pending
regulations, and required aircraft modifications will apply to all of the
Company's aircraft. The Company anticipates that it, along with all other
operators of Boeing 737-200 aircraft, will be required by the FAA to
modify the tail section of its Boeing 737-200 aircraft. The Company does not
now know the extent of such modifications.
The Company provides its own routine and daily aircraft maintenance
repair and checks at its Columbia, South Carolina airport facility, or in other
cities, as needed, by an FAA-approved independent contractor, often another
airline. Major scheduled maintenance, including C-checks, component
overhaul/repair services and engine overhaul services are performed under
contract at maintenance bases of other airlines or at various independent
maintenance or overhaul providers.
The Company does not own or lease a spare engine. The Company
has an agreement with an independent spare parts inventory supplier to provide
spare parts inventory purchasing and financing services for a fee.
6
<PAGE> 7
EMPLOYEES
At March 31, 1997, the Company had 589 full-time equivalent employees.
Training, both initial and recurrent, is required for all flight
operations, maintenance, reservations and customer service personnel. The
average training period for all new employees is approximately four weeks,
although the Company's cockpit crews undergo approximately eight weeks of
training. Both pilot training on 737-200 aircraft simulators and mechanic
training for the 737-200 is provided by contractors, which include other
airlines. The Company entered into an agreement with the State of South
Carolina providing for payment by the State for the initial training for all
South Carolina based flight crews, mechanics, reservations agents, and airport
service agents up to a total of 1,004 employees. Recurrent training of pilots
and flight attendants is done by qualified in-house instructors. Recurrent
737-200 simulator time for pilots is paid for by the Company.
FAA regulations require pilots to be licensed as commercial pilots
with specific ratings for each aircraft to be flown and to be medically
certified as physically fit. Licenses and medical certification are subject to
periodic re-evaluation requirements, including recurrent training and recent
flying experience. Mechanics, quality-control inspectors, and flight
dispatchers must be licensed and qualified for specific aircraft. Flight
attendants must have initial and periodic competency fitness training and FAA
certification, and must be qualified for specific aircraft. Training programs
are subject to approval and monitoring by the FAA. Management personnel
directly involved in the supervision of flight operations, training,
maintenance and aircraft inspection must meet experience standards prescribed
by FAA regulations. All of these employees are subject to background checks
and pre-employment and subsequent drug testing.
Management believes that the current conditions in the airline
industry have created a sufficient pool of qualified pilots, dispatchers, and
mechanics to satisfy the Company's current and foreseeable future needs in the
flight operations, maintenance, and quality control areas and that the Company
should have no difficulty hiring and continuing to employ the required
personnel. The Company is presently considering what changes are appropriate
in its overall employee benefits and compensation programs.
While the Company believes that its per employee labor cost is lower
than those of its competitors, this cost may increase in the future. None of
the Company's employees are represented by a labor union. The Company is
unable to predict whether any of its employees will elect to be represented by
a labor union or other collective bargaining unit in the future. The Company
considers its relationship with its employees to be very good.
FUEL
The cost of jet fuel is one of the Company's largest operating
expenses. Fuel costs represent approximately 24.3% of revenue and 16.1% of
operating costs for the twelve-month period ended December 31, 1996.
Fuel costs have increased significantly recently. Any additional significant
increase in fuel costs would materially affect the Company's operating results.
A significant increase in fuel costs would also result in a disproportionately
higher increase in the Company's fuel expense compared to many of its
competitors whose average aircraft is newer and thus more fuel efficient. Both
the cost and availability of fuel are subject to many economic and political
factors and events occurring throughout the world which the Company can neither
control nor accurately predict. In the event of a fuel shortage resulting from
a disruption of oil imports or otherwise, higher fuel prices or curtailment of
scheduled service could result. The Company has no agreement assuring the
availability and price stability of fuel over any period of time because such
agreements are generally not available, and to date has not used forward
purchases as a hedging technique to minimize fuel price fluctuations.
Therefore, an increase in the cost of jet fuel will be immediately passed
through to the Company by suppliers. The Company has not in the past been able
to pass along increases in fuel costs to its customers.
The Company cannot predict the future cost and availability of fuel.
Substantial price increases or the unavailability of adequate suppliers could
have a material adverse effect on the Company's business, financial condition,
or results of operations. Airlines that are larger and better capitalized than
the Company, or which
The Company uses an outside fuel management organization to assist it
in the management of its fuel purchases and related airport fuel storage
arrangements.
7
<PAGE> 8
have successfully applied hedging techniques, may be able to better absorb
increases in fuel prices than the Company.
COMPETITION
Under the Deregulation Act, domestic certificated airlines are free to
enter and exit domestic routes and to set fares without regulatory approval,
and all city-pair domestic airline markets are generally open to any domestic
certificated airline. As a consequence, the airline industry is intensely
competitive.
Airlines compete primarily with respect to fares, scheduling
(frequency and flight time), destinations, frequent flyer programs, and type
(jet or propeller) and size of aircraft. The Company competes with other
airlines on its routes and expects to compete with other airlines on any future
routes. Many of these airlines are larger and have greater name recognition
and greater financial resources than the Company.
In the Southeast market, two major carriers, Delta Air Lines (and its
commuter affiliate Comair) and USAir, and one low-fare carrier, ValuJet
Airlines, are the principal competition for the Company. In addition,
Continental Airlines introduced service between Newark and Charleston, Columbia
and Myrtle Beach, South Carolina in May and June, 1996. The Delta commuter
affiliate, Comair, recently introduced 50-seat jet service between New York
LaGuardia and Charleston and Columbia, South Carolina. Delta's and Comair's
average fares are generally more than twice the Company's average fares on the
same routes. USAir provides only connecting service through its hub in
Charlotte at fares generally more than double the Company's fares on the same
routes. Although the major carriers sometimes offer low competing fares, such
fares usually are subject to restrictions and are available only on a limited
number of seats. All of the major carriers (including Delta's commuter
affiliate, Comair) have far greater resources than the Company and have
established reputations and name recognition. As a result, all provide
formidable competition.
Delta has established a low-fare subsidiary, Delta Express, to compete
with low-fare carriers such as the Company, but does not now compete in the
Company's markets. Delta Express is based in Orlando, Florida,
Southwest Airlines introduced service in the Southeast, mainly in
Florida, beginning in January, 1996. Southwest does not now serve any of the
same markets as the Company; Southwest does, however, fly between Jacksonville
and Fort Lauderdale, Florida which could be considered competitive with the
Company's Jacksonville and Miami, Florida service.
Airtran Airways, Inc. recently began service from three of the
Company's cities to Orlando, Florida, a city not served by the Company.
There can be no assurance that Delta Express, Southwest or Airtran
will not directly compete with the Company in the future. If such competition
does occur, the Company would need to rely on greater stimulation of traffic
and its low-fare structure to be successful.
In the future, competing airlines may set their prices at or below the
Company's fares or introduce new non-stop service between cities served by the
Company in attempts to prevent the Company from achieving or maintaining
profitable operations. The Company may face competition not only from existing
airlines which may begin servicing markets the Company serves, but also from new
low-cost airlines that may be formed to compete in the low-fare market
(including any airlines that may be formed by major airlines) and from ground
transportation alternatives. For example, Jet Express, a public-charter
airline, has provided seasonal scheduled jet airline service with discounted air
fares from Myrtle Beach, South Carolina to Chicago, Illinois, Boston,
Massachusetts, Detroit, Michigan, Newark, New Jersey, Long Island, New York,
and Philadelphia, Pennsylvania. In addition to traditional competition among
the scheduled domestic carriers, the industry may be subject to new forms of
competition in the future, such as video teleconferencing and other methods of
electronic communication, that may add a new dimension of competition to the
industry as businesses seek lower cost substitutes for air travel. The Company
recognizes that recurrent travelers have developed loyalties to existing
airlines or may desire benefits (such as numerous destinations and a choice in
class of service) that only major airlines currently provide. Many business
travelers are able to obtain reimbursement for their travel expenses and
therefore may be unwilling to give up the perceived benefits of national
full-fare airlines simply to obtain the Company's lower fares. In addition,
the Company anticipates that attracting customers from established airlines to
the Company's new routes will be even more difficult than attracting customers
to the Company's existing routes. The Company has previously experienced a
poor record of on time performance and passenger service, and has had an above
average number of cancelled flights. The Company has taken steps which have
alleviated much of this problem; however, this may continue to hamper
8
<PAGE> 9
passenger acceptance in the future. The Company believes that these problems
have been greatly alleviated as a result of reductions in its schedule, better
training and better management of personnel, facilities and equipment. The
Company's decision to discontinue service to certain cities may also have
created dissatisfaction among passengers expecting to fly these routes and may
also negatively affect passenger acceptance. In addition, all low-fare
start-up airlines experienced a decline in the acceptance level of the flying
public as a result of the publicity and criticism of ValuJet Airlines following
the May 11, 1996 aircraft crash and the June 18, 1996 grounding of all ValuJet
aircraft.
GOVERNMENT REGULATION
All interstate air carriers are subject to regulation by the
DOT and the FAA under the Aviation Act. The DOT's jurisdiction extends
primarily to the economic aspects of air transportation, while the FAA's
regulatory authority relates primarily to air safety, including aircraft
certification and operations, crew licensing and training, and maintenance
standards. The Company has obtained a Certificate of Public Convenience and
Necessity issued by the DOT and a Part 121 Operating Certificate issued by the
FAA. The Certificates remain in effect until revoked by administrative action.
In general, the amount of economic regulation over interstate air carriers in
terms of market entry, exit, pricing, and inter-carrier acquisitions and
agreements has been greatly reduced subsequent to enactment of the Deregulation
Act.
The FAA has jurisdiction over, and imposes requirements concerning,
flight operations generally, including the licensing of pilots, maintenance and
flight dispatch personnel, the establishment of standards and requirements with
respect to training, maintenance and flight operations, including standards
applicable to cabin crews, communications and air and ground equipment, among
other things. The Company must obtain and maintain FAA certificates of
airworthiness for all of its aircraft. The Company's flight personnel, flight
and emergency procedures, aircraft and maintenance facilities are subject to
periodic inspections and tests by the FAA.
Presently, four airports, Chicago O'Hare, New York LaGuardia,
New York Kennedy and Washington National, are regulated by means of "slot"
allocations, which represent governmental authorizations to take off or land at
a particular airport within a specified time period. The DOT regulations
currently permit the buying, selling, trading or leasing of slots. Slot values
depend on several factors, including the airport, time of day covered, the
availability of slots, and the class of aircraft. FAA regulations require the
use of each slot at least 80% of the time and provide for forfeiture of slots
in certain circumstances without compensation. The DOT may require forfeiture
of slots without compensation if it determines slots are needed to meet
operational needs of international or essential air transportation.
The FAA recently conducted a review of slot regulation and determined
that the present structure of the slot system should not be changed. The
Company's ability to gain access to these four airports is affected by the
number of slots available to it for takeoffs and landings.
The Company currently leases six slots at New York Kennedy for use
during the slot controlled hours of 3:00 pm to 8:00 pm daily. These leases
expire April 29, 1997. The Company is aggressively pursuing slot leases from
carriers who own slots at New York Kennedy for use beyond April 29, 1997.
Should these efforts not be successful, and if the DOT does not agree to
provide slots for the Company's temporary use, the Company will only
maintain flight operations at New York Kennedy outside the slot controlled
hours.
All air carriers are also subject to certain provisions of the
Communications Act of 1934, as amended, because of their extensive use of radio
and other communication facilities, and are required to obtain an aeronautical
radio license from the Federal Communications Commission ("FCC"). To the
extent the
9
<PAGE> 10
Company is subject to FCC requirements, it has taken, and will continue to
take, all necessary steps to comply with those requirements.
The Company's operations may become subject to additional federal
regulatory requirements in the future under certain circumstances. For
example, the Company's labor relations are covered under Title 11 of the
Railway Labor Act of 1926, as amended, and are subject to the jurisdiction of
the National Mediation Board. During a period of past fuel scarcity, air
carrier access to jet fuel was subject to allocation regulations promulgated by
the Department of Energy. The Company is also subject to state and local laws
and regulations at locations where it operates and the regulations of various
local authorities that operate the airports it serves.
Recently, the FAA escalated air carrier inspections involving carriers
of all sizes. Recent inspections have resulted in the suspension of service by
certain airlines. The Company was recently inspected as part of that program;
only immaterial penalties have been issued against the Company resulting from
FAA inspections; there can be no assurance as to future inspections that
material penalties will not be assessed. The Company believes that low-fare
and start-up airlines may be being subjected to regulation at a level of
scrutiny greater than that applicable to larger, more established airlines.
INSURANCE
The Company carries the types and amounts of insurance that are
required by the DOT and that the Company believes are customary for airlines
similar to the Company. These coverages include: Aircraft Third Party
Liability Insurance; and All Risk Aircraft Hull Insurance and War Risk and
Allied Perils Insurance; these coverages have a $500,000,000 Combined Single
Limit limit of liability and include within them Baggage Liability and Cargo
Legal Liability coverages. The Company also carries $3,000,000 of All Risk
Spare Parts Insurance, as well as workers' compensation insurance. While the
Company believes such insurance will be adequate as to amounts and risks
covered, there can be no assurance that such coverage will continue to be
available or that it will fully protect the Company against all material losses
which it might sustain.
ENVIRONMENTAL MATTERS
The DOT and FAA have authority under the Aviation Safety and Noise Abatement
Act of 1979, as amended, under the Airport Noise and Capacity Act of
1990 and, along with the Environmental Protection Agency, under the Clean Air
Act, as amended, to monitor and regulate aircraft engine noise and exhaust
emissions. The Company believes it is operating its aircraft in compliance
with all applicable FAA noise control regulations and with current emissions
standards.
The Company does not believe that compliance with federal, state and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to protection of the
environment will have any material adverse effect upon the capital
expenditures, earnings or competitive position of the Company. The Company
does not expect to make any material environmentally related capital
expenditures in the forseeable future. However, if the Company increases its
fleet from the current seven aircraft, the Company may have to comply with
federal noise control regulations which could cause it to incur material
capital expenses.
BUSINESS COMMUNITY, STATE, COUNTY AND CITY SUPPORT
The Company was initially financed with a combination of equity
capital from its founding shareholders, local businesses and business leaders,
and loans and grants from state and municipal governments, totaling more than
$17,000,000. Business and government leaders in South Carolina arranged this
financing to attract a jet airline to the State in order to stimulate tourism
and aid the State's future economic growth and development. The business
community throughout the State as well as state and local government officials
have been very cooperative and supportive of the Company's efforts to provide
low-fare jet service to South Carolina cities, and other cities in the
Southeast.
In late 1993 and early 1994, Patrick J. O'Shea, Clifton E. Haley and
other founders of the Company met frequently with South Carolina development
officials about locating the headquarters of the proposed, low-cost, low-fare
regional airline in Columbia, South Carolina, and establishing flight service
from Columbia and other South Carolina cities.
Early cooperative efforts between the State of South Carolina,
Richland and Lexington Counties, South Carolina and the City of Columbia, South
Carolina resulted in an innovative package of financing and benefits as an
inducement for the Company to bring a low-fare jet airline to South Carolina
and to locate its corporate headquarters in the South Carolina midlands. This
financing and benefits package included:
- a $12,000,000 State arranged loan guaranteed by the Department of
Housing and Urban Development (the "State Loan").
- $3,000,000 of non-reimbursable grants from the City of Columbia
and Richland and Lexington Counties to be used for personnel
relocation, advertising, the cost of the Company's headquarters,
reservation center and other facilities in the Columbia area, and
working capital.
10
<PAGE> 11
- $1,137,000 of training grants for pre-employment training for
pilots, mechanics, flight attendants, reservations personnel and
others.
The State Loan provides for a deferred, low-interest rate (4%, with
interest payments beginning in August 1997); deferred principal repayment
(principal payments beginning in September 1997); and an interest rate
adjustment at September 1, 2004. The State Loan also limits the ability of the
Company to move its headquarters or its principal operational base from
Columbia without the written consent of the City of Columbia.
As part of the cooperative effort of the business community and
government authorities to provide capital, in May 1994, the Company raised
approximately $1,000,000 through the sale of Common Stock in a private
offering to South Carolina accredited investors (the "South Carolina
Offering"). In connection with the final draw on the State Loan, the Company
raised an additional approximately $1,500,000 in a rights offering of Common
Stock to certain of its stockholders, including those who purchased stock in
the South Carolina Offering and an offering to employees pursuant to a stock
purchase plan.
As of December 31, 1996 the Compamy was not (and is not now) in
compliance with certain covenants of the State Loan Agreement; however,
compliance with such covenants has been waived through December 31, 1997.
The Company believes that the support, cooperation, and confidence
shown by the various individuals and governmental entities has been a
significant factor in its progress. However, there can be no assurance that
the Company will continue to experience a supportive and cooperative
environment in its governmental relations and with the communities in which it
is located.
ITEM 2. FINANCIAL INFORMATION.
(a) SELECTED FINANCIAL AND OPERATING DATA
The selected Statement of Operations and Balance Sheet data as of and
for each of the years ended August 31, 1994 and 1995 and December 31, 1996, and
the four month period ended December 31, 1995, have been derived from
the audited financial statements of the Company. The selected data as of and
for the year ended December 31, 1995 have been derived from financial
statements of the Company which are unaudited but which, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and include all adjustments necessary (consisting of normal
recurring adjustments) for a fair presentation of the results for the unaudited
period. The selected financial data is qualified by, and should be read in
conjunction with, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" elsewhere in this ITEM 2 and with the Company's
financial statements and the related notes thereto included elsewhere in this
Form 10.
11
<PAGE> 12
<TABLE>
<CAPTION>
Four Months
Ended
Twelve Months Ended August 31,(1) December 31, Twelve Month Ended December 31,
--------------------------------- ------------- -------------------------------
1994(2) 1995 1995 1995 1996
------------ ----------- ------------- ----------- ------------
($000) ($000) ($000) ($000) ($000)
Statement of Selected
Financial Data
- - - ----------------------
<S> <C> <C> <C> <C> <C>
TOTAL OPERATING REVENUES $ 132 $ 45,130 $ 19,858 $ 58,368 $ 53,960
OPERATING EXPENSES
- - - ------------------
Salaries, Wages & Benefits 1,083 13,254 5,166 15,154 15,872
Aircraft Fuel & Oil 100 10,172 4,120 12,309 13,134
Aircraft Leases 156 4,924 2,088 6,036 7,920
Maintenance Materials and Repairs 146 7,573 3,671 9,625 8,330
Agency Commissions 6 2,512 1,379 3,544 3,031
Other rentals, landing and ground
handling fees 105 4,619 1,990 5,690 5,900
Advertising 324 2,393 595 1,978 4,501
Depreciation & Amortization 29 350 175 442 668
Other Operating Expenses(3) 1,037 16,120 5,482 17,241 22,723
-------- -------- -------- -------- --------
Total Operating Expenses 2,986 61,917 24,666 72,019 82,079
-------- -------- -------- -------- --------
Net Operating Loss (2,854) (16,787) (4,808) (13,651) (28,119)
Interest Expense (net) 6 332 76 393 857
Grants/Other 1,045 1,256 58 407 447
-------- -------- -------- -------- --------
Net Loss $ (1,815) $(15,863) $ (4,826) $(13,637) $(28,529)
======== ======== ======== ======== ========
Net Loss Per Share $ (0.72) $ (3.18) $ (0.69) $ (1.95) $ (4.14)
Weighted average common shares
outstanding 2,523 4,987 6,981 6,981 6,888
SELECTED OPERATING AND OTHER DATA:(4)
Revenue Passenger Enplaned (000) 3 788 330 996 730
Revenue Passenger Miles (RPMs) (000) 1,104 273,965 119,059 351,239 361,230
Available Seat Miles (ASMs) (000) 6,149 583,126 226,997 712,017 648,390
Load Factor 18.0% 47.0% 52.4% 49.3% 55.7%
Operating Break-even Load Factor 406.1% 64.5% 65.1% 60.9% 84.3%
Average Fare $ 44.00 $ 57.27 $ 60.18 $ 58.60 $ 73.92
Passenger Yield Per RPM (cents) 11.96 16.47 16.68 16.62 14.94
Total Revenue Per ASM (cents) 2.15 7.74 8.75 8.20 8.32
Operating Cost Per ASM (cents)(5) 48.56 10.62 10.87 10.11 12.59
Block Hours Flown 197 18,434 7,049 22,307 15,639
Average Flight Segment (miles) 255 255 272 261 340
Operating Cost Per Block Hour $ 15,157 $ 3,359 $ 3,499 $ 3,229 $ 5,219
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 3,552 $ 1,054 $ 2,370 $ 2,370 $ 1,070
Working Capital (Deficiency) 2,833 (6,934) (8,546) (8,546) (27,321)
Property and Equipment, Net 1,061 2,238 2,595 2,595 3,469
Total Assets 6,359 10,676 11,617 11,617 9,984
Total Long Term Debt 5,000 12,000 12,000 12,000 18,291
Total Stockholders' Equity
(Deficiency) $ 2 $(13,996) $(16,347) $(15,847) $(40,233)
</TABLE>
(1) The Company's fiscal year was changed from August 31, to December 31
effective for the year ended December 31, 1995
(2) The Company conducted flight operations for only ten days during the twelve
months ended August 31, 1994.
(3) Other Operating Expenses include communications, utilities, professional and
technical fees, postage, freight, supplies, all insurance (except workers'
compensation coverage), credit card processing fees, computerized
reservation system fees, flight crew hotel and per diem costs, other outside
services, equipment rental, passenger food and interrupted trip expense and
substitute aircraft service costs.
(4) See 'GLOSSARY' following item 14 for definitions of certain terms.
(5) From September 1995 through December 1996, the number of aircraft in service
was reduced by at least one aircraft due to scheduled heavy maintenance
inspections on the fleet as required by FAA regulations. During such
periods operating cost per ASM was adversely affected because the Company's
cost infrastructure and overhead remained unchanged while the number of ASMs
were reduced.
<PAGE> 13
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company was incorporated on January 14, 1993. Until commencement of
flight operations on August 22, 1994, the Company raised capital, obtained
certification from the FAA and the DOT, recruited key personnel, negotiated
facility and aircraft leases, contracted ground handling and maintenance
services, trained flight personnel, and selected and installed a reservation
system.
The Company began flight operations with two Boeing 737-200 aircraft and
initially provided service to Columbia, South Carolina, Atlanta, Georgia, St.
Petersburg, Florida, and Miami, Florida. Service was later expanded to other
Southern cities, some of which have since been dropped. Beginning in the first
calendar quarter of 1996, following a change in management, the Company began a
linear, point-to-point strategy designed to provide passengers with non-stop
and direct jet air service from cities in the Southeast to selected
high-density, high-volume markets in the Northeast, Midwest, and Florida.
The Company's revenues are derived principally from the sale of airline
services to passengers and are recognized when transportation is provided.
Revenues are primarily a function of fare levels and the number of seats sold
per flight. The Company's business is characterized, as is true for the
airline industry generally, by high fixed costs relative to revenues, and low
profit margins. Management's principal business strategy is to expand airline
service where there is sufficient customer demand and the Company's operating
costs permit profitable operations.
The Company expects its future revenues to be affected by its ability to
offer and maintain competitive fares, the reaction of existing competitors to
the Company's service, the possible entry of national and other low-fare
airlines into the Company's current or future markets, the effectiveness of the
Company's marketing efforts, and general economic conditions. The Company's
costs may be affected by increases in the price of jet fuel, scheduled and
unscheduled aircraft maintenance expenses, labor costs, fees charged by
independent contractors for various services, and rent for gates and other
facilities.
The Company expects to compete with new or existing competitors on future
routes. Competing airlines may set prices at or below the Company's fares or
introduce new, competing service. Competitors have responded to the Company's
addition of routes to New York by providing new service and reduced fares.
Typically, airlines experience reduced demand for services at various
times during the fall and winter. During these periods, an airline may
experience variations in passenger demand based on its particular routes and
passenger demographics. Due to the Company's limited history and the
implementation of the Company's linear, point-to-point strategy, the Company is
unable to predict whether, or to what extent, seasonal variations in its
operations will differ from those of the airline industry generally. If the
Company's demand patterns are similar to those of the airline industry
generally, the Company would experience reduced demand during the fall and
winter with adverse effects on revenues, operating results, and cash flow.
The Company has a limited history of operations, and since its inception
has experienced significant losses. As of December 31, 1995, the Company had
an accumulated deficit of $23.2 million and negative stockholders' equity of
$15.8 million; as of December 31, 1996 such accumulated deficit and negative
stockholders' equity were $51.2 million and $40.2 million, respectively.
13
<PAGE> 14
RESULT OF OPERATIONS
The Company began flight operations on August 22, 1994, operating only ten days
for the fiscal year ended August 31, 1994. In 1995, the Company changed from a
fiscal year ending August 31, to a calendar year ending December 31. The
following tables set forth selected financial data of the Company for the
twelve months ended August 31, 1994 and 1995, and December 31, 1995 and 1996.
<TABLE>
<CAPTION>
Twelve Months Ended August 31,
---------------------------------------------------------------
1994 1995
----------------------------- ------------------------------
Percent of Percent of
Amount Operating Amount Operating
(000) Revenues (000) Revenues
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Passenger Revenue $ 132 $ 44,466
Other Operating Revenue 0 664
----------------------------- ------------------------------
TOTAL OPERATING REVENUES $ 132 100.0% $ 45,130 100.0%
----------------------------- ------------------------------
OPERATING EXPENSES
Salaries, Wages & Benefits 1,083 820.5% 13,254 29.4%
Aircraft Fuel & Oil 100 75.8% 10,172 22.5%
Aircraft Leases 156 118.2% 4,924 10.9%
Maintenance Materials and Repairs 146 110.6% 7,573 16.8%
Agency Commissions 6 4.5% 2,512 5.6%
Other Rentals, Landing & Ground Handling Fees 105 79.5% 4,619 10.2%
Advertising 324 245.5% 2,393 5.3%
Depreciation & Amortization 29 22.0% 351 0.8%
Other Operating Expenses 1,037 785.6% 16,120 35.7%
----------------------------- ------------------------------
Total Operating Expenses 2,986 2262.1% 61,918 137.2%
----------------------------- ------------------------------
Net Operating Income\(Loss) (2,854) (16,788)
NON OPERATING ITEMS:
Interest Expense 6 332
Grants/Other 1,045 1,257
------------- -------------
Net Nonoperating 1,039 925
------------- -------------
Net Loss $(1,815) $(15,863)
============= =============
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
---------------------------------------------------------------
1995 1996
----------------------------- ------------------------------
Percent of Percent of
Amount Operating Amount Operating
(000) Revenues (000) Revenues
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Passenger Revenue $ 57,326 $ 51,780
Other Operating Revenue 1,042 2,180
----------------------------- ------------------------------
TOTAL OPERATING REVENUES $ 58,368 100.0% $ 53,960 100.0%
----------------------------- ------------------------------
OPERATING EXPENSES
Salaries, Wages & Benefits 15,154 26.0% 15,872 29.4%
Aircraft Fuel & Oil 12,309 21.1% 13,134 24.3%
Aircraft Leases 6,036 10.3% 7,920 14.7%
Maintenance Materials and Repairs 9,625 16.5% 8,330 15.4%
Agency Commissions 3,544 6.1% 3,301 5.6%
Other Rentals, Landing & Ground Handling Fees 5,690 9.7% 5,900 10.9%
Advertising 1,978 3.4% 4,501 8.3%
Depreciation & Amortization 442 0.8% 668 1.2%
Other Operating Expenses 17,241 29.5% 22,723 42.1%
----------------------------- ------------------------------
Total Operating Expenses 72,019 123.4% 82,079 152.1%
----------------------------- ------------------------------
Net Operating Income\(Loss) (13,651) (28,119)
NON OPERATING ITEMS:
Interest Expense 393 857
Grants/Other 407 447
------------- -------------
Net Nonoperating 14 (410)
------------- -------------
Net Loss $(13,637) $(28,529)
============= =============
</TABLE>
<PAGE> 15
Comparison of the twelve months ended December 31, 1996 and 1995, and recent
developments.
Operating Revenues
Total operating revenues were 7.6% lower for the twelve months ended
December 31, 1996 compared to the twelve months ended December 31, 1995
primarily as a result of the Company flying fewer aircraft in 1996 than 1995.
The Company operated 5.6 equivalent aircraft of its 7 aircraft for all of 1996
and 6.4 (of 6.6 available) for 1995. At December 31, 1996 the Company provided
service to 11 cities as compared to 8 cities at December 31, 1995.
Operating revenues for January and February 1997 totaled approximately
$7.0 million, reflecting the seasonal drop in travel in the airline industry
and higher than normal flight cancellations caused by both scheduled and
unscheduled maintenance requirements. Approximately 11%, 18% and 15% of
scheduled flights were canceled in January and February and March, 1997
resulting from the operation of only five aircraft. A new schedule, effective
April 6, 1997, adds new flights to reflect a sixth aircraft returning to the
fleet.
Total available seat miles ("ASMs") decreased from approximately 712.0
million during the twelve months ended December 31, 1995 to approximately 648.4
million during the twelve months ended December 31, 1996. Revenue passenger
miles ("RPMs") increased from approximately 351.2 million during the twelve
months ended December 31, 1995 to approximately 361.2 million during the twelve
months ended December 31, 1996. The decrease in available seat miles was
primarily attributable to the decrease in the average number of aircraft being
flown, and the increase in RPMs was primarily attributable to increased
acceptance by the traveling public of the new routes being operated.
ASMs increased 7.5% and 1.8% from 51.7 and 45.7 million to 55.6 and 46.5
million for January and February 1997 over the same period in 1996 in spite of
higher than normal cancellations. A change in the flight schedule resulted in
higher flying levels for the five aircraft scheduled and an increase in the
average stage lengths from 263 miles in January/February 1996 to 355 miles for
the same period in 1997.
The Company's load factor increased from 49.3% for the twelve months
ended December 31, 1995, to 55.7% for the twelve months ended December 31,
1996. This increase was primarily the result of increased awareness of the
Company's service.
RPMs increased 9.9% from 20.6 to 25.0 million from January 1996 compared
to the same period in 1997 but decreased 7.7% from 24.7 to 22.8 million for
February 1996 compared to the same period in 1996. The February decrease was a
result of lower demand brought on by excessive flight cancellations.
Cancellations through March 16, 1997 were increased over the February levels;
however, since March 17 the cancellations have improved to 2% and load factors
are nearly 63% compared to 45% and 49% for January and February, respectively.
Passenger yield decreased 10.1%, from 16.62 cents per revenue passenger
mile for the twelve months ended December 31, 1995, to 14.94 cents per RPM for
the twelve months ended December 31, 1996. The decrease in passenger yield was
the result of increases in fares from initial promotional levels, the
introduction of advance reservation requirements to attain the lowest fares,
and increases in the distance flown by travelers.
<PAGE> 16
The Company's operating break-even load factor increased from 60.9%
during the twelve months ended December 31, 1995, to 84.3% during the
twelve-month period ended December 31, 1996. The Company's high operating
break-even load factor during the 1996 period was the result of (i) certain
non-recurring maintenance and repair expenses, and (ii) the impact of spreading
the cost of the Company's corporate infrastructure over a smaller number of
total available seat miles, resulting from the Company operating less than six
of the seven leased aircraft. The Company's break-even load factor should
decrease as it generates incremental passenger revenue with the expansion of
its new routes and with the addition of aircraft to the Company's fleet. There
can be no assurance, however, that any such incremental passenger revenue will
be sufficient to cover the incremental costs of expansion or that, ultimately,
as a result of these or other factors, the Company's operating break-even load
factor will decrease.
Operating Expenses
Operating expenses reflect costs for salaries, wages and benefits,
aircraft fuel and oil, aircraft leases, maintenance, materials and repairs,
agency commissions, other rental, landing, and ground handling fees,
advertising, depreciation and amortization, and other operating expenses.
Salaries, wages and benefits reflect compensation earned by all employees
of the Company. Fees paid to independent contractors (not a material amount)
are included in other operating expenses. The Company's employees are not
unionized and when practicable, part-time employees are used.
Salaries, wages and benefits increased 4.7% for the twelve months ended
December 31, 1996 compared to the same twelve month period in 1995. The
increase was primarily result of a charge for the amortization of increased
unearned compensation in the amount of $370,565 related to the value of
stock options granted to certain employees and severance pay for several
executives who left during the year, made in the twelve month period ended
December 31, 1996. There was no similar charge in the twelve month period ended
December 31, 1995. Salaries, wages, and benefits accounted for 21.0% of
operating expense and 26.0% of operating revenue for the twelve months ended
December 31, 1995. By contrast, salaries, wages, and benefits accounted for
19.3% of operating expenses and 29.4% of operating revenue for the twelve months
ended December 31, 1996.
Aircraft fuel and oil expenses include the cost of fuel, oil, and taxes,
as well as the cost of pumping the fuel into the aircraft. Aircraft fuel and
oil expenses increased 6.7% for the twelve months ended December 31, 1996. The
increase was attributable to exceptionally high fuel prices (up to $.84 per
gallon from $.67 per gallon), plus increased consumption per block hour as a
result of heavier loads. Aircraft fuel and oil expenses accounted for 17.1% of
operating expense and 21.1% of operating revenue for the twelve months ended
December 31, 1995. By contrast, aircraft fuel and oil expenses accounted for
16.1% of operating expenses and 24.3% of operating revenue for the twelve
months ended December 31, 1996. The Company will likely absorb moderate
increases in fuel costs, which would reduce profits or increase losses for the
period affected. The Company would seek to offset significant longer term
increases in fuel costs with increases in ticket prices. However, because of
the Company's low-fare policy, its ability to pass on the additional costs may
be limited. The Company's aircraft are relatively fuel inefficient compared to
newer aircraft. An increase in the price of fuel could, therefore, result in a
disproportionately higher increase in the Company's expense as compared with
many of its competitors.
<PAGE> 17
Aircraft lease expenses increased 31.2%, from $6.0 million for the twelve
months ended December 31, 1995, to $7.9 million for the twelve months ended
December 31, 1996. The increase was primarily attributable to an increase in
the number of aircraft in the fleet to seven in March 1995. The average monthly
lease cost increased for all but two aircraft starting in April 1996 as a
result of renegotiated leases. The lease rate on one of the remaining two
aircraft increased from $38,900 to $105,000 per month on February 1, 1997 in
exchange for heavy maintenance costs of approximately $2,400,000 being paid for
by the lessor. This change in the lease rate also resulted in a one time
charge of $261,000 in prepaid rent expense. Aircraft lease expense accounted
for 8.4% of operating expenses and 10.3% of operating revenue for the twelve
months ended December 31, 1995. By contrast, aircraft lease expense accounted
for 9.7% of operating expenses and 14.7% of operating revenue for the twelve
months ended December 31, 1996.
Maintenance, materials, and repairs expense includes all the costs
incurred by the Company for maintenance services and related parts and
supplies, but excludes wages paid to the Company's maintenance employees.
Currently, the Company uses its employees to perform minor maintenance at
several of the airports it serves. At some locations, and whenever required,
the Company uses qualified contractors to perform maintenance on a contract
basis. Heavy maintenance, such as major engine repairs and major airframe
checks, are performed by third parties at their locations. The Company accrues
for scheduled C-check inspections at $125 per block hour, or $375,000 per
aircraft.
Maintenance, materials, and repairs expense decreased 13.5% for the twelve
months ended December 31, 1996. The decrease was partially due to operating
fewer aircraft and flying fewer hours (down 16.1%). Maintenance, materials and
repairs expense accounted for 13.4% of operating expenses and 16.5% of
operating revenue for the twelve months ended December 31, 1995. By contrast,
maintenance, materials and repairs expense accounted for 10.2% of operating
expenses and 15.4% of operating revenue for the twelve months ended December
31, 1996. The Company's fleet consists of aircraft manufactured between 1968
and 1979. In general, the costs to maintain older aircraft exceeds the cost to
maintain newer aircraft. Modifications or additions may also be required to
these older aircraft to meet regulations which may be issued from time to time
by the FAA. Included in maintenance, materials, and repair expense are
reserves paid to the lessors, based on hours flown, and for scheduled overhauls,
primarily of engines. Major engine repairs are capitalized and amortized over
the period to the next scheduled overhaul.
Agency commissions expense reflect fees paid to travel agents. For the
twelve months ended December 31, 1996, these commissions were paid at 10.0% on
the net fare paid at the time of the sale. Agency commissions expense is
recognized in the same period as the revenue is recognized. Approximately 50%
of the Company's bookings are made through travel agents.
Agency commissions expense decreased 14.5%, from $3.5 million for the
twelve months ended December 31, 1995, to $3.0 million for the twelve months
ended December 31, 1996. The decrease was primarily attributable to a
reduction in travel agents commission rated from 11% in 1995 to 10% in 1996.
Agency commissions expense accounted for 4.9% of operating expenses and 6.1% of
operating revenue for the twelve months ended December 31, 1995. Agency
commissions expense accounted for 3.7%$ of operating expense but 5.6% of
operating revenue for the twelve months ended December 31, 1996.
Other rentals, landing, and ground handling fees include costs incurred by
the Company for rental of airport facilities, reservations, and administrative
offices. Landing fees are fees assessed by each airport for each landing.
Ground handling fees reflect the costs incurred by the Company for use of
airport facilities for baggage claims and security and passenger holding areas,
as well as fees under contracts with a third party for handling and cleaning
the aircraft and passengers at certain locations.
Other rentals, landing and ground handling fees expenses incurred 3.0%,
from $5.7 million for the twelve months ended December 31, 1995, to $5.9
million for the twelve months ended December 31, 1996. The increase was
primarily attributable to higher fees at New York and Chicago. Other rentals,
<PAGE> 18
landing, and ground handling fees represented 7.9% of operating expenses and
9.7% of operating revenues for the twelve months ended December 31, 1995. By
contrast, these expenses represented 7.2% of operating expenses and 10.9% of
operating revenues for the twelve months ended December 31, 1996.
Advertising expense includes all external costs associated with the
production and distribution of advertisements and promotional materials and
sponsorship of various promotional events. Advertising costs increased 127.6%
from $2.0 million for the twelve months ended December 31, 1995, to $4.5
million for the twelve months ended December 31, 1996. The increase was
primarily attributable to increased advertising associated with implementing
the new route structure and the higher costs in New York and Chicago.
Depreciation and amortization expense includes leasehold improvements on
facilities and depreciation of equipment, spare parts, and ground equipment.
The Company recognizes such expenses on a straight line basis over the
estimated useful lives of the Company's assets. Depreciation and amortization
expenses increased by $226,000 or 51.1% for the twelve months ended December
31, 1996 as compared to the twelve months ended December 31, 1995. The
increase was due to the increase in ground handling equipment.
Other operating expenses include communications and utilities,
professional and technical fees, postage, freight and supplies, all insurance
(except workers' compensation coverage), credit card processing and computerized
reservation system fees, flight crew hotel and per diem costs, other outside
services, equipment rental, passenger food, passenger re-accommodation expense,
and substitute aircraft service costs. Other expenses increased 31.8%, from
$17.2 million for the twelve months ended December 31, 1995, to $22.7 million
for the twelve months ended December 31, 1996. The increase in other expenses
is primarily attributable to the increase in cancelled flights resulting in
passenger re-accommodation costs ($2.0 million), the write-off required as a
result of changing reservations systems ($.5 million) and higher than normal
legal and audit fees resulting from the preparation of certain regulatory
reports and filings ($.7 million). Interest expense increased from $393,000
for the year ended December 31, 1995 to $845,000 for the year ended December
31, 1996. This increase related primarily to new debt incurred in 1996.
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Almost from its inception, the Company has experienced serious
liquidity problems. These problems continue. From the Company's inception on
January 14, 1993, through March 1995, the Company's pre-operating and
development costs, as well as its operating costs since it commenced flight
operations, were funded with operational revenues and capital comprised of (A)
the initial investment of the Company's founders; (B) the debt and equity
investments described below, and (C) a series of loans, grants, and
reimbursements of expenses provided by the State of South Carolina, the County
of Lexington, and the City of Columbia, South Carolina, including: (i) a $12
million State Loan guaranteed by the Department of Housing and Urban
Development, (ii) $3 million of grants from the City of Columbia and Richland
and Lexington Counties, to be used for personnel relocation, advertising, cost
of Company headquarters, the reservation center, and working capital, and (iii)
$1.1 million of training grants for pre-employment training for pilots,
mechanics, flight attendants, reservation personnel, and others. As of
December 31, 1996, the Company had $277,765 of unused grants available for rent
subsidy for the Company's reservations facility. In September 1996, the terms
of the State Loan were modified to provide (a) for four percent (4%) fixed
interest rate through August 31, 2004; beginning September 1, 2004 the interest
rate may be increased, not to exceed prevailing commercial loan rates, based on
the Company's net operating income, (b) that interest due for September 1, 1996
through August 1, 1997 is deferred until August 1, 1997, (c) that the loan is
to be repaid in 143 equal installments based on 204 months amortization with a
balloon payment one month after the last (final) installment; and (d) that the
outstanding principal balance is based on the size of an initial public
offering with principal repayment not to exceed $6 million of the net proceeds
of an initial public offering greater than $20 million. The Company does not
now have any plans for an initial public offering.
In the Spring of 1995 the Company sold approximately 3,000,000 shares
of Common Stock to certain employees and shareholders for proceeds of
approximately $1,500,000. Subsequently, the Company from December 1995
through the date hereof: (a) entered into $2,500,000 of bank loans; (b) issued
shares of preferred stock convertible into, in the aggregate 9,250,000 shares
of Common Stock, for an aggregate consideration of $6,500,000; (c) sold
convertible debentures convertible into an aggregate of 20,880,000 shares of
preferred stock which are, in turn, convertible into an aggregate of 20,880,000
shares of Common Stock, for an aggregate consideration of $5,220,000; (d)
issued warrants to purchase 24,400,000 shares of preferred stock which in turn
are convertible into 24,400,000 shares of Common Stock; (e) agreed to the sale
to The Pointe Group L.L.C. at $0.02 per share of Common Stock equal, on a fully
diluted basis, to six percent of the Company's Common Stock; assuming issuance
and conversion of the convertible debentures referred to in "(g)," below
25,281,464 shares will be issued for an aggregate consideration of $505,629;
(f) has issued $13,700,000 of demand promissory notes to Hambrecht & Quist and
affiliates, $2,300,000 of which have been repaid; and (g) has authorized the
sale of up to $12,500,000 of convertible debentures. Such convertible
debentures would be convertible into 125,000,000 shares of Series F Preferred
Stock which in turn would be convertible into 125,000,000 shares of Common
Stock on the basis of $0.10 per share. Such Series F Preferred Stock would be
issued on substantially the same terms as the Series A, Series B, Series C,
Series D and Series E Preferred Stock. As is the case with the Series D and
Series E Preferred Stock, the Company does not have sufficient authorized but
unissued preferred stock and common stock to allow conversion of such
convertible debentures and Series F Preferred Stock. It is anticipated that
the shareholders of the Company will authorize sufficient additional preferred
and common stock for such conversions. The transactions referred to in "(b)",
"(c)", "(d)" and "(g)", above all have the broad weighted-average anti-dilution
provisions usual in the terms of such securities.
It is anticipated that $11,400,000 million of the proceeds of such sale
of convertible debentures will be used to retire certain demand promissory
notes of the Company.
In addition, there are outstanding options and warrants to purchase
shares of Common Stock which have been issued to directors, officers, employees
and certain suppliers and customers of the company.
Early in 1996 the Company commenced new routes; thereafter, its load
factors and yields were below prior levels, and the Company's advertising and
other promotional costs were higher, which resulted in significant start-up
losses on the new routes. In addition, significant cash was required to fund
increases in accounts receivable and prepaid expenses. The effects of the
expansion described above has caused the Company to have substantial cash
requirements.
When passengers purchase tickets using a credit card, the credit card
company generally requires that the payment be held in reserve until the
passenger actually flies. Approximately 85% of the Company's ticket sales are
credit card sales made for future travel. These payments are unavailable for
the immediate cash needs of the Company. The Company has entered into an
agreement by which a letter of credit provided by Hambrecht & Quist California
allows cash to be obtained more promptly from credit card receivables.
In January 1996 a 10% federal excise tax on air fares expired. It was
reinstated in August 1996. The Company reflected such reinstatement in its
fare structure, thereby avoiding any adverse effect on the Company. On
January 1, 1997 that excise tax again expired but was reinstated on March 7,
1997; the same methods have been used upon its reinstatement.
On April 8, 1996 the Company ceased scheduled service to the Tampa
International Airport in order to improve the deployment of its aircraft.
Hillsborough County Aviation Authority, which operates the Tampa airport, has
sued the Company for breach of contract. See Item 8 LEGAL PROCEEDINGS.
On May 21, 1997, the Company will suspend service to Savannah in order
to improve deployment of aircraft.
During the period from inception through December 31, 1996, the
Company's pre-operating and operating activities resulted in a significant
deficit in cash flow. This cash flow deficit was funded primarily with the
proceeds from private securities sales, bank loans, the State Loan, and
certain vendors. At December 31, 1996, the Company had cash and cash
equivalents of $1.1 million. The working capital deficit at December 31, 1996
was approximately $27.0 million.
19
<PAGE> 20
The Company expects to incur approximately $1.0 million for capital
expenditures over the next twelve months to lease additional aircraft, engines
and related spare parts.
In March 1996, the Company entered into an agreement with a bank for a
revolving line of credit which provided the Company with additional working
capital; $500,000 has been advanced under this agreement and no further
advances are expected. The principal of this Loan was payable on March 29,
1997; the Bank has agreed to an extension until May 28, 1997. Interest is
payable monthly at one percent above the prime rate.
In April 1996, the Company obtained a $2,000,000 million bank loan all
of which has been funded. Hambrecht & Quist Group, L.L.C. ("H&Q Group") was
granted a warrant to purchase 400,000 shares of Air South Common Stock at a
price of $2.00 per share as consideration for guaranteeing such loan; in May
1996, the purchase price per share was changed to $0.50 per share as additional
consideration for H&Q Air South Investors, L.P. ("H&Q"), purchasing $2.5
million of Series B Preferred Stock. The principal of this loan was payable on
December 1, 1996 with interest at one percent above the bank's prime rate,
payable monthly. The maturity date of this loan has been extended to June 1,
1998. A letter of credit provided by an affiliate of H&Q Group has been
substituted for the guarantee by H&Q Group of such loan; such affiliate has
been granted a warrant to purchase 8,000,000 shares of Air South Common Stock
at a price of $0.25 per share, subject to adjustment if shares of Common Stock
or equivalents are later sold at a lower price. The Company may from
time-to-time enter into other short-term borrowing arrangements for additional
working capital. However, there can be no assurance that additional loans or
lines of credit will be available in the future.
As of December 31, 1996, the Company had seven aircraft under operating
leases with terms from approximately one and one-half to three years. Rent
expense under these leases is recognized on a straight-line basis over the
lease terms. The amount charged to aircraft lease expense was approximately
$6.9 million for the year ended December 31, 1996. The Company's working
capital deficit and accumulated deficit are likely to hinder its ability to
obtain additional aircraft.
The Company's over 60-day payables as of December 31, 1996 were and as
of the date hereof are approximately $5,100,000. The Company currently has
agreements with certain of its creditors to make payments in excess of $4.0
million of payables over periods ranging up to one year.
The Company's operations have not generated positive cash flow since
August 1995. However, the Company plans to raise additional capital through
private sales of securities, and the Company expects that this amount will be
sufficient to meet its obligations and its liquidity and capital needs through
June 30, 1997. Additionally, the Company is likely to continue to make use of
lease financing. The Company may also raise capital by selling certain of its
fixed assets and aircraft parts. However, there can be no assurance that the
Company's efforts to raise additional capital will be successful. If it is
not successful, the Company's ability to continue operaitons in the short term
is unlikely.
ITEM 3. PROPERTIES.
The Company's operations in Columbia, South Carolina include a downtown
office which houses reservations, an office near the airport which houses
accounting and customer relations, and a facility at the Columbia Municipal
Airport that houses executive offices and other administrative and operations
functions. The downtown facility comprises approximately 16,200 square feet.
The offices near the airport comprise 4,000 square feet. The airport facility
comprises approximately 8,400 square feet of office space surrounding a 13,400
square foot hangar. The downtown facility is under a four year lease, entered
into on May 9, 1994. The offices near the airport are leased on a
month-to-month basis. The office/hangar complex at the airport is under lease
for a five-year period from February 1996.
The Company also maintains leased ticketing and boarding facilities, and
office and storage space at airports in the cities it serves. Such facilities
are leased from the airport owner or subleased from other carriers at such
airports.
The Company believes its properties are suitable for their intended
purposes and are adequate for the Company's needs at present. Although the
properties of the Company are essentially fully utilized, the Company believes
that there is room for any anticipated expansion in the near term. If further
expansion is required, the Company believes that adequate properties suitable
for its needs will be available in the locations concerned which can be
obtained on an economically feasible basis.
20
<PAGE> 21
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth beneficial ownership of the shares of
Common Stock as of March 31, 1997 by (i) each stockholder known by the Company
to be the beneficial owner of more than 5% of Common Stock, (ii) each director
of the Company, (iii) each Named Executive Officer, and (iv) all directors and
Executive Officers of the Company as a group. Unless otherwise indicated, all
shares are owned directly and the indicated owner has sole voting and
dispositive power with respect thereto.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
----------------------------
Amount and
----------
Nature of
---------
Beneficial
----------
Name of Beneficial Owner Ownership(2) Percent of Class(2)
------------------------ ------------ -------------------
<S> <C> <C>
H&Q Air South Investors, L.P.(3). . . . . 332,457,143* 78.9
William R. Hambrecht(3) . . . . . . . . . 332,457,143** 78.9
Fil-Fibers Manufacturing, Inc. Ltd.(4). . 27,000,000* 6.4
Donald P. Duncan(4) . . . . . . . . . . . 27,000,000** 6.4
W.J. Flynn & Associates, Inc.(5). . . . . 7,500,000* 1.8
The Pointe Group L.L.C.(6). . . . . . . . 25,281,464** 6.0
Clifton E. Haley(7) . . . . . . . . . . . 942,500* ** ***
Patrick J. O'Shea(8) . . . . . . . . . . 628,450* ** ***
Donald Baker(9) . . . . . . . . . . . . 320,500* ** ***
William K. Flynn(5) . . . . . . . . . . . 7,500,000** 1.8
Paul T. Gillcrist(10) . . . . . . . . . . 2,108,900* ***
Harold Stowe(11) . . . . . . . . . . . . 102,800** ***
John P. Tague(6) . . . . . . . . . . . . 25,281,464** 6.0
John Affeltranger(6) . . . . . . . . . . 25,281,464** 6.0
All Directors and Executive Officers as a
group (14 persons) . . . . . . . . 396,594,695
</TABLE>
----------------------------
* Direct Ownership
** Indirect Ownership
*** Less than 1%
(1) Pursuant to the regulations of the Securities and Exchange
Commission, shares are deemed to be "beneficially owned" by
a person if such person directly or indirectly has or shares the
power to vote or dispose of such shares, whether or not such person
has any pecuniary interest in such shares, or the right to acquire
the power to vote or dispose of such shares within 60 days,
including any right to acquire shares through the exercise of any
option, warrant or right.
(2) The Company has sold $5,200,000 of convertible debentures which
are convertible into shares of preferred stock which, in turn, are
convertible into Common Stock. By May 31, 1997 the Company
expects to have sold and issued an additional $12,500,000 of such
debentures; for purposes of this table, the Company has assumed
the sale, issuance and conversion to common stock of such
debentures. At the time of each such sale, the Company did not,
and does not now, have sufficient authorized shares of preferred
stock or Common Stock to effect the conversion of such debentures,
which fact is recognized in the debentures and related debenture
purchase agreement. The Company expects that by June 30, 1997
sufficient preferred stock and Common Stock will have been
authorized to allow the conversion of such debentures to shares of
preferred stock and that such debentures will be converted.
Accordingly, all calculations with respect to beneficial ownership
of the Company have assumed the authorization of such preferred
stock and Common Stock.
21
<PAGE> 22
(3) Includes: (a) 1,250,000 shares of Series A Preferred Stock
("Series A Preferred") held by H&Q AirSouth Investors L.P. ("H&Q")
convertible at $2.00 per share into 1,250,000 shares of Common
Stock; (b) 625,000 shares of Series B Preferred Stock ("Series B
Preferred") held by H&Q convertible at $0.50 per share into
5,000,000 shares of Common Stock; (c) $4,000,000 of Convertible
Debentures held by H&Q which are convertible into 16,000,000
shares of Series D Preferred Stock ("Series D Preferred") when
Series D Preferred shares are authorized which, in turn, are
convertible at $0.25 per share into 16,000,000 shares of Common
Stock; and (d) warrants to purchase 400,000 shares of Common Stock
at $0.50 per share issued to H&Q Group, an affiliate of H&Q; (e)
warrants to purchase 16,000,000 shares of Common Stock at $0.25
per share issued to an affiliate of H&Q and H & Q Group; (f)
warrants to purchase 8,000,000 shares of Common Stock at $0.25 per
share issued to an affiliate of H&Q Group and H & Q Group (such
warrants and the warrants described at "(d)," and "(e)" herein
being collectively called the "H & Q Warrrants"); and (g)
$11,400,000 of Convertible Debentures to be purchased by H&Q
which will be convertible into 114,000,000 shares of Series F
Preferred Stock when Series F Preferred Stock shares are authorized
which, in turn, are convertible into 114,000,000 shares of Common
Stock. The shares of Series A Preferred, Series B Preferred,
Series D Preferred and the H&Q Warrants all have broad
anti-dilution provisions which, upon the issuance of certain other
equity securities, would act to increase the conversion ratios.
The application of such anti-dilution provisions and the conversion
of such preferred stock and the exercise of the H&Q Warrants have
been assumed in all calculations with respect to beneficial
ownership of the Company. H&Q and H&Q Group currently hold on a
fully diluted basis almost 50% of the issued and outstanding voting
shares of the Company. On a fully diluted basis (assuming the
issuance and conversion of the Convertible Debentures referred to
in "(c)" and "(g)", above) H&Q and H&Q Group would hold in excess
of 75% of the issued and outstanding voting shares. William R.
Hambrecht, a director of the Company, is Chairman of H&Q Group.
Mr. Hambrecht disclaims beneficial ownership of the shares held by
H&Q Group and H&Q except to the extent of his proportionate
beneficial interest therein. The address of H&Q, H&Q Group and Mr.
Hambrecht is One Bush Street, San Francisco, California 94104.
(4) Includes: (a) 80,000 shares of Series C Preferred Stock
("Series C Preferred") which are convertible at $0.50 per share
into 2,000,000 shares of Common Stock; and (b) $400,000 of
Convertible Debentures which are convertible into 1,600,000 shares
of Series D Preferred when Series D Preferred shares are
authorized which, in turn, are convertible at $0.25 per share into
1,600,000 shares of Common Stock. The shares of Series C
Preferred and Series D Preferred have broad anti-dilution
provisions which, upon the issuance of certain other equity
securities, would act to increase the conversion ratios. The
application of such anti-dilution provisions and the conversion of
the Series C and D Preferred have been assumed in all calculations
with respect to beneficial ownership of the Company. Donald P.
Duncan was elected a director of the Company pursuant to a
contractual right of Fil-Fibers Manufacturing, Inc. Ltd. ("Fil
Fibers") to nominate one director of the Company. Mr. Duncan
disclaims beneficial ownership of the shares held by Fil-Fibers.
The address of Fil-Fibers Manufacturing, Inc. Ltd. and Mr.
Duncan is Murray Hill Plaza, 2H, 244 Madison Avenue, New York, New
York 10016.
(5) Includes: (a) 40,000 shares of Series C Preferred which are
convertible at $0.50 per share into 1,000,000 shares of Common
Stock; and (b) $200,000 of Convertible Debentures which are
convertible into 800,000 shares of Series D Preferred when Series
D Preferred shares are authorized which, in turn, are convertible
at $0.25 per share into 800,000 shares of Common Stock. The shares
of Series C Preferred and Series D Preferred have broad
anti-dilution provisions which, upon the issuance of certain other
equity securities, would act to increase the conversion ratios.
The application of such anti-dilution provisions and the
conversion of the Series C and D Preferred have been assumed in
all calculations with respect to beneficial ownership of the
Company. W.K. Flynn, a director of the Company, is President of
W.J. Flynn & Associates, Inc. Mr. Flynn disclaims beneficial
ownership of the shares held by W.J. Flynn & Associates, Inc.
except to the extent of his proportionate beneficial interest
therein. The address of W.J. Flynn & Associates, Inc. and Mr.
Flynn is 320 Park Avenue, New York, NY 10022.
(6) Includes approximately 25,281,464 shares of Common Stock which are
to be issued to The Point Group, L.L.C. ("TPG"), an
aviation and transportation consulting firm, pursuant to a
consulting agreement between TPG and the Company. Issuance of
these shares has been assumed in all calculations with respect to
beneficial ownership of the Company. John P. Tague, Chairman of
the Board, President and Chief Executive Officer of the Company
and John Affeltranger, Senior Vice President and Chief Operating
Officer of the Company, are each a principal of TPG. Mr. Tague and
Mr. Affeltranger disclaim beneficial ownership of such shares
except to the extent of their proportionate beneficial interests
in TPG. The address of TPG is 866 United Nations Plaza, Suite
451, New York, New York, 10017.
22
<PAGE> 23
(7) Includes 725,000 shares subject to options exercisable
immediately, and 217,500 shares held of record by the Clifton E.
Haley Trust dated September 27, 1988. Exercise of options has
been assumed in all calculations with respect to beneficial
ownership.
(8) Includes 522,650 shares held of record jointly by Mr. O'Shea and
his spouse, 75,000 shares subject to options to be exercised at the
time of a public offering of Common Stock by the Company,
20,000 shares which Mr. O'Shea holds the right to vote pursuant to
irrevocable proxies and 10,800 shares held by Mr. O'Shea's
daughter; Mr. O'Shea disclaims beneficial ownership of the shares
owned by his daughter. Exercise of options has been assumed in all
calculations with respect to beneficial ownership.
(9) Includes 270,500 shares held of record by Mr. Baker, 10,000 shares
held by Mr. Baker as Trustee for Andrew C. Baker, and 40,000
shares subject to options immediately exercisable. Exercise of
options has been assumed in all calculations with respect to
beneficial ownership.
(10) Includes 447,900 shares of Common Stock, options to purchase 36,000
shares of Common Stock and $120,000 of Convertible Debentures which
are convertible into 480,000 shares of Series E Preferred Stock
("Series E Preferred") when Series E Preferred shares are
authorized which, in turn, are convertible at $0.25 per share into
480,000 shares of Common Stock. Conversion of the Series E
Preferred and exercise of options has been assumed in all
calculations with respect to beneficial ownership of the Company.
Mr. Gillcrist's address is 210 Upper East Coast Road, Eastern
Lagoon II, Singapore 1541.
(11) Includes 102,800 shares of Common Stock held by CSI Group, Inc. of
which Mr. Stowe is an affiliate.
23
<PAGE> 24
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
On August 16, 1996, H&Q purchased $4 million of Convertible Debentures
due August 16, 1999 from the Company. In connection with the purchase of such
debentures: (1) all directors except Messrs. Clifton E. Haley, William R.
Hambrecht and Robert B. Spane were asked to submit their resignations as
directors; all of such directors except Messrs. Donald Baker and Patrick J.
O'Shea have resigned; (2) Mr. Roden A. Brandt was removed as President and
Chief Executive Officer; and (3) Mr. John P. Tague was elected Chairman of the
Board, President and Chief Executive Officer and Mr. John Affeltranger was
elected Senior Vice President. Subsequent to the foregoing changes there have
been numerous changes in management at all levels.
The Company's Executive Officers and Directors are now as follows:
<TABLE>
<CAPTION>
Name Age Position
- - - ---- --- --------
<S> <C> <C>
John P. Tague 34 Chairman of the Board, President, and Chief Executive Officer
John Affeltranger 40 Senior Vice President and Chief Operating Officer
Dennis B. Crosby 51 Vice President
Thomas J. Volz 53 Vice President
David Y. Monteith 61 General Counsel and Secretary
Donald Baker(1) 67 Director
Donald P. Duncan 49 Director
William K. Flynn 40 Director
Paul Gillcrist 42 Director
Clifton E. Haley 65 Director
William R. Hambrecht 60 Director
Patrick J. O'Shea(1) 56 Director
Robert B. Spane 56 Director
Harold Stowe 49 Director
</TABLE>
Mssrs. Hambrecht and Spane are directors pursuant to agreements entered
into in connection with the purchase by H & Q of shares of Series A and Series B
Preferred. Messrs. Duncan and Flynn are directors pursuant to agreements
entered into in connection with the purchase, respectively, by Fil-Fibers
Manufacturing, Inc. Ltd. and W.J. Flynn & Associates, of Series C Preferred.
John P. Tague joined the Company in July 1996 as President and Chief
Executive Officer, and as a director; in September 1996 he became Chairman of
the Board. Mr. Tague has also served since November 1996 as Chairman of the
Board, President and Chief Executive Officer of Vanguard Airlines, Inc.
Previously, since 1995, he was and remains a principal of The Pointe Group,
L.L.C. ("TPG") and its Co-Chairman and Chief Executive Officer. TPG is an
aviation and transportation consulting firm. Prior to that, for more than
five years, he was with American Trans Air, Inc., the United States' 10th
largest airline, most recently as President and Chief Operating Officer and
with World Airways, an airline.
John Affeltranger joined the Company in July 1996, became a Senior Vice
President in August 1996 and became Chief Operating Officer in March 1997.
Since 1995 he has been and remains a principal of and an Executive Vice
President of TPG. Prior to that, for more than five years he was with American
Trans Air, Inc., most recently as a Vice President and Assistant to the Chief
Executive Officer with responsibilities for, among other things, corporate and
fleet develpment.
Dennis B. Crosby has been a Vice President of the Company since
December 1994. A thirty-year veteran of the airline industry, including
President of an American Airlines subsidiary and Senior Vice President at World
Airways, he was most recently Executive Vice President and Chief Operating
Officer of The California Kamchatka Companies from 1992 to 1994 and Executive
Vice President and Chief Operating Officer of Monevest Holdings b.v. from 1990
- - - - 1992.
____________________________
(1) Messrs. Baker and O'Shea have entered into agreements with the Company that
they will not stand for election as directors at the next meeting of
stockholders.
24
<PAGE> 25
Thomas J. Volz has been a Vice President of the Company since May 1993.
Mr. Volz was a director of the Company until July 1996. Previously, for more
than five years, he was a self-employed marketing consultant. Mr. Volz was
Vice President - Marketing for Southwest Airlines from 1978 to 1984. Mr. Volz
also worked as a marketing executive for Continental Airlines and Braniff, Inc.
David Y. Monteith has been General Counsel and Secretary of the Company
since October 1995. Since 1964 until 1990 Mr. Monteith was engaged in the
practice of corporate, securities, and commercial law in New York City. For
more than five years he has practiced corporate, securities and commercial law
in Columbia, South Carolina, most recently in his own office and previously as
a partner in Nelson Mullins Riley & Scarborough, L.L.P.
Donald P. Duncan became a director of the Company in January 1997. Mr.
Duncan is a Vice President of AT&T Data Network Services and has for more than
20 years served in various capacities with various units of American Telephone
& Telegraph Company.
Donald Baker served as General Counsel and Secretary of the Company
from early 1994 until October 1995 and has been a director of the Company since
early 1994. Previously, for more than five years he practiced law in Chicago
as a partner in Baker & McKenzie.
William K. Flynn became a director of the Company in October 1996. For
more than five years he has been President of W. J. Flynn & Associates, Inc.,
an investment and venture capital firm. Previously he was a certified public
accountant with Arthur Andersen & Company.
Paul Gillcrist became a director of the Company in 1993 and has been a
Boeing 747-400 Senior Captain for Singapore Airlines for more than the past
five years. He formerly was Vice President - Flight Operations at Southern Air
Transport, Inc. and Airborne Freight Corporation, which owns and operates
Airborne Express.
Clifton E. Haley served as a Chairman of the Board from January 1994 to
September 1996. In May 1995 the Board ratified Mr. Haley's role in the
management of the Company since the resignation of the Chief Executive Officer
in February 1995 and granted him the authority of an acting chief executive
officer until the election of a new Chief Executive Officer. In October 1995
Mr. Haley became an interrim Chief Executive Officer pending the election of
Roden M. Brandt, the Company's new President, to that position; Mr. Brandt
became Chief Executive Officer in April 1996. Previously for more than five
years, Mr. Haley was the Chairman, President, and Chief Executive Officer of
Budget Rent-a-Car Corporation.
William R. Hambrecht has served as a director of the Company since
December 1995. For more than five years he has been with Hambrecht & Quist
Group, L.L.C., an investment banking firm specializing in emerging growth
companies, of which Mr. Hambrecht is a co-founder and Chairman. Mr. Hambrecht
is also a director of Adobe Systems, Inc., a software development company.
Patrick J. O'Shea is the founder of the Company and was Chief Executive
Officer of the Company from its inception until February 1995. As such he was
instrumental in the conception, planning, and implementation of the Company and
the successful beginning of its operations. Prior to that he was a Senior Vice
President of AMADEUS Group, an airline CRS and Chief Executive Officer of
Amadeus Marketing, S.A. Mr. O'Shea is currently Chairman of the Board,
President an Chief Executive Officer of Jet America, Inc.
Robert B. Spane was elected a director in July 1996. Admiral Spane is
retired from the United States Navy and for more than five years has been
engaged as a consultant in various aspects of military and civil aviation.
Admiral Spane is also a director of Vanguard Airlines, Inc.
Harold C. Stowe became a director of the Company in 1995 and has been
Co-President of Canal Industries, Inc., of Conway, South Carolina, for more
than the past five years. Mr. Stowe is also a director of Home State Holdings,
Inc., the holding company for Home State Insurance Company, Inc.
ITEM 6. EXECUTIVE COMPENSATION
Summary Compensation of Executive Officers. The following table sets
forth a summary of the compensation paid by the Company during the fiscal year
ended December 31, 1996 to (a) Its Chairman of the Board, President and Chief
Executive Officer, (b) its former President and Chief Executive Officer, (c)
its former Chairman of the Board and former interim Chief Executive Officer, and
(d) its Senior Vice President and Chief Operating Officer (the "Named Executive
Officers"). No other executive officer of the Company received total annual
compensation for services rendered to the Company during the fiscal year ended
December 31, 1996, in excess of $100,000.
25
<PAGE> 26
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996
------------------------------------
Name and Principal Position Annual Compensation All Other
- - - --------------------------- ------------------- ---------
Position Salary Bonus Compensation
- - - -------- ------ ----- ------------
<S> <C> <C> <C>
(a) John P. Tague . . . . . . . . . . . . . . . $ 160,470 $ -0- $ -0-
Chairman of the Board,
President and Chief
Executive Officer (1)
(b) Roden A. Brandt . . . . . . . . . . . . . . . $ 99,604 $50,000 $ -0-
President and Chief
Executive Officer (2)
(c) Clifton E. Haley . . . . . . . . . . . . . . $ -0- $ -0- $ -0-
Chairman of the Board
and interim Chief
Executive Officer (3)
(d) John Affeltranger . . . . . . . . . . . . . . $ 160,470 $ -0- $ -0-
Senior Vice President
and Chief Operating
Officer (4)
</TABLE>
____________________________
(1) Mr. Tague was elected as President and Chief Executive Officer on
July 25, 1996; he became Chairman of the Board upon the resignation of
Mr. Haley on September 15, 1996. Mr. Tague is compensated pursuant to
a contract (the "TPG Contract") between the Company and The Pointe
Group L.L.C. ("TPG") a consulting firm in which Mr. Tague is a
principal. The compensation shown for Mr. Tague is the aggregate
compensation paid to TPG during the year ended December 31, 1996 for
the services of Mr. Tague, Mr. Affeltranger and one other person
pursuant to the contract with TPG.
(2) Mr. Brandt was elected President and Chief Operating Officer of the
Company on October 25, 1995 and became Chief Executive Officer on
April 23, 1996. Mr. Brandt was removed as President and Chief
Executive Officer on July 25, 1996.
(3) Mr. Haley received no salary or other cash payments for his services.
Mr. Haley was appointed interim Chief Executive Officer of the Company
on October 25, 1995 (formerly, as Chairman of the Board, at the request
of the Board of Directors, he had performed the function of interim
Chief Executive Officer), and on that date Mr. Haley was awarded
options to purchase 750,000 shares at an exercise price of
$1.00 per share. The options were to vest: (a) with respect to
250,000 shares on October 25, 1995; (b) with respect to 250,000 shares
on January 1, 1997; and (c) with respect to 250,000 on January 1,
1998. Under the options, 250,000 shares vested earlier upon the Board
of Directors' determination that an orderly management succession plan
had been implemented; and an additional 250,000 vested earlier upon the
closing of sales by the Company of equity securities aggregating
$4,000,000. All options have vested. Mr. Haley resigned as interim
Chief Executive Officer on April 23, 1996 and as Chairman of the Board
on September 15, 1996.
(4) Mr. Affeltranger joined the Company on July 25, 1996, became a Senior
Vice President on August 28, 1996, acting Chief Operating Officer on
October 30, 1996 and Chief Operating Officer on March 4, 1997. Mr.
Affeltranger is compensated pursuant to the contract between the
Company and TPG. The compensation shown for Mr. Affeltranger is the
aggregate compensation paid to TPG during the year ended December 31,
1996 for the services of Mr. Tague, Mr. Affeltranger and one other
person pursuant to the contract with TPG.
Aggregated Option Exercises and Year End Option Values. During the
year ended December 31, 1996 no options held by the Named Executive Officers
were exercised. At December 31, 1996 Mr. Haley held exercisable options to
purchase 725,000 shares of Common Stock at an exercise price of $1.00 per
share; none of Mr. Haley's options are unexercisable. At December 31, 1996 Mr.
Brandt held exercisable options to purchase 250,000 shares of Common Stock at
an exercise price of $1.00 per share; none of Mr. Brandt's options are
unexercisable. Pursuant to the TPG Contract, under certain circumstances Mr.
Tague may be granted options to purchase up to five percent of the Company's
Common Stock at its fair market value on the date of grant. Based upon the
grant of a warrant as consideration for the provision of collateral security
for certain debts of the Company on December 3, 1996 in an arm's length
transaction, the fair market value of the Common Stock is estimated to have
been $0.25 per share. No other Named Executive Officer held any options to
purchase shares of Common Stock. The Company does not have any plan allowing
the issuance of stock appreciation rights.
26
<PAGE> 27
Employment Agreements and Other Arrangements. Mr. John P. Tague became
President and Chief Executive Officer and a director of the Company on July 25,
1996; on September 15, 1996 he became Chairman of the Board. Mr. Tague will
serve pursuant to an agreement between the Company and TPG (the "TPG
Agreement"). The TPG Agreement provides, among other things that: TPG will
cause Messrs. Tague and John Affeltranger, and one other person to perform
consulting services including serving as officers of the Company for $425,000
annually for two years. The TPG Agreement also provides for the sale to TPG of
6% of the Common Stock of the Company, approximately 25,281,464 shares, for a
purchase price of $0.02 per share. Upon termination of the contract with TPG,
it is anticipated that the Company will either renew the contract or enter into
an employment contract with Mr. Tague for continued service. Under such
contract, Mr. Tague will be granted an option to purchase Common Stock on a
fully-diluted basis equal to 5% of the Company's Common Stock at a price per
share equal to the then fair market value of the Company's Common Stock.
On October 31, 1996, with the endorsement of the Company's Board,
of Directors, Mr. Tague became Chairman of the Board, President and Chief
Executive Officer of Vanguard Airlines, Inc., an airline serving the Midwest
and West Coast. The Company's agreement with TPG provides that if Mr. Tague
devotes less than his full time to rendering services to the Company, the cash
compensation of TPG will be reduced to $325,000. Mr. Tague currently spends
approximately one-half his time rendering services to Vanguard.
On November 9, 1995, the Company employed Mr. Roden A. Brandt as
President and Chief Operating Officer. Mr. Brandt was to receive a minimum
gross annual salary of $135,000 per year. His minimum gross annual salary was
increased to $160,000 per year on June 1, 1996. He received performance bonuses
equal to 50% of base salary based on achievement of specific agreed objectives,
paid one-half on February 1, 1996, and one-half on June 1, 1996. He was to
receive an additional bonus following the year-end audit in early 1997 equal to
50% of base salary based on specific objectives with primary emphasis on the
Company's profit plan. Mr. Brandt became eligible to purchase, and purchased,
100,000 shares of Common Stock at $0.50 per share immediately upon acceptance
of employment; 50% of the purchase price was paid immediately and the balance
was paid in July 1996. He was awarded options to purchase 250,000 shares of
Common Stock at $1.00 per share, with 50,000 shares vesting immediately upon
employment, 100,000 shares vesting on June 1, 1996, and 100,000 shares vesting
on January 1, 1997. Upon the change in control, mentioned above, non-vested
shares became vested immediately. The terms of Mr. Brandt's employment
included a term of three years and a $250,000 severance payment if terminated
for reasons other than cause. Mr. Brandt's employment with the Company was
terminated on July 25, 1996. The Company has entered into an agreement with Mr.
Brandt which provides for settlement of claims by Mr. Brandt, including claims
for severance and moving expenses, for $290,000 plus interest at 8.5% payable
over 15 months.
Pursuant to employment agreements with each of its Vice Presidents
(other than Mr. Affeltranger), the Company has agreed to pay six months'
severance to any Vice President whose employment with the Company terminates;
three Vice Presidents have been terminated and have agreed to receive an
aggregate of $146,250 payable over six-month periods; Mr. Haley is not and has
not been a salaried employee of the Company and has no contract with the
Company regarding his service as a director or his prior service as Chairman of
the Board and interim Chief Executive Officer.
On March 16, 1995, the Company entered into a termination agreement
(the "O'Shea Agreement") with Patrick J. O'Shea, a director and the former
Vice Chairman of the Board, President, and Chief Executive Officer of the
Company, providing for severance payments totaling $130,000 payable in 15
equal monthly installments with the first installment on April 10, 1995 (the
"Termination Payments"). The O'Shea Agreement also provides that Mr. O'Shea's
option to purchase 75,000 shares of Common Stock at $1.00 per share awarded to
him on August 23, 1994, became fully vested and becomes exercisable on the
earlier of 30 days prior to the date the Company announces its initial public
offering or March 16, 2000. On December 22, 1995, the Company and Mr. O'Shea
amended the O'Shea Agreement (the "O'Shea Amendment") to, among other things,
provide for the payment of the Termination Payments as a lump sum rather than
periodically and for the
27
<PAGE> 28
redemption by the Company for $2.00 per share of up to 250,000 shares of Common
Stock owned by Mr. O'Shea and specified persons designated by him. The Company
redeemed 150,000 shares of Common Stock held by Mr. O'Shea and 100,000 shares
of Common Stock held by persons designated by him. Pursuant to the O'Shea
Amendment, Mr. O'Shea agreed not to stand for election as a director of the
Company.
On December 22, 1995, the Company entered into a termination agreement
with Donald Baker, a former director and former Vice President, General
Counsel, and Secretary of the Company. This agreement provides for, among
other things, the payment in a lump sum of the remainder of the $48,750 in the
aggregate of periodic severance payments provided for by Mr. Baker's employment
agreement and termination agreement, and immediate vesting of stock options
previously granted to him. The Company redeemed 20,000 shares of Mr. Baker's
Common Stock at $2.00 per share as a designee of Mr. O'Shea under the O'Shea
Amendment. Pursuant to such termination agreement, Mr. Baker agreed not to
stand for election as a director of the Company.
Stock Option Plans. In January 1994, the Board of Directors adopted
and the Company's stockholders approved the 1993 Incentive Stock Option Plan
(the "1993 Stock Option Plan") under which 500,000 shares of Common Stock were
available to be granted to key officers and employees of the Company. Options
for 350,000 of such shares have been granted. Options granted under the 1993
Stock Option Plan are intended to be incentive stock options as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), which
permits the deferral of taxable income related to the exercise of such options.
Options granted under the 1993 Stock Option Plan have an exercise price equal
to the fair market value at the date of the option grant. Generally, the
options are nontransferable and become void unless the optionee remains
continuously employed by the Company for at least six months following the date
of grant. In addition, the 1993 Stock Option Plan requires each optionee to
agree in writing not to sell or otherwise transfer any shares acquired by
exercise of an option under the plan until two years after the date of grant
and one year after the date of exercise thereof. It is not contemplated that
any additional options will be granted under the 1993 Stock Option Plan.
In August 1994, the Board of Directors adopted the 1994-1995 Stock
Option Plan (the "1994-1995 Stock Option Plan") under which 750,000 shares of
Common Stock were available to be granted to officers and employees of the
Company, as well as nonemployee directors, consultants, and others who have a
relationship with the Company. The 1994-1995 Stock Option Plan was approved by
the Company's stockholders in January 1995. In March 1996 the Board of
Directors adopted the Amended 1994-1995 Stock Option Plan (the "Amended Plan")
which, among other things, increased the number of shares available for grant
to 2,500,000. In the discretion of the Board of Directors, the Amended Plan
may be submitted to the stockholders for approval. The Company may award
either incentive stock options or non-qualified stock options under the Amended
Plan. However, until stockholder approval is obtained, options granted will
not qualify as incentive options under applicable state and federal tax laws.
However, because of major changes and proposed changes to the capitalization of
the Company, the Company does not (a) plan to submit the Amended Plan to its
shareholders for approval or (b) anticipate that any additional options will be
granted under the Amended Plan.
Options under the Amended Plan may become exercisable with respect to
not more than one-third of the total number of shares granted thereby during
each twelve-month period during which the optionee remains continually an
employee, director, or consultant of the Company, commencing twelve months from
the date of grant.
Organization and Compensation Committee. Until July 25, 1996, the
Company's Organization and Compensation Committee (the "Committee") consisted
of Clifton E. Haley, Paul Gillcrist, Harold Stowe and Suzy Van Huss. Other
than Mr. Haley, none of the members of the committee was employed by or served
as an officer of the Company; from October 25, 1995 until April 23, 1996 Mr.
Haley served without salary as interim Chief Executive Officer of the Company.
From January 1994 until September 15, 1996, Mr. Haley was Chairman of the Board
of the Company. On July 25, 1996 Mssrs. Gillcrist and Stowe, and Dr. Van Huss
resigned as Directors; the Committee has not been reconstituted. The Committee
has not adopted any policies relating to the Company's executive officers.
Actions on executive officer compensation since July 25, 1996 have been made
on the recommendation of the Chairman of the Board.
On July 25, 1996 John P. Tague was elected President and Chief
Executive Officer of the Company. The principal factor considered by the Board
in electing Mr. Tague and establishing his compensation was his successful
experience in operating an airline and causing its significant growth.
Directors' Compensation. The Company's Directors receive no pay for
service as such; they are, however, reimbursed for their out-of-pocket expenses
of traveling to and attending meetings of the Board of Directors. On June 23,
1995 certain directors of the Company including Mssrs. Gillcrist and Stowe
were each granted an option to purchase 36,000 shares of Common Stock at an
exercise price of $0.50 per share.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 16, 1995, the Company entered into the O'Shea Agreement. On
December 22, 1995, the Company entered into an agreement supplemental to the
O'Shea Agreement. See ITEM 6. EXECUTIVE COMPENSATION.
On December 22, 1995 the Company entered into an agreement with Donald
Baker, a director. See ITEM 6. EXECUTIVE COMPENSATION - Employment Agreements
and Other Arrangements.
On March 31, 1997 the Company entered into an agreement with The
Pointe Group, Inc. regarding the services, among others, Mssrs. Tague and
Affeltranger. See ITEM 6. EXECUTIVE COMPENSATION - Employment Agreements
and Other Arrangements.
28
<PAGE> 29
The Company has had the following transactions with H&Q and certain of
its affiliates of which William R. Hambrecht, a director of the Company, is
also an affiliate: (a) the sale to H&Q on December 29, 1995 of $2.5 million of
Series A Preferred; (b) the sale to H&Q on May 24, 1996 of $2.5 million of
Series B Preferred; (c) the sale to H&Q on August 16, 1996 of $4 million of
convertible debentures; (d) the delivery to H&Q and certain of its affiliates
from September 1996 through the date hereof of Promissory Notes reflecting
loans to the Company aggregating $13,700,000 of which $2,300,000 has been
repaid; (e) an affiliate of H&Q has provided a letter of credit as security for
the early payment of credit card receivables of the Company; the Company has
issued to such affiliate a warrant to purchase 16,000,000 shares of the
Company's common stock for $0.25 per share, subject to adjustment if Common
Stock or equivalents are later sold at a lower price; and (f) an affiliate of
H&Q has provided a letter of credit in exchange for the guaranty by another
affiliate of H&Q of a $2,000,000 bank loan to the Company; as consideration for
providing such letter of credit, such subsidiary has been granted a warrant to
purchase 8,000,000 shares of the Company's Common Stock for $0.25 per share,
subject to adjustment if Common Stock or equivalents are later sold at a lower
price. The Company has issued to H&Q Group a warrant to purchase 400,000
shares of Common Stock for $0.50 per share as consideration for its guarantee
of a $2 million bank loan. See ITEM 4. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
During the years ended December 31, 1995 and 1996 the Company paid CEH
Inc. $96,270 and $31,650, respectively for air travel on Company business by
its Director and former Chairman of the Board, Clifton E. Haley, between
Columbia, S.C. and various places. As of the date hereof, $121,596 is owed to
CEH, Inc. for such air travel by Mr. Haley; the invoices representing such
amount are all more than 120 days past due. CEH Inc. is owned by Mr. Haley.
On July 12, 1996, Mr. Haley paid $277,359 directly to a vendor for
payment of certain payables of the Company. As of December 31, 1996, this
amount was, and is now, payable to Mr. Haley
ITEM 8. LEGAL PROCEEDINGS.
The Company is a party to a lawsuit which if decided adversely to
the Company might be considered a material lawsuit. In Hillsborough County
Aviation Authority v. Air South Airlines, Inc., the Hillsborough County
Aviation Authority seeks damages from the Company arising out of the Company's
alleged breach of four contracts relating to the use by the Company of Tampa
International Airport. This suit was instituted in April, 1996 in the Circuit
Court of the Thirteenth Judicial Circuit in and for Hillsborough County, State
of Florida, Civil Division. The suit seeks approximately $472,000 in damages
plus interest, costs and attorneys' fees. An accrual of $680,000 reflecting
management's estimate of the amount required to settle this suit has been
recorded as of December 31, 1996.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
(a) Market Information.
There is no established trading market for any securities of the
Company. The Company takes the position that all its issued and outstanding
securites issued by it to date are "restricted securities" as defined in Rule
144(a)(3) promulgated under the Securities Act and cannot be sold or otherwise
transferred unless registered or sold or transferred pursuant to an applicable
exemption. On the date hereof: (i) there are outstanding options or warrants to
purchase 34,384,833 shares of Common Stock; (ii) there are outstanding shares
of preferred stock and convertible debentures which are convertible into
38,367,598 shares of Common Stock; and there are no shares of common equity
which could be sold pursuant to Rule 144. The Company has agreed under certain
circumstances to register under the Securities Act of 1933, as amended (the
"Securities Act"), for sale by certain security holders up to 62,382,598 shares
of Common Stock; and (iii) the Company is not presently proposing to publicly
offer any of its common equity.
(b) Holders.
On March 31, 1997 there were 899 holders of record of shares of Common
Stock.
(c) Dividends.
The Company has never declared or paid dividends on its capital stock.
The Company currently intends to retain any available earnings for use in the
operation and expansion of its business. Therefore, the Company does not
expect to pay any cash dividends on the Common Stock in the foreseeable future.
Any payments of dividends by the Company in the future will be at the
discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition, and any other factors
deemed relevant by the Board of Directors. In addition, the Company is
prohibited from making any cash distribution in respect of its Common Stock
pursuant to restrictive covenants in various agreements with banks and others,
including the State Loan agreement.
29
<PAGE> 30
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Since the Company's inception, the registrant has sold and issued or
otherwise issued the following unregistered securities; all transactions
described below have been adjusted to reflect a two-for-one split of the shares
of Common Stock effective in September, 1993:
(1) Between April 1993 and September 1993, the Company sold
2,097,334 shares of Common Stock to the founding stockholders and original
directors and officers of the Company for cash, services rendered, or a
combination of cash and services rendered, $0.23 to $0.83 per share.
(2) (a) In September 1993 the Company sold 30,000 shares of Common
Stock to a consultant to the Company in exchange for consulting services on the
basis of $0.50 per share; (b) in January, 1994 the Company issued 56,000 shares
in the aggregate to four directors of the Company in exchange for services as
directors and consulting services on the basis of $0.50 per share; (c) in April
1994 the Company sold 80,000 shares to its chief pilot and 35,000 shares to its
chief financial officer, in each case for $0.50 per share.
(3) In May 1994, the Company sold 1,022,000 shares of Common Stock
to South Carolina accredited investors for $1.00 and 235,000 shares of Common
Stock to certain of its founding stockholders for $0.50 per share.
(4) In July 1994, the Company sold 436,200 shares of Common Stock to
certain of its founding stockholders, officers, directors and certain
executive employees for $0.50 per share.
(5) In January 1995, the Company issued an aggregate of 32,775
shares of Common Stock to substantially all employees of the Company as holiday
gifts. The number of shares issued to each employee was based upon months of
service. Half of such shares were donated by Patrick J. O'Shea, the then
President and Chief Executive Officer, and founder of the Company.
(6) In April 1995, the Company sold 1,836,560 shares of Common Stock
pursuant to the Company's Employee Stock Purchase Plan for $0.50 per share.
(7) In April 1995, the Company sold 1,181,040 shares of Common Stock
pursuant to a rights offering to existing stockholders (other than employee
stockholders who had received shares as 1994 holiday gifts or who had purchased
shares pursuant to the Employees Stock Purchase Plan) for $0.50 per share.
(8) In May 1995 the Company sold 122,400 shares of Common Stock to a
consultant for consulting services on the basis of $0.50 per share.
(9) In August 1995, the Company issued an aggregate of 129,590 shares
of Common Stock to substantially all employees of the Company as gifts on the
occasion of the Company's first anniversary of flight operations. The number
of shares issued to each employee was based upon months of service.
(10) In November 1995, the Company sold 100,000 shares of Common Stock
to an officer and director for $0.50 per share in connection with his
employment by the Company.
(11) In December 1995, the Company sold 1,250,000 shares of Series A
Preferred to H&Q Group for $2.00 per share.
(12) On March 12, 1996, the Company issued 7,500 shares of Common
Stock to a bank in connection with a loan.
(13) In April 1996, the Company borrowed $2,000,000 from a bank. H&Q
Group guaranteed the loan in exchange for a warrant to purchase 400,000 shares
of Series A Preferred at $2.00 per share; that price has subsequently been
reduced to $.50 per share.
(14) On May 24, 1996, the Company sold 5,000,000 shares of Series B
Preferred to H&Q for $2,500,000.
(15) In June 1996, the Company sold 3,000,000 shares of Series C
Preferred for $1,500,000. $1,000,000 was sold to a corporation of British
Virgin Islands registry and $500,000 to a New York corporation.
(16) On August 16, 1996, the Company sold $4 million of Convertible
Debentures to H&Q.
(17) On September 4, 1996 the Company sold $500,000 of Convertible
Debentures to a North Carolina corporation.
30
<PAGE> 31
(18) On September 30, 1996, the Company sold $400,000 and $200,000,
respectively, of Convertible Debentures to the two investors referred to in
"(15)", above.
(19) In October 1996, the Company sold $120,000 of Convertible
Debentures to a present stockholder and director of the Company resident in
Singapore.
(20) As of September 30, 1996, the Company had granted stock options
and warrants (in addition to those described elsewhere in this Item 10)
to employees, officers and directors and certain suppliers covering an
aggregate of 10,384,833 shares of Common Stock exercisable at $.50 per share.
None of these options and warrants have been exercised except for 3,333 shares
by one person leaving the employment of the Company.
(21) From September 20, 1996 through the date hereof the Company has
borrowed $13,700,000 from Accredited Investors pursuant to demand promissory
notes; $2,300,000 has been repaid. It is anticipated that such Accredited
Investors will cause such demand promissory notes to be satisfied in
consideration of the issuance of a similar amount of the Company's convertible
debentures to them.
(22) On December 3, 1996 the Company issued a Warrant to H&Q to
purchase 16,000,000 shares of Common Stock at an exercise price of $0.25 per
share subject to adjustment if Common Stock on equivalents are later sold at a
lower price. Such Warrant was issued as consideration for H&Q providing a $4
million letter of credit to secure the early payment of credit card receivables
of the Company.
(23) On January 29, 1997 the Company issued a warrant to H&Q to
purchase 8,000,000 shares of Common Stock at an exercise price of $0.25 per
share subject to adjustment if Common Stock or equivalents are later sold at a
lower price. Such warrant was issued as consideration for H&Q providing a
$2,000,000 letter of credit to secure a bank loan to the Company.
The sales and issuance of securities in the transactions described in
paragraph "(6)", above, were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold pursuant to a written contract relating to compensation. With
respect to (a) the grant of stock options described in paragraph "(20)" and (b)
the issuances referred to in paragraphs "(5)" and "(9)", above, an exemption
from registration under the Securities Act was unnecessary in that the issuance
of the securities did not involve a sale of securities as such term is used in
Section 2(3) of the Securities Act. The sales and issuances of securities in
the transactions described in all other paragraphs above were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2) and
Regulation D promulgated thereunder.
Except for certain shares issued prior to May 1994, appropriate legends
are affixed to the stock certificates for all shares issued by the Company and
investment representations were obtained from the purchasers. All purchasers
of securities either received adequate written information about the Company or
had access, through employment or other relationships, to such information.
The Company considers all securities issued by it to date to be "restricted
securities" as defined in Rule 144(a)(3) promulgated under the Securities Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The authorized capital stock of the Company consists of 18,000,000
shares of Common Stock, par value $0.001 per share, and 2,000,000 shares of
Preferred Stock, par value $0.001 par value per share (the "Preferred Stock").
COMMON STOCK
As of the date hereof, there are 6,967,182 shares of Common Stock
outstanding, held of record by 899 stockholders. Options and warrants to
purchase 34,384,833 shares of Common Stock have been issued. If all
convertible securities were converted and all options and warrants were
exercised, there would be 65,219,858 shares of Common Stock outstanding, held
of record by approximately 925 stockholders.
Holders of Common Stock are entitled to one vote for each share held
and have no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with respect to
Common Stock. There is cumulative voting for the election of directors.
Holders of Common Stock are entitled to such dividends as may be declared by
the Board of Directors out of funds legally available therefor, subject to
preferential dividend rights of any outstanding series of Preferred Stock, if
any. Upon the liquidation, dissolution, or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata the net assets of the
Company remaining after the payment of all creditors and any Preferred Stock or
other liquidation preferences. The outstanding shares of Common Stock are
fully paid and nonassessable.
PREFERRED STOCK
As of the date hereof, there was an aggregate of 1,955,000 shares of
Preferred Stock outstanding, which shares were issued in series, to the
number of holders of record indicated, and with rights of conversion (before
application of anti-dilution provisions) into the number of shares of Common
Stock as follows:
31
<PAGE> 32
<TABLE>
<CAPTION>
Name of Series and Number of Shares
Number of Shares Number of of Common Stock Issuable
Outstanding Holders Upon Conversion
---------------------- ----------- ---------------------------
<S> <C> <C>
Series A 1
1,250,000 shares 1,250,000 shares
Series B 1
625,000 shares 5,000,000 shares
Series C 2
120,000 shares 3,000,000 shares
</TABLE>
Series A
The Series A Preferred Stock (the "Series A") shall be entitled to
receive non-cumulative dividends at the rate of $0.16 per share per annum. No
cash dividend shall be paid on the Common Stock in any year unless an equal
dividend is paid on each outstanding share of Series A on an as-if-converted
basis. In the event of liquidation, the holders of the Series A shall be
entitled to receive, pari passu with the shares of Series B Preferred Stock
("Series B") and Series C Preferred Stock ("Series C") in preference to the
Common Stock, $2.00 per share. After payment of such preferential amount, the
remaining assets shall be distributed ratably among the holders of Series A,
Series B, Series C and Common Stock in proportion to the shares held. Each
share of Series A is convertible at any time into one share of Common Stock.
The holders of Series A have the right to vote with the holders of Common Stock
as a single class upon the election of directors and upon any other matter
submitted to the stockholders. Each share of Preferred Stock has the same
voting rights and number of votes as the shares of Common Stock into which it is
convertible. In addition, the vote of a majority of the Series A shares shall
be necessary to adopt certain fundamental changes in the Company, including any
change to the Certificate of Incorporation or Bylaws of the Company, liquidation
of the Company, change in the principal business of the Company or certain
securities repurchases by the Company. So long as at least 50% of the Series A
remains outstanding, the holders of Series A voting as a class shall be entitled
to elect one member to the Board of Directors. The Series A holders' rights
with respect to preferences upon liquidation, conversion into Common Stock, and
voting with the holders of Common Stock as a class on certain matters are
protected by broad anti-dilution provisions.
Series B
The Series B Preferred Stock (the "Series B") shall be entitled to
receive non-cumulative dividends at the rate of $0.32 per share per annum. No
cash dividend shall be paid on the Common Stock in any year unless an equal
dividend is paid on each outstanding share of Series B on an as-if-converted
basis. In the event of liquidation, the holders of the Series B shall be
entitled to receive, pari passu with Series A and Series C, in preference to the
Common Stock, $4.00 per share. After payment of such preferential amount, the
remaining assets shall be distributed ratably among the holders of Series A,
Series B, Series C and Common Stock in proportion to the shares held. Each
share of Series B is convertible at any time into eight shares of Common Stock.
The holders of Series B have the right to vote with the holders of Common Stock
as a single class upon the election of directors and upon any other matter
submitted to the stockholders. Each share of Preferred Stock has the same
voting rights and number of votes as the shares of Common Stock into which it is
convertible. In addition, the vote of a majority of the Series B shares shall
be necessary to adopt certain fundamental changes in the Company, including any
change to the Certificate of Incorporation or Bylaws of the Company, liquidation
of the Company, change in the principal business of the Company or certain
securities repurchases by the Company. So long as at least 50% of the Series B
remains outstanding, the holders of Series B voting as a class shall be entitled
to elect one member to the Board of Directors. The Series B holders' rights
with respect to preferences upon liquidation, conversion into Common Stock, and
voting with the holders of Common Stock as a class on certain matters are
protected by broad anti-dilution provisions.
Series C
The Series C Preferred Stock (the "Series C") shall be entitled to
receive non-cumulative dividends at the rate of $1.00 per share per annum. No
cash dividend shall be paid on the Common Stock in any year
32
<PAGE> 33
unless an equal dividend is paid on each outstanding share of Series C on an
as-if-converted basis. In the event of liquidation, the holders of the Series
C shall be entitled to receive, pari passu with Series A and Series B, in
preference to the Common Stock, $12.50 per share. After payment of such
preferential amount, the remaining assets shall be distributed ratably among
the holders of Series A, Series B, Series C and Common Stock in proportion to
the shares held. Each share of Series C is convertible at any time into 25
shares of Common Stock. The holders of Series C have the right to vote with
the holders of Common Stock as a single class upon the election of directors
and upon any other matter submitted to the stockholders. Each share of
Preferred Stock has the same voting rights and number of votes as the shares of
Common Stock into which it is convertible. In addition, the vote of a majority
of the Series C shares shall be necessary to adopt certain fundamental changes
in the Company, including any change to the Certificate of Incorporation or
Bylaws of the Company, liquidation of the Company, change in the principal
business of the Company or certain securities repurchases by the Company. So
long as at least 50% of the Series C remains outstanding, the holders of Series
C voting as a class shall be entitled to elect one member to the Board of
Directors. The Series C holders' rights with respect to preferences upon
liquidation, conversion into Common Stock, and voting with the holders of
Common Stock as a class on certain matters are protected by broad anti-dilution
provisions.
SERIES D AND E
The Company has sold $4,600,000 of Convertible Debentures which are
convertible to Series D Preferred Stock which is, in turn, convertible into
Common Stock; and $620,000 of Convertible Debentures which are convertible into
Series E Preferred Stock which is, in turn, convertible into Common Stock. The
Company does not now have sufficient authorized preferred or common stock for
the conversion of such debentures and preferred stock. It is anticipated that
the shareholders of the Company will approve such additional authorized capital
stock at the next annual meeting of stockholders. It is also anticipated that
the terms of such Series D and Series E Preferred Stock will be substantially
similar to those of the Series A, Series B and Series C Preferred Stock except
that Series D and Series E Preferred will be convertible at $0.25 per share.
SERIES F
The Company anticipates that within 30 days after the date hereof it
will have sold $12,500,000 of Convertible Debentures which are convertible to
Series F Preferred Stock which is, in turn, convertible into Common Stock. The
Company does not now have sufficient authorized preferred or common stock for
the conversion of such debentures and preferred stock. It is anticipated that
the shareholders of the Company will approve such additional authorized capital
stock at the next annual meeting of stockholders. It is also anticipated that
the terms of such Series F Preferred Stock will be substantially similar to
those of the Series A, Series B and Series C Preferred Stock except that Series
F Preferred will be convertible at $0.10 per share.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) The Delaware General Corporation Law ("DGCL") (Section 145) (i)
gives Delaware corporations broad powers to indemnify their present and former
directors, officers, employees or agents and those directors, officers,
employees or agents of certain other entities who serve in such capacities for
those entities at the request of a Delaware corporation against expenses
incurred in the defense of any lawsuit to which they are made parties by reason
of being or having been such directors, officers, employees or agents, subject
to specified conditions and exclusions, (ii) gives a director or officer who
successfully defends an action the right to be so indemnified, and (iii)
authorizes the Company to buy directors' and officers' liability insurance.
Such indemnification is not exclusive of any other rights to which those
indemnified may be entitled under any bylaws, agreement, vote of stockholders
or otherwise.
(b) The Company's Certificate of Incorporation provides that the
Company shall indemnify officers, directors, employees and agents of the
Company to the fullest extent permitted by the DGCL.
(c) In accordance with Section 102(b)(7) of the DGCL, the Company's
Certificate of Incorporation provides that directors shall not be personally
liable for monetary damages for breaches of their fiduciary duty as directors
except for (i) breaches of their duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law, (iii) breaches of Section
174 of the DGCL (unlawful payment of dividends), or (iv) transactions from which
a director derives an improper personal benefit.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements required by this ITEM 13 are set forth in pages
F-1 through F-21 of this Registration Statement. No supplementary financial
information is required by Item 302 of Regulation S-K.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the registrant's two most recent fiscal years or any subsequent
interim period, no independent accountant who was previously engaged as the
principal accountant to audit the registrant's financial statements, or an
independent accountant who was previously engaged to audit a significant
subsidiary and on whom the
33
<PAGE> 34
principal accountant expressed reliance in its report, has resigned (or
indicated it has declined to stand for re-election after the completion of the
current audit) or was dismissed.
GLOSSARY
"Available seat miles" or "ASMs" represents the number of seats available for
passengers on scheduled service flights multiplied by the number of miles those
seats are flown.
"Aviation Act" means the Federal Aviation Act of 1958.
"Average fare" means operating revenues divided by enplaned passengers.
"Average flight length" represents total aircraft miles flown divided by the
number of departures.
"Average segment fare" means operating revenue divided by onboard passengers.
"Block hours flown" represents the time between aircraft gate departure and
aircraft gate arrival.
"Break-even load factor" represents the percentage of RPMs that must be flown
for the airline to break even after operating and interest expenses.
Break-even load factor is calculated by taking total expenses, minus
non-passenger revenue, divided by ASMs, divided by passenger yields per RPM.
"CRS" means Computer Reservation Systems used extensively by travel agents in
the airline industry to book reservations.
"C-check" means scheduled heavy maintenance required by FAA regulations to be
performed on aircraft every 3,000 hours of flight time.
"Deregulation Act" means the Airline Deregulation Act of 1978.
"DOT" means the United States Department of Transportation.
"FAA" means the Federal Aviation Administration.
"Grants" means the approximately $4.0 million of grants to the Company by South
Carolina State and local governments for relocation, training, facility, and
advertising reimbursement.
"Load" means the percentage of available seats occupied.
"Load Factor" represents Revenue Passenger Miles divided by available seat
miles.
"Operating Cost per total ASM" for any period represents the amount determined
by dividing total operating expenses for each period by total ASMs for each
such period.
"Passenger yield per RPM" represents the total passenger revenue divided by
RPMs.
"Revenue Passenger Miles" or "RPMs" represents the total number of miles flown
by passengers on scheduled service flights.
"State Loan" means a $12 million loan to the Company arranged by the State of
South Carolina from Lexington County, South Carolina guaranteed and sold by the
United States Department of Housing and Urban Development.
"Total Revenue per ASM" represents total revenues divided by total Available
seat miles.
"Working Capital" means the excess of current assets over current liabilities.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
FINANCIAL STATEMENTS
(a) Independent Auditors' Report;
Audited Balance sheets at December 31, 1995 and 1996,
Statements of Operations, Stockholders' Deficiency, and Statement
of Cash Flows for the years ended August 31, 1994 and 1995, the
four months ended December 31, 1995 and the year ended
December 31, 1996.
(b) EXHIBIT INDEX
The exhibits listed below are, unless marked with an asterisk,
incorporated by reference to the Company's Registration Statement on Form 10
filed on February 7, 1997 (withdrawn pursuant to request letter dated
March 21, 1997); those exhibits marked with an asterisk are filed herewith.
<TABLE>
<CAPTION>
Sequential
Exhibit Page
Number Description Number
- - - ------- ----------- ----------
<S> <C> <C> <C>
2.1 -- Agreement of Merger dated December 29, 1995
between Air South Airlines, Inc. and Air South,
Inc.
3.1 -- Certificate of Incorporation of Registrant and
Certificates of Designation as to Series B and C
Preferred Stock.
3.2 -- Bylaws of Registrant.
4.1 -- Article 4 of Registrant's Articles of Incorporation
(included in Exhibit 3.1).
4.2 -- Articles VI and VII of Registrant's Bylaws
(included in Exhibit 3.2).
4.3 -- HUD Section 108 Program Loan Agreement between
Lexington County, South Carolina and the Registrant,
and the related Grant Agreement between the City
of Columbia and the Regisrtant, in each case dated
July 15, 1994.
4.4 -- Specimen Common Stock Certificate.
4.5 -- Series A Preferred Stock Purchase Agreement and
the related Investors' Rights Agreement dated
December 29, 1995 between the Company and
Hambrecht and Quist Group, L.L.C.
4.6 -- Loan Agreement and certain related documents
dated March 29, 1996 between NationsBank, N.A.
and the Company.
4.7 -- Loan Agreement and certain related documents
dated April 26, 1996 between The National Bank of
South Carolina and the Company.
4.7(a)* -- Note Revision Agreement between the National Bank
of South Carolina and the Company, and related
agreements.
4.8 -- Option Purchase Agreement and certain related
documents dated April 26, 1996 between the
Company and Hambrecht & Quist Group, L.L.C.
4.9 -- Series B Preferred Stock Purchase Agreement and
the related Investors' Rights Agreement dated May
24, 1996 between the Company and H&Q Air South
Investors, L.P. ("H&Q").
4.10 -- Series C Preferred Stock Purchase Agreement and
the related Investors' Rights Agreement dated June
14, 1996 between the Company and W.J. Flynn &
Associates, Inc. ("Flynn").
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C> <C> <C>
4.11 -- Series C Preferred Stock Purchase Agreement and
the related Investors' Rights Agreement dated June
24, 1996 between the Company and Fil-Fiber
Manufacturing, Inc., Ltd. ("Fil-Fiber").
4.12 -- Convertible Debenture Purchase Agreement and the
related Investors' Rights Agreement dated August
16, 1996 between the Company and H&Q.
4.13 -- Convertible Debenture Purchase Agreement and the
related Investors' Rights Agreement dated
September 4, 1996 between the Company and
Godley Group Ltd.
4.14 -- Convertible Debenture Purchase Agreement and the
related Investors' Rights Agreement dated
September 30, 1996 between the Company and Flynn.
4.15 -- Convertible Debenture Purchase Agreement and the
related Investors' Rights Agreement dated
September 30, 1996 between the Company and
Fil-Fiber.
4.16* -- Convertible Debenture Purchase Agreement
and the related Investor's Rights Agreement dated October 16,
1996 between the Company and Paul Gillcrist.
10.1 -- 1993 Incentive Stock Option Plan.
10.2 -- 1994-1995 Incentive and Non-Qualified Stock
Option Plan.
10.3 -- 1994-1995 Amended Incentive and Non-Qualified
Stock Option Plan.
10.4 -- Employee Stock Purchase Plan.
10.5 -- (Intentionally omitted.)
10.6 -- Common stock purchase warrant for 725,000 shares
issued January 11, 1996 to Clifton E. Haley by Air
South Airlines, Inc.
10.7 -- Common stock purchase warrant for 10,000 shares
issued October 25, 1995 to David Y. Monteith by
Air South Airlines, Inc.
10.8 -- Common stock purchase warrant for 250,000 shares
issued November 8, 1995 to Roden A. Brandt by
Air South, Inc.
10.9 -- Incentive Stock Option Agreement dated November
12, 1994 between Air South, Inc. and Dennis
Crosby for the purchase of up to 80,000 shares of
common stock.
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C> <C> <C>
10.10 -- Incentive Stock Option Agreement dated August 23,
1994 between Air South, Inc. and Donald Baker for
the purchase of up to 40,000 shares of common
stock.
10.11 -- Incentive Stock Option Agreement dated August 23,
1994 between Air South, Inc. and Thomas Volz for
the purchase of up to 50,000 shares of common
stock.
10.12 -- Incentive Stock Option Agreement dated June 23,
1995 between Company and Paul Gillcrist for the
purchase of up to 36,000 shares of common stock.
10.13 -- Incentive Stock Option Agreement dated June 23,
1995 between Company and Harold Stowe for the
purchase of up to 36,000 shares of common stock.
10.14 -- Letter from Air South, Inc. to Roden A. Brandt,
dated October 20, 1995.
10.15 -- Employment agreement between Air South, Inc.
and Tom Volz, dated December 8, 1993.
10.16 -- Employment agreement between Air South, Inc.
and Dennis Crosby dated November 12, 1994.
10.17 -- Lease dated ____________, 199_ between
Jacksonville Port Authority and Air South, Inc.
10.18 -- Lease between Dade County, Florida and Air
South, Inc. dated ____________, 199_.
10.19 -- Lease between Air South, Inc. and Horry County
dated February 20, 1995
10.20 -- Lease between Air South, Inc. and the City of
Atlanta dated ____________, 199_.
10.21 -- Aircraft Use and Lease Agreement between Air
South, Inc. and Richland-Lexington Airport
District dated August 15, 1994.
10.22 -- Airline Operating Agreement between Savannah
Airport Commission and Air South dated April 10,
1996.
10.23 -- Non-Signatory Airlines Tenant Agreement between
Greenville-Spartanburg Airport District dated
June 20, 1996.
10.24 -- Airport Use Agreement between Norfolk Airport
Authority and Air South, Inc. dated May 2, 1996.
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C> <C>
10.25(a)* -- Scheduled Airline Operating Agreement and Terminal Building
Lease dated October 1, 1996 between the Company and
Charleston County Aviation Authority
10.26 -- Airport License and Agreement between the City of
Chicago and Air South Airlines, Inc.
10.27 -- (Intentionally omitted.)
10.28 -- (Intentionally omitted.)
10.29 -- Airport Use and Lease Agreement between
Richland-Lexington Airport District and Air South, Inc.
dated August 1, 1994
10.30 -- Lease Agreement between Richland-Lexington
Airport District and Air South, Inc. dated
December 12, 1995.
10.31 -- Lease between Polaris Aircraft Leasing K.B. and
Air South Airlines, Inc. dated April 29, 1996 for
Boeing 737 Advanced Aircraft Serial Number 21612.
10.32 -- Lease between Polaris Aircraft Leasing K.B. and
Air South Airlines, Inc. dated April 29, 1996
for Boeing 737 Advanced Aircraft Serial Number 21356.
10.33 -- Lease between Polaris Holding Co. and Air South
Airlines, Inc. dated April 29, 1996 for Boeing 737
Advanced Aircraft Serial Number 21186.
10.34 -- Lease between Polaris Aircraft Leasing K.B. and
Air South Airlines, Inc. dated April 29, 1996 for
Boeing 737 Advanced Aircraft Serial Number 21677.
10.35 -- Lease between Polaris Aircraft Leasing K.B. and
Air South Airlines, Inc. dated April 29, 1996 for
Boeing 737 Advanced Aircraft Serial Number 21733.
10.36 -- Lease between Air South, Inc. and MIMI Leasing
Corp. dated October 31, 1994 for the lease of
Boeing 737 Serial Number 19612.
10.37(A)* -- Lease between Air South Airlines, Inc. and MIMI Leasing
Corp. dated as of February 1, 1997 for the lease of
Boeing 737 Serial Number 19607.
10.38* -- Consulting Agreement between Air South Airlines, Inc. and
The Pointe Group, L.L.C. effective as of August 16, 1996,
and a related Indemnity Agreement.
10.39* -- Reimbursement Agreement between Air South Airlines, Inc.
and Hambrecht & Quist California relating to a $4,000,000
Letter of Credit dated December 3, 1996, and related
agreements.
10.40* -- Reimbursement Agreement between Air South Airlines, Inc.
and Hambrecht & Quist California relating to a $2,000,000
Letter of Credit dated January 29, 1997, and related
agreements.
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C> <C>
27.1* -- Financial Data Schedule for the twelve months ended December
31, 1996 - (for SEC use only)
</TABLE>
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
AIR SOUTH AIRLINES, INC.
April 17, 1997
By: /s/ John P. Tague
---------------------------------------
John P. Tague, Chairman of the Board,
President and Chief Executive Officer
39
<PAGE> 40
-----------------------------------------------
Air South Airlines, Inc.
Financial Statements for the Fiscal Years Ended
August 31, 1994 and 1995, the Four-Month Period
Ended December 31, 1995 and the Fiscal Year
Ended December 31, 1996 and Independent
Auditors' Report
<PAGE> 41
AIR SOUTH AIRLINES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
BALANCE SHEETS F-3
STATEMENTS OF OPERATIONS F-4
STATEMENTS OF STOCKHOLDERS' DEFICIENCY F-5
STATEMENTS OF CASH FLOWS F-6
NOTES TO FINANCIAL STATEMENTS F-8
</TABLE>
F-1
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
Board of Directors
Air South Airlines, Inc.:
We have audited the accompanying balance sheets of Air South Airlines, Inc. (the
"Company") as of December 31, 1995 and 1996 and the related statements of
operations, stockholders' deficiency, and cash flows for each of the two years
in the period ended August 31, 1995, the four-month period ended December 31,
1995 and the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995 and 1996,
and the results of its operations and its cash flows for each of the two years
in the period ended August 31, 1995, the four-month period ended December 31,
1995 and the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company's recurring losses from operations and stockholders'
deficiency raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Columbia, South Carolina
March 31, 1997
F-2
<PAGE> 43
AIR SOUTH AIRLINES, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
ASSETS (NOTE 3) 1995 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 2,369,614 $ 1,070,063
Investments (Notes 1 and 3) 694,430 1,211,000
Receivables (principally air traffic) 2,419,171 671,825
Prepaid expenses and other current assets 1,435,438 1,522,176
------------ ------------
Total current assets 6,918,653 4,475,064
DEPOSITS (Note 5) 1,170,000 1,170,000
PROPERTY AND EQUIPMENT, NET (Notes 1 and 2) 2,594,600 3,469,287
DEBT ISSUE COSTS (net of accumulated amortization of $30,723 and
$37,873, respectively) (Note 1) 262,424 312,976
OTHER 671,786 426,469
------------ ------------
Total assets $ 11,617,463 $ 9,853,796
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term borrowings (Note 3) $ 5,277,359
Accounts payable $ 6,077,084 10,572,801
Accrued expenses (Note 1) 6,357,336 10,178,518
Air traffic liability (Note 1) 2,933,101 4,500,157
Current portion of long-term debt (Note 3) 96,789 1,266,752
------------ ------------
Total current liabilities 15,464,310 31,795,587
------------ ------------
LONG-TERM DEBT (Note 3) 12,000,000 18,291,122
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 5 and 6)
REDEEMABLE COMMON STOCK (Note 10) - $.001 par value, 250,000
shares issued and outstanding at December 31, 1995 (redeemed in 1996) 500,000
STOCKHOLDERS' DEFICIENCY (Notes 1, 3, 4 and 11):
Convertible preferred stock, $.001 par value, 2,000,000 shares authorized,
1,250,000 and 1,995,000 shares outstanding at December 31, 1995 and 1996,
respectively; aggregate liquidation preference of $6,500,000 1,250 1,995
Common stock, $.001 par value, 18,000,000 shares authorized; shares
issued and outstanding: December 31, 1995 - 6,818,019 and
December 31, 1996 - 6,967,182 6,818 6,967
Additional capital 7,263,606 11,453,645
Accumulated deficit (23,166,328) (51,695,520)
Unearned compensation (452,193)
------------ ------------
Total stockholders' deficiency (15,846,847) (40,232,913)
------------ ------------
Total liabilities and stockholders' deficiency $ 11,617,463 $ 9,853,796
============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE> 44
AIR SOUTH AIRLINES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 1994 AND 1995,
THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 1995
AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FOUR
AUGUST 31, MONTHS ENDED YEAR ENDED
------------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger (Note 1) $ 132,181 $ 44,465,530 $ 19,463,505 $ 51,780,268
Other 664,170 394,626 2,179,389
------------ ------------ ------------ ------------
Total operating revenues 132,181 45,129,700 19,858,131 53,959,657
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 1,083,381 13,253,773 5,165,701 15,872,183
Aircraft fuel and oil 100,000 10,172,353 4,120,382 13,133,798
Aircraft leases 155,820 4,924,358 2,088,116 7,920,265
Maintenance materials and repairs (Note 1) 146,477 7,572,728 3,670,797 8,329,850
Agency commissions 6,000 2,511,632 1,379,132 3,030,434
Other rentals, landing and ground handling fees 104,911 4,619,166 1,990,312 5,900,070
Advertising (Note 1) 323,518 2,392,574 595,516 4,500,960
Depreciation and amortization 28,694 350,447 174,864 667,753
Other operating expenses (Note 9) 1,037,543 16,120,423 5,481,611 22,723,333
------------ ------------ ------------ ------------
Total operating expenses 2,986,344 61,917,454 24,666,431 82,078,646
------------ ------------ ------------ ------------
OPERATING LOSS (2,854,163) (16,787,754) (4,808,300) (28,118,989)
------------ ------------ ------------ ------------
NONOPERATING (EXPENSE) AND INCOME:
Grants (Notes 1 and 6) 1,261,198 1,316,811 88,493 215,800
Interest expense (21,375) (514,171) (164,764) (1,045,557)
Interest income 14,950 182,476 65,152 188,534
Other income (expense) (215,873) (60,543) (6,876) 231,020
------------ ------------ ------------ ------------
Total nonoperating income (expense), net 1,038,900 924,573 (17,995) (410,203)
------------ ------------ ------------ ------------
NET LOSS $ (1,815,263) $(15,863,181) $ (4,826,295) $(28,529,192)
============ ============ ============ ============
NET LOSS PER SHARE (Note 1) $ (.72) (3.18) $ (.69) $ (4.14)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES (000's) 2,523 4,987 6,981 6,888
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE> 45
AIR SOUTH AIRLINES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED AUGUST 31, 1994 AND 1995,
THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 1995
AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Number of Number of
Preferred Preferred Common Common Additional
Shares Stock Shares Stock Capital
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1993 2,097,334 $ 2,098 $ 709,877
Issuance of shares of common stock 1,571,200 1,571 1,440,812
Net loss --------- ------- ------------
BALANCE, AUGUST 31, 1994 3,668,534 3,669 2,150,689
Issuance of shares of common stock 3,187,055 3,187 1,598,025
Issuance of stock options, warrants and stock awards 162,530 162 312,558
Amortization of unearned compensation
Net loss
--------- ------- ------------
BALANCE, AUGUST 31, 1995 7,018,119 7,018 4,061,272
Issuance of shares of common stock 49,900 50 82,784
Issuance of stock options 795,800
Amortization of unearned compensation
Issuance of preferred stock (Series A) 1,250,000 $ 1,250 2,498,750
Transfer of redeemable common stock (250,000) (250) (175,000)
Net loss
--------- --------- --------- ------- ------------
BALANCE, DECEMBER 31, 1995 1,250,000 1,250 6,818,019 6,818 7,263,606
Issuance of shares of common stock 149,163 149 93,184
Issuance of shares of preferred stock - Series B 625,000 625 2,499,375
Issuance of shares of preferred stock - Series C 120,000 120 1,499,880
Amortization of unearned compensation
Issuance of warrants 97,600
Net loss
--------- --------- --------- ------- ------------
BALANCE, DECEMBER 31, 1996 1,995,000 $ 1,995 6,967,182 $ 6,967 $ 11,453,645
========= ========= ========= ======= ============
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Accumulated Unearned Equity
Deficit Compensation (Deficiency)
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1993 (336,839) $ 375,136
Issuance of shares of common stock 1,442,383
Net loss (1,815,263) (1,815,263)
------------ ------------
BALANCE, AUGUST 31, 1994 (2,152,102) 2,256
Issuance of shares of common stock 1,601,212
Issuance of stock options, warrants and stock awards $ (66,240) 246,480
Amortization of unearned compensation 26,791 26,791
Net loss (15,863,181) (15,863,181)
------------ --------- ------------
BALANCE, AUGUST 31, 1995 (18,015,283) (39,449) (13,986,442)
Issuance of shares of common stock 82,834
Issuance of stock options (795,800)
Amortization of unearned compensation 383,056 383,056
Issuance of preferred stock (Series A) 2,500,000
Transfer of redeemable common stock (324,750) (500,000)
Net loss (4,826,295) (4,826,295)
------------ --------- ------------
BALANCE, DECEMBER 31, 1995 (23,166,328) (452,193) (16,346,847)
Issuance of shares of common stock 93,333
Issuance of shares of preferred stock - Series B 2,500,000
Issuance of shares of preferred stock - Series C 1,500,000
Amortization of unearned compensation 452,193 452,193
Issuance of warrants 97,600
Net loss (28,529,192) (28,529,192)
------------ --------- ------------
BALANCE, DECEMBER 31, 1996 $(51,695,520) $ $(40,232,913)
------------ ========= ============
</TABLE>
See notes to financial statements.
F-5
<PAGE> 46
AIR SOUTH AIRLINES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1994 AND 1995,
THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 1995
AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FOUR
MONTHS ENDED YEAR ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
------------------------------- -------------- -----------
1994 1995 1995 1996
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,815,263) $(15,863,181) $ (4,826,295) $(28,529,192)
Adjustments to reconcile net
loss to net cash used
by operating activities:
Grants (1,261,198) (1,316,811) (88,493) (215,800)
Stock compensation 295,866 465,890 452,193
Loss (gain) on disposal of equipment 6,876 (231,020)
Depreciation and amortization 28,694 350,447 174,864 724,389
Changes in assets and liabilities:
(Increase) decrease in receivables (490,385) (3,181,173) 1,252,387 1,747,346
Increase in prepaid expenses and
other current assets (148,306) (749,858) (537,274) (86,738)
Increase in deposits (853,387) (316,613)
(Increase) decrease in other assets (513,697) (158,089) 342,917
Increase in accounts payable 972,530 2,912,454 2,192,100 5,140,375
Increase in accrued liabilities 357,671 5,014,562 985,102 3,821,182
Increase (decrease) in air
traffic liability 27,000 3,218,276 (312,175) 1,567,056
Net cash used by operating activities (3,182,644) (10,149,728) (845,107) (15,267,292)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (1,089,237) (1,509,028) (549,809) (1,941,778)
Proceeds on sale of property 20,000
(Increase) decrease in investments (100,000) (759,972) 165,542 (516,570)
Net cash used by investing activities (1,189,237) (2,269,000) (364,267) (2,458,348)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from grants 1,261,198 1,316,811 88,493 215,800
Proceeds from short-term borrowings 5,277,359
Payments of long-term debt (500,000) (1,038,877) (63,153) (24,311)
Proceeds from issuance of long-term debt 5,500,000 8,198,819 7,445,000
Proceeds from issuance of common stock 1,442,383 1,578,617 93,333
Proceeds from issuance of preferred stock 2,500,000 4,000,000
Common stock redemption (500,000)
Debt issue costs (154,862) (134,968) (81,092)
------------ ------------ ------------ ------------
Net cash provided by financing activities 7,548,719 9,920,402 2,525,340 16,426,089
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,176,838 (2,498,326) 1,315,966 (1,299,551)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 375,136 3,551,974 1,053,648 2,369,614
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,551,974 $ 1,053,648 $ 2,369,614 $ 1,070,063
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 9,040 $ 217,988 $ 415 $ 494,564
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-6
<PAGE> 47
AIR SOUTH AIRLINES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1994 AND 1995,
THE FOUR-MONTH PERIOD ENDED DECEMBER 31, 1995
AND YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FOUR
AUGUST 31, MONTHS ENDED YEAR ENDED
------------------------ DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Stock bonus $183,831 $ 50,000
Unearned compensation 66,240 $795,800 --
Stock and warrants issued to vendors and investors 135,544 82,834 137,600
Equipment exchanged with vendors for reduction of trade payables 875,678
</TABLE>
See notes to financial statements.
F-7
<PAGE> 48
AIR SOUTH AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1994 AND 1995, THE FOUR-MONTH PERIOD
ENDED DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION - Air South Airlines, Inc. (the "Company") was incorporated in
Illinois in 1993 as Travel Management Industry Services, Inc. for the purposes
of providing consulting services regarding travel industry marketing. On January
26, 1994, an amendment to the Articles of Incorporation was filed which changed
the name of the Company to Air South, Inc. and the stated purpose to operation
of an airline and related services. The Company commenced airline operations on
August 22, 1994. Prior to commencement of airline operations, the Company was
essentially a development stage enterprise with activities consisting of
organizational and pre-operating activities. The Company's management primarily
spent the pre-operating period and the initial phase of operations recruiting
key personnel, developing strategies, obtaining Federal Aviation Administration
and Department of Transportation certification and negotiating aircraft leases,
debt agreements and grant agreements. During the period ended August 31, 1993,
the Company produced no revenues and incurred development stage losses of
approximately $300,000. The Company is a passenger airline providing all jet
service primarily in the Southeastern and Eastern seaboard regions of the United
States. Services are provided with a fleet of seven leased Boeing 737-200
aircraft.
On December 29, 1995, the Company:
- - - - was reincorporated in Delaware;
- - - - changed its name from Air South, Inc. to Air South Airlines, Inc.;
- - - - changed its common shares authorized from 10 million to 18 million and from no
par value shares to $.001 par value shares; and
- - - - authorized 2 million shares of preferred stock with a $.001 par value.
The Company also changed its year end for financial reporting purposes from
August 31 to December 31.
INDUSTRY RISKS - The airline industry is intensely competitive. Domestic
certified airlines are free to enter and exit domestic markets and to set
fares without regulatory approval. Any significant fare reductions or
introduction of directly competing routes by other airlines could have a
material adverse effect on the Company's results of operations and financial
condition.
The Company cannot predict the future cost and availability of fuel for flight
operations. Substantial price increases or the unavailability of adequate
suppliers could have a material adverse effect on the Company's financial
position or results of operations.
F-8
<PAGE> 49
CONTINUITY OF OPERATIONS - The Company has incurred significant operating losses
since inception, and at December 31, 1996, has a deficiency in working capital
of $27,321,000 and a stockholders' deficiency of $40,233,000. The Company
continues to experience negative cash flows and payments to certain trade
creditors are past due. Operating revenues have not yet exceeded a breakeven
threshold. In addition, loan covenant violations on $12,000,000 of indebtedness
have been waived through December 31, 1997, but there is no assurance that
waivers can be obtained for any future violations subsequent to that date.
The financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business. The continuance of the Company as a going concern
is dependent, among other things, upon obtaining sufficient additional financing
to fulfill cash flow requirements, growth in the Company's revenue base and,
ultimately, the attainment of profitable operations. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Management's plans to mitigate the uncertainty as to continuity of operations
include the following:
1. The Company has employed new management personnel in key positions, including
a chief executive officer with significant experience in airline management.
2. Under the new management team, the Company has realigned its flight schedules
in order to improve on-time performance and reduce flight cancellations. Since
mid-year 1996 the Company has been operating five of its seven aircraft. The
Company has a new schedule which is to go into effect in April 1997 which uses
an additional aircraft and has plans to add the seventh aircraft to the schedule
by mid-year, in time for the peak travel season. No new cities will be served.
Management has installed a new reservations system with improved revenue
management and accounting capabilities. Additionally, the Company is in
the process of installing an automated scheduling system which should reduce
flight crew expenses by producing better crew utilization.
3. The Company hopes to add additional B737-200 aircraft in 1997 if the
financial performance shows that reliability and traffic can be sustained at
levels which can produce profits.
4. During 1996, the Company raised approximately $17 million of additional funds
through debt and equity transactions. A substantial portion of these funds have
been received from H&Q Air South Investors, L.P. ("H&Q"), an affiliate of
Hambrecht & Quist, L.L.C., an investment banking firm. As of March 31, 1997, the
Company has raised approximately $8 million of additional funds through debt and
equity transactions with H&Q and affiliates of H&Q (Note 11). H&Q has also
guaranteed a $2 million bank loan for the Company and now has in excess of 50%
voting control of the Company.
Management is seeking additional sources of financing from H&Q and other
investors. However, the Company's ability to raise additional funds is dependent
upon the Company's ability to meet its operational plans over the peak travel
season.
CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company
considers certificates of deposit with an original maturity of three months or
less to be cash equivalents.
INVESTMENTS - Investments consist of certificates of deposit which are stated at
cost.
F-9
<PAGE> 50
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost. Major
additions, betterments and renewals are capitalized. Depreciation of estimated
residual values is computed on the straight-line basis over the estimated useful
lives of the related assets, which are seven years for all flight equipment and
five years for other property and equipment. Leasehold improvements are
amortized on a straight-line basis over the five year term of the leases.
DEBT ISSUE COSTS - Debt issuance costs are amortized over the term of the
related debt.
ACCRUED EXPENSES - Included in accrued expenses are federal excise taxes payable
of $795,140 and $1,722,976, accrued maintenance reserves of $790,170 and
$1,543,463 and accrued aircraft rent of $1,035,025 and $1,139,185 at December
31, 1995 and 1996, respectively.
FREQUENT FLYER AWARDS - The Company accrues the estimated incremental cost of
providing free travel awards earned under its frequent flyer program at the time
of travel by participating passengers.
AIRCRAFT AND ENGINE MAINTENANCE - The Company accounts for airframe overhaul
costs using the accrual method. The accrual method provides for accruing the
estimated cost of the next overhaul based on cycles or flight hours. For
airframe overhauls, the actual cost of an overhaul is charged to the accrual,
with any deficiency or excess charged or credited to expense. For engine
overhauls, the Company accounts for overhaul costs using the deferral method.
Costs of engine overhauls are capitalized and amortized to the next overhaul.
The cost of routine maintenance is charged to expense as incurred.
PASSENGER REVENUES - Passenger ticket sales are recognized as earned revenue
when the transportation is provided. Customer flight deposits and unused
passenger tickets sold are included in air traffic liability. As is customary
within the industry, the Company performs periodic evaluations of this
estimated liability and any adjustments resulting thereform, which can be
significant, are included in the results of operations for the periods in which
the valuations are completed.
GRANTS - Grants from governmental entities are restricted for specified purposes
and are recognized when an expenditure for which the grant provides
reimbursement is incurred. Grants related to expenses are recognized as
nonoperating income, while grants relating to property and equipment or to
intangible assets reduce their recorded cost.
INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
Accordingly, deferred tax assets and liabilities are recorded for temporary
differences in the book and tax basis of assets and liabilities and for tax loss
and credit carryforwards. Deferred tax assets, which are not considered more
likely than not to be realized, are offset by a valuation allowance.
PREOPERATING COSTS - All preoperating costs incurred during the development
stage were charged to expense as incurred.
RETIREMENT PLAN - The Company has a contributory 401(k) plan covering
substantially all employees. The Company may make matching and discretionary
contributions to the plan at the determination of the Company's Board of
Directors. The Company has made no contributions to the plan.
PASSENGER TRAFFIC COMMISSIONS - Passenger traffic commissions are recognized as
expense when the transportation is provided and the related revenue is
recognized. The amount of passenger traffic commissions paid but not yet
recognized as expense is included in prepaid expenses and other current assets
in the accompanying balance sheet.
ADVERTISING - The cost of advertising is expensed as incurred.
F-10
<PAGE> 51
USE OF ESTIMATES - Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the recorded amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
IMPAIRMENT OF LONG-LIVED ASSETS - Effective September 1, 1995, the Company
adopted the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of". This Statement requires assessment of impairment of
long-lived assets whenever factors, events or changes in circumstances indicate
the carrying amount of certain long-lived assets to be held and used may not be
recoverable. Assessment of impairment is based on the expected undiscounted
cash flows of the assets. If an asset is determined to be impaired, an
impairment loss is recognized to the extent the carrying amount of the impaired
asset exceeds fair value. Adoption of this Statement did not materially affect
the Company's financial position or results of operations.
LOSS PER COMMON SHARE - The net loss per common share is calculated by dividing
the net loss by the weighted average common shares and common share equivalents
outstanding. Fully diluted earnings per share are equal to primary earnings in
all periods presented. The effect of common stock equivalents is antidilutive in
all periods presented.
RECLASSIFICATIONS - Certain amounts for prior years have been reclassified to
conform with the 1996 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1995 and 1996 consists of the
following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1996
<S> <C> <C>
Flight equipment $ 1,545,825 $ 2,382,820
Computer equipment 844,240 1,392,305
Ground property and equipment 474,877 481,874
Office furniture, fixtures and
equipment 221,889 271,487
Leasehold improvements 33,395 34,724
------------- ------------
Total 3,120,226 4,563,210
Less accumulated depreciation (525,626) (1,093,923)
------------- ------------
Property and equipment, net $ 2,594,600 $ 3,469,287
============= ============
</TABLE>
3. DEBT
LINE OF CREDIT - On March 12, 1996, the Company entered into an agreement to
obtain a one year, $500,000 line of credit from a bank. Subject to the bank's
discretion, and subject to such additional terms, conditions and provisions as
the bank considers necessary, an additional $500,000 may be provided under the
agreement. The line of credit is collateralized by a first lien on substantially
all the Company's assets and bears interest at the rate of prime plus 1%. This
line of credit is past its maturity date as of March 31, 1997 and the Company is
in default on the payment of principal and related accrued interest.
F-11
<PAGE> 52
As consideration for this line of credit, the Company issued 7,500 shares of
common stock in 1996 to the bank. Subject to funding of the additional $500,000,
the Company will issue an additional 15,000 shares of common stock to the bank.
Such shares are required to be registered in any subsequent equity offering.
DEMAND NOTES - In September through December 1996, the Company issued $6,800,000
of demand notes to H&Q and H&Q affiliates bearing an interest rate of 8%;
$2,300,000 of such notes was repaid prior to December 31, 1996.
NOTE PAYABLE - See Note 9 for a description of the $277,359 short-term note
payable to a related party.
LONG-TERM DEBT - Long-term debt outstanding as of December 31, 1995 and 1996
consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1996
<S> <C> <C>
Loan from Lexington County, South Carolina (the "State
Loan"), see below $ 12,000,000 $ 12,000,000
Bank loan at prime plus 2.0% (10.25% at December 31, 1996) 2,000,000
Convertible debentures 5,220,000
Other 96,789 337,874
------------ ------------
Total 12,096,789 19,557,874
Less current portion 96,789 1,266,752
------------ ------------
Long term portion $ 12,000,000 $ 18,291,122
============ ============
</TABLE>
The terms of the State Loan provide (i) for 4% fixed interest rate through
August 31, 2004; beginning September 1, 2004 the interest rate may be increased,
not to exceed prevailing commercial loan rates, based on the Company's net
operating income, (ii) that interest due for June 1, 1996 through August 1, 1997
is deferred until August 1, 1997, (iii) that the loan is to be repaid in 143
equal installments based on 204 months amortization with a balloon payment one
month after the last (final) installment and (iv) that the outstanding principal
balance is based on the size of an initial public offering with principal
repayment not to exceed $6 million of the net proceeds of a public offering
greater than $20 million. Substantially all of the Company's assets serve as
collateral for this loan, subordinate to the interests of the line of credit
described above. The Company has also agreed to use the proceeds of any initial
public stock offering to repay up to one half of the loan's outstanding balance.
The loan was funded through the issuance of Lexington County, South Carolina
general revenue bonds and was guaranteed by the United States Department of
Housing and Urban Development ("HUD").
The loan agreement relating to the State Loan contains, among other things,
provisions which limit payment of dividends, salary increases and other
financial restrictions and requires the Company to maintain certain financial
ratios (working capital, tangible net worth, and other financial ratios).
Dividend payments are prohibited until one-half of the loan is paid. As of
December 31, 1996, the Company was not in compliance with the above described
financial covenants as well as certain other provisions of the loan agreement;
however, on February 6, 1997, the South Carolina Jobs - Economic Development
Authority, the Servicing Agent, waived compliance with those provisions through
December 31, 1997.
The $2,000,000 bank loan requires payment of interest only monthly with a final
payment of principal and accrued interest on June 1, 1998. This note is secured
by an irrevocable letter of credit issued on behalf of H&Q.
In August and September of 1996, the Company issued $4,600,000 of convertible
debentures to H&Q and two existing investors in the Company. These securities
are convertible into 18,400,000 shares of Series D
F-12
<PAGE> 53
Preferred Stock (to be authorized), which in turn are convertible at $.25 per
share into shares of common stock.
F-13
<PAGE> 54
In September and October of 1996, the Company issued $620,000 of Convertible
Debentures. These securities are convertible into 2,480,000 shares of Series E
Preferred Stock (to be authorized), which in turn are convertible at $.25 per
share into shares of common stock.
The provisions of Series D and E preferred stock (other than conversion
provisions) will be substantially the same as the previously issued Series A,
B, and C Preferred Stock. The Convertible Debentures bear interest at 6% per
annum. Interest is deferred and added to the principal balance. Principal is
due on August 16, 1999.
Additionally, the Company has standby letters of credit totaling $1,211,000 at
December 31, 1996, with two banks, for which $1,211,000 of investments was
pledged as collateral.
Principal payments on debt are due as follows:
<TABLE>
<CAPTION>
Fiscal year:
<S> <C>
1997 $ 1,266,752
1998 3,055,321
1999 6,230,321
2000 1,010,321
2001 1,010,321
Thereafter 6,984,838
-----------
Total $19,557,874
===========
</TABLE>
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK - Convertible preferred stock at December 31, 1996
consists of 1,250,000 shares designated as Series A Preferred Stock, 625,000
shares designated as Series B Preferred Stock and 120,000 shares designated as
Series C Preferred Stock.
Significant terms of these Convertible Preferred Stocks are as follows:
- - - - Each share is convertible at the option of the holder into one share of common
stock for Series A, eight shares of common stock for Series B and 25 shares of
common stock of Series C, subject to adjustment for events of dilution. Shares
will automatically be converted upon an initial public offering of common stock
meeting specified criteria or upon written consent of the holder of a specified
percentage of the outstanding shares of each respective series of preferred
stock.
- - - - Each share has the same voting rights and number of votes as shares of common
stock into which it is convertible.
- - - - Dividends are at the discretion of the Board of Directors and are
noncumulative. Each share is entitled to a per share dividend of $.16 per share
of Series A, $.32 of Series B and $1.00 for Series C per annum before any
dividend is paid to common shareholders. All series participate with the Company
common stock on an as-if-converted basis with respect to any other dividends
that may be paid on the Company's common stock.
F-14
<PAGE> 55
- - - - In the event of liquidation, the preferred shareholders are entitled to
receive $2.00 per share for Series A, $4.00 per share for Series B and $12.50
per share for Series C, plus any declared but unpaid dividends, prior to any
distribution to the common shareholders.
- - - - The holders of the preferred shares have certain piggyback and demand
registration rights with respect to the underlying shares of common stock into
which the preferred shares are convertible.
WARRANTS - Warrants to purchase 25,000 shares of the Company's common stock were
issued to an aircraft lessor in November 1994. Warrants to purchase 200,000
shares of common stock were issued to a leasing agent in April 1995. The value
of these warrants has been treated as deferred lease expense and is being
amortized over the life of the related leases. The warrants have an exercise
price of $1.00 and expire October 31, 2005. In April 1996 warrants to purchase
400,000 shares of Series A Preferred Stock were issued to Hambrecht & Quist
Group L.L.C. as consideration for guaranting the $2,000,000 line of credit.
These warrants have an exercise price of $.50 and expire in April 2006. In
December 1996, the Company issued to H&Q warrants to purchase 16,000,000 shares
(of which 6,400,000 were fully vested at December 31, 1996) of common stock at
an exercise price of $.25 per share to H&Q. The warrants were issued as
consideration for a $4,000,000 letter of credit provided by H&Q which allows
the Company to obtain cash more promptly from certain credit card receivables.
STOCK OPTION PLANS - The Company has adopted the 1993 Stock Option Plan and the
1994-1995 Stock Option Plan. These plans (the "Plans") provide for grants of
both incentive stock options ("ISO's") and non-qualified options. Under the
Plans, ISO's may be granted to employees and non-qualified options may be
granted to employees, directors, consultants and other advisors. Shares subject
to incentive stock options generally vest over a three year period. Although
vesting may vary, no options have vesting periods in excess of three years.
Certain options provide for acceleration of vesting upon occurrence of specified
events. Options expire over varying periods from five to ten years after the
date of grant.
ISO's shall be granted at a price at least equal to the fair market value at the
time of issuance as determined by the Board of Directors. Non-qualified options
may have an exercise price of less than fair market value. At the March 18, 1996
board meeting, directors voted to increase the number of authorized shares under
the 1994-1995 Stock Option Plan to 2,500,000. On May 18th, the board voted to
reduce the exercise price for outstanding options to purchase common stock by
current employees, officers, and directors to $.50 per share. No future grants
will be made under the 1993 Stock Option Plan.
The Company will continue to follow the accounting provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
The effect of applying the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation", on a proforma basis is not material to the
financial statements.
F-15
<PAGE> 56
<TABLE>
<CAPTION>
Number of Exercise Price
Options Per Share
-------------- -------------
<S> <C> <C>
Activity under the Plans is summarized as follows:
Outstanding at September 1, 1993 -
Granted 350,000 $ 0.50
----------
Outstanding at August 31, 1994 350,000
Granted 939,100 $ 0.50
Forfeited (62,000)
----------
Outstanding at August 31, 1995 1,227,100
Granted 1,030,000 $ 0.50
----------
Outstanding at December 31, 1995 2,257,100 $ 0.50
Forfeited (61,000)
Exercised (3,333) $ 0.50
----------
Outstanding at December 31, 1996 2,192,767 $ 0.50
==========
Options exercisable at December 31, 1996 1,921,858 $ 0.50
==========
</TABLE>
F-16
<PAGE> 57
UNEARNED STOCK COMPENSATION - In connection with the grant of certain stock
options to employees, the Company recorded unearned stock compensation for the
difference between the deemed fair value for accounting purposes based on
independent appraisals and the option price as determined by the Board of
Directors at the date of grant. Deferred compensation was recorded as a
reduction in stockholders' equity at December 31, 1995. Such amounts were
recognized as compensation expense over the vesting period of the related stock
options, and were fully amortized at December 31, 1996.
STOCK AWARDS - On January 24, 1995 and August 22, 1995 the Company awarded
stock to all employees. The fair value of the stock issued to employees
of $183,831 has been treated as compensation expense for the year ended August
31, 1995. In addition, stock was awarded to a Company executive during 1996.
The fair value of that issuance of $50,000 has been treated as compensation
expense for the year ended December 31, 1996.
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases aircraft, its principal facilities,
including airport and terminal facilities, sales offices and general offices.
These operating leases are generally on a long-term net rent basis whereby the
Company pays taxes, maintenance, insurance and certain other operating expenses
applicable to the leased premises. Management expects that, in the normal course
of business, leases that expire will be renewed or replaced by other leases.
At December 31, 1996, approximate minimum lease payments under leases expiring
after December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Calendar year
<S> <C>
1997 $ 8,490,000
1998 4,830,000
1999 4,831,000
2000 3,633,000
2001 3,093,000
Thereafter 2,848,000
-----------
Total minimum lease payments $27,725,000
===========
</TABLE>
Total rental expense for all operating leases was approximately $11,825,000 and
$16,940,000 for the years ended August 31, 1995 and December 31, 1996,
respectively, of which approximately $4,342,000 and $5,943,000 represented
contingent rentals. Comparable amounts for the four months ended December 31,
1995 were $4,882,000 and $1,742,000 for contingent rentals. Contingent rentals
are based on number of flights, enplaned passengers (as defined) or usage (as
defined) for terminal space. Rent expense was not significant for the year ended
August 31, 1994.
In April 1996, the Company renegotiated certain of its aircraft lease
agreements. Under these agreements, the Company would be required to make an
additional payment of up to $3 million to the lessor upon completion of a
successful initial public offering meeting specified criteria.
Noncurrent deposits include $1,170,000 at December 31, 1995 and 1996 for leased
aircraft.
F-17
<PAGE> 58
STOCK REGISTRATION - The Company sold shares in the year ended August 31, 1995
and the period ended December 31, 1995 (the "Rescission Shares") which may have
violated the Securities Act of 1933 or other applicable state securities laws.
The shares were not registered under the securities laws, and exemptions from
registration provided by such securities laws may not have been available or may
not have been perfected, and, in some cases, sales of the shares may have been
made by unregistered persons with the result that the Company may be deemed to
have violated the registration requirements of the securities laws. The Company
does not believe the possible violations of securities laws will have a material
impact on the Company's financial position or future results of operations.
LITIGATION - The Hillsborough County Aviation Authority is seeking damages
arising out of the Company's alleged breach of four contracts relating to the
use by the Company of Tampa International Airport. An accrual of approximately
$680,000 reflecting management's estimate of the amount of potential exposure on
this litigation has been recorded. The Company does not believe the ultimate
settlement of this litigation will have a material impact on the Company's
financial position or results of operation.
The Company is a defendant in certain other legal proceedings arising out of the
ordinary conduct of the Company's business. In the opinion of management, the
ultimate outcome of these legal proceedings will not have a material adverse
effect on the final position or future results of the operations of the Company.
6. GRANTS
Certain governmental entities committed to provide the Company reimbursement for
certain types of expenditures or to provide services free of charge. At December
31, 1996, grant commitments of $184,015 are available to the Company for free
training services to be provided by the South Carolina State Board for Technical
and Comprehensive Education, and $277,765 is available for rent subsidy for the
Company's reservation facility.
Grants totaling $3,000,000 are repayable on a pro-rata basis, with interest at
4% per annum, to the governmental entities should the Company, within five years
of commencement of operations, relocate its operations and headquarters away
from the Columbia, South Carolina metropolitan area.
F-18
<PAGE> 59
7. INCOME TAXES
The components of deferred income taxes are:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1996
<S> <C> <C>
Depreciation $ 11,839 $ 156,284
Vacation and other reserves 462,168 862,576
Accrued maintenance reserves 285,884 575,712
Net operating loss carryforwards 7,420,764 17,030,530
----------- --------------
Gross deferred tax assets 8,180,655 18,625,102
Valuation allowance (8,180,655) (18,625,102)
----------- --------------
Net deferred tax assets $ 0 $ 0
=========== ==============
</TABLE>
As of December 31, 1996, the Company had available net operating loss
carryforwards of approximately $48,000,000. These carryforwards expire beginning
in 2008. The Company has experienced a change in ownership. The ownership change
may limit the utilization of these carryforwards in the future.
F-19
<PAGE> 60
The Company has recorded a valuation allowance for the total amount of the gross
deferred tax asset in all years presented as recoverability of such assets.
8. OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
Year Ended Four Months
August 31, Ended Year Ended
------------------------------ December 31, December 31,
1994 1995 1995 1996
<S> <C> <C> <C> <C>
Travel, lodging and meals $ 118,333 $ 1,042,240 $ 253,506 $ 963,978
Communications 74,632 1,638,396 549,862 2,404,489
Useage fees - reservations 26,104 1,502,235 619,009 1,457,587
Purchased services 185,100 1,546,173 836,301 4,974,939
Equipment rentals 648,991 230,382 685,357
Aircraft charters 1,290,373 298,808
Insurance 115,872 2,861,286 1,174,539 3,405,818
Taxes and licenses 13,304 465,682 57,818 226,110
Passenger food and drink 31,219 324,343 137,892 410,935
Credit card fees 1,100,276 587,485 1,357,534
Interrupted trip expense 209,519 53,458 2,343,821
Corporate and fiscal 140,516 169,231 71,611 245,589
Other 332,463 3,321,678 909,748 3,948,368
----------- ------------ ------------ -------------
Total $ 1,037,543 $ 16,120,423 $ 5,481,611 $ 22,723,333
=========== ============ ============ =============
</TABLE>
9. RELATED PARTY TRANSACTION
On July 12, 1996, the then Chairman of the Board of Directors of the Company
paid $277,359 directly to a vendor for payment of certain payables of the
Company. As of December 31, 1996, this amount is payable to the former Chairman
of the Board.
10. REDEEMABLE COMMON STOCK
On December 22, 1995 the Company entered into an agreement with a former officer
of the Company to repurchase for $2.00 a share, 250,000 shares of the Company's
common stock from the former officer or designated individuals. On January 3,
1996, the Company repurchased the shares of common stock under the terms of this
agreement.
F-20
<PAGE> 61
11. SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the Company has received new financing as
follows:
- - - - In January and March 1997, the Company issued $8,300,000 of demand notes to
H&Q and H&Q affiliates bearing interest at 8%.
- - - - In January 1997, the Company issued warrants to purchase 8,000,000 shares of
Common Stock at an exercise price of $.25 per share to H&Q. The warrants were
issued as consideration for a $2 million letter of credit provided by H&Q which
allowed the Company to obtain an extension on the maturity of the $2 million
bank loan.
- - - - The Company has executed an agreement to sell approximately 6% (25,281,464
shares) of the outstanding shares of the Company (on a fully diluted basis) to
management at $.02 per share.
*********
F-21
<PAGE> 1
EXHIBIT - 4.7a
STATE OF SOUTH CAROLINA
NOTE MODIFICATION AGREEMENT
COUNTY OR RICHLAND
This Agreement is effective as of December 24, 1996 by and between
THE NATIONAL BANK OF SOUTH CAROLINA, a national bank (the "Lender") and AIR
SOUTH AIRLINES, INC., a Delaware corporation (the "Borrower").
WITNESSETH:
Whereas, Borrower executed its certain Note dated April 26, 1996
(the "Note"), whereby it promised to pay to the order of the Lender the sum of
Two Million Dollars ($2,000,000.00) (the "Loan") on or before December 1, 1996
(the "Maturity Date"), with interest thereon at a rate equal to the Lender's
prime rate ("Prime"), to change as Prime changes, and
Whereas, the Note further provides for the payment of seven (7)
consecutive monthly installments of interest, commencing June 1, 1996, and
continuing on the first day of each month thereafter, with a final installment
due on the Maturity Date, in an amount equal to the unpaid principal amount
plus all accrued interest thereon, and
Whereas, Borrower is in default under the terms of the Loan,
however, Borrower has requested that the Maturity Date be extended.
NOW THEREFORE, in consideration of the mutual covenants hereof,
and the sum of $12,882.51 paid by Borrower to Lender representing accrued
interest, the receipt and sufficiency of which is hereby acknowledged, Lender
and Borrower hereby agree as follows:
1. The Maturity Date is hereby extended to January 15, 1997.
Borrower acknowledges that by agreeing to extend the Maturity Date, Lender has
accommodated Borrower's requests and Lender has not agreed to waive any future
defaults by Borrower under the Note.
2. All documents and instruments evidencing or securing the
repayment of the Note are hereby modified as necessary to reflect the terms of
this Agreement.
3. It is intended that this Agreement will not disturb the
existing priority of mortgages, security agreements and other loan documents
(the "Security Instruments") creating or evidencing liens as security for the
repayment of the Note. The parties to this Agreement intend that the Security
Instruments, as modified by this Agreement, shall retain the same priority as
originally recorded or filed.
4. Except as modified by this Agreement, the terms of the Note
and the Security Instruments shall remain in full force and effect.
5. It is agreed that the execution and delivery of this
Agreement shall not affect any release of any guarantor of the Note nor any
collateral given at any time to secure payment or performance of the Loan.
6. Borrower and Hambrecht & Quist Group, Inc. ("Guarantor")
acknowledge and agree that Lender has performed all of its obligations to date
in connection with the Loan and that there exists no defense, offset or
counterclaim against enforcement of the Note or any other loan documents by
Lender in accordance with their respective terms. To the extent there are
defenses, offsets or counterclaims to the Note or any other loan documents,
known or unknown, available to the Borrower, the Guarantor or any person
claiming through any of them, the Borrower and the Guarantor, for them, their
successors or assigns, each hereby release, acquit and forever
<PAGE> 2
discharge Lender, its officers, directors, agents, servants, employees,
attorneys, representatives, shareholders, beneficiaries, successors and assigns,
and any of them, from any and all claims, contingent claims, counterclaims,
third party claims, liabilities, demands, losses, judgments, debts, actions,
suits, causes of action, accountings, rights, damages, punitive damages, and
interests, direct or derivative, known or unknown, choate or inchoate, that
Borrower or Guarantor had, now have, may have at any time in the future, or
claims to have had prior to the date of the execution of this Agreement as a
result of, concerning, arising from, or with respect to any and all matters,
dealings, occurrences, actions, failures to act, or events that are in any way
related to the Note and the Security Instruments. This paragraph is intended
to be a complete release of Lender from any claims by way of counterclaim or
offset that the Borrower or the Guarantor may have in relation to the Note and
the Security Instruments and a waiver of any defense that the Borrower or the
Guarantor may have to the enforcement of the Note and the Security Instruments
by the Lender.
8. This Agreement shall be binding on the parties hereto,
their heirs, successors and assigns.
IN WITNESS WHEREOF, the undersigned have hereunto executed this
Agreement effective on the day and year above written.
WITNESS: BORROWER:
AIR SOUTH AIRLINES, INC.
/s/ By: /s/
- - - ---------------------------- --------------------------------
Its Authorized Officer
/s/ John ?
- - - ----------------------------
LENDER:
THE NATIONAL BANK OF SOUTH CAROLINA
By:
- - - ---------------------------- ---------------------------------
Its Authorized Officer
- - - ----------------------------
In consideration of the execution by Lender of this Agreement, the
undersigned Guarantor acknowledges and consents to the terms of this Agreement
and shall continue to be bound according to the terms of the guaranty agreement
executed in connection with the Loan.
HAMBRECHT & QUIST GROUP, INC.
By:
- - - ---------------------------- ---------------------------------
Its Authorized Officer
- - - ----------------------------
2
<PAGE> 1
EXHIBIT 4.16
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
BETWEEN
AIR SOUTH AIRLINES, INC.
AND
PAUL T. GILLCRIST
DATED AS OF OCTOBER 16, 1996
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I DEFINITIONS
SECTION 1.01. DEFINITIONS ..........................................................................1
ARTICLE II PURCHASE AND SALE OF CONVERTIBLE DEBENTURES
SECTION 2.01. ISSUANCE, SALE AND DELIVERY OF THE CONVERTIBLE
DEBENTURES............................................................................6
SECTION 2.02. CLOSING...............................................................................6
ARTICLE III CONVERSION
SECTION 3.01. CONVERSION; NUMBER....................................................................7
SECTION 3.02. CONVERSION PROCEDURE..................................................................7
SECTION 3.03. REPRESENTATIONS, WARRANTIES COVENANTS, NO
DEFAULT, CONDITIONS PRECEDENT TO CONVERSION ..........................................7
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.01. ORGANIZATION, QUALIFICATIONS AND CORPORATE
POWER.................................................................................8
SECTION 4.02. AUTHORIZATION.........................................................................8
SECTION 4.03. VALIDITY..............................................................................9
SECTION 4.04. CAPITALIZATION........................................................................9
SECTION 4.05. FINANCIAL STATEMENTS.................................................................10
SECTION 4.06. EVENTS SUBSEQUENT TO THE DATE OF THE BALANCE
SHEET................................................................................10
SECTION 4.07. COMPLIANCE WITH INSTRUMENTS .........................................................10
SECTION 4.08. LITIGATION...........................................................................11
SECTION 4.09. COMPLIANCE WITH LAW..................................................................11
SECTION 4.10. TITLE TO PROPERTIES .................................................................11
SECTION 4.11. LEASEHOLD INTERESTS..................................................................11
SECTION 4.12. TAXES ...............................................................................12
SECTION 4.13. PATENTS, TRADEMARKS, ETC ............................................................12
SECTION 4.14. OUTSTANDING DEBT; LOANS AND ADVANCES ................................................13
SECTION 4.15. GUARANTEES ..........................................................................13
SECTION 4.16. GOVERNMENTAL APPROVALS ..............................................................13
SECTION 4.17. DISCLOSURE ..........................................................................13
SECTION 4.18. BROKERS..............................................................................13
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
SECTION 4.19. SECURITIES ACT.......................................................................13
SECTION 4.20. MARGIN REGULATIONS...................................................................14
SECTION 4.21. INSURANCE COVERAGE...................................................................14
SECTION 4.22. ERISA................................................................................14
SECTION 4.23. ENVIRONMENTAL COMPLIANCE.............................................................15
SECTION 4.24. PERMITS AND LICENSES.................................................................15
SECTION 4.25. BOARD COMPOSITION....................................................................15
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
SECTION 5.01. REPRESENTATIONS AND WARRANTIES OF THE
PURCHASER ...........................................................................15
ARTICLE VI CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER .............................................16
SECTION 6.01. CONDITIONS TO THE OBLIGATION OF THE PURCHASER........................................16
ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
SECTION 7.01. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY ........................................18
ARTICLE VIII COVENANTS OF THE COMPANY
SECTION 8.01. FINANCIAL STATEMENTS AND REPORTS.....................................................19
SECTION 8.02. CORPORATE EXISTENCE..................................................................21
SECTION 8.03. MAINTENANCE OF PROPERTIES AND INSURANCE..............................................21
SECTION 8.04. INSPECTION, CONSULTATION AND ADVICE..................................................21
SECTION 8.05. RESTRICTIVE AGREEMENTS PROHIBITED....................................................22
SECTION 8.06. TRANSACTIONS WITH AFFILIATES.........................................................22
SECTION 8.07. USE OF PROCEEDS......................................................................22
SECTION 8.08. SUBSIDIARIES.........................................................................22
SECTION 8.09. COMPLIANCE WITH LAWS ................................................................22
SECTION 8.10. KEEPING OF RECORDS AND BOOKS OF ACCOUNT..............................................22
SECTION 8.11. OBLIGATIONS AND TAXES................................................................22
SECTION 8.12. TRANSFER AND EXCHANGE OF CONVERTIBLE
DEBENTURES; LOST CONVERTIBLE DEBENTURES..............................................23
SECTION 8.13. LIMITATION ON DEBT ..................................................................23
SECTION 8.14. LIMITATION ON LIENS..................................................................23
SECTION 8.15. LIMITATION ON RESTRICTED PAYMENTS....................................................24
SECTION 8.16. COVENANT REGARDING STOCKHOLDER VOTE AND
FILING OF CERTIFICATE OF DESIGNATION ................................................24
ARTICLE IX EVENTS OF DEFAULT
SECTION 9.01. ACCELERATION.........................................................................25
SECTION 9.02. RESCISSION OF ACCELERATION...........................................................27
SECTION 9.03. NOTICE OF ACCELERATION OR RESCISSION.................................................27
SECTION 9.04. OTHER REMEDIES.......................................................................28
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE X MISCELLANEOUS
SECTION 10.01. PAYMENTS ...........................................................................28
SECTION 10.02. EXPENSES............................................................................28
SECTION 10.03. CONSENT TO AMENDMENTS ..............................................................29
SECTION 10.04. PERSONS DEEMED OWNERS; PARTICIPATIONS ..............................................29
SECTION 10.05. SURVIVAL OF REPRESENTATIONS AND WARRANTIES .........................................30
SECTION 10.06. BROKERAGE ..........................................................................30
SECTION 10.07. PARTIES IN INTEREST ................................................................30
SECTION 10.09. NOTICES.............................................................................30
SECTION 10.09. ENTIRE AGREEMENT ...................................................................31
SECTION 10.10. COUNTERPARTS........................................................................32
SECTION 10.11. SEVERABILITY........................................................................32
SECTION 10.12. DESCRIPTIVE HEADINGS ...............................................................32
SECTION 10.13. GOVERNING LAW ......................................................................32
SECTION 10.14. GENDER; PLURALS.....................................................................32
EXHIBITS
EXHIBIT A Form of Convertible Debenture
EXHIBIT B Form of Certificate of Designation
EXHIBIT C Certificate of Incorporation
EXHIBIT D Form of Investors Rights Agreement
EXHIBIT E Form of Opinion of General Counsel
SCHEDULES
SCHEDULE 4.04 Outstanding Options, Warrants, Etc.
SCHEDULE 4.06 Events Subsequent to Balance Sheet
SCHEDULE 4.07 Violations, Defaults
SCHEDULE 4.08 Defaults
SCHEDULE 4.11 Leasehold Interests
SCHEDULE 4.14 Existing Debt
</TABLE>
iii
<PAGE> 5
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT ("Agreement"), dated as of
October 16, 1996, between AIR SOUTH AIRLINES, INC., a Delaware corporation (the
"Company"), and PAUL T. GILLCRIST, a United States citizen residing in Singapore
(the "Purchaser").
RECITALS
WHEREAS, the Company wishes to issue and sell to the Purchaser its
convertible debenture (herein, together with any such convertible debentures
which may be issued pursuant to any provision of this Agreement, and any such
convertible debentures which may be used in substitution or exchange thereon,
collectively called the "Convertible Debentures" and individually called a
"Convertible Debenture") in the original aggregate principal amount of $120,000,
to be dated the date of issue, to mature August 16, 1999, to bear interest on
the unpaid balances thereof from the date thereof until the principal shall have
become due and payable at the rate of 6% per annum, which interest shall be
deferred and added to the outstanding principal balance of the Convertible
Debentures, and to be substantially in the form of Exhibit A attached hereto;
and such Convertible Debenture will be a part of up to $4,000,000 of convertible
debentures having identical terms (other than as to the purchaser, date and
amount) which the Company may sell pursuant to a convertible debenture purchase
agreement and an investor's rights agreement having the same terms as this
Agreement and the Investor's Rights Agreement.
WHEREAS, the Purchaser wishes to purchase the Convertible Debenture on
the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the above recitals, the mutual
promises contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINITIONS. As used herein, unless the context otherwise
requires, the following terms have the following meanings specified with respect
thereto below:
"AGREEMENT" shall mean this Convertible Debenture Purchase
Agreement, as the same may be amended or supplemented and in effect from
time to time.
1
<PAGE> 6
"AMENDMENT" shall have the meaning ascribed thereto in Section
8.16.
"BALANCE SHEET" shall have the meaning ascribed thereto in Section
4.05.
"BANKRUPTCY LAW" shall have the meaning ascribed thereto in
Section 9.01.
"BLANK CHECK PREFERRED STOCK" shall have the meaning ascribed
thereto in Section 4.04.
"BUSINESS DAY" shall mean any day which is not a Saturday or
Sunday or a national banking holiday.
"BY-LAWS" shall mean the By-laws of the Company, as amended.
"CERTIFICATE OF DESIGNATION" shall mean the Certificate of
Designation of the Company to be substantially in the form of Exhibit B
attached hereto.
"CERTIFICATE OF INCORPORATION" shall mean the Certificate of
Incorporation of the Company, including all amendments thereto through
the date hereof, including any amendments effected by means of a
certificate of designation, a copy of which is attached hereto as Exhibit
C.
"CLOSING" shall have the meaning ascribed thereto in Section 2.02.
"CLOSING DATE" shall have the meaning ascribed thereto in Section
2.02.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMISSION" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
"COMMON CONVERSION SHARES" shall mean the shares of Common Stock
issuable upon conversion of the Preferred Conversion Shares.
"COMMON STOCK" shall mean the Common Stock, par value $0.001 per
share, of the Company.
"COMPANY" shall have the meaning ascribed thereto in the preamble.
"CONVERTIBLE DEBENTURE" shall have the meaning ascribed thereto in
the preamble.
2
<PAGE> 7
"CONVERSION" shall have the meaning ascribed thereto in Section
3.01.
"CONVERSION NOTICE" shall mean the notice of conversion in the
form attached to the Convertible Debenture, which notice shall set forth
the name of the registered owner of the Convertible Debenture being
converted and the principal balance, or portion thereof, being converted.
"CURRENT DEBT" shall mean, with respect to any Person, all
Indebtedness of such Person for borrowed money which by its terms or by
the terms of any instrument or agreement relating thereto matures on
demand or within one year from the date of the creation thereof and is
not directly or indirectly renewable or extendible at the option of the
debtor to a date more than one year from the date of the creation
thereof.
"DEBT" shall mean Current Debt and Funded Debt.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974. as amended.
"ERISA AFFILIATE" shall mean any corporation which is a member of
the same controlled group of corporations as the Company within the
meaning of Section 414(b) of the Code, or any trade or business which is
under common control with the Company within the meaning of Section
414(c) of the Code, or any other entity which is considered to be a
single employer with the Company pursuant to Sections 414(m), (n) or (o)
of the Code.
"EVENT OF DEFAULT" shall mean any of the events specified in
Section 9.01 provided that there has been satisfied any requirement in
connection with such event for the giving of notice, or the lapse of
time, or the happening of any further condition, event or act, and
"Default" shall mean any of such events, whether or not any such
requirement has been satisfied.
"EXISTING DEBT" shall have the meaning ascribed thereto in Section
4.14.
"FUNDED DEBT" shall mean, with respect to any Person, all
Indebtedness of such Person which by its terms or by the terms of any
instrument or agreement relating thereto matures, or which is otherwise
payable or unpaid, more than one year from, or is directly or indirectly
renewable or extendible at the option of the debtor to a date more than
one year from, the date of the creation thereof
"GUARANTEE" shall mean, with respect to any Person, any direct or
indirect liability, contingent or otherwise, of such Person with respect
to any indebtedness, lease dividend or other obligation of another,
including, without limitation, any such
3
<PAGE> 8
obligation directly or indirectly guaranteed, endorsed (otherwise than
for collection or deposit in the ordinary course of business) or
discounted or sold with recourse by such Person, or in respect of which
such Person is otherwise directly or indirectly liable, including,
without limitation, any such obligation in effect guaranteed by such
Person through any agreement (contingent or otherwise) to purchase,
repurchase or otherwise acquire such obligation or any security therefor,
or to provide funds for the payment or discharge of such obligation
(whether in the form of loans, advances, stock purchases, capital
contributions or otherwise), or to maintain the solvency or any balance
sheet or other financial condition of the obligor of such obligation, or
to make payment for any products, materials or supplies or for any
transportation or services regardless of the non-delivery or
non-furnishing thereof, in any such case if the purpose or intent of such
agreement is to provide assurance that such obligation will be paid or
discharged, or that any agreements relating thereto will be complied
with, or that the holders of such obligation will be protected against
loss in respect thereof.
"HUD LOAN" shall mean that certain loan to the Company by
Lexington County, South Carolina pursuant to the United States Department
of Housing and Urban Development Section 108 Loan Program.
"INDEBTEDNESS" shall mean, with respect to any Person, without
duplication, (i) all items which in accordance with generally accepted
accounting principles would be included in determining total liabilities
as shown on the liability side of a balance sheet of such Person as of
the date on which Indebtedness is to be determined, (ii) all indebtedness
secured by any Lien on any property or asset owned or held by such Person
subject thereto, whether or not the indebtedness secured thereby shall
have been assumed, and (iii) all indebtedness of others with respect to
which such Person has become liable by way of a Guarantee.
"INTELLECTUAL PROPERTY" shall have the meaning ascribed thereto in
Section 4.13.
"INVESTOR'S RIGHT AGREEMENT" shall mean the Investor's Right
Agreement, dated the date hereof, between the Company and the Purchaser,
a copy of which is attached hereto as Exhibit D.
"LIEN" shall mean any mortgage, pledge, priority, security
interest, encumbrance, lien (statutory or otherwise) or charge of any
kind (including any agreement to give any of the foregoing, any
conditional sale or other title retention agreement, any lease in the
nature thereof, and the filing of or agreement to give any financing
statement under the Uniform Commercial Code of any jurisdiction) or any
other type of preferential arrangement for the purpose, or having the
effect, of protecting a creditor against loss or securing the payment or
performance of an obligation.
4
<PAGE> 9
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on
the assets, business, operations or financial condition of the Company.
"MULTIEMPLOYER PLAN" shall mean any Plan which is a "multiemployer
plan" (as such term is defined in Section 4001(a)(3) of ERISA).
"OFFICER'S CERTIFICATE" shall mean a certificate signed in the
name of the Company by its Chairman of the Board, President and Chief
Executive Officer, Chief Financial Officer, one of its Vice Presidents or
its General Counsel and Secretary.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor entity.
"PERSON" shall mean a corporation, an association, a partnership,
an organization, a business, an individual, a governmental or political
subdivision thereof or a governmental agency.
"PLAN" shall mean any "employee pension benefit plan" (as such
term is defined in Section 3(2) of ERISA) which is or has been
established or maintained, or to which contributions are or have been
made, by the Company or any ERISA Affiliate.
"PREFERRED CONVERSION SHARES" shall mean the shares of Series E
Preferred Stock issuable upon conversion of the Convertible Debentures as
set forth in Article III hereof.
"PREFERRED STOCK" shall mean all classes or series of preferred
stock, par value $0.001 per share, of the Company.
"PURCHASER" shall have the meaning ascribed thereto in the
preamble.
"RESTRICTED PAYMENT" shall mean (i) the declaration, payment or
setting apart of any sum for payment of dividend (including a dividend
payable in capital stock of the Company) on, or any distribution
(including a distribution in capital stock of the Company) in respect of,
any shares of capital stock of the Company or any warrants, rights or
options to purchase any shares of capital stock of the Company or (ii)
the redemption, repurchase, retirement or other acquisition of (or the
setting apart of any sum in respect of any of the foregoing actions) any
shares of capital stock of the Company or any warrants, rights or
options to purchase or acquire any shares of capital stock.
5
<PAGE> 10
"SECURITIES" shall have the meaning ascribed thereto in Section
4.19.
"SECURITIES ACT" shall have the meaning ascribed thereto in
Section 4.19.
"SERIES E PREFERRED STOCK" shall mean shares of Series E Preferred
Stock of the Company.
"STOCKHOLDER APPROVAL" shall have the meaning ascribed thereto in
Section 8.16.
"SUBSIDIARY" shall mean, as to the Company, any corporation of
which more than 50% of the outstanding stock having ordinary voting power
to elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time stock of any other class or
classes shall have or might have voting power by reason of the happening
of any contingency) is at the time directly or indirectly owned by the
Company, or by one or more of its subsidiaries.
"TRANSFEREE" shall mean any direct or indirect transferee of all
or any part of any Convertible Debenture purchased by the Purchaser under
this Agreement.
ARTICLE II
PURCHASE AND SALE OF CONVERTIBLE DEBENTURES
SECTION 2.01. ISSUANCE, SALE AND DELIVERY OF THE CONVERTIBLE DEBENTURES.
The Company agrees to issue and sell to the Purchaser and the Purchaser hereby
agrees to purchase from the Company, the Convertible Debentures in the aggregate
principal amount of $120,000 at 100% of such aggregate principal amount.
SECTION 2.02. CLOSING. The closing shall take place at the offices of Air
South Airlines, Inc., 2625 Airport Boulevard, West Columbia, SC 29170 at 12:30
o'clock p.m. Eastern Daylight Savings Time, on October 16, 1996, or at such
other location, date and time as may be agreed upon between the Purchaser and
the Company (such closing being called the "Closing" and such date and time
being called the "Closing Date"). At the Closing, the Company shall issue and
deliver to the Purchaser one or more Convertible Debentures, registered in the
name of such Purchaser, evidencing the aggregate principal amount of Convertible
Debentures to be purchased by the Purchaser at the Closing, and in the
denomination or denominations specified in writing by the Purchaser. As payment
in full for the Convertible Debentures being purchased by the Purchaser under
this Agreement, on the Closing Date the Purchaser shall deliver to the Company a
check payable to the order of the Company, in the amount of the purchase price
or shall transfer such sum to the account of the
6
<PAGE> 11
Company by wire transfer, or shall deliver to the Company notes evidencing
indebtedness of the Company for cancellation thereof, or any combination of the
foregoing.
ARTICLE III
CONVERSION
SECTION 3.01. CONVERSION; NUMBER. The holder of any Convertible
Debenture, at its option, will be entitled at any time commencing three (3)
Business Days after Stockholder Approval and ending on the close of business on
the final maturity date of the Convertible Debentures to convert any Convertible
Debentures, or portions thereof, into shares of Series E Preferred Stock. The
Convertible Debenture will automatically be converted into shares of Series E
Preferred Stock upon the closing of a firmly underwritten public offering of
Common Stock on a Form S-l Registration Statement at an aggregate public
offering price (after underwriting discounts and commissions) of at least
$10,000,000 and a per share price equal to or greater than $4.00 (as
appropriately adjusted for stock splits and the like). In either case (each of
which is sometimes hereinafter referred to as a "Conversion"), the number of
shares of Series E Preferred Stock to be issued upon such Conversion shall be
determined by dividing the aggregate principal balance of the Convertible
Debenture to then be converted by twenty-five hundredths (0.25). The Company is
not required to issue fractional shares of Series E Preferred Stock upon
conversion of any Convertible Debenture and, in lieu thereof, will pay a cash
adjustment.
SECTION 3.02. CONVERSION PROCEDURE. If the holder elects to convert any
Convertible Debenture such holder may do so by delivering the Convertible
Debenture at the specified office of the Company, accompanied by a duly signed
and completed Conversion Notice. The date of the Conversion shall be the date on
which the Convertible Debenture and the duly signed and completed Conversion
Notice are received by the Company. A holder delivering a Convertible Debenture
for conversion will not be required to pay any taxes or duties payable with
respect to the issue or delivery of Series E Preferred Stock on Conversion and
any such taxes or duties shall be paid by the Company.
SECTION 3.03. REPRESENTATIONS, WARRANTIES, COVENANTS, NO DEFAULT;
CONDITIONS PRECEDENT TO CONVERSION.
(a) On and as of the date of each Conversion, (i) the Company
shall be deemed to have (A) remade, ratified and confirmed all
representations and warranties of the Company contained in Article IV of
this Agreement, (B) certified compliance with all covenants contained in
Article VIII of this Agreement and (C) certified that no Event of Default
or Default exists and is continuing, and (ii) the Company shall deliver
an Officer's Certificate to the effects set forth in (A), (B) and (C)
above.
7
<PAGE> 12
(b) In addition to the provisions of Section 3.03(a) above, on
and as of the date of each Conversion, the Company shall have caused to
be delivered to the Purchaser an opinion of the General Counsel of the
Company, substantially in the form of Exhibit E attached hereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser that:
SECTION 4.01. ORGANIZATION, QUALIFICATIONS AND CORPORATE POWER.
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware and
is duly qualified to transact business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of the business
transacted by it or the character of the properties owned or leased by it
requires such qualification, except where the failure to be so qualified
would not have a Material Adverse Effect. The Company has the corporate
power and authority to own and hold its properties and to carry on its
business as now conducted and as proposed to be conducted, to execute,
deliver and perform its obligations under this Agreement, to issue, sell
and deliver the Convertible Debentures and, subject to approval by the
stockholders of the Company of an amendment to the Certificate of
Incorporation, to increase the authorized number of shares of Common
Stock and Preferred Stock, to issue and deliver the Preferred Conversion
Shares and the Common Conversion Shares.
(b) The Company has no Subsidiaries. The Company does not (i)
own of record or beneficially, directly or indirectly (A) any shares of
capital stock or securities convertible into capital stock of any other
corporation or (B) any participating interest in any partnership, joint
venture or other non-corporate business enterprise or (ii) control,
directly or indirectly, any other entity.
SECTION 4.02. AUTHORIZATION. The execution and delivery by the Company of
this Agreement, the performance by the Company of its obligations hereunder, the
issuance, sale and delivery of the Convertible Debentures and, subject to
approval by the stockholders of the Company of an amendment to the Certificate
of Incorporation to increase the authorized number of shares of Common Stock and
Preferred Stock, the issuance and delivery of the Preferred Conversion Shares
and the Common Conversion Shares have been duly authorized by all requisite
corporate action and will not violate any provision of law, any order of any
court or other agency of government, the Certificate of Incorporation or the
By-laws, or any provision of any indenture, agreement or other instrument to
which the Company, any of its
8
<PAGE> 13
subsidiaries or any of their respective properties or assets is bound, or
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under any such indenture agreement or other instrument,
or result in the creation or imposition of any lien, charge, restriction, claim
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company or any of its subsidiaries.
SECTION 4.03. VALIDITY. This Agreement has been duly executed and
delivered by the Company and constitutes the legal, valid and binding obligation
of the Company, enforceable in accordance with its terms.
SECTION 4.04. CAPITALIZATION. The authorized capital stock of the
Company consists of (i) 18,000,000 shares of Common Stock, par value $0.001 per
share; (ii) 1,250,000 shares of Series A Preferred Stock, par value $0.001 per
share;(iii) 625,000 shares of Series B Preferred Stock, par value $0.001 per
share; (iv) 120,000 shares of Series C Preferred Stock, par value $0.001 per
share; and (v) 5,000 shares of one or more series of Preferred Stock (the "Blank
Check Preferred Stock"). Immediately prior to the Closing, 6,917,182 shares of
Common Stock, 1,250,000 shares of Series A Preferred Stock, 625,000 shares of
Series B Preferred Stock and 120,000 shares of Series C Preferred Stock were
outstanding and have been validly issued and are fully paid and nonassessable
with no personal liability attaching to the ownership thereof. The Company has
sold $4,000,000 of convertible debentures due August 16, 1999. Such convertible
debentures are convertible into 16,000,000 shares of Series D Preferred Stock
which, when authorized and issued, will in turn, be convertible into 16,000,000
shares of Common Stock. The convertible Debentures are part of up to an
additional $3,000,000 of convertible debentures due August 16, 1999 authorized
to be issued on or prior to September 30, 1996; such additional convertible
debentures shall be convertible into a number of shares of Series E Preferred
Stock determined by dividing the aggregate principal balance of the convertible
debentures to then be converted by twenty five hundredths (0.25). Such shares of
Series E Preferred Stock are in turn each convertible into one share of Common
Stock. The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of the Company are as set forth in the Certificate of
Incorporation, and all such designations, powers, preferences, rights,
qualifications, limitations and restrictions are valid, binding and enforceable
and in accordance with all applicable laws. Except as set forth on Schedule
4.04, there are no outstanding options, preemptive or other rights, warrants,
agreements, voting trusts, proxies, contracts, calls, commitments or demands of
any character relating to any shares of capital stock, or any other securities
of the Company, whether or not issued, including, but not limited to, securities
convertible into or evidencing the right to purchase any capital stock or other
securities of the Company. Except as set forth on Schedule 4.04, the Company has
no obligation (contingent or other) to purchase, redeem or otherwise acquire any
of its equity securities or any interest therein or to pay any dividend or make
any other distribution in respect thereof. Except as set forth on Schedule 4.04,
there are no voting trusts or agreements, stockholders' agreements,
9
<PAGE> 14
pledge agreements, buy-sell agreements, rights of first refusal, preemptive
rights or proxies relating to any securities of the Company or any of its
subsidiaries (whether or not the Company or any of its subsidiaries is a party
thereto). All of the outstanding securities of the Company were issued in
compliance with all applicable federal and state securities laws.
SECTION 4.05. FINANCIAL STATEMENTS. The Company has furnished to the
Purchaser the consolidated balance sheet of the Company as of December 31, 1995
(the "Balance Sheet"), and the related statements of income, stockholders'
equity and cash flows of the Company for the year ended December 31, 1995. All
such financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied and fairly present the
financial position of the Company as of December 31, 1995, and the results of
operations and cash flows of the Company for the year ended December 31, 1995.
Since the date of the Balance Sheet, (i) there has been no change in the assets,
liabilities or financial condition of the Company (on a consolidated basis) from
that reflected in the Balance Sheet, except for changes in the ordinary course
of business which in the aggregate have not been materially adverse, and (ii)
none of the business, prospects, financial condition, operations, property or
affairs of the Company (on a consolidated basis) has been materially adversely
affected by any occurrence or development, individually or in the aggregate,
whether or not insured against.
SECTION 4.06. EVENTS SUBSEQUENT TO THE DATE OF THE BALANCE SHEET. Since
the date of the Balance Sheet, the Company has not, except as set forth on
Schedule 4.06, (i) issued any stock, bond or other corporate security, (ii)
borrowed any amount or incurred or become subject to any liability (absolute,
accrued or contingent), except current liabilities incurred and liabilities
under contracts entered into in the ordinary course of business, (iii)
discharged or satisfied any lien or encumbrance or incurred or paid any
obligation or liability (absolute, accrued or contingent) other than current
liabilities shown on the Balance Sheet and current liabilities incurred since
the date of the Balance Sheet in the ordinary course of business, (iv) declared
or made any payment or distribution to stockholders or purchased or redeemed any
share of its capital stock or other security, (v) mortgaged, pledged or
subjected to lien any of its assets, tangible or intangible, other than liens of
current real property taxes not yet due and payable, (vi) sold, assigned or
transferred any of its tangible assets except in the ordinary course of
business, or canceled any debt or claim, (vii) sold, assigned, transferred or
granted any exclusive license with respect to any patent, trademark, trade name,
service mark, copyright, trade secret or other intangible asset, (viii) suffered
any loss of property or waived any right of substantial value whether or not in
the ordinary course of business, (ix) made any change in officer compensation
except in the ordinary course of business and consistent with past practice, (x)
made any material change in the manner of business or operations of the Company,
(xi) entered into any transaction except in the ordinary course of business or
as otherwise contemplated hereby or (xii) entered into any commitment
(contingent or otherwise) to do any of the foregoing.
10
<PAGE> 15
SECTION 4.07. COMPLIANCE WITH INSTRUMENTS. The Company is not in
violation of any term of its Certificate of Incorporation or By-laws, or any
statute, rule or regulation applicable to the Company. Except as set forth on
Schedule 4.07, the Company is not in violation or in default of any term
contained in any instrument or contract to which it is a party. Except as set
forth on Schedule 4.07, no event or failure of performance has occurred which,
with the passage of time or the giving of notice or both, would constitute such
a violation. None of the violations set forth on Schedule 4.07 will have a
Material Adverse Effect.
SECTION 4.08. LITIGATION. Except as set forth on Schedule 4.08, there are
no (i) actions, suits, claims, proceedings or investigations pending or, to the
best of the Company's knowledge, threatened against or affecting the Company, at
law or in equity, or before or by any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, (ii) arbitration proceedings relating to the Company
pending under collective bargaining agreements or otherwise or (iii)
governmental inquiries pending or, to the best of the Company's knowledge,
threatened against or affecting the Company (including without limitation any
inquiry as to the qualification of the Company to hold or receive any license or
permit), and the Company is not aware of any basis for any of the foregoing.
None of the actions, suits, claims, proceedings, or investigations set forth on
Schedule 4.08 will have a Material Adverse Effect. The Company is not in default
with respect to any order, writ, injunction or decree known to or served upon
the Company of any court or of any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign.
SECTION 4.09. COMPLIANCE WITH LAW. The Company has complied with all
laws, rules, regulations and orders applicable to its business, operations,
properties, assets, products and services, and the Company has all necessary
permits, licenses and other authorizations required to conduct its business as
conducted and as proposed to be conducted to the extent failure to do so would
have a material adverse effect on the business of the Company. There is no
existing law, rule, regulation or order, and the Company is not aware of any
proposed law, rule, regulation or order, whether federal or state, which would
prohibit or restrict the Company from, or otherwise materially adversely affect
the Company in, conducting its business in any jurisdiction in which it is now
conducting business or in which it proposes to conduct business.
SECTION 4.10. TITLE TO PROPERTIES. The Company has good and marketable
title to its properties and assets reflected on the Balance Sheet or acquired by
It since the date of the Balance Sheet (other than properties and assets
disposed of in the ordinary course of business since the date of the Balance
Sheet), and all such properties and assets are free and clear of mortgages,
pledges, security interests, liens, charges, claims, restrictions and other
encumbrances, except (i) for Liens set forth on Schedule 4.10, (ii) for Liens
for taxes not yet due and payable and minor imperfections of title, if any, not
material in nature or amount and
11
<PAGE> 16
(iii) for Liens not materially detracting from the value or impairing the use of
the property subject thereto or impairing the operations or proposed operations
of the Company.
SECTION 4.11. LEASEHOLD INTERESTS. Each lease or agreement to which the
Company is a party under which it is a lessee of any property, real or personal,
is a valid and subsisting agreement without any default of the Company
thereunder, except as set forth on Schedule 4. 11, and, to the best of the
Company's knowledge, without any default thereunder of any other party thereto.
No event has occurred and is continuing which, with due notice or lapse of time
or both, would constitute a default or event of default by the Company under any
such lease or agreement or, to the best of the Company's knowledge, by any other
party thereto. The Company's possession of such property has not been disturbed
and, to the best of the Company's knowledge, no claim has been asserted against
the Company adverse to its rights in such leasehold interests.
SECTION 4.12. TAXES. The Company has filed all tax returns, federal,
state, county and local, required to be filed by it, and the Company has paid
all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or payable, including
without limitation all taxes which the Company is obligated to withhold from
amounts owing to employees, creditors and third parties. All such taxes with
respect to which the Company has become obligated pursuant to elections made by
the Company in accordance with generally accepted practice have been paid and
adequate reserves have been established for all taxes accrued but not yet
payable. The Federal income tax returns of the Company have never been audited
by the Internal Revenue Service. No deficiency assessment with respect to or
proposed adjustment of the Company's Federal, state, county or local taxes is
pending or, to the best of the Company's knowledge, threatened. There is no tax
lien, whether imposed by any federal, state, county or local taxing authority,
outstanding against the assets, properties or business of the Company.
SECTION 4.13. PATENTS, TRADEMARKS, ETC. The Company owns or possesses
adequate licenses or other rights to use all trademarks, trademark applications,
service marks, service mark applications, trade names, copyrights, manufacturing
processes, formulae, trade secrets and know how, and all patents and patent
applications known to the Company (collectively, "Intellectual Property"),
necessary to the conduct of its business as conducted and as proposed to be
conducted, and no claim is pending or, to the best of the Company's knowledge,
threatened to the effect that the operations of the Company infringe upon or
conflict with the asserted rights of any other person under any Intellectual
Property, and there is no known basis for any such claim (whether or not pending
or threatened). No claim is pending or threatened to the effect that any such
Intellectual Property owned or licensed by the Company, or which the Company
otherwise has the right to use, is invalid or unenforceable by the Company, and
there is no basis known to the Company for any such claim (whether or not
pending or threatened). To the best of the Company's knowledge, all technical
information developed by and belonging to the Company which has not been
patented has been kept confidential. Except as set forth on Schedule 4.13, the
Company has
12
<PAGE> 17
not granted or assigned to any other person or entity any right to manufacture,
have manufactured, assemble or sell the products or proposed products or to
provide the services or proposed services of the Company.
SECTION 4.14. OUTSTANDING DEBT; LOANS AND ADVANCES.
(a) All of the outstanding Debt of the Company is set forth on
Schedule 4.14 ("Existing Debt"). Except as set forth on Schedule 4.07,
there exists no default under the provisions of any instrument evidencing
such Existing Debt or of any agreement relating thereto.
(b) The Company does not have any outstanding loans or advances
to any person and is not obligated to make any such loans or advances,
except, in each case, for advances to employees of the Company in respect
of reimbursable business expenses anticipated to be incurred by them in
connection with their performance of services for the Company.
SECTION 4.15. GUARANTEES. The Company is not a party to any Guarantee by
it of obligations of any other party.
SECTION 4.16. GOVERNMENTAL APPROVALS. No registration or filing with, or
consent or approval of or other action by, any federal, state or other
governmental agency or instrumentality is or will be necessary for the valid
execution, delivery and performance by the Company of this Agreement, the
issuance, sale and delivery of the Convertible Debentures, the issuance and
delivery of the Preferred Conversion Shares upon the conversion of the
Convertible Debentures, or the issuance and delivery of the Common Conversion
Shares upon conversion of the Preferred Conversion Shares, other than the
approval by the stockholders of the Company of an amendment to the Certificate
of Incorporation to increase the authorized number of shares of Common Stock and
Preferred Stock.
SECTION 4.17. DISCLOSURE. Neither this Agreement, nor any Schedule or
Exhibit to this Agreement contains an untrue statement of a material fact or
omits a material fact necessary to make the statements contained herein or
therein not misleading. None of the statements, documents, certificates or other
items prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained therein not misleading
There is no fact which the Company has not disclosed to the Purchaser and of
which the Company is aware which materially and adversely affects or could
materially and adversely affect the business, prospects, financial condition,
operations, property or affairs of the Company or any of its subsidiaries.
13
<PAGE> 18
SECTION 4.18. BROKERS. The Company has no contract, arrangement or
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
SECTION 4.19. SECURITIES ACT. The offer, sale and issuance of the
Convertible Debentures, the Preferred Conversion Shares and the Common
Conversion Shares (collectively, the "Securities") will be exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and will have been registered or qualified (or are exempt
from registration and qualification) under the registration, permit or
qualification requirements of any applicable state securities laws. Neither the
Company nor any agent on its behalf has solicited or will solicit any offers to
sell or has offered to sell or will offer to sell all or any part of the
Securities to any Person so as to bring the sale of such Securities by the
Company within the registration provisions of the Securities Act.
SECTION 4.20. MARGIN REGULATIONS. The Company will not, directly or
indirectly, use any of the proceeds of the Securities for the purpose, whether
immediate, incidental or ultimate, of maintaining, purchasing or carrying any
stock that is currently a "margin stock" within the meaning of Regulation G of
the Board of Governors of the Federal Reserve System (12 C.F.R. 207, as amended)
or Regulation U of such Board (12 C.F.R. 221, as amended), or otherwise take or
permit to be taken any action which would result in the carrying out of any of
the other transactions contemplated hereby or thereby being violative of such
Regulation G or Regulation U, or of Regulation T (12 C.F.R. 220, as amended),
Regulation X (12 C.F.R. 224, as amended) or any other regulation of such Board.
The Company and its Subsidiaries do not own or intend to acquire any "margin
stock" within the meaning of such Regulation G or such Regulation U.
SECTION 4.21. INSURANCE COVERAGE. Each property of the Company is insured
for the benefit of the Company in amounts deemed adequate by the Company's
management against risks usually insured against by persons operating businesses
similar to those of the Company in the localities where such properties are
located.
SECTION 4.22. ERISA. No accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists
with respect to any Plan (other than a Multiemployer Plan). No liability to the
PBGC has been or is expected by the Company or any ERISA Affiliate to be
incurred with respect to any Plan (other than a Multiemployer Plan) by the
Company or any ERISA Affiliate which would have a Material Adverse Effect.
Neither the Company nor any ERISA Affiliate Is a participant in any
Multiemployer Plan. The execution and delivery of this Agreement and the
issuance and sale of the Convertible Debentures will be exempt from or will not
involve any transaction which is subject to, the prohibitions of Section 406 of
ERISA and will not involve any transaction in connection with which a penalty
could be imposed under Section 502(i) of ERISA or a tax could be imposed
pursuant to Section,4975 of the Code. The Company and its ERISA Affiliates do
not provide any benefits to former employees except as may be
14
<PAGE> 19
required by COBRA (Section 4980B of the Code and Sections 601 et seq. of ERISA).
Neither the Company nor any ERISA Affiliate is a party to a collective
bargaining agreement or is required to bargain with any collective bargaining
unit.
SECTION 4.23. ENVIRONMENTAL COMPLIANCE. The Company and its properties
and facilities have complied at all times and in all respects with all federal,
state, local and regional statutes, laws, ordinances and judicial or
administrative orders, judgments, rulings and regulations relating to protection
of the environment except, in any such case, where failure to comply would not
have a Material Adverse Effect.
SECTION 4.24. PERMITS AND LICENSES. The Company has all federal, state
and local governmental permits, licenses, certificates of authority any similar
authority necessary for the conduct of its business as now being conducted and
as proposed to be conducted. The Company is not in default in any material
respect under any such permit, license, certificate of authority or other
similar authority.
SECTION 4.25. BOARD COMPOSITION. Article III, Section 1 of the By-laws
provides that the number of directors which shall constitute the whole Board of
Directors of the Company (the "Board") shall be not less that three (3) nor more
than fifteen (15), with the specific number determined by a resolution of the
Board, or by the shareholders of the Company at the annual meeting. Effective
immediately upon the Closing, the current Board members will be Donald Baker,
Roden A. Brandt, Clifton E. Haley, William B. Hambrecht, Patrick J. O'Shea,
Robert J. Spane and John Tague.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
SECTION 5.01. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The
Purchaser represents and warrants to the Company that:
(a) the Convertible Debentures being purchased by it are being
acquired for its own account for the purpose of investment and not with a
view to or for sale in connection with any distribution thereof;
(b) it understands that: (i) there is not now any market for
the Convertible Debentures, the Series E Preferred Stock or the Common
Stock (collectively, the "Securities") and that it is possible that no
market may develop in the foreseeable future; (ii) that the Securities
when issued will have been issued in transactions which are exempt from
registration under the federal securities laws and any applicable state
securities laws (the "Securities Laws"); (iii) will be "restricted
securities" in the
15
<PAGE> 20
context of the Securities Laws; and, thus, (iv) will not be transferable
unless registered or an exemption from registration is available.
(c) it understands that an investment in the Securities
involves a high degree of risk and that there is a significant risk of
losing the investment in its entirety;
(d) if the investor is a natural person he or she is either (i)
a person who has an individual net worth, or joint net worth with that
person's spouse, on the date hereof of $1,000,000 or (ii) a person who
had an individual income of $200,00 in each of the two most recent years
or joint income with that person's spouse of $300,000 in each of those
years and has a reasonable expectation of reaching the same income level
in the current year.
(e) it has not employed any broker or finder in connection with
the transactions contemplated by this Agreement; and
(f) the execution, delivery and performance by it of this
Agreement have been duly authorized by all requisite action by it and
this Agreement constitutes the valid and binding obligation of it,
enforceable in accordance with its terms.
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS
OF THE PURCHASER
SECTION 6.01. CONDITIONS TO THE OBLIGATION OF THE PURCHASER. The
obligation of the Purchaser to purchase and pay for the Convertible Debentures
being purchased by it on the Closing Date is, at its option, subject to the
satisfaction, on or before the Closing Date, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TO BE TRUE AND CORRECT. The
representations and warranties of the Company contained in Article IV
shall be true, complete and correct on and as of the Closing Date with
the same effect as though such representations and warranties had been
made on and as on such date.
(b) PERFORMANCE. The Company shall have performed and compiled
with all agreements contained herein required to be performed or compiled
with by it prior to or at the Closing Date
(c) OFFICER'S CERTIFICATE. The Company shall have executed and
delivered to the Purchaser an Officer's Certificate to the effects set
forth in (a) and (b) above.
16
<PAGE> 21
(d) INVESTOR'S RIGHTS AGREEMENT. The Company shall have
executed and delivered the Investor's Rights Agreement to the Purchaser.
(e) OPINION OF COUNSEL. The Purchaser shall have received an
opinion of the General Counsel of the Company, such opinion to be
substantially in the form of Exhibit F attached hereto.
(f) ALL PROCEEDINGS TO BE SATISFACTORY. All corporate and other
proceedings to be taken by the Company in connection with the
transactions contemplated hereby and all documents incident thereto shall
be satisfactory in form and substance to the Purchaser and its counsel,
and the Purchaser and its counsel shall have received all such
counterpart originals or certified or other copies of such documents as
they reasonably may request.
(g) SUPPORTING DOCUMENTS. The Purchaser and its counsel shall
have received copies of the following documents:
(i) a certificate of the Secretary of State of the State
of Delaware, dated as of a recent date as to the due incorporation
and good standing of the Company;
(ii) a certificate of the Secretary or an Assistant
Secretary of the Company dated the Closing Date and certifying:
(A) that the Certificate of Incorporation attached to this
Agreement is a true and complete copy of the Certificate of
Incorporation of the Company; (B) that the Certificate of
Incorporation has not been amended since the date of the last
amendment referred to in the certificate delivered pursuant to
clause (ii)(A) above; (C) that attached thereto is a true and
complete copy of the By-laws of the Company as in effect on the
date of such certification; (D) that attached thereto is a true
and complete copy of all resolutions adopted by the Board of
Directors or the stockholders of the Company authorizing the
execution, delivery and performance of this Agreement, and the
issuance, sale and delivery of the Convertible Debentures and that
all such resolutions are in full force and effect and are all the
resolutions adopted in connection with the transactions
contemplated by this Agreement; and (E) to the incumbency and
specimen signature of each officer of the Company executing this
Agreement, the Convertible Debentures and any certificate or
instrument furnished pursuant hereto, and a certification by
another officer of the Company as to the incumbency and signature
of the officer signing the certificate referred to in this
subparagraph 6.01(g)(ii); and
17
<PAGE> 22
(iii) such additional supporting documents and other
information with respect to the operations and affairs of the
Company as the Purchaser or its counsel reasonably may request.
(h) THIRD PARTY CONSENTS, PERMITS AND WAIVERS. The Company
shall have obtained any and all consents, permits and waivers necessary
or appropriate for the consummation of the transactions contemplated by
this Agreement.
(i) NO INJUNCTIONS OR RESTRAINTS. There shall be no action,
suit, investigation or proceeding pending, or, to the best of the
Company's knowledge, threatened, against or affecting the Company, any of
the Company's properties or rights, or any of the Company's officers or
directors, before any court, arbitrator or administrative or governmental
body which (i) seeks to restrain, enjoin, or prevent the consummation of
the transactions contemplated by this Agreement or (ii) questions the
validity or legality of any such transactions or seeks to recover damages
or to obtain other relief in connection with any such transactions and,
to the best of the Company's knowledge, there shall be no valid basis for
any such action, proceeding or investigation.
All such documents shall be satisfactory in form and substance to the Purchaser
and its counsel.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
SECTION 7.01. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligation of the Company to issue and sell the Convertible Debentures on the
Closing Date is, at its option, subject to the satisfaction, on or before the
Closing Date, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TO BE TRUE AND CORRECT. The
representations and warranties of the Purchaser contained in Article 5
shall be true, complete and correct on and as of the Closing Date with
the same effect as though such representations and warranties had been
made on and as of such date.
(b) PERFORMANCE. The Purchaser shall have performed and
complied with all agreements contained herein required to be performed or
complied with by it prior to or at the Closing Date.
18
<PAGE> 23
(c) OFFICER'S CERTIFICATE. The Purchaser shall have delivered
to the Company a certificate of an officer of the Purchaser to the
effects set forth in (a) and (b) above.
(d) ALL PROCEEDINGS TO BE SATISFACTORY. All corporate and other
proceedings to be taken by the Purchaser in connection with the
transactions contemplated hereby and all documents incident thereto shall
be satisfactory in form and substance to the Company and its counsel, and
the Company and its counsel shall have received all such counterpart
originals or certified or other copies of such documents as they
reasonably may request.
(e) NO INJUNCTIONS OR RESTRAINTS. There shall be no action,
suit, investigation or proceeding pending, or, to the best of the
Company's knowledge, threatened, against or affecting the Company, any of
the Company's properties or rights, or any of the Company's officers or
directors, before any court, arbitrator or administrative or governmental
body which (i) seeks to restrain, enjoin, or prevent the consummation of
the transactions contemplated by this Agreement or (ii) questions the
validity or legality of any such transactions or seeks to recover damages
or to obtain other relief in connection with any such transactions and,
to the best of the Company's knowledge, there shall be no valid basis for
any such action, proceeding or investigation.
ARTICLE VIII
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Purchaser that so long as any
Convertible Debenture is outstanding:
SECTION 8.01. FINANCIAL STATEMENTS AND REPORTS. The Company shall furnish
to the Purchaser:
(a) as soon as practicable, and in any event at least 30 days
prior to the beginning of each fiscal year of the Company, consolidated
statements of forecasted income and cash flow and consolidated forecasted
balance sheet of the Company for each month and each fiscal quarter in
such fiscal year and for the period from the beginning of such fiscal
year to the end of each such month and end of each such fiscal quarter,
in each case as at the end of each such month and fiscal quarter;
(b) as soon as practicable after the end of each month in each
fiscal year (other than the last month in each fiscal year), and in any
event within 30 days thereafter, consolidated statements of income and
cash flow of the Company for such
19
<PAGE> 24
month and for the period from the beginning of the current fiscal year to
the end of such month and a consolidated balance sheet of the Company as
at the end of such month, and setting forth, in each case, in comparative
form, figures for the corresponding months in the preceding fiscal year
(other than any such corresponding months ended prior to the Closing) and
figures in the Company's budget for the corresponding months in the
current fiscal year;
(c) as soon as practicable after the end of each fiscal quarter
of the Company in each fiscal year (other than the last fiscal quarter in
each fiscal year), and in any event within forty-five (45) days
thereafter, a consolidated balance sheet of the Company and the related
consolidated statements of income, stockholders' equity and cash flows,
unaudited but prepared in accordance with generally accepted accounting
principles and certified by the Chief Financial Officer of the Company,
such consolidated balance sheet to be as of the end of such fiscal
quarter and such consolidated statements of income, stockholders' equity
and cash flows to be for such fiscal quarter and for the period from the
beginning of the fiscal year to the end of such fiscal quarter, in each
case with comparative statements for the corresponding period in the
prior fiscal year;
(d) as soon as practicable after the end of each fiscal year of
the Company, and in any event within ninety (90) days thereafter, a
consolidated balance sheet of the Company as of the end of such fiscal
year and the related consolidated statements of income, stockholders'
equity and cash flows for the fiscal year then ended, prepared in
accordance with generally accepted accounting principles and certified by
a firm of independent public accountants of recognized national standing
selected by the Board of Directors of the Company;
(e) promptly upon transmission thereof, copies of all such
financial statements, proxy statements, notices and reports as it shall
send to its stockholders and copies of all registration statements
(without exhibits) and all reports which it files with the Commission;
(f) promptly upon sending, all press releases that the Company
disseminates:
(g) promptly upon receipt thereof, a copy of each other report
submitted to the Company or any Subsidiary by independent accountants in
connection with any annual, interim or special audit made by them of the
books of the Company or any Subsidiary;
(h) as soon as practicable and in any event within five days
after any officer of the Company obtaining knowledge (i) of any condition
or event which, in the opinion of management of the Company, would have a
Material Adverse Effect (ii)
20
<PAGE> 25
that any Person has given any notice from any Person to the Company or
taken any other action with respect to a claimed default or event or
condition of the type referred to in Section 9.01(ii), (iii) of the
institution of any litigation involving claims against the Company equal
to or greater than $100,000 with respect to any single cause of action or
of any adverse determination in any court proceeding in any litigation
involving a potential liability to the Company equal to or greater than
$100,000 with respect to any single cause of action which makes the
likelihood of an adverse determination in such litigation against the
Company substantially more probable, or (iv) of any regulatory proceeding
which may have a Material Adverse Effect on the Company, an Officer's
Certificate specifying the nature and period of existence of any such
condition or event, or specifying the notice given or action taken by
such Person and the nature of any such claimed default, event or
condition, or specifying the details of such proceeding, litigation or
dispute and what action the Company has taken, is taking or proposes to
take with respect thereto;
(i) promptly after the filing or receiving thereof, copies of
all reports and notices which the Company files under ERISA with the
Internal Revenue Service or the PBGC or the U.S. Department of Labor or
which the Company receives from such corporation; and
(j) with reasonable promptness, such other information
respecting the condition or operations, financial or otherwise, of the
Company as the Purchaser may reasonably request.
Together with each delivery of financial statements required by clauses (c) and
(d) above, the Company will deliver to the Purchaser an Officer's Certificate
stating that there exists no Event of Default or Default, or, if any Event of
Default or Default exists, specifying the nature and period of existence thereof
and what action the Company proposes to take with respect thereto. Together with
each delivery of financial statements required by clause (d) above, the Company
will deliver to the Purchaser a certificate of such accountants stating that, in
making the audit necessary for their report on such financial statements, they
have obtained no knowledge of any Event of Default or Default, or, if they have
obtained knowledge of any Event of Default or Default, specifying the nature and
period of existence thereof.
The Company also covenants that immediately after any officer obtains
knowledge of an Event of Default or Default, it will deliver to the Purchaser an
Officer's Certificate specifying the nature and period of existence thereof and
what action the Company proposes to take with respect thereto.
SECTION 8.02. CORPORATE EXISTENCE. The Company shall maintain its
corporate existence, rights and franchises in full force and effect.
21
<PAGE> 26
SECTION 8.03. MAINTENANCE OF PROPERTIES AND INSURANCE. The Company will
maintain or cause to be maintained in good repair, working order and condition
all properties used or useful in the business of the Company and from time to
time will make or cause to be made appropriate repairs, renewals and
replacements thereof. The Company shall maintain its properties and business,
with financially sound and reputable insurers, insurance against such casualties
and contingencies and of such types and in such amounts as is customary for
companies similarly situated, including but not limited to fire and other risks
insured against by extended coverage, product liability insurance and public
liability insurance against claims for personal injury or death or property
damage occurring upon, in, about or in connection with the use of any properties
owned, occupied or controlled by the Company, which insurance shall be deemed by
the Company to be sufficient; and maintain workers' compensation insurance and
such other insurance as may be required by law.
SECTION 8.04. INSPECTION, CONSULTATION AND ADVICE. The Company shall
permit the Purchaser to visit and inspect any of the properties of the Company,
examine its books and take copies and extracts therefrom, discuss the affairs,
finances and accounts of the Company with its officers, employees and public
accountants (and the Company hereby authorizes said accountants to discuss with
the Purchaser such affairs, finances and accounts), and consult with and advise
the management of the Company as to its affairs, finances and accounts, all at
reasonable times and upon reasonable notice.
SECTION 8.05. RESTRICTIVE AGREEMENTS PROHIBITED. The Company shall not
become a party to any agreement which by its terms restricts the Company's
performance of this Agreement.
SECTION 8.06. TRANSACTIONS WITH AFFILIATES. Except for transactions
contemplated by this Agreement, the Company shall not enter into any transaction
with any director, officer, employee or holder of more than 5% of the
outstanding capital stock of any class or series of capital stock of the
Company, member of the family of any such person, or any corporation,
partnership, trust or other entity in which any such person, or member of the
family of any such person is a director, officer, trustee, partner or holder of
more than 5% of the outstanding capital stock thereof.
SECTION 8.07. USE OF PROCEEDS. The Company shall use the proceeds from
the sale of the Convertible Debentures solely for working capital or other such
uses as may be authorized by the Board of Directors.
SECTION 8.08. SUBSIDIARIES. The Company shall not create or have any
Subsidiaries.
SECTION 8.09. COMPLIANCE WITH LAWS. The Company shall comply with all
applicable laws, rules, regulations and orders, noncompliance with which could
have a Material Adverse Effect.
22
<PAGE> 27
SECTION 8.10. KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company shall
keep true records and books of account, in which full and complete entries will
be made in accordance with generally accepted accounting principles consistently
applied, reflecting all financial and business transactions of the Company, and
in which, for each fiscal year, all proper accruals and reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made as shall be required
under generally accepted accounting principles consistently applied.
SECTION 8.11. OBLIGATIONS AND TAXES. The Company shall pay all of its
indebtedness and obligations promptly and in accordance with their terms and pay
and discharge promptly all taxes, assessments and governmental charges or levies
imposed upon it or its income or profits or in respect of its property, before
the same shall become in default, as well as all lawful claims for labor and
supplies or otherwise which, if unpaid, might become a lien or charge upon such
properties or any part thereof; provided, however, that the Company shall not be
required to pay and discharge or to cause to be paid and discharged any tax,
assessment, charge, levy or claim so long as the validity or amount thereof
shall be contested in good faith by appropriate proceedings and the Company
shall set aside on its books such reserves as are required by generally accepted
accounting principles with respect to any such tax, assessment, charge, levy or
claim so contested.
SECTION 8.12. TRANSFER AND EXCHANGE OF CONVERTIBLE DEBENTURES; LOST
CONVERTIBLE DEBENTURES. Upon surrender for registration or transfer of any
Convertible Debenture at the principal office of the Company, the Company shall,
at its expense, execute and deliver one or more new Convertible Debentures of
like tenor and of a like aggregate principal amount, registered in the name of
such transferee or transferees. At the option of the Purchaser, such Convertible
Debenture may be exchanged for other Convertible Debentures of like tenor and of
any authorized denominations, of a like aggregate principal amount, upon
surrender of the Convertible Debenture to be exchanged at the principal office
of the Company. Whenever any Convertible Debentures are so surrendered for
exchange, the Company shall, at its expense, execute and deliver the Convertible
Debentures which the Purchaser making the exchange is entitled to receive. Every
Convertible Debenture surrendered for registration of transfer or exchange shall
be duly endorsed, or be accompanied by a written instrument of transfer duly
executed, by the Purchaser of such Convertible Debenture or the Purchaser's
attorney duly authorized in writing. Any Convertible Debenture or Convertible
Debentures issued in exchange for any Convertible Debenture or upon transfer
thereof shall carry the rights to unpaid interest and interest to accrue which
were carried by the Convertible Debenture so exchanged or transferred, so that
neither gain nor loss of interest shall result from any such transfer or
exchange. Upon receipt of written notice from the Purchaser of the loss, theft,
destruction or mutilation of such Convertible Debenture and, in the case of any
such loss, theft or destruction, upon receipt of the Purchaser's unsecured
indemnity agreement, or in the case of any such mutilation upon surrender and
cancellation of such Convertible Debenture, the Company will make and deliver a
new Convertible
23
<PAGE> 28
Debenture, of like tenor, in lieu of the lost, stolen, destroyed or mutilated
Convertible Debenture. The Purchaser's own agreement of indemnity shall
constitute indemnity satisfactory to the Company for purposes of this Section
8.12.
SECTION 8.13. LIMITATION ON DEBT. The Company will not create, incur,
assume or otherwise become or be liable with respect to any Debt except (i) Debt
represented by the Convertible Debentures; (ii) Existing Debt of the Company;
and (iii) Debt of the Company aggregating not more than $500,000 in unpaid
principal amount at any time outstanding.
SECTION 8.14. LIMITATION ON LIENS. The Company will not create, assume or
suffer to exist any Lien upon any of its properties or assets, whether now owned
or hereafter acquired and whether or not provision is made by equally and
ratably securing the Convertible Debentures; provided, however, that the
foregoing restriction and limitation shall not apply to the following Liens:
(a) Liens for taxes, assessments or governmental charges or
levies not yet delinquent or which are being contested in good faith by
appropriate proceedings;
(b) other Liens incidental to the conduct of their business or
the ownership of their properties and assets which were not incurred in
connection with the borrowing of money or the obtaining of advances or
credit, and which do not in the aggregate materially detract from the
value of their properties or assets, or materially impair the use thereof
in the operation of their business; and
(c) any Lien existing at the time of acquisition upon any real
or personal property acquired by the Company through purchase, merger or
consolidation or otherwise, whether or not assumed by the Company, or
placed upon real or personal property being acquired by the Company
(within six months of such acquisition) to secure all or a portion of the
purchase price thereof or any Debt incurred to finance all or any portion
of such purchase price; provided, however, that (A) such property is not
and shall not thereby become encumbered in an amount in excess of the
lesser of the cost thereof or fair value thereof (as determined in good
faith by the Company), and (B) any such Lien shall not encumber any other
property of the Company; and provided, further, that the aggregate amount
at any time of all such Debt secured under this subparagraph ) shall be
permitted by Section 8.13 (and any Lien renewing, extending or refunding
any Lien permitted by this subparagraph 8.14 (c)(iii), provided that the
principal amount secured it not increased, the Lien is not extended to
other property and the Debt secured thereby would be permitted under the
provisions of Section 8.13).
SECTION 8.15. LIMITATION ON RESTRICTED PAYMENTS. The Company will not
directly or indirectly make any Restricted Payments.
24
<PAGE> 29
SECTION 8.16. COVENANT REGARDING STOCKHOLDER VOTE AND FILING OF
CERTIFICATE OF DESIGNATION.
(a) On or prior to February 1, 1997 the Company will have
solicited and obtained the requisite approval of its stockholders (the
"Stockholder Approval") to an amendment to the Certificate of
Incorporation (the "Amendment") to increase (i) the number of authorized
shares of Preferred Stock by a sufficient number of shares to allow all
securities of the Company which are convertible into Preferred Stock to
be converted and (ii) the number of authorized shares of Common Stock by
a sufficient number of shares to allow (A) all securities of the Company
which are convertible either directly or indirectly into Common Stock to
be converted and (B) the exercise of all options, warrants and any other
rights to purchase Common Stock to be exercised.
(b) Within two (2) Business Days after obtaining the
Stockholder Approval, the Company shall (i) file the Amendment and the
Certificate of Designation with the Secretary of State of the State of
Delaware, and (ii) take such other action as may be necessary to enable
the Purchaser, in its sole discretion, to convert any Convertible
Debenture into Series E Preferred Stock at any time thereafter and from
time to time.
(c) After giving effect to Sections 8.16(a) and (b) above,
upon the conversion of any Convertible Debenture, the Preferred
Conversion Shares and, upon conversion of the Preferred Conversion
Shares, the Common Conversion Shares, will have been duly authorized and
will be validly issued, fully paid and nonassessable with no personal
liability attaching to the ownership thereof and will be free and clear
of all Liens imposed by or through the Company. In addition, after giving
effect to Sections 8.16(a) and (b), the Preferred Conversion Shares and
the Common Conversion Shares will have been duly reserved for issuance
upon conversion of the Convertible Debenture or conversion of the
Preferred Conversion Shares, respectively. Neither the issuance, sale or
delivery of the Preferred Conversion Shares or the Common Conversion
Shares will be subject to any preemptive right of stockholders of the
Company or to any right of first refusal or other right in favor of any
person.
ARTICLE IX
EVENTS OF DEFAULT
SECTION 9.01. ACCELERATION. if any of the following events shall occur
and be continuing for any reason whatsoever (and whether such occurrence shall
be voluntary or involuntary or come about or be effected by operation of law or
otherwise):
25
<PAGE> 30
(i) the Company defaults in the payment of any principal of or
interest on any Convertible Debenture when the same shall become due,
either by the terms thereof or otherwise as herein provided; or
(ii) the Company defaults (whether as primary obligor or as
guarantor or other surety) in any payment of principal of or interest on
any other obligation for money borrowed beyond any period of grace
provided with respect thereto, or the Company fails to perform or observe
any other agreement, term or condition contained in any agreement under
which any such obligation is created (or if any other event thereunder or
under any such agreement shall occur and be continuing) and the effect of
such failure or other event is to cause, or to permit the holder or
holders of such obligation (or a trustee on behalf of such holder or
holders) to cause, such obligation to become due (or to be repurchased by
the Company) prior to any stated maturity; or
(iii) any representation or warranty made by the Company herein
or by the Company or any of its officers in any writing furnished in
connection with or pursuant to this Agreement shall be false in any
material respect on the date as of which made; or
(iv) the Company fails to perform or observe (A) any term,
covenant or agreement contained in Sections 8.01(h)(i), 8.02, 8.04, 8.08,
8.09, 8.11, 8.13, 8.14, 8.15, 8.16 or 8.17, or (B) any other agreement,
covenant, term or condition contained herein and such failure shall not
be remedied within 30 days after any officer obtains actual knowledge
thereof; or
(v) a majority of the members of the Board of Directors shall
be persons nominated by a person or entity other than the Company; or
(vi) the Company makes an assignment for the benefit of
creditors or is generally not paying its debts as such debts become due;
or
(vii) any decree or order for relief in respect of the Company is
entered under any bankruptcy reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar
law, whether now or hereafter in effect (the "Bankruptcy Law"), of any
jurisdiction; or
(viii) the Company petitions or applies to any tribunal for, or
consents to, the appointment of, or taking possession by, a trustee,
receiver, custodian, liquidator or similar official of the Company, or of
any substantial part of the assets of the Company, or commences a
voluntary case under the Bankruptcy Law of the United States or any
proceedings relating to the Company under the Bankruptcy Law of any other
jurisdiction; or
26
<PAGE> 31
(ix) any such petition or application is filed, or any such
proceedings are commenced, against the Company and the Company by any act
indicates its approval thereof, consent thereto or acquiescence therein,
or an order, judgment or decree is entered appointing any such trustee,
receiver, custodian, liquidator or similar official, or approving the
petition in any such proceedings, and such order, judgment or decree
remains unstayed and in effect for more than 30 days; or
(x) any order, judgment or decree is entered in any proceedings
against the Company decreeing the dissolution of the Company and such
order, judgment or decree remains unstayed and in effect for more than 60
days; or
(xi) any order, judgment or decree is entered in any proceedings
against the Company decreeing a split-up of the Company which requires
the divestiture of assets representing a substantial part of the
consolidated assets of the Company (determined in accordance with
generally accepted accounting principles) for any of the three fiscal
years then most recently ended, and such order, judgment or decree
remains unstayed and in effect for more than 60 days; or
(xii) any judgment or order, or series of judgments or orders, is
rendered against the Company and either (A) enforcement proceedings have
been commenced by any creditor upon such judgment or order or (B) within
60 days after entry thereof, such judgment is not discharged or execution
thereof stayed pending appeal, or within 60 days after the expiration of
any such stay, such judgment is not discharged;
then (a) if such event is an Event of Default specified in clause (i) of this
Section 9.01 the Purchaser may at its option, by notice in writing to the
Company, declare such Convertible Debenture to be, and such Convertible
Debenture shall thereupon be and become, immediately due and payable at par
together with interest accrued thereon, without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Company, (b) if
such event is an Event of Default specified in clause (vi), (vii), (viii) or
(ix) of this Section 9.01 with respect to the Company, all of the Convertible
Debentures at the time outstanding shall automatically become immediately due
and payable at par together with interest accrued thereon, without presentment,
demand, protest or notice of any kind, all of which are hereby waived by the
Company, and (c) if such event is not an Event of Default specified in clause
(vi), (vii), (viii) or (ix) of this Section 9.01 with respect to the Company,
the Purchaser may, by notice in writing to the Company, declare all of the
Convertible Debentures to be, and all of the Convertible Debentures shall
thereupon be and become, immediately due and payable together with interest
accrued thereon with respect to each Convertible Debenture, without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Company.
SECTION 9.02. RESCISSION OF ACCELERATION. At any time after any or all of
the Convertible Debentures shall have been declared immediately due and payable
pursuant to
27
<PAGE> 32
Section 9.01, the Purchaser may, by notice in writing to the Company, rescind
and annul such declaration and its consequences if (i) the Company shall have
paid all overdue interest on the Convertible Debentures, the principal payable
with respect to any Convertible Debentures which have become due otherwise than
by reason of such declaration, and interest on such overdue interest and overdue
principal at the rate specified in the Convertible Debentures, (ii) the Company
shall not have paid any amounts which have become due solely by reason of such
declaration, (iii) all Events of Default and Defaults, other than non-payment of
amounts which have become due solely by reason of such declaration, shall have
been cured or waived pursuant to Section 10.03, and (iv) no judgment or decree
shall have been entered for the payment of any amounts due pursuant to the
Convertible Debentures or this Agreement. No such rescission or annulment shall
extend to or affect any subsequent Event of Default or Default or impair any
right arising therefrom.
SECTION 9.03. OTHER REMEDIES. If any Event of Default or Default shall
occur and be continuing, the Purchaser may proceed to protect and enforce its
rights under this Agreement and such Convertible Debenture by exercising such
remedies as are available to such holder in respect thereof under applicable
law, either by suit in equity or by action at law, or both, whether for specific
performance of any covenant or other agreement contained in this Agreement or in
aid of the exercise of any power granted in this Agreement. No remedy conferred
in this Agreement upon the Purchaser is intended to be exclusive of any other
remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy conferred herein or now or hereafter existing at
law or in equity or by statute or otherwise.
ARTICLE X
MISCELLANEOUS
SECTION 10.01. PAYMENTS. The Company will make payments of principal of
and interest on any Convertible Debenture by wire transfer of immediately
available funds for credit (not later than 12:00 noon, New York City time, on
the date due) to the account or accounts as specified by the Purchaser in
writing. The Purchaser agrees that, before disposing of any Convertible
Debenture, the Purchaser will make a notation thereon (or on a schedule attached
thereto) of all principal payments previously made thereon and of the date to
which interest thereon has been paid. Anything in this Agreement or in the
Convertible Debenture to the contrary notwithstanding, any payment in respect of
the Convertible Debenture that is due on a date other than a Business Day shall
be made on the next succeeding Business Day. If the date for any payment is
extended to the next succeeding Business Day by reason of the preceding
sentence, the period of such extension shall be included on the computation of
the amount payable on such Business Day.
28
<PAGE> 33
SECTION 10.02. EXPENSES. The Company agrees, whether or not the
transactions contemplated hereby shall be consummated, to pay, and save the
Purchaser harmless against liability for the payment of, all out-of-pocket
expenses arising in connection with such transactions, including (i) all
document production and duplication charges and the fees and expenses of any
special counsel engaged by the Purchaser in connection with this Agreement, the
transactions contemplated hereby and any subsequent proposed modification of, or
proposed consent under, this Agreement, whether or not such proposed
modification shall be effected or proposed consent granted, and (ii) the costs
and expenses, including attorneys' fees, incurred by you or such Transferee in
enforcing (or determining whether or how to enforce) any rights under this
Agreement or the Convertible Debentures or in responding to any subpoena or
other legal process or informal investigative demand issued in connection with
this Agreement or the transactions contemplated hereby, including without
limitation costs and expenses incurred in any bankruptcy case.
SECTION 10.03. CONSENT TO AMENDMENTS. This Agreement may be amended, and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, if the Company shall obtain the written
consent to such amendment, action or omission to act, of the Purchaser. No
course of dealing between the Company and the Purchaser nor any delay in
exercising any rights hereunder or under the Convertible Debenture shall operate
as a waiver of any rights of any holder of the Purchaser.
SECTION 10.04. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due
presentment for registration of transfer, the Company may treat the Person in
whose name any Convertible Debenture is registered as the owner and holder of
such Convertible Debenture for the purpose of receiving payment of principal of,
interest on such Convertible Debenture and for all other purposes whatsoever,
whether or not such Convertible Debenture shall be overdue, and the Company
shall not be affected by notice to the contrary.
SECTION 10.05. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made herein or any certificate or instrument
delivered by the parties pursuant to or in connection with this Agreement shall
survive the execution and delivery of this Agreement, the issuance, sale and
delivery of the Convertible Debenture, the transfer by the Purchaser of any
Convertible Debenture or portion thereof or interest therein and the payment of
any Convertible Debenture.
SECTION 10.06. BROKERAGE. Each party hereto will indemnify and hold
harmless the others against and In respect of any claim for brokerage or other
commissions relative to this Agreement or the transactions contemplated hereby,
based in any way on agreements, arrangements or understandings made or claimed
to have been made by such party with any third party.
SECTION 10.07. PARTIES IN INTEREST. All representations covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind
29
<PAGE> 34
and inure to the benefit of the respective permitted successors and assigns of
the parties hereto whether so expressed or not.
SECTION 10.09. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed effectively
given: (i) upon receipt at the address specified below after having been sent by
certified or registered mail, return receipt requested, postage prepaid; or (ii)
upon receipt at the address specified below after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt. All communications shall be sent to the party to be
notified at the address set forth below:
(a) if to the Purchaser, to
Captain Paul T. Gillcrist
210 Upper East Coast Road #0160
Eastern Lagoon II
Singapore 1545
(b) if to the Company. to
Air South Airlines, Inc.
2625 Airport Boulevard
West Columbia, South Carolina 29170
Attention: President
with a copy (which shall not constitute notice) to
David Y. Monteith, Esq.
Monteith Law Offices
2805 Millwood Avenue
Columbia, South Carolina 29205
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
SECTION 10.09. ENTIRE AGREEMENT. This Agreement, including the Schedules
and Exhibits hereto, constitutes the sole and entire agreement of the parties
with respect to the subject matter hereof. All Schedules and Exhibits hereto are
hereby incorporated herein by reference.
SECTION 10.10. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
SECTION 10.11. SEVERABILITY. If any provision of this Agreement shall be
declared void or unenforceable by any judicial or administrative authority, the
validity of any other provision and of the entire Agreement shall not be
affected thereby.
30
<PAGE> 35
SECTION 10.12. DESCRIPTIVE HEADINGS. The descriptive headings of the
several sections and paragraphs of this Agreement are inserted for reference
only and shall not limit or otherwise affect the meaning hereof.
SECTION 10.13. GOVERNING LAW. This agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
SECTION 10.14. GENDER; PLURALS. Words of the masculine gender shall be
deemed and construed to include correlative words of the feminine and neuter
genders. Words importing the singular number shall include the plural number and
vice versa.
31
<PAGE> 36
IN WITNESS WHEREOF, the Company and the Purchaser have executed this
Agreement as of the day and year first above written.
COMPANY:
AIR SOUTH AIRLINES, INC.
By: /s/ Dennis B. Crosby
---------------------
Dennis B. Crosby
Vice President
PURCHASER:
PAUL T. GILLCRIST
By:
---------------------
Paul T. Gillcrist
32
<PAGE> 37
INVESTOR'S RIGHTS AGREEMENT
BETWEEN
AIR SOUTH AIRLINES, INC.
AND
PAUL T. GILLCRIST
OCTOBER 16, 1996
<PAGE> 38
INVESTOR'S RIGHTS AGREEMENT
THIS INVESTOR'S RIGHTS AGREEMENT (the "Agreement") is entered into as of
the 4th day of September 1996, by and among AIR SOUTH AIRLINES, INC., a Delaware
corporation (the "Company") and PAUL T. GLLLCRIST, a United States citizen
residing in Singapore ("Purchaser").
RECITALS
WHEREAS, the Company proposes to sell and issue up to an aggregate
of $4,000,000 of convertible debentures (the "Debentures") and Purchaser propose
to purchase $120,000 of Debentures pursuant to the Convertible Debenture
Purchase Agreement of even date herewith between the Company and Purchaser (the
"Purchase Agreement"); and
WHEREAS, as a condition to entering into the Purchase Agreement, the
Purchaser has requested that the Company extend to it registration rights,
information rights and certain other rights as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants, and conditions set forth in this Agreement and in the
Purchase Agreement, the parties mutually agree as follows:
GENERAL.
DEFINITIONS. As used in this Agreement the following terms shall
have the following respective meanings:
"1934 ACT" means the Securities Exchange Act of 1934, as amended.
"EQUITY SECURITIES" means (i) any stock or similar security of the
Company, (ii) any security convertible, with or without consideration, into any
stock or similar security (including any option to purchase such a convertible
security), (iii) any security carrying any warrant or right to subscribe to or
purchase any stock or similar security or (iv) any such warrant or right.
"FAMILY MEMBER" means a Holder's spouse, children, stepchildren and
grandchildren.
"FINAL PROSEPCTUS" means an amended prospectus filed with the SEC
pursuant to SEC Rule 424(b) of the Securities Act.
"FORM S-3" means such form under the Securities Act as in effect on
the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"HOLDER" means any person owning of record Registrable Securities.
"INITIAL OFFERING" means the first underwritten public offering of the
Company's securities.
"INITIATING HOLDERS" means the Holder or Holders of at least forty
percent (40%) of the Registrable Securities then outstanding.
2
<PAGE> 39
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness by the SEC of
such registration statement or document.
"REGISTRABLE SECURITIES" means (i) the Shares; (ii) Common Stock of
the Company issued or issuable upon conversion of the Shares; and (iii) any
Common Stock of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of,
such above-described securities. Notwithstanding the foregoing, Registrable
Securities shall not include any securities sold by a person to the public
either pursuant to a registration statement or Rule 144 or sold in a private
transaction in which the transferors rights under Article 2 of this Agreement
are not assigned. Outstanding Shares and warrants, rights and other securities
issued as a dividend or other distribution with respect to outstanding Shares,
or in exchange or replacement of outstanding Shares, shall be deemed to
represent a number of shares of Registrable Securities equal to the number of
shares of Common Stock into which such Shares, warrants, rights or other
securities are convertible as of the time such determination is made.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SHARES" shall mean shares of Company's Series E Preferred Stock,
assuming the conversion of the Convertible Debentures.
"SEC" or "COMMISSION" means the Securities and Exchange Commission.
RESTRICTIONS ON TRANSFER; REGISTRATION.
RESTRICTIONS ON TRANSFER.
Each Holder agrees not to make any disposition of all or any
portion of the Registrable Securities unless and until the transferee has agreed
in writing for the benefit of the Company to be bound by this Section 2.1
provided and to the extent such Section is then applicable and either:
there is then in effect a registration statement under
the Securities Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or
(A) such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (B) if
reasonably requested by the Company, such Holder shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the
Securities Act.
Notwithstanding the provisions of subparagraphs 2.l(a)(i)
and (ii) above, no such registration statement or opinion of counsel shall be
necessary for a transfer by a Holder (A) which is a partnership to its partners
in accordance with partnership interests, (B) to the Holder's Family Member or
trust for the benefit of an individual Holder or (C) to an affiliate (as that
term is defined in Rule 144 (a)(l) of the Securities Act) of the Holder (an
"Affiliate"), provided the transferee will be subject to the terms of this
Section 2.1 to the same extent as if he were an original Holder hereunder.
3
<PAGE> 40
Each certificate representing Registrable Securities shall
(unless otherwise permitted by the provisions of the Agreement) be stamped or
otherwise imprinted with a legend substantially similar to the following (in
addition to any legend required under applicable state securities laws or as
provided elsewhere in this Agreement):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL OR BASED ON OTHER
WRITTEN EVIDENCE IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF
THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION
DOES NOT REQUIRE REGISTRATION.
The Company shall be obligated to reissue promptly
unlegended certificates at the request of any holder thereof if the holder
shall have obtained an opinion of counsel (which counsel may be counsel to the
Company) reasonably acceptable to the Company to the effect that the securities
proposed to be disposed of may lawfully be so disposed of without registration,
qualification or legend.
Any legend endorsed on an instrument pursuant to applicable
state securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
DEMAND REGISTRATIONS AND FORM S-3 REGISTRATION
(A) The Purchaser shall have no right to demand that the
Company shall register all or any part of any Registrable Securities.
(B) If holders of shares of the Company's Series A Preferred
Stock or Series B Preferred Stock or when authorized and issued Series D
Preferred Stock (collectively, "A, B and D Preferred") shall exercise their
right to demand that the Company shall register any registrable securities, as
such term is defined in the investors rights agreements (the "Applicable
Agreements") relating to the A, B and D Preferred, then the Company shall also
allow the Purchaser to register Registrable Securities on a pro-rata basis to
the number of registrable securities being registered by holders of A, B and D
Preferred, based on the ratio of the total number of shares of Common Stock into
which the Series A, B and D Preferred, as the case may be, are convertible to
the total number of shares of Common Stock into which shares of the Series E
Preferred Stock are convertible. If Registrable Securities are so included in a
demand registration, the holders of such included securities shall be subject to
the terms and conditions, and obligations regarding such registration contained
in the Applicable Agreements.
(C) If the holders of A, B and D Preferred shall exercise their
right to a Form S-3 Registration under the Applicable Agreements then the
Company shall also allow the Purchaser to register Registrable Securities on
Form S-3 on a pro-rata basis to the number of registrable securities being
registered by holders of A, B and D Preferred, based on the ratio of the total
number of shares of Common Stock into which the A, B, and D Preferred, as the
case may be, are convertible to the number of shares of Common Stock into which
the Series E Preferred Stock is convertible If Registrable Securities are so
included in a Form S-3 registration, the holders of such included securities
shall be subject to the terms and conditions, and obligations regarding such
registration contained in the Applicable Agreements.
4
<PAGE> 41
(D) The Company has issued and outstanding a class of preferred
stock known as Series C Preferred Stock which is entitled to registration rights
which are substantially the same as those contained in subsections 2.2 (b) and
(c), above. Series C Preferred Stock avail themselves of such registration
rights than the pro-rata registration rights provided in subsections 2.2 (b) and
(c), above will be based on the ratio of the total number of shares of Common
Stock into which the A, B and D Preferred, as the case may be, are convertible
to the total number of shares of Common Stock into which the shares of Series C
Preferred Stock and Series E Preferred Stock are convertible.
PIGGYBACK REGISTRATIONS.
The Company shall notify all Holders in writing at least
thirty (30) days prior to the filing of any registration statement under the
Securities Act for purposes of a public offering of securities of the Company
(including, but not limited to, registration statements relating to secondary
offerings of securities of the Company, but excluding registration statements
relating to the Initial Offering, employee benefit plans and corporate
reorganizations) and will afford each such Holder who would have been unable to
sell all of such Registrable Securities on an unrestricted basis pursuant to
Rule 144 promulgated under the Securities Act, during the four-week period
immediately preceding the effective date of the registration statement, an
opportunity to include in such registration statement all or part of such
Registrable Securities held by such Holder. Each Holder desiring to include in
any such registration statement all or any part of the Registrable Securities
held by it shall, within twenty (20) days after receipt of the above-described
notice from the Company, so notify the Company in writing. Such notice shall
state the intended method of disposition of the Registrable Securities by such
Holder. If a Holder decides not to include all of its Registrable Securities in
any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein. Notwithstanding anything to the contrary, the
foregoing shall nor apply to any registrations occurring on or after the fifth
anniversary of the Initial Offering
(B) If the registration statement under which the Company gives
notice under this Section 2.3 is for an underwritten offering, the Company shall
so advise the Holders. In such event, the right of any such Holder to be
included in a registration pursuant to this Section 2.3 shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their Registrable Securities through
such underwriting shall enter into an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting.
Notwithstanding any other provision of the Agreement, if the underwriter
determines in good faith that marketing factors require a limitation of the
number of shares to be underwritten, the number of shares that may be included
in the underwriting shall be allocated, first, to the Company; second, to the
holders of shares of the Company's Series A, Series B, Series C, Series D and
Series E Preferred Stock allocated pro rata on the basis of the total number of
shares of Common Stock into which the shares of Series A, Series B, Series C,
Series D and Series E Preferred Stock are convertible; third to the 7,500 shares
of Common Stock par value $0.001 per share held by a designee of NationsBank,
N.A.; and fourth to any), stockholder of the Company (other than a Holder) on a
pro rata basis. No such reduction shall reduce the securities being offered by
the Company for its own account to be included in the registration and
underwriting.
(C) The Company shall bear all fees and expenses incurred in
connection with any registration under this Section 2.3 ( excluding
underwriters' discounts and commissions, which shall be paid by the selling
Holders pro rata with respect to their included shares), including without
limitation all registration, filing, qualification, printers' and accounting
fees, fees and disbursements of counsel to the Company, and the reasonable fees
and disbursements of a single counsel to the selling Holders (which counsel
shall also be counsel to the Company unless counsel to the Company has a
conflict of interest with
5
<PAGE> 42
respect to the representation of any selling Holder or the underwriters object
to the selling Holders representation by Company counsel).
FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 2.3, that the
selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to effect the registration
of their Registrable Securities.
DELAY OF REGISTRATION. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Article 2.
INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 2.2 or 2.3:
To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the partners, officers and directors of each
Holder, any underwriter (as defined in the Securities Act) for such Holder and
each person, if any, who controls such Holder or underwriter within the meaning
of the Securities Act or the 1934 Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation") by the Company: (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Securities Act, the 1934 Act, any
state securities law or any rule or regulation promulgated under the Securities
Act, the 1934 Act or any state securities law in connection with the offering
covered by such registration statement; and the Company will reimburse each such
Holder, partner, officer or director, underwriter or controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this Section 2.6(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished to
the Company expressly for use in connection with such registration by such
Holder, partner, officer, director, underwriter or controlling person of such
Holder.
To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers, each person, if any, who controls the Company within the meaning of
the Securities Act, any underwriter and any other Holder selling securities
under such registration statement or any of such other Holder's partners,
directors or officers or any person who controls such Holder, against any
losses, claims, damages or liabilities joint or several) to which the Company or
any such director, officer, controlling person, underwriter or other such
Holder, or partner, director, officer or
6
<PAGE> 43
controlling person of such other Holder may become subject under the Securities
Act, the 1934 Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Holder expressly for use in
connection with such registration; and each such Holder will reimburse any legal
or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or other Holder, or partner, officer,
director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there was such a Violation; provided, however,
that the indemnity agreement contained in this Section 2.5(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided further, that in no event shall any
indemnity under this Section 2.6 exceed the proceeds from the offering received
by such Holder.
Promptly after receipt by an indemnified party under this
Section 2.5 of notice of the commencement of any action (including any
governmental action) as to which indemnity may be sought, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying party
under this Section 2.6, deliver to the indemnifying party a written notice of
the commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party shall have the right to retain its own counsel, with
the fees and expenses to be paid by the indemnifying party, if representation of
such indemnified party by the counsel retained by the indemnifying party would
be inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if materially
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
2.6, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 2.6.
If the indemnification provided for in this Section 2.6 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided that, in no event shall any contribution by a
Holder hereunder exceed the proceeds from the offering received by such Holder.
The foregoing indemnity agreements of the Company and
Holders are subject to the condition that, insofar as they relate to any
Violation made in a preliminary
7
<PAGE> 44
prospectus but eliminated or remedied in the amended prospectus on file with the
SEC at the time the registration statement in question becomes effective or the
Final Prospectus, such indemnity agreement shall not inure to the benefit of any
person obligated under the Securities Act to furnish to the person asserting the
loss, liability, claim or damage a copy of the Final Prospectus if a copy of the
Final Prospectus was furnished to the indemnified party and was not furnished to
the person asserting the loss, liability, claim or damage at or prior to the
time such action is required by the Securities Act.
The obligations of the Company and Holders under this
Section 2.5 shall survive the completion of any offering of Registrable
Securities pursuant to a registration statement, or otherwise.
ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company
to register Registrable Securities pursuant to this Article 2 may be assigned by
a Holder to a transferee or assignee of Registrable Securities; provided,
however, that no such transferee or assignee shall be entitled to registration
rights under Sections 2.2 and 2.3, hereof unless such transferee or assignee:
(i) is a Holder; (ii) holds after such transfer or assignment at least one
hundred thousand (100,000) shares of Registrable Securities (as adjusted for
stock dividends, splits and combinations); or (iii) is a Family Member or a
subsidiary, parent, general partner, Affiliate, or limited partner of a Holder.
In each such case, the Company shall, within twenty (20) days after such
transfer, be furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned.
AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Article 2
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of more than fifty percent (50%)
of the Registrable Securities. Any amendment or waiver effected in accordance
with this Section 2.8 shall be binding upon each Holder and the Company. By
acceptance of any benefits under this Article 2, each Holder hereby agrees to be
bound by the provisions hereunder.
2.9 "MARKET STAND-OFF" AGREEMENT. If requested by the Company
and an underwriter of Common Stock (or other securities) of the Company, the
Purchaser shall not sell or otherwise transfer or dispose of any Common Stock
(or other securities) of the Company held by such stockholder (other than those
included in the registration) for a period specified by the underwriters not to
exceed one hundred eighty (180) days following the effective date of a
registration statement of the Company filed under the Securities Act, provided
that all officers and directors of the Company and all holders of at least one
percent (1%) of the Company's voting securities enter into similar agreements.
The obligations described in this Section 2.9 shall not apply to a registration
relating solely to employee benefit plans on Form S-l or Form S-8 or similar
forms that may be promulgated in the future, or a registration relating solely
to a Commission Rule 145 transaction on Form S-4 or similar forms that may be
promulgated in the future. The Company may impose stop-transfer instructions
with respect to the shares (or securities) subject to the foregoing restriction
until the end of said one hundred eighty (180) day period.
COVENANTS OF THE COMPANY.
BASIC FINANCIAL INFORMATION AND REPORTING.
The Company will maintain true books and records of account
in which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting
8
<PAGE> 45
principles consistently applied, and will set aside on its books all such proper
accruals and reserves as shall be required under generally accepted accounting
principles consistently applied.
As soon as practicable after the end of each fiscal year of
the Company, and in any event within 90 days thereafter or, after the Initial
Offering, simultaneously with the filing of the Company's annual report on Form
10-K with the SEC), the Company will furnish each Holder a consolidated balance
sheet of the Company, as at the end of such fiscal year, and a consolidated
statement of income and a consolidated statement of cash flows of the Company
for such year, all prepared in accordance with generally accepted accounting
principles and setting forth in each case in comparative form the figures for
the previous fiscal year, all in reasonable detail. Such financial statements
shall be accompanied by a report and opinion thereon by independent public
accountants of national standing selected by the Company's Board of Directors.
As soon as practicable after the end of each fiscal quarter
of the Company, and in any event within thirty days thereafter or, after the
Initial Offering, simultaneously with the filing of the Company's reports on
Form 10-Q with the SEC), the Company will furnish each Holder a consolidated
balance sheet of the Company, as at the end of such fiscal quarter, and a
consolidated statement of income and a consolidated statement of cash flows of
the Company for such quarter, prepared and presented in a manner consistent with
the financial statements described in Section 3.l(b). Such statement shall be
accompanied by a certificate signed by the Chairman of the Board and Chief
Financial Officer of the Company stating that the preparation and presentation
of such statements is consistent with the financial statements described in
Section 3.l(b).
So long as a Holder (with its Affiliates) shall own not
less than one hundred thousand (100,000) shares of Registrable Securities, the
Company will furnish such Holder a consolidated balance sheet of the Company, as
at the end of each calendar month, and a consolidated statement of income and a
consolidated statement of cash flows of the Company for such month, prepared and
presented in a manner consistent with the financial statements described in
Section 3.l(b). Such statements shall be furnished as soon as practicable after
the end of each month and in any event within ten days thereafter and shall be
accompanied by a certificate signed by the Chairman of the Board and Chief
Financial Officer of the Company stating that the preparation and presentation
of such statements is consistent with the financial statements described in
Section 3.l(b). Prior to January 1st of each year, the Company shall furnish
such Holders an annual budget for the Company for the following twelve month
period, broken down by month. The Company's obligations under this Section
3.l(d) shall terminate upon the Initial Offering.
3.2 Inspection Rights. So long as a Holder (with its
affiliates) shall own not less than one hundred thousand (100,000) shares of
Registrable Securities, each such Holder shall have the right to visit and
inspect any of the properties of the Company or any of its subsidiaries, and to
discuss the affairs, finances and accounts of the Company or any of its
subsidiaries with its officers, all at such reasonable times and as often as may
be reasonably requested; provided, however, that the Company shall not be
obligated under this Section 3.2 with respect to a competitor of the Company or
with respect to information which the Board of Directors determines in good
faith is confidential and should not , therefore be disclosed.
3.3 CONFIDENTIALITY OF RECORDS. Each Holder agrees to use, and
to use its best efforts to insure that its authorized representative use, the
same degree of care as such Holder uses to protect its own confidential
information to keep confidential any information furnished to it which the
company identifies as being confidential or proprietary (so long as such
information is not in the public
9
<PAGE> 46
domain), except that such Holder may disclose such proprietary or confidential
information to any partner, subsidiary, Affiliate or parent of such Holder for
the purpose of evaluating its investment in the Company as long as such partner,
subsidiary or parent is advised of the confidentiality provisions of this
Section 3.3
3.4 RESERVATION OF SERIES E PREFERRED STOCK. Upon filing by the
Company of the Certificate of Designation (as defined in the Purchase Agreement)
with the Secretary of State of the State of Delaware and at all times
thereafter, the Company will reserve and keep available, solely for issuance and
delivery upon the conversion of the Convertible Debentures, all Series E
Preferred Stock issuable from time to time upon such conversion.
3.5 RESERVATION OF COMMON STOCK. Upon filing by the Company of
the Certificate of Designation (as defined in the Purchase Agreement) with the
Secretary of State of the State of Delaware and at all times thereafter, the
Company will reserve and keep available solely for issuance and delivery upon
the conversion of the Series E Preferred Stock issuable upon conversion of the
Convertible Debentures, all Common Stock issuable from time to time upon such
conversion.
RIGHTS OF FIRST REFUSAL.
4.1 SUBSEQUENT OFFERINGS. Each Holder shall have a right of
first refusal to purchase its pro rata share of all Equity Securities that the
Company may, from time to time, propose to sell and issue after the date of this
Agreement, other than the Equity Securities excluded by Section 4.6 hereof. Each
Holder's pro rata share is equal to the ratio of the number of shares of Common
Stock, assuming full conversion of all shares of Registrable Securities owned by
such Holder, held by such Holder immediately prior to the issuance of such
Equity Securities to the total number of shares of the Company's outstanding
Common Stock (including all shares of Common Stock issuable upon conversion of
the Registrable Securities).
4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any
Equity Securities, it shall give each Holder written notice of its intention,
describing the Equity Securities, the price, and the terms and conditions upon
which the Company proposes to issue the same. Each Holder shall have fifteen
(15) days from the receipt of such notice to agree to purchase its pro rata
share of the Equity Securities for the price and upon the terms and conditions
specified in the notice by giving written notice to the Company and stating
therein the quantity of Equity Securities to be purchased. Notwithstanding the
foregoing, the Company shall not be required to offer or sell such Equity
Securities to any Holder who would cause the Company to be in violation of
applicable federal securities laws by virtue of such offer or sale.
4.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If the
Holders fail to exercise in full the rights of first refusal, the Company shall
have ninety (90) days thereafter to sell the Equity Securities in respect of
which the Holders' rights were not exercised, at a price and upon terms and
conditions no more favorable to the purchaser thereof than specified in the
Company's notice to the Holders pursuant to Section 4.2 hereof. If the Company
has not sold such Equity Securities within such ninety (90) days, the Company
shall not thereafter issue or sell any Equity Securities, without first offering
such securities to the Holders in the manner provided above.
4.4 TERMINATION OF RIGHTS OF FIRST REFUSAL. The rights of first
refusal established by this Article IV shall terminate upon the closing of the
Initial Offering.
10
<PAGE> 47
4.5 TRANSFER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal
of each Holder under this Article IV may be transferred to any subsidiary or
parent of such Holder, to any successor in interest to all or substantially all
the assets of such Holder, or to an assignee or transferee who acquires
Registrable Securities.
4.6 EXCLUDED SECURITIES. The rights of first refusal established by
this Article IV shall have no application to any of the following Equity
Securities:
(A) shares of Common Stock (and/or options, warrants or other
common Stock purchase rights issued pursuant to such options, warrants or other
rights) issued or to be issued to employees, officers or directors of, or
consultants or advisors to, the Company, pursuant to stock purchase or stock
option plans or other compensation arrangements that are approved by the Board
of Directors of the Company;
(B) stock issued pursuant to any rights, options and warrants
granted after the date of this Agreement, provided that the rights of first
refusal established by this Article IV applied with respect to the initial sale
or grant by the Company of such rights, options or warrants;
(C) Any Equity Securities issued for consideration other than cash
pursuant to a merger, consolidation, acquisition or similar business
combination;
(D) any Equity Securities that are issued by the Company as part
of the Initial Offering referred to in Section 4.4 hereof;
(E) shares of Common Stock issued in connection with any stock
split, stock dividend or recapitalization by the Company;
(F) shares of Common Stock issued upon conversion of the Company's
Preferred Stock; and
(G) shares of Series E Preferred Stock issued upon conversion of
the Convertible Debentures; and
(H) any Equity Securities issued pursuant to any equipment leasing
arrangement or commercial bank financing approved by the Company's Board of
Directors.
4.7 OTHER RIGHTS OF FIRST REFUSAL. The Company has granted to the
Holders of its outstanding Series A and Series B Preferred Stock rights of first
refusal similar to the rights of first refusal granted by this Article IV. The
Company has obtained an agreement between the Company, and the holders of Series
A, Series B and Series C Preferred Stock that the Rights of the Purchaser shall
rank pari passu with each other based upon the relative number of shares of
Common Stock into which the Series A, Series B and Series C are convertible.
MISCELLANEOUS.
5.1 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of New York.
11
<PAGE> 48
5.2 SURVIVAL. The representations, warranties, covenants, and
agreements made herein shall survive any investigation made by any Holder and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instruments delivered by
or on behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.
5.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.
5.4 SEPARABILITY. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
5.5 AMENDMENT AND WAIVER.
Except as otherwise expressly provided, this Agreement may be amended or
modified only upon the written consent of the Company and the holders of more
than fifty percent (50%) of the Registrable Securities.
Except as otherwise expressly provided, the obligations of the Company
and the rights of the Holders under this Agreement may be waived only with the
written consent of the holders of more than fifty percent (50%) of the
Registrable Securities.
5.6 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent, or approval of any kind or character on
any Holder's part of any breach, default or noncompliance under this Agreement
or any waiver on such Holder's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not
alternative.
5.7 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (i) upon personal delivery to the
party to be notified; (ii) upon receipt alter having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (iii) upon receipt
after deposit with a nationally recognized overnight courier, specifying next
day delivery, with written verification of receipt. All communications shall be
sent to the party to be notified at the address as set forth below or at such
other address as such party may designate by ten (10)days advance written
notice to the other party hereto in the manner provided above.
IF TO THE COMPANY: WITH A COPY TO:
Air South Airlines, Inc. David Y. Monteith, Esquire
2625 Airport Boulevard Monteith Law Office
West Columbia, SC 29170 2805 Millwood Avenue
Attention: President; Columbia, SC 29205
12
<PAGE> 49
IF TO THE PURCHASER
Captain Paul T. Gillcrist
210 Upper East Coast Road #160
Eastern Lagoon II
Singapore 1545
5.8 ATTORNEYS' FEES. If legal action is brought to enforce or
interpret this Agreement, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and legal costs in connection therewith.
5.9 TITLES AND SUBTITLES. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
5.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
13
<PAGE> 50
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date set forth in the first paragraph hereof.
COMPANY: PURCHASER:
AIR SOUTH AIRLINES, INC. PAUL T. GILLCRIST
By:/s/ Dennis B. Crosby By:
--------------------- -----------------------
Vice President Paul T. Gillcrist
14
<PAGE> 51
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR IN THE
OPINION OF COUNSEL OR BASED ON OTHER WRITTEN EVIDENCE IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER,
PLEDGE OR HYPOTHECATION DOES NOT REQUIRE REGISTRATION.
EXHIBIT A
FORM OF CONVERTIBLE DEBENTURE
AIR SOUTH AIRLINES, INC.
6% CONVERTIBLE DEBENTURE DUE AUGUST 16, 1999
No. CD-1996-5 October __, 1996
$120,000
FOR VALUE RECEIVED, the undersigned, AIR SOUTH AIRLINES, INC. (the
"Company"), a corporation organized and existing under the laws of the State of
Delaware, hereby promises to pay PAUL T. GILLCRIST, or registered assigns, the
principal sum of One Hundred Twenty Thousand and 00/100 DOLLARS ($120,000)
(together with all additional sums of deferred interest, if any, added to the
principal balance of this Convertible Debenture as provided below) on August 16,
1999, (the "Maturity Date") with interest (computed on the basis of a 360-day
year of twelve 30-day months)(a) on the unpaid balance thereof at the rate of
6% per annum from the date hereof, payable quarterly on the last day of March,
June, September and December in each year, commencing with the March 31, June
30, September 30 or December 31 next succeeding the date hereof, until the
principal hereof shall have become due and payable, and (b) on any overdue
payment of principal or any overdue payment of interest accruing after the
Maturity Date or the acceleration hereof, payable quarterly (or, at the option
of the registered holder hereof, on demand), at a rate per annum from time to
time equal to the greater of (i) 8% or (ii) 2.0% over the rate of interest
publicly announced by Morgan Guaranty Trust Company of New York from time to
time in New York City as its Prime Rate; but in no event shall the rate of
interest exceed the maximum rate of nonusurious interest permitted by law to be
paid by the Company (and to the extent permitted by law, interest on any overdue
principal or interest thereon).
This convertible debenture (the "Convertible Debenture") is one of a
series of up to $3,000,000 of convertible debentures which may be issued by the
Company on or before October 16, 1996 and is issued pursuant to a Convertible
Debenture Purchase Agreement, dated as of September _, 1996 (the "Agreement"),
between the Company and Paul T. Gillcrist and is entitled :o the benefits
thereof. Capitalized terms used herein and not otherwise defined shall have the
meaning ascribed thereto in the Agreement.
Interest accruing on this Convertible Debenture and remaining unpaid on
the last day of March, June, September and December in each year, commencing
with the March 31, June 30, September 30 or December 31 next succeeding the date
hereof and extending through the Maturity Date, shall be added to the
outstanding principal balance of this Convertible Debenture with effect as of
such date and any interest thereafter shall be due and payable in cash according
with the terms hereof.
1
<PAGE> 52
Payments of principal of and interest on this Convertible Debenture are to
be made to 210 Upper East Coast Road #0160, Eastern Lagoon II, Singapore 1545,
or at such other place as the holder hereof shall designate to the Company in
writing, in lawfUl money of the United States of America. All payments made
hereunder, whether at maturity or as a result of acceleration, shall be
allocated first to costs and expenses of the holder resulting from collection
efforts with respect to this Convertible Debenture, second to accrued but unpaid
interest, and third to principal.
This Convertible Debenture is a registered Convertible Debenture and, as
provided in the Agreement, and subject to compliance with federal and any
applicable state securities laws upon surrender of this Convertible Debenture
for registration of transfer, duly endorsed, or accompanied by a written
instrument of transfer duly executed, by the registered holder hereof or such
holder's attorney duly authorized in writing, a new Convertible Debenture for a
like principal amount will be issued to, and registered in the name of, the
transferee. Prior to due presentment for registration of transfer, the Company
may treat the person in whose name this Convertible Debenture is registered as
the owner hereof for the purpose of receiving payment and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
This Convertible Debenture may be prepaid, in whole or in part from time
to time, without penalty.
The outstanding principal balance and accrued interest on this Convertible
Debenture may be converted in whole or in part at any time or from time to time
at the option of the holder or may automatically be converted into shares of
Series E Preferred Stock, all as set forth in the Agreement.
If an Event of Default, as defined in the Agreement, shall occur and be
continuing, the principal of this Convertible Debenture may be declared or
otherwise become due and payable in the manner and with the effect provided in
the Agreement.
THIS CONVERTIBLE DEBENTURE iS INTENDED TO BE PERFORMED IN THE STATE OF
DELAWARE AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW
OF SUCH STATE.
IN WITNESS WHEREOF, the Company has issued this Convertible Debenture as of
the 16th day of October, 1996.
AIR SOUTH AIRLINES, INC.
By:
--------------------------------
Dennis B. Crosby
Vice President
<PAGE> 53
FORM OF
NOTICE OF CONVERSION
To be executed if holder desires to convert
this Convertible Debenture)
TO: AIR SOUTH AIRLINES, INC.
The undersigned hereby irrevocably elects to convert the principal
balance, or portion thereof specified below, of this Convertible Debenture into
the number of shares of Series E Preferred Stock of the Company determined in
accordance with and under the Agreement and requests that certificates for the
shares of Series E Preferred Stock to be issued upon such conversion be issued
in the name of:
------------------------------------
(Please Print Name)
Address (print):
____________________________________
____________________________________
____________________________________
Social Security Number
____________________________________
(Please print principal balance of
this Convertible Debenture being
converted)
------------------------------------
Signature
(Signature must conform in all respects to name of holder as
specified on the face of this Convertible Debenture.)
<PAGE> 54
EXHIBIT B
FORM OF
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES E PREFERRED STOCK
OF
AIR SOUTH AIRLINES, INC.
a corporation organized and existing under the General Corporation Law of the
State of Delaware.
DOES HEREBY CERTIFY
That, pursuant to authority conferred upon the Board of Directors by the
Certificate of Incorporation of said corporation, and pursuant to the provisions
of Section 151 of Title 8 of the Delaware Code of 1953, said Board of Directors
has established a class of preferred stock of this Corporation designated
Series E Preferred Stock ("Series E Preferred") consisting of __________________
million (____________) shares* of such Series E Preferred. Such Series E
Preferred was established with the powers, designations, preferences and
relative participating optional or other rights contained in EXHIBIT I attached
hereto.
IN WITNESS WHEREOF, said Air South Airlines, Inc. has caused this
Certificate to be signed by ______________________, its President and Chief
Executive Officer, this ___________ day of _____________________,1997.
By:___________________________________
*This is to be set based on the amount of Convertible Debentures which will be
Convertible into Series E Preferred Stock.
<PAGE> 55
EXHIBIT I
AIR SOUTH AIRLINES, INC. SERIES E PREFERRED STOCK
SECTION 1. CLASS OF PREFERRED STOCK. The Air South Airlines Series E
Preferred Stack shall have such voting powers, and such other powers,
designations, preferences and other special rights set out below.
SECTION 2. DIVIDENDS. The holders of outstanding shares of Series E
Preferred stock shall be entitled to receive dividends at the rate of two cents
($0.02) per share (as adjusted for any stock dividends, combinations or splits
with respect to such shares) per annum, when, if and as declared by the Board of
Directors, out of funds legally available therefor. The right to such dividends
on the Series E Preferred Stock shall not be cumulative. No cash dividend shall
be paid on the Common Stock in any year unless an equal dividend is paid with
respect to all outstanding shares of Series E Preferred Stock in an amount for
each such share to a holder of the number of shares of Common Stock into which
such share of Series E Preferred Stock could then be converted.
SECTION 3. LIQUIDATION RIGHTS.
a. In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of the Series E
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock, the amount of twenty-five cents ($0.25) per share
(the "Original Issue Price") (as adjusted for any stock dividends, combinations
or splits with respect to such shares) plus all accrued or declared but unpaid
dividends on each share of Series E Preferred Stock held by such holders (the
"Preferential Amount"). The right of the holders of Shares of Series E Preferred
Stock to a preference in such a liquidation dissolution or winding up shall in
all respects be pari passu with the rights of the holders of shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. If upon
the occurrence of any liquidation, dissolution or winding up of the Corporation,
either voluntary or involuntary, the assets and funds to be distributed among
the holders of Series E Preferred Stock shall be insufficient to permit the
payment to such holders of the full Preferential Amount, the entire assets and
funds of the Corporation legally available for distribution shall be distributed
ratably among the holders of the Series E Preferred Stock in proportion to the
Preferential Amount each such holder is otherwise entitled to receive.
b. After payment to the holders of the Series E Preferred
Stock of the Preferential Amount, the entire remaining assets and funds of the
Corporation legally available for distribution, if any, shall be distributed
ratably among the holders of Series E Preferred Stock and the Common Stock in
proportion to the shares of Series E Preferred Stock and Common Stock then held
by such holders.
c. For purposes of this Section 3, (i) a merger or
consolidation of the Corporation into or with another corporation (other than
with a wholly owned subsidiary of this Corporation), or any other corporate
reorganization in which the stockholders of the Corporation
I-1
<PAGE> 56
will not own a majority of the outstanding shares of the surviving entity of
such merger, consolidation or reorganization, or (ii) a sale, transfer or other
disposition of all or substantially all of the assets of the Corporation, shall
be deemed to be a liquidation, dissolution or winding up of the Corporation.
SECTION 4. CONVERSION.
A. RIGHT TO CONVERT. Each share of Series E Preferred Stock
shall initially be convertible, at the option of the holder, at any time after
the date of issuance of such share, at the office of the Corporation or any
transfer agent for the Series E Preferred Stock, into one (1) fully paid and
nonassessable shares of Common Stock (subject to adjustment as set forth
herein). The number of shares of Common Stock into which one share of Series E
Preferred Stock may be converted hereinafter is referred to as the "Series E
Conversion Rate". The price at which shares of Common Stock shall be deliverable
upon conversion of shares of Series E Preferred shall initially be twenty-five
cents ($0.25) per share of Common Stock (the "Series E Conversion Price"). Such
initial Series E Conversion Price shall be subject to adjustment from time to
time, as hereinafter provided.
B. AUTOMATIC CONVERSION. Each share of Series E Preferred
Stock shall automatically be converted into shares of Common Stock at the then
effective Series E Conversion Rate upon the earlier of (i) the closing of a
firmly underwritten public offering of the Corporation's Common Stock on a Form
S-l Registration Statement at an aggregate public offering price (after
underwriting discounts and commission) of at least $10,000,000 and a per share
price equal to or greater than fifty cents ($0.50) (as appropriately adjusted
for stock splits and the like) (an "Initial Public Offering"); (ii) the vote or
written consent of the holders of at least 50% of the then outstanding shares of
Series E Preferred Stock; or (iii) the date as of which less than 20% of the
maximum number of shares of Series E Preferred Stock issued by the Company (or
issuable upon conversion or exchange of securities of the Company) prior to such
date remain outstanding (the "Automatic Conversion Event").
C. MECHANICS OF CONVERSION. Before any holder of Series E
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates for such
shares, duly endorsed, at the office of the Corporation or of any transfer agent
for the Series E Preferred Stock, or notify the Corporation or its transfer
agent that such Series E Preferred Stock certificates have been lost, stolen or
destroyed and execute an agreement satisfactory to the Corporation to indemnify
the Corporation from any loss incurred by it in connection with such
certificates, and shall give written notice to the Corporation at such office
that such holder elects to convert the same and shall state in the notice the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall then, as soon as is
practicable, issue and deliver at such office to such holder of Series E
Preferred Stock, or to such holder's nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of surrender of the shares of Series E
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
I-2
<PAGE> 57
all purposes as the record holder or holders of such shares of Common Stock on
such date; provided, however, that in the event of automatic conversion pursuant
to Section 4(b), such conversion shall be deemed to have been made upon the
occurrence of the Automatic Conversion Event triggering such conversion without
any further action by the holders of shares of Series E Preferred Stock,
although the Corporation shall not be obligated to issue certificates evidencing
the shares of Common Stock issuable upon such automatic conversion unless the
certificates evidencing such shares of Series E Preferred Stock are delivered to
the Corporation or its transfer agent as provided above, or the holder notifies
the Corporation or its transfer agent that such Series E Preferred Stock
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates. If the conversion is in
connection with an underwritten offering of securities pursuant to the
Securities Act, the conversion may, at the option of any holder tendering shares
of Series E Preferred Stock for conversion, be conditioned upon the closing with
the underwriters of the sale of securities pursuant to such offering, in which
event the person(s) entitled to receive the Common Stock upon conversion of
Series E Preferred Stock shall not be deemed to have converted such Series E
Preferred Stock until immediately prior to the closing of such sale of
securities.
D. ADJUSTMENTS TO THE SERIES E CONVERSION PRICE FOR CERTAIN
DILUTING ISSUES.
(I) SPECIAL DEFINITIONS. For purposes of this Section
4(d), the following definitions apply:
(1) "Option " shall mean rights, options, or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities (defined below).
(2) "Original Issue Date " shall mean the date on
which a share of Series E Preferred Stock was first issued or securities
convertible or exchangeable for Series E Preferred Stock were first issued.
(3) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
(4) "Additional Shares of Common Stock" shall
mean all shares of Common Stock issued (or, pursuant to Section (4)(d)(iii),
deemed to be issued) by the Corporation after the Original Issue Date, other
than shares of Common Stock issued or issuable:
(A) upon conversion of shares of Series E
Preferred Stock;
(B) to officers, directors or employees
of, or consultants to, the Corporation pursuant to stock option or stock
purchase plans or agreements on terms approved by the Board of Directors;
I-3
<PAGE> 58
(C) as a dividend or distribution on
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock;
(D) for which adjustment of the Series E
Conversion Price is made pursuant to Section 4(e) or for which adjustment of the
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price
or Series D Conversion Price is made pursuant to the counterpart of Section 4(e)
in the charter documents of the Company;
(E) upon the closing of an Initial Public
Offering;
(F) upon conversion of up to an aggregate
of $4.0 million in convertible debentures which are convertible into Series D
Preferred Stock and the conversion of $____ in Convertible Debentures which are
convertible into Series E Preferred Stock; or
(G) in connection with an acquisition of
another company on terms approved by the Board of Directors.
(5) "Initial Public Offering" shall mean the
first underwritten public offering of the Corporation's equity securities.
(II) NO ADJUSTMENT OF THE SERIES E CONVERSION
PRICE. Any provisions herein to the contrary notwithstanding, no adjustment in
the Series E Conversion Price shall be made in respect of the issuance of
Additional Shares of Common Stock unless the consideration per share (determined
pursuant to Section 4(d)(v) hereof) for an Additional Share of Common Stock
issued or deemed to be issued by the Corporation is less than the Series E
Conversion Price in effect on the date of, and immediately prior to, such issue.
(III) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON
STOCK. In the event the Corporation at any time or from time to time after the
Original Issue Date shall issue any Options or Convertible Securities or shall
such. a record date for the determination of holders of any class of securities
then entitled to receive any such Options or Convertible Securities, then the
maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein designed to protect against
dilution) of Common Stock issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be additional Shares of
Common Stock issued as of the time of such issue or, in case such a record date
shall have been futed, as of the close of business on such record date, provided
that in any such case in which Additional Shares of Common Stock are deemed to
be issued:
(1) no further adjustment in the Series E
Conversion Price shall be made upon the upon the exercise of such Options or
conversion or exchange of such Convertible Securities to the extent that
adjustment had been previously made pursuant to this Section 4(d);
I-4
<PAGE> 59
(2) If such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the Corporation, or
decrease or increase in the number of shares of Common Stock issuable, upon the
exercise, conversion or exchange thereof, the Series E Conversion Price computed
upon the original issue thereof (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments based thereon, shall, upon any
such increase or decrease becoming effective, be recomputed to reflect such
increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities provided, however, that
no such adjustment of the Series E Conversion Price shall affect Common Stock
previously issued upon conversion of the Series E Preferred);
(3) upon the expiration of any such Options
or any rights of conversion or exchange under such Conversion Securities which
shall not have been exercised, the Series E Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(A) in the case of Convertible
Securities or Options for Common Stock, the only Additional Shares of Common
Stock issued were the shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities and the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange; and
(B) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually issued
upon the exercise thereof were issued at the time of issue of such Options, and
the consideration received by the Corporation for the Additional Shares of
Common Stock deemed to have been then issued was the consideration actually
received by the Corporation for the issue of all such Options, whether or not
exercised, plus the consideration deemed to have been received by the
Corporation (determined pursuant to Section 4(d) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(4) no readjustment pursuant to clause (2)
or (3) above shall have the effect of increasing the Series E Conversion Price
to an amount which exceeds the lower of (a) the Series E Conversion Price on the
original adjustment date, or (b) the Series E Conversion Price that would have
resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such adjustment date;
(5) in the case of any Options which
expire by their terms not more than 30 days after the date of issue thereof, no
adjustment of the Series E Conversion Price
I-5
<PAGE> 60
shall be made until the expiration or exercise of all such Options whereupon
such adjustment shall be made in the same manner provided in clause (3) above.
(IV) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK. In the event this Corporation, at any time after the
Original Issue Date, shall issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section 4
without consideration or for a consideration per share less than the Series E
Conversion Price in effect on the date of and immediately prior to such issue,
then and in such event, the Series E Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated to the nearest cent)
determined by multiplying the Series E Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock which
the aggregate consideration received by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such Series E
Conversion Price in effect immediately prior to such issuance, and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of such Additional Shares of
Common Stock so issued. For the purpose of the above calculation, the number of
shares of Common Stock outstanding immediately prior to such issue shall be
calculated on a fully diluted basis, as if all shares of Series E Preferred and
all Convertible Securities had been fully converted into shares of Common Stock
immediately prior to such issuance and any outstanding Options had been fully
exercised immediately prior to such issuance (and the resulting securities fully
converted into shares of Common Stock, if so convertible) as of such date, but
not including in such calculation any additional shares of Common Stock issuable
with respect to shares of Series E Preferred, Convertible Securities, or
outstanding Options, solely as a result of the adjustment of the Series E
Conversion Price (or other conversion ratio) resulting from the issuance of the
Additional Shares of Common Stock causing the adjustment in question.
(V) DETERMINATION OF CONSIDERATION. For purpose of this Section
4(d), the consideration received by the Corporation for the issuance of any
Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be computed
at the aggregate amount of cash received by the Corporation excluding amounts
paid or payable for accrued interest or accrued dividends;
(B) insofar as if consists of property other than
cash, be computed as the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common
Stock are issued together with other stock or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clause (A) and (B) above, as
determined in good faith by the Board of Directors.
I-6
<PAGE> 61
(2) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 4(d)(iii), relating
to Options and Convertible Securities shall be determined by dividing:
(A) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution) payable
to the Corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common Stock
(as set forth in the instruments relating hereto, without regard to any
provision contained therein designed to protect against the dilution), issuable
upon the exercise of such Options or conversion or exchange of such Convertible
Securities.
E. ADJUSTMENT TO SERIES E CONVERSION PRICE FOR STOCK DIVIDENDS
AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this
Corporation at any time or from time to time after the Original Issue Date shall
declare or pay, without consideration, any dividend on the Common Stock payable
in Common Stock or in any right to acquire Common Stock for no consideration, or
shall effect a subdivision of the outstanding shares of Common Stock into a
greater number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right to
acquire Common Stock), or in the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, then the Series E Conversion Price in
effect immediately prior to such event shall, concurrently with the
effectiveness of such event, be proportionately decreased or increased, as
appropriate. In the event that this Corporation shall declare or pay, without
consideration, any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration, then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock.
F. ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the
Common Stock issuable upon conversion of Series E Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of shares, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for in
Section 4(e) above or a merger or other reorganization referred to in Section 3
(c) above), the Series E Conversion Price than in affect shall, concurrently
with the effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series E Preferred shall be convertible
into, in lieu of the number of shares of. Common Stock which the holders would
otherwise have been entitled to receive, a number of shares. of such other class
or classes of stock
I-7
<PAGE> 62
equivalent to the number of shares of Common Stock that would have been subject
to receipt by the holders upon conversion of the Series E Preferred Stock
immediately before that change.
G. OTHER DISTRIBUTIONS. In the event the Corporation shall at
anytime or from time to time make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities (including evidences of indebtedness)
of the Corporation other than Common Stock, then in each such event provision
shall be made so that the holders of Series E Preferred Stock shall receive,
upon the conversion thereof, the securities of the Corporation which they would
have received had their Series E Preferred Stock been converted into Common
Stock on the date of such event.
H. NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 4 and in the taking of all such action as may be necessary or
appropriate to protect the holders of the Series E Preferred Stock against
impairment of the rights afforded them by this Section A.
I. CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment pursuant to Section 4(d) of the Series E Conversion
Rate or in the other securities or property (including cash) deliverable upon
the conversion of the shares of Series E Preferred Stock, the Corporation, at
its expense, shall promptly compute such adjustment or readjustment in
accordance with the terms thereof, and cause independent certified public
accountants selected by the Corporation to verify such computation and prepare
and furnish to each holder of Series E Preferred Stock a certificate setting
forth such adjustment or readjusrment and showing in detail the facts upon which
such adjustment or readjustment is based.
J. NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security or
right convertible into or entitling the holder thereof to receive shares of
Common Stock, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, the
Corporation shall cause to be mailed by first class mail to each holder of
Series E Preferred Stock, at least twenty (20) days prior to the applicable
record date, a notice specifying the date on which any such record was to be
taken for the purpose of such dividend, distribution, security or right, and the
amount and character of such dividend, distribution, security or right.
K. ISSUE TAXES. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue of delivery of
shares of Common Stock on conversion of shares of Series E Preferred Stock
pursuant hereto.
I-8
<PAGE> 63
L. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall take such corporate action as may be necessary, in the opinion
of its counsel, to increase its authorized but unissued shares of Common Stock
to such number of shares as shall be sufficient to effect the conversion of all
the outstanding shares of Series E Preferred Stock into shares of Common Stock
at such time as the Corporation elects to effect such conversion, including,
without limitation, using its best efforts to obtain the requisite stockholder
approval of any necessary amendment to its Certificate of Incorporation.
M. FRACTIONAL SHARES. No fractional share shall be issued upon
the conversion of any share of Series E Preferred Stock. All shares of Common
Stock (including fractions thereof) issuable upon conversion of more than one
share of Series E Preferred Stock by a holder thereof shall be aggregated for
purposes of determining whether the conversion would result in the issuance of
any fractional share. If, after the aforementioned aggregation, the conversion
should result in the issuance of a fraction of a share of Common Stock, the
Corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to such fraction
multiplied by the Series E Conversion Price then in effect.
N. NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series E Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid and
addressed to each holder of record at such holder's address appearing on the
books of the Corporation.
Section 5. AMENDMENT. Any term relating to the Series E Preferred
Stock may be amended only with the vote or written consent of holders of at
least a majority of all shares of Series E Preferred Stock then outstanding. Any
such amendment shall be binding upon the Corporation and any holder of Series E
Preferred Stock.
Section 6. VOTING RIGHTS. Except as otherwise provided herein or as
required by law, the holders of Series E Preferred Stock shall be entitled to
notice of any stockholders' meeting and to vote together with the holders of
Common Stock as single class of capital stock upon the election of directors and
upon any other matter submitted to the stockholders for a vote, On the following
basis:
A. Holders of Common Stock shall have one (1) vote per share;
and
B. Holders of Series E Preferred Stock shall have the number
of votes per share as is equal to the number of full shares of Common Stock into
which each such share of Series E Preferred Stock held by such holder is
convertible at the record date for the determination of the stockholders
entitled to vote on such matters or, if no such record date is established, at
the date such vote is taken or any written consent to stockholders is solicited.
C. In addition to any other vote or consent required herein or
by law, the vote or written consent of the holders of at least a majority of the
outstanding shares of Series E Preferred Stock shall be necessary:
I-9
<PAGE> 64
(I) for any amendment, alteration, or repeal of any
provision of the Certificate of Incorporation (including any Certificates of
Designation of Preferred Stock) or Bylaws of the Corporation (including any
filing of a Certificate of Designation);
(II) to alter or change the rights, preferences or
priviledges of the Series E Preferred Stock;
(III) to create any new series of Preferred Stock having
preferences over the Series E Preferred Stock;
(IV) to increase the authorized number of shares of
Series E Preferred Stock;
(V) for any action that results in any liquidation,
acquistion, merger or sale of the Corporation or all or substantially all or its
assets;
(VI) for any action that results in any change in the
principal business of the Corporation; or
(VII) for any action that results in the repurchase of
equity securities of the Corporation (other than the repurchase of stock from
employees of the Corporation at original cost or pursuant to a Board approved
incentive stock option plan).
I-10
<PAGE> 1
EXHIBIT 10.25(a)
SCHEDULED AIRLINE OPERATING AGREEMENT
AND
TERMINAL BUILDING LEASE
FOR
CHARLESTON INTERNATIONAL AIRPORT
BY AND BETWEEN
CHARLESTON COUNTY AVIATION AUTHORITY
AND
AIR SOUTH AIRLINES, INC.
------------------------
<PAGE> 2
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE AND SECTION PAGE
<S> <C>
ARTICLE 1
Definitions........................................................................................................2
ARTICLE 2
Term...............................................................................................................8
ARTICLE 3 ASSIGNED AREA
Section 3.01 Terminal Facilities ..................................................................................9
Section 3.02 Aircraft Parking Positions............................................................................9
Section 3.03 Relocation of Concourse Facilities ..................................................................10
Section 3.04 Accommodation of Preferential Use Space .............................................................10
ARTICLE 4 USES AND PRIVILEGES
Section 4.01 Use of the Airport ..................................................................................12
Section 4.02 Scope of Privileges .................................................................................12
Section 4.03 Purchasing...........................................................................................14
Section 4.04 Signage..............................................................................................14
Section 4.05 Employees' Parking Facilities .......................................................................14
Section 4.06 Access ..............................................................................................15
ARTICLE 5 GENERAL USE OF ASSIGNED AREA
Section 5.01 Non-Interference with Utility Systems................................................................16
Section 5.02 Duty to Report Malfunctions .........................................................................16
Section 5.03 Hazardous Materials .................................................................................16
Section 5.04 Deprivation of Public Use............................................................................17
Section 5.05 Interference with Use by Others .....................................................................17
Section 5.06 Creation of Safety Hazards ..........................................................................17
Section 5.07 Creation of Nuisance.................................................................................18
Section 5.08 Release of Noxious Gases.............................................................................18
Section 5.09 Use of Area for Lodgings.............................................................................18
Section 5.10 Trash and Garbage ...................................................................................18
Section 5.11 Airport Operations ..................................................................................18
Section 5.12 Reserved Rights and Privileges ......................................................................19
</TABLE>
-i-
<PAGE> 3
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
<TABLE>
<S> <C>
ARTICLE 6 IMPROVEMENTS, ALTERATIONS, AND REPAIRS
Section 6.01 Authority Capital Improvements ....................................................................20
Section 6.02 M.I.I. Consideration of Capital Improvements ......................................................20
Section 6.03 Accounting Treatment of Capital Improvements.......................................................21
Section 6.04 Improvements, Alterations, and Repairs.............................................................22
Section 6.05 Design of Improvements.............................................................................22
Section 6.06 Architectural Requirements ........................................................................23
Section 6.07 Construction of Improvements ......................................................................23
Section 6.08 Completion of Improvements ........................................................................23
Section 6.09 Easements on Assigned Area.........................................................................24
Section 6.10 Title to Improvements and Alterations..............................................................24
Section 6.11 Removal............................................................................................25
Section 6.12 Liens..............................................................................................25
ARTICLE 7 RENTALS, CHARGES AND FEES
Section 7.01 Monthly Activity Report............................................................................26
Section 7.02 Terminal Rentals...................................................................................27
Section 7.03 Landing Fee .......................................................................................28
Section 7.04 Apron Fees.........................................................................................28
Section 7.05 Other Fees and Charges ............................................................................29
Section 7.06 Payment Provision/Interest on Overdue Amounts......................................................29
Section 7.07 Net Agreement......................................................................................29
Section 7.08 Passenger Facility Charge..........................................................................30
Section 7.09 No Other Fees and Charges .........................................................................30
ARTICLE 8 RECALCULATIONS OF RENTALS, FEES, AND CHARGES
Section 8.01 General............................................................................................31
Section 8.02 Accounting Records.................................................................................31
Section 8.03 Coordination Procedures--Budget Review and Calculation of Rentals
Fees and Charges .......................................................................................31
Section 8.04 Calculation of Terminal Building Area Rental Rates ................................................32
Section 8.05 Calculation of Apron Fee Rate .....................................................................35
Section 8.06 Extraordinary Adjustments of Terminal Building Space Rental Rates and
Apron Fee Rate .........................................................................................36
ARTICLE 9 AUTHORIZING LEGISLATION FOR SALE OF BONDS
Section 9.01 General............................................................................................37
</TABLE>
-ii-
<PAGE> 4
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
<TABLE>
<S> <C>
ARTICLE 10 MAINTENANCE AND OPERATIONS OF AIRPORT
Section 10.01 General...........................................................................................38
Section 10.02 Terminal Building.................................................................................38
Section 10.03 Authority's Right to Inspect and Make Repairs ....................................................39
Section lO.04 Pollution Control.................................................................................40
ARTICLE 11 DAMAGE OR DESTRUCTION OF PREMISES
Section 11.01 Damage or Destruction ............................................................................42
ARTICLE 12 INSURANCE AND INDEMNIFICATION
Section 12.01 Insurance.........................................................................................43
Section 12.02 Indemnification...................................................................................44
Section l2.03 Non-Liability of Authority........................................................................45
ARTICLE 13 ASSIGNMENT OR TRANSFER
Section 13.01 General ..........................................................................................46
Section 13.02 Relinquishment of Space ..........................................................................46
Section 13.03 Mergers ..........................................................................................46
Section 13.04 Bankruptcy........................................................................................47
Section 13.05 Consent to Assignment, Transfer, or Conveyance....................................................47
ARTICLE 14 DEFAULTS
Section 14.01 Default...........................................................................................49
Section 14.02 Attorney Fees ....................................................................................49
ARTICLE 15 TERMINATION
Section 15.01 Events Permitting Termination by Airline..........................................................50
Section 15.02 Events Permitting Termination by Authority .......................................................50
Section 15.03 Survival of Airline's Obligation .................................................................51
Section 15.04 Surrender of Assigned Area........................................................................51
Section 15.05 Environmental Contamination.......................................................................52
ARTICLE 16 GENERAL PROVISIONS
Section 16.01 Non-Discrimination................................................................................53
Section 16.02 Granting of More Favorable Terms .................................................................53
</TABLE>
-iii-
<PAGE> 5
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
<TABLE>
<S> <C>
Section 16.03 Federal Aviation Act, Section 308.......................................................54
Section 16.04 Subordination to Agreements with the United States Government...........................54
Section 16.05 Rules, Regulations, and Ordinances......................................................54
Section 16.06 Compliance with Law.....................................................................55
Section 16.07 Governing Laws .........................................................................55
Section 16.08 Nonwaiver of Rights.....................................................................55
Section 16.09 Agent for Service of Process............................................................56
Section 16.10 Waiver of Claims .......................................................................56
Section 16.11 Notices ................................................................................56
Section 16.12 Headings ...............................................................................57
Section 16.13 Severability ...........................................................................57
Section 16.14 Incorporation of Exhibits ..............................................................57
Section 16.15 Incorporation of Required Provisions ...................................................58
Section 16.16 Consent of the Parties .................................................................58
Section 16.17 Nonliability of Agents and Employees....................................................58
Section 16.18 Successor and Assigns Bound ............................................................58
Section 16.19 Time of Essence ........................................................................58
Section l6.20 Prudent Operation.......................................................................58
Section 16.21 Quiet Enjoyment.........................................................................58
Section 16.22 Entire Agreement .......................................................................59
CERTIFICATE OF SECRETARY .................................................................................61
OPINION OF ATTORNEY.......................................................................................62
EXHIBITS
A Airport Layout Cost Center Plan .....................................................................A-1
B Premises in Terminal Building .......................................................................B-1
C Preferential Use Gate Assignment Plan ...............................................................C-1
D Illustrative Calculation of Airline Rentals, Fees, and Charges ......................................D-1
E Operation and Maintenance Responsibilities Chart ....................................................E-1
</TABLE>
-iv-
<PAGE> 6
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
CHARLESTON INTERNATIONAL AIRPORT
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
This Scheduled Airline Operating Agreement and Terminal Building Lease
(hereinafter referred to as "Agreement"), entered into this 1st of October,.
1996, by and between the Charleston County Aviation Authority (hereinafter
called "AUTHORITY"), as the governing body of the Charleston County Airport
District, a body politic and corporate, existing under and by virtue of the laws
of the State of South Carolina, and AIR SOUTH AIRLINES, INC. a (sole
proprietorship, partnership, or corporation), organized and existing under the
laws of the State of DELAWARE, (hereinafter called "AIRLINE"), having its
principal offices at 1800 ST. JULIAN PLACE - 4TH FLOOR COLUMBIA, SC 29204
WITNESSETH:
WHEREAS, AUTHORITY is owner and operator of Charleston International
Airport (hereinafter called "Airport") located in Charleston County, South
Carolina contiguous to Charleston Air Force Base (hereinafter called "Charleston
AFB"); and
WHEREAS, under the terms of the instrument entitled "Agreement Between
the Charleston County Aviation Authority, Charleston, South Carolina and The
United States Air Force, (USAF), Charleston Air Force Base, S.C., on Joint Use
of Charleston Air Force Base" hereinafter referred to as the "Joint Use
Agreement", AUTHORITY has secured certain rights for the use of the flying field
and necessary appurtenances of Charleston AFB by civil aircraft; and
WHEREAS, AIRLINE is engaged in the business of scheduled transportation
by air of persons, property, mail and/or cargo and desires to use certain areas
and facilities owned by the AUTHORITY and acquire from AUTHORITY certain rights
and privileges in connection with its use of Airport; and
WHEREAS, AUTHORITY has the right to permit use of property on the Airport
upon the terms and conditions hereinafter set forth and has full power and
authority to enter into this Agreement in respect thereof; and
NOW, THEREFORE, for and in consideration of the mutual covenants,
agreements, and conditions contained herein, the parties hereto agree as
follows:
-1-
<PAGE> 7
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 1
DEFINITIONS
SECTION 1.01--DEFINITIONS
The following words and phrases, wherever used in this Agreement shall,
for the purpose of this Agreement, have the following meaning:
1. "Act" means Act No. 1235 of the Acts and Joint Resolutions of the
General Assembly of the State of South Carolina, Regular Session
of 1970, as amended.
2. "Agreement" means this Scheduled Airline Operating Agreement and
Terminal Building Lease between the AUTHORITY and AIRLINE, as the
same may be amended or supplemented from time to time pursuant to
the terms hereof.
3. "Airline" means the scheduled air carrier executing this
Agreement.
4. "Air Transportation Company" shall mean a company engaged in the
business of scheduled or nonscheduled commercial transportation by
air of persons, property, mail, and/or cargo.
5. "Airport" means the land areas contiguous to Charleston AFB which
are now or hereafter owned, leased, or acquired and operated by
AUTHORITY and referred to collectively as Charleston International
Airport, the approximate boundaries of which are more particularly
shown on Exhibit "A", attached hereto.
6. "Airport Cost Centers" means cost areas to be used in accounting
for Airport Revenues and expenses, and for calculating and
adjusting certain rates, fees, and charges described herein and,
as more particularly described below:
a) "Airfield Area" means the flying field at Charleston AFB
(including runways, taxiways, approach and clear zones,
safety areas, infield areas, together with all associated
landing and navigational aids) owned, operated, and
maintained by the USAF, as it now exists or hereafter may
be modified, changed or developed, which provides for the
landing and takeoff, taxiing, and other operations of
military and civil aircraft, and the use of which by civil
aircraft is subject to the provisions of the Joint Use
Agreement between AUTHORITY and the USAF.
b) "Terminal Building Area" means the terminal building,
including related signage, landscaping, and curbside areas.
-2-
<PAGE> 8
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
c) "Parking and Roadway Area" means public, employee, and
rental car parking areas, access and terminal circulation
roads and rights-of-way, and related signage and
landscaping.
d) "Apron and Taxiway Area" means all airfield pavements and
appurtenances owned and operated by AUTHORITY and located
in "civil use areas" of the Airport (as the term is used in
the Joint Use Agreement), which now exist or are
constructed in the future by AUTHORITY, including, but not
necessarily limited to, the aircraft parking aprons, and
connecting taxiways.
e) "Aviation Support Area" means the civil area in the
northern portion of the Airport comprising fixed based
operations and fuel storage facilities, and other
facilities and leased property, as it now exists or may be
developed or improved from time to time.
f) "Airline Service Area" means the area adjacent to the
Terminal Building Area designated for cargo handling
facilities, maintenance facilities, and other airline
service and support facilities.
g) "Fuel Storage Area" means the aviation fuel storage and
distribution facilities serving the terminal complex at the
Airport.
h) "Reliever Airports Area" means the AUTHORITY's Reliever
Airports.
i) "Commercial/Industrial Area" means all remaining land areas
on Airport available for development by AUTHORITY for
aviation and/or nonaviation purposes.
7. "Airport District" means the Charleston County Airport District,
which is the territory embraced by the County of Charleston, a
political subdivision of the State of South Carolina created
pursuant to Act No. 1235 of the Acts and Joint Resolutions of
General Assembly of the State of South Carolina, Regular Session
of 1970, as amended.
8. "Airport System" means the Airport and the Reliever Airports.
9. "Annual General Obligation Bond Debt Service" means the total
annual amount of principal and interest payments required to be
deposited in a given Fiscal Year on any General Obligation Bonds
issued by the Airport District, together with an annual amount
sufficient to amortize, over the term of such bonds, the total
cost of interest on such bonds incurred during construction of the
bond funded project.
-3-
<PAGE> 9
CHARLESTON AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
10. "Annual Revenue Bond Debt Service" means the total amount required
to be deposited in any Fiscal Year to any interest, principal, and
sinking fund accounts established pursuant to the Bond Resolution.
11. "Assigned Area" means the space in the terminal building leased to
AIRLINE under this Agreement, including space leased
preferentially to AIRLINE, space leased jointly to AIRLINE and one
or more other Signatory Airlines, and space leased by AIRLINE in
common with all other Signatory Airlines.
12. "Authority" means the Charleston County Aviation Authority, the
governing body of the Airport District which is granted the
responsibilities of exercising and performing the corporate powers
and duties of the Airport District, and when used herein refers to
both.
13. "Bond Resolution" means the Airport Facilities Revenue Bond
Resolution Authorizing Airport System Revenue Bonds of the
Charleston County Airport District, Charleston County, South
Carolina, as the same may from time to time be amended or
supplemented by a Supplemental Resolution in accordance with the
terms thereof.
14. "Capital Improvement" means (1) the acquisition of land or
easements, (2) the purchase of machinery, equipment or rolling
stock, (3) the planning, engineering, design, and construction of
new facilities, or (4) the performance of any extraordinary,
non-recurring major maintenance of existing facilities, all of
which may be acquired, purchased, or constructed by AUTHORITY to
improve, maintain, or develop the Airport System, and any single
item of which has a cost of $7,500 or more and a useful life in
excess of one year.
15. "Common Use Formula" means a formula which prorates the cost of a
service or space among those airlines using the service or space
so that each user pays that proportion thereof that the number of
its Enplaned Passengers at the Airport bears to the total number
of Enplaned Passengers of all such users of the service or space.
16. "Common Use Space" means those areas which may be assigned to two
or more airlines, as shown on Exhibit "B," attached hereto, the
cost of which is prorated among the users based on the Common Use
Formula.
17. "Director" means the Director of Airports or such other person
designated by AUTHORITY to exercise functions with respect to the
rights and obligations of AUTHORITY under this Agreement.
-4-
<PAGE> 10
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
18. "Enplaned Passenger" means any passenger boarding at the terminal,
including any such passenger that previously disembarked from
another aircraft of the same or a different air transportation
company.
19. "FAA" means the Federal Aviation Administration of the United
States Government, or any federal agencies succeeding to its
jurisdiction.
20. "Fiscal Year" refers to AUTHORITY's fiscal year and means the
twelve-month period commencing on July 1 and extending to June 30
of the following year.
21. "General Obligation Bonds" means any bond issued by the Airport
District secured by an irrevocable pledge of the full faith,
credit and taxing power of the Airport District, including the
$15,500,000 Series 1979 General Obligation Bonds issued in
September 1979.
22. "Joint Use Agreement" means the Agreement for Joint Use of the
Charleston AFB between the AUTHORITY and the United States Air
Force dated February 20, 1985, as same may be amended, modified,
or supplemented from time to time.
23. "Joint Use Formula" means a formula which prorates 50 percent of
the cost of a service or space among those airlines using the
service or space on the basis of that proportion which the number
of each user's Enplaned Passengers bears to the total number of
Enplaned Passengers of all such users of the service or space, and
50 percent of the charge on the basis of that proportion which the
number of each user's actual aircraft departures bears to the
total number of aircraft departures of all such users of the
service or space.
24. "Joint Use Space" means those areas which may be assigned to two
or more airlines, as shown on Exhibit "B," attached hereto, the
cost of which is prorated among the users based on the Joint Use
Formula.
25. "Maintenance and Operating Expenses" means AUTHORITY's current
annual expenses of maintaining, repairing, operating and
administering the Airport System including taxes, if any, as set
forth in the current approved AUTHORITY budget.
26. "Majority-in-Interest" (or "MII") means at least 50 percent in
number of the Signatory Airlines which together account for at
least 50 percent of the total dollars paid by all Signatory
Airlines through Landing Fees, Apron Fees, and Terminal Building
Space Rentals during the latest available Fiscal Year.
-5-
<PAGE> 11
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
27. "Maximum Certificated Gross Take-off Weight" means the maximum
weight in 1,000-pound units at which each aircraft operated by
AIRLINE at the Airport is authorized by the FAA to take off, as
recited in AIRLINE's flight manual governing that aircraft.
28. "Preferential Use Space" means those portions of the Terminal
Building Area and Apron and Taxiway Area assigned to AIRLINE as
shown on Exhibits "B and "C," attached hereto, to which AIRLINE
shall have priority over all other users subject to the provisions
of Article 3.
29. "Reliever Airports" means the system of general aviation airports,
other than the Airport, owned or operated by AUTHORITY, as such
system now exists (Charleston Executive Airport and East Cooper
Airport) or as planned for the future.
30. "Requesting Airline" means AIRLINE or any other scheduled airline
requesting facilities in the terminal complex.
31. "Revenue Bonds" means any bonds issued by the Airport District
secured solely by a pledge of the Revenues of the Airport or the
Airport System.
32. "Revenue Departure" means any AIRLINE aircraft departure at the
Airport other than (1) an unscheduled departure of an aircraft
which landed at the Airport because of weather conditions,
mechanical or operating failure or causes, or for any other reason
of precaution or emergency, or (2) ferry (other than for a
revenue-producing charter flight), test, or training flights that
are less than 10 percent of AIRLINE's total monthly departures.
33. "Revenues" means income accrued by the AUTHORITY in accordance
with generally accepted accounting practices, including investment
earnings, from or in connection with ownership or operation of the
Airport System or any part thereof, or the leasing or use thereof,
all as defined and determined in the Bond Resolution.
34. "Rules, Regulations and Ordinances" means those lawful,
reasonable, and nondiscriminatory rules, regulations and
ordinances, pursuant to Section 16.05 of this Agreement,
promulgated by AUTHORITY for the orderly use of the Airport by
AIRLINE and other tenants and users of the Airport as the same may
be amended, modified, or supplemented from time to time.
35. "Signatory Airlines" means airlines engaged in the business of
scheduled transportation by air of persons, property, mail and/or
cargo to and from the Airport which have executed agreements with
AUTHORITY essentially
-6-
<PAGE> 12
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
identical to this Agreement covering the use and occupancy of
facilities at the Airport.
36. "Signatory Rented Space" means the space in the terminal building
actually leased by AUTHORITY to Signatory Airlines.
37. "Special Facility" means any facility, improvement, or structure
acquired or constructed on the Airport System, the cost of
construction, acquisition, maintenance, and operation of which is
financed by Special Facility Bonds or by debt instrument other
than Revenue Bonds or General Obligation Bonds.
38. "Total Take-off Weight" means the sum of the Maximum Certificated
Gross Take-off Weight for all Revenue Departures of an airline
over a stated period of time. Said sum shall be rounded to the
nearest thousand pounds for all landing fee and apron fee
computations.
END OF ARTICLE 1
-7-
<PAGE> 13
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 2
TERM
The term of this Agreement (the "term") shall commence at 12:01 a.m. on
Oct 1, 96, and shall continue thereafter until 12:01 a.m. on JUNE 30, 2001.
END OF ARTICLE 2
-8-
<PAGE> 14
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 3
ASSIGNED AREA
SECTION 3.01--TERMINAL FACILITIES
A. AUTHORITY does hereby lease and demise to AIRLINE, and AIRLINE
does hereby lease and accept from AUTHORITY, the following Preferential Use
Space, Joint Use Space, and Common Use Space, as more particularly delineated on
Exhibit "B," attached hereto:
1. Preferential Use Space
(a) Ticket Counter and Queuing Area
(b) Office and Operations Space
(c) Outbound Baggage Area
(d) Baggage Service Office
2. Joint Use Space
(a) Hold Room
3. Common Use Space
(a) Inbound Baggage Area
(b) Baggage Claim Area
B. Any changes to the Assigned Area shall be evidenced by an
amendment to this Agreement pursuant to Section 16.22.
C. In the event that changes to Exhibit "B" are made to reflect
changes in the leased premises of others, or to reflect other space changes not
inconsistent with the provisions of this Agreement, then in such event said
revised Exhibits may be substituted herein without the necessity for amendment
of this Agreement.
SECTION 3.02--AIRCRAFT PARKING POSITIONS
A. Aircraft parking positions (gates) in the terminal complex shall
be assigned on a preferential use basis. AIRLINE will have priority in using
gates assigned to it on a
-9-
<PAGE> 15
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
preferential basis to accommodate its scheduled flights; however, AUTHORITY may
assign such gate for use by others in periods when not used by AIRLINE, so long
as unassigned gates are not available and the gate is scheduled to be vacated by
others at least 30 minutes prior to AIRLINE's next scheduled arrival at said
gate.
B. Aircraft parking positions assigned to AIRLINE are designated on
Exhibit "C" attached hereto. AIRLINE shall have the right and first priority to
use those gates to which it is preferentially assigned and the right to locate
appropriate identifying interior signs at the doorways to those gates.
SECTION 3.03--RELOCATION OF CONCOURSE FACILITIES
In order to optimize passenger flow and maximize terminal concession
revenue, AUTHORITY reserves the right to reassign aircraft parking positions,
Joint Use Space, and associated operations space. Should any such reassignment
occur AIRLINE will be assigned new space comparable in size, quality, and
finish. Prior to any relocation, AUTHORITY and AIRLINE shall meet and mutually
agree on the cost of such relocation and responsibility for same. Such
relocation will be contingent upon mutual agreement concerning the cost and
responsibility for same.
SECTION 3.04--ACCOMMODATION OF PREFERENTIAL USE SPACE
A. In the event the AUTHORITY receives a written request from a
Requesting Airline for a type of space leased on a preferential basis to others,
and the Requesting Airline demonstrates to the satisfaction of the AUTHORITY
that it has contacted all Signatory Airlines at a level above the local station
manager and has exhausted all reasonable efforts to find reasonable
accommodations for its proposed operations on the Airport, the AUTHORITY shall
serve written notice to all Signatory Airlines of the AUTHORITY's intention to
make a determination, in not less than fifteen (15) calendar days, as to how the
Requesting Airline will be accommodated.
B. The AUTHORITY will be guided by all pertinent factors, including
AIRLINE's present use and the use planned by AIRLINE for such premises in the
one hundred eighty (180) days immediately after the request, the compatibility
of such Requesting Airline proposed operations and work force with AIRLINE's own
operations and work force, and the security of AIRLINE's and the Requesting
Airline's operations.
C. The AUTHORITY may request that planned uses and requirements be
documented and submitted in writing to the AUTHORITY, and if AIRLINE requests,
the AUTHORITY shall treat such planned uses and requirements as confidential,
proprietary information.
-10-
<PAGE> 16
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
D. If the AUTHORITY determines that the Requesting Airline can be
accommodated in the Preferential Use Space, the AUTHORITY shall: (1) assign the
Requesting Airline the space previously assigned to the AIRLINE; (2) notify
AIRLINE in writing of such reassignment of space and the effective date thereof;
and (3) provide to AIRLINE and to such Requesting Airline written statement
specifying the required terms and conditions, if any.
E. If a portion of AIRLINE's Assigned Area is reassigned to
accommodate a Requesting Airline in accordance with this Section 3.04, AIRLINE
shall make available to the Requesting Airline for the Requesting Airline's use,
AIRLINE's Preferential Use Space or such portion thereof as determined by the
AUTHORITY. Subject to the provisions of Article 6, AIRLINE may be entitled to
reimbursement for the unamortized book value of its improvements.
END OF ARTICLE 3
-11-
<PAGE> 17
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 4
USES AND PRIVILEGES
SECTION 4.01--USE OF THE AIRPORT
AIRLINE, its employees, passengers, guests, patrons, and invitees shall
have the right to the use (in common with other duly authorized users) of the
Airport and appurtenances, together with all facilities improvements, equipment,
and services which have been or may hereafter be provided for common use at or
in connection with the Airport, subject to the Joint Use Agreement and the
Rules, Regulations and Ordinances of AUTHORITY, which documents AUTHORITY shall
make available to AIRLINE.
SECTION 4.02--SCOPE OF PRIVILEGES
AIRLINE shall have the right, in addition to all rights elsewhere granted
in this Agreement, to use the Airport for the following purposes:
A. The operation of a public transportation system by air for the
carriage of persons, property, mail, and/or cargo, including all activities
reasonably necessary to such operation.
B. The landing, taking off, flying over, taxiing, towing, loading,
unloading, servicing, repairing, de-icing and parking of aircraft or other
equipment of or operated by AIRLINE, or other Air Transportation Companies with
which there is an applicable agreement between AIRLINE and such other Air
Transportation Companies, including the right to provide or handle all or part
of the operations or services of such other companies subject to Section 4.03
and such Rules, Regulations and Ordinances as the AUTHORITY may establish.
C. The sale of tickets, documentation of shipments, handling of
reservations, operation of a customer service lounge, provision of skycap
services, and the loading and unloading of persons, property, cargo and mail at
Airport by such motor vehicles or other means of conveyance as AIRLINE may
desire to use in the operation of its air transportation system; provided,
however, that any ground transportation commercial carrier (including AIRLINE,
if applicable, except for such ground transportation as AIRLINE or its nominee
may provide solely for the benefit of its employees) regularly transporting
persons to and from Airport shall first secure and thereafter hold a valid
lease, license, or other agreement with AUTHORITY for the right to carry persons
to and from Airport and shall pay AUTHORITY such rentals, fees and/or
percentages of the fares of such ground transportation commercial carrier for
such right as AUTHORITY may set by ordinance or resolution.
-12-
<PAGE> 18
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
D. The training at the Airport of persons and testing of aircraft and
other equipment, such training and testing to be limited to that incidental to
AIRLINE's air transportation business at the Airport. Flight training shall be
undertaken by AIRLINE only to the extent permitted by, and subject to the
conditions of, the Joint Use Agreement and the Rules, Regulations and Ordinances
of AUTHORITY.
E. The sale, disposal, and exchange of AIRLINE's aircraft, engines,
accessories, fuel, oil, lubricants and other equipment, and materials or
supplies; provided however, that such right shall not be construed as
authorizing the conduct of a separate regular business by AIRLINE, but as
permitting AIRLINE to perform only such functions as are incidental to the
operation of its air transportation system or that of any other Signatory
Airline.
F. Subject to the provisions of Section 4.03, the servicing by
AIRLINE, or by its suppliers of materials or its furnishers of services, of
aircraft and other equipment, operated by AIRLINE or by other Signatory Airlines
with which AIRLINE has an applicable handling agreement, with fuel, oil,
lubricants, line maintenance, or other materials or supplies at its assigned
aircraft parking positions or other aircraft parking positions designated by
AUTHORITY. AUTHORITY reserves the right to designate other locations reasonably
accessible from the terminal complex for performance of aircraft maintenance and
service activities if such activities would interfere with aircraft operations
of other airlines in the terminal complex. Nothing herein shall be construed to
permit AIRLINE to construct, maintain, or operate a fuel storage facility. The
granting of a right to construct, maintain, or operate a fuel storage facility
shall be subject to the execution of a separate agreement between AIRLINE and
AUTHORITY.
G. The installation, maintenance and operation of such radio,
communication, meteorological and aerial navigation equipment and facilities at
suitable locations on the Airport, including computer equipment and furnishings
at passenger check-in counters in the terminal building, as may be necessary or
convenient in the opinion of AIRLINE for its operations; provided that such
equipment and facilities do not interfere with other Airport communication,
meteorological, or aerial navigation systems. The location of such equipment and
facilities shall be subject to the prior written approval of AUTHORITY.
H. AIRLINE may install and operate in its non-public Preferential Use
Space in the terminal building pay telephones or coin vending machines for the
sale of cigarettes, soft drinks, and food to its employees.
I. AIRLINE shall have the right to assess and collect a reasonable
charge to others for the use of any systems, equipment, or furnishings financed
and installed by AIRLINE. Such charges shall be reasonable and based upon
AIRLINE's cost of providing the systems, equipment, or furnishings. AIRLINE
shall provide the AUTHORITY a schedule of its charges.
-13-
<PAGE> 19
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
SECTION 4.03--PURCHASING
A. Airline shall have the right to purchase its requirements of
personal property or services, including fuel, lubricants, food, beverage, and
other passenger supplies, and any other materials and supplies used by AIRLINE
from any person or company of AIRLINE's choice, and the making of agreements
with any person or company of AIRLINE's choice for services to be performed for
AIRLINE which are incidental to operation of AIRLINE's air transportation
system.
B. AUTHORITY reserves the right to levy a reasonable and
non-discriminatory fee against any contractors, suppliers, or furnishers of
services including, but not limited to, AIRLINE. Notwithstanding the foregoing,
no fee shall be charged to AIRLINE for services provided to or by AIRLINE's
parent, subsidiary, or code-sharing partner.
C. It is understood that if AIRLINE's suppliers, contractors and
furnishers of service use any portion of the Airport or facilities of AUTHORITY
not leased to AIRLINE, then AUTHORITY may charge reasonable fees therefore, but
nothing herein gives the AIRLINE the right to grant to any other party the
privilege to use any portion of the Airport or facilities of the AUTHORITY.
SECTION 4.04--SIGNAGE
A. AIRLINE may install and operate identification signs, posters, and
graphics within AIRLINE's Assigned Area, subject to the prior written approval
of AUTHORITY, provided that such signs shall be:
1. Substantially uniform in size, type, and location with
those of other airlines;
2. Consistent with AUTHORITY's graphic standards; and
3. In compliance with all local laws, Rules, Regulations and
Ordinances.
B. Nothing herein shall be deemed to prohibit AIRLINE's installation
on the walls behind ticket counters and ticket lift counters in holdrooms,
identification and company logo signs as are customarily installed by AIRLINE in
such areas at comparable facilities.
SECTION 4.05--EMPLOYEES' PARKING FACILITIES
If not otherwise provided, AIRLINE shall have the right to the use of
reasonably adequate vehicular parking facilities for its employees employed at
the Airport in common with
-14-
<PAGE> 20
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
other employees, which facilities shall be located in an area designated by
AUTHORITY as near as practicable to the terminal building. AUTHORITY reserves
the right to assess a reasonable charge for such employee parking facilities,
based on the cost of providing, operating, and maintaining the facilities.
SECTION 4.06--ACCESS
A. Subject to the provisions hereof, the Rules, Regulations and
Ordinances, and such restrictions as AUTHORITY may impose with respect to
AIRLINE's Assigned Area, AUTHORITY hereby grants to AIRLINE, its agents,
suppliers, employees, contractors, passengers, guests, and invitees, the right
and privilege of ingress and egress to the Assigned Area and to public areas and
public facilities of the Airport.
B. The ingress and egress provided for above shall not be used,
enjoyed, or extended to any person engaging in any activity or performing any
act or furnishing any service for or on behalf of AIRLINE that AIRLINE is not
authorized to engage in or perform under the provisions hereof unless expressly
authorized by AUTHORITY.
C. AUTHORITY shall have the right at any time or times to close,
relocate, reconstruct, change, alter, or modify any such means of access
provided for AIRLINE's use pursuant to this Agreement or otherwise, either
temporarily or permanently; provided that reasonable notice to AIRLINE and a
reasonably convenient and adequate means of ingress and egress shall exist or be
provided in lieu thereof. AUTHORITY shall suffer no liability by reason thereof
and such action shall in no way alter or affect any of AIRLINE's obligations
under this Agreement.
END OF ARTICLE 4
-15-
<PAGE> 21
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 5
GENERAL USE OF ASSIGNED AREA
In addition to other obligations stated herein, AIRLINE assumes the
following obligations:
SECTION 5.01--NON-INTERFERENCE WITH UTILITY SYSTEMS
AIRLINE shall not do or permit to be done anything at or about the
Airport which may interfere with the effectiveness or accessibility of the
drainage and sewage system, fire protection system, alarm system, fire hydrants
and hoses, air conditioning systems, communications systems, and electrical
systems, if installed or located on the Airport. AIRLINE shall indemnify and
hold AUTHORITY harmless for any and all damages and/or expenses incurred by
AUTHORITY due to the interference by AIRLINE or any of its subcontractors with
the systems enumerated above.
SECTION 5.02--DUTY TO REPORT MALFUNCTIONS
AIRLINE shall report all malfunctions of the drainage and sewage system,
fire protection system, sprinkler system, alarm system, fire hydrants and hoses,
air conditioning systems, communications systems, and electrical systems, if
installed or located on the Assigned Area or AIRLINE's preferential aircraft
parking positions to the AUTHORITY promptly after its discovery. At a minimum,
such reporting will be promptly given to AUTHORITY's 24-hour communication phone
line.
SECTION 5.03--HAZARDOUS MATERIALS
A. AIRLINE shall not keep or store flammable liquids within the
enclosed portion of the Assigned Area, except in rooms or tanks especially
constructed for such purposes in accordance with standards established by the
National Board of Fire Underwriters, and approved by AUTHORITY from the
standpoint of safety. Any such liquids having a flash point of less than
100(degrees) F shall be kept and stored in safety containers of a type approved
by the Underwriters Laboratories.
B. Any and all materials stored, handled, used or disposed of by
AIRLINE or AIRLINE's tenants shall be the responsibility of the AIRLINE who
shall ensure that all laws, rules, and regulations of AUTHORITY, FAA, USAF,
Environmental Protection Agency (EPA), Department of Health and Environmental
Control (DHEC) and local, state, and federal governments and agencies are
followed.
-16-
<PAGE> 22
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
C. AIRLINE shall not use the Assigned Area to generate, manufacture,
refine, heat, produce or process any "Hazardous Materials". For purposes of this
Section, "Hazardous Materials", includes without limitation, petroleum, crude
oil, natural gas, natural gas liquids, liquefied natural gas, synthetic gas
usable as fuel and "Hazardous Substances" or related materials as defined in 42
U.S.C. 9601 et. seq as amended and 42 U.S.C. 2011 et. seq as amended, in each
case as such laws may be amended and regulations and publications promulgated
pursuant thereto.
D. AIRLINE shall handle, store, transfer and/or dispose of "Hazardous
Substances", "Substances Hazardous to the Environment" and/or "Hazardous Waste"
in compliance with all applicable local, state, and federal statutes.
E. AIRLINE will defend, indemnify and hold harmless the AUTHORITY
from and against any claims, demands, penalties, damages, costs or expenses of
any nature including, without limitation reasonable and actual attorney,
engineering and consultant fees, investigation and laboratory fees, court costs
and litigation expenses, arising out of or in any way related to the past,
present, or future presence; past, present, or future release or threatened
release; past, present, or future disposal or removal of any "Hazardous
Substance" or "Hazardous Waste" when such presence, release, threatened release
or disposal was caused by AIRLINE, its agents, employees or contractors.
SECTION 5.04--DEPRIVATION OF PUBLIC USE
AIRLINE shall not conduct its operation in a manner that deprives the
public of its rightful, equal, and uniform use of the Airport property.
SECTION 5.05--INTERFERENCE WITH USE BY OTHERS
AIRLINE shall not interfere with reasonable use by others of common
facilities.
SECTION 5.06--CREATION OF SAFETY HAZARDS
AIRLINE shall not conduct its operations in such a way as to hinder
police, fire-fighting or other emergency personnel in the discharge of their
duties or as to constitute a hazardous condition that would increase the risks
normally attendant upon the operations contemplated under this Agreement.
-17-
<PAGE> 23
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
SECTION 5.07--CREATION OF NUISANCE
AIRLINE shall not commit any nuisance or knowingly do or permit to be
done anything which may result in the creation or commission of a nuisance. The
conduct of the AIRLINE's normal scheduled air service shall not be deemed to
violate this provision.
SECTION 5.08--RELEASE OF NOXIOUS GASES
AIRLINE shall not cause, produce or permit to emanate from the Assigned
Area any unusual, noxious or objectionable smokes, gases, vapors, fumes or
odors. The conduct of the AIRLINE's normal scheduled air service shall not be
deemed to violate this provision.
SECTION 5.09--USE OF AREA FOR LODGINGS
AIRLINE shall not use the Assigned Area nor any part thereof for lodgings
or sleeping purposes.
SECTION 5.10--TRASH AND GARBAGE
AIRLINE shall make suitable arrangements for the temporary storage for
collection and for removal from the Preferential Use Space of all trash, garbage
and other refuse resulting from AIRLINE's operations on the Preferential Use
Space. AIRLINE shall provide appropriate covered, metal receptacles in an
attractive, safe, and sanitary manner, and will store such receptacles in an
inconspicuous place on the Preferential Use Space. AIRLINE shall pay for all
such costs. In addition, AIRLINE shall provide AUTHORITY with a copy of any
contract AIRLINE enters into with a garbage or waste company or disposal
service.
SECTION 5.11--AIRPORT OPERATIONS
A. AUTHORITY reserves unto itself and unto its successors and assigns
for the use and benefit of the public, a right of flight for the passage of
aircraft through the airspace above the surface of the Assigned Area, together
with the right to cause in said airspace such noise as may be inherent in the
operation of aircraft now known or hereafter used, and for navigation of flight
in said airspace for landing on, taking off from or operating on the Airport.
B. AIRLINE expressly agrees, on behalf of itself and its successors
and assigns, to restrict the height of structures, objects of natural growth and
other obstructions on the Assigned Area in compliance with the requirements of
Federal Aviation Regulations, Part 77, as such may be amended or replaced.
-18-
<PAGE> 24
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
C. AIRLINE expressly agrees, on behalf of itself and its successors
and assigns, to prevent any use of the Assigned Area and any leasehold
improvements which would interfere with or adversely affect the operation or
maintenance of the Airport, or which would otherwise constitute a hazard at the
Airport.
D. AIRLINE agrees to comply with the intent of Federal Aviation
Regulations Part 107 (airport security) in the AUTHORITY's policies as outlined
in AUTHORITY's Federal Aviation Administration approved Security Master Plan.
AIRLINE further agrees that charges, fees, fines levied upon and paid by the
AUTHORITY through enforcement of Federal Aviation Regulations Part 107 or Part
139 or any subsequent regulation because of acts by AIRLINE's employees, agents,
suppliers, guests or patrons shall be borne by AIRLINE.
SECTION 5.12--RESERVED RIGHTS AND PRIVILEGES
All rights and privileges not specifically granted to AIRLINE in this
Agreement are reserved to the AUTHORITY.
END OF ARTICLE 5
-19-
<PAGE> 25
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 6
IMPROVEMENTS, ALTERATIONS, AND REPAIRS
SECTION 6.01--AUTHORITY CAPITAL IMPROVEMENTS
A. It is contemplated by the parties that from time to time during
the term of this Agreement, AUTHORITY will undertake Capital Improvements to
preserve, protect, enhance, expand, or otherwise improve the Airport System. Any
such Capital Improvement to be paid for or funded using Airport Revenues shall
be subject to the provisions of this Article 6.
B. In conjunction with submission of its Annual Budget as described
in Section 8.03 hereof, AUTHORITY shall submit to AIRLINE, at least 60 days
prior to the first day of each Fiscal Year, a written report regarding proposed
Capital Improvements to the Terminal Building Area, Apron and Taxiway Area, and
Airfield Area to be undertaken during the Fiscal Year. This report shall include
the following:
1. A description of the proposed Capital Improvements,
together with cost estimates and any available preliminary
drawings.
2. Documentation of the need for and the benefits to be
derived from such expenditure.
3. The proposed method of funding (rate base, bonds, AUTHORITY
funds, grants-in-aid, etc.)
4. The allocation of cost, debt service or amortization
charges to Airport Cost Centers.
C. Within 30 days from receipt of such report, Signatory Airlines
will have the opportunity to meet collectively with AUTHORITY staff to review
the Capital Improvement program recommended by AUTHORITY to present any
questions, comments, or objections they may have with regard to the Capital
Improvement program. AUTHORITY agrees to give due consideration to the
questions, comments and objectives in developing its proposed Capital
Improvement program.
SEDITION 6.02--M.I.I. CONSIDERATION OF CAPITAL IMPROVEMENTS
A. AIRLINE agrees that debt service or amortization attributable to
AUTHORITY's cost, net of grants, of any other proposed Capital Improvement in
any given Fiscal Year may, upon completion and beneficial use of such project,
be included as an element of cost in the calculation of rentals, fees, and
charges in the applicable airline-supported cost
-20-
<PAGE> 26
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
center under this Agreement if (1) the AUTHORITY's cost is not in excess of
$400,000, or (2) should the AUTHORITY's cost exceed $400,000, if the project is
not specifically disapproved in writing by a Majority-in-Interest of the
Signatory Airlines within sixty (60) days of submission of AUTHORITY's proposed
annual budget as provided in Section 8.03 of this Agreement.
B. Notwithstanding the limitation set forth in the preceding
paragraph, AUTHORITY reserves the right, subject to prior consultation with the
Signatory Airlines, to undertake the acquisition, purchase, or construction of
any Capital Improvement, and include debt service or amortization properly
attributable to that Capital Improvement in the applicable airline-supported
cost center for calculation of rentals, fees and charges hereunder, so long as
the Capital Improvement is necessary to:
1. Ensure compliance with any lawfully promulgated rule,
regulation or order of any federal, State, or other
governmental agency other than AUTHORITY which has
jurisdiction over the operation of the Airport.
2. Permit the continued operation, maintenance, and
improvement of the Airport for any of the purposes intended
hereunder, or as required by the trustee for the security
of the general obligation and revenue bonds.
3. Repair casualty damage to Airport property to the extent
not covered by Insurance.
C. The dollar amounts cited in Section 6.02, Section 6.03, and
Section 1.01(14) shall be adjusted each year in proportion to changes in the
Implicit Price Deflator index published by the U.S. Department of Labor, Bureau
of Labor Statistics, using as a base the latest published index available when
the AUTHORITY prepares its Annual Budget; provided, however, such annual
increases shall not exceed three (3%) percent in any single year.
SECTION 6.03--ACCOUNTING TREATMENT OF CAPITAL IMPROVEMENTS
A. SUBJECT to certain limitations described in this Section and
Section 6.02, the cost, debt service or amortization charges attributable to
Capital Improvements undertaken by AUTHORITY and properly allocable to the
Terminal Building Area, Apron and Taxiway Area, and Airfield Area will be
included in the applicable cost center for calculation of rates, fees and
charges payable by AIRLINE hereunder, as described below.
1. If, in any given Fiscal Year, the AUTHORITY's total
estimated cost, net of grants, of proposed Capital
Improvements applicable to airline supported cost centers
(the Terminal Building Area, Apron and Taxiway Area, and
Airfield Area) is less than $200,000, such Capital
-21-
<PAGE> 27
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
Improvements will be funded through the Equipment and
Capital Outlay Fund, and AUTHORITY will include its cost of
such Capital Improvements as an element of cost in the
calculation of AIRLINE rates, fees and charges under
Section 8.04(A)(3) and 8.05(A)(3) of this Agreement. This
limit may be exceeded only if specifically approved by a
Majority-in-Interest of the Signatory Airlines.
2. If, in any given Fiscal Year, the AUTHORITY's total
estimated cost (net of grants) of proposed Capital
Improvements applicable to airline supported cost centers
is more than $200,000, AUTHORITY may:
a) Fund that portion of the total cost of such Capital
Improvements in excess of $200,000 from funds on
deposit in the Renewal and Replacement Fund or
Development and Contingency Fund, and include the
cost of amortization of such investment as an
element of cost in the calculation of AIRLINE rates,
fees and charges under Sections 8.04(A)(4) and
8.05(A)(4) of this Agreement, or
b) Fund such Capital Improvements through the issuance
of Additional Bonds, or some other form of debt
obligation and include annual debt service costs
attributable to such bonds as an element of cost in
the calculation of AIRLINE rates, fees and charges
under Section 8.04(A)(2) and 8.05(A)(2) of this
Agreement.
SECTION 6.04--AIRLINE IMPROVEMENTS, ALTERATIONS AND REPAIRS
A. AIRLINE shall make no alterations, additions, improvements to, or
installations on the Assigned Area under this Agreement without the prior
written approval of AUTHORITY. Any such alterations or improvements shall be
without cost to the AUTHORITY.
B. The ultimate control over the quality and acceptability of the
improvements in the Assigned Area will be retained by AUTHORITY and shall
require the review and written release for construction by the AUTHORITY prior
to installation.
SECTION 6.05--DESIGN OF IMPROVEMENTS
AIRLINE shall develop plans for constructing, erecting, and installing
any improvements on the Assigned Area, which in final form shall consist of (1)
working drawings, (2) technical specifications, (3) schedule for accomplishing
improvements, (4) schedule of finishes and graphics, and (5) a list of all
furnishings, fixtures and equipment to be located on
-22-
<PAGE> 28
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
the Assigned Area. AIRLINE shall submit two copies of all of the foregoing
documents, and any additional plans developed by or for AIRLINE, for the
construction of all improvements to AUTHORITY for approval.
SECTION 6.06--ARCHITECTURAL REQUIREMENTS
All construction shall be of first class quality. All structural
improvements, signs, equipment, and interior design and decor constructed or
installed by AIRLINE, its agents or contractors, including the plans and
specifications therefor, shall conform in all respects to applicable standards,
statutes, ordinances, building codes, and Rules, Regulations and Ordinances. All
plans and specifications must be stamped "Released for Construction" by the
AUTHORITY.
SECTION 6.07--CONSTRUCTION OF IMPROVEMENTS
A. At least two sets of final plans and specifications for the
improvements shall be submitted by AIRLINE to AUTHORITY for review. AUTHORITY
shall within thirty (30) days of receipt of any such plans and specifications
either release or refuse to release for construction the plans and
specifications so submitted. Released plans and specifications shall be stamped
"Released for Construction" by AUTHORITY. Only plans and specifications so
stamped may be used by AIRLINE.
B. AIRLINE shall be responsible for obtaining all building permits.
All proposed construction shall have all the proper environmental approvals.
C. In the event of AUTHORITY's refusal to release any portion of the
plans and specifications, AIRLINE shall promptly submit necessary modifications
and revisions thereof. AUTHORITY shall not unreasonably withhold or delay such
release. No substantial changes or alterations shall be made in said plans or
specifications after initial release by AUTHORITY, and no structural alterations
or improvements shall be made to or upon the Assigned Area without the prior
written release of AUTHORITY. AUTHORITY agrees to act promptly upon such plans
and specifications and upon requests for release of changes or alterations in
said plans or specifications. One final copy of plans for all improvements or
subsequent changes therein or alterations thereof shall, within thirty (30) days
after completion of project, be signed by AIRLINE and deposited with AUTHORITY
as an official record thereof.
SECTION 6.08--COMPLETION OF IMPROVEMENTS
A. Upon release for construction of plans and specifications as
provided in Section 6.07 hereof, and when authorized to proceed in accordance
with said Section of this Agreement,
-23-
<PAGE> 29
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
AIRLINE shall in good faith immediately begin construction and installation of
the improvements, facilities, furniture and equipment in the Assigned Area and
prosecute the same to completion.
B. All of the aforementioned contractors of AIRLINE shall maintain
evidence of general liability and worker's compensation/employee's liability
insurance coverage satisfactory to the AUTHORITY. The AUTHORITY shall require
both a Payment and Performance Bond, each in the amount of one hundred percent
(100%) of the contract price, to be obtained in all cases. AIRLINE shall provide
evidence of builder's risk insurance naming the AUTHORITY as loss payee with
respect to one hundred percent (100%) in value of the improvements to be
provided under such contracts. No improvements, fixtures, or equipment shall be
subject to any liens whether created by operation of law or by agreement. All
construction shall in every respect conform to and comply with applicable
statutes, ordinances, building codes, rules and regulations of such authorities
as may have jurisdiction over any aspect of said construction. AIRLINE, at its
sole cost and expense, shall also procure all building, fire, safety, and other
permits necessary for any construction. Prior to commencement of construction,
AIRLINE shall submit evidence of a Performance Bond and a Payment Bond in the
amount of one hundred percent (100%) of the cost of improvements.
SECTION 6.09--EASEMENTS ON PREFERENTIAL USE SPACE
The Preferential Use Space shall be accepted by AIRLINE subject to any
and all then existing easements, and AUTHORITY shall have the right to install,
lay, construct, maintain, repair, and operate such sanitary sewers, drains,
storm water sewers, pipelines, manholes, connections, water, oil or gas
pipelines, and telephone and telegraph power lines and such OTHER appliances and
appurtenances necessary or convenient in connection therewith, over, in, upon,
through, across, and along the Preferential Use Space, or any part thereof, and
to enter thereupon at reasonable times for any and all such purposes; provided,
however, that no right of AUTHORITY provided for in this paragraph shall be so
exercised as to interfere unreasonably with the AIRLINE's operations hereunder.
Notwithstanding the language above, AUTHORITY shall have the right of immediate
access to utilities systems or portions thereof in the Preferential Use Space in
the event of an emergency which would threaten the safety of human life and/or
the property of the AUTHORITY.
SECTION 6.10--TITLE TO IMPROVEMENTS AND ALTERATIONS
A. Subject to the provisions of Section 15.04 (B), all improvements
made to the Assigned Area and all additions and alterations thereto made upon
said area by AIRLINE, shall be and remain the property of AIRLINE until
expiration or termination of this Agreement as set forth in Article 2, or
Article 15 at which time the said improvements shall become the property of
AUTHORITY.
-24-
<PAGE> 30
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
B. AIRLINE shall make no alterations, additions, improvements to, or
installations outside of the Assigned Area under this Agreement.
C. Plans and specifications for such work shall be filed with and
subject to the approval of the Director and all work shall be done in accordance
with local ordinances and state laws. Only plans and specifications marked
"Released for Construction" by the AUTHORITY may be used by AIRLINE's
contractors.
SECTION 6.11--REMOVAL
AIRLINE shall not remove or demolish, in whole or in part, any
improvements made either by AIRLINE or by AUTHORITY, without the prior written
approval of AUTHORITY.
SECTION 6.12--LIENS
A. If any mechanic's lien or other encumbrance shall be filed against
the Assigned Area or the improvements because of any act or omission (or alleged
act or omission) of AIRLINE, and arising from AIRLINE's work or subsequent
repair, maintenance, alteration or otherwise, AIRLINE shall, at its own cost and
expense, cause the same to be discharged of record or bonded within sixty (60)
days after written demand for the discharge or bonding thereof from AUTHORITY to
AIRLINE. Notwithstanding the foregoing, AIRLINE may contest any such lien or
encumbrance so long as such contest does not create an imminent danger of
foreclosure of such lien or encumbrance.
B. If AIRLINE fails to comply with the foregoing provisions,
AUTHORITY shall have the option, on fifteen (15) business days' prior notice to
AIRLINE, of discharging or bonding any such lien, charge, order or encumbrance
and AIRLINE shall reimburse AUTHORITY for all reasonable costs and expenses
thereof.
END OF ARTICLE 6
-25-
<PAGE> 31
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 7
RENTALS, CHARGES, AND FEES
In return for use of the facilities, rights, licenses, and privileges
granted hereunder and for the undertakings of AUTHORITY, AIRLINE agrees to pay
AUTHORITY without deduction or set-off, during the term of this Agreement
certain charges and fees as set forth herein, in the following manner:
7.01--MONTHLY ACTIVITY REPORT
A. AIRLINE shall furnish to AUTHORITY on or before the fifteenth
(15th) day of each month, an accurate report of AIRLINE's operations at the
Airport during the preceding month, setting forth all data necessary to
calculate the fees and charges due under this Agreement. Said report shall
include, but shall not necessarily be limited to: (1) the AIRLINE's total number
of Revenue Departures for the month by type of aircraft and the Maximum
Certificated Gross Take-off Weight for the month; (2) the total number of
Enplaned Passengers and deplaned passengers; and (3) the amount of cargo,
freight, mail and express for such month.
B. If AIRLINE fails to furnish AUTHORITY with the report required by
Section 7.01(A), AIRLINE's Landing Fee and Apron Fee, as provided for hereafter
shall be determined by assuming that the AIRLINE's Total Take-off Weight for
such month was 100% of its Total Take-off Weight during the most recent month
for which such data are available for AIRLINE. Any necessary adjustment in such
Landing Fee and Apron Fee, shall be calculated after an accurate report
delivered to AUTHORITY by AIRLINE for the month in question, and resulting
surpluses or deficits shall be applied as credits or charges to the appropriate
invoices in the next succeeding month.
C. AIRLINE shall at all times maintain and keep books, ledgers
accounts or other records, wherein are accurately kept all entries reflecting
the activity statistics to be reported pursuant to Section 7.01(A). Such records
shall be retained by AIRLINE for a period of three (3) years subsequent to the
activities reported therein, or such other retention period as set forth in
Federal Aviation Regulation Part 249.7, and made available at Charleston, SC for
audit and/or examination by AUTHORITY or its duly authorized representative
during all normal business hours upon reasonable advance notice. AIRLINE shall
produce such books and records at Charleston, SC within thirty (30) calendar
days of AUTHORITY's notice to do so or pay all reasonable expenses, including
but not limited to transportation, food and lodging, necessary for an auditor
selected by AUTHORITY to audit said books and records.
-26-
<PAGE> 32
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
D. The cost of audit, with the exception of the aforementioned
expenses, shall be borne by AUTHORITY; provided, however, the total cost of said
audit shall be borne by AIRLINE if either or both of the following conditions
exist:
1. The audit reveals an underpayment of more than five percent
(5%) of rentals, fees and charges due hereunder, as
determined by said audit; and/or
2. AIRLINE has failed to maintain true and complete books,
records, accounts, and supportive source documents in
accordance with Section 7.01(C)
SECTION 7.02--TERMINAL RENTALS
A. AIRLINE shall pay to AUTHORITY for its Preferential Use Space,
Joint Use Space, and Common Use Space in the terminal building, as set forth in
Section 3.01(A) hereof, monthly rentals based on annual rental rates for space
listed below, with such rates to be recalculated each Fiscal Year thereafter, as
set forth in Article 8 hereof.
<TABLE>
<CAPTION>
TYPE OF SPACE BASIS OF USE
------------- ------------
<S> <C>
Ticket Counter Space
and Queuing Area Preferential
Office and Operations
Space Preferential
Outbound Baggage Area Preferential
Baggage Service Office Preferential
Hold Room Joint
Baggage Claim Area Common
Inbound Baggage Area Common
</TABLE>
B. Rental for Joint Use Space and Common Use Space shall be prorated
among the Signatory Airlines and other airline tenants and users according to
the Joint Use Formula and Common Use Formula using Enplaned Passenger and
aircraft departure statistics for the preceding six-month calendar period;
however, (1) if a new airline begins service to the Airport, the Enplaned
Passenger and aircraft departure statistics will be predetermined by AUTHORITY
to take into account any cessation or commencement of service and (2) if AIRLINE
ceases serving the Airport, it will continue to pay for Joint Use Space in an
amount equal to the average monthly billing for the last three full months of
AIRLINE's operations at THE AIRPORT FOR THE remaining duration of this
Agreement.
C. Subject to the limitations set forth in Article 6, to the extent
AUTHORITY funds are used to fund improvements, finishes, or equipment for
AIRLINES' benefit,
-27-
<PAGE> 33
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
AIRLINE shall pay to AUTHORITY, monthly in advance, amounts sufficient to
amortize AIRLINE's appropriate share of the cost of tenant finishes and
equipment.
SECTION 7.03--LANDING FEE
A. AIRLINE shall pay to AUTHORITY monthly Landing Fees to be
determined by multiplying the number of 1,000-pound units of Total Take-off
Weight for AIRLINE during the month by the then-current Landing Fee rate
established by AUTHORITY, as provided for under provisions of the Joint Use
Agreement or Section 7.03(D) herein.
B. Effective October 1, 1996, the Landing Fee rate shall be $0.20 per
1,000 pounds of Maximum Gross Take-off Weight, the rate set forth in current Air
Force Regulation (AFR) 55-20 regarding civil operations at joint-use military
airfields. The AUTHORITY may increase the Landing Fee rate at the Airport,
provided that in no event shall said Landing Fee be greater than the rate set
forth in AFR 55-20, as amended or superseded.
C. The Landing Fee collected under this Section shall be applied as
Revenue to the Airfield Area Cost Center. Airfield Area cost shall be calculated
by totaling the following amounts:
1. The total fees payable to the USAF, as such amount is
established under the Joint Use Agreement.
2. The net cost incurred by AUTHORITY in operating the
Reliever Airports, up to a maximum of 50% of the Airfield
Area Cost Center Revenue.
D. In the event that the U.S. Air Force discontinues use of Charleston
AFB for a military flying mission and subsequently sells, transfers, or leases
to AUTHORITY the landing areas, runways, taxiways, and appurtenances necessary
for civil aircraft operations, all as provided for in the Joint Use Agreement,
AUTHORITY may establish the Landing Fee rate at the Airport, subject to prior
consultation with the Signatory Airlines, at the level necessary to recover the
costs incurred by AUTHORITY in operating, maintaining, and improving the
Airfield Area and providing crash/fire/rescue protection.
SECTION 7.04--APRON FEES
AIRLINE shall pay to AUTHORITY monthly Apron Fees to be determined by (1)
multiplying the monthly Variable Apron Fee Rate (to be calculated as provided in
Article 8) by AIRLINE'S total Take-off Weight for the month and (2) adding the
product of the
-28-
<PAGE> 34
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
monthly Fixed Apron Fee Rate (to be calculated as provided in Article 8)
multiplied by the number of gates preferentially assigned to AIRLINE.
SECTION 7.05--OTHER FEES AND CHARGES
AIRLINE shall pay to AUTHORITY its pro rata shares of any actual costs
for the provision of any service or facilities which AUTHORITY is required to
provide by any governmental entity (other than AUTHORITY acting within its
proprietary capacity) having jurisdiction over the Airport.
SECTION 7.06--PAYMENT PROVISION/INTEREST ON OVERDUE AMOUNTS
A. Terminal Building Area rentals and charges shall be due and
payable the first day of each month in advance. Together with AIRLINE's Monthly
Activity Report submitted to AUTHORITY as provided in Section 7.01, AIRLINE
shall transmit to AUTHORITY payment for the amount of Landing Fees and Apron
Fees incurred by AIRLINE during said month, as computed by AIRLINE. The
acceptance by AUTHORITY of any payment made by AIRLINE shall not preclude
AUTHORITY from verifying the accuracy of AIRLINE's report and computations or
from recovering any additional payment actually due from AIRLINE. All other
charges or fees set forth herein shall be due within fifteen (15) days of the
date of the invoice therefor.
B. Any payment not received by the due date shall accrue interest at
the rate of 1.5% per month from the due date until paid in full.
SECTION 7.07--NET AGREEMENT
This is a net agreement with references to charges paid to AUTHORITY.
AIRLINE shall pay all taxes of whatever character that may be lawfully levied,
assessed, or charged by any governmental entity other than AUTHORITY upon the
property, real and personal, occupied, used or owned by AIRLINE, or upon the
rights of AIRLINE to occupy and use the premises and emolument received hereby,
or upon AIRLINE's improvements, fixtures, equipment or other property thereon,
or upon AIRLINE's rights or operations hereunder. AIRLINE shall have the right
at its sole cost and expense to contest the amount or validity of any tax or
license as may have been or may be levied, assessed or charged.
-29-
<PAGE> 35
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
SECTION 7.08--PASSENGER FACILITY CHARGE
The AUTHORITY reserves the right to assess and collect passenger facility
charges subject to the terms and conditions and such methods of collection set
forth in the Aviation Safety and Capacity Expansion Act of 199O, Section 9110
(the "PFC Act"), as such may be amended or superseded.
SECTION 7.09--NO OTHER FEES AND CHARGES
Except as provided in this Agreement, no further rentals, fees, licenses,
excise or operating taxes, tolls or charges shall be charged against or
collected from AIRLINE, its passengers, shippers and receivers of freight and
express; its suppliers of material, contractors, or furnishers of services, by
AUTHORITY for the premises, facilities, rights, licenses, and privileges granted
to AIRLINE in this Agreement.
END OF ARTICLE 7
-30-
<PAGE> 36
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 8
RECALCULATION OF RENTALS, FEES, AND CHARGES
SECTION 8.01--GENERAL
Rentals, fees, and charges will be reviewed at least annually and
recalculated as necessary, based on principles and procedures set forth in this
Agreement, effective July 1 of each Fiscal Year.
SECTION 8.02--ACCOUNTING RECORDS
A. AUTHORITY shall maintain accounting records which will document
the following items for each of the Airport Cost Centers: (1) Revenues; (2)
Maintenance and Operating Expenses (3) Revenue Bond Debt Service; (4) General
Obligation Bond Debt Service; (5) Amortization of the cost of Capital
Improvements funded by AUTHORITY from other than bonds or grants-in-aid; and (6)
any other annual funding requirements pursuant to the Bond Resolution.
B. For purposes of keeping AIRLINE informed as to the financial
performance of the Airport, AUTHORITY shall provide to AIRLINE its annual budget
and audited financial statements. AIRLINE may request, and AUTHORITY shall
provide reasonable supplemental financial data required to assess the adequacy
of rates and charges established under this Agreement.
SECTION 8.03--COORDINATION PROCEDURES - BUDGET REVIEW AND CALCULATION OF
RENTALS, FEES, AND CHARGES
A. On or before March 1 prior to the beginning of each Fiscal Year,
AIRLINE shall submit to AUTHORITY, in writing, its Maximum Certificated Gross
Take-off Weight forecast for that Fiscal Year. On or before May 1 prior to the
beginning of each Fiscal Year adjustment period, AUTHORITY shall submit to
AIRLINE the following reports:
1. AUTHORITY's proposed annual budget for the Fiscal Year
including all estimated Maintenance and Operating Expenses;
Revenue Bond Debt Service and General Obligation Bond Debt
Service; proposed expenditures for Capital Improvements for
the Airports, and estimated Revenues, all allocated to
Airport Cost Centers on a consistent basis from year to
year.
-31-
<PAGE> 37
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
2. AUTHORITY's calculation of proposed AIRLINE rentals,
fees, and charges for the Fiscal Year, based on the
procedures set forth in this Agreement.
B. Within thirty (30) days after receipt of the reports, a
meeting shall be held between AUTHORITY and the Signatory Airlines, to discuss
the proposed rentals, fees, and charges and to initiate any action pursuant to
Sections 6.01, 6.02, and 6.03. AUTHORITY shall give due consideration to any
comments and suggestions of AIRLINE regarding the proposed annual budget and
calculation of the proposed rentals, fees, and charges.
C. AUTHORITY shall adopt an annual budget which may include
revisions made as a result of AUTHORITY's discussions with AIRLINE and as a
result of AUTHORITY's budget process. AUTHORITY shall promptly furnish AIRLINE
with a copy of such approved annual budget, together with the calculation of
rentals, fees and charges which will become effective as of the first day of the
Fiscal Year.
D. AUTHORITY will act with due diligence to adopt the annual
budget in a timely fashion. If, for any reason, the annual budget has not been
adopted by AUTHORITY as of the first day of any Fiscal Year, the rentals, fees
and charges in effect during the preceding Fiscal Year shall continue in effect
until (1) the new Annual Budget has been adopted by AUTHORITY and (2) AUTHORITY
has calculated the rentals, fees and charges in accordance therewith. The new
rentals, fees, and charges shall then be made effective retroactive to the first
day of such Fiscal Year.
SECTION 8.04--CALCULATION OF TERMINAL BUILDING AREA RENTAL RATES
Terminal Building Area rental rates shall be calculated in the following
manner, in accordance with Exhibit "D":
A. AUTHORITY's estimated total "Terminal Building Area Cost"
for the Fiscal Year shall be calculated by totaling the following amounts:
1. The total of estimated direct and allocated indirect
Maintenance and Operating Expenses allocable to the
Terminal Building Area.
2. The pro rata portion of Annual Revenue Bond Debt
Service allocable to the Terminal Building Area.
3. The pro rata portion of the budgeted deposit to the
Equipment and Capital Outlay Fund allocable to the
Terminal Building Area. The total annual deposit to
the Equipment and Capital Outlay Fund shall
-32-
<PAGE> 38
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
not be in excess of $200,000 or such greater amount
as a Majority-in-Interest of the Signatory Airlines
shall approve.
4. The annual amortization of the amount applicable to
the Terminal Building Area for any expenditures made
by AUTHORITY prior to July 1 of the adjustment year
for Capital Improvements in the Terminal Building
Area, which are financed by AUTHORITY from the
Renewal and Replacement Fund, the Development and
Contingency Fund, the Surplus Fund, or other funds
not subject to provisions of the Bond Resolution,
with such annual amortization to be computed at
interest and based on economic lives for each
capital item determined by AUTHORITY in accordance
with generally accepted accounting practices and
current average municipal bond interest rates. It is
understood, however, that in performing the
calculations under this section, no amortization
charges will be included on capital expenditures
which have been financed with the proceeds of
AUTHORITY bond issues.
5. The pro rata portion of Annual General Obligation
Bond Debt Service allocable to the Terminal Building
Area.
B. The sum of the following estimated Revenues and credits
will then be deducted from the estimated Terminal Building Area Cost for the
Fiscal Year:
1. Estimated Terminal Building Area Revenues from
sources other than Signatory Airlines and USAF AMC
space rentals, military charter departure fees,
international arrival fees, and concession revenues
directly attributable to international and military
charter activities, specifically including:
a) Concession fees and utility charges from food
and beverage, news and gifts, on-Airport
rental car (other than ground rentals and
ready car space rentals), specialty shops,
insurance, telephone, and advertising display
concessions.
b) Rental income from space leased to all
tenants other than Signatory Airlines and the
USAF AMC.
c) Allocable interest income from the Revenue
Fund, Operation and Maintenance Fund, and
Bond Fund based upon the proportion of net
income (prior to depreciation) generated by
the Domestic and International Terminal
Building Area,
-33-
<PAGE> 39
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
Airfield Area, Apron and Taxiway Area, and
Reliever Airports Area Cost Centers.
Concession revenues generated from military charter
operations, including the duty free shop and income
from food, beverage, and vending machine concessions
serving military charter areas of the terminal, are
specifically excluded from the above definition of
Terminal Building Area revenues and are not to be
credited against the estimated Terminal Building
Area Cost in the calculation of Signatory Airline
rental rates.
2. The "Military Charter Facilities Revenue Credit,"
computed by the applying the following formula:
Credit = A x B/C
Where:
A= the area (in square feet) of the military
charter boarding area, outbound baggage area,
and the International Arrivals Area
B= the estimated Terminal Building Area Cost for
the Fiscal Year
C= the total area (in square feet) of enclosed
space in the terminal building
C. The estimated net Terminal Building Area cost for the Fiscal Year
will then be divided by the total amount of Signatory Rented Space to determine
an average rental rate per square foot.
D. The amount of space leased to Signatory Airlines will be
multiplied by the average rental rate per square foot to determine the
"Signatory Airline Rental Requirement."
E. The AUTHORITY will then develop a schedule of rental rates by type
of space such that the sum of the products obtained by multiplying the total
amount of space leased by the Signatory Airlines (estimated as of the first day
of the adjustment period for which rates are being calculated) by the rental
rate will equal the total annual Signatory Airline Rental Requirement for the
Fiscal Year for which the space rentals are being calculated.
F. As soon as possible following the close of a Fiscal Year, actual
Terminal Building Area Costs attributable to the Terminal Building Area shall be
ascertained by the AUTHORITY for such Fiscal Year and the difference between the
actual Signatory Airline
-34-
<PAGE> 40
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
Rental Requirement and Signatory Airline space rentals billed shall be applied
as (or recovered through) direct credits against (or additional charges to)
space rental invoices over the remaining months of the current Fiscal Year.
G. Notwithstanding the rental rate calculation procedure described in
this Section 8.04, paragraphs (A) through (F), the average rental rate paid by
the Signatory Airlines in each Fiscal Year shall not be less than the rate
obtained by dividing the total Terminal Building Area Cost by the total area of
enclosed space in the terminal building.
SECTION 8.05--CALCULATION OF APRON FEE RATE
Apron Fee rates shall be recalculated in the following manner and in
accordance with Exhibit "D":
A. AUTHORITY's estimated "Apron and Taxiway Area Cost" for the Fiscal
Year shall be calculated by totaling the following amounts:
1. The total of estimated direct and allocated indirect
Maintenance and Operating Expenses allocable to the Apron
and Taxiway Area.
2. The pro rata portion of Annual Revenue Bond Debt Service
allocable to the Apron and Taxiway Area.
3. The pro rata portion of the budgeted deposit to the
Equipment and Capital Outlay Fund allocable to the Apron
and Taxiway Area.
4. The annual amortization of the total amount (or the pro
rata amount applicable to the Apron and Taxiway Area) of
any expenditures made (or expected to be made) by AUTHORITY
prior to July 1 of the adjustment year for Capital
Improvements in the Apron Taxiway Area, which are financed
by AUTHORITY from the Renewal and Replacement Fund, the
Development and Contingency fund, the Surplus Fund, or
other funds not subject to provisions of the Bond
Resolution with such annual amortization to be computed at
interest and based on economic lives for each capital
expenditure item determined by the AUTHORITY in accordance
with generally accepted accounting practices and current
average municipal bond interest rates. It is understood
that no amortization charges will be included in the
calculation under this section which is associated with
capital expenditures which have been financed with the
proceeds of AUTHORITY bond issues.
-35-
<PAGE> 41
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
5. The pro rata portion of Annual General Obligation Bond Debt
Service allocable to the Apron and Taxiway Area.
6. Any additional amounts estimated by AUTHORITY to meet the
requirements of Article VII of the Bond Resolution
(Particular Covenants), Section 711 (Rates and Charges) for
the Fiscal Year.
B. The sum of all estimated Revenues for the Fiscal Year attributable
to the Apron and Taxiway Area, not including Revenues derived from Signatory
Airlines for use of the aprons and taxiways, shall then be deducted from the
Apron and Taxiway Area Cost to determine the estimated "Net Apron and Taxiway
Area Cost" for the Fiscal Year.
C. Fifty percent of the estimated Net Apron and Taxiway Area Cost
shall then be divided by the total number of preferentially assigned aircraft
parking positions and the quotient so obtained shall be further divided by
twelve to determine the monthly "Fixed Apron Fee Rate" per gate; and fifty
percent of the estimated Net Apron and Taxiway Area Cost shall be divided by the
projected Total Take-off Weight of Signatory Airlines for the Fiscal Year to
determine the "Variable Apron Fee Rate" per 1,000 pounds of take-off weight.
D. As soon as possible following the close of each Fiscal Year, the
actual Apron and Taxiway Area Cost and actual required Variable and Fixed Apron
Fee Rates shall be ascertained by the AUTHORITY for the Fiscal Year. The actual
required Variable Apron Fee Rate will be multiplied by the actual Total Take-off
Weight of all Signatory Airlines and the actual required Fixed Apron Fee Rate
will be multiplied by the number of aircraft parking positions preferentially-
assigned to Signatory Airlines to determine the actual Signatory Airline Apron
Fee Requirement for the Fiscal Year. The difference between the actual Signatory
Airline Apron Fee Requirement and actual Apron Fees billed to such Signatory
Airlines for such Fiscal Year shall be applied as (or recovered through) direct
credits against (or additional charges to) invoices over the remaining months of
the current Fiscal Year.
SECTION 8.06--EXTRAORDINARY ADJUSTMENTS OF TERMINAL BUILDING SPACE RENTAL RATES
AND APRON FEE RATE
In the event that, at any time during a Fiscal Year, any of the
components of Terminal Building Area Cost, or Apron and Taxiway Area Cost, or
the total Takeoff Weight of all Signatory Airlines varies materially (upward or
downward 10% or more) from the estimates used in setting Terminal Building
Rental Rates or Apron Fee Rates, such rates may be adjusted either up or down
for the balance of such Fiscal Year, in the event that such adjustment is deemed
necessary by AUTHORITY or AIRLINE to ensure that adequate Revenues will be
available from such fees to cover the estimated Signatory Airline Rental
Requirement and Signatory Airline Apron Fee Requirement for the Fiscal Year.
END OF ARTICLE 8
-36-
<PAGE> 42
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 9
AUTHORIZING LEGISLATION FOR SALE OF BONDS
SECTION 9.01--GENERAL
A. In the event of conflicts between this Agreement and the Bond
Resolution, the Bond Resolution shall govern.
B. The following terms, where used in this Agreement, have the
meanings set forth in the Bond Resolution:
- Construction Fund
- Revenue Fund
- Operation and Maintenance Fund
- Bond Fund
- Equipment and Capital Outlay Fund
- Renewal and Replacement Fund
- Development and Contingency Fund
- Surplus Fund
C. Subject to the terms and provisions of the Bond Resolution, it is
mutually understood and agreed that, so long as any Bonds secured by the Bond
Resolution are outstanding, the deposit and application of Revenues shall be
governed by the Bond Resolution. AUTHORITY agrees to notify AIRLINE of any
material changes to Bond Resolution affecting AIRLINE's obligations herein.
END OF ARTICLE 9
-37-
<PAGE> 43
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 10
MAINTENANCE AND OPERATION OF AIRPORT
SECTION 10.01--GENERAL
A. AUTHORITY agrees that it will with reasonable diligence prudently
develop, improve, and at all times maintain and operate the Airport with
adequate, efficient, and qualified personnel and keep Airport in good repair
including, without limitation, the Terminal Building Area, Apron and Taxiway
Area, and all appurtenances, facilities, and services now or hereafter connected
therewith as the same relate to AIRLINE's air transportation system; will keep
Airport and its aerial approaches free from obstruction and interference for the
safe and proper use thereof by AIRLINE; and will develop, maintain and operate
Airport in all respects in a manner at least equal to the standards or rating
established by the FAA and any other governmental agency having jurisdiction
thereof, except for conditions beyond the control of AUTHORITY.
B. Responsibility for maintenance, cleaning, and operation of
terminal building and apron facilities shall be as set forth in Exhibit "E," and
as set forth in Section 10.02 below.
SECTION 10.02--TERMINAL BUILDING
A. AUTHORITY shall operate and maintain and keep in good condition
and repair the terminal building and all additions, improvements, utilities,
facilities, and equipment now or hereafter provided by AUTHORITY at or in
connection with the terminal building, except any improvements, facilities, and
equipment constructed or installed by AIRLINE. AUTHORITY shall keep the terminal
building, except AIRLINE's Preferential Use Space, in a neat, orderly, sanitary,
and presentable condition.
B. In accordance with EXHIBIT "E," AUTHORITY shall at all times
maintain and keep in good condition and repair the public area and Joint Use
Space and Common Use Space of the terminal building so as to provide for
reasonable unobstructed use thereof by passengers and invitees, and shall keep
such area adequately supplied, equipped (including directional signs),
furnished, and decorated.
C. AUTHORITY shall supply or cause to be supplied appropriate and
adequate equipment and maintenance for air conditioning, ventilation, heat,
water, and sewerage facilities for terminal building public use areas, AIRLINE's
Preferential Use Space, Joint Use Space, and Common Use Space; adequate
illumination in Common Use Space and Joint Use Space; and janitorial service in
terminal building public use areas and Common Use Space and Joint Use Space.
-38-
<PAGE> 44
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
D. AIRLINE shall at all times keep its Preferential Use Space neat,
orderly, sanitary, and presentable. AIRLINE shall be responsible for relamping
such spaces; shall furnish its own janitorial service for such spaces and shall
cause to be removed at AIRLINE's own expense from such spaces all waste,
garbage, and rubbish, and agrees not to deposit the same on any part of Airport,
except that AIRLINE may deposit same temporarily in its Preferential Use Space
or in space designated by AUTHORITY in connection with collection for removal.
Any repairs made by AIRLINE or on its account shall be of good, commercially
reasonable quality in both materials and workmanship. All repairs will be made
in conformity with the rules, regulations and ordinances prescribed from time to
time by federal, state, county, or municipal authorities having jurisdiction
over the location of the work.
E. AIRLINE shall maintain the apron area associated with its
preferentially assigned gates in a neat, clean, and orderly condition, free from
litter, debris, refuse, petroleum products, or grease that may result from
activities of its passengers, employees, agents, or suppliers, and remove all
oil and grease spillage which is attributable to AIRLINE's aircraft or equipment
from its aircraft parking positions.
F. AIRLINE shall perform, at its sole expense, ordinary preventive
maintenance and ordinary upkeep and repair of it's personal property, trade
fixtures, and equipment located in its Preferential Use Space, or Joint Use
Space.
G. AIRLINE shall, at the expiration of the term of this Agreement,
make any and all repairs necessary to restore the property within its
Preferential Use Space to its original condition, ordinary wear and tear
accepted.
H. No abatement of fees and charges shall be claimed by or allowed to
AIRLINE by reason of the exercise of any or all of the foregoing rights
enumerated in this Section.
SECTION 10.03--AUTHORITY'S RIGHT TO INSPECT AND MAKE REPAIRS
AUTHORITY, by its authorized officers, employees, agents, contractors,
subcontractors and other representatives shall have the right (at reasonable
times, upon prior notice, and using its best efforts to create as little
interruption of AIRLINE's business as is reasonably practical), to enter upon
the Assigned Area accompanied by an authorized AIRLINE representative, if
practical for the following purposes:
A. To inspect such area to determine whether AIRLINE has complied and
is in compliance with the terms and conditions of this Agreement. AUTHORITY
shall be the sole judge of the quality of maintenance.
B. To perform such maintenance, cleaning, or repair as AUTHORITY
reasonable deems necessary and, if AIRLINE fails to perform its obligations
under this Article,
-39-
<PAGE> 45
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
AUTHORITY may perform the work and recover the reasonable cost of such
maintenance, cleaning, or repair from AIRLINE, plus a 15 percent administrative
charge from AIRLINE on the next rent date.
C. Without limiting the generality of the foregoing, the AUTHORITY,
by its officers, employees, representatives, and contractors, shall have the
right, for the benefit of AIRLINE or for the benefit of others at the Airport,
to maintain existing or future utilities systems or portions thereof in the
Assigned Area, including therein, without limitation thereto, systems for the
supply of heat, hot and cold water, gas, electricity, and for the furnishing of
fire alarm, fire protection, sewage, drainage, air conditioning, telephone,
telegraph, and equipment connected with or appurtenant to all such systems, and
to enter upon the Assigned Area at all reasonable times to make such repairs,
alterations, and replacement as may, in the opinion of the AUTHORITY be deemed
necessary or advisable and from time to time, to construct or install over, in,
under or through the Assigned Area new lines, pipes, mains, wires, conduits, and
equipment; provided, however, that such repair, alteration, replacement or
construction shall not unreasonably interfere with the use of the Assigned Area
by AIRLINE. Notwithstanding the above language, AUTHORITY shall have the right
to immediate access to utilities systems or portions thereof in Assigned Area in
the event of an emergency which would threaten the safety of human life and/or
the property of the AUTHORITY.
D. Nothing in this Section shall, or shall be construed to, impose
upon the AUTHORITY any additional obligation so to construct or maintain or to
make repairs, replacements, alterations, or additions to Preferential Use Space,
or shall create any liability for any failure so to do.
E. No abatement of fees and charges shall be claimed by or allowed to
AIRLINE by reason of the exercise of any or all of the foregoing rights
enumerated in this Section.
SECTION 10.04--POLLUTION CONTROL
AIRLINE, its officers, agents, servants, employees, invitees, independent
contractors, successors or assigns shall not discharge or place any industrial
waste or other foreign material into any component of the storm drainage system
or onto any paved or unpaved area within the boundaries of the Airport without
first neutralizing or treating same as required by applicable anti-pollution
laws or ordinances, and in a manner satisfactory to AUTHORITY, the Environmental
Protection Agency, the Department of Health and Environmental Control, and other
public bodies, federal, state, or local having jurisdiction over, or
responsibility for prevention of pollution of canals, streams, rivers, and other
bodies of water. AIRLINE's introduction of objectionable waste into any
component of AUTHORITY'S sanitary or storm drainage system may, if not remedied
by AIRLINE with all due dispatch, at the sole discretion of AUTHORITY, be deemed
to be an event of default and cause for cancellation of this
-40-
<PAGE> 46
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
Agreement by AUTHORITY, in conformity with the provisions of Article 14 hereof.
Such cancellation shall not relieve AIRLINE of or from liability for such
introduction.
END OF ARTICLE 10
-41-
<PAGE> 47
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 11
DAMAGE OR DESTRUCTION OF PREMISES
SECTION 11.01--DAMAGE OR DESTRUCTION
A. Should the Assigned Area or any portions thereof, or buildings or
structures of which such space may be a part, be damaged by fire or other
casualty, the AUTHORITY shall notify AIRLINE within sixty (60) days whether the
space shall be repaired. If the space is to be repaired, it will be repaired
with due diligence by the AUTHORITY, and the rental allocable to the particular
building, rooms, or other portion of the space rendered untenantable shall be
abated for the period from the occurrence of the damage to the completion of the
repairs provided, however, that the AUTHORITY will exert its best effort to
provide AIRLINE with reasonably similar temporary substitute space, if
available, at such rent as deemed necessary and reasonable by the AUTHORITY, but
in no event in art amount greater than that previously paid by AIRLINE for such
space until such time as the repairs are completed.
B. If the AUTHORITY shall fail to notify AIRLINE of its decision
within sixty (60) days after destruction, the AUTHORITY shall be deemed to have
elected to terminate this Agreement as to the space damaged or destroyed, and
the Agreement shall automatically terminate as to such space as of the date of
the damage.
END OF ARTICLE 11
-42-
<PAGE> 48
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 12
INSURANCE AND INDEMNIFICATION
SECTION 12.01--INSURANCE
A. AIRLINE shall carry during the term of this Agreement, the
liability insurance coverage with limits as hereinafter stated, but the carrying
of such insurance coverage shall not relieve AIRLINE of any of its obligations
under this Agreement.
B. AIRLINE shall, without expense to AUTHORITY, and upon commencement
of the term hereof, obtain and cause to be kept in force liability insurance
coverage, insofar as such coverage is available under policies and endorsements
thereto approved by the South Carolina Insurance Commission, insuring against
the liabilities set forth in the indemnification paragraph below. Such insurance
shall include, by way of example but not by way of limitation, comprehensive
general liability coverage and automobile liability insurance coverage and shall
be in not less than the amounts hereinafter stated. Such insurance coverage
shall be provided by policies issued by a company or companies of sound and
adequate financial responsibility. Such insurance policies shall contain an
endorsement providing that AUTHORITY will be given not less than thirty (30)
days notice prior to the cancellation of the policy or material alteration of
the coverages provided by said policies. The comprehensive general liability
policies shall include contractual liability coverage and shall make reference
to this Agreement. AIRLINE shall cause a certificate or certificates of
insurance to be furnished to AUTHORITY evidencing such insurance coverage. In
the event AUTHORITY is notified that any of the coverage required herein is to
be canceled or changed in such a manner as not to comply with the requirements
of the Agreement, AIRLINE shall, within thirty (30) days prior to the effective
date of such cancellation or change, obtain and provide AUTHORITY with
certificates evidencing the re-establishment of the insurance coverage required
hereby.
The following statement is required on the face of the insurance
certificate:
"Charleston County Aviation Authority, its officials, servants, agents,
and employees are named as additional insureds consistent with the terms
of the Scheduled Airline Operating Agreement and Terminal Building
Lease. "
C. The minimum limits of coverage shall be as follows:
1) Comprehensive Public Liability Insurance, including but not
limited to Personal Injury, broad form contractual and
broad form Property Damage, (per accident):..........
Combined Single Limit $100,000,000
-43-
<PAGE> 49
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
2) Automobile Liability Insurance, bodily (per person)
Property Damage
(per accident):............Combined Single Limit $5,000,000
3) Fire Insurance - (Contents, improvements, etc. within
Assigned Area):
..................l00% of replacement value of improvements
4) Worker's Compensation:.............Per Applicable State Law
The aforesaid amounts and types of insurance shall be reviewed from time
to time by AUTHORITY and adjusted if AUTHORITY reasonably determines such
adjustments are necessary to protect AUTHORITY's interest.
D. Insofar as said insurance provides protection against liability for
damages to third parties for personal injury, death, and property damage,
AUTHORITY shall be included as an additional insured; provided, however, such
liability insurance coverage shall also extend to damage, destruction, and
injury, to AUTHORITY owned or leased property and AUTHORITY personnel excluding
claims attributable to worker's compensation, and to the extent caused by, or
resulting from the negligent or willful acts, operations, or omissions of
AIRLINE, its officers, agents, employees, and independent contractors on the
Airport. AUTHORITY shall have no liability for any premiums charged for such
coverage, and the inclusion of AUTHORITY as an additional insured is not
intended to, and shall not, make AUTHORITY a partner or joint venturer with
AIRLINE in its operations on the Airport.
SECTION 12.02--INDEMNIFICATION
AIRLINE covenants that it and all of its agents, servants, employees, and
independent contractors will use due care and diligence in all of its or their
activities and operations at the Airport and that AIRLINE hereby agrees to
indemnify and hold harmless AUTHORITY for all damages to the property of
AUTHORITY which shall be caused by an act or omission on the part of AIRLINE,
its agents, servants, employees, or independent contractors, and AIRLINE shall
pay on behalf of AUTHORITY all sums which AUTHORITY shall become obligated to
pay by reason of the liability, if any, imposed by law upon AUTHORITY for
damages because of bodily injury, including damages for care and loss of
service, and including death at any time resulting from bodily injury, and
because of injury to or destruction of property, including pollution or
environmental damage, and including the loss of use thereof, which may be caused
by or result from any of the activities, omissions, or operations of AIRLINE,
its agents, servants, employees, or contractors and AIRLINE shall pay and
satisfy judgments finally establishing the liability of AUTHORITY in all
actions defended by AIRLINE pursuant to this section; AIRLINE shall investigate
or cause the investigation of accidents involving such injuries; shall negotiate
or cause to be negotiated all claims made as may be deemed expedient by AIRLINE,
and shall defend, or cause to be defended, suits for damages, even if
groundless, false, or fraudulent, brought on account of such injuries or
damages, in the name and on behalf
-44-
<PAGE> 50
CHARLESTON COUNTY AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
of AUTHORITY; AIRLINE shall pay or cause to be paid all cost incurred by
AUTHORITY including but not limited to reasonable legal fees and expert fees
actually incurred in any legal proceeding defended by AIRLINE aforesaid, and
interest accruing up to the date of payment by AIRLINE, and all premiums charged
upon appeal bonds required in such proceedings, and all expenses incurred by
AIRLINE for investigation, negotiation, and defense. AUTHORITY shall, upon
notice thereof, give AIRLINE every demand, notice, summons, or other process
received in any claim or legal proceeding contemplated herein. In the event
AUTHORITY shall fail to give AIRLINE notice of any such demand, notice, summons,
or process received by AUTHORITY and such failure to give notice shall result in
prejudice to AIRLINE in the defense of any action or legal proceeding
contemplated herein, such failure or delay shall release AIRLINE of its
liability as set forth in this paragraph insofar as only the particular claim or
legal proceeding is concerned, and only to the extent of such prejudice. Nothing
in this Article shall be deemed a change or modification in any manner
whatsoever of the method or conditions of preserving, asserting, or enforcing
any claim or legal liability against AUTHORITY. This shall not be construed as a
waiver of AUTHORITY's sovereign immunity. AIRLINE shall further indemnify
AUTHORITY for any and all fines, penalties, assessments, levies, or similar
costs assessed on the AUTHORITY but caused by or as a result of actions taken or
forborne by AIRLINE.
SECTION 12.03--NON-LIABILITY OF AUTHORITY
A. AUTHORITY shall not in any event be liable for any acts or
omissions of AIRLINE or its agents, servants, employees, or independent
contractors, or for any condition resulting from the operations or activities of
any lessee, tenant, or concessionaire, AIRLINE's agents, servants, employees, or
independent contractors, or for any conditions resulting from the operations or
activities of AIRLINE's agents, servants, employees, or independent contractors
either to AIRLINE or to any other person except to the extent caused by the
negligence or willful misconduct of AUTHORITY, its officers, employees, or
agents.
B. AUTHORITY shall not be liable for AIRLINE's failure to perform any
of the obligations under this Agreement or for any delay in the performance
thereof, nor shall any such delay or failure be deemed a default by AUTHORITY
except to the extent caused by the negligence or willful misconduct of
AUTHORITY, its officers, employees, or agents.
C. AUTHORITY shall not be liable for any loss or damages suffered by
AIRLINE arising out of the interruption or cessation of the business conducted
by AIRLINE under this Agreement.
END OF ARTICLE 12
-45-
<PAGE> 51
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 13
ASSIGNMENT OR TRANSFER
SECTION 13.01--GENERAL
Except as provided in this Article 13, AIRLINE shall not at any time
assign, transfer, convey, mortgage, pledge, or encumber its interest under this
Agreement, or any part of the Assigned Area, to any party without prior written
approval of AUTHORITY.
SECTION 13.02--RELINQUISHMENT OF SPACE
If AIRLINE desires to relinquish any of its Assigned Area, AIRLINE will
notify AUTHORITY in writing of the space available, and AUTHORITY shall use its
best efforts to reassign the space to another airline. No assignment, transfer,
conveyance, or sublease by AIRLINE shall relieve AIRLINE of its responsibility
for payment of rent and performance of all other obligations provided in this
Agreement, without specific written consent by AUTHORITY to such relief.
SECTION 13.03--MERGERS
A. AIRLINE shall not allow its interest under this Agreement to be
transferred to, passed to or devolved upon any other person, firm or
corporation, by operation of law, stock transfer, or otherwise without the prior
written consent of AUTHORITY, it being understood that a transfer or series of
transfers of an amount or amounts totaling fifty percent (50%) or more of
AIRLINE's outstanding voting stock to one party or a group of parties acting in
concert shall be deemed to be a transfer of AIRLINE's interest hereunder.
B. The foregoing provisions shall not apply to AIRLINE or to a
corporation which owns all or substantially all of the shares of AIRLINE if the
shares of AIRLINE or such owner corporation are traded on the New York Stock
Exchange, American Stock Exchange, or NASDAQ Exchange.
C. As to AIRLINE's or owner corporations whose shares are traded on
the New York Stock Exchange, American Stock Exchange, or NASDAQ Exchange, the
following provision shall apply:
AIRLINE shall not assign, transfer, sublease, pledge, surrender,
or otherwise encumber or dispose of the Assigned Area, or any
interest therein, or permit any other person to occupy the same,
without the prior written consent of AUTHORITY. However, the
obligations of
-46-
<PAGE> 52
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
AIRLINE hereunder may be fulfilled or discharged by a licensed
member of AIRLINE, duly appointed by AIRLINE and approved by
AUTHORITY, on the express condition that any such licensee shall
subscribe to this Agreement and expressly assume each and every
obligation of AIRLINE hereunder and upon such assumption shall
have all the privileges and rights granted to AIRLINE. The
restrictions of this paragraph shall also not apply to any
assignment by AIRLINE to a corporation into or with which AIRLINE
may merge or consolidate upon such successor corporation's express
assumption of AIRLINE's obligations hereunder.
D. Any assignment, sublease, or transfer of any type of AIRLINE's
obligations permitted hereunder or to which AUTHORITY may consent shall not
operate to release or discharge AIRLINE from its obligations under this
Agreement.
SECTION 13.04--BANKRUPTCY
Furthermore, Section 13.01 shall not apply to any valid assumption or
assignment of this Agreement, the Assigned Area, or any part thereof by a
trustee, or the AIRLINE, as a debtor in possession under Section 365 of the
Bankruptcy Code of 1978, as amended; provided, however, that adequate assurance
of future performance as provided by Section 365 of the Bankruptcy Code of 1978,
as amended is given. For the purposes of the assumption or assignment of this
Agreement this shall include, but shall not be limited to:
1. Adequate assurance of the reliability of the proposed source for
the charges and fees due under this Agreement upon the assumption
or assignment of this Agreement;
2. Adequate assurance that all other consideration due under this
Agreement shall be forthcoming after the assumption or assignment
of this Agreement; and
3. The procurement of a bond from a financially reputable surety
covering any costs or damages incurred by the AUTHORITY.
SECTION 13.05--CONSENT TO ASSIGNMENT, TRANSFER, OR CONVEYANCE
A. Except as otherwise provided in this Agreement, AIRLINE may
assign, transfer, or convey its interest under this Agreement only upon
receiving the prior written consent of AUTHORITY, which consent shall not be
unreasonably withheld.
-47-
<PAGE> 53
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
B. Under no circumstances will AIRLINE be allowed to mortgage,
encumber, or subrogate the real property contained in the Assigned Area.
C. Consent by AUTHORITY to any type of transfer provided for by this
Article shall not in any way be construed to relieve AIRLINE from obtaining
further consent for any subsequent transfer or assignment of any nature
whatsoever.
END OF ARTICLE 13
-48-
<PAGE> 54
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 14
DEFAULTS
SECTION 14.01--DEFAULT
A. If AIRLINE (1) fails to pay fees and charges or any other payment
past due hereunder within thirty (30) days of mailing of written notice of a
past due account, or (2) fails to commence immediately to keep and perform any
of its other covenants and agreements within thirty (30) days of mailing of
written notice, or (3) fails to continue to complete any of its covenants and
agreements after performance is commenced, or after the filing of any petition,
proceedings, or action by, for, or against the AIRLINE under any insolvency,
bankruptcy, or re-organization act of law, then at the election of AUTHORITY:
1. Without terminating this Agreement, AUTHORITY may re-enter the
areas and improve and recontract all or any part of it to others,
for the account of AIRLINE, including costs of renovation and
fifteen percent (15%) administrative fee paid to AUTHORITY for all
amounts received, and AIRLINE shall promptly reimburse AUTHORITY
for any deficiency in charges or other payments received under
such recontracting, as compared to AIRLINE's obligations
hereunder.
2. At any time before or after a re-entry and recontracting as
provided in Section 14.01(A) above, AUTHORITY may terminate
AIRLINE's rights under this Agreement as provided in Article 15,
without any restriction upon recovery by AUTHORITY for past due
charges and other obligations of AIRLINE.
B. AUTHORITY shall have all additional rights and remedies as may be
provided by law.
SECTION 14.02--ATTORNEY FEES
If the termination of the Agreement by AUTHORITY is due to the default of
the AIRLINE, thereby resulting in any litigation, settlement, or arbitration
that finds the AIRLINE in default under the above conditions, the AIRLINE agrees
to indemnify and hold harmless the AUTHORITY from all liability and expense and
will pay and discharge all loss including reasonable and actual attorney fees,
cost and expenses resulting from or in any manner connected with such
litigation, settlement, or arbitration including administration, appellate or
collateral proceedings, investigation, negotiation, and defense of the
Agreement.
END OF ARTICLE 14
-49-
<PAGE> 55
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 15
TERMINATION
SECTION 15.01--EVENTS PERMITTING TERMINATION BY AIRLINE
AIRLINE may terminate this Agreement and terminate all of its future
obligations hereunder at any time that AIRLINE is not in default in its payments
or other obligations to the AUTHORITY hereunder, by giving AUTHORITY thirty (30)
days advance written notice;
1. If the Airport is permanently abandoned as an air transportation
facility.
2. If the use of the Airport is restricted in such a manner that the
AIRLINE cannot reasonably operate on the Airport for a period of
sixty (60) days.
3. If the AUTHORITY is in breach of any of the covenants or
agreements contained in this Agreement for a period exceeding
thirty (30) days after receipt of written notice of such breach.
SECTION 15.02--EVENTS PERMITTING TERMINATION BY AUTHORITY
A. AUTHORITY may terminate this Agreement and all of its obligations
hereunder upon thirty (30) days notice and may exercise all rights of entry and
re-entry upon the demised Assigned Area, with or without process of law, upon or
after the occurrence of any one of the following events:
1. The breach by AIRLINE of any of the covenants or agreements
contained in this Agreement for a period exceeding thirty
(30) days after mailing of written notice of such breach;
or subsequent breach by AIRLINE of any of the covenants or
agreements contained herein at any time after mailing of
thirty (30) days written notice whether or not AIRLINE came
into initial compliance; or
2. The termination by AIRLINE of the conduct, or a material
portion of the conduct, of AIRLINE's business at the
Airport.
3. Pursuant to the requirements of 14 CFR Part 158, AUTHORITY
shall have the right to terminate this Agreement in the
event any portion of AIRLINE's Assigned Area is not fully
utilized and is not made available for use by potentially
competing air carriers or foreign air carriers. The
-50-
<PAGE> 56
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
foregoing provision shall apply only if and to the extent
required by 14 CFR Part 158 or by any PFC assurance
executed by AUTHORITY pursuant to said regulation.
B. Any re-entry shall not in any manner affect, alter, or diminish
any of the obligations of AIRLINE under this Agreement.
C. No acceptance by the AUTHORITY of fees, charges, or other
payments, in whole or in part, for any period or periods during or after a
default of any of the terms, covenants, or conditions to be performed, kept, or
observed by AIRLINE, other than payment in full after a default in the payment
of fees and charges as set forth in Article 7 hereof, shall be deemed a waiver
of any right on the part of the AUTHORITY to terminate this Agreement on
account of such default.
D. No waiver by the AUTHORITY of any default on the part of AIRLINE
in the performance of any of the terms, covenants, or conditions hereof to be
performed, kept, or observed by AIRLINE shall be, or be construed to be, a
waiver by the AUTHORITY of any other or subsequent default in performance of any
of said terms, covenants and conditions.
E. Not withstanding any of the above, AUTHORITY may immediately
terminate this Agreement if AIRLINE fails to keep the requirements of Section
12.01 in full force and effect.
SECTION 15.03--SURVIVAL OF AIRLINE'S OBLIGATION
In the event that this Agreement shall have been terminated in accordance
with the notice of termination, as provided in Section 15.02 hereof, or the
interests of AIRLINE canceled pursuant thereto, or in the event that the
AUTHORITY has re-entered, regained, or resumed possession of the Assigned
Area, the AUTHORITY shall have the right of continuing in effect all
obligations hereunder of AIRLINE.
SECTION 15.04--SURRENDER OF ASSIGNED AREA
A. AIRLINE covenants and agrees that upon expiration of the term of
this Agreement or upon earlier termination as herein above provided, it will
peaceably surrender possession of the Assigned Area hereunder in good condition,
reasonable wear and tear, acts of God, fire, and other casualties excepted.
AUTHORITY shall have the right to take possession of said Assigned Area.
AUTHORITY shall not be required to give notice to quit possession at the
expiration date of the term of this Agreement.
-51-
<PAGE> 57
CHARLESTON COUNTY AVIATION AUTHORITYY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
B. AIRLINE shall have the right upon termination or reassignment and
within thirty (30) days thereafter, to remove all trade fixtures and other
personal property installed or placed by it at its expense, in, on, or about the
Airport, subject, however, to any valid lien which AUTHORITY may have thereon
for unpaid rentals, fees and charges. The AIRLINE shall not abandon any of its
property on the Assigned Area without the written consent of AUTHORITY and
agrees to reimburse AUTHORITY for any costs incurred in the removal of AIRLINE's
property by AUTHORITY.
C. Any and all property not removed by AIRLINE within the said thirty
(30) day period shall, at the option of the AUTHORITY become a part of the land
on which it is located and title shall vest in the AUTHORITY.
D. Any holding-over by AIRLINE after the termination of this
Agreement or the expiration of its term without the written consent of
AUTHORITY, except for the period authorized for removal of property herein upon
the expiration or termination hereof, shall create a month to month term only.
All insurance and performance bond requirements shall remain in full force and
effect.
SECTION 15.05--ENVIRONMENTAL CONTAMINATION
Upon termination (whether by expiration of the term, cancellation,
forfeiture, repurchase or otherwise), AUTHORITY may test the Assigned Area for
environmental and/or petroleum contamination, the cost for which shall be
reimbursed by AIRLINE upon demand if the contamination was caused by AIRLINE's
operations. In the event the Assigned Area tests positive for environmental
and/or petroleum contamination, AIRLINE, at AIRLINE's expense, shall be required
to clean up any and all contamination (all in accordance with all applicable
laws, rules, and regulations) if the contamination was caused by AIRLINE's
operations. At the AUTHORITY'S option, AUTHORITY may require AIRLINE to deposit
a sum of money equal to estimated cost to clean up the contamination. Said
deposit shall be due within ten (l0) days of demand by the AUTHORITY. Upon
completion of clean up and acceptance by AUTHORITY, AUTHORITY shall return said
deposit to AIRLINE, less cost incurred, if any. If costs exceed the amount of
the deposit, AIRLINE shall promptly reimburse AUTHORITY for the costs.
END OF ARTICLE 15
-52-
<PAGE> 58
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
ARTICLE 16
GENERAL PROVISIONS
SECTION 16.01--NON-DISCRIMINATION
A. The AIRLINE, for itself, its personal representatives, successors
in interest, and assigns, as a part of the consideration hereof, does hereby
covenant and agree: (1) that no person, on the grounds of race, color, creed,
political ideas, sex, age, or physical or mental handicap, shall be excluded
from participation, denied the benefits of, or be otherwise subjected to
discrimination in the use of said facilities; (2) that in the construction of
any improvements and the furnishing of services, no person on the grounds of
race, color, creed, political ideas, sex, age, or physical or mental handicaps,
shall be excluded from participation in, denied the benefits of, or otherwise be
subjected to discrimination; (3) that the AIRLINE shall use the Assigned Area in
compliance with all other requirements imposed by or pursuant to Title 49, Code
of Federal Regulations, Department of Transportation, Subtitle A, Office of the
Secretary, Part 21, Non-discrimination in Federally Assisted Programs of the
Department of Transportation, Effectuation of Title VI of the Civil Rights Act
of 1964, and as said acts and regulations may be amended.
B. Noncompliance with Section 16.01(A) above shall constitute a
material breach thereof, and in the event of such noncompliance, within a
reasonable period, the AUTHORITY shall have the right to terminate this
Agreement and the rights hereby created without liability therefor or, at the
election of the AUTHORITY or the United States, either or both said Governments
shall have the right to judicially enforce Section 16.01(A).
SECTION 16.02--GRANTING OF MORE FAVORABLE TERMS
A. AUTHORITY covenants and agrees not to enter into any lease,
contract, or any other agreement with any other Air Transportation Company
providing scheduled service at the Airport containing substantially more
favorable terms than this Agreement, or to grant to any tenant engaged in
scheduled air transportation, rights or privileges with respect to the Airport
which are not accorded AIRLINE hereunder, unless the same rights, terms, and
privileges are concurrently made available to AIRLINE.
B. This Article shall not prevent AUTHORITY from permitting
non-scheduled itinerant aircraft operators from using the terminal building
facilities on a charge-per-use basis. Further, this Article shell not prevent
AUTHORITY from extending more favorable terms to any carrier operating aircraft
of less than 12,500 pounds gross landing weight on routes which are not
competitive with Signatory Airlines; provided, however, that rental rates
extended to such carriers shall not be less than the rate obtained by dividing
the total Terminal Building Area Cost by the total area of enclosed space in the
terminal building.
-53-
<PAGE> 59
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
C. Notwithstanding Section 16.02 (B) above, AUTHORITY convenants that
it will take the differing commitments and obligations of the nonsignatory
tenants into consideration in establishing nonsignatory tenant rates. At the
effective date of this Agreement, it is the AUTHORITY's intent to establish
nonsignatory rates at the lesser of the commercial compensatory rate or 1.25
times the Signatory Airlines' rate.
SECTION 16.03--FEDERAL AVIATION ACT, SECTION 308
Nothing herein contained shall be deemed to grant AIRLINE any exclusive
right or privilege within the meaning of Section 308 of the Federal Aviation Act
for the conduct of any activity on the Airport.
SECTION 16.04--SUBORDINATION TO AGREEMENTS WITH THE UNITED STATES GOVERNMENT
This Agreement is subject and subordinate to the provisions of any
agreement heretofore or hereafter made between AUTHORITY and the United States,
relative to the operation or maintenance of the Airport, the execution of which
has been required as a condition precedent to the transfer of federal rights or
property to AUTHORITY for Airport purposes, or to the expenditure of federal
funds for the improvement or development of the Airport, including the
expenditure of federal funds for the development of the Airport in accordance
with the provisions of the Federal Aviation Act of 1958, as it has been amended
from time to time. To the best of its knowledge and belief, AUTHORITY convenants
that it has no existing agreements with the United States in conflict with the
express provisions hereof.
SECTION 16.05--RULES, REGULATIONS AND ORDINANCES
A. AIRLINE shall observe and obey all Rules, Regulations and
Ordinances promulgated, from time to time during the term hereof, by AUTHORITY
governing conduct on and operations at the Airport and use of its facilities.
Copies of the Rules, Regulations and Ordinances as adopted, shall be forwarded
to AIRLINE upon request. AUTHORITY agrees that all Rules, Regulations and
Ordinances so promulgated shall not be inconsistent with the express terms of
this Agreement or any legally authorized rule or regulation of the Federal
Aviation Administration, or any other federal or state agency, which is binding
in law on AIRLINE, as the same now are or may from time to time be amended or
supplemented.
B. AIRLINE shall not violate, nor knowingly permit its agents,
contractors, or employees acting on AIRLINE's behalf to violate any such Rules,
Regulations and Ordinances.
-54-
<PAGE> 60
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
SECTION 16.06--COMPLIANCE WITH LAW
A. AIRLINE shall not use the Assigned Area or any part thereof, or
permit the same to be used by any of its employees, officers, agents,
subcontractors, invitees, or licensees for any illegal purposes and shall, at
all times during the term of this Agreement, comply with all applicable
ordinances and laws of any City, County, or State government or of the United
States Government, and of any political division or subdivision or agency,
authority, or commission thereof which may have jurisdiction to pass laws or
ordinances or to make and enforce Rules, Regulations and Ordinances with respect
to the uses hereunder or the Assigned Area.
B. At all times during the term of this Agreement, AIRLINE shall in
connection with its activities and operations at the Airport:
1. Comply with and conform to all present and future statutes
and ordinances, and regulations promulgated thereunder, of
all federal, state, and other governmental bodies of
competent jurisdiction which apply to or affect, either
directly or indirectly, the AIRLINE's activities under this
Agreement.
2. Make, at its own expense, all nonstructural improvements,
repairs, and alterations to its Preferential Use Space
(subject to prior written approval of AUTHORITY),
equipment, and personal property which are required to
comply with or conform to any of such statutes and
ordinances.
3. Be and remain an independent contractor with respect to all
installation, construction, and services performed by or on
behalf of AIRLINE hereunder.
C. AUTHORITY shall in no way be held liable or responsible for
AIRLINE's violation or non-observance of any of the aforementioned ordinances
and laws.
SECTION 16.07--GOVERNING LAWS
This Agreement and all disputes arising hereunder shall be governed by
the laws of the State of South Carolina.
SECTION 16.08--NONWAIVER OF RIGHTS
No waiver of default by either party of any of the terms, covenants, and
conditions hereof to be performed, kept, and observed by the other party shall
be construed as, or shall
-55-
<PAGE> 61
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
operate as, a waiver of any subsequent default of any of the terms, covenants,
or conditions herein contained, to be performed, kept, and observed by the other
party.
SECTION 16.09--AGENT FOR SERVICE OF PROCESS
It is expressly understood and agreed that if AIRLINE is not a resident
of the State of South Carolina, or is an association or partnership without a
member or partner resident of said State, or is a foreign corporation, then in
any such event AIRLINE shall appoint an agent for the purpose of service of
process in any court action between it and AUTHORITY arising out of or based
upon this Agreement; otherwise, if AIRLINE does not notify AUTHORITY of said
appointment within thirty (30) days of execution of this Agreement, AIRLINE does
hereby designate the Secretary of State, State of South Carolina its agent for
the purpose of service of process in any court action between it and AUTHORITY
arising out of or based upon this Agreement, and the service shall be made as
provided by the laws of the State of South Carolina for service upon a
non-resident. It is further expressly agreed, covenanted, and stipulated that,
if for any reason, service of such process is not possible, and as an
alternative method of service of process, AIRLINE may be personally served with
such process out of this State by the registered mailing of such complaint and
process to AIRLINE at the address set out hereafter in this Agreement. Any such
service out of this State shall constitute valid service upon AIRLINE as of the
date of mailing, and AIRLINE shall have thirty (30) days from date of mailing to
respond thereto. It is further expressly agreed that AIRLINE is amenable to and
hereby agrees to the process so served, submits to the jurisdiction, and waives
any and all obligations and protest thereto, any laws to the contrary
notwithstanding.
SECTION 16.10--WAIVER OF CLAIMS
AIRLINE hereby waives any claim against AUTHORITY, and its officers, or
employees for loss of anticipated profits caused by any suit or proceedings
directly or indirectly attacking the validity of this Agreement or any part
thereof, or by any judgment or award in any suit proceeding declaring this
Agreement null, void, or voidable, or delaying the same or any part hereof, from
being carried out.
SECTION 16.11--NOTICES
A. Notices required herein shall be given by registered or certified
mail by depositing the same in the United States Mail in the continental United
States, postage prepaid. Any such notice so mailed shall be presumed to have
been received by the addressee 72 hours after deposit of same in the mail or
upon actual receipt if sent by courier or overnight delivery. Either party shall
have the right, by giving written notice to the other, to change the address at
-56-
<PAGE> 62
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
which its notices are to be received. Until any such change is made, notices
shall be delivered as follows:
1) AUTHORITY:
Director of Airports
Charleston County Aviation Authority
Charleston International Airport
5500 International Boulevard, #101
Charleston, South Carolina 29418-6911
2) AIRLINE:
PRESIDENT & VICE PRESIDENT, AIRLINE SERVICES
--------------------------------------------
AIR SOUTH AIRLINES, INC.
--------------------------------------------
2625 AIRPORT BLVD
--------------------------------------------
WEST COLUMBIA, SC 29170
--------------------------------------------
FAX (803) 822-4132
--------------------------------------------
B. If notice is given in any other Manner or at any other place, it
will also be given at the place and in the manner specified above.
SECTION 16.12--HEADINGS
The headings of the several articles and sections of this Agreement are
inserted only as a matter of convenience and for reference and in no way define,
limit, or describe the scope or intent of any provisions of this Agreement and
shall not be construed to affect in any manner the terms and provisions hereof
or the interpretation or construction hereof.
SECTION 16.13--SEVERABILITY
If one or more clauses, sections, or provision of this Agreement shall be
held to be unlawful, invalid, or unenforceable, it is agreed that the remainder
of the Agreement shall not be affected thereby.
SECTION 16.14--INCORPORATION OF EXHIBITS
All exhibits referred to in this Agreement are intended to be and hereby
are a part of this Agreement.
-57-
<PAGE> 63
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
SECTION 16.15--INCORPORATION OF REQUIRED PROVISIONS
The parties incorporate herein by this reference all provisions lawfully
required to be contained herein by any governmental body or agency.
SECTION 16.16--CONSENT OF THE PARTIES
Where this Agreement requires the consent of one or more parties, the
AIRLINE and the AUTHORITY agree that such consent shall not be unreasonably
withheld.
SECTION 16.17--NONLIABILITY OF AGENTS AND EMPLOYEES
No member, officer, agent, director, or employee of AUTHORITY or AIRLINE
shall be charged personally or held contractually liable by or to the other
party under term or provision of this Agreement or because of any breach thereof
or because of its or their execution or attempted execution.
SECTION 16.18--SUCCESSORS AND ASSIGNS BOUND
This Agreement shall be binding upon and inure to the benefit of the
successors and assigns of the parties hereto.
SECTION 16.19--TIME OF ESSENCE
Time is expressed to be of the essence of this Agreement.
SECTION 16.20--PRUDENT OPERATION
AUTHORITY hereby covenants to manage the Airport System in a prudent and
reasonable manner.
SECTION 16.21--QUIET ENJOYMENT
A. AUTHORITY agrees that, so long as AIRLINE's payment of rentals,
fees and charges is timely and AIRLINE keeps all covenants and agreements
contained herein, AIRLINE shall peaceably have and enjoy its Assigned Area and
all rights, privileges and
-58-
<PAGE> 64
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
licenses of the Airport, its appurtenances and facilities granted herein,
subject to the terms and conditions herein contained.
B. Consistent with the nature of AIRLINE's business, AIRLINE agrees
that the occupancy of its Assigned Area will be lawful and quiet and that it
will not knowingly use or permit the use of Assigned Area in any way that would
violate the terms of this Agreement, create a nuisance, or disturb other tenants
or the general public. AIRLINE shall be responsible for the activity of its
officers, employees, agents, and others under its control with respect to this
provision.
SECTION 16.22--ENTIRE AGREEMENT
This Agreement, together with all exhibits attached hereto, constitutes
the entire Agreement between the parties hereto, and all other representations
or statements heretofore made, verbal or written, are merged herein, and this
Agreement may be amended only in writing, and executed by duly authorized
representatives of the parties hereto.
END OF ARTICLE 16
-59-
<PAGE> 65
CHARLESTON COUP AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ATTEST: CHARLESTON COUNTY AIRPORT DISTRICT
CHARLESTON COUNTY AVIATION AUTHORITY
/s/ Elaine Wick By: /s/ Waring S. Howe, Jr.
- - - ----------------------- -----------------------------
Waring S. Howe, Jr., Chairman
/s/ Mary Carol Campbell By: /s/ Jerry D. Gambrell
- - - ----------------------- -----------------------------
Jerry D. Gambrell, Secretary
AIRLINE: AIR SOUTH AIRLINES, INC.
Dennis B. Crosby
/s/ By: /s/ Dennis B. Crosby
- - - ----------------------- -----------------------------
Title: Vice President
--------------------------
-60-
<PAGE> 66
CERTIFICATE OF SECRETARY OF
AIR SOUTH AIRLINES, INC.
I, David Y. Monteith hereby certify that, (1) I am the duly authorized Secretary
of Air South Airlines, Inc., a Delaware Corporation, charged with keeping the
records and seal of said corporation, (2) that the President or any Vice
president is authorize to execute contracts, performance bonds, labor and
materials bonds on behalf of the Corporation, and (3) that Dennis B. Crosby is a
Vice President of the Corporation.
WITNESS by my hand as Secretary, and the seal of the Corporation this 10th day
of
January, 1997.
/s/ David Y. Monteith (L.S.)
----------------------------
David Y. Monteith
Sworn to before me this 10th
day of January, 1997.
/s/
- - - --------------------------------
Notary Public for South Carolina
My Commission Expires: 11-16-98
-61-
<PAGE> 67
CHARLESTON COUNTY AVIATION AUTHORITY
SCHEDULED AIRLINE OPERATING AGREEMENT
AND TERMINAL BUILDING LEASE
CHARLESTON COUNTY AVIATION AUTHORITY
OPINION OF ATTORNEY
This is to certify that I have examined the attached Contract Documents,
that after examination I am of the opinion that such Documents appear to conform
to the Laws of the State of South Carolina, that the execution of the Contract
Documents appear to be in due and proper form, and that the representatives of
the respective contracting parties appear to have full power and authority to
execute such Contract and Bonds on behalf of the respective contracting parties
and that it appears the foregoing agreements constitute valid and binding
obligations on such parties.
/s/ Diane Schafer Goodstein
------------------------------
DIANE SCHAFER GOODSTEIN
Attorney for Charleston County
Aviation Authority
Charleston, South Carolina
This 19 day of March 1997.
-62-
<PAGE> 68
[MAP]
<PAGE> 69
EXHIBIT B - AIR SOUTH
PREMISES IN TERMINAL BUILDING
[MAP OF CHARLESTON INTERNATIONAL AIRPORT
CHARLESTON, SOUTH CAROLINA]
<PAGE> 70
INTERIM EXHIBIT B - AIR SOUTH
PREMISES IN NEW TERMINAL BUILDING FOLLOWING DBO
[MAP OF CHARLESTON INTERNATIONAL AIRPORT
CHARLESTON, SOUTH CAROLINA]
<PAGE> 71
EXHIBIT C
PREFERENTIAL USE GATE ASSIGNMENT PLAN
[MAP OF CHARLESTON INTERNATIONAL AIRPORT
CHARLESTON, SOUTH CAROLINA]
<PAGE> 72
EXHIBIT D
EXAMPLE OF
CALCULATION OF AIRLINE RENTALS, FEES & CHARGES
FOR FISCAL YEAR ENDING JUNE 30, 1997
<TABLE>
<CAPTION>
FY-97
BUDGET
------
<S> <C>
TERMINAL BUILDING AREA RENTALS & CHARGES
- - - ----------------------------------------
Terminal Building Area Operations and
Maintenance Expenses $4,426,214
Revenue Bond Debt Service Allocable to
Terminal Building Area 2,191,018
Deposit to Equipment & Capital Outlay Fund 88,800
Amortization of Authority-Funded
Improvements 138,623
General Obligation Bond Debt Service
Allocable to Terminal Building Area 866,357
----------
Total Terminal Building Area Cost 7,711,012
Less: (1) Designated Revenue to be Credited
Non-Military Concession Fees 2,739,515
Other Terminal Building Rentals 160,794
Telecommunications System Charge 55,500
Allocable Interest Income 96,000
----------
3,051,809
(2) Military Charter Facilities
Revenue Credit 1,048,398
----------
Net Terminal Building Area Cost 3,610,805
Signatory Airline Leased Space
(square feet) 66,551
Average Rental Rate (per square foot) 54.26
Signatory Airline Rental Requirement 3,610,805
==========
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
FY-97
BUDGET
------
<S> <C>
APRON FEES
- - - ----------
Apron & Taxiway Area Operation and
Maintenance Expenses $ 76,646
Revenue Bond Debt Service Allocable to
Apron & Taxiway Area 0
Deposit to Equipment & Capital Outlay Fund 0
Amortization of Authority-Funded
Improvements 126,505
General Obligation Bond Debt Service
Allocable to Apron & Taxiway Area 160,227
----------
Total Apron & Taxiway Area Cost 363,378
Less: (1) Apron & Taxiway Area Revenues
from Sources Other than Signatory
Airline & MAC Charter Carriers 5,000
(2) Apron & Taxiway Revenues from
AMC Charter Carriers 4,000
----------
Net Apron & Taxiway Area Cost 354,378
Fixed Apron Fee (50%) 177,189
Number of Preferentially Assigned Gates 8
----------
Fixed Apron Fee Rate (per gate per year) 22,149
Fixed Apron Fee Rate (per gate per month) 1,846
==========
Variable Apron Fee (50%) 177,189
Takeoff Weights (1,000-pound units):
Signatory Airlines 1,500,000
Variable Apron Fee Rate (per 1,000 pounds) $ 0.12
==========
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
FY-97
BUDGET
------
<S> <C>
LANDING FEES
- - - ------------
Landing Fee Rate (per 1,000-pound unit of
takeoff weight) $ 0.20
Signatory Airline Takeoff Weight 1,500,000
----------
Signatory Airline Landing Fees 300,000
==========
MILITARY CHARTER FACILITIES REVENUE CREDIT
Terminal Building Area Cost $7,711,012
Divided by Total Enclosed Building Area
(square feet) 278,162
Rate per square foot 27.72
Military Charter Facilities Space 37,821
Military Charter Facilities Revenue Credit $1,048,398
==========
</TABLE>
<PAGE> 75
EXHIBIT "E"
MAINTENANCE RESPONSIBILITY CHART
TERMINAL BUILDING
CHARLESTON INTERNATIONL AIRPORT
<TABLE>
<CAPTION>
====================================================================================================================================
MECHANICAL/
PLUMBING ELECTRICAL
====================================================================================================================================
Sanitary Systems Storm Sewer Fixture Maintenance HVAC System Electrical System Fixture Relamping
<S> <C> <C> <C> <C> <C>
- - - A A L
- - - A A L
- - - A A A
A A L A A L
- - - A A A
A A L A A L
- - - A A L
- - - A A L
- - - A A A
- - - A A A
- - - A A A
- - - - A A
- - - - A A
<CAPTION>
====================================================================================================================================
EQUIPMENT PAVEMENT
====================================================================================================================================
Tenant Equipment Authority Equipment Snow and Ice Removal Grease/Oil Removal Maintenance and Repair Striping
<S> <C> <C> <C> <C> <C>
L A - - - -
L A - - - -
- A - - - -
L A - - - -
L A - - - -
L A - - - -
L A - - - -
L A - - - -
- A - - - -
- A - - - -
- A - - - -
L - L L A L
L A - - A -
<CAPTION>
====================================================================================================================================
JANITORIAL
====================================================================================================================================
Interior Cleaning Interior Window Washing Exterior Window Washing Garbarge to Central Location Exterior Cleaning
<S> <C> <C> <C> <C>
L L A L A
L L A L A
A - A A A
L L A L A
A A A A A
L L A L A
L L A L A
L L A L A
A A A A A
A A A A A
A A - A -
- - - - L
A A A A A
</TABLE>
<PAGE> 1
EXHIBIT 10.37(a)
AIRCRAFT LEASE AGREEMENT
Dated as of
February 1, 1997
between
MIMI LEASING CORP.
as
Lessor
and
AIR SOUTH AIRLINES, INC.
as
Lessee
in respect of One Boeing Model 737-247 Aircraft
Serial Number 19607,
Federal Aviation Administration
Registration No. N4510W
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
SECTION PAGE
- - - ------- ----
<S> <C>
1. INTERPRETATION ............................................................. 1
1.1 DEFINITIONS ........................................................... 1
1.2 CONSTRUCTION ......................................................... 14
2. REPRESENTATIONS AND WARRANTIES ............................................ 15
2.1 Lessee's Representations and Warranties .............................. 15
2.2 Lessee's Further Representations and Warranties ...................... 17
2.3 Survival.............................................................. 18
2.4 Lessor's Representations and Warranties .............................. 18
3. CONDITIONS PRECEDENT ...................................................... 20
3.1 Lessor's Conditions Precedent ........................................ 20
3.2 Further Conditions Precedent ......................................... 21
3.3 Waiver ............................................................... 22
4. COMMENCEMENT .............................................................. 22
4.1 Leasing .............................................................. 22
4.2 Acceptance and Delivery ...............................................22
4.3 Not Used ............................................................. 22
4.4 Licenses ............................................................. 22
5. PAYMENTS .................................................................. 23
5.1 Aircraft Deposit...................................................... 23
5.2 Rental Periods ....................................................... 23
5.3 Rent.................................................................. 23
5.4 Maintenance Reserves.................................................. 23
5.5 Payments ............................................................. 24
5.6 Not Used ............................................................. 24
5.7 Taxation.............................................................. 24
5.8 Information .......................................................... 24
5.9 Taxation of Indemnity Payments ....................................... 25
5.10 Payment Date; Default Interest ....................................... 25
5.11 Contest............................................................... 26
5.12 Absolute and Conditional Obligations of Lessee ....................... 26
5.13 Security ............................................................. 27
6. MANUFACTURER'S WARRANTIES ................................................. 28
6.1 Assignment ........................................................... 28
6.2 Proceeds ............................................................. 28
6.3 Parts ................................................................ 29
6.4 Agreement............................................................. 29
7. LESSOR'S COVENANTS ........................................................ 29
7.1 Quiet Enjoyment ...................................................... 29
7.2 Maintenance Contribution ............................................. 29
7.3 Lessor Obligations Following Expiration Date ......................... 30
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C>
8. LESSEE'S COVENANTS ....................................................... 31
8.1 Duration ............................................................ 31
8.2 Information ......................................................... 31
8.3 Lawful and Safe Operation ........................................... 32
8.4 Other Payments....................................................... 34
8.5 Sub-Leasing ......................................................... 35
8.6 Inspection .......................................................... 35
8.7 Ownership; Property Interests; Related Matters ...................... 35
8.8 General ............................................................. 37
8.9 Records ............................................................. 39
8.10 Protection .......................................................... 39
8.11 Maintenance and Repair ...............................................40
8.12 Removal of Engines and Parts ........................................ 42
8.13 Installation of Engines and Parts ................................... 42
8.14 Non-Installed Engines and Parts ..................................... 43
8.15 Pooling of Engines and Parts ........................................ 44
8.16 Equipment Changes ................................................... 44
8.17 Title on an Equipment Change ........................................ 45
8.18 Third Party ......................................................... 45
9. INSURANCE ................................................................ 45
9.1 Insurance ........................................................... 45
9.2 Requirements ........................................................ 46
9.3 Change .............................................................. 46
9.4 Insurance Covenants ................................................. 46
9.5 Failure to Insure ................................................... 47
9.6 Continuing Indemnity ................................................ 48
9.7 Application of Insurance Proceeds ................................... 48
10. INDEMNITY ................................................................ 49
10.1 General ............................................................. 49
10.2 Duration ............................................................ 49
10.3 Subrogation ......................................................... 49
10.4 Notice and Cooperation .............................................. 50
11. EVENTS OF LOSS ........................................................... 50
11.1 Events of Loss ...................................................... 50
11.2 Requisition ......................................................... 51
12. RETURN OF AIRCRAFT........................................................ 52
12.1 Return .............................................................. 52
12.2 Final Inspection .................................................... 53
12.3 Non-Compliance ...................................................... 53
12.4 Not Used ............................................................ 54
12.5 Acknowledgement ..................................................... 53
12.6 Maintenance Program ................................................. 53
12.7 Not Used ............................................................ 54
12.8 Aircraft Storage .................................................... 54
13. DEFAULT .................................................................. 54
13.1 Events of Default ................................................... 54
13.2 Rights .............................................................. 57
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<S> <C>
13.3 Deregistration ..................................................... 58
13.4 Default Payments ................................................... 58
14. ASSIGNMENT .............................................................. 59
15. ILLEGALITY .............................................................. 60
16. MISCELLANEOUS ........................................................... 60
16.1 Waivers, Remedies Cumulative ....................................... 60
16.2 Delegation ......................................................... 60
16.3 Appropriation ...................................................... 60
16.4 NOT USED............................................................ 61
16.5 NOT USED............................................................ 61
16.6 Set-off ............................................................ 61
16.7 Severability ....................................................... 61
16.8 Remedy ............................................................. 61
16.9 Expenses ........................................................... 61
16.10 Time of Essence ................................................... 62
16.11 Notices ........................................................... 62
16.12 Law and Jurisdiction .............................................. 62
16.13 Entire Agreement .................................................. 63
16.14 Indemnities ....................................................... 63
16.15 Counterparts ...................................................... 64
17. DISCLAIMERS AND WAIVERS ................................................. 64
17.1 Exclusion .......................................................... 64
17.2 Waiver ............................................................. 64
17.3 Confirmation ....................................................... 64
18. TRUE LEASE ...............................................................65
</TABLE>
- iii -
<PAGE> 5
THIS AIRCRAFT LEASE AGREEMENT (this "Agreement") is made as of the 1st
day of February, 1997 between MIMI LEASING CORP., a corporation incorporated
under the laws of the State of Iowa whose principal office is at 600 Sunset
Ridge, Dubuque, Iowa 52003, its successors and assigns ("Lessor"), and AIR SOUTH
AIRLINES, INC., a company incorporated under the laws of the State of Delaware
whose chief executive office is at 1800 St. Julian Place, Columbia, South
Carolina 29204 ("Lessee")
WHEREAS, Lessor and Lessee are parties to a certain Aircraft Lease No. 1
dated as of October 31, 1994, with Lease Schedule to Aircraft Lease No. 1 and
Delivery and Acceptance Certificate, dated November 8, 1994, attached, recorded
by the FAA on February 7, 1995, as conveyance number AA51144, as amended through
the date hereof (the "Original Lease") relative to the lease by Lessor to Lessee
of the Aircraft (as defined herein); and
WHEREAS, notwithstanding the terms of the Original Lease, Lessee has
requested that Lessor, at its expense, engage AAR Oklahoma of Oklahoma City,
Oklahoma and other third party vendors to improve and upgrade the Aircraft by
performing a certain mutually agreed upon work scope (the "Work") in respect of
the Aircraft; and
WHEREAS, subject to the condition that Lessee would enter into a new
lease for the Aircraft, Lessor agreed to engage such parties to perform the Work
in respect of the Aircraft; and
WHEREAS, Lessor and Lessee now desire to enter into this Agreement to
satisfy such condition.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements of the parties herein set forth, Lessor and Lessee agree as follows:
1. INTERPRETATION
1.1 DEFINITIONS
In this Agreement, the following terms have the meanings set forth below:
ACCEPTANCE LOCATION Oklahoma City, Oklahoma
AGREED MAINTENANCE
PERFORMER Lessee (up to and including B Check) or any
FAA-certified maintenance/ overhaul facility (for C
Check and higher) or any other person agreed to from
time to time in writing by
- 1 -
<PAGE> 6
Lessor (such agreement not to be
unreasonably withheld).
AGREED MAINTENANCE Lessee's FAA-approved Continuous
PROGRAM Airworthiness Maintenance Program and
General Maintenance Manual, as amended from
time to time with the prior written
agreement of Lessor (such agreement not to
be unreasonably withheld); provided, that
such agreement of Lessor shall not be
required with respect to amendments to the
Agreed Maintenance Program which are
required by law, including any rule,
regulation, order or directive of the FAA or
other Government Entity having jurisdiction
over the maintenance and operation of the
Aircraft.
AGREED VALUE Has the meaning specified in Letter
Agreement No. 1.
AIR AUTHORITY The FAA.
AIRCRAFT The aircraft described in Part 1 of Schedule
1 (which term includes, where the context
permits, a separate reference to all
Engines, Parts and Aircraft Documents).
AIRCRAFT DEPOSIT The amount payable pursuant to Section 5.1.
AIRCRAFT DOCUMENTS The documents, data and records identified
in Part 2 of Schedule 1 (all of which are
presently in the possession of Lessee) and
all additions, renewals, revisions and
replacements from time to time made in
accordance with this Agreement.
AIRFRAME The Aircraft, excluding the Engines and
Aircraft Documents.
APU The auxiliary power unit installed on the
Aircraft on the Delivery Date and any
replacement auxiliary power unit installed
in accordance with this Agreement.
- 2 -
<PAGE> 7
BANKS Such financial institution(s) which from
time to time finance(s) the Aircraft for
Lessor and/or for whose benefit security
over, or rights relating to, the Aircraft
and/or this Agreement is granted by Lessor.
BOEING The Boeing Company, a Delaware corporation
with its principal office in Seattle,
Washington.
BUSINESS DAY A day (other than a Saturday or Sunday or a
legal holiday) on which business of the
nature required by this Agreement is carried
out in the States of Iowa and South Carolina
or where used in relation to payments on
which banks are open for banking business in
Dubuque, Iowa and Columbia, South Carolina.
CERTIFICATEDR Any corporation (except the United States
CARRIER Government) domiciled in the United States
of America and holding a Certificate of
Public Convenience and Necessity issued
under 49 U.S.C. Section 41102 by the
Department of Transportation or any
predecessor or successor agency thereto and
an Air Carrier Certificate issued by the FAA
under 49 U.S.C. Section 44705, or, in the
event such Certificates shall no longer be
issued, any corporation (except the United
States Government) domiciled in the United
States of America and legally engaged in the
business of transporting for hire passengers
or cargo by air predominantly to, from or
between points within the United States of
America, and, in either event, operating
commercial jet aircraft, which also is
certificated so as to fall within the
purview of Section 1110 of Title 11 of the
United States Code or any similar statute.
CIVIL RESERVE AIR The Civil Reserve Air Fleet Program
FLEET PROGRAM currently administered by the United States
Air Force Air Mobility
- 3 -
<PAGE> 8
Command pursuant to Sections 951 et seq. of
Title 10 of the United States Code, or any
substantially similar program.
COLD SECTION The completion of the following tasks with
REFURBISHMENT respect the an Engine: completely unstack
both high and low compressors and accomplish
complete visual inspection; de-blade disks
as necessary; accomplish visual inspections
of all disks; measure to assure all snap
diameters on disks are within limits;
inspect blades for proper chord dimensions
and cracking; repair or replace blades below
minimums; inspect and repair stators as
necessary; blade up disks using new lock
plates; assemble compressor rotors; balance
both rotors; and install rotors in such
Engine.
CYCLE One take-off and landing of the Aircraft.
DAMAGE NOTIFICATION Has the meaning set forth in Letter
THRESHOLD Agreement No. 1.
DEFAULT Any Event of Default and any event or
condition which with the giving of notice or
lapse of time would constitute an Event of
Default.
DELIVERY DATE The date hereof.
DELIVERY LOCATION Oklahoma City, Oklahoma.
DOLLARS AND $ The lawful currency of the United States of
America.
ENGINE Whether or not installed on the Aircraft:
(a) each engine of the manufacture
and model specified in Part 1 of
Schedule 1 which Lessor
constructively delivers to
Lessee with the Aircraft on the
Delivery Date, such
- 4 -
<PAGE> 9
engines being described as to
serial numbers on the
certificate of acceptance to be
executed by Lessee upon delivery
of the Aircraft; or
(b) any engine which has replaced
that engine, title to which has
passed to Lessor in accordance
with this Agreement;
and in each case includes all
modules and Parts from time to
time belonging to or installed
in that engine but excludes any
properly replaced engine, title to
which has passed to Lessee
pursuant to this Agreement.
EVENT OF DEFAULT An event or condition specified in Section
13.1.
EVENT OF LOSS With respect to the Aircraft, Airframe or
any Engine, any of the following events:
(a) the actual or constructive total
loss (including any damage which
results in an insurance
settlement on the basis of a
total loss, or requisition for
use or hire which results in an
insurance settlement on the
basis of a total loss); or
(b) it being destroyed, damaged
beyond repair or permanently
rendered unfit for normal use
for any reason whatsoever; or
(c) the requisition of title, or
other compulsory acquisition,
capture, seizure, deprivation,
confiscation or detention for
any reason by the government of
the State of Registration or
other competent authority
(whether de jure or de facto)
for a period in excess of 60
- 5 -
<PAGE> 10
days or such shorter period
ending on the date which an
insurance settlement on the
basis of total loss shall occur,
but excluding requisition for
use or hire not involving
requisition of title; or
(d) the hijacking, theft,
condemnation, confiscation,
seizure or requisition for use
or hire for a period in excess
of 60 days, or such shorter
period ending on the date on
which an insurance settlement on
the basis of total loss shall
occur.
An Event of Loss with respect to the
Aircraft shall be deemed to have occurred if
an Event of Loss has occurred with respect
to the Airframe.
EXCUSABLE DELAY With respect to delivery of the Aircraft,
delay or non-performance due to or arising
out of acts of God or public enemy, civil
war, insurrection or riot, fire, flood,
explosion, earthquake, accident, epidemic,
quarantine restriction, any act of
government, governmental priority,
allocation, regulation or order affecting
directly or indirectly, the Aircraft, any
vendor, Lessor or any materials or
facilities which are necessary for the
delivery of the Aircraft in accordance with,
and in the condition required by this
Agreement, strike or labor dispute causing
cessation, slowdown or interruption of work
which are necessary for the delivery of the
Aircraft in accordance with, and in the
condition required by this Agreement,
inability after due and timely diligence to
procure equipment, data or materials which
are necessary for the delivery of the
Aircraft in accordance with, and
- 6 -
<PAGE> 11
in the condition required by this Agreement
from manufacturers, suppliers, any existing
owner, seller or lessee in a timely manner,
damage to the Aircraft, destruction or loss
of the Aircraft, or any other cause to the
extent that such cause is beyond the control
of Lessor.
EXPIRATION DATE Subject to Section 12.l(b), the day
preceding the numerically corresponding day
36 months after the Delivery Date or, if
earlier, the date on which:
(a) the Aircraft has been redelivered
in accordance with this Agreement;
or
(b) Lessor receives the Agreed Value
following an Event of Loss
involving the Airframe.
FAA The Federal Aviation Administration of the
United States of America and any successor
agency thereof.
FEDERAL AVIATION ACT 49 U.S.C. Subtitle VII, as amended, or any
similar legislation of the United States of
America enacted in substitution or
replacement thereof.
FINANCING STATEMENTS Uniform Commercial Code Financing Statements
in respect of this Agreement and the
collateral described therein prepared in a
form acceptable for filing with the
applicable Government Entities in the
Habitual Base, the State in which the chief
executive office (as that term is defined in
Article 9 of the Uniform Commercial Code as
in effect in the State of South Carolina)
and such other jurisdiction as Lessor shall
reasonably require.
FLIGHT HOUR Each hour or part thereof (rounded to one
decimal place) elapsing from the moment the
wheels of the Aircraft leave the ground on
take
- 7 -
<PAGE> 12
off until the wheels of the Aircraft next
touch the ground.
GOVERNING LAW The laws of the State of Iowa.
GOVERNMENT ENTITY Any of the following:
(a) any national government, state
government, political subdivision
of either thereof, or local
jurisdiction therein;
(b) any instrumentality, board,
commission, court or agency of
any thereof, however
constituted; and
(c) any association, organization,
or institution of which any of
the above is a member or to
whose jurisdiction any thereof
is subject or in whose
activities any of the above is a
participant.
HABITUAL BASE The State of South Carolina, or, subject to
the prior written consent of Lessor, any
other state, country or countries in which
the Aircraft is for the time being
habitually based.
HOT SECTION The complete visual inspection and repair as
REFURBISHMENT necessary of the combustion section of an
Engine. In conductine such inspection and
repair, the engine shop must completely
unstack the high pressure turbine and
accomplish complete visual inspection;
de-blade disks as necessary; accomplish
visual inspections of ail disks; measure to
assure all snap diameters on disks are
within limits; inspect blades for proper
chord dimensions and cracking; repair or
replace blades below minimums; inspect and
repair stators as necessary; blade up disks
using new lock plates; assemble compressor
rotors, balance both
- 8 -
<PAGE> 13
rotors; and install rotors in such Engine.
INDEMNITEES Each of Lessor and Banks including any of
their respective successors and assigns,
shareholders, subsidiaries, affiliates,
partners, contractors, directors, officers,
servants, agents and employees.
LANDING GEAR The landing gear assembly of the Aircraft
excluding any rotable components.
LEASE Means this agreement as is may be amended
from time to time in accordance with its
terms.
LESSOR LIEN Any of the following:
(a) any security interest whatsoever
from time to time created by or
through Lessor or its affiliates
in connection with the financing
of the Aircraft;
(b) any other security interest in
respect of the Aircraft which
results from acts or omissions of
or claims against Lessor or any
affiliate of Lessor not related to
the transactions contemplated by
or permitted under this Agreement;
(c) claims against Lessor or any
affiliate arising out of the
voluntary transfers of all or any
part of its interest in the
Aircraft, other than a transfer
pursuant to Sections 11 and 13
hereof; and
(d) liens in respect of the Aircraft
for Lessor Taxes.
LESSOR TAXES Taxes:
(a) imposed as a result of activities
of Lessor or any affiliate in the
jurisdiction
- 9 -
<PAGE> 14
imposing the liability unrelated to
Lessor's (or an affiliate's)
dealings with Lessee with respect
to the Aircraft or to the
transactions contemplated by this
Agreement or the operation of the
Aircraft by Lessee; or
(b) imposed on or measured by the gross
revenues or net income, profits,
capital, franchises, net worth or
gains of Lessor or an affiliate by
any Government Entity; or
(c) imposed with respect to (i) any
period prior to the Delivery Date,
(ii) any event occurring prior to
the Delivery Date (other than the
execution of this Agreement), or
(iii) any period commencing or
event occurring after the
Expiration Date; or
(d) which are penalties, surcharges,
fines or interest (i) which relate
to Lessor Taxes or (ii) which are
imposed as a direct result of (A)
the failure of Lessor to timely and
properly file a tax return or to
pay any Taxes which are required to
be filed or paid by Lessor; or (B)
the failure by Lessor to timely and
properly furnish to Lessee any
information, document or signature
required by Lessee in order for
Lessee to timely and properly file
a tax return or to pay any Taxes on
behalf of Lessor which Lessee is
obligated to do hereunder; or
(e) imposed on Lessor or an affiliate
as a direct result of an
assignment or disposition by
Lessor of the Aircraft, an Engine,
or any
- 10 -
<PAGE> 15
part of either thereof, any
interest in or with respect to the
Aircraft, an Engine or any part of
either thereof, or any interest in
or with respect to this Agreement
or the Rent; or
(f) imposed on, resulting from, or
which would not have occurred but
for a Lessor Lien; or
(g) imposed against a transferee of
Lessor (or any subsequent
transferee) to the extent of the
excess of such Taxes over the
amount of such Taxes which would
have been imposed had there not
been a transfer by Lessor of any
interest of Lessor in the
Aircraft, an Engine or the Lease;
or
(h) which arise out of or are caused
by (x) the gross negligence, fraud
or willful misconduct of Lessor or
any affiliate thereof or (y) the
breach or inaccuracy of the repre-
sentation of Lessor contained in
Section 2.4(a); or
(i) imposed by section 4975 of the
Internal Revenue Code of 1986 (or
any successor provision thereto);
or
(j) which are United States with-
holding taxes imposed on payments
to a foreign person.
LETTER AGREEMENT
NO. 1 Letter Agreement of even date herewith
between Lessor and Lessee in respect of the
Aircraft, the terms of which constitute an
integral part of this Agreement.
LETTER AGREEMENT
NO. 2 Letter Agreement of even date herewith
between Lessor and Lessee in respect of the
Aircraft, the
- 11 -
<PAGE> 16
terms of which, subject to the conditions
set forth therein, constitute an integral
part of this Agreement.
LIEN Any mortgage, charge, pledge, lien,
assignment, hypothecation, right of set off
or any agreement or arrangement having the
effect of creating a security interest other
than a Permitted Lien, or any agreement to
create the foregoing other than a Permitted
Lien.
MAINTENANCE RESERVES All amounts payable under section 5.4.
MAJOR CHECKS Any C-Check, multiple C-Check, or heavy
maintenance visit or segment thereof
suggested for commercial aircraft of the
same model as the Aircraft by its
manufacturer (however denominated) as set
out in the Agreed Maintenance Program.
MANUFACTURER Boeing.
MINIMUM LIABILITY
COVERAGE Has the meaning set forth in Letter
Agreement No. 1.
NEW EXPIRATION DATE Has the meaning set forth in Section
12.1(b).
OTHER AGREEMENTS Any agreement (other than this agreement)
made or to be made between Lessor (or an
affiliate or subsidiary of Lessor) and
lessee (or an affiliate or Subsidiary of
Lessee).
PART Whether or not installed on the Aircraft:
(a) any component, furnishing or
equipment (other than a complete
Engine) furnished with the
Aircraft on the Delivery Date; and
(b) any other component, furnishing or
equipment (other
- 12 -
<PAGE> 17
than a complete engine) title to
which has passed to Lessor
pursuant to this Agreement;
but excludes any such items, title to which
has passed to Lessee pursuant to this
Agreement.
PERMITTED LIEN Has the meaning specified in Section 8.7(e)
hereof.
PERSON Any individual person, corporation,
partnership, limited liability company or
partnership, firm, joint stock company,
joint venture, trust, estate, unincorporated
organization, association, Government
Entity, or organization or association of
which any of the above is a member or a
participant.
PRIME RATE The rate of interest most recently announced
by Mercantile Bank of Dubuque, Iowa, as its
prime rate, as in effect from time to time.
REDELIVERY LOCATION Lessee's principal maintenance facility, or
such other location within the continental
United States, as the parties may agree.
RENT All amounts payable pursuant to section 5.3.
RENTAL PERIOD Each calendar month (or portion
thereof) in accordance with section 5.2.
RENT DATE The Delivery Date and the first day of
each calendar month thereafter.
STAGE 3 REQUIREMENTS Has the meaning specified in Section 5.12(c)
hereof.
STATE OF INCORPORATION The State of Delaware.
STATE OF REGISTRATION The United States of America.
SUBSIDIARY (a) in relation to any reference to
financial statements, any company
whose accounts are consolidated
with the accounts
- 13 -
<PAGE> 18
of Lessee in accordance with
United States accounting
principles generally accepted
under accounting standards in the
United States; and
(b) for any other purpose an entity
from time to time:
(i) of which another has
direct or indirect
control or owns directly
or indirectly more than
fifty (50) percent of
the voting share
capital; or
(ii) which is a direct or
indirect subsidiary of
another under the laws
of the jurisdiction of
its incorporation.
TAXES Taxes, duties and the like of all kinds and
any other amount corresponding to any
taxation, together with any penalties,
fines, surcharge or interest thereon, which
are imposed by any Government Entity or
other competent authority having power to
collect public charges.
TERM The period commencing on February 1, 1997
and ending on the Expiration Date.
WORK Has the meaning specified in the recitals
and more particularly described in a certain
letter agreement dated October 28, 1996
between Lessor and Lessee.
1.2 CONSTRUCTION
(a) In this Agreement, unless a contrary intention is
expressly stated, a reference to:
(i) each of "Lessor" or "Lessee" or any other person
includes without prejudice to the provisions of this Agreement any successor in
title to such Person and any permitted assignee;
- 14 -
<PAGE> 19
(ii) words importing the plural shall include the
singular and vice versa;
(iii) any document shall include that document as amended,
modified, novated or supplemented;
(iv) a law [A] includes any statute, decree,
constitution, regulation, order, judgment or directive of any Government
Entity; [B] includes any treaty, pact, compact or other agreement to
which any Government Entity is a signatory or party; [C] includes any
judicial or administrative interpretation or application thereof and (4)
is a reference to that provision as amended, substituted or re-enacted;
(v) a Section or a Schedule is a reference to a section
of or a schedule to this Agreement; and
(b) The headings in this Agreement are for convenience only
and shall not be considered part of any Section for purposes of construing this
Agreement.
2. REPRESENTATIONS AND WARRANTIES
2.1 LESSEE'S REPRESENTATIONS AND WARRANTIES: Lessee represents and
warrants to Lessor that:
(a) STATUS. Lessee is a corporation duly incorporated and
validly existing in good standing under the laws of the State of Incorporation
and has the corporate power to own its assets and carry on its business as it is
being conducted and is the holder of all necessary licenses required in
connection therewith and with the use and operation of the Aircraft;
(b) POWER AND AUTHORITY. Lessee has the corporate power to
enter into and perform, and has taken all necessary corporate action to
authorize the entry into, performance and delivery of, this Agreement and the
transactions contemplated by this Agreement;
(c) LEGAL VALIDITY. This Agreement constitutes Lessee's legal,
valid and binding obligation, enforceable against Lessee in accordance with its
terms;
(d) NO CONFLICTS, ETC. The entry into and performance by Lessee
of, and the transactions contemplated by, this Agreement do not and will not:
(i) conflict with any laws binding on Lessee; or
- 15 -
<PAGE> 20
(ii) conflict with any provisions of the organizational
documents of Lessee, or
(iii) conflict with or result in default under any
indenture, mortgage, chattel mortgage, deed of trust, conditional sales
contract, lease, bank loan or credit agreement or other agreement which
is binding upon Lessee or any of its assets nor result in creation of
any Lien over any of its assets;
(e) AUTHORIZATIONS. All authorizations, consents, registrations
and notifications required in connection with the entry into, performance,
validity, and enforceability of, this Agreement and the transactions
contemplated by this Agreement, have been (or will on or before the Delivery
Date have been) obtained by Lessee or effected (as appropriate) and are (or will
on their being obtained or effected be) in full force and effect;
(f) NO IMMUNITY.
(i) Lessee is subject to civil U.S. commercial law with
respect to its obligations under this Agreement; and
(ii) neither Lessee nor any of its assets is entitled to
any right of immunity and the entry into and performance of this
Agreement by Lessee constitute private and commercial acts;
(g) FINANCIAL STATEMENTS; ABSENCE OF CHANGES.
(i) The audited financial statements of Lessee most
recently delivered to Lessor:
[A] have been prepared in accordance with United
States generally accepted accounting principles applied
consistently with the past practices of Lessee; and
[B] fairly present the consolidated
financial condition of Lessee as at the date thereof; and
(ii) There has been no material adverse change in the
financial condition of Lessee since the date of the financial statements
most recently delivered to Lessor;
(h) CHIEF EXECUTIVE OFFICE. Lessee's chief executive
office (as that term is defined in Article 9 of the Uniform Commercial Code as
in effect in the State of South Carolina) is located at 1800 St. Julian Place,
4th Floor, Columbia, South Carolina 29204.
- 16 -
<PAGE> 21
(i) CERTIFICATED AIR CARRIER. Lessee is a Certificated Air
Carrier and Lessor, as lessor of the Aircraft to Lessee, is entitled to the
benefits of Section 1110 of Title 11 of the United States Code with respect to
the Aircraft; and
(j) CITIZEN OF THE UNITED STATES. Lessee is a "citizen of the
United States" as defined in 49 U.S.C. section 40102(a)(15) of the Federal
Aviation Act.
2.2 LESSEE'S FURTHER REPRESENTATIONS AND WARRANTIES: Lessee further
represents and warrants to Lessor that:
(a) NO DEFAULT. NO Default has occurred and is continuing or
might result from the entry into or performance of this Agreement.
(b) REGISTRATION. Except for the filing of this Agreement with
the FAA and the Financing Statements and related documents with the Secretary of
State of South Carolina, it is not necessary to make any other filing or
recordation in order to ensure the validity, effectiveness and enforceability of
this Agreement.
(c) LITIGATION. No litigation, arbitration, administrative
proceedings or investigation are pending or to Lessee's knowledge threatened
against Lessee which, if adversely determined, would have a material adverse
effect upon its financial condition or business or its ability to perform its
obligations under this Agreement, provided that it is understood and agreed that
Lessee is subject to periodic investigations (i) by the U.S. Department of
Transportation relating to its "continuing fitness" within the meaning of the
Federal Aviation Act and (ii) by the FAA relating to its operations and
compliance thereof with applicable laws and regulations;
(d) PARI PASSU. The obligations of Lessee under this Agreement
rank at least pari passu with all other present unsecured and unsubordinated
obligations of Lessee, with the exception of such obligations as are mandatorily
preferred by law and not by virtue of any contract;
(e) TAXES. Lessee has delivered all necessary returns and
payments due to the tax authorities in all jurisdictions in which Lessee is
required to pay taxes and/or file tax returns or tax reports (unless Lessee has
been granted an extension of time for such filings by the appropriate tax
authority or the taxes are being contested in good faith by appropriate
proceedings and adequate reserves have been established by Lessee), the failure
of which is reasonably likely to result in the creation or imposition of a Lien
in the Aircraft or otherwise have a material adverse effect on Lessee's ability
to perform its obligations under this Agreement and on its financial condition;
- 17 -
<PAGE> 22
(f) ERISA. To the best knowledge of Lessee, Lessee is not
engaged in any transaction in connection with which it could be subjected to
either a civil penalty assessed pursuant to Section 502(c) of ERISA or any tax
imposed by Section 4975 of the Internal Revenue Code of 1986, as amended; no
material liability of the Pension Benefit Guaranty Corporation has been or is
expected by Lessee to be incurred with respect to any employee pension benefit
plan (as defined in Section 3 of ERISA) maintained by Lessee; there has been no
reportable event (as defined in Section 4043(b) of ERISA) with respect to any
such employee pension benefit plan. There is no event of termination of any such
employee pension benefit plan by the Pension Benefit Guaranty Corporation; and
no accumulated funding deficiency (as defined in Section 302 of ERISA or Section
412 of the Internal Revenue Code), whether or not waived, exists with respect to
any such employee pension benefit plan; and
(g) MAINTENANCE PROGRAM. The Agreed Maintenance Program for the
Aircraft complies with all FAA requirements, is approved by the FAA and is in
full force and effect, and is based on the Boeing MPD.
(h) INFORMATION. To Lessee's knowledge, the financial and other
information furnished by Lessee in connection with this Agreement does not
contain any untrue statement or omit to state facts, the omission of which makes
the statement therein, in the light of the circumstances under which they were
made, misleading, nor omits to disclose any material matter to Lessor and all
forecasts and opinions contained therein were honestly made on reasonable
grounds after due and careful inquiry by Lessee.
2.3 SURVIVAL. The representations and warranties in Sections 2.1 and
2.2 will survive the execution of this Agreement will be deemed to be remade by
Lessee on the Delivery Date with reference to the facts and circumstances then
existing. The representations and warranties contained in clause 2.1 will be
deemed to be remade by Lessee on each Rent Date as if made with reference to the
facts and circumstances then existing.
2.4 LESSOR'S REPRESENTATIONS AND WARRANTIES. Lessor represents and
warrants to Lessee that:
(a) STATUS. Lessor is a corporation duly incorporated and
validly existing under the laws of the State of Iowa and has the corporate power
to own its assets and carry on its business as it is now being conducted and is
the holder of all necessary air transportation licenses required in connection
with the ownership of the Aircraft;
(b) POWER AND AUTHORITY. Lessor has the corporate power to
enter into and perform, and has taken all necessary
- 18 -
<PAGE> 23
corporate action to authorize the entry into, performance and delivery of, this
Agreement and the transactions contemplated by this Agreement;
(c) LEGAL VALIDITY. This Agreement constitutes Lessor's legal,
valid and binding obligation, enforceable against Lessor in accordance with its
terms;
(d) NO CONFLICTS. The entry into and performance by Lessor of,
and the transactions contemplated by, this Agreement do not and will not:
(i) conflict with any laws binding on Lessor; or
(ii) conflict with the organizational documents of
Lessor; or
(iii) conflict with or result in default under any
indenture, mortgage, chattel mortgage, deed of trust, conditional sales
contract, lease, bank loan or credit agreement or other agreement which
is binding upon Lessor or any of its assets;
(e) AUTHORIZATIONS. All authorizations, consents,
registrations and notifications required in connection with the entry into,
performance, validity and enforceability of, and the transactions contemplated
by, this Agreement by Lessor have been (or will on or before the Delivery Date
have been) obtained by Lessor or effected (as appropriate) and are (or will on
their being obtained or effected be) in full force and effect;
(f) NO IMMUNITY
(i) Lessor is subject to civil U.S. commercial law with
respect to its obligations under this Agreement; and
(ii) neither Lessor nor any of its assets is entitled to
any right of immunity and the entry into and performance of this
Agreement by Lessor constitute private and commercial acts; and
(g) CITIZEN OF THE UNITED STATES. Lessor is a "citizen of the
United States" as defined in 49 U.S.C. Section 40102 (a)(15) of the Federal
Aviation Act.
- 19 -
<PAGE> 24
3. CONDITIONS PRECEDENT
3.1 LESSOR'S CONDITIONS PRECEDENT. Lessor's obligation to deliver and
lease the Aircraft to Lessee under this Agreement is subject to satisfaction of
each of the following conditions:
(a) Receipt by Lessor from Lessee on the Delivery Date of the
following, reasonably satisfactory in form and substance to Lessor:
(i) ORGANIZATIONAL DOCUMENTS. A copy of the
organizational documents of Lessee, certified by the Secretary or an
Assistant Secretary of Lessee;
(ii) RESOLUTIONS. A copy of resolutions of the board of
directors of Lessee, certified by the Secretary or an Assistant Secretary
of Lessee, approving the terms of, and the transactions comtemplated by,
this Agreement, resolving that it enter into this Agreement, and
authorizing a specified person or persons to execute this Agreement and
accept delivery of the Aircraft on its behalf;
(iii) OPINION. An opinion, dated the Delivery Date, by
legal counsel for Lessee (which shall be Lessee's general counsel), as to
such matters and in form and substance reasonably acceptable to Lessor;
(iv) FAA OPINION. An opinion of William C. Boston &
Associates, special FAA counsel for Lessee, acceptable to Lessor, in form
and substance reasonably acceptable to Lessor (which opinion will be
delivered as promptly as practicable following the Delivery Date);
(v) BANKRUPTCY OPINION. An opinion of Ginsburg, Feldman
and Bress Chartered, special counsel for Lessee, as to Lessor's
entitlement to the benefits of Section 1110 of Title 11 of the United
States Code with respect to the Aircraft, in form and substance
reasonably acceptable to Lessor;
(vi) APPROVALS. Each approval, license and consent which
may be required in relation to the performance by Lessee of any of its
obligations hereunder;
(vii) CERTIFICATE. A certificate of the Secretary or an
Assistant Secretary of Lessee:
(a) Secting out a specimen of each signature
referred to in Section 3.1(a)(ii); and
- 20 -
<PAGE> 25
(b) Certifying that each copy of a document
specified in this Section is correct, complete and in full force and
effect;
(viii) GENERAL. Such other documents as Lessor
may reasonably request;
(b) The receipt by Lessor on or before the Delivery Date of:
(i) OPINIONS. A signed original of each of the opinions
referred to in Sections 3.l(a)(iii) and (v);
(ii) PAYMENTS. All sums due to Lessor under this
Agreement on or before the Delivery Date, including, without limitation,
the first payment of Rent;
(iii) INSURANCE. A report from Lessee's insurance brokers
and a certificate of insurance, both in substance reasonably satisfactory
to Lessor, demonstrating that Lessee has complied with the provisions of
this Agreement as to Insurance effective on and after the Delivery Date;
(iv) FINANCIAL STATEMENTS. The latest available financial
statements of Lessee as described in sections 8.2(b)(i) and (ii);
(v) NOT USED.
(vi) GENERAL. Such other documents as Lessor may
reasonably request;
(c) Receipt by Lessor of such information and documents
relating to the Agreed Maintenance Program as Lessor may reasonably require; and
(d) Evidence that (i) a Financing Statement on Form UCC-1,
prepared in form satisfactory to Lessor, has been duly filed with the Secretary
of State of the State of South Carolina and (ii) a Lease Supplement,
substantially in the form set forth in Schedule 1, Part 1, hereof has been
filed, along with this Lease, with the FAA's aircraft registry in Oklahoma City,
Oklahoma.
3.2 FURTHER CONDITIONS PRECEDENT. The obligations of Lessor to deliver
and lease the Aircraft under this Agreement are subject to the further
conditions precedent that:
(a) The representations and warranties of Lessee under Sections
2.1 and 2.2 are correct and remain correct on the
- 21 -
<PAGE> 26
Delivery Date as if remade on delivery of the Aircraft under this Agreement;
and
(b) No Default has occurred and is continuing or might result
from the leasing of the Aircraft to Lessee under this Agreement.
3.3 WAIVER. Tile conditions specified in Sections 3.1 and 3.2 are for
the sole benefit of Lessor and may be waived in whole or in part and with or
without conditions by Lessor. If any of those conditions are not satisfied on
the Delivery Date and Lessor (in its absolute discretion) nonetheless agrees to
deliver the Aircraft to Lessee, Lessee will ensure that those conditions are
satisfied within fifteen (15) days after the Delivery Date and Lessor may treat
as an Event of Default the failure of Lessee to do so.
4. COMMENCEMENT
4.1 LEASING. Lessor will lease the Aircraft to Lessee, and Lessee will
lease the Aircraft from Lessor, in accordance with this Agreement for the
duration of the Term.
4.2 ACCEPTANCE AND DELIVERY.
(a) As of February 1, 1997, the Aircraft will be deemed to be
constructively delivered to Lessee at AAR Oklahoma's facility at the Acceptance
Location. Lessee will effect acceptance of the Aircraft by execution and
delivery of a Lease Supplement in the form, of Part 1 of Schedule 1.
Notwithstanding the foregoing to the contrary, the parties acknowledge that the
Aircraft was delivered to AAR Oklahoma for accomplishment of the work. In the
event that the work is not complete at the time of execution of this Agreement,
Lessor shall, at its cost and expense, use its reasonable efforts to cause AAR
Oklahoma to promptly complete the Work; provided that Lessee shall have
delivered to AAR Oklahoma for temporary installation on the Aircraft a
serviceable Pratt & Whitney JT8D-9A engine with QEC (Quick Engine Change)
components.
(b) After delivery, the Aircraft and every Part will be in
every respect at the sole risk of Lessee, who will hear all risk f loss, theft,
damage or destruction to the Aircraft from any cause whatsoever.
4.3 NOT USED.
4.4 LICENSES. Lessee will at its expense obtain and maintain all
licenses, permits and approvals, if any, which may be necessary to ferry the
Aircraft from the Delivery Location.
- 22 -
<PAGE> 27
5. PAYMENTS
5.1 AIRCRAFT DEPOSIT. In order to secure its obligations hereunder,
Lessee shall pay to Lessor on or before May 1, 1997 an Aircraft Deposit in the
amount set forth in paragraph 1 of the Letter Agreement. Unless this Lease
Agreement shall have been earlier terminated pursuant to Section 13.2, and
provided that no Default shall have occurred and be continuing, the Aircraft
Deposit shall be returned by Lessor to Lessee on (i) the Expiration Date, (ii)
prior to the Expiration Date if this Lease Agreement is terminated by reason of
Lessor's breach of its covenant in Section 7.1 or (iii) as provided in Section
7.3(b)(ii) in connection with an Event of Loss.
5.2 RENTAL PERIODS. The Term will be divided into Rental Periods. The
first Rental Period will commence on the Delivery Date and end on the last day
of the calendar month during which the Delivery Date occurs, and the second
Rental Period will commence on the first day of the month next following. Each
subsequent Rental Period will commence on the first day of each calendar month
and will end on the last day of that month, except that if a Rental Period would
otherwise overrun the Expiration Date, it will end on the Expiration Date, in
which event the amount of Rent payable shall be prorated on a daily basis.
5.3 RENT. Lessee will pay to Lessor or its order on each Rent Date,
Rent, in advance, in immediately available funds in the amount set forth in
paragraph 2 of Letter Agreement No. 1. If a Rental Period begins on a
non-Business Day, the Rent payable in respect of that Rental Period shall be
paid on the Business Day immediately following the date on which such Rental
Period commences.
5.4 MAINTENANCE RESERVES. Lessee will pay to Lessor Maintenance
Reserves in relation to each Rental Period (including without limitation the
last Rental Period of the Term) on the 10th day following the end of each Rental
Period as follows:
(a) in respect of the Airframe, the amount set forth in
paragraph 3(i) of Letter Agreement No. 1 in respect of each Flight Hour or
Cycle, whichever is higher, operated by the Aircraft during such Rental Period
("Airframe Maintenance Reserves");
(b) in respect of each Engine, the amount set forth in
paragraph 3(ii) of Letter Agreement No. 1 in respect of each Flight Hour or
Cycle, whichever is higher, operated by that Engine during that Rental Period
("Engine Refurbishment Maintenance Reserves");
(c) in respect of the APU, the amount set forth in paragraph
3(iii) of Letter Agreement No. 1 in respect of each
- 23 -
<PAGE> 28
Flight Hour or Cycle, whichever is higher, operated by that APU during that
Rental Period ("APU Refurbishment Maintenance Reserves"); and
(d) in respect of each Landing Gear, the amount set forth in
paragraph 3(iv) of Letter Agreement No. 1 in respect of each Flight Hour or
Cycle, whichever is higher, operated by that Landing Gear during that Rental
Period ("Landing Gear Maintenance Reserves").
If the 10th day following the end of a Rental Period is a non-Business Day, the
Maintenance Reserves in respect of such Rental Period shall be paid on the
Business Day immediately following the date on which such payment was otherwise
due.
5.5 PAYMENTS. All payments by Lessee to Lessor under this Agreement will
be made on the due date in Dollars and in immediately available funds by wire
transfer to Mercantile Bank of Dubuque, Dubuque, Iowa (Acct. No. 28100164518),
ABA No. 073900111, or such other account as Lessor may direct in writing from
time to time.
5.6 NOT USED.
5.7 TAXATION. Lessee will pay and indemnify Lessor against all Taxes
(other than Lessor Taxes) levied or imposed against or upon Lessor or Lessee and
relating to or attributable to Lessee, this Agreement or the Aircraft directly
or indirectly in connection with the leasing, subleasing, delivery, possession,
use, operation, repair, maintenance, overhaul, transportation, landing, storage
or redelivery of the Aircraft or any part thereof or any rent, receipts,
insurance proceeds, income or other amounts arising therefrom.
5.8 INFORMATION. If Lessee is required by any applicable law to deliver
any report or return in connection with any Taxes for which indemnification is
required pursuant to Section 5.7, Lessee will complete the same on a timely
basis and Lessee will, on request supply a copy of the report or return to
Lessor, provided that Lessor shall have furnished Lessee, at Lessee's request,
with such information (if any), not within the control of Lessee, as is in
Lessor's control and is reasonably available to Lessor and reasonably necessary
to file such report or return, and provided, further that if any report or
return is to be prepared by Lessor, upon written request of Lessor, Lessee shall
supply to Lessor such information (if any), not within the control of Lessor, as
is reasonably available to Lessee and is reasonably necessary to enable Lessor
to prepare such report or return. Any information disclosed pursuant to this
Section shall be treated as confidential and shall not be disclosed to any
person other than to the extent reasonably necessary to enable
- 24 -
<PAGE> 29
the Lessee or Lessor to fulfill its tax return filing obligations.
5.9 TAXATION OF INDEMNITY PAYMENTS.
(a) If and to the extent that any sums payable to Lessor by
Lessee pursuant to Section 5.7 or Section 10.1 are insufficient, by reason of
any Taxes (other than Lessor Taxes) payable in respect of those sums, for Lessor
to discharge the corresponding liability to the relevant party (including any
taxation authority), or to reimburse Lessor for the cost incurred by it to a
third party (other than Lessor Taxes) (including any taxation authority), Lessee
will pay to Lessor such sum as will after the tax liability has been fully
satisfied leave Lessor with the same amount as it would have been entitled to
receive in the absence of that liability (taking into account the anticipated
realization by Lessor of tax benefits resulting from the Taxes or transaction to
which such indemnity is related, and the present value of any anticipated future
tax benefits to be realized by Lessor as a result of deducting or crediting such
Tax or as a result of the matters immediately giving rise thereto, based on tax
rates in effect on the date payment pursuant to this Section 5.9 is made and a
discount rate for purposes of calculations of present value of 8% per annum
compounded semiannually); and
(b) If and to the extent that any sums constituting (directly
or indirectly) an indemnity to Lessor pursuant to Section 5.7 or Section 10.1
but paid by Lessee to any person other than Lessor are treated as taxable in the
hands of Lessor (other than Lessor Taxes), Lessee will pay to Lessor such sum as
will after the tax liability has been fully satisfied indemnify Lessor to the
same extent as it would have been indemnified in the absence of such liability
(taking into account the anticipated realization by Lessor of tax benefits
resulting from the Taxes or transaction to which such indemnity is related, and
the present value of any anticipated future tax benefits to be realized by
Lessor as a result of deducting or crediting such Tax or as a result of the
matters immediately giving rise thereto, based on tax rates in effect on the
date payment pursuant to this Section 5.9 is made and a discount rate for
purposes of calculations of present value of 8% per annum compounded
semiannually)
5.10 PAYMENT DATE; DEFAULT INTEREST. Any amount payable to Lessor
pursuant to Section 5.7 shall be paid within 30 days after receipt of a written
demand therefor from Lessor accompanied by a written statement describing in
reasonable detail the basis for such indemnity and the computation of the amount
so payable, provided that such amount need not be paid prior to the time such
Taxes are paid. If Lessee fails to pay any amount payable under this Agreement
on the due date, Lessee will pay on demand
- 25 -
<PAGE> 30
from time to time to Lessor interest (both before and after judgment) on that
amount, from the due date to the date of payment in full by Lessee to Lessor, at
the rate calculated by Lessor to be the Prime Rate plus five percent (5%) per
annum. All such interest will be compounded monthly and calculated on the basis
of the actual number of days elapsed and a 360 day year.
5.11 CONTEST. Lessee may, at its own cost and expense, either in its
own name or in Lessor's name, contest the validity, applicability or assessment
of any Taxes by (i) resisting payment thereof, (ii) paying same under protest,
or (iii) using reasonable efforts to obtain a refund thereof in appropriate
proceedings. If Lessee disputes the payment of any Taxes payable by Lessor for
which Lessee is responsible under this Agreement, Lessor will take such action
as Lessee may reasonably request, at Lessee's expense, to contest that payment
but will not be obliged to take any such action:
(a) If such action to be taken will result in the risk of an
imposition of criminal penalties or in a material risk of any sale, forfeiture
or loss of the Aircraft or an Engine (except if Lessee shall have adequately
bonded any Lien that results in such risk or otherwise made adequate provision
to protect the interests of Lessor); or
(b) Which Lessor considers does not have a reasonable prospect
of success, unless Lessee furnishes an opinion of independent tax counsel,
reasonably satisfactory to Lessor, that Lessee has a reasonable prospect of
success in connection with such proceedings.
If Lessor shall obtain a refund or credit of any amount paid by Lessee pursuant
to Sections 5.7 or 5.10 (including any gross-up amount paid by Lessee), Lessor
shall pay Lessee the amount of such refund or credit together with any interest
actually received or accrued by Lessor on account of such refund or credit.
5.12 ABSOLUTE AND CONDITIONAL OBLIGATIONS OF LESSEE. Lessee's
obligations to pay all Rent, Maintenance Reserves and other amounts payable and
perform each of its other obligations under this Agreement are absolute and
unconditional and shall not be affected by any circumstance or contingency
whatsoever including (but not limited to):
(a) Any right of set-off, counterclaim, recoupment, defense or
other right which either party to this Agreement may have against the other;
(b) Any unavailability of the Aircraft for any reason,
including, but not limited to, a requisition of the Aircraft or
- 26 -
<PAGE> 31
any prohibition or interruption of or interference with or other
restriction against Lessee's use, operation or possession of the
Aircraft;
(c) Any lack, invalidity of or defect in airworthiness,
merchantability, fitness for any purpose, condition, design, or operation of any
kind or nature of the Aircraft for any particular use or trade (including, but
not limited to, the failure of the Airframe or any Engine to comply with the
Stage 3 noise standards of 14 C.F.R. Part 36 of the Federal Aviation Regulations
as such standards may be modified or amended from time to time (the "Stage 3
Requirements") or for registration or documentation under the laws of any
relevant jurisdiction, or any Event of Loss in respect of or any damage to the
Aircraft;
(d) Any insolvency, bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceedings by or
against Lessor or Lessee;
(e) Any invalidity or unenforceability or lack of due
authorization of, or other defect in, this Agreement; and
(f) Any other cause which but for this provision would or might
otherwise have the effect of terminating or in any way affecting any obligation
of Lessee under this Agreement.
5.13 SECURITY.
(a) It is intended by Lessor and Lessee that the Maintenance
Reserves payable to Lessor pursuant to Section 5.4 are amounts paid by Lessee to
Lessor in consideration for the use of the Aircraft by Lessee and the
satisfaction of Lessee's obligations under this Agreement and that, once paid,
those monies irrevocably and unconditionally shall be the property of Lessor.
Notwithstanding that stated intent, if and to the extent that those monies or
any thereof, under any applicable law or otherwise, are determined to be
security deposits or otherwise the property of Lessee or if it is so determined
those monies are a debt owed to Lessee or that Lessee shall have any interest in
those monies (the "Maintenance Reserve Account"), the parties agree that
subsections (c), (d) and (e) below shall apply.
(b) It is further intended by Lessor and Lessee that Aircraft
Deposit payable by Lessee to Lessor pursuant to Section 5.1 and, if applicable,
the Insurance Security Deposit contemplated by the first paragraph of Schedule 4
(collectively the "Deposits") are security deposits to faithfully secure the
satisfaction by Lessee of its obligations under the Agreement.
(c) To the fullest extent permitted by law and by way of
continuing security, Lessee grants to Lessor a security
- 27 -
<PAGE> 32
interest in the Maintenance Reserve Account and the Deposits and all rights of
Lessee to payment thereof, the debt represented thereby and/or any and all
interest of Lessee therein to Lessor by way of first priority security interest
as security for Lessee's obligations and liabilities under this Agreement and
the Other Agreements (the "Secured Liabilities"). Except as expressly permitted
under Section 7.2 of this Agreement, Lessee will not be entitled to payment of
the Maintenance Reserve Account. Lessee will not assign, transfer or otherwise
dispose of all or part of its rights in the Maintenance Reserve Account or the
Deposits, and Lessee agrees that it will enter into any additional documents and
instruments necessary or reasonably requested by Lessor to evidence, create or
perfect Lessor's rights to the Maintenance Reserve Account and the Deposits.
(d) If Lessee fails to comply with any provision of this
Agreement or any Event of Default has occurred and is continuing Lessor may
immediately or at any time thereafter, without prior notice to Lessee:
(i) Set-off all or any part of the Secured Liabilities
against the liabilities of Lessor in respect of the Maintenance Reserve Account
and/or the Deposits;
(ii) Apply or appropriate the Maintenance Reserve Account
and/or the Deposits in or towards the payment or discharge of the Secured
Liabilities in such order as Lessor sees fit; and
(e) If Lessor has exercised the set-off described in sub-clause
(d) above, Lessee shall, following a demand in writing from Lessor, promptly
restore the Maintenance Reserve Account and/or the Deposits to the level at
which they stood immediately prior to such set-off.
6. MANUFACTURER'S WARRANTIES
6.1 ASSIGNMENT. Notwithstanding this Agreement, Lessor will remain
entitled to the benefit of each warranty, express or implied, with respect to
the Aircraft, any Engine or Part so far as concerns any manufacturer, vendor,
subcontractor or supplier or any seller from whom Lessor acquired the Aircraft.
Except to the extent Lessor otherwise directs, Lessor hereby authorizes Lessee
to pursue any claim against any manufacturer, vendor, subcontractor or supplier
(but not any seller of the Aircraft) in relation to defects affecting the
Aircraft, any Engine or Part and Lessee agrees diligently to pursue any such
claim which arises at its own cost. Lessee will notify Lessor promptly upon
becoming aware of any such claim.
6.2 PROCEEDS. Except to the extent Lessor otherwise agrees in a
particular case, all proceeds of any such claim will be paid
- 28 -
<PAGE> 33
directly to Lessor, except, but if and to the extent that such claim relates:
(a) To defects affecting the Aircraft which Lessee has
rectified; or
(b) To compensation for loss of use of the Aircraft, an Engine
or any Part during the Term; and
provided no Default described in Sections 13.1(a) or 13.1(h)-(l) has occurred
and is continuing, the proceeds will be paid to Lessee by Lessor but in the case
of (a) only on receipt of evidence satisfactory to Lessor that Lessee has
rectified the relevant defect.
6.3 PARTS. Except to the extent Lessor otherwise agrees in a
particular case, Lessee will procure all engines, components, furnishings or
equipment provided by the manufacturer, vendor, subcontractor or supplier in
replacement of a defective Engine or Part pursuant to the terms of any warranty,
all of which will be installed promptly by Lessee such that title thereto free
of Liens vests in Lessor. On installation those items will be deemed to be an
Engine or Part hereunder, as applicable.
6.4 AGREEMENT. To the extent any warranties relating to the Aircraft
are made available under an agreement between any manufacturer, vendor,
subcontractor or supplier and Lessee, this Section 6 is subject to that
agreement. However Lessee will:
(a) Pay the proceeds received by Lessee of any claim thereunder
to Lessor to be applied pursuant to Section 6.2 and pending such payment will
hold the claim and the proceeds on trust for Lessor; and
(b) Lessee will take all such steps as are necessary at the end
of the Term to ensure the benefit of any of those warranties which have not
expired are vested in Lessor.
7. LESSOR'S COVENANTS
7.1 QUIET ENJOYMENT. Lessor agrees that, notwithstanding any other
provision of this Agreement, but without limiting Lessor's rights under Section
8.6, so long as Lessee is in compliance with its obligations under this
Agreement (including applicable grace periods) and no Event of Default has
occurred and is continuing, Lessee shall quietly enjoy the Aircraft and all
rents, revenues, profits and income thereto, and including without limitation,
the right to possession and use of the Aircraft, without interference from
Lessor.
7.2 MAINTENANCE CONTRIBUTION. Provided no Default described in
Sections 13.1(a) or Sections 13.1(h)-(1) has
- 29 -
<PAGE> 34
occurred and is continuing, Lessor will pay promptly to third party vendors,
suppliers, maintenance shops, service facilities or other contractors, by way of
contribution to the cost of maintenance of the Aircraft, upon submission by
Lessee to Lessor, within one hundred eighty (180) days after the completion of
that maintenance (but not later than thirty (30) days after the Expiration Date,
unless an invoice is being contested and Lessee has given Lessor notice of such
invoice and the pendency of such contest within such thirty (30) day period), of
an invoice and supporting documentation reasonably satisfactory to Lessor,
evidencing with respect to (x) the Airframe, any "C" checks, or (y) any Engine
or APU, the performance in accordance with this Agreement of a Hot Section
Refurbishment, a Cold Section Refurbishment and/or the replacement of Life
Limited Parts or (z) any Landing Gear, work in the nature of overhaul requiring
removal and disassembly (in each case, other than (i) repairs arising as a
result of foreign object damage or operational or maintenance mishandling;
and/or (ii) removal, installation, maintenance and repair of QEC (Quick Engine
Change) kits; and/or (iii) the performance of airworthiness directives) the
lesser of (a) the amount of that invoice and (b) an amount equal to the
aggregate amount of Maintenance Reserves paid in respect of the Airframe that
Engine or APU or that Landing Gear, as applicable, under this Agreement at the
time of commencement of such maintenance less the aggregate amount previously
paid in respect of the Airframe, that Engine or APU or the Landing Gear, as
applicable, by Lessor under this subsection.
7.3 LESSOR OBLIGATIONS FOLLOWING EXPIRATION DATE. Within five (5)
Business Days after:
(a) Redelivery of the Aircraft to Lessor in accordance
with and in the condition required by this Agreement; or
(b) Payment to Lessor of the Agreed Value following an Event of
Loss after the Delivery Date;
or in each case such later time as Lessor is satisfied Lessee has irrevocably
paid to Lessor all amounts which may then be outstanding or become payable under
this Agreement and provided that no Default shall have occurred and is
continuing, Lessor will pay to Lessee:
(i) the amount of any Rent received in respect of any
period falling after the date of redelivery of the Aircraft or payment
of the Agreed Value, as the case may be; and
(ii) the Aircraft Deposit.
- 30 -
<PAGE> 35
8. LESSEE'S COVENANTS
8.1 DURATION. The obligations in this Section and in Section 12 will:
(a) Except as otherwise stated, be performed at the expense of
Lessee; and
(b) Remain in force until the Expiration Date in accordance
with this Agreement and thereafter to the extent of any accrued rights of Lessor
in relation to those obligations.
8.2 INFORMATION. Lessee will:
(a) Notify Lessor forthwith of the occurrence of any Default or
any other event which might materially adversely affect Lessee's ability to
perform any of its obligations under this Agreement;
(b) Furnish to Lessor:
(i) 60 days after the last day of each fiscal quarter,
the consolidated unaudited financial statements of Lessee (comprising a
balance sheet and profit and loss statement) prepared for the most recent
previous fiscal quarter, certified by Lessee's chief financial officer as
being true and correct;
(ii) as soon as available but not in any event later than
one hundred twenty (120) days after the last day of each fiscal year of
Lessee, its audited consolidated financial statements for the year ending
on such day;
(iii) at the same time the same are issued to the
shareholders or creditors of Lessee generally, a copy of each report to
or filing with the SEC; and
(iv) on request from time to time, such other
information relevant to the transactions contemplated by this Agreement
regarding Lessee and its business and affairs as Lessor may reasonably
request;
(c) Keep Lessor informed as to any engine installed on the
Aircraft;
(d) Promptly furnish to Lessor all information Lessor from time to
time reasonably requests regarding the Aircraft, any Engine or any Part, its
use, location and condition including, without limitation, the hours available
on the Aircraft and any Engine until the next scheduled check, inspection,
overhaul or shop visit, as the case may be;
- 31-
<PAGE> 36
(e) Not used.
(f) On request, furnish to Lessor evidence satisfactory to
Lessor that all Taxes and charges incurred by Lessee with respect to the
Aircraft, including without limitation all payments due to the relevant air
traffic control authorities: the nonpayment of which could give rise to the
imposition of a Lien on the Aircraft, have been paid and discharged in full;
(g) Provide Lessor with a monthly report on the Flight Hours
and Cycles accumulated in respect of each Engine and APU during the preceding
month in the form required from time to time by Lessor;
(h) Give Lessor not less than thirty (30) days' written notice
as to the time and location of all Major Checks and allow Lessor or its
authorized representatives to be present at such Check and inspect any area of
the Aircraft which is normally inspected during such a Check; and
(i) Notify Lessor within five (5) days of:
(i) Any loss, theft, damage or destruction to the
Aircraft, any Engine or any Part, or any modification to the Aircraft if
the potential cost may exceed the Damage Notification Threshold; and
(ii) Any occurrence reasonably likely to give rise to a
claim under the Insurance (but in the case of an occurrence with respect
to the hull, only claims in excess of the Damage Notification Threshold)
and details of any negotiations with the insurance brokers over any such
claim.
8.3 LAWFUL AND SAFE OPERATION. Lessee will:
(a) Comply with all laws in force in any country or
jurisdiction in which the Aircraft may be located or operated or, so far as
concerns the use and operation of the Aircraft or an owner or operator thereof
and take all reasonable steps to ensure that the Aircraft is not used for any
illegal purpose;
(b) Not use the Aircraft in any manner contrary to any
recommendation of the manufacturer of the Aircraft, any Engine or any Part or
any recommendation or regulation of the Air Authority or for any purpose for
which the Aircraft is not designed or reasonably suitable;
(c) Ensure that the crew and engineers employed by it in
connection with the operation and maintenance of the Aircraft have the
qualifications and hold the licenses required by the Air Authority and
applicable law;
- 32 -
<PAGE> 37
(d) Use the Aircraft solely in commercial or other operations
for which Lessee is duly authorized by the Air Authority and applicable law;
(e) Not use the Aircraft for the carriage of:
(i) whole animals living or dead except in the cargo
compartments according to I.A.T.A. regulations, and except domestic pet
animals carried in a suitable container to prevent the escape of any
liquid and to ensure the welfare of the animal;
(ii) acids, toxic chemicals, other corrosive materials,
explosives, nuclear fuels, nuclear wastes, or any nuclear assemblies or
components, except as permitted for passenger aircraft under the
"Restriction of Goods" schedule issued by I.A.T.A. from time to time and
provided that all the requirements for packaging or otherwise contained
therein are fulfilled;
(iii) any other goods, materials or items of cargo which
could reasonably be expected to cause damage to the Aircraft and which
would not be adequately covered by the Insurances; or
(iv) any illegal item or substance;
(f) Not utilize the Aircraft for purposes of training,
qualifying or reconfirming the status of cockpit personnel except for the
benefit of Lessee's cockpit personnel, and then only if the use of the Aircraft
for such purpose is not disproportionate to the use for such purpose of other
aircraft of the same type operated by Lessee;
(g) Not cause or permit the Aircraft to proceed to, or remain
at, any location which is then the subject of a prohibition order (or any
similar order or directive), sanctions or restrictions by:
(i) the United Nations Security Council, the U.S.
International Economic Emergency Powers Act or U.N. Security Council
directives or the U.S. Export Administration Act Regulations (15 C.F.R.
Parts 730-799), except as may be permitted by operating in accordance
with the conditions specified by the U.S. Export Administration
Regulations, General License GATS (15 C.F.R. Part 771.19);
(ii) any Government Entity of the State of Registration;
(iii) any Government Entity of the country in which such
location is situated; or
- 33 -
<PAGE> 38
(iv) any Government Entity having jurisdiction over
Lessor, the Banks or the Aircraft;
(h) Obtain and maintain in full force all certificates,
licenses, permits and authorizations required for the use and operation of the
Aircraft;
(i) Not operate or locate the Aircraft or suffer or permit the
Aircraft to be operated or located during the Term in any area excluded from
coverage by any insurance policy issued pursuant to the requirements of this
Agreement unless such operation or location is pursuant to a Civil Reserve Air
Fleet Program requisition or other use of the Aircraft by the United States
Government, and Lessee has obtained, prior to the operation and location of the
Airframe or any Engine in such area, indemnification from the United States
Government, or other insurance, against the risks and In the amounts required
by, and in compliance with, Section 9 hereof covering such area (and naming
Lessor, and the Banks, if any, as loss payees in respect of the indemnification
or insurance payable in respect to casualties to the Aircraft) or unless the
Aircraft is only temporarily located in such area as a result of an isolated
occurrence attributable to hijacking, medical emergency, equipment malfunction,
weather conditions, navigational error or similar unforeseen circumstances and
Lessee is using its good faith efforts to remove the Aircraft from such area;
and
(j) Not operate or locate the Aircraft in or to or over any
country which is (x) the subject of sanctions under the U.S. International
Economic Emergency Powers Act or United Nations Security Council Directives
and/or (y) restricted under the United States Trading with the Enemy Act or the
United States Export Administration Act except as may be permitted by operating
in accordance with the conditions specified by the United States Export
Administration Regulations, General License GATS (15 CFR Part 771.19)
8.4 OTHER PAYMENTS. Lessee will promptly pay:
(a) All license and registration fees, and other amounts of any
nature (other than Taxes) imposed by any Government Entity with respect to the
Aircraft, including without limitation the delivery, leasing, possession, use,
operation, return of the Aircraft; and
(b) All rent, fees, charges, and other amounts in respect of
any premises (other than Taxes) where the Aircraft or any Part thereof is
located from time to time;
except to the extent that such payment is being contested in good faith by
appropriate proceedings, in respect of which adequate reserves have been
provided by Lessee and non-payment of which
- 34 -
<PAGE> 39
does not give rise to any material likelihood of the Aircraft or any interest
therein being sold, forfeited or otherwise lost or of criminal liability on the
part of Lessor or any Bank.
8.5 SUB-LEASING. LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF
LESSOR, SUB-LEASE OR OTHERWISE PART WITH POSSESSION OF THE AIRCRAFT, THE ENGINES
OR ANY PART EXCEPT THAT LESSEE MAY PART WITH POSSESSION (A) WITH RESPECT TO THE
AIRCRAFT, THE ENGINES OR ANY PART TO THE RELEVANT MANUFACTURERS FOR TESTING OR
SIMILAR PURPOSES OR TO THE AGREED MAINTENANCE PERFORMER FOR SERVICE, REPAIR,
MAINTENANCE OR OVERHAUL WORK, OR ALTERATIONS, MODIFICATIONS OR ADDITIONS TO THE
EXTENT REQUIRED OR PERMITTED BY THIS AGREEMENT, AND (B) WITH RESPECT TO AN
ENGINE OR PART, AS EXPRESSLY PERMITTED BY THIS AGREEMENT.
8.6 INSPECTION.
(a) Lessor and any qualified person designated by Lessor may at
any time visit, inspect and survey the Aircraft, any Engine or any Part;
(b) Lessee will pay to Lessor on demand all reasonable
out-of-pocket expenses (but not including the salaries of Lessor's employees)
incurred by Lessor in connection with each such visit, inspection or survey
which takes place during the continuance of a Default; and
(c) Lessor will have no duty or liability to make, or arising
out of any such visit, inspection or survey; and
(d) So long as no Default has occurred and is continuing,
Lessor will not exercise such right other than on reasonable notice and during
normal business hours and so as not to disrupt unreasonably the commercial
operations of Lessee.
8.7 OWNERSHIP; PROPERTY INTERESTS; RELATED MATTERS. Lessee will:
(a) Not do or knowingly permit to be done or omit or knowingly
permit to be omitted to be done any act or thing which might reasonably be
expected to jeopardize the rights of Lessor as owner and lessor of the Aircraft;
(b) On all occasions when the ownership of the Aircraft, any
Engine or any Part is relevant, make clear to third parties that title is held
by Lessor;
(c) Not at any time (i) represent or hold out Lessor or the
Banks as carrying goods or passengers on the Aircraft or as being in any way
connected or associated with any operation or carriage (whether for hire or
reward or gratuitously) which may
- 35 -
<PAGE> 40
be undertaken by Lessee or (ii) pledge the credit of Lessor or the Banks;
(d) Ensure that there is always affixed, and not removed or in
any way obscured, a fireproof plate (having dimensions of not less than 10 cm. x
7 cm.) in a reasonably prominent position in the cockpit of the Aircraft
adjacent to the certificate of airworthiness and on each Engine stating:
"This Aircraft/Engine is owned by MIMI Leasing Corp.
and is leased to Air South Airlines, Inc.
(e) Not during the Term directly or indirectly create, incur,
assume or suffer to exist any Lien on or with respect to the Airframe or any
Engine or title thereto or any interest therein, or in this Agreement, except
(a) the respective rights of Lessor and Lessee as provided herein and the rights
of the Banks, if any; (b) Liens for Taxes either not yet due or being contested
in good faith by appropriate proceedings in respect of which adequate reserves
have been established by Lessee, so long as neither the nonpayment of such taxes
pending the outcome of such proceedings nor such proceedings involve any
material likelihood of the sale, forfeiture or loss of the Airframe or Engine,
(c) suppliers', mechanics', workers', repairers', employees' or other like liens
arising in the ordinary course of business and for amounts the payment of which
is either not yet delinquent or is being contested in good faith (and for the
payment of which adequate reserves have been provided) by appropriate
proceedings, so long as neither the nonpayment of such amounts pending the
outcome of such proceedings nor such proceedings involve any material likelihood
of the sale, forfeiture or loss of the Airframe or any Engine; (d) Liens arising
out of judgments or awards against Lessee with respect to which at the time an
appeal or proceeding for review is being prosecuted in good faith and there
shall have been secured a stay of execution pending such appeal or proceeding
for review; (e) Lessor's Liens; and (f) salvage and similar rights of insurers
under policies of insurance maintained with respect to the Aircraft. Liens
described in clauses (a) through (f) above are referred to herein as "Permitted
Liens." Lessee shall promptly, at its own expense, take such action as may be
necessary to duly discharge any Lien other than a Permitted Lien if the same
shall arise at any time;
(f) Not do or permit to be done anything which may reasonably
be expected to expose the Aircraft, any Engine or any Part to penalty,
forfeiture, impounding, detention, appropriation, damage or destruction and
without prejudice to the foregoing, if any such penalty, forfeiture, impounding,
detention or appropriation, damage or destruction occurs give Lessor notice and
use best endeavors to procure the immediate release of the Aircraft, any Engine
or the Part, as the case may be;
- 36 -
<PAGE> 41
(g) Not abandon the Aircraft, the Engine or any Part;
(h) Pay and discharge or cause to be paid and discharged when
due and payable or make adequate provision by way of security or otherwise for
all debts, damages, claims and liabilities which have given or might give rise
to a Lien over or affecting the Aircraft, any Engine or any Part; and
(i) Not attempt, or hold itself out as having any power, to
sell, lease or otherwise dispose of the Aircraft, any Engine or any Part.
8.8 GENERAL. Lessee will:
(a) Not liquidate or dissolve and Lessee shall not
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and other assets, whether in one or series of related transactions nor
consolidate with or merge into any other corporation, unless in the case of any
such consolidation merger, conveyance, transfer, lease or other disposition:
(i) the corporation formed by or surviving such
consolidation or merger (the "Successor Entity"):
(A) shall be a corporation organized and existing
under the laws of the United States of America or any state
thereof;
(B) immediately after giving effect to such
transaction, shall be Lessee or shall have acquired or succeeded
to all or substantially all of the property and other assets
(including, without limitation, all or substantially all of
Lessee's property and other assets) as an entity; and
(C) shall execute and deliver to Lessor an
agreement, in form and substance reasonably satisfactory to
Lessor, which is a legal, valid, binding and enforceable
assumption by such Successor Entity of the due and punctual
performance and observance of each covenant and condition of this
Agreement and agreement to be bound thereby, and shall execute,
deliver and/or file such recordations and filings with any
Government Entity and such other documents as Lessor shall
reasonably deem to be necessary or advisable (including, without
limitation, to preserve and protect the interests of Lessor) to
evidence, or in connection with, such consolidation, merger, sale,
lease, transfer or other disposition or acquisition and an
officer's certificate from a responsible officer of the Successor
Entity confirming
- 37 -
<PAGE> 42
the legal, valid, binding and enforceable nature of such
assumption, and to the effect that the other requirements of this
paragraph have been satisfied, and a legal opinion from counsel
confirming the legal, valid, binding and enforceable nature of
such assumption and otherwise in such form and substance
reasonably satisfactory to Lessor; and
(ii) prior to and immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing.
No such permitted transaction involving a Successor Entity shall relieve or
release Lessee of or from any obligations hereunder which arose or existed prior
to such transaction. Promptly following the closing of such transaction, Lessee
shall provide Lessor with a certificate signed by Lessee's chief financial
officer to the effect that such transaction, will not have a material adverse
effect on Lessee's ability to perform its obligations under this Agreement;
(b) ensure that no change will occur in the Habitual Base of
the Aircraft without the prior written consent of Lessor. Lessor agrees that it
shall not withhold its consent to a change in the Habitual Base to another state
of the United States of America, provided that Lessee promptly do all things
required of it under Section 8.10 to insure the protection of the interests of
Lessor and the Banks in the Aircraft and this Lease; and
(c) not, without giving Lessor 30 days prior notice (in
accordance with this Agreement), change its chief executive office (as such term
is defined in Article 9 of the Uniform Commercial Code as in effect in the State
of South Carolina) from 1800 St. Julian Place, 4th Floor, Columbia, South
Carolina 29204;
(d) remain a Certificated Air Carrier and maintain, without
limitation, its status so as to fall within the purview of Section 1110 of Title
11 of the United States Code or any analogous Statute;
(e) remain a "citizen of the United States" as defined in 49
U.S.C. Section 40102(a)15) of the Federal Aviation Act;
(f) ensure that no change will occur in the Habitual Base of
the Aircraft without the prior written notice to Lessor; and
(g) Not, without giving Lessor thirty (30) days prior notice
(in accordance with this Agreement), change its chief executive office (as such
term is defined in Article 9 of the Uniform Commercial Code as in effect in the
State of South
- 38 -
<PAGE> 43
Carolina) from 1800 St. Julian Place, 4th Floor Columbia, South Carolina;
8.9 RECORDS. Lessee will:
(a) Cause accurate, complete and current records of all flights
made by, and all maintenance carried out on, the Aircraft (including in relation
to each Engine and Part subsequently installed, before the installation) to be
kept in such manner as the Air Authority may from time to time require. The
records will form part of the Aircraft Documents; and
(b) Maintain its own or procure access to a revision service in
respect of, and will maintain with appropriate revisions, all Aircraft
Documents, records, logs, and other materials in respect of the Aircraft
required by applicable laws and customary practice of United States air carriers
operating under Part 121 of the Federal Aviation Regulations.
8.10 PROTECTION: Lessee will:
(a) Maintain the registration of the Aircraft with the Air
Authority in the name of Lessor and, to the extent permitted under the laws of
the State of Registration, reflecting the interests of Lessor and not do or
suffer to be done anything which might adversely affect that registration; and
(b) Do all acts and things (including, without limitation,
making any filing or registration with the Air Authority or any other Government
Entity) and execute and deliver, notarize, file, register and record all
documents (including, without limitation, any amendment of this Agreement, other
than an amendment which would alter any of the material terms hereof in a manner
adverse to Lessee) as may be reasonably required by Lessor, which shall be at
Lessor's cost with respect to item (i) and at Lessee's cost with respect to
items (ii) and (iii) below:
(i) following any change or proposed change in the
ownership or financing of the Aircraft or in the manner of securing
Lessor's obligations to the Banks; or
(ii) following any modification of the Aircraft, any
Engine or any Part or the permanent replacement of any Engine or Part in
accordance with this Agreement, so as to ensure that the rights of Lessor
as owner and lessor of the Aircraft and under this Agreement apply with
the same effect as before; or
(iii) to establish, maintain, preserve, perfect and
protect the rights of Lessor under this
- 39 -
<PAGE> 44
Agreement or the interest of Lessor as owner of the Aircraft.
8.11 MAINTENANCE AND REPAIR. Lessee will:
(a) Keep the Aircraft airworthy in all respects and in good
repair and condition;
(b) Not change the Agreed Maintenance Program or the schedule
of the Agreed Maintenance Program without the written consent of Lessor;
provided, that such agreement of Lessor shall not be required with respect to
amendments to the Agreed Maintenance Program which are required by law,
including any rule, regulation, order or directive of the FAA or other
Government Entity having jurisdiction over the maintenance and operation of the
Aircraft
(c) Maintain the Aircraft in accordance with the Agreed
Maintenance Program through Agreed Maintenance Performers and perform (at the
respective intervals provided in the Agreed Maintenance Program) all Major
Checks;
(d) Maintain the Aircraft in accordance with FAA Federal
Aviation Regulations Part 121 and any other rules and regulations of the FAA as
may be applicable to passenger category aircraft and in at least the same manner
and with at least the same care, [including, without limitation, maintenance
scheduling, modification status and technical condition,] as is the case with
respect to similar aircraft owned or otherwise operated by Lessee including,
without limitation, all maintenance to the Airframe, any Engine or any Part
required to maintain all warranties, performance guarantees or service life
policies in full force and effect and will not discriminate in the care,
scheduling, scope, status or technical condition of maintenance of the Aircraft
as compared with other aircraft included in Lessee's fleet of Boeing 737
Aircraft;
(e) Comply with all mandatory inspection and modification
requirements, airworthiness directives and similar requirements applicable to
the Aircraft, any Engine or Part having a compliance date during the Term or
within sixty (60) days after the Expiration Date and which are required by the
Air Authority (each of the foregoing being hereinafter referred to as a
"Relevant AD").
The cost of compliance with any single Relevant AD shall be
allocated among Lessor and Lessee as follows:
(i) Lessee shall be responsible for the first $100,000 of such
cost;
- 40 -
<PAGE> 45
(ii) Lessor and Lessee shall share, on an equal basis, the
portion of such cost (if any) which exceeds $100,000 up to and including
$200,000; and
(iii) Lessor shall be wholly responsible for the portion of such
cost (if any) which exceeds $200,000 (subject always to the provisions of
the following paragraph.
Notwithstanding the foregoing, in the event that the total
cost of any single Relevant AD (such total cost to be mutually agreed, in good
faith, between Lessor and Lessee) exceeds $200,000 (the "Threshold Amount"),
Lessor may elect not to make its contribution to the cost of compliance with
such Relevant AD as described in (iii) above. If Lessor shall so elect, Lessee
shall be entitled, by giving prior written notice to Lessor, to terminate this
Agreement and redeliver the Aircraft to Lessor in accordance with the terms of
Sections 12.1 through 12.8 and Schedule 3 (except for compliance with the
Relevant AD which gave rise to such termination) on the earlier of (x) the date
which is 30 days after the date of such notice from Lessee to Lessor or (y) the
date on which the Aircraft is required to be removed from service by reason of
non-compliance with the applicable Relevant AD. Such notice shall specify the
proposed redelivery date of the Aircraft by Lessee and, upon the receipt of such
notice by Lessor, the then current definition of Expiration Date shall be deemed
to have been amended accordingly. Upon any termination of this Agreement
pursuant to this Section 8.11(e), neither party shall be under any further
obligation in the other hereunder except for (x) accrued and outstanding
obligations of Lessee hereunder; and (y) obligations hereunder which are
expressed to continue notwithstanding the expiration of the Term; provided,
however, that Lessor shall, if applicable having regard to the provisions of
Section 7.3, make the payments described in Section 7.3(b) but shall be under no
obligation to repay, rebate or otherwise refund any Maintenance Reserves
previously paid by Lessee under this Agreement.
(f) Comply with all applicable laws and the regulations of
the Air Authority and other aviation authorities with jurisdiction over Lessee
or the Aircraft, any Engine or Part regardless of upon whom such requirements
are imposed and which relate to the maintenance, condition, use or operation of
the Aircraft or require any modification or alteration to the Aircraft, any
Engine or Part;
(g) Maintain in good standing a current certificate of
airworthiness (in the appropriate category for the nature of the operations of
the Aircraft) for the Aircraft issued by the Air Authority except where (i) the
Aircraft is undergoing maintenance, modification or repair required or permitted
by this Agreement or (ii) the Aircraft's Certificate of Airworthiness is
- 41 -
<PAGE> 46
withdrawn by the Air Authority for all Aircraft of the same model as the
Aircraft, and will from time to time provide to Lessor a copy of such
certificate of airworthiness on request;
(h) If required by the Air Authority, maintain a current
certification as to maintenance issued by or on behalf of the Air Authority in
respect of the Aircraft and will from time to time provide to Lessor a copy on
request; and
(i) Procure promptly the replacement of any Engine or Part
which has become time, cycle or calendar expired, lost, stolen, seized,
confiscated, destroyed, damaged beyond repair, unserviceable or permanently
rendered unfit for use, with an engine or part complying with the conditions set
out in Section 8.13(a).
8.12 REMOVAL OF ENGINES AND PARTS. Lessee will ensure that no Engine
or Part installed on the Aircraft is at any time removed from the Aircraft other
than:
(a) If replaced as expressly permitted by this Agreement; or
(b) If the removal is of an obsolete item and is in accordance
with the Agreed Maintenance Program; or
(c) (i) during the course of maintaining, servicing, repairing,
overhauling or testing that Engine or the Aircraft, as the case may be;
or
(ii) as part of a normal engine or part rotation program;
or
(iii) for the purpose of making such modifications to the
Engine or the Aircraft, as the case may be, as are permitted under this
Agreement;
and then in each case only if it is reinstalled or replaced by an engine
or part complying with Section 8.13(a) as soon as practicable and in any
event no later than the Expiration Date.
8.13 INSTALLATION OF ENGINES AND PARTS. Lessee will:
(a) Ensure that, except as permitted by this Agreement, no
engine or part is installed on the Aircraft unless:
(i) in the case of an engine, it is an engine of the
same model as, or an improved or advanced version of the Engine it
replaces, which has a value and utility (based on but not limited to all
life limited engine components and time since the last Hot Section
- 42 -
<PAGE> 47
Refurbishment) and is in as good or better operating condition and has
substantially similar or greater hours available until the next scheduled
checks, inspections, overhauls and shop visits, as determined by Lessor
in its reasonable judgment;
(ii) in the case of a part, it is in as good operating
condition, has substantially similar hours available until the next
scheduled checks, inspections, overhauls and shop visits, is of the same
or a more advanced make and model and is of the same interchangeable
modification status as the replaced Part;
(iii) in each case, it has become and remains the property
of Lessor free from Liens and on installation on the Aircraft will
without further act be subject to this Agreement;
(iv) in each case, Lessee has sufficient details as to
its source and maintenance records to assure compliance with all
applicable Air Authority requirements;
(b) If no Default has occurred which is continuing, be entitled
to install any engine or part on the Aircraft by way of replacement
notwithstanding Section 8.13(a) if:
(i) there is not available to Lessee at the time and in
the place that that engine or part is required to be installed on the
Aircraft, a replacement engine or, as the case may be, part complying
with the requirements of Section 8.13(a);
(ii) it would result in an unreasonable disruption of the
operation of the Aircraft and/or the business of Lessee to ground the
Aircraft until an engine or part, as the case may be, complying with
Section 8.13(a) becomes available for installation on the Aircraft; and
(iii) as soon as practicable after installation of the
same on the Aircraft but, in any event, no later than the earlier of
thirty (30) days after [A] installation on the Aircraft or [B] the
Expiration Date, Lessee removes any such engine or part and replaces it
with the Engine or Part replaced by it or by an engine or part, as the
case may be, complying with Section 8.13(a).
8.14 NON-INSTALLED ENGINES AND PARTS. Lessee will:
(a) Ensure that any Engine or Part which is not installed on
the Aircraft (or any other aircraft as permitted by this Agreement) is, except
as expressly permitted by this Agreement, properly and safely stored, and kept
free from Liens;
- 43 -
<PAGE> 48
(b) Notify Lessor whenever any Engine is removed from the
Aircraft and, from time to time, on request procure that any person to whom
possession of an Engine is given acknowledges in writing to Lessor, in form and
substance satisfactory to Lessor, that it will respect the interests of Lessor
and as owner of the Engine and will not seek to exercise any rights whatsoever
in relation to it;
(c) Notwithstanding the foregoing provisions of this
subsection, be permitted, if no Default has occurred and is continuing, to
install any Engine or Part on an aircraft, or in the case of a Part, an engine:
(i) owned and operated by Lessee free from Liens; or
(ii) leased or hired to Lessee pursuant to a lease or
conditional sale agreement on a long-term basis and on terms whereby
Lessee has full operational control of that aircraft or engine; or
(iii) acquired by Lessee and/or financed or refinanced,
and operated by Lessee, on terms that ownership of that aircraft or
engine, as the case may be, pursuant to a lease or conditional sale
agreement, or a Lien therein, is vested in or held by any other person;
provided that in the case of (ii) and (iii):
(l) the terms of any such lease, conditional sale
agreement or Lien will not have the effect of prejudicing the
interests of Lessor as owner and lessor of that Engine or Part;
and
(2) the lessor under such lease, the seller under
such conditional sale agreement or the holder of such Lien, as the
case may be, has confirmed and acknowledged in writing to Lessor,
in form and substance satisfactory to Lessor, that it will respect
the interest of Lessor as owner and lessor of that Engine or Part
and that it will not seek to exercise any rights whatsoever in
relation thereto.
8.15 POOLING OF ENGINES AND PARTS. Lessee will not enter into nor
permit any pooling agreement or arrangement in respect of an Engine or Part
without the prior written consent of Lessor.
8.16 EQUIPMENT CHANGES.
(a) Lessee will not make any modification or addition to the
Aircraft (each an "Equipment Change."), except for an
- 44 -
<PAGE> 49
Equipment change which is expressly permitted by Letter Agreement No. 2.
8.17 TITLE ON AN EQUIPMENT CHANGE.
(a) Title to all Engines and Parts installed on the Aircraft
whether by way of replacement, as the result of an Equipment Change or otherwise
(except those installed pursuant to Section 8.13(b)) will on installation,
without further act, vest in Lessor subject to this Agreement free and clear of
all Liens. Lessee will at its own expense take all such steps and execute, and
procure the execution of, all such instruments as Lessor may require and which
are necessary to ensure that title so passes to Lessor according to all
applicable laws. At any time when requested by Lessor, Lessee will provide
evidence to Lessor's satisfaction (including the provision, if required, to
Lessor of one or more legal opinions) that title has so passed to Lessor;
(b) Lessor may require Lessee to remove any Equipment Change
and to restore the Aircraft to its condition prior to that Equipment Change at
the end of the Term; and
(c) Except as referred to in Section 8.17(b) any Engine or Part
at any time removed from the Aircraft will remain the property of Lessor until a
replacement has been made in accordance with this Agreement and until title in
that replacement has passed, according to applicable laws, to Lessor subject to
this Agreement free of all Liens whereupon title to the replaced Engine or Part
will pass to Lessee.
8.18 THIRD PARTY. Lessee will use its best efforts to ensure that no
person (other than Lessor or any Bank) will act in any manner inconsistent with
its obligations under this Agreement and that all persons will comply with those
obligations as if references to "Lessee" included a separate reference to those
persons.
9. INSURANCE
9.1 INSURANCE. Lessee will maintain in full force during the Term
insurance in respect of the Aircraft in form and substance satisfactory to
Lessor (the "Insurance", which expression includes, where the context so admits,
any relevant re-insurance(s)) through such brokers and with such insurers and
having such deductibles and being subject to such exclusions as may be approved
by Lessor. The Insurance will be effected either: (a) on a direct basis with
insurers of recognized standing who normally participate in aviation insurance
in the leading United States and/or international insurance markets and led by
reputable underwriter(s) reasonably approved by Lessor; or (b) with a single
insurer or group of insurers reasonably approved by Lessor who does not retain
the risk but effects
- 45 -
<PAGE> 50
substantial reinsurance with reinsurers in the leading international insurance
markets and through brokers each of recognized standing and acceptable to Lessor
for a percentage acceptable to Lessor of all risks insured (the "Reinsurance").
9.2 REQUIREMENTS. Lessor's current requirements as to required
Insurance are as specified in this Section and in Schedule 4 and in Letter
Agreement No. 1. Lessor may from time to time stipulate other requirements for
the Insurance so that the scope and level of cover is maintained in line with
commercially accepted industry practice and the interests of Lessor protected.
9.3 CHANGE. If at any time Lessor reasonably determines that it is
necessary to revoke its approval of any insurer, reinsurer, insurance or
reinsurance, Lessor and/or its brokers, in order to protect the interests of the
parties insured, Lessor will first consult with Lessee and Lessee's brokers (as
for the time being approved by Lessor) regarding whether that approval should be
revoked to protect the interests of the parties insured. If, following the
consultation, Lessor reasonably determines that any change should be made to
protect the interests of the Lessor and the parties insured, Lessee will then
arrange or procure the arrangement of alternative cover satisfactory to Lessor.
9.4 INSURANCE COVENANTS. Lessee will:
(a) Ensure that all legal requirements as to insurance of the
Aircraft, any Engine or any Part which may from time to time be imposed by the
laws of the State of Registration or any state which can assert jurisdiction
over the Lessee, its business or the Aircraft, in so far as they affect or
concern the operation of the Aircraft, are complied with and in particular those
requirements compliance with which is necessary to ensure that (i) the Aircraft
is not in danger of detention or forfeiture, (ii) the Insurance remain valid and
in full force and effect, and (iii) the interests of the Indemnitees in the
Insurance and the Aircraft or any Part are not thereby prejudiced;
(b) Not use, cause or permit the Aircraft, any Engine or any
Part to be used for any purpose or in any manner not covered by the Insurance or
outside any geographical limit imposed by the Insurance except as provided by
Section 8.3(i);
(c) Comply with the terms and conditions of each policy of the
Insurance and not do, consent or agree to any act or omission which:
(i) invalidates or may invalidate the Insurance; or
- 46 -
<PAGE> 51
(ii) renders or may render void or voidable the whole or
any part of any of the Insurance; or
(iii) brings any particular liability within the scope of
an exclusion or exception to the Insurance;
(d) Not used.
(e) Commence renewal procedures within a reasonable period
prior to expiration of any of the Insurance and provide to Lessor:
(i) if requested by Lessor, a written status report of
renewal negotiation 14 days prior to each expiration date;
(ii) facsimiled confirmation of completion of renewal
prior to each expiration date;
(iii) certificates of insurance and broker's (and any
reinsurance brokers') letter of undertaking in a form acceptable to
Lessor, detailing the coverage and confirming the insurers' (and any
reinsurers') agreement to the specified insurance requirements of this
Agreement within seven (7) days after each renewal date;
(f) On reasonable request, provide to Lessor a certificate of
insurance issued by Lessee's insurance brokers;
(g) On reasonable request, provide to Lessor evidence that the
Insurance premiums have been paid;
(h) Not make any modification or alteration to the Insurance
material and adverse to the interests of any of the Indemnitees;
(i) Be responsible for any deductible under the Insurance; and
(j) Provide any other insurance and reinsurance related
information, or assistance, in respect of the Insurance as Lessor may reasonably
require.
9.5 FAILURE TO INSURE. If Lessee fails to maintain THE Insurance in
compliance with this Agreement, each of the Indemnitees will be entitled but not
bound (without prejudice to any other rights of Lessor under this Agreement):
(a) To pay the premiums due or to effect and maintain insurance
satisfactory to it or otherwise remedy Lessee's failure in such manner
(including, without limitation to effect and maintain an "owner's interest"
policy) as it considers
- 47 -
<PAGE> 52
appropriate. Any sums so expended by it will become immediately due and payable
by Lessee to Lessor together with interest thereon at the rate specified in
Section 5.10, from the date of expenditure by it up to the date of reimbursement
by Lessee; and
(b) At any time while such failure is continuing to require the
Aircraft to remain at any airport or to proceed to and remain at any airport
designated by it until the failure is remedied to its satisfaction.
9.6 CONTINUING INDEMNITY. Lessor may require Lessee to effect and to
maintain insurance after the Expiration Date with respect to its liability under
the indemnities in Section 10 for such period as Lessor may reasonably require
(but in any event not more than three (3) years) which provides for each
Indemnitee to be named as additional insured. Lessee's obligation in this
Section shall not be affected by Lessee ceasing to be lessee of the Aircraft
and/or any of the Indemnitees ceasing to have any interest in respect of the
Aircraft.
9.7 APPLICATION OF INSURANCE PROCEEDS. As between Lessor and Lessee:
(a) All insurance payments received as the result of an Event
of Loss occurring during the Term will be paid to Lessor, and Lessor will pay
the balance of those amounts to Lessee after deduction of all amounts which may
be or become payable by Lessee to Lessor under this Agreement (including under
Sections 11.1(b) and 11.1(c));
(b) All insurance proceeds of any property damage or loss to
the Aircraft, any Engine or any Part occurring during the Term not constituting
an Event of Loss and in excess of the Damage Notification Threshold will be paid
to Lessor and applied in payment (or to reimburse Lessee) for repairs or
replacement property upon Lessor being satisfied that the repairs or replacement
have been effected in accordance with this Agreement. Insurance proceeds in
amounts below the Damage Notification Threshold may be paid by the insurer
directly to Lessee. Any balance remaining may be retained by Lessor;
(c) All insurance proceeds in respect of third party liability
will, except to the extent paid by the insurers to the relevant third party, be
paid to Lessor to be paid directly in satisfaction of the relevant liability or
to Lessee in reimbursement of any payment so made; and
(d) Notwithstanding Sections 9.7(a), (b) or (c), if at the time
of the payment of any such insurance proceeds a Default has occurred and is
continuing, all such proceeds will be paid to or retained by Lessor to be
applied toward payment of any amounts
- 48 -
<PAGE> 53
which may be or become payable by Lessee in such order as Lessor sees fit or as
Lessor may elect.
10. INDEMNITY
10.1 GENERAL. Lessee agrees to assume liability for, defend, indemnify
and hold harmless the Indemnitees on an after tax basis from and against any and
all claims, proceedings, losses, liabilities, damages (whether direct, indirect,
special, incidental or consequential) suits, judgments, costs, expenses
(including, without limitation, reasonable legal fees and expenses), penalties
(whether civil or criminal) or fines (each a "Claim") (regardless of whether
such Claim is made during or after the Term (but not before)):
(a) Which may at any time be suffered or incurred directly or
indirectly as a result of or in any manner connected with Lessee's possession,
delivery, performance, management, registration, control, maintenance,
condition, service, repair, overhaul, leasing, use, operation or return of the
Aircraft, any Engine or Part (either in the air or on the ground), whether or
not the Claim may be attributable to any defect in the Aircraft, any Engine or
any Part or to its design, testing or use or otherwise, and regardless of
whether it arises out of or is attributable to any act or omission, negligent or
otherwise, of any Indemnitee except as otherwise provided herein; or
(b) Which arise out of any act or omission which invalidates or
which renders voidable any of the Insurance; or
(c) Which results from Lessee's breach of any of its
representations or warranties or any other Event of Default under this
Agreement;
but excluding any Claim in relation to a particular Indemnitee to the extent
that that Claim is covered pursuant to another indemnity provision of this
Agreement or to the extent it arises as a RESULT OF THE GROSS NEGLIGENCE OR
wilful misconduct of that Indemnitee, Taxes or a Lessor Lien, or to the extent
it arises out of facts or circumstances occurring prior to the Delivery Date or
after the Expiration Date, where such facts or circumstances do not result from
acts or omissions of Lessee.
10.2 DURATION. Lessee's obligations arising under this Section 10 will
continue in full force after the Expiration Date.
10.3 SUBROGATION. Lessee shall be subrogated to an Indemnitee's rights
to any matter with respect to which Lessee has reimbursed such Indemnitee for
amounts expended or incurred by it or has paid such amount directly pursuant to
Section 10.1.
- 49 -
<PAGE> 54
10.4 NOTICE AND COOPERATION. In case any action, suit or proceeding is
brought against an Indemnitee in connection with any Claim indemnified against
under this Agreement, such Indemnitee will: promptly after receipt of notice of
such action, suit or proceeding, notify Lessee thereof, enclosing a copy of all
papers served upon such Indemnitee. Lessee may resist or defend such action,
suit or proceeding The Indemnitee shall take all actions reasonably requested by
Lessee, at Lessee's cost and expense, in connection with Lessee's defense or
resistance of such action, suit or proceeding.
11. EVENTS OF LOSS
11.1 EVENTS OF LOSS.
(a) If an Event of Loss occurs with respect to the Aircraft
prior to delivery of the Aircraft to Lessee, this Agreement will immediately
terminate and, except as expressly stated in this Agreement, neither party will
have any further obligation or liability under this Agreement except that Lessor
will refund to Lessee the amount of any Aircraft Deposit paid under this
Agreement; and
(b) If an Event of Loss occurs with respect to the Aircraft
after delivery of the Aircraft to Lessee, Lessee will pay the Agreed Value to
Lessor on or prior to the later of (i) five (5) Business Days after the Event of
Loss and (ii) the date of receipt of insurance proceeds in respect of that Event
of Loss, but no later than sixty (60) days after the Event of Loss occurs.
Subject to the rights of any insurers and reinsurers or other third party, upon
irrevocable payment in full to Lessor of that amount and all other amounts which
may be or become payable to Lessor under this Agreement, Lessor will without
recourse or warranty (except as to Lessor's Liens) and without further act, be
deemed to have transferred to Lessee all of Lessor's rights to any Engine and
Parts not installed when the Event of Loss occurred, all on an as-is where-is
basis, and will at Lessee's expense, execute and deliver such bills of sale and
other documents and instruments as Lessee may reasonably request to evidence (on
the public record or otherwise) the transfer and the vesting of Lessor's rights
in such Parts in Lessee, free and clear of all rights of Lessor and Lessor
Liens.
(c) If an Event of Loss occurs with respect to an Engine under
circumstances in which there has not occurred an Event of Loss with respect to
the Aircraft:
(i) Lessee shall forthwith (and in any event within five
(5) days after such occurrence) give Lessor written notice thereof, and Lessor
and Lessee shall proceed diligently and cooperate fully with each other in the
recovery of any and all proceeds of insurance applicable thereto.
- 50 -
<PAGE> 55
(ii) Subject to satisfaction of the conditions set forth
in Clause (iii) below, as soon as practicable but in no event later than sixty
(60) days after the occurrence of such Event of Loss, Lessor shall substitute a
Replacement Engine (as defined herein) for the Engine as to which such Event of
Loss has occurred. In such event, immediately upon the effectiveness of such
substitution, the Replacement Engine shall become subject to this Lease
Agreement and be deemed part of the Aircraft for all purposes thereof to the
same extent as the Engine which is replaced. Upon such substitution, Lessor and
Lessee shall execute and deliver such documents and instruments (including
appropriate filings with the FAA's Aircraft Registry) to evidence such
substitution of the Engine in question by the Replacement Engine.
(iii) Lessor shall retain all insurance proceeds up to the
full amount of the purchase price for the Replacement Engine. In the event that
the insurance proceeds are less than the full amount of the purchase price for
the Replacement Engine, Lessee shall reimburse Lessor for any such shortfall. In
the event that the insurance proceeds exceed such purchase price for the
Replacement Engine, Lessor shall return to Lessee the amount of any such excess.
Notwithstanding the foregoing terms and conditions to the contrary, Lessor's
obligation to provide a Replacement Engine or to refund, return or repay to
Lessee such excess insurance proceeds are subject to the condition that no
Default described in Sections 13.l(a) or (b) or Sections 13.1(h)-(1) shall have
occurred and be continuing.
(iv) For purposes of this Section 11.1(c), the term
"Replacement Engine means a Pratt and Whitney Model JT8D-9A engine (or an engine
of the same manufacturer of a comparable or improved model that is suitable and
certificated by the FAA, for installation and use on the Aircraft) which has a
value and utility (based on but not limited to all life-limited engine
components and time since last Hot Section Refurbishment), and is in as good
operating condition as the Engine it is replacing, assuming such Engine was in
the condition and repair as required by the terms hereof immediately prior to
the occurrence of such Event of Loss.
11.2 REQUISITION. During any requisition for use or hire of the
Aircraft, any Engine or Part which does not constitute an Event of Loss:
(a) The Rent, Maintenance Reserves and other charges payable
under this Agreement will not be suspended or abated either in whole or in part,
and Lessee will not be released from any of its other obligations under the
Agreement (other than operational obligations with which Lessee is unable to
comply solely by virtue of the requisition); and
- 51 -
<PAGE> 56
(b) So long as no Default has occurred and is continuing,
Lessee will be entitled to any hire or other compensation paid by the
requisitioning authority in respect of the Term. Lessee will, as soon as
practicable after the end of any such requisition, cause the Aircraft to be put
into the condition required by this Agreement. Lessor will be entitled to all
compensation payable by the requisitioning authority in respect of any change in
the structure, state or condition of the Aircraft arising during the period of
requisition, and Lessor will apply such compensation in reimbursing Lessee for
the cost of complying with its obligations under this Agreement in respect of
any such change, but so that, if any Default has occurred and is continuing,
Lessor may apply the compensation or hire in or towards settlement of any
amounts owing by Lessee under this Agreement.
12. RETURN OF AIRCRAFT.
12.1 RETURN. (a) On the Expiration Date or earlier termination of the
lease of the Aircraft under this Agreement unless an Event of Loss has occurred,
Lessee will, at its expense, redeliver the Aircraft and Aircraft Documents to
Lessor at the Redelivery Location or such other airport as is mutually
acceptable to the parties hereto, in a condition complying with Schedule 3, free
and clear of all Liens, including Permitted Liens (but excluding Lessor Liens)
and in a condition qualifying for immediate certification of airworthiness by
the FAA or as otherwise agreed by Lessor and Lessee.
(b) Provided that (x) no Default shall have occurred and is
continuing; and (y) there shall have been no material adverse change in Lessee's
financial condition since the Delivery Date, Lessee shall have the option (the
"C Check Option") to extend the Term for up to 2 months provided that such
extension of the Term is required by Lessee so as to enable Lessee to perform
the C Check required by paragraph 1 (e) of Schedule 3 at the time at which such
check would otherwise fall to be performed pursuant to the Agreed Maintenance
Program in the absence of the requirement contained in such section. The C Check
Option shall be exercised, if at all, by Lessee delivering an irrevocable
written notice (a "C Check Notice") to Lessor not later than one hundred eighty
(180) days prior to the New Expiration Date (as defined below) proposed by
Lessee which notice shall state whether Lessee desires to extend the Term and
the proposed date of performance and completion of the aforementioned C Check.
Upon the receipt by Lessor of the C Check Notice, (xx) Lessee shall be obliged
to lease the Aircraft from Lessor until the date (the "New Expiration Date") of
completion of the aforementioned C Check in accordance with the terms and
conditions of this Agreement; and (yy) the definition of "Expiration Date" shall
be deemed to have been amended so as to refer to the New Expiration Date and the
Aircraft shall be redelivered to Lessor on that date
- 52 -
<PAGE> 57
(or, as may be applicable, any other date contemplated by such definition) in
accordance with the terms and conditions of this Agreement.
12.2 FINAL INSPECTION. Immediately prior to redelivery of the Aircraft,
Lessee will make the Aircraft available to Lessor for inspection ("Final
Inspection") in order to verify that the condition of the Aircraft complies with
this Agreement. The Final Inspection will be long enough to permit Lessor to:
(a) Inspect the Aircraft Documents;
(b) Inspect the Aircraft and uninstalled Parts;
(c) Inspect the Engines, including without limitation (i) at
Lessor's expense, a video boroscope inspection of (A) the low pressure and high
pressure compressors and (B) turbine area and (ii) at Lessee's expense, on-wing
engine condition runs; and
(d) Observe a two (2) hour demonstration flight (with up to
three (3) of Lessor's representatives as on-board observers)
Provided, however, that such Final Inspection will not exceed three (3)
consecutive days.
12.3 NON-COMPLIANCE. To the extent that, at the time of Final
Inspection, the condition of the Aircraft does not comply with this Agreement,
Lessee will at Lessor's option:
(a) Immediately rectify the non-compliance and to the extent
the non-compliance extends beyond the Expiration Date, the Term will be
automatically extended and this Agreement will remain in force until the
non-compliance has been rectified; or
(b) Redeliver the Aircraft to Lessor and indemnify Lessor, and
provide to Lessor's satisfaction cash as security for that indemnity, against
the cost of putting the Aircraft into the condition required by this Agreement.
For the avoidance of doubt, nothing in this Agreement shall be
construed to require Lessor or Lessee to modify the Airframe or any Engine at
any time during the Term or upon redelivery of the Aircraft in order to bring
such equipment into compliance with the Stage 3 Requirements.
12.4 NOT USED.
12.5 ACKNOWLEDGMENT. Provided Lessee has complied with its obligations
under this Agreement, upon redelivery of the Aircraft by Lessee to Lessor at the
Redelivery Location, Lessor will deliver to Lessee an acknowledgment confirming
that Lessee has
- 53 -
<PAGE> 58
redelivered the Aircraft to Lessor in accordance with this
Agreement.
12.6 MAINTENANCE PROGRAM.
(a) Prior to the Expiration Date and upon Lessor's request,
Lessee will provide Lessor or its agent reasonable access to the Agreed
Maintenance Program and the Aircraft Documents in order to facilitate the
Aircraft's integration into any subsequent operator's fleet;
(b) Lessee will, if requested by Lessor to do so, upon return
of the Aircraft, deliver to Lessor a certified true current and complete copy of
the Agreed Maintenance Program, together with a letter authorizing Lessor to use
such copy for "bridging" purposes for the next lessee of the Aircraft. Lessor
agrees that it will not disclose the contents of the Agreed Maintenance Program
to any person or entity except to the extent necessary to bridge the Maintenance
Program for the Aircraft from the Agreed Maintenance Program to another program
after the Expiration Date; provided, however, that this will not give Lessor or
any third party any rights to use the Agreed Maintenance Program.
12.7 NOT USED.
12.8 AIRCRAFT STORAGE. During the period of thirty (30) days after the
Expiration Date, Lessor shall have the right to (a) require Lessee to maintain,
store and insure the Aircraft at Lessee's principal maintenance facility or such
other location as may be mutually agreed by Lessor and Lessee, at Lessor's sole
cost and expense as provided below; and (b) require Lessee to ferry the Aircraft
to Lessor's principal place of business or its principal maintenance facility
within the continental United States, at Lessee's sole cost and expense. Any
maintenance or insurance cost actually incurred or paid by Lessee to any third
party vendor in connection with the foregoing shall be payable by Lessor at
Lessee's direct cost without "mark-up". No later than thirty (30) days prior to
the Expiration Date, Lessor shall advise Lessee as to whether Lessor requires
Lessee to provide the services contemplated by this Section 12.8.
13. DEFAULT
13.1 EVENTS OF DEFAULT. Each of the following events or conditions will
constitute an Event of Default (whether any such event or condition is voluntary
or involuntary or occurs by operation of law or pursuant to or in compliance
with any judgment, decree or order of any court or any order, rule or regulation
of any Government Entity):
- 54 -
<PAGE> 59
(a) NON-PAYMENT. Lessee fails to make (i) any payment of Rent,
Maintenance Reserves or the Agreed Value or fails to pay the Deposit on the due
date and such failure continues for two (2) Business Da.Js or (ii) any other
payment due under this Agreement on the due date and such failure continues for
five (5) Business Days after written demand therefor from Lessor to Lessee given
on or after such due date; or
(b) INSURANCE. Lessee fails to comply with any provision of
Section 9 or any insurance required to be maintained under this Agreement is
canceled or terminated or notice of cancellation is given in respect of any such
insurance and such insurance is not renewed or replaced before cancellation or
termination; or
(c) BREACH. Lessee fails to comply with any other provision of
this Agreement and, if such failure is in the reasonable opinion of Lessor
capable of remedy, the failure continues for ten (10) calendar days after
written notice from Lessor to Lessee; or
(d) REPRESENTATION. Any material representation or warranty
made (or deemed to be repeated) by Lessee in or pursuant to this Agreement or in
any document or certificate or statement is or proves to have been incorrect in
any material respect when made or deemed to be repeated; or
(e) CROSS DEFAULT. An Event of Default shall occur and be
continuing under any Other Agreement or any other payment of Lessee owing to
Lessor under any Other Agreement is not paid when due.
(f) APPROVALS: Any consent, authorization, license, certificate
or approval of or registration with or declaration to any Government Entity in
connection with this Agreement (including, without limitation):
(i) required by Lessee to authorize, or in connection
with, the execution, delivery, validity, enforceability or admissibility
in evidence of this Agreement or the performance by Lessee of its
obligations under this Agreement; or
(ii) the registration of the Aircraft (to the extent that
the same is within the control of Lessee); or
(iii) Lessee's authority to operate the Aircraft under
Part 121 of the Federal Public Aviation Regulations and Lessee's
interstate Certificate of Public Convenience and Necessity issued under
Section 401 of the Federal Aviation Act;
- 55 -
<PAGE> 60
is modified in a manner unacceptable to Lessor or is withheld, or is revoked,
suspended, canceled, withdrawn, terminated or not renewed, or otherwise ceases
to be in full force provided the foregoing is not the result of any act,
omission or breach of Lessor; or
(g) BANKRUPTCY, ETC.
(i) Lessee consents to the appointment of a custodian,
receiver, trustee or liquidator of itself or all or any material part of
Lessee's property or Lessee's consolidated property, or Lessee admits in
writing its inability to, or is unable to, or does not, 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 or insolvency laws (as now or hereafter in effect), 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 relate under the provisions of any other 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, or any corporate action
(including, without limitation, any board of directors or shareholder
action) is taken by Lessee in furtherance of any of the foregoing,
whether or not the same is fully effected or accomplished; or
(ii) an order, judgment or decree is entered by any court
appointing, without the consent of Lessee, a custodian, receiver, trustee
or liquidator of Lessee, or of all or any material part of Lessee's
property or Lessee's consolidated property 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 or at any time an order for relief
is granted; or
(iii) an involuntary petition against Lessee in a
proceeding under the United States Federal Bankruptcy laws or other
insolvency laws (as now or hereafter in effect) is filed and is not
withdrawn or dismissed within thirty (30) days thereafter or at any time
an order for relief is granted in such proceeding, or if, under the
provisions of any 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 material part of Lessee's property, or Lessee's
consolidated property and such jurisdiction, custody or control remains
in effect,
- 56 -
<PAGE> 61
unrelinquished, unstayed or unterminated for a period of sixty (60) days
or at any time an order for relief is granted in such proceeding; or
(h) UNLAWFUL. It becomes unlawful for Lessee to perform any of
its obligations under this Agreement or this Agreement becomes wholly or partly
invalid or unenforceable;
(i) SUSPENSION OF BUSINESS. Lessee suspends or ceases or
threatens to suspend or cease to carry on all or a substantial part of its
business as a Certificated Air Carrier for a period of more than seven (7) days
other than for any of the events enumerated in the definition of "Excusable
Delay"; or
(j) DISPOSAL. Except for a reorganization the terms of which
have received the previous consent in writing of Lessor, Lessee disposes,
conveys or transfers or threatens to dispose, convey or transfer of all or a
material part of its assets, liquidates or dissolves or consolidates or merges
with any other Person (other than a consolidation or merger permitted by the
terms of Section 8.8(b) above), whether by one or a series of transactions,
related or not.
(k) RIGHTS. The existence, validity, enforceability or priority
of the rights of Lessor as owner and lessor in respect of the Aircraft are
challenged by Lessee or any other person claiming by or through Lessee, except
if such challenge is in connection with a breach by Lessor of Section 7.1; or
(l) DELIVERY. Lessee fails to accept the Aircraft when validly
tendered for acceptance or delivery by Lessor in the condition required by and
pursuant to this Agreement.
13.2 RIGHTS. If an Event of Default occurs, Lessor may at its option
(and without prejudice to any of its other rights under this Agreement), at any
time thereafter (without notice to Lessee except as required under applicable
law):
(a) By written notice to Lessee and with immediate effect,
terminate this lease of the Aircraft (but without prejudice to the continuing
obligations of Lessee under this Agreement), whereupon all rights of Lessee
under this Agreement shall cease; and/or
(b) Proceed by appropriate court action or actions to enforce
performance of this Agreement or to recover damages for the breach of this
Agreement; and/or
(c) Either:
(i) Take possession of the Aircraft, for which purpose
Lessor may enter any premises belonging to or
- 57 -
<PAGE> 62
in the occupation of or under the control of Lessee where the Aircraft
may be located, or cause the Aircraft to be redelivered to Lessor at
Dubuque, Iowa (or such other location in the continental U.S. as Lessor
may require) Lessor is hereby irrevocably by way of security for Lessee's
obligations under this Agreement appointed attorney for Lessee in causing
the redelivery [or in directing the pilots of Lessee or other pilots to
fly] the Aircraft to that airport and will have all the powers and
authorizations necessary for taking that action; or
(ii) By serving written notice require Lessee to
redeliver the Aircraft to Lessor at Dubuque, Iowa (or such other location
in the continental U.S. as Lessor may require).
13.3 DEREGISTRATION. If an Event of Default occurs, Lessor may sell or
otherwise deal with the Aircraft free and clear of any leasehold or other
interest of Lessee as if this Agreement had never been made and Lessee will, at
the request and expense of Lessor, execute and deliver to Lessor such
acknowledgment of termination of this Lease or other consent to deregistration
of the Aircraft and its export from the United States to enable the Aircraft to
be delivered, at Lessor's option, outside the United States; Lessee hereby
irrevocably and by way of security for its obligations under this Agreement
appoints (which appointment is coupled with an interest) Lessor as its attorney
to execute and deliver any such documentation required in connection with the
foregoing.
13.4 DEFAULT PAYMENTS. If:
(a) An Event of Default occurs; or
(b) The Aircraft is not delivered on the proposed Delivery Date
by reason of failure of Lessee to satisfy any conditions to that delivery and
such failure is not the result of Lessor's breach hereunder;
Lessee will indemnify Lessor on demand against any loss, damage, expense, cost
or liability which Lessor may sustain or incur directly or indirectly as a
result including but not limited to:
(i) Any amount of principal, interest, fees or other
sums whatsoever paid or payable on account of funds borrowed in order to carry
any unpaid amount provided that the element of Lessor's damages described in
this clause (i) shall not exceed the aggregate amount of Rent remaining to be
paid under this Agreement discounted at the Prime Rate to the date of Lessee's
payment; or
- 58 -
<PAGE> 63
(ii) Any loss, cost, expense or liability sustained or
incurred by Lessor owing to Lessee's failure to redeliver the Aircraft on the
date, at the place and in the condition required by this Agreement.
14. ASSIGNMENT
14.1 LESSEE WILL NOT ASSIGN, TRANSFER (VOLUNTARILY OR INVOLUNTARILY BY
OPERATION OF LAW OR OTHERWISE) OR CREATE OR PERMIT TO EXIST ANY LIEN IN, TO OR
UNDER, ANY OF ITS RIGHTS UNDER THIS AGREEMENT.
14.2 Lessor may assign or transfer all of its rights under this
Agreement and in the Aircraft, and in the case of an assignment other than by
way of security, Lessor will have no further obligation under this Agreement
following the assignment of all its rights under this Agreement but
notwithstanding that assignment will remain entitled to the benefit of each
indemnity and the liability insurances effected under this Agreement; provided
that such assignment, novation or transfer does not violate any provision of the
Federal Aviation Act or any rule or regulation thereunder, or prevent the
continued U.S. registration of the Aircraft. Lessee will comply with all
reasonable requests of Lessor, its successors and assigns in respect of any such
assignment, and Lessor will promptly notify Lessee of any such assignment.
14.3 If Lessor desires to effect any assignment or transfer of its
rights and obligations under this Agreement, Lessee agrees to cooperate and take
all such steps as Lessor may reasonably request to give the transferee the
benefit of this Agreement. Any reasonable expenses incurred by Lessee directly
as a result of any assignment contemplated by Section 14.2 shall be advanced by
Lessor.
14.4 Any assignment, novation or transfer by Lessor will be at Lessor's
cost and expense.
14.5 Any provisions of this Section 14 to the contrary notwithstanding,
Lessor's assignee shall:
(i) be a "citizen" of the United States within the
meaning of 49 U.S.C. Section 40102(a) (15);
(ii) have the full power and authority to enter into and
carry out the transactions contemplated hereby;
(iii) enter into an agreement satisfactory in form and
substance to Lessee whereby the assignee confirms that it shall be deemed
a party to this Agreement and provides all of the representations,
warranties and
- 59 -
<PAGE> 64
agreements of Lessor under Sections 2.4 and 7 hereof and is bound by all
the terms of, and undertakes all the obligations of Lessor contained in
this Agreement and the documents ancillary thereto to which Lessor is a
party and confirms that such Agreement and agreements are legal, binding
and enforceable in accordance with their terms.
15. ILLEGALITY
If it is or becomes unlawful in any jurisdiction for Lessor to give
effect to any of its obligations as contemplated by this Agreement or to
continue this Agreement, Lessor may by notice in writing to Lessee terminate the
leasing of the Aircraft under this Agreement and Lessee will forthwith redeliver
the Aircraft to Lessor in accordance with Section 12. Without prejudice to the
foregoing Lessor will consult in good faith with Lessee as to any steps which
may be taken to restructure the transaction to avoid that unlawfulness but will
be under no obligation to take any such steps.
16. MISCELLANEOUS
16.1 WAIVERS, REMEDIES CUMULATIVE. The rights of each party under this
Agreement:
(a) May be exercised as often as necessary;
(b) Are cumulative and not exclusive of its rights under any
law; and
(c) May be waived only in writing and specifically.
Delay in exercising or non-exercise of any such right will not constitute a
waiver of that right.
16.2 DELEGATION. Lessor may delegate to any person or persons all or
any of the trusts, powers or discretions vested in it by these presents and any
such delegation may be made upon such terms and conditions and subject to such
regulations (including power to sub-delegate) as Lessor in its absolute
discretion thinks fit provided, however, that such delegation shall not relieve
Lessor of its obligations hereunder, including without limitation, Lessee's
right of quiet enjoyment under Section 7.1 hereof.
16.3 APPROPRIATION. If any sum paid or recovered in respect of the
liabilities of Lessee under this Agreement is less than the amount then due,
Lessor may apply that sum to amounts due under this Agreement in such
proportions and order and generally in such manner as Lessor may determine at
its sole discretion.
- 60 -
<PAGE> 65
16.4 NOT USED.
16.5 NOT USED.
16.6 SET-OFF. Lessor may set off any matured obligation owed by Lessee
under this Agreement or the Other Agreements !to the extent beneficially owned
by Lessor) against any obligation (whether or not matured) owed by Lessor to
Lessee, regardless of the place of payment or currency. If an obligation is
unascertained or unliquidated, Lessor may in good faith estimate that obligation
and set off in respect of the estimate, subject to the relevant party accounting
to the other when the obligation is ascertained or liquidated. Lessor will not
be obliged to pay any amounts to Lessee under this Agreement so long as any sums
which are then due from Lessee under this Agreement or the Other Agreements
remain unpaid and any such amounts which would otherwise be due will fall due
only if and when Lessee has paid all such sums except to the extent Lessor
otherwise agrees or sets off such amounts against such payment pursuant to the
foregoing.
16.7 SEVERABILITY. If a provision of this Agreement is or becomes
illegal, invalid or unenforceable in any jurisdiction, that will not affect:
(a) The legality, validity or enforceability in that
jurisdiction of any other provision of this Agreement; or
(b) The legality, validity or enforceability in any other
jurisdiction of that or any other provision of this Agreement.
16.8 REMEDY. If Lessee fails to comply with any provision of this
Agreement, Lessor may, without being in any way obliged to do so or responsible
for so doing and without prejudice to the ability of Lessor to treat the
non-compliance as a Default or an Event of Default, effect compliance on behalf
of Lessee, where upon Lessee shall become liable to pay immediately any sums
expended by Lessor together with all costs and expenses (including legal costs)
in connection therewith.
In the event that Lessee obtains a judgment against Lessor, Lessee
will be entitled to receive all costs and expenses (including legal costs) in
connection therewith.
16.9 EXPENSES. Unless this Agreement is terminated by reason of
Lessor's failure to deliver the Aircraft to Lessee through no breach or default
of Lessee of the terms of this Agreement, Lessee will pay to Lessor on demand,
upon the occurrence of a Default, all reasonable expenses (including legal,
survey and other costs) payable or incurred by Lessor in contemplation of, or
otherwise in connection with, the
- 61 -
<PAGE> 66
enforcement of or preservation of any of Lessor's rights under this Agreement,
or in respect of the repossession of the Aircraft.
All expenses payable pursuant to this Section 16.9 will be paid as they are
incurred by Lessor.
16.10 TIME OF ESSENCE. The time stipulated in this Agreement for all
payments payable by Lessee to Lessor and for the performance of Lessee's other
obligations under this Agreement will be of the essence of this Agreement.
16.11 NOTICES. All notices under, or in connection with, this Agreement
will, unless otherwise stated, be given in Any such notice is deemed effectively
to be given, if by letter, by registered mail, return receipt requested, or by
an overnight courier which provides a receipt upon deposit with such courier,
when delivered.
The address of Lessee and Lessor are as follows:
Lessee: Air South Airlines, Inc.
2625 Airport Boulevard
West Columbia, South Carolina 29120
Attn: Vice President - Airline
Services
Lessor: Mimi Leasing Corp.
600 Sunset Ridge
Dubuque, Iowa 52003
Attn: Robert H. Wahlert
16.12 LAW AND JURISDICTION:
(a) THIS AGREEMENT IN ALL RESPECTS IS GOVERNED BY AND TO BE
INTERPRETED IN ACCORDANCE WITH LAWS OF THE STATE OF THE GOVERNING LAW, WITHOUT
REGARD TO ITS CONFLICTS OF LAW PRINCIPLES, AND THIS AGREEMENT SHALL BE DEEMED TO
BE EXECUTED AND DELIVERED IN SUCH STATE.
(b) For the benefit of Lessor, Lessee agrees that the federal
courts of the Eastern District of Iowa, are to have nonexclusive jurisdiction to
settle any disputes in connection with this Agreement and submits itself and its
property to the jurisdiction of the courts of the State of Iowa in connection
with this Agreement;
(c) Without prejudice to any other mode of service, Lessee
consents to the service of process relating to any such proceedings by prepaid
mailing of a copy of the process to Lessee's agent at the address identified in
paragraph [i);
(d) Lessee:
- 62 -
<PAGE> 67
(i) waives objection to the federal courts in the State
of Iowa on grounds of inconvenient forum or otherwise as regards
proceedings in connection with this Agreement; and
(ii) agrees that a judgment or order of a federal court
in the State of Iowa in connection with this Agreement is conclusive and
binding on it and may be enforced against it in the courts of any other
jurisdiction;
(e) Nothing in this Section limits the right of Lessor to bring
proceedings against Lessee in connection with this Agreement in any other court
of competent jurisdiction.
(f) Lessee and Lessor irrevocably and unconditionally:
(i) agrees that if the other party brings legal
proceedings against it or its assets in relation to this Agreement no
immunity from such legal proceedings (which will be deemed to include
without limitation, suit, attachment prior to judgment, other attachment,
the obtaining of judgment, execution or other enforcement) will be
claimed by or on behalf of itself or with respect to its assets;
(ii) waives any such right of immunity which it or its
assets now has or may in the future acquire;
(iii) consents generally in respect of any such
proceedings to the giving of any relief or the issue of any process in
connection with such proceedings including, without limitation, the
making, enforcement or execution against any property whatsoever
(irrespective of its use or intended use) of any order or judgment which
may be made or given in such proceedings.
16.13 ENTIRE AGREEMENT. Except for the Original Lease which will remain
in full force and effect until the Aircraft is accepted by Lessee pursuant to
Section 4.2 of this Agreement, after which time the Original Lease shall be
released, terminated and appropriate filings with respect thereto made at the
FAA Registry, Oklahoma City, Oklahoma, this Agreement, Letter Agreement No. 1
and Letter Agreement No. 2 are the sole and entire agreements between Lessor and
Lessee in relation to the leasing of the Aircraft, and shall supersede all
previous agreements in relation to that leasing.
16.14 INDEMNITIES. All rights expressed to be granted to each Indemnitee
under this Agreement (other than Lessor) are given to Lessor on behalf of that
Indemnitee.
16.15 COUNTERPARTS. This Agreement may be executed in counterparts each
of which will constitute one and the same document.
- 63 -
<PAGE> 68
17. DISCLAIMERS AND WAIVERS
17.1 EXCLUSION. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, THE
AIRCRAFT IS DELIVERED "AS IS, WHERE IS" AND LESSEE AGREES AND ACKNOWLEDGES THAT
UPON ACCEPTANCE OF DELIVERY OF THE AIRCRAFT BY LESSEE, SAVE AS EXPRESSLY STATED
IN THIS AGREEMENT, LESSOR WILL HAVE NO LIABILITY IN RELATION TO, AND LESSOR HAS
NOT AND WILL NOT BE DEEMED TO HAVE MADE OR GIVEN, ANY WARRANTIES OR
REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO, THE AIRCRAFT, INCLUDING
BUT NOT LIMITED TO:
(a) THE AIRWORTHINESS, MERCHANTABILITY, FITNESS FOR ANY
PARTICULAR USE OR PURPOSE, VALUE, CONDITION, OR DESIGN, OF THE AIRCRAFT OR ANY
PART; OR
(b) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT,
WHETHER OR NOT ARISING FROM LESSOR'S NEGLIGENCE, ACTUAL OR IMPUTED; OR
(c) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS
OF OR DAMAGE TO THE AIRCRAFT, FOR ANY LIABILITY OF LESSEE TO ANY THIRD PARTY, OR
FOR ANY OTHER DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
17.2 WAIVER. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, LESSEE
HEREBY WAIVES, AS BETWEEN ITSELF AND THE LESSOR, ALL ITS RIGHTS IN RESPECT OF
ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, ON THE PART OF LESSOR AND
ALL CLAIMS AGAINST LESSOR HOWSOEVER AND WHENEVER ARISING AT ANY TIME IN RESPECT
OF OR OUT OF THE OPERATION OR PERFORMANCE OF THE AIRCRAFT OR THIS AGREEMENT
EXCEPT TO THE EXTENT ARISING UNDER SECTION 2.4.
17.3 CONFIRMATION. LESSEE CONFIRMS THAT IT IS FULLY AWARE OF THE
PROVISIONS OF THIS SECTION 17 AND ACKNOWLEDGES THAT RENT AND OTHER AMOUNTS HAVE
BEEN CALCULATED BASED ON ITS PROVISIONS.
- 64 -
<PAGE> 69
18. TRUE LEASE
(i) It is the intent of Lessor and Lessee that for all
purposes (including without limitation U.S. federal income tax purposes)
this Agreement will be a true lease, and that this Agreement conveys to
the Lessee no right, title or interest in the Aircraft except as a
lessee.
(ii) Notwithstanding any provision herein or elsewhere
contained to the contrary, it is understood and agreed between the Lessor
and the Lessee that the transactions contemplated by this Agreement are
expressly intended to be, shall be and should be construed so as to be,
entitled to the full benefits of 11 U.S.C. Section 1110 from time to time
with respect to the right to repossess the Airframe, the Engines and any
Parts as provided herein, and in any circumstances where more than one
construction of the terms and conditions of this Agreement is possible, a
construction which would preserve such benefits shall control over any
construction which would not preserve such benefits or would render them
doubtful.
(iii) Lessee acknowledges that Lessor would not have
entered into this Agreement unless it had available to it the benefits of
a lessor under Section 1110 of Title 11 of the United States Code. Lessee
covenants and agrees with Lessor that to better ensure the availability
of such benefits, Lessee shall support any motion, petition or
application filed by Lessor with any bankruptcy court having jurisdiction
over Lessee, whereby Lessor seeks recovery of possession of the Aircraft
under said Section 1110 and shall not in any way oppose such action by
Lessor unless Lessee shall have complied with the requirements of said
Section 1110 to be fulfilled in order to entitle Lessee to continued use
and possession of the Aircraft hereunder, In the event said Section 1110
is amended, or if it is repealed and another statute is enacted in lieu
thereof, Lessor and Lessee agree to amend this Agreement and take such
other action not inconsistent with this Agreement as Lessor reasonably
deems necessary so as to afford to Lessor the rights and benefits as such
amended or substituted statute confers upon owners and lessors of
aircraft similarly situated to Lessor.
- 65 -
<PAGE> 70
IN WITNESS whereof the parties hereto have executed this Agreement on the
date shown at the beginning of this Agreement.
WITNESS: Lessor:
MIMI LEASING CORP.
By:
- - - -------------------------- ---------------------
Name:
-------------------
Title:
------------------
WITNESS: Lessee:
AIR SOUTH AIRLINES, INC.
/s/ By: /s/ Dennis B. Crosby
- - - ------------------------- ---------------------
Name: Dennis B. Crosby
-------------------
Title: Vice President
------------------
- 66 -
<PAGE> 71
SCHEDULE 1
PART 1
FORM OF LEASE SUPPLEMENT
THIS LEASE SUPPLEMENT is dated as of February 1, 1997, and is
executed by Air South Airlines, Inc. ("Lessee") and Mimi Leasing Corp.
("Lessor"), pursuant to Section 3.1(d) of the Aircraft Lease Agreement between
Lessor and Lessee dated as or February 1, 1997 (the "Lease"). All capitalized
terms used herein which are not otherwise defined herein shall have the meaning
given to such terms in the Lease.
Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Aircraft described below (the "Aircraft") upon and subject to all of
the terms, conditions and provisions of the Lease, and Lessor and Lessee further
agree and state as follows:
1. Description of the Aircraft:
(a) Airframe: Boeing 737-247
FAA Registration No.: N4510W
Manufacturer's Serial No.: 19607
(b) Engines: Two (2) Pratt & Whitney engines, Model
JT8D-9A, Serial Numbers 674165B and 674214B, each of
said engines having 750 or more rated take-off
horsepower or the equivalent thereof;
(c) All Parts (other than Engines) installed on or
associated with the Airframe and Engines; and
(d) The Aircraft Documents relating to the Airframe and
Engines.
2. The main base of the Aircraft is Columbia, South Carolina.
3. The Term for the Lease commences on February 1, 1997 (the
"Delivery Date") and ends on the day preceding the numerically corresponding day
36 months after the Delivery Date, both dates inclusive, unless sooner
terminated in accordance with the provisions of the Lease.
4. The Rent for the Aircraft shall be payable in advance for
each calendar month of the Term commencing on the Delivery Date and shall be the
amount set forth in Schedule 1 to Letter Agreement No. 1 to the Lease.
- 67 -
<PAGE> 72
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease
Supplement to be executed by their respective corporate officers as of the date
first above written.
AIR SOUTH AIRLINES, INC. (LESSEE)
By:
------------------------------
Title:
---------------------------
MIMI LEASING CORP. (LESSOR)
By:
------------------------------
Title:
---------------------------
- 68 -
<PAGE> 73
SCHEDULE 1
PART 2
AIRCRAFT DOCUMENTS
A. CERTIFICATES
- FAA Certificate of Airworthiness
B. AIRCRAFT STATUS RECORDS
- Log Books
- Airframe Maintenance Status Report
- Supplemental Structural Inspection Document Status (if applicable)
- Manufacturer's Service Bulletin Status Report
- Airworthiness Directive Service Bulletin Compliance Records and
Report (terminated and repetitive), including documentation
adequate to determine the method of compliance, but not limited to
current status
- Modification Status Report List documents will be provided upon
request)
- Last Weighing Report
- List of Life Limited Components with remaining hours/cycles, with
FAA-approved serviceable tags or other documentation or releases
approved by the FAA under Part 121
C. AIRCRAFT MAINTENANCE RECORDS (last heavy maintenance visits)
- Test Flight Reports
- X-ray pictures
- Last "C" check and heaviest maintenance check Work Cards
D. AIRCRAFT HISTORY RECORDS
- Aircraft Maintenance History Cards (may include computer generated
summaries and records in lieu of cards)
- Service Difficulty Report
- Accident, Incident or Major Structural Repair Report
E. ENGINE RECORDS (for each engine)
- Engine time and cycle records
- Last overhaul and repair summaries (including FAA Forms 337)
- Airworthiness Directive Compliance Records and Report (terminated
and repetitive), including documentation adequate to determine the
method of compliance, but not limited to current status
- 69 -
<PAGE> 74
- Manufacturer's Service Bulletin Status Report for those service
bulletins which Lessee has complied with, including documentation
adequate to determine the method of compliance, but not limited to
current status
- List of Time Controlled Components with remaining hours and cycles
with FAA-approved serviceable tags or other documentation or
releases approved by the FAA under Part 121
- Modification Status Report
- Engine Disc Sheets
- Engine Build Specifications for last major engine shop visit.
F. APU RECORDS
- Last Overhaul and Repair Documents (including modification status)
- Airworthiness Directive Compliance Records and Report (terminated
and repetitive), including documentation adequate to determine the
method of compliance, but not limited to current status
- Manufacturer's Service Bulletin Records and Status Report
- List of Time Controlled Components with remaining hours/cycles
- Modification Status Report, with FAA approved serviceable tags or
other documentation or releases approved by the FAA under Part 121
G. COMPONENT RECORDS
- Time Controlled Component Historical Records with Installation
Records and FAA Serviceability Tags or other documentation or
releases in a form acceptable to the FAA for a Part 121 Air
Carrier
H. MANUALS
- Airplane Flight Manual (Manufacturer Approved, FAA Approved)
- Flight Crew Operating Manual
- Weight and Balance Manual
- Wiring Diagram Manual (microfilm and hard copy if available)
- Illustrated Parts Catalog (microfilm)
- Aircraft Maintenance Manual (microfilm)
- Manufacturer's Engine Maintenance Manual and any approved
engineering changes, as applicable
I. MISCELLANEOUS TECHNICAL DOCUMENTS
- Maintenance Program
- Interior Configuration Drawings
- Original Delivery Documents
- Loose Equipment Inventory
- 70 -
<PAGE> 75
SCHEDULE 2
CERTIFICATE OF ACCEPTANCE AND DELIVERY
This Certificate of Acceptance and Delivery is delivered, on the date set
forth below by Air South Airlines, Inc. ("Lessee"), to Mimi Leasing Corp.
("Lessor"), pursuant to the Aircraft Lease Agreement dated as of February l,
1997 between Lessor and Lessee (the "Agreement"). Capitalized terms used in this
Certificate shall have the meaning given to such terms in the Agreement.
1. DETAILS OF ACCEPTANCE
Lessee hereby confirms to Lessor that Lessee has at _____________ o'clock
on this ____ day of __________, 199_, at Oklahoma City, Oklahoma, accepted the
following, in accordance with the provisions of the Agreement:
(a) Boeing 737-247 airframe, Manufacturer's Serial No. 19607, FAA
Registration Number N4510W;
(b) 2 Pratt & Whitney JT8D-9A Engines:
Manufacturer's Serial No.
674214B
674165B
(Each of which shall have more than 750 rated takeoff horsepower or the
equivalent of such horsepower).
(c) Loose Equipment Check List: as per list signed by Lessor and
Lessee and attached hereto.
2. HOURS AND CYCLES DATA (AS OF ACCEPTANCE DATE)
(a) Airframe:
Number of Hours since last "C-7" Plus SI Check (Heaviest Check):
______ hours
"C" Check (or Equivalent):
Interval: ________________________
Time Since: ______________________
- 71 -
<PAGE> 76
(b) Landing Gear Overhaul:
Number of Hours Since Last Overhaul:
Left Gear ________________________________ Hours
Right Gear _______________________________ Hours
Nose Gear ________________________________ Hours
Interval: Left Gear ________________________________
Right Gear _______________________________
Nose Gear ________________________________
(c) Engines:
Total Number of Hours and Cycles:
S/N ______: ______ hours; ______________________ cycles
S/N ______: ______ hours; ______________________ cycles
Number of Hours Since Last Hot Section Refurbishment:
S/N ______: ______ hours
S/N ______: ______ hours
Number of Hours Since Last Cold Section Refurbishment:
S/N ______: ______ hours
S/N ______: ______ hours
Hot Section Refurbishment:
Interval __________________________________________
Time Since (S/N ________): ________________________
Time Since (S/N ________):_________________________
- 72 -
<PAGE> 77
Time Remaining to First Restriction:
Engine S/N: ____________________
Hours: ____________ Restriction: __________________
Cycles: ___________ Restriction: __________________
Engine S/N: ____________________
Hours: ____________ Restriction: __________________
Cycles: ___________ Restriction: __________________
Average Cycles in Life Limited Parts (see attached Schedule):
______________
(d) Auxiliary Power Unit:
Number of APU Hours Since Last Heavy Shop Visit:
__________ hours ______________ Date accomplished
Hot Section Refurbishment:
Interval: ________________________________
Time Since: ______________________________
(e) Time Controlled Components: [see attached report]
(f) Interior Equipment:
<TABLE>
<S> <C> <C>
Number of Passenger Seats
and Configuration: _______ _______
Number of Galleys and Location: _______ _______
Number of Lavatories and Location: _______ _______
LOPA - Attached: _______ _______
List of Loose Equipment on Board:
_________________________________ _______ _______
_________________________________ _______ _______
_________________________________ _______ _______
_________________________________ _______ _______
</TABLE>
- 73 -
<PAGE> 78
<TABLE>
<S> <C> <C>
________________________________ _______ _______
________________________________ _______ _______
</TABLE>
(g) Avionics:
<TABLE>
Part
Description Model No.
<S> <C> <C>
_______________________________ _______ _______
_______________________________ _______ _______
_______________________________ _______ _______
_______________________________ _______ _______
_______________________________ _______ _______
_______________________________ _______ _______
</TABLE>
IN WITNESS WHEREOF, Lessee has, by its duly authorized representative,
executed this Certificate on the date in paragraph 1 above.
LESSEE:
AIR SOUTH AIRLINES, INC.
By: _________________________________
Title: ______________________________
- 74 -
<PAGE> 79
SCHEDULE 3
OPERATING CONDITION AT REDELIVERY
On the Expiration Date, the Aircraft shall:
(1) GENERAL CONDITION
(a) Possess a valid Certificate of Airworthiness with respect to the
Aircraft issued by the Air Authority. The Aircraft will also meet all
requirements for U.S. domestic operations under FAR Part 121 without waiver or
restriction. There will be no deferred, open or carryover items on the Aircraft
or any Engine on the Expiration Date;
(b) Be clean by U.S. airline standards;
(c) Have installed the full complement of engines and other equipment,
parts and accessories and loose equipment as is normally installed in the
Aircraft, and be in the same economy configuration of 122 seats, in accordance
with an approved STC, as at Delivery;
(d) Have undergone, immediately prior to redelivery, a full C check
(with all supplemental inspections associated with that Check complied with) in
accordance with the Agreed Maintenance Program, so that all airframe inspections
falling due within the next following C check interval, in accordance with the
Agreed Maintenance Program, and in addition at least 3,100 Flight Hours or
Cycles (whichever is lower) remain to the next C-7 plus SI Major Check per the
Agreed Maintenance Program.
Notwithstanding Paragraph l(d) above, if Lessee wishes to redeliver the
Airframe to Lessor with less life so remaining, Lessee shall give written notice
to Lessor no later than sixty (60) days prior to the Expiration Date, and
Lessee, shall deliver the Arframe in such condition with an additional payment
(in addition to the Airframe Maintenance Reserves otherwise payable) equal to
the number of Flight Hours or Cycles less than the minimum required by this
Schedule 3 multiplied by the amount of Airframe Maintenance Reserve per Flight
Hour or Cycle then in effect under the Lease, unless Lessor and Lessee shall
mutually agree that Lessee perform a premature C 7 plus SI Major Check and
utilize the Airframe Maintenance Reserves (if such work qualifies for
contribution by Lessor pursuant to Section 7.2) held by Lessor under the Lease;
(e) Be in compliance with all airworthiness directives issued by the
FAA ("ADs") for compliance during the Term and within 180 days after the
Expiration Date (except that repetitive inspections having intervals of less
than 180 days will be performed only once at or immediately prior to the
Expiration
- 75 -
<PAGE> 80
Date), including being current with all initial tasks of the Corrosion
Prevention and Control Program (CPCP) under the Boeing D6-38528 document, with
no exceptions or deviations and with proper supporting documentation;
(f) Be stripped and freshly painted with an "all white" fuselage and
gray wings;
(g) Have all required signs and decals clean, secure and legible.
(2) COMPONENTS
(a) All time-controlled components (other than the Engines and Landing
Gears which are referred to elsewhere in this Schedule 3) shall have at least
3,000 Flight Hours or Cycles (whichever is the most limiting) or at least one
(1) year remaining to the next scheduled overhaul per the Agreed Maintenance
Program;
(b) Each "on-condition" and "condition monitored" component shall be
serviceable; and
(c) The APU will be in the same operational condition as at the
Delivery Date with temperatures and air outputs within the APU manufacturer's
limits at all operational settings; and
(3) ENGINES
Each Engine will be installed on the Aircraft and if not the engines
installed on the Delivery Date will be accompanied by all documentation Lessor
may require to evidence that title thereto is properly vested in Lessor and:
(a) Each Engine and each life limited part within each Engine will
have no less than 3,500 Cycles or 6,000 Flight Hours until the next scheduled
life limited part replacement;
(b) Each Engine will, at Lessor's option and expense, have had a
complete hot (including combustion chamber) and cold section video borescope
inspection, and a power assurance run in accordance with the Engine
manufacturer's maintenance manual and all items beyond such manufacturer's
limits will be repaired at Lessee's expense. No Engine will be "on watch" for
any reason requiring any special or out of sequence inspection.
Notwithstanding Paragraph 3(a) above, if Lessee wishes to redeliver an
Engine to Lessor with less life so remaining, Lessee shall give written notice
to Lessor no later than sixty (60) days prior to the Expiration Date, and Lessee
shall redeliver such Engine in such condition with an additional payment (in
addition to Maintenance Reserves otherwise payable per Engine) equal to
- 76 -
<PAGE> 81
the number of Flight Hours or Cycles less than the minimum required by this
Schedule 3, multiplied by the amount of Engine Maintenance Reserves per Flight
Hour or cycle then in effect, unless Lessor and Lessee shall mutually agree that
Lessee perform a premature Hot Section Refurbishment Inspection and shop visit
and utilize the Engine Maintenance Reserves (if such work qualifies for
contribution by Lessor pursuant to Section 7.2) held by Lessor under the Lease.
(4) FUSELAGE, WINDOWS AND DOORS
(a) The fuselage will be free of major dents outside allowable Boeing
Maintenance or Structural Repair Manual Limits and abrasions and loose or pulled
or missing rivets;
(b) Doors will be free moving, correctly rigged and be fitted with
serviceable seals, free from damage as defined by the Boeing Maintenance or
Structural Repair Manual Limits.
(5) WINGS AND EMPENNAGE
(a) Leading edges will be free from damage, outside allowance Boeing
Maintenance or Structural Repair Manual Limits;
(b) Wings will be free of fuel leaks.
(6) INTERIOR
(a) Ceilings, sidewalls and bulkhead panels will be clean and
reasonably free of noticeable cracks and stains by U.S. airline standards.
(b) Carpets and seat covers will be in good condition, clean and
reasonably free of noticeable stains by U.S. airline standards and meet FAR burn
certification regulations;
(c) Seats will be serviceable and in good condition;
(d) Emergency equipment having a calendar life will have a minimum of
1 year or 100% of its total approved life, whichever is less, remaining;
(e) Galleys will contain all equipment installed and functional
including service carts (trolleys), containers and coffee pots, which will be
reasonably clean by airline standards and shall have all FAA required markings
installed;
(f) Overhead stowage compartments will be clean by airline standards
and serviceable with proper markings installed; and
(g) Lavatories will be clean by airline standards and serviceable with
correct FAA markings installed.
- 77 -
<PAGE> 82
(7) COCKPIT
(a) Trim panels shall be reasonably free of noticeable stains and
cracks, will be clean secure and repainted as necessary;
(b) Seat covers will be in good condition, clean and free of stains
and will conform to FAR burn certification regulations; and
(8) CARGO COMPARTMENTS
(a) Panels will be in good condition; and
(b) Nets will be in good condition.
(9) LANDING GEAR
Time on each Landing Gear will not be less than 5,000 Flight Hours or
Cycles (whichever is less) remaining until the next scheduled overhaul. Each
life limited part within the landing gear will have at least the same time
remaining as at the Delivery Date. The Landing Gear and wheel wells will be
clean, free of leaks and repaired as necessary.
Notwithstanding paragraph 9 above, if Lessee wishes to redeliver a
Landing Gear to Lessor with less life so remaining, Lessee shall give written
notice to Lessor no later than sixty (60) days prior to the Expiration Date, and
Lessor shall redeliver such Landing Gear in such condition with an additional
payment (in addition to the Landing Gear Maintenance Reserves otherwise payable)
equal to the number of Flight Hours or Cycles less than the minimum required by
this Schedule 3 multiplied by the amount of Landing Gear Maintenance Reserve per
Flight Hour or Cycle then in effect under the Lease, unless Lessor and Lessee
shall mutually agree that Lessee perform a premature overhaul of such Landing
Gear and use the Landing Gear Maintenance Reserve (if such work qualifies for
contribution by Lessor pursuant to Section 7.2) held by Lessor under the Lease.
(10) CORROSION
(a) The Aircraft will have been inspected and treated with respect to
corrosion as defined in the Agreed Maintenance Program and/or Boeing Document
No.D6-38528 relative to compliance with the Corrosion Prevention and Control
Program (CPCP). The entire fuselage will be free from corrosion which, if
discovered during any Check, would require treatment or repair in accordance
with the Boeing Structural Repair Manual; and
(b) Fuel tanks will be free from contamination and corrosion and a
tank treatment Program will be in operation.
- 78 -
<PAGE> 83
Notwithstanding anything contained in this Schedule 3, Lessor shall not
be required to make any payments to Lessee in the event that the Airframe, the
Engines, the Landing Gear, any time, cycle or calendar controlled component is
returned to Lessor in a condition better than that specified in Section 12 and
this Schedule 3.
- 79 -
<PAGE> 84
SCHEDULE 4
INSURANCE REQUIREMENTS
The Insurance required to be maintained are as follows:
(a) HULL ALL RISKS of Loss or Damage (while flying and on the ground)
with respect to the Aircraft on an "agreed value basis" for the Agreed Value and
with a deductible not exceeding $100,000 (including, without limitation, foreign
object damage coverage with a deductible not exceeding $100,000 per engine per
occurrence), or such other amount agreed by Lessor from time to time. Without
prejudice to the foregoing, with the prior written consent of Lessor, Lessee may
increase the aforesaid deductible amount to $500,000 if, prior to doing so,
Lessee shall have paid to Lessor the sum of $250,000 by way of an insurance
security deposit (the "Insurance Security Deposit") (which Insurance Deposit
shall also be available to be applied to deductible losses between $100,000 and
$500,000) Insurance Security Deposit (which shall be held by Lessor as security
for the performance by Lessee of its obligations under this Agreement and the
Other Agreements), shall be returned to Lessee on the Expiration Date if all
amounts payable by Lessee under this Agreement and any Other Agreement shall
have been paid in full and no Default shall have occurred and be continuing.
With Lessor's prior consent, the Insurance Deposit may be provided by Lessee by
way of letter of credit issued by a bank acceptable to Lessor and in form and in
substance satisfactory to Lessor.
In the event that the Insurance Security Deposit is applied to a loss
claim thereby reducing the balance thereof, Lessee will either (a) replace any
deficiency in such balance; or (b) lower the all risk hull insurance deductible
to $100,000 within 15 days after the aforementioned application.
(b) HULL WAR AND ALLIED PERILS, being such risks excluded from the
Hull All Risks Policy to the fullest extent available from the leading
international insurance markets including confiscation and requisition by the
State of Registration for the Agreed Value;
(c) ALL RISKS (INCLUDING WAR AND ALLIED RISK except when on the ground
or in transit other than by air) property insurance on all Engines and Parts
when not installed on the Aircraft on an "agreed value" basis and including
engine test and running risks;
(d) AIRCRAFT THIRD PARTY, PROPERTY DAMAGE, PASSENGER, BAGGAGE, CARGO
AND MAIL AND AIRLINE GENERAL THIRD PARTY (INCLUDING PRODUCTS) LEGAL LIABILITY
for a Combined Single Limit (Bodily Injury/Property Damage) of an amount not
less than the Minimum Liability Coverage for any one occurrence (but in respect
of products and personal injury liability this limit may be an
- 80 -
<PAGE> 85
aggregate limit for any and all losses occurring during the currency of the
policy) War and Allied Risks are also to be covered under the Policy to the
fullest extent available from the leading international insurance markets;
(e) All required hull and spares insurance (as specified above), so
far as it relates to the Aircraft will:
(i) name Lessor and its respective successors and assigns as
additional assureds for their respective rights and interests;
(ii) provide that any loss will be settled jointly with Lessor
and Lessee, subject to final prior approval of Lessor and will be payable
in Dollars to Lessor, for the account of all interests except where the
loss does not exceed the Damage Notification Threshold, and Lessor has
not notified the insurers to the contrary, in which case the loss will be
settled with and paid to Lessee;
(iii) include a notice and/or acknowledgment of assignment in a
form acceptable to Lessor;
(iv) if separate Hull "all risks" and "war risks" insurances are
arranged, include a 50/50 provision in accordance with market practice
(AVS. 103 is the current market language);
(v) confirm that the insurers are not entitled to replace the
Aircraft in the event of an insured Event of Loss;
(vi) confirm that the insurers will not obtain a valid discharge
of the obligations under the Insurance by payment to the broker,
notwithstanding market practice to the contrary;
(f) All required liability insurances (specified above) will:
(i) include Lessor and Mercantile Bank of Dubuque, Iowa and
their respective successors and assigns, and their respective
shareholders, subsidiaries, directors, officers, agents, employees and
indemnitees as additional insureds for their respective rights and
interests, warranted, each as to itself only, no operational interest;
(ii) include a Severability of Interest Clause which provides
that the insurance, except for the limit of liability, will operate to
give each assured the same protection as if there was a separate policy
issued to each assured;
- 81 -
<PAGE> 86
(iii) contain a provision confirming that the policy is primary
without right of contribution and the liability of the insurers will not
be affected by any other insurance of which Lessor or Lessee have the
benefit so as to reduce the amount payable to the additional insureds
under such policies;
(g) All Insurance will:
(i) be in accordance with normal industry practice of persons
operating similar aircraft in similar circumstances;
(ii) provide cover denominated in Dollars and any other
currencies which Lessor may reasonably require in relation to liability
insurance;
(iii) operate on a worldwide basis subject to such reasonable
limitations and exclusions as Lessor may agree;
(iv) acknowledge the insurer is aware (and has seen a copy) of
this Agreement and that the Aircraft is owned by Lessor;
(v) provide that, in relation to the interests of each of the
additional assureds the Insurance will not be invalidated by any act or
omission by Lessee, or any other person other than the respective
additional assured seeking protection and shall insure the interests of
each of the additional assureds regardless of any breach or violation by
Lessee, or any other person other than the respective additional assured
seeking protection of any warranty, declaration or condition, contained
in such Insurances;
(vi) provide that the insurers will hold harmless and waive any
rights of recourse and/or subrogation against the additional assureds or
to be subrogated to any rights of the Banks against Lessor or Lessee;
(vii) provide that the additional assureds will have no
obligation or responsibility for the payment of any premiums due (but
reserve the right to pay the same should any of them elect so to do) and
that the insurers will not exercise any right of set-off or counter-claim
in respect of any premium due against the respective interests of the
additional assureds other than outstanding premiums relating to the
Aircraft, any Engine or Part the subject of the relevant claim;
(viii) provide that the Insurance will continue unaltered for the
benefit of the additional assureds for at least thirty (30) days after
written notice by registered
- 82 -
<PAGE> 87
mail or telex of any cancellation, change, event of non-payment of
premium or installment thereof has been sent to Lessor, except in the
case of war risks for which seven (7) days (or such lesser period as is
or may be customarily available in respect of war risks or allied perils)
will be given, or in the case of war between the five [5) great powers or
nuclear peril for which termination is automatic;
(ix) contain a provision entitling Lessor or any insured party
to initiate a claim under any policy in the event of the refusal or
failure of Lessee to do so; and
(x) accept and insure the indemnity provisions of this
Agreement to the extent of the risks covered by the policies.
- 83 -
<PAGE> 88
LETTER AGREEMENT NO. 1
From: MIMI Leasing Corp.
To: Air South Airlines, Inc.
Date: February 1, 1997
Re: Aircraft Lease Agreement (the "Lease Agreement") of even date
herewith between Mimi Leasing Corp. ("Lessor") and Air South
Airlines, Inc. (the "Lessee") in respect of Boeing 737-247
Aircraft, Serial Number 19607
Dear Sirs,
This is Letter Agreement No. 1, referred to in the Lease Agreement, and
upon your acceptance of its terms, will record our further agreement with
respect to the Lease Agreement. Capitalized terms used, but not defined, in this
Letter Agreement shall have the respective meanings assigned to them in the
Lease Agreement.
For valuable consideration (the receipt and sufficiency of which is
acknowledged), Lessor and Lessee agree as follows:
In order to preserve the confidentiality of certain other business terms
of the Lease Agreement, Lessor and Lessee have agreed that certain provisions
referred to in the Lease Agreement shall be set forth in this Letter Agreement
No. 1 rather than in the body of the Lease Agreement, as follows:
Paragraph 1
AIRCRAFT DEPOSIT. The amount of the Aircraft Deposit contemplated by
Section 5.1 of the Lease Agreement shall be that sum specified on Schedule 1
hereto, payable in full on or before May 1, 1997.
Paragraph 2
RENT. The amount of Rent payable by Lessee in respect of each Rental
Period pursuant to Section 5.3 of the Lease Agreement shall be as follows:
Rental Periods 1-36 The sum specified on
Schedule 1 hereto
<PAGE> 89
Paragraph 3
MAINTENANCE RESERVES. The amount of Maintenance Reserves payable pursuant
to Section 5.4 of the Lease Agreement shall be as specified on Schedule 1
hereto.
On or about February 1, 1998 and on February 1, 1999, the rate of Maintenance
Reserves may be adjusted upwards by Lessor at a percentage rate per annum not to
exceed the percentage increase in the Consumer Price Index for the Columbia,
South Carolina Metropolitan Area since the Delivery Date or the date of the last
price adjustment under this provision, if later. In addition, but not limiting
the foregoing, Lessee acknowledges that the rates of Maintenance Reserves
currently provided for in this Agreement are based upon the assumption the
Agreed Maintenance Program for the Aircraft during the Term will be the same as
that in effect on the Delivery Date. In the event that such assumption proves to
be incorrect at any time during the Term, Lessor and Lessee agree that Lessor
shall have the right, upon written notice to Lessee, to adjust the rate of
Maintenance Reserves so as to reasonably account for the incorrectness of such
assumption. In the event that the Agreed Maintenance Program changes during the
Term (any such change to be in accordance with the relevant terms and conditions
of this Agreement), Lessor shall make the aforementioned adjustment in the
manner which Lessor determines, in its reasonable discretion, is necessary to
maintain the rates of Maintenance Reserves at levels which accurately reflect
the costs associated with obtaining the maintenance services referred to in
Section 7.2 at prevailing industry rates. Each such notice shall specify the
revised rate of Maintenance Reserves and the effective date of such revision.
Lessee agrees to advise Lessor, in writing, of any circumstances or events which
would result in the foregoing assumption becoming incorrect at any time during
the Term.
Paragraph 4
INSURANCE
(a) The Agreed Value shall be that sum specified on Schedule 1 hereto,
or, if higher, the appraised value of the Aircraft most recently determined by
an appraiser selected by Lessor and experienced in valuing Boeing 737 aircraft.
(b) The Damage Notification Threshold shall be that sum specified on
Schedule 1 hereto.
(c) The Minimum Liability Coverage shall mean that sum specified on
Schedule 1 hereto, on each occurrence.
(d) Nothing in the Lease Agreement shall prohibit Lessor or Lessee
from insuring the Aircraft (or, in the case of Lessor only, its interest in the
Lease Agreement), at their own expense and to the extent their respective
interests may appear, in an
<PAGE> 90
amount in excess of that required to me maintained by Lessee under Section 9 and
Schedule 4 of the Lease Agreement and this Letter Agreement No. 1; provided that
in no event shall such additional insurance obtained be the Lessor interfere
with Lessee's ability to insure its interests in the Aircraft in accordance with
its standard policies and practices in effect from time to time during the Term;
and provided further that Lessee shall not maintain insurance covering the
aircraft hull risks described in Clauses (a) and (b) of Schedule 4 to the Lease
Agreement in an amount greater than $1,000,000 in excess of the Agreed Value, or
such higher limit as Lessee may maintain with a prior written approval of
Lessor, which approval will not be unreasonably withheld.
Except as amended hereby, the Lease Agreement remains in full force and
effect as the legal, valid and binding obligations of Lessor and Lessee.
This letter shall be governed by, and construed in accordance with, the
Governing Law. Please indicate your acceptance of the foregoing by signing this
letter at the place indicated and return it to us.
Yours truly,
MIMI LEASING CORP.
By______________________________________
Its_____________________________________
Agreed and accepted
AIR SOUTH AIRLINES, INC.
By______________________________
Its_____________________________
<PAGE> 91
SCHEDULE 1
TO LETTER AGREEMENT NO. 1
DATED FEBRUARY 1, 1997
Paragraph 1
The Aircraft Deposit is $210,000.
Paragraph 2
The Rent per Rental Period is $105,000.
Paragraph 3
The amount of Maintenance Reserves is:
(i) Airframe Maintenance Reserves $90 per Flight Hour or Cycle,
whichever is higher;
(ii) Engine Maintenance Reserves - $85 per Flight Hour or Cycle,
whichever is higher, in respect of each Engine;
(iii) APU Maintenance Reserves - $10 per Flight Hour or Cycle,
whichever is higher, in respect of the APU.
(iv) Landing Gear Maintenance Reserves - $10 per Flight Hour or
Cycle, whichever is higher.
Paragraph 4
(a) The Agreed Value is $4,800,000.
(b) The Damage Notification Threshold is $100,000.
(c) The Minimum Liability Coverage is $400,000.000.
<PAGE> 92
LETTER AGREEMENT NO. 1
From: MIMI Leasing Corp.
To: Air South Airlines, Inc.
Date: February 1, 1997
Re: Aircraft Lease Agreement (the "Lease Agreement") of even date herewith
between Mimi Leasing Corp. ("Lessor") and Air South Airlines, Inc. (the
"Lessee") in respect of Boeing 737-247 Aircraft, Serial Number 19607
Dear Sirs,
This is Letter Agreement No. 1, referred to in the Lease Agreement, and
upon your acceptance of its terms, will record our further agreement with
respect to the Lease Agreement. Capitalized terms used, but not defined, in
this Letter Agreement shall have the respective meanings assigned to them in
the Lease Agreement.
For valuable consideration (the receipt and sufficiency of which is
acknowledged), Lessor and Lessee agree as follows:
In order to preserve the confidentiality of certain other business
terms of the Lease Agreement, Lessor and Lessee have agreed that certain
provisions referred to in the Lease Agreement shall be set forth in this Letter
Agreement No. 1 rather than in the body of the Lease Agreement, as follows:
Paragraph 1
AIRCRAFT DEPOSIT. The amount of the Aircraft Deposit contemplated by
Section 5.1 of the Lease Agreement shall be that sum specified on Schedule 1
hereto, payable in full on or before May 1, 1997.
Paragraph 2
RENT. The amount of Rent payable by Lessee in respect of each Rental
Period pursuant to Section 5.3 of the Lease Agreement shall be as follows:
Rental Periods 1-36 The sum specified on
Schedule 1 hereto
<PAGE> 93
Paragraph 3
Maintenance Reserves. The amount of Maintenance Reserves payable
pursuant to Section 5.4 of the Lease Agreement shall be as specified on
Schedule 1 hereto.
On or about February 1, 1998 and on February 1, 1999, the rate of Maintenance
Reserves may be adjusted upwards by Lessor at a percentage rate per annum not
to exceed the percentage increase in the Consumer Price Index for the Columbia,
South Carolina Metropolitan Area since the Delivery Date or the date of the
last price adjustment under this provision, if later. In addition, but not
limiting the foregoing, Lessee acknowledges that the rates of Maintenance
Reserves currently provided for in this Agreement are based upon the assumption
the Agreed Maintenance Program for the Aircraft during the Term will be the same
as that in effect on the Delivery Date. In the event that such assumption
proves to be incorrect at any time during the Term, Lessor and Lessee agree
that Lessor shall have the right, upon written notice to Lessee, to adjust the
rate of Maintenance Reserves so as to reasonably account for the incorrectness
of such assumption. In the event that the Agreed Maintenance Program changes
during the Term (any such change to be in accordance with the relevant terms
and conditions of this Agreement), Lessor shall make the aforementioned
adjustment in the manner which Lessor determines, in its reasonable discretion,
is necessary to maintain the rates of Maintenance Reserves at levels which
accurately reflect the costs associated with obtaining the maintenance services
referred to in Section 7.2 at prevailing industry rates. Each such notice
shall specify the revised rate of Maintenance Reserves and the effective date
of such revision. Lessee agrees to advise Lessor, in writing, of any
circumstances or events which would result in the foregoing assumption becoming
incorrect at any time during the Term.
Paragraph 4
INSURANCE
(a) The Agreed Value shall be that sum specified on Schedule 1
hereto, or, if higher, the appraised value of the Aircraft most recently
determined by an appraiser selected by Lessor and experienced in valuing Boeing
737 aircraft.
(b) The Damage Notification Threshold shall be that sum specified
on Schedule 1 hereto.
(c) The Minimum Liability Coverage shall mean that sum specified on
Schedule 1 hereto, on each occurrence.
(d) Nothing in the Lease Agreement shall prohibit Lessor or Lessee
from insuring the Aircraft (or, in the case of Lessor only, its interest in the
Lease Agreement), at their own expense and to the extent their respective
interests may appear, in an
<PAGE> 94
amount in excess of that required to be maintained by Lessee under Section 9
and Schedule 4 of the Lease Agreement and this Letter Agreement No. 1; provided
that in no event shall such additional insurance obtained by the Lessor
interfere with Lessee's ability to insure its interest in the Aircraft in
accordance with its standard policies and practices in effect from time to time
during the Term; and provided further that Lessee shall not maintain insurance
covering the aircraft hull risks described in Clauses (a) and (b) of Schedule 4
to the Lease Agreement in an amount greater than $1,000,000 in excess of the
Agreed Value, or such higher limit as Lessee may maintain with a prior written
approval of Lessor, which approval will not be unreasonably withheld.
Except as amended hereby, the Lease Agreement remains in full force and
effect as the legal, valid and binding obligations of Lessor and Lessee.
This letter shall be governed by, and construed in accordance with, the
Governing Law. Please indicate your acceptance of the foregoing by signing
this letter at the place indicated and return it to us.
Yours truly,
MIMI LEASING CORP.
By
-------------------------------
Its
------------------------------
Agreed and accepted
AIR SOUTH AIRLINES, INC.
BY /s/
--------------------------
Its Vice President
-------------------------
<PAGE> 95
Mimi Leasing Corp.
600 Sunset Ridge
Dubuque, Iowa 52003
February 1, 1997
Air South Airlines, Inc.
2625 Airport Boulevard
West Columbia, South Carolina 29170
Attn.: Vice President - Airline Services
Re: Letter Agreement No. 2 to Aircraft Lease Agreement, dated as
of even date herewith (the "Lease Agreement"), between Mimi
Leasing Corp. ("Lessor") and Air South Airlines, Inc.
("Lessee") in respect of One Boeing 737-247 Aircraft,
manufacturer's serial number 19607, United States
registration N4510W
Dear Sirs:
This Letter Agreement No. 2, upon your acceptance of its terms, will
record our further agreements with respect to the referenced Lease Agreement,
and the provisions hereof shall be incorporated into, and for all purposes
deemed part of the Lease Agreement.
Capitalized terms used, but not defined, in this Letter Agreement No. 2
shall have the respective meanings assigned to them in the Lease Agreement.
For valuable consideration, the receipt and sufficiency of which is
acknowledged, Lessor and Lessee agree as follows:
1. Any provisions of Sections 8.5 and 8.7 of the Lease Agreement
to the contrary notwithstanding, Lessee may (a) enter into contracts (sometimes
referred to as "leases" or "wet leases") covering a part or all of the capacity
of the Aircraft in the ordinary course of Lessee's business, under which Lessee
retains operational control of the Aircraft (which for the purposes hereof
means, among other things, that Lessee will at all times supply and be
responsible for furnishing flight and cabin crews, maintenance and insurance
for, and covering, such operations of the Aircraft), and such leases or wet
leases shall not be deemed to be prohibited transfers of possession under the
Lease Agreement, provided that in all events Lessee's obligations under the
Lease Agreement shall continue in full force and
<PAGE> 96
Air South Airlines, Inc.
February 1, 1997
Page 2
effect notwithstanding such leases or wet leases, and (b) transfer possession
of the Airframe or any Engine to the United States of America or any
instrumentality thereof pursuant to the Civil Reserve Air Fleet Program
authorized by 10 U.S.C. Section 9511 et seq., or any substantially similar
program of the United States Government, provided that any such transfer of
possession does not extend beyond the Expiration Date of the Lease Agreement.
2. Any provisions of Sections 8.12, 8.13 and 8.14(c) of the Lease
Agreement to the contrary notwithstanding, with respect to any Engine, and at
any time and from time to time during the Term, Lessee may:
(a) install such Engine on an airframe owned by Lessee free and
clear of all Liens, except (i) Permitted Liens, (ii) 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 aircraft or airframe as an
entirety), and (iii) those created by the rights of others under normal
interchange or pooling agreements or arrangements customary in the airline
industry which do not contemplate, permit or require the transfer of title to,
or give rise to a Lien upon, such airframe as an entirety or the engines
installed thereon; and
(b) install an Engine on an airframe leased to Lessee, or purchased
by Lessee subject to a conditional sale or otherwise subject to a security
agreement, provided that (i) such airframe is free and clear of all Liens
except (y) the rights of the parties to the lease, conditional sale or other
security agreement and (z) Liens of the type permitted by the immediately
preceding Clause 2(a), and (ii) such lease, conditional sale or other security
agreement expressly provides that such Engine shall not become subject to the
lien of such lease, conditional sale or other security agreement,
notwithstanding the installation thereof on such airframe; and
(c) install an engine on the Aircraft, provided that (i) such
engine shall meet the standards for a replacement engine set forth herebelow,
(ii) such engine shall be airworthy and in condition required by the Agreed
Maintenance Program for regular use on the Aircraft and (iii) if such
replacement engine is being installed on the Aircraft because an Engine has
become time, cycle or calendar expired, unserviceable or otherwise damaged,
Lessee shall promptly comply with all maintenance requirements of the Lease
Agreement and the Agreed Maintenance Program and/or otherwise repair or return
such Engine to an airworthy and
<PAGE> 97
Air South Airlines, Inc.
February 1, 1997
Page 3
serviceable condition. For the purposes of this Clause 3(c), the term
"replacement engine" means a Pratt and Whitney Model JT8D-9A engine, or an
engine of the same or another manufacturer of a comparable or improved model,
that is suitable and certificated by the FAA for installation and use on the
Aircraft and that is in as good an operating condition as the Engine it is
temporarily replacing assuming such Agreement at the time it is replaced.
(d) In the Event Lessor shall have received from the lessor or
secured party of any airframe leased to Lessee or purchased by Lessee subject
to a conditional sale or other security agreement, a written agreement
(contemplated by the immediately preceding Clause 2(b)(ii) and Clause 2(e)
below), which provides that the lessor or secured party under such agreement
shall not acquire or claim any right, title or interest in any Engine or
Lessor, 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 Aircraft at any
time while such engine is owned by such lessor or is subject to such
conditional sale or other security agreement or security interest in favor of
such secured party. Without limiting the requirements of Clause 2(e), below,
Lessor agrees that the existence of a clause reciprocal to the foregoing in
such lease, conditional sale or other security agreement shall suffice the
purposes of this paragraph as the required written agreement.
(e) For the avoidance of doubt, Lessee's rights under Clauses 2(b)
and 2(c), above, shall become effective (i) upon Lessee's having first
obtained from the lessor of, or the secured party having a security interest
in, a specific airframe or engine, a written agreement expressly providing that
such Person will not claim or acquire any interest in Lessor's Aircraft or any
Engine as a result of the temporary engine exchanges authorized by this Clause
2, and (ii) upon Lessor's approval of such written agreement which approval
will not be unreasonable withheld.
(f) Lessee shall furnish Lessor with a written report of any engine
exchanges authorized by this Clause 2 which shall identify (i) the location and
maintenance status of each affected Engine and (ii) any engine not owned by
<PAGE> 98
Air South Airlines, Inc.
February 1, 1997
Page 4
Lessor that is installed on the Airframe. Lessee shall also furnish Lessor
with a written report identifying any interchange or pooling agreement or parts
leasing agreement entered into by Lessee, identifying by name and address, the
other party to any such agreement, and Lessor may, upon request, review such
agreements. Such written reports shall be submitted monthly along with
Lessee's payment of maintenance reserves pursuant to Section 5.4 of the Lease
Agreement.
3. (a) The provisions of Sections 8.12 through 8.18, inclusive,
of the Lease Agreement to the contrary notwithstanding, with respect to any
Part, and at any time and from time to time during the Term, Lessee shall, at
its own cost and expense, as promptly as practicable replace all Parts that may
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 remove any damaged beyond repair or permanently rendered
unfit for use, provided that Lessee shall, except as otherwise provided in
Clause 3(d) below, replace such Parts as provided in Clause 3(c), below,
provided, however, that Lessee shall notify Lessor in writing and obtain
Lessor's approval prior to replacing any Landing Gear or the APU. All
replacement Parts shall be free and clear of all Liens except Permitted Liens
and shall be in as good operating condition as, and shall have a value and
utility at least equal to, the Parts replaced, assuming such replace Parts were
in the condition and repair required to be maintained by the terms hereof.
(b) Except as otherwise provided in Clause 3(d), below, all Parts at
any time removed from the Airframe or any Engine shall remain the property of
Lessor and subject to the Lease Agreement, no matter where located, until such
time as such Parts shall be replaced by Parts that have been incorporated or
installed in or attached to such Airframe or Engine and that meet the
requirements for such replacement Parts specified in Clause 3(a) hereof.
Immediately upon any replacement Part becoming incorporated or installed in or
attached to an Airframe or Engine as provided in Clause 3(a) hereof, without
further act, (i) title to the replaced Part shall thereupon vest in Lessee,
free and clear of all rights of Lessor and shall no longer be deemed a Part
hereunder; (ii) title to such replacement Part shall thereupon vest in Lessor;
and (iii) such replacement Part shall become subject to this Lease and be
deemed part of such 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 such Airframe or Engine.
<PAGE> 99
Air South Airlines, Inc.
February 1, 1997
Page 5
(c) Any Part (other than a Landing Gear or the APU) removed from the
Airframe or from any Engine as provided in Clause 3(A) hereof may be subjected
by Lessee to a normal pooling or leasing agreement or arrangement customary in
the airline industry entered into in the ordinary course of Lessee's business
with any Certificated Air Carrier or a recognized lessor of aircraft parts,
provided the part replacing such removed Part shall be incorporated or
installed in or attached to such Airframe or Engine in accordance with Clauses
3(a) and 3(b) hereof as promptly as practicable after the removal of such
removed Part. In addition, any temporary replacement part when incorporated or
installed in or attached to the Airframe or any Engine in accordance with
Clause 3(A) hereof may be owned by another airline or vendor as customary in
the airline industry, subject to such a normal pooling or leasing arrangement,
provided (i) such arrangement does not contemplate, permit or require the
transfer of title to , or give rise to any Lien upon, the Airframe or any
Engine, and (ii) Lessee, at its expense, as promptly thereafter as practicable,
either (A) causes title to such temporary replacement part to vest in Lessor in
accordance with Clause 3(b) hereof by Lessee acquiring title thereto for the
benefit of Lessor free and clear of all Liens except Permitted Liens, at which
time such temporary replacement part shall become a Part and become subject to
the Lease Agreement, or (B) replaces such temporary replacement part by
incorporating or installing in or attaching to such Airframe or Engine a
further replacement Part owned by Lessee free and clear of all Liens except
Permitted Liens, and by causing title to such further replacement Part to vest
in Lessor in accordance with Clause 3(b) hereof.
(d) Lessee, at its own expense, shall make alterations and
modifications in and additions to the Airframe and any Engine as may be
required to be made from time to time during the Term by applicable law
regardless upon whom such requirements are, by their terms, nominally imposed.
In addition, Lessee, at its own expense and with the prior written approval of
Lessor, which approval will not be unreasonably withheld, may from time to time
make such alterations and modifications in and additions to the Airframe and
any Engine as Lessee deems desirable in the proper conduct of its business
(including, without limitation, removal of Parts other than a landing gear or
the APU), provided that no such alteration, modification or addition diminishes
the value, utility, condition or airworthiness of such Airframe or Engine below
the value, utility, condition or airworthiness thereof immediately prior to
such alteration, modification or addition, assuming such Airframe or Engine
was then in the condition required to be maintained by the terms of this Lease.
Title to all Parts incorporated or installed in or attached or added to the
Airframe or any Engine as the result of any alteration,
<PAGE> 100
Air South Airlines, Inc.
February 1, 1997
Page 6
modification or addition effected by Lessee shall, without further act, vest in
the Lessor and become subject to this Lease, provided, however, to the extent
agreed to in advance, in writing by Lessor and Lessee, Lessee may remove any
such Part from the Airframe or an Engine if (i) such Part is in addition to, and
not in replacement of or in substitution for, any Part originally incorporated
or installed in or attached to such Airframe or Engine at the time of delivery
thereof hereunder or any Part in replacement of, or in substitution for, any
such original Part, (ii) such Part is not required to be incorporated or
installed in or attached or added to such Airframe or Engine pursuant to the
terms of Section 8.11 of the Lease Agreement or the first sentence of this
Clause 3(d), and (iii) such Part is readily removable without causing material
damage to such Airframe or Engine and such Part can be removed from such
Airframe or Engine without diminishing or impairing the value, condition,
utility or airworthiness which such Airframe or Engine would have had at the
time of removal had such alteration, modification or addition not been effected
by Lessee. Upon the removal by Lessee or any Part agreed to in advance, in
writing by Lessor and Lessee as provided by the immediately preceding Clauses
3(d)(i) through 3(d)(iii) title thereto shall, without further act, vest in
Lessee free and clear of all rights of Lessor and Lessor's Liens and such Part
shall no longer be deemed a Part hereunder and Lessee shall, as soon as
practicable, repair any damage to the Aircraft or Engine resulting from the
removal of such Part. Any Part not removed by Lessee as above provided prior to
the return of the Airframe or respective Engine to Lessor under the Lease
Agreement shall remain the property of Lessor all subject to this Lease. If any
removable part, incorporated or installed in or attached or added to the
Airframe or any Engine as the result of any alteration modification or addition
agreed to in advance, in writing by Lessor and Lessee is (y) owned by any third
party and leased to Lessee or installed on the Aircraft under license granted to
or by Lessee, or (z) sold to Lessee subject to a conditional sales contract or
other security subject to a security interest in favor of any third party, then
Lessor will not acquire or claim, as against such lessor, licensor, conditional
vendor or secured party, any right, title or interest in any such removal part
as the result of such removable part being installed in the Aircraft, provided,
however, that (A) the inability of Lessor to so acquire or claim is subject to
the express condition that such lessor, licensor, conditional vendor or secured
party (aa) shall not acquire or claim, as against Lessor, any right, title or
interest in the Aircraft, or any Part other than its interest in such removable
part by reason of such removable part being installed thereon, and (bb) shall
expressly disclaim in writing any right to assert a claim, as against Lessor, to
any right, title or interest in the Aircraft or any Part thereof, and (B) any
removable part not removed by Lessee within 60 days after the occurrence of an
Event of Default which is continuing uncured, shall, at
<PAGE> 101
Air South Airlines, Inc.
February 1, 1997
Page 7
such time, become the property of Lessor and be subject to this Lease. 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.
(e) For the avoidance of doubt, under this Clause 3, a whole Engine
shall is not be construed to be a Part.
4. (a) Except as expressly set forth herein, the Lease Agreement,
including Letter Agreement No. 1 with respect thereto, shall remain in full
force and effect as the legal, valid and binding obligations of Lessor and
Lessee.
(b) This Letter Agreement No. 2 shall be governed by, and
construed in accordance with the Governing Law.
(c) This Letter Agreement No. 2 may be executed by the parties
hereto in separate counterparts each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same instrument.
<PAGE> 102
Air South Airlines, Inc.
February 1, 1997
Page 8
Please indicate your acceptance of the foregoing by signing this letter
at the place indicated and returning it to us.
Yours truly,
MIMI LEASING CORP.
By:
-------------------------------
Its:
------------------------------
Agreed and Accepted
AIR SOUTH AIRLINES, INC.
By: /s/
---------------------------------
Its: Vice President
--------------------------------
Date: 3/5/97
-------------------------------
<PAGE> 1
EXHIBIT 10.38
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made and entered
into effective as of the 16th day of August, 1996 (the "Effective Date") by and
between (1) Air South Airlines, Inc., a Delaware corporation (the "Company"),
and (2) The Pointe Group, L.L.C., a Maryland limited liability company ("TPG").
RECITALS:
A. The Company is engaged in the business of owning and operating an
air carrier certificated by the U.S. government to engage in the provision of
air transportation services in the common carriage of persons, property, and
mail (the "Company Business"). The Company is based in Columbia, South Carolina
and operates flights from and between various cities in the southern region of
the United States to various major cities in the northeastern and Midwestern
region of the United States.
B. The Company is authorized to issue (1) 18,000,000 shares of common
stock having a par value of $0.001 per share (the "Common Stock") and (2)
2,000,000 shares of preferred stock having a par value of $0.001 per share (the
"Preferred Stock"), of which, (1) 6,917,182 shares of Common Stock are issued
and outstanding, (2) 1,995,000 shares of Preferred Stock are issued and
outstanding, and (3) 56,236,500 shares of Common Stock are reserved for issuance
upon conversion of any outstanding shares of Preferred Stock and any issued and
outstanding convertible debentures, and upon the exercise of any outstanding
stock options and/or warrants; the amounts given in "(3)" above are subject to
increase as a result of anti-dilution provisions applicable to the various
issuance of convertible debt and preferred stock.
C. TPG has various members and employees that have experience in
operating companies engaged in the Company Business.
D. The Company is in need of certain consulting services from TPG, on
an interim and longer term basis, in connection with the conduct of all aspects
of the Company Business. TPG has commenced providing such consulting services
for the Company on an interim basis and TPG and the Company have entered into an
Indemnification Agreement with respect thereto, the terms and conditions of
which will remain in full force and effect. In order to induce TPG to provide
such consulting services for and on behalf of the Company on a longer term basis
beyond an interim basis, the parties desire to enter into this Agreement.
E. The Company hereby agrees to engage TPG and TPG hereby agrees to
accept such consulting engagement with the Company in accordance with the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants as
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
1. Incorporation of Recitals.
The Recitals set forth above shall be incorporated herein and made
a part hereof by this reference.
2. Engagement.
The Company hereby engages TPG to perform independent contractor,
consulting, and management services, including by way of illustration but not
limitation, to (a) supervise, operate, and manage the overall operations of the
Company Business, including by way of illustration but not limitation, decisions
regarding (i) airline schedules and routes, (ii) regulation of the Company
Business by governmental authorities, (iii) aircraft and other equipment and
real estate acquisitions and/or leases, (iv) formulation, implementation, and
administration of strategies, policies, and practices, (v) formulation,
implementation, and administration of budgets, business and financial plans,
(vi) hiring, firing, and supervising employees and consultants, (vii) setting
compensation and benefit programs for employees and consultants, and (viii) such
other duties, responsibilities, and authority usually and customarily granted to
the chief executive officer of a company, and/or (b) provide such additional
services as reasonably
<PAGE> 2
requested by the Company (collectively the "Services"). TPG agrees that it will
at all times faithfully, industriously, and to the best of its ability,
experience, and talents perform the Services. TPG shall, with the concurrence
and approval of the Board of Directors of the Company and/or the Executive
Committee of the Board of Directors of the Company, have the power to determine
(a) the specific duties that shall be performed by it in rendering the Services
and (b) the means and manner by which those duties shall be performed. The
specific employees of TPG that shall render the Services shall be John P. Tague,
John Affeltranger, and Donna Phillips (the "TPG Team"). In connection with TPG's
supervising, operating, and managing the overall operations of the Company
Business, (a) John P. Tague shall have the officer title of President and Chief
Executive Officer of the Company, and shall become a member of the Board of
Directors of the Company, and (b) John Affeltranger shall have such officer
titles as determined by the Board of Directors of the Company, after
consultation with John P. Tague.
3. Term.
The term of this Agreement shall commence on the Effective Date
set forth above and shall continue for a period of two (2) years (the "Initial
Term"), unless (a) terminated prior thereto pursuant to Section 8 hereof or (b)
otherwise extended by the written agreement of the parties hereto.
4. Consideration.
In addition to the TPG Acquired Stock (as hereinafter defined) and
the expense reimbursement and other consideration hereinafter provided, for all
Services rendered by TPG pursuant to this Agreement, the Company shall pay TPG
the sum of $425,000 per year (the "TPG Fee"); provided, however, that in the
event John P. Tague renders less than his full time and attention to the
rendering of the Services by TPG pursuant to this Agreement, the TPG Fee shall
be reduced to the sum of $325,000 per year. The TPG Fee shall be paid in advance
in equal monthly installments of $35,416.67 in the event the TPG Fee is $425,000
per year or $27,083.33 in the event the TPG Fee is $325,000 per year.
5. Non-Exclusive Service.
In connection with the Services to be rendered by TPG hereunder,
it is expected that the TPG Team will be required to devote such time,
attention, and energies as shall be mutually deemed necessary to the rendering
of such Services. Notwithstanding the foregoing, the TPG Team shall be entitled
to devote such time, attention, and energies as shall be required for (a) the
TPG Team to complete their one existing and ongoing project of TPG dealing
primarily with the disposition of various aircraft for a specific client, (b)
the TPG Team to reassign its other projects with TPG to other contractors as
necessary, (c) John P. Tague to act as a director and/or officer (but not
involved in day to day management) of Semicon, Inc., a family owned business,
and (d) the TPG Team, or any member thereof, to render such other services to
such other company or client as shall be requested by TPG and reasonably
approved by the Company.
6. Working Facilities.
The Company shall be obligated to provide to and maintain for the
TPG Team appropriate offices, supplies, equipment, and such other facilities and
services, including but not limited to such technical, secretarial, and other
support personnel, necessary to perform the Services.
7. TPG Acquired Stock.
The Company hereby agrees to sell to TPG 6% of the outstanding
Common Stock of the Company (the "TPG Acquired Stock"). The terms of the sale of
the TPG Acquired Stock by the Company to TPG shall be as follows:
(a) the determination of the number of shares of Common Stock
of the Company which constitute the TPG Acquired Stock
shall be done on a fully diluted basis, in accordance with
the "treasury stock" calculation method, such that it shall
be determined as if all convertible debt has been converted
to preferred stock of the Company, all preferred stock of
the Company has been converted to Common Stock of the
Company, and all
<PAGE> 3
authorized and outstanding stock options and/or warrants of
the Company have been fully exercised, including but not
limited to all shares of the Company issued and outstanding
as of December 31, 1996 plus shares of Common Stock
issuable upon conversion of up to $12,500,000 of
convertible debentures to be sold and issued prior to June
30, 1997;
(b) the closing for the purchase by TPG from the Company of the
TPG Acquired Stock shall take place on such date as shall
be mutually agreed to by the parties hereto (the "TPG
Acquired Stock Closing Date");
(c) the closing for the purchase by TPG from the Company of the
TPG Acquired Stock shall take place at the offices of the
Company or such other location as shall be mutually agreed
to by the parties hereto;
(d) the purchase price for the TPG Acquired Stock shall be
$0.02 per share (the "TPG Acquired Stock Purchase Price");
(e) the TPG Acquired Stock Purchase Price shall be payable by
TPG to the Company on the TPG Acquired Stock Closing Date
in the form of cash or check in an amount equal to the par
value of the TPG Acquired Stock together with TPG's
noninterest bearing, promissory note, which shall be due
and payable six (6) months from the TPG Acquired Stock
Closing Date;
(f) subject to the provisions of Section 7(g), the Company
shall have the option to repurchase all of the "unvested"
TPG Acquired Stock (the "Repurchase Option") in the event
this Agreement is terminated before the end of the Initial
Term for any of the reasons set forth in Sections 8(a),
8(c), or 8(d);
(g) subject to the provisions of Section 7(g), the Company
shall have the Repurchase Option to repurchase one-sixth
(1/6th) of the "unvested" TPG Acquired Stock purchased by
TPG in the event that John Affeltranger resigns as a member
of the TPG Team before the end of the Initial Term of this
Agreement; and
(h) the Repurchase Option may be exercised only with respect to
"unvested" TPG Acquired Stock and the TPG Acquired Stock
shall vest as follows: (i) in equal quarterly increments
during the Initial Term commencing with the Effective Date
of this Agreement, with such vesting to be effective upon
the last day of each calendar quarter, (ii) one-half of any
"unvested" TPG Acquired Stock shall vest upon the death or
permanent disability of John P. Tague, (iii) upon the
closing by the Company of an IPO (as hereinafter defined),
(iv) upon the merger of the Company into or with another
person, unless (A) the Company is the surviving entity and
(B) this Agreement remains in full force and effect, or (v)
the sale of all or substantially all of the assets or stock
of the Company to another person. The foregoing terms
regarding the TPG Acquired Stock shall, if the parties
hereto mutually so agree, be set forth in a separate
agreement (the "Stock Purchase Agreement"), to be entered
into within 30 days of the Effective Date of this
Agreement. The Stock Purchase Agreement shall contain all
usual and customary provisions, including the foregoing
terms.
8. Termination of Engagement.
This Agreement shall be terminated and the independent contractor
consulting relationship between the Company and TPG shall cease upon the
occurrence of any of the following events:
(a) by TPG for any reason, upon 30 days prior written notice;
(b) by any party upon the expiration of the Initial Term or any
subsequent term established in accordance with Section 3;
(c) by the Company upon the death or permanent disability of
John P. Tague or his resignation as the President and Chief
Executive Officer of the
<PAGE> 4
Company;
(d) by the Company for "Cause", which for purposes of this
Section 8 shall mean any of the following: (i) TPG's breach
of or failure to comply with or observe any of the material
terms, conditions or agreements contained in this
Agreement, which breach or failure to comply has not been
cured within 30 days following written notice by the
Company to TPG setting forth in detail the specific nature
of such breach or failure to comply, or if such breach
or failure to comply cannot be cured within such 30 day
period, TPG has not, (A) within such 30 day period,
commenced actions to cure such breach or failure to comply
and diligently pursued such actions and (B) actually cured
such breach or failure to comply within 90 days following
such initial written notice by the Company to TPG, (ii) TPG
or any member of the TPG Team shall be adjudged by a court
of competent jurisdiction as guilty of (A) any willful or
grossly negligent act which causes material harm to the
Company, (B) any criminal act which causes material harm to
the Company, (C) any act involving moral turpitude which
causes material harm to the Company, or (D) any fraud upon
the Company, or (iii) any member of the TPG Team shall be
guilty of habitual absenteeism, chronic alcoholism or other
form of chronic addiction;
(e) by the Company upon 30 days prior written notice after the
closing of the sale of shares of Common Stock of the
Company offered under a registration statement filed by the
Company pursuant to the Securities Act of 1933, the gross
proceeds of which are not less than $10,000,000 (the
"IPO").
9. Termination Obligations of the Company.
(a) In the event of termination of this Agreement by the
Company under Section 8(b) because of the expiration of the Initial Term or any
subsequent term of this Agreement, or Section 8(e) because of the closing by the
Company of an IPO, the Company shall have the following obligations to TPG:
(i) any unpaid portion of the TPG Fee earned through the
date of termination shall be paid by the Company to
TPG;
(ii) any unreimbursed expenses owed by the Company to TPG
for expenses incurred through the date of
termination shall be paid by the Company to TPG;
(iii) the Repurchase Option with respect to the TPG
Acquired Stock shall lapse, such that all of the
shares of the TPG Acquired Stock shall be fully
vested;
(iv) the TPG Team shall each be offered full-time
employment with the Company upon mutually
satisfactory terms usual and customary in the
airline industry for companies of comparable
operations as the Company; provided, however, that
the Company and John P. Tague shall enter into a
written employment agreement (the "Tague Employment
Agreement") which shall, for purposes of
illustration but not limitation, contain the
following provisions:
(1) he shall have the officer title of Chairman,
President, and Chief Executive Officer of
the Company, and shall be a member of the
Board of Directors of the Company;
(2) he shall have duties at least as expansive as
the Services set forth in Section 2 of this
Agreement;
(3) he shall have an annual base salary and
annual bonus as mutually agreed upon and
usual and customary in the airline industry
for companies of comparable operations as
<PAGE> 5
the Company;
(4) a term and severance arrangement as mutually
agreed upon and usual and customary in the
airline industry for companies of comparable
operations as the Company; and
(5) the Tague Option Arrangement, as set forth in
more detail in Section 10 of this Agreement.
(b) In the event of termination of this Agreement by the
Company under Sections 8(a), 8(c), or 8(d), the Company
shall have the following obligations to TPG:
(i) any unpaid portion of the TPG Fee earned through the
date of termination shall be paid by the Company to
TPG;
(ii) any unreimbursed expenses owed by the Company to TPG
for expenses incurred through the date of
termination shall be paid by the Company to TPG; and
(iii) the Company shall be entitled to exercise the
Repurchase Option with respect to those shares of
the TPG Acquired Stock that have not vested as of
the date of termination.
10. Tague Stock Option.
In the event that the Company offers and enters into the Tague
Employment Agreement with John P. Tague, the Company shall grant to John P.
Tague the option to acquire Common Stock of the Company (the "Tague Option
Arrangement"). The Tague Option Arrangement shall be consistent with the
Company's stock option plan and shall contain all usual and customary
provisions, including by way of illustration but not limitation, the following:
(a) Common Stock of the Company representing 5% of all shares
of the Company shall be reserved for issuance pursuant to
the Tague Option Arrangement (the "Tague Option Shares"),
with the determination of the number of Tague Option Shares
pursuant to which the Tague Option Arrangement shall apply
being done on a fully diluted basis, in accordance with the
"treasury stock" calculation method, such that it shall be
determined as if all convertible debt has been converted to
Common Stock of the Company, all Preferred Stock of the
Company has been converted to Common Stock of the Company,
and all authorized and outstanding stock options and/or
warrants of the Company have been fully exercised; and
(b) the Tague Option Shares granted shall be exercisable at the
fair market value of the Common Stock on the date of each
respective grant.
11. Registration Rights.
TPG shall, with respect to the TPG Acquired Stock, and John P.
Tague shall, with respect to the Tague Option Shares, be granted unlimited
piggy-back registrations, with any cut-backs of shares to be registered pursuant
to the applicable registration statement to be done on a pro-rata basis among
all of the Sellers of Company Common Stock pursuant to the applicable
registration statement. A specific Registration Rights Agreement containing all
usual and customary provisions shall be entered into among TPG, John P. Tague
and the Company.
12. Expense Reimbursement.
The Company shall reimburse TPG and/or the TPG Team or directly
pay all of the reasonable expenses incurred by TPG and/or the TPG Team in
connection with the performance of TPG's Services in accordance with this
Agreement, including by way of illustration but not limitation, as follows:
(a) an amount equal to $__,000 for legal and related fees in
connection with the preparation and review of this
Agreement;
(b) all ordinary and necessary travel, lodging, entertainment,
and related expenses;
(c) the cost of leasing a home in Columbia, South Carolina for
and selected by John P. Tague for one (1) year in an amount
not to exceed $3,000 per
<PAGE> 6
month;
(d) the cost of leasing a home in Columbia, South Carolina for
and selected by John Affeltranger for one (1) year in an
amount not to exceed $1,250 per month;
(e) the cost of food and lodging at a hotel in Columbia, South
Carolina for and selected by John P. Tague and John
Affeltranger until the homes referred to in sections 12(c)
and 12(d) can be leased; and
(f) the cost of moving household and personal effects for John
P. Tague and John Affeltranger from Indianapolis, Indiana
to Columbia, South Carolina to the rental homes referred to
in Sections 12(c) and 12(d), and the cost of moving
household and personal effects for John P. Tague and John
Affeltranger from the rental homes referred to in Sections
12(c) and 12(d) located in Columbia, South Carolina to such
permanent residences as John P. Tague and John Affeltranger
shall each select upon moving out of the rental homes
referred to in Sections 12(c) and 12(d), in an amount not
to exceed $10,000 for John P. Tague and $10,000 for John
Affeltranger.
13. Representations and Warranties.
(a) The Company covenants, represents and warrants as of the
Effective Date to TPG as follows:
(i) The Company has the sole and entire right, power and
authority (a) to enter into this Agreement, (b) to
fulfill the obligations imposed herein upon the
Company, and (c) to consummate the transactions
contemplated herein;
(ii) This Agreement constitutes the legal, valid and
binding obligation of the Company, enforceable
against the Company in accordance with its terms;
and
(iii) There are no agreements, contracts, understandings
or commitments which would prevent the Company from
entering into this Agreement, making any
representations or warranties herein and/or
consummating any of the transactions contemplated
herein.
(b) TPG covenants, represents and warrants as of the Effective
Date to the Company as follows:
(i) TPG has the full and entire right, power and
authority (a) to enter into this Agreement, (b) to
fulfill the obligations imposed herein upon TPG, and
(c) to consummate the transactions contemplated
herein;
(ii) This Agreement constitutes the legal, valid and
binding obligation of TPG, enforceable against TPG
in accordance with its terms; and
(iii) There are no agreements, contracts, understandings
or commitments which would prevent TPG from entering
into this Agreement, making any representations or
warranties herein and/or consummating any of the
transactions contemplated herein.
(c) The representations, warranties, covenants, indemnities,
obligations and agreements set forth in or made pursuant to this Agreement shall
remain operative and shall survive the commencement and termination of this
Agreement
14. Indemnification.
(a) Neither the Company nor TPG as independent contractor shall
be liable for any of the debts, liabilities or obligations of the other.
Accordingly, the Company will indemnify TPG and TPG will indemnify the Company,
and each will hold the other harmless from and against any and all loss, cost,
damage, injury or expense (including court costs and reasonable attorneys' fees)
whatsoever and howsoever arising which TPG or the Company (as the case may be)
or any of their respective agents, successors or assigns incurs as a proximate
result of (i) TPG or the Company (as the case may be) being held liable for any
debt, liability
<PAGE> 7
or obligation of the Company or TPG (as the case may be) or (ii) any breach of
this Agreement by the Company or TPG (as the case may be).
(b) TPG will assume full responsibility for and will indemnify
the Company and hold the Company harmless from and against any and all loss,
cost, damage, injury or expense (including court costs and reasonable attorneys'
fees) whatsoever and howsoever arising which the Company incurs relating to
TPG's status as an independent contractor in connection with the non-withholding
by the Company of federal, state, and local income taxes.
15. Notices
All notices under this Agreement shall be in writing and shall be
delivered by personal service, or by certified or registered mail, postage
prepaid, return receipt requested, to the parties at the addresses herein set
forth:
To the Company:
in care of:
David Y. Monteith, III, Esquire
Secretary and General Counsel
Air South Airlines, Inc.
2625 Airport Boulevard
West Columbia, South Carolina 29170
Telephone Number 803-822-0502
Telecopy Number 803-822-4132
To TPG:
in care of:
Mr. John P. Tague
President and Chief Executive Officer
Air South Airlines, Inc.
2625 Airport Boulevard
West Columbia, South Carolina 29170
Telephone Number 803-822-0502
Telecopy Number 803-822-8439
with a copy to:
David B. Armstrong, Esquire
Ginsburg, Feldman and Bress Chartered
1250 Connecticut Avenue, N.W.
Washington, D.C. 20036
Telephone Number 202-637-9068
Telecopy Number 202-637-9195
16. Independent Contractor Status.
Unless otherwise agreed by the parties, TPG is retained and
engaged by the Company only for the purposes and to the extent set forth in this
Agreement, and its relationship to the Company shall, during the period or
periods of its engagement hereunder, be that of an independent contractor.
Accordingly, the Company shall have no obligation to withhold any federal, state
or local income or other taxes or other similar charges from the TPG Fee or
other consideration payable by the Company to TPG. TPG shall be fully
responsible for all such taxes or charges with respect to the members of the TPG
Team. Furthermore, TPG shall be free to exercise its judgment as to the manner
in which it and its employees will perform the Services expected of it with the
concurrence and approval of the Board of Directors of the Company
<PAGE> 8
and/or the Executive Committee of the Board of Directors of the Company.
17. Alteration, Amendment, or Waiver.
No change or modification of this Agreement shall be valid unless
the same is in writing and signed by the parties hereto. No waiver of any
provision of this Agreement shall be valid unless in writing and signed by the
person against whom it is sought to be enforced. The failure of any party at any
time to insist upon strict performance of any condition, promise, agreement or
understanding set forth herein shall not be construed as a waiver or
relinquishment of the right to insist upon strict performance of the same
condition, promise, agreement, or understanding at a future time. The invalidity
or unenforceability of any particular provision of this Agreement shall not
affect the other provisions hereof, and this Agreement shall be construed in all
respects as if such invalid or unenforceable provisions were omitted.
18. Integration.
This Agreement together with the Indemnification Agreement and
other separate agreements referred to herein set forth (and are intended to be
an integration of) all of the promises, agreements, conditions, understandings,
warranties, and representations, oral or written, express or implied, among them
with respect to the terms of the consulting engagement and there are no
promises, agreements, conditions, understandings, warranties or representations,
oral or written, express or implied, among them with respect to the terms of the
consulting engagement other than as set forth in this Agreement together with
the Indemnification Agreement and other separate agreements referred to herein.
19. Conflicts of Law.
This Agreement shall be subject to and governed by the laws of the
State of Delaware irrespective of the fact that one or more of the parties now
is or may become a resident of a different state.
20. Counterparts.
This Agreement may be executed in counterparts, each of which
shall be deemed to be an original but all of which together shall constitute one
and the same instrument.
21. Further Assurances.
The parties hereto agree to execute and deliver to the other such
other documents or instruments as may be reasonable and necessary in furtherance
of the performance of the terms, covenants, and conditions of this Agreement.
22. Benefits and Burden.
This Agreement shall inure to the benefit of, and shall be binding
upon, the parties hereto and their respective successors, heirs, and personal
representatives. This Agreement shall not be assignable.
IN WITNESS WHEREOF, the Company and TPG have each caused this
Agreement to be signed by its respective duly authorized officers and each of
the parties hereto has executed this Agreement on the date and year first above
written.
WITNESS/ATTEST:
The Company:
Air South Airlines, Inc.
By: /s/ Dennis B. Crosby
------------------------
Name: Dennis B. Crosby
Title: Vice President
TPG:
<PAGE> 9
The Pointe Group, L.L.C.
By: /s/ John P. Tague
--------------------------
Name: John P. Tague
Title: Co-Chairman and CEO
<PAGE> 10
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made and
entered into effective as of the 17th day of July, 1996 (the "Effective Date")
by and between (1) Air South Airlines, Inc., a Delaware corporation (the
"Company"), and (2) The Pointe Group, L.L.C., a Maryland limited liability
company ("TPG").
RECITALS:
A. The Company is engaged in the business of owning and operating an
air carrier certificated by the U.S. government to engage in the provision of
air transportation services in the common carriage of persons, property, and
mail (the "Company Business"). The Company is based in Columbia, South Carolina
and operates flights from and between various cities in the southern region of
the United States to various major cities in the northeastern and Midwestern
region of the United States.
B. The Company is authorized to issue (1) 18,000,000 shares of common
stock having a par value of $0.001 per share (the "Common Stock") and (2)
2,000,000 shares of preferred stock having a par value of $0.001 per share (the
"Preferred Stock"), of which, (1) 6,917,182 shares of Common Stock are issued
and outstanding, (2) 1,995,000 shares of Preferred Stock are issued and
outstanding, and (3) 56,236,500 shares of Common Stock are reserved for issuance
upon conversion of any outstanding shares of Preferred Stock and any issued and
outstanding convertible debentures, and upon the exercise of any outstanding
stock options and/or warrants; the amounts given in "(3)" above are subject to
increase as a result of anti-dilution provisions applicable to the various
issuance of convertible debt and preferred stock.
C. TPG has various members and employees that have experience in
operating companies engaged in the Company Business.
D. The Company is in need of certain consulting services from TPG, on
an interim and longer term basis, in connection with the conduct of all aspects
of the Company Business. TPG has commenced providing such consulting services
for the Company on an interim basis, but in order to induce TPG to continue
providing such consulting services for the Company on an interim basis, TPG has
requested and the Company hereby agrees to indemnify TPG with respect to its
actions for and on behalf of the Company.
E. The Company and TPG intend to enter into a separate agreement (the
"Consulting Agreement") with respect to the consulting services to be provided
by TPG for and on behalf of the Company on a longer term basis.
NOW, THEREFORE, in consideration of the mutual promises and covenants as
contained herein, the parties hereto, intending to be legally bound, agree as
follows:
1. Incorporation of Recitals.
The Recitals set forth above shall be incorporated herein and made
a part hereof by this reference.
2. Services.
The Company hereby engages TPG, on an interim basis until a formal
Consulting Agreement is entered into between the Company and TPG, for TPG to
perform independent contractor, consulting, and management services, including
by way of illustration but not limitation, to (a) supervise, operate, and manage
the overall operations of the Company Business, including by way of illustration
but not limitation, decisions regarding (i) airline schedules and routes, (ii)
regulation of the Company Business by governmental authorities, (iii) aircraft
and other equipment and real estate acquisitions and/or leases, (iv)
formulation, implementation, and administration of strategies, policies, and
practices, (v) formulation, implementation, and administration of budgets,
business and financial plans, (vi) hiring, firing, and supervising employees and
consultants, (vii) setting compensation and benefit programs for employees and
consultants, and (viii) such other duties, responsibilities, and authority
usually and customarily granted to the chief executive officer of a company,
and/or (b) provide such additional services as reasonably requested by the
Company (collectively the "Services"). TPG agrees that it will at all times
faithfully, industriously, and to the best of its ability, experience,
<PAGE> 11
and talents perform the Services. TPG shall, with the concurrence and approval
of the Board of Directors of the Company, and/or the Executive Committee of the
Board of Directors of the Company have the power to determine (a) the specific
duties that shall be performed by it in rendering the Services and (b) the means
and manner by which those duties shall be performed. The specific employees of
TPG that shall render the Services shall be John P. Tague, John Affeltranger,
and Donna Phillips (the "TPG Team"). In connection with TPG's supervising,
operating, and managing the overall operations of the Company Business, (a) John
P. Tague shall have the officer title of President and Chief Executive Officer
of the Company, and shall become a member of the Board of Directors of the
Company, and (b) John Affeltranger shall have such officer titles as determined
by the Board of Directors of the Company, after consultation with John P. Tague.
3. Representations and Warranties.
(a) The Company covenants, represents and warrants as of the
Effective Date to TPG as follows:
(i) The Company has the sole and entire right, power and
authority (a) to enter into this Agreement (b) to
fulfill the obligations imposed herein upon the
Company, and (c) to consummate the transactions
contemplated herein;
(ii) This Agreement constitutes the legal, valid and
binding obligation of the Company, enforceable
against the Company in accordance with its terms;
and
(iii) There are no agreements, contracts, understandings
or commitments which would prevent the Company from
entering into this Agreement, making any
representations or warranties herein and/or
consummating any of the transactions contemplated
herein.
(b) TPG covenants, represents and warrants as of the Effective
Date to the Company as follows:
(i) TPG has the full and entire right, power and
authority (a) to enter into this Agreement, (b) to
fulfill the obligations imposed herein upon TPG, and
(c) to consummate the transactions contemplated
herein;
(ii) This Agreement constitutes the legal, valid and
binding obligation of TPG, enforceable against TPG
in accordance with its terms; and
(iii) There are no agreements, contracts, understandings
or commitments which would prevent TPG from entering
into this Agreement, making any representations or
warranties herein and/or consummating any of the
transactions contemplated herein.
(c) The representations, warranties, covenants, indemnities,
obligations and agreements set forth in or made pursuant to this Agreement shall
commence as of the beginning of time and shall remain operative and shall
survive the commencement and termination of this Agreement.
4. Indemnification.
(a) Neither the Company nor TPG as an independent contractor
shall be liable for any of the debts, liabilities or obligations of the other.
Accordingly, the Company will indemnify TPG and TPG will indemnify the Company,
and each will hold the other harmless from and against any and all loss, cost,
damage, injury or expense (including court costs and reasonable attorneys' fees)
whatsoever and howsoever arising which TPG or the Company (as the case may be)
or any of their respective agents, successors or assigns incurs as a proximate
result of (i) TPG or the Company (as the case may be) being held liable for any
debt, liability or obligation of the Company or TPG (as the case may be) or (ii)
any breach of this Agreement by the Company or TPG (as the case may be).
(b) In the TPG Team's rendering of the Services hereunder and
in their
<PAGE> 12
capacity as officers, directors, employees, independent contractors, and/or
agents of the Company, the Company shall, as and to the extent permitted by the
General Corporation Law of Delaware, indemnify the TPG Team, TPG, and the
members, officers, employees, representatives, agents, successors, and assigns
of TPG (collectively the "TPG Group") and hold the TPG Group harmless from and
against any and all loss, cost, damage, injury or expense (including court costs
and reasonable attorneys' fees) whatsoever and howsoever arising which the TPG
Group or any person within the TPG Group incurs relating to their actions under
this Agreement and the status of the TPG Team as officers, directors, employees,
independent contractors, and/or agents of the Company. In addition, the Company
shall include the TPG Group and the persons within the TPG Group as
beneficiaries and covered persons in the Company's insurance policy to protect
the TPG Group and the persons within the TPG Group relating to their status as
officers, directors, employees, independent contractors, and/or agents of the
Company.
5. Notices
All notices under this Agreement shall be in writing and shall be
delivered by personal service, or by certified or registered mail, postage
prepaid, return receipt requested, to the parties at the addresses herein set
forth:
To the Company:
in care of:
David Y. Monteith, III, Esquire
Secretary and General Counsel
Air South Airlines, Inc.
2625 Airport Boulevard
West Columbia, South Carolina 29170
Telephone Number 803-822-0502
Telecopy Number 803-822-4132
To TPG:
in care of:
Mr. John P. Tague
President and Chief Executive Officer
Air South Airlines, Inc.
2625 Airport Boulevard
West Columbia, South Carolina 29170
Telephone Number 803-822-0502
Telecopy Number 803-822-8439
with a copy to:
David B. Armstrong, Esquire
Ginsburg, Feldman and Bress Chartered
1250 Connecticut Avenue, N.W.
Washington, D.C. 20036
Telephone Number 202-637-9068
Telecopy Number 202-637-9195
6. Alteration, Amendment, or Waiver.
No change or modification of this Agreement shall be valid unless
the same is in writing and signed by the parties hereto. No waiver of any
provision of this Agreement shall be valid unless in writing and signed by the
person against whom it is sought to be enforced.
<PAGE> 13
The failure of any party at any time to insist upon strict performance of any
condition, promise, agreement or understanding set forth herein shall not be
construed as a waiver or relinquishment of the right to insist upon strict
performance of the same condition, promise, agreement, or understanding at a
future time. The invalidity or unenforceability of any particular provision of
this Agreement shall not affect the other provisions hereof, and this Agreement
shall be construed in all respects as if such invalid or unenforceable
provisions were omitted.
7. Integration.
This Agreement sets forth (and is intended to be an integration
of) all of the promises, agreements, conditions, understandings, warranties, and
representations, oral or written, express or implied, among them with respect to
the terms of the matters set forth herein and there are no promises, agreements,
conditions, understandings, warranties or representations, oral or written,
express or implied, among them with respect to the matters set forth herein
other than as set forth herein.
8. Conflicts of Law.
This Agreement shall be subject to and governed by the laws of the
State of Delaware irrespective of the fact that one or more of the parties now
is or may become a resident of a different state.
9. Counterparts.
This Agreement may be executed in counterparts, each of which
shall be deemed to be an original but all of which together shall constitute one
and the same instrument.
10. Further Assurances.
The parties hereto agree to execute and deliver to the other such
other documents or instruments as may be reasonable and necessary in furtherance
of the performance of the terms, covenants, and conditions of this Agreement.
11. Benefits and Burden.
This Agreement shall inure to the benefit of, and shall be binding
upon, the parties hereto and their respective successors, heirs, and personal
representatives. This Agreement shall not be assignable.
IN WITNESS WHEREOF, the Company and TPG have each caused this Agreement
to be signed by its respective duly authorized officers and each of the parties
hereto has executed this Agreement as of the date and year first above written.
WITNESS/ATTEST:
The Company:
Air South Airlines, Inc.
By:
--------------------------
Name: Dennis B. Crosby
Title: Vice President
TPG:
The Pointe Group, L.L.C.
By:
--------------------------
Name: John P. Tague
Title: Co-Chairman and CEO
<PAGE> 1
EXHIBIT 10.39
REIMBURSEMENT AGREEMENT
BY AND AMONG
AIR SOUTH AIRLINES, INC.
AND
HAMBRECHT & QUIST CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF
HAMBRECHT & QUIST GROUP
DATED AS OF DECEMBER 3, 1996
RELATING TO THE ISSUANCE OF A
$4,000,000
LETTER OF CREDIT
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I DEFINITIONS .................................................... 1
Section 1.1 Definitions .......................................... 1
Section 1.2 Construction ......................................... 3
ARTICLE II LETTER OF CREDIT .............................................. 4
Section 2.1 Amount and Terms of Letter of Credit.................. 4
Section 2.2 Drawings and Reinstatement............................ 4
Section 2.3 Fees and Other Payment................................ 4
Section 2.4 Reimbursement......................................... 4
Section 2.5 Security.............................................. 5
Section 2.6 Place of Payment...................................... 6
Section 2.7 Termination of Agreement.............................. 6
Section 2.8 Reimbursement Loans................................... 6
ARTICLE III CONDITIONS PRECEDENT TO ISSUANCE OF LETTER OF CREDIT........... 7
Section 3.1 Documents To Be Received ............................. 7
Section 3.2 Other Conditions Precedent............................. 8
ARTICLE IV OBLIGATIONS OF THE CORPORATION ................................. 9
Section 4.1 Obligations of the Corporation......................... 9
ARTICLE V REPRESENTATIONS AND WARRANTIES .................................. 10
Section 5.1 Representations and Warranties of the Corporation...... 10
ARTICLE VI COVENANTS OF THE CORPORATION ................................... 11
Section 6.1 Affirmative Covenants.................................. 11
Section 6.2 Negative Covenants .................................. 13
ARTICLE VII EVENTS OF DEFAULT ............................................. 13
Section 7.1 Events of Default...................................... 13
ARTICLE VIII RIGHTS AND REMEDIES .......................................... 14
Section 8.1 Rights and Remedies.................................... 14
ARTICLE IX MISCELLANEOUS .................................................. 14
Section 9.1 Modification of Agreement.............................. 14
Section 9.2 Waiver of Rights by Lender; Remedies................... 15
Section 9.3 Notices................................................ 15
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
Page
Section 9.4 Indemnification.........................................16
Section 9.5 Liability of Lender.....................................16
Section 9.6 Participations..........................................17
Section 9.7 Satisfaction Requirement................................17
Section 9.8 Governing Law...........................................17
Section 9.9 Waiver of Jury Trial....................................17
Section 9.10 Jurisdiction: Service of Process........................18
Section 9.11 Survival of Agreement...................................18
Section 9.12 Severability............................................18
Section 9.14 Counterparts............................................18
ii.
<PAGE> 4
EXHIBITS
EXHIBIT A Form of Reimbursement Loan Note
EXHIBIT B Form of Letter of Credit
EXHIBIT C Form of Certificate Relating to Accuracy of Certain Corporation
Representations Contained in, and the Authorization to Execute,
Certain Documents
EXHIBIT D Form of Warrant
EXHIBIT E Credit Card Agreement between First Bank National Association and
Air South, Inc.
iii.
<PAGE> 5
REIMBURSEMENT AGREEMENT
This REIMBURSEMENT AGREEMENT dated as of December 3, 1996, is made by and
between AIR SOUTH AIRLINES, INC., a Delaware corporation having its principal
place of business at 2625 Airport Boulevard, West Columbia, South Carolina,
29170 ("Corporation"), in favor of HAMBRECHT & QUIST CALIFORNIA, a wholly owned
subsidiary of Hambrecht & Quist Group ("Lender").
RECITALS
A. Corporation has requested that Lender arrange for the issuance of a
letter of credit to be issued in favor of First Bank National Association for
the account of Corporation in the aggregate amount of Four Million Dollars
($4,000,000).
B. Lender is willing to arrange for the issuance of said Letter of
Credit, but only upon the condition, among others, that Corporation shall have
executed and delivered to Lender this Reimbursement Agreement.
AGREEMENT
NOW, THEREFORE, in order to induce Lender to cause the issuance of the
Letter of Credit and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, and intending to be legally bound,
the parties hereto represent, warrant, covenant and agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS. Unless otherwise defined herein the following
terms shall have the following meanings (such meanings being equally applicable
to both the singular and plural forms of the terms defined):
"ACT OF BANKRUPTCY" shall mean the Corporation shall commence a
voluntary case or other proceeding in seeking liquidation, reorganization,
arrangement, readjustment of its debts or for any other relief under the federal
bankruptcy laws, including the Federal Bankruptcy Code, as amended, or under any
other insolvency act or law, state or federal, now or hereafter existing, or
shall take any other action indicating its consent to, approval of, or
acquiescence in, any such petition or proceedings; the Corporation shall apply
for, or consent to or acquiesce in, the appointment of a receiver, liquidator,
custodian, sequestrator, or a trustee for all or a substantial part of its
property; the Corporation shall make an assignment for the benefit of its
creditors; the Corporation shall be unable, or shall admit in writing its
inability, to pay its debts when due; or a petition in bankruptcy shall be filed
against the Corporation, as a debtor, under any applicable bankruptcy,
insolvency or similar law as now or hereafter in
<PAGE> 6
effect which shall not be discharged by a court of competent jurisdiction within
sixty (60) days of the date of such filing.
"AIR SOUTH, INC." means Air South Airlines, Inc.
"AGREEMENT" shall mean this Reimbursement Agreement together with
all duly authorized and executed amendments thereto.
"APPLICATION" shall mean that certain Application and Agreement for
Standby Letter of Credit dated November 20, 1996 by and between Issuing Bank and
Lender.
"BANK" shall mean First Bank National Association, a national
banking association with its principal office located at 601 Second Avenue
South, Minneapolis, Minnesota 55402 or any surviving, resulting or transferee
entity.
"BRIDGE LOANS" shall mean those certain demand notes executed and
delivered by Corporation to Lender as of October 31, 1996, November 6, 1996 and
November 13, 1996.
"BUSINESS DAY" shall mean any day other than (i) a Saturday or
Sunday, (ii) a day on which banking institutions in the States of California,
Minnesota or South Carolina are authorized or required by law or executive order
not to be open for the conduct of their commercial banking business, or (iii) a
day on which the federal reserve bank for the federal reserve district in which
Bank is located is closed.
"COLLATERAL" shall have the meaning assigned to such term in
Section 2 of the Security Agreement.
"CREDIT CARD AGREEMENT" means that certain Agreement between First
Bank National Association and Air South, Inc. effective as of August 1, 1994,
attached as EXHIBIT E hereto, as the same may from time to time be amended,
modified, supplemented or restated.
"DATE OF DELIVERY" shall mean December 4, 1996 or any other date
agreed upon by the Corporation and Lender as the date upon which the initial
Letter of Credit shall be issued.
"DEFAULT RATE" shall mean a rate per annum equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
"DEPOSIT" shall have the meaning assigned to such term in Section 1
of the Credit Card Agreement.
"DRAWING" shall mean a drawing under the Letter of Credit in
accordance with its terms.
"EVENT OF DEFAULT" shall have the meaning set forth in SECTION 7.1
hereof.
2.
<PAGE> 7
"INTEREST RATE" shall mean ten percent (10%) per annum.
"ISSUING BANK" shall mean Bank of America National Trust and
Savings Association acting through its Chicago branch, or any surviving,
resulting or transferee entity.
"LETTER OF CREDIT" shall mean the Letter of Credit arranged by
Lender and issued by Issuing Bank pursuant to the Application on the Date of
Delivery, as the same may from time to time be amended, modified, supplemented
or restated, and shall include any substitute Letter of Credit issued pursuant
to Lender's obligations hereunder.
"MAXIMUM CREDIT" shall mean, as of any date of calculation, the
maximum amount available to be drawn under the Letter of Credit. Initially, the
Maximum Credit shall be $4,000,000.
"PERSON" shall mean any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock corporation, estate, entity or governmental agency.
"REIMBURSEMENT LOAN NOTE" shall mean the note evidencing the
Reimbursement Loans, substantially in the form attached hereto as EXHIBIT A.
"REIMBURSEMENT LOANS" shall mean a reimbursement loan described in
SECTION 2.8 hereof.
"SECURITY AGREEMENT" shall mean that certain Security Agreement
dated December 3, 1996 made by Corporation in favor of Lender.
"TERMINATION DATE" shall mean the date determined in the manner
provided in Section 2.7 hereof.
"TRANSACTION DOCUMENTS" means, collectively, this Agreement, the
Security Agreement, the Reimbursement Loan Note, and any other agreement entered
into between Corporation and Lender, and any certificate or instrument executed
by Lender, in connection with said agreements and note, as the same may from
time to time be amended, modified, supplemented or restated.
SECTION 1.2 CONSTRUCTION. In this Agreement, unless the context otherwise
requires:
(A) Articles and Sections referred to by number shall mean the
corresponding Articles and Sections of this Agreement.
(B) The terms "hereby," "hereof," hereto," "herein," "hereunder,"
and any similar terms, as used in this Agreement refer to this Agreement, and
the term "hereafter shall mean after, and the term "heretofore" shall mean
before the date of execution of this Agreement.
3.
<PAGE> 8
(C) Words of the masculine gender shall be deemed and construed to
include correlative words of the feminine and neuter genders. Words importing
the singular number shall include the plural number and vice versa, and words
importing persons shall include corporations and associations, including public
bodies, as well as natural persons.
ARTICLE II
LETTER OF CREDIT
SECTION 2.1 AMOUNT AND TERMS OF LETTER OF CREDIT. At the request of
Corporation, Lender agrees, on the terms and subject to the conditions set forth
in this Agreement, including without limitation the conditions set forth in
ARTICLE III hereof, to on or before the Date of Delivery cause the issuance of
the Letter of Credit by Issuing Bank, in favor of Bank for the account of
Corporation, to secure, and to provide a source of payment of, the Deposit. The
Letter of Credit will be issued in an initial amount equal to the Maximum
Credit. The Letter of Credit shall be issued in favor of Bank for the account of
the Corporation substantially in the form of EXHIBIT B hereto.
SECTION 2.2 DRAWINGS AND REINSTATEMENT.
(A) Drawings under the Letter of Credit are intended to be made by
Bank for the account of the Corporation and to be honored by Issuing Bank, all
pursuant to the provisions, on the terms and subject to the conditions set forth
in the Letter of Credit. The honoring of any Drawing shall automatically reduce
by like amount the Maximum Credit. No Drawing under the Letter of Credit shall
be honored in an amount exceeding the Maximum Credit.
(B) The Maximum Credit, or any lesser amount, may be reinstated by
Lender at its sole option, provided Lender has been reimbursed by Corporation
any such amounts to be reinstated.
SECTION 2.3 FEES AND OTHER PAYMENT.
(A) The Corporation hereby agrees to pay to or reimburse Lender:
(I) On or before the Date of Delivery, the origination fee
paid to Issuing Bank in an amount equal to $200;
(II) On or before the Date of Delivery, an amount equal to all
costs and expenses (including attorneys' fees and expenses) incurred by Lender
in connection with the preparation and negotiation of this Agreement, the
Reimbursement Loan Note, the other Transaction Documents and the closing of the
transactions contemplated hereby.
(III) On demand from time to time from Lender, any fees or
other amounts (not otherwise reimbursed by Corporation to Lender pursuant to
SECTION 2.4 hereof) required to be paid by Lender to the Issuing Bank in
connection with the Letter of Credit,
4.
<PAGE> 9
including, without limitation, a one percent (1%) per annum fee, payable
quarterly by Lender to Issuing Bank;
(IV) On demand from time to time by Lender, an amount equal to
all costs and expenses (including attorneys fees and expenses) (not otherwise
reimbursed by Corporation to Lender pursuant to SECTION 2.4 hereof) incurred by
Lender relative to a Drawing under the Letter of Credit.
(V) On demand from time to time by Lender, an amount equal to
all costs and expenses (including attorneys' fees and expenses) incurred by
Lender relative to the Letter of Credit (not otherwise reimbursed by Corporation
to Lender pursuant to this SECTION 2.3 or SECTION 2.4) or each Reimbursement
Loan or the enforcement or preservation of any rights of Lender under this
Agreement, the other Transaction Documents, each Reimbursement Loan or the
Reimbursement Loan Note, or in connection with the exercise or waiver of any of
Lender's discretionary rights under this Agreement, the Reimbursement Loan Note
or under the other Transaction Documents;
(VI) On demand from time to time by Lender, interest, at the
Default Rate, on any and all amounts unpaid by the Corporation when due under
this Agreement or the Reimbursement Loan Note, but in no event shall such rates
exceed the maximum rate of nonusurious interest allowed from time to time by
law, as is now or, to the extent allowable by law, as hereinafter may be in
effect, to be paid by the Corporation;
Each such payment or reimbursement shall be deemed to be earned in
full on the date on which such amount is due and payable by the Corporation.
(B) The Corporation agrees to pay, on demand from time to time by
the Lender, all reasonable costs and expenses incurred by the Lender, in
connection with (i) any transfer or amendment of the Letter of Credit or
amendment of this Agreement, (ii) any review by the Lender of the documents
necessary for Lender to honor a Drawing under the Letter of Credit, or relative
to the Lender's curing of any event of default by Borrower under any of the
Transaction Documents, (iii) the exercise, enforcement or preservation of any
rights of Lender under this Agreement, (iv) any action or proceeding relating to
a court order, injunction, or other process or decree restraining or seeking to
restrain Lender from paying any amount under the Letter of Credit, and (v) the
waiver or amendment of any of the Lender's rights under any of the Transaction
Documents; provided, however, that no payment shall be required under this
SECTION 2,3(b) in respect of any cost or expense Lender has incurred because of
its gross negligence or willful misconduct if so determined by a court of
competent jurisdiction.
SECTION 2.4 REIMBURSEMENT. The Corporation agrees to pay to or reimburse
Lender in full for any and all Drawings made under the Letter of Credit on the
date any Drawing is made. Any amount drawn under the Letter of Credit shall be,
to the extent permitted by and in accordance with SECTION 2.8 HEREOF,
automatically converted into a Reimbursement Loan. A Reimbursement Loan, when
made, will satisfy the reimbursement obligation of the Corporation to Lender in
the principal amount of such Reimbursement Loan.
5.
<PAGE> 10
SECTION 2.5 SECURITY. The obligations of the Corporation under this
Agreement, including, without limitation, the Corporation's obligations to make
payments under SECTIONS 2.3 and 2.4 hereof, are secured by the Collateral
identified and described as security therefore in the Security Agreement.
SECTION 2.6 PLACE OF PAYMENT. All payments to be made by the Corporation to
the Lender hereunder shall be made in lawful currency of the United States of
America and in immediately available funds by wire to the following account:
Hambrecht and Quist Group
c/o Citibank, F.S.B.
260 California Street
San Francisco, CA 94111
ABA: 321171184
Account#: 601022205
Account Name: H&Q Management Corporation
or at such other address as Lender may specify from time to time by notice to
the Corporation.
SECTION 2.7 TERMINATION OF AGREEMENT. This Agreement (except for the
obligations of the Corporation set forth in SECTIONS 2.3(b) and 9.4) shall
terminate at such time as the Letter of Credit shall have expired and when all
amounts due and payable to Lender hereunder shall be paid in full (the
"Termination Date").
SECTION 2.8 REIMBURSEMENT LOANS.
(A) Lender agrees, upon the terms, subject to the conditions and
relying upon the representations and warranties set forth in this Agreement and
the other Transaction Documents, that, unless an Event of Default shall have
occurred and be continuing Drawing under the Letter of Credit that is not repaid
in full by the Corporation on the date thereof shall automatically be converted
into a Reimbursement Loan. On and as of the date of the making of each
Reimbursement Loan: (i) the Corporation shall be deemed to have (A) remade,
ratified and confirmed all representations and warranties of the Corporation
contained in SECTION 5.1 of this Agreement, and (B) certified compliance with
all covenants contained in ARTICLE VI hereof;
(B) The principal amount of the Reimbursement Loans shall not
exceed the Maximum Credit available under the Letter of Credit on such date. All
the Reimbursement Loans shall be evidenced by a single Reimbursement Loan Note
substantially in the form of EXHIBIT A hereto with appropriate insertions, duly
executed and delivered by the Corporation to Lender, dated by Lender on the
attached schedule the date of each Drawing under the Letter of Credit that gives
rise to a Reimbursement Loan, and payable to Lender or its assigns in an amount
equal to the amount drawn on the Letter of Credit that is not reimbursed as
provided in the first sentence of SECTION 2.4 of this Agreement. The principal
amount of each Reimbursement Loan, together with any unpaid and accrued interest
thereon, shall be due and
6.
<PAGE> 11
payable on the later of (a) the first anniversary of such Reimbursement Loan or
(b) such time as the Letter of Credit shall have expired.
(C) The Reimbursement Loans shall bear interest at the Interest
Rate. Such Interest shall be calculated on the basis of a 365 or 366 day year
and actual number of days elapsed. Lender shall, and is hereby authorized by the
Corporation to, date the schedule attached to the Reimbursement Loan Note the
dare of any Drawing under the Letter of Credit that is not reimbursed as
provided in the first sentence of SECTION 2.4 of this Agreement and insert the
amount (or the portion thereof nor so reimbursed, as the case may be), and
endorse on such schedule an appropriate notation evidencing the date and amount
of each repayment and any other information provided for on such schedule;
provided, however, that the failure of Lender to insert any such date or amount
or set forth such repayments and other information on such schedule shall not in
any manner affect the obligation of the Corporation to repay the related
Reimbursement Loans in accordance with the terms of this Agreement.
(D) Lender agrees that the Corporation may prepay a Reimbursement
Loan in whole or in part without premium or penalty at any time.
ARTICLE III
CONDITIONS PRECEDENT TO ISSUANCE
OF LETTER OF CREDIT
SECTION 3.1 DOCUMENTS TO BE RECEIVED. Lender's obligations to cause the
issuance of the Letter of Credit as set forth in SECTION 2.1 hereof are subject
to the conditions precedent that, on or prior to the Date of Delivery, Lender
shall receive the following documents, all in form and substance satisfactory to
Lender:
(A) executed counterparts of the this Agreement, the Security
Agreement and the Reimbursement Loan Note, which shall be duly executed and
dated by the Corporation (except for the schedule attached thereto, which shall
be undated and blank as to amount);
(B) a certificate of the appropriate officer(s) of the Corporation
certifying (i) that the statements contained in SECTIONS 3.2(a) and 5.1 are true
and correct, (ii) the name and true signatures of the officers of the
Corporation authorized to sign this Agreement and the other documents to be
delivered by the Corporation hereunder and (iii) as to such other matters as
Lender shall determine, in substantially the form attached hereto as EXHIBIT C;
(C) all filings, notices and recordings necessary to perfect the
security interest granted Lender pursuant to the Security Agreement shall have
been delivered to Lender;
(D) the Warrant duly executed and delivered by Corporation in the
form attached hereto as EXHIBIT D;
7.
<PAGE> 12
(E) the Notification of Assignment and Irrevocable Distribution
Instructions duly executed and delivered by Corporation and acknowledged,
consented and agreed to by Bank in the form attached as Exhibit A to the
Security Agreement;
(F) an Intercreditor Agreement duly executed and delivered by
Jobs-Economic Development Authority ("JEDA") and NationsBank N.A. in a form and
substance satisfactory to Lender;
(G) such other documents, certificates, instruments, approvals or
filings as Lender may reasonably deem necessary or appropriate.
SECTION 3.2 OTHER CONDITIONS PRECEDENT. The Lender's obligation to cause
the issuance of the Letter of Credit as set forth in Section 2.1 hereof shall be
subject to the additional conditions precedent that:
(A) the following statements shall be true and correct on the Date
of Delivery and Lender shall have received a certificate signed by a duly
authorized officer of the Corporation, dated the Date of Delivery to the
following effect and to such other effects as the Lender may request,
substantially in the form attached hereto as EXHIBIT C:
(I) the representations and warranties of the Corporation set
forth in SECTION 5.1 hereof and in the other Transaction Documents are true and
correct as of the Date of Delivery as though made on and as of such date;
(II) no event has occurred and is continuing, or would result
directly or indirectly from the issuance of the Letter of Credit, which
constitutes an Event of Default hereunder or which would constitute such an
Event of Default, but for the requirement that notice be given or time elapse,
or both; and
(III) no "event of default" (however defined or designated) has
occurred under any of the Transaction Documents, and no event has occurred and
is continuing which would constitute such an event of default, but for the
requirement that notice be given or time elapse, or both.
(B) On or before the Date of Delivery, the Corporation shall have
duly adopted a resolution authorizing the execution, delivery and performance by
the Corporation of the Transaction Documents to which it is a party, and on and
after the Date of Delivery such resolution shall continue to be in full force
and effect.
8.
<PAGE> 13
ARTICLE IV
OBLIGATIONS OF THE CORPORATION
SECTION 4.1 OBLIGATIONS OF THE CORPORATION.
(A) The obligations of the Corporation under this Agreement shall
be absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement, under all circumstances whatsoever,
including without limitation the following circumstances:
(I) any lack of validity or enforceability of any of the
Transaction Documents (other than this Agreement) or any other agreement or
instrument contemplated thereby or related thereto;
(II) any amendment or waiver of or any consent to departure
from all or any of the documents contemplated hereby;
(III) the existence of any claim, setoff, defense or other
rights which the Corporation may have at any time against any beneficiary or any
transferee of the Letter of Credit (or any persons or entities for whom such
beneficiary may be acting), the Lender or any other Person, whether in
connection with the Transaction or any unrelated transaction;
(IV) any breach of contract or other dispute between the
Corporation and any beneficiary of the Letter of Credit (or any persons or
entities for whom any such beneficiary may be acting), Lender, Issuing Bank,
Bank or any other Person;
(V) any statement or any other document presented under the
Transaction Documents proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect whatsoever;
(VI) payment by the Issuing Bank under the Letter of Credit
against presentation of a sight draft or certificate which does not comply with
the terms of the Letter of Credit, provided that such payment shall not have
constituted an act of gross negligence or willful misconduct by Lender as
determined by a court of competent jurisdiction; or
(VII) any delay, extension of time, renewal, compromise or
other indulgence or modification granted or agreed to by Lender, with or without
notice to or approval by the Corporation, as the case may be, in respect of any
of the Corporation's indebtedness to Lender under this Agreement.
(B) Lender shall not be deemed to have waived or released any of
its rights or remedies (whether specified in or arising under this Agreement or
otherwise available to it by law or agreement) unless it signs a written waiver
or release. Delay or failure to act on the Lender's part shall not constitute a
waiver of or otherwise preclude enforcement of any of its
9.
<PAGE> 14
rights and remedies. All of Lender's rights and remedies shall be cumulative and
may be exercised singularly or concurrently. Lender need not resort to any
particular right or remedy before exercising or enforcing any other, and
Lender's resort to any right or remedy shall not preclude the exercise or
enforcement of each other right and remedy.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.1 REPRESENTATIONS AND WARRANTIES OF THE CORPORATION. The
Corporation represents and warrants as follows:
(A) ORGANIZATION AND POWERS. The Corporation is a corporation, duly
organized and validly existing under the laws of the State of Delaware and is
authorized to transact business and exercise its power under the applicable laws
of any state in which the conduct of its business or its ownership of property
requires that it be so qualified.
(B) AUTHORIZATION AND ABSENCE. The execution, delivery and
performance of the Transaction Documents (i) have been duly authorized by all
necessary action on the part of the Corporation, (ii) do not and will not
conflict with, or result in a violation of, any provision of law, or any order,
writ, rule or regulation of any court or governmental agency or instrumentality
binding upon or applicable to the Corporation and (iii) do not and will not
conflict with, result in a violation of, or constitute a default under, any
resolution, material agreement or instrument to which the Corporation is a party
or by which the Corporation or any of its property is bound.
(C) BINDING OBLIGATION. Each of the Transaction Documents will be a
valid and binding obligation of the Corporation enforceable in accordance with
its terms.
(D) GOVERNMENTAL CONSENT OR APPROVAL. No consent, approval, permit,
authorization or order of, or registration or filing with, any court or
governmental agency, authority or other instrumentality not already obtained,
given or made is required on the part of the Corporation for the execution,
delivery and performance by the Corporation of any of the Transaction Documents.
(E) ABSENCE OF LITIGATION. There is no action, suit, proceeding,
inquiry or investigation, at law or in equity, before or by any court,
arbitrator, governmental or other board, body or official, pending or, to the
best knowledge of the Corporation, threatened against or affecting the
Corporation, questioning the validity of any proceeding taken or to be taken by
the Corporation in connection with the execution, delivery and performance by
the Corporation of the Transaction Documents or seeking to prohibit, restrain or
enjoin the execution, delivery or performance by the Corporation of any of the
foregoing. nor, to the best knowledge of the Corporation, is there any basis
therefor, wherein an unfavorable decision, ruling or finding would (i) adversely
affect the validity or enforceability of, or the authority or ability of the
Corporation to perform its obligations under the Transaction Documents or (ii)
have a material
10.
<PAGE> 15
adverse effect on the ability of the Corporation to conduct its business as
currently conducted or as proposed or contemplated to be conducted.
(F) NO DEFAULTS BY THE CORPORATION. Other than as set forth on the
Schedule of Exceptions attached hereto (the "Schedule"), the Corporation is not
in default in the performance, observance or fulfillment of any of the
obligations, covenants or conditions contained in any agreement or instrument to
which the Corporation is a party or by which the Corporation or any of its
property is bound, except for such defaults as would not have a material adverse
effect on the ability of the Corporation to conduct its business as currently
conducted or as proposed or contemplated to be conducted.
(G) INCORPORATION OF REPRESENTATIONS. The Corporation hereby makes
to the Lender the same representations and warranties as are made by the
Corporation and set forth in any other Transaction Documents, which
representations and warranties, as well as the defined terms contained therein
(or in such defined terms), are hereby incorporated by reference with the same
effect as if each and every such representation and warranty and defined term
were set forth herein in its entirety. No amendment to such representations and
warranties or defined terms made pursuant thereto shall be effective to amend
such representations and warranties and defined terms as incorporated by
reference herein without the consent of Lender.
(H) COMPLIANCE WITH LAWS. The Corporation is in material compliance
with all provisions of applicable law.
ARTICLE VI
COVENANTS OF THE CORPORATION
SECTION 6.1 AFFIRMATIVE COVENANTS. So long as the Termination Date has not
occurred or so long as any amount is due and owing to Lender hereunder, the
Corporation will, unless Lender otherwise shall consent in writing:
(A) DELIVERY OF INFORMATION, REPORTS AND OPINIONS. Furnish to
Lender the following: (i) as soon as possible and in any event within two (2)
Business Days after the occurrence of (A) each Event of Default or any event or
condition that, with the passage of time or the giving of notice or both, would
constitute an Event of Default, under this Agreement, and (B) each "event of
default" (however defined or designated) or any event or condition that, with
the passage of time or the giving of notice or both, would constitute an "event
of default" under any Transaction Document, a statement of an officer of the
Corporation setting forth details thereof and the action which the Corporation
proposes to take with respect thereto; (ii) audited financial statements, if
any, of the Corporation within ten (10) days after the Corporation's receipt of
the same from the respective accountants; (iii) a copy of the annual budget, if
any, for the Corporation within ten (10) days after the adoption of such budget;
and (iv) as promptly as practicable, written notice to the Lender of all
proceedings before any court or governmental authority which, if adversely
determined, would materially and adversely affect the ability of the Corporation
to pay when due the principal of or any interest on the Reimbursement Loan Note.
11.
<PAGE> 16
(B) PAYMENT OF INDEBTEDNESS. Other than as set forth on the
Schedule, duly and punctually pay or cause to be paid all principal and interest
on the indebtedness of the Corporation legally due and owing to third parties,
comply with and perform all conditions, terms and obligations of the notes or
bonds evidencing such indebtedness and the security agreements, deeds of trust
and mortgages securing such indebtedness, and upon being notified of a default
or having made a determination not to pay an indebtedness when due, promptly
inform Lender of any such default, or anticipated default, under any such note,
bond, security agreement, deed of trust or mortgage, and forward to the Lender a
copy of any notice of default or notice of an event that might result in default
under any such note, bond, security agreement, deed of trust or mortgage;
(C) ACCESS TO RECORDS AND AUDIT. Upon reasonable notice to
Corporation (unless an Event of Default has occurred and is continuing, in which
case no notice is necessary) Corporation shall permit Lender to at all times
have full and free access during normal business hours to all the books and
records and correspondence of Corporation, and Lender or any agents or
representatives of Lender may examine the same, take extracts therefrom and make
photocopies thereof, and Corporation agrees to render to Lender, at
Corporation's cost and expense, such clerical and other assistance as may be
reasonably requested with regard thereto; and cause Bank to permit Lender to
have all rights of Borrower to audit, copy or make extracts of the records of
Bank as are specified under Section 10 of the Credit Card Agreement;
(D) RELATED COVENANTS. Fully and faithfully perform each of the
covenants and agreements required of it pursuant to the provisions of the
Transaction Documents;
(E) FURTHER ACTION. At any and all times, insofar as it may be
authorized to do so by law, pass, make, do, execute, acknowledge and deliver all
and every such further resolutions, acts, deeds, conveyances, assignments,
recordings, filings, transfers and assurances as may be necessary or reasonably
desirable for the better assuring, conveying, granting, assigning and confirming
the amounts due hereunder and under the Reimbursement Loan Note, or intended so
to be, or which the Corporation may hereafter become bound to pledge or assign
thereto;
(F) COMPLIANCE WITH LAWS. Comply in all material respects with all
applicable (A) laws (including, rules, regulations, writs, decrees and orders of
all Federal, state, local or foreign courts or governmental agencies,
authorities, instrumentalities or regulatory bodies and (B) rules, regulations
and requirements necessary to maintain its operating and business licenses,
authorizations and permits; and
(G) INCORPORATION OF COVENANTS. The Corporation hereby makes to
Lender the same covenants as are made by the Corporation and set forth in any
other Transaction Document, which covenants, as well as the defined terms
contained therein (or in such defined terms), are hereby incorporated by
reference with the same effect as if each and every such covenant and defined
term were set forth herein in its entirety. No amendment to such covenants or
defined terms made pursuant thereto shall be effective to amend such covenants
and defined terms as incorporated by reference herein without the consent of the
Lender.
12.
<PAGE> 17
SECTION 6.2 NEGATIVE COVENANTS. So long as the Termination Date has not
occurred or any amount remains due and owing to Lender hereunder, unless the
Lender otherwise shall consent in writing, the Corporation agrees not to issue
any indebtedness which would be secured (whether on a senior, parity or junior
lien basis) by any pledge of or security interest in the Collateral.
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1 EVENTS OF DEFAULT. The occurrence of any of the following
events shall be an "Event of Default" hereunder unless waived by Lender pursuant
to SECTION 9.1 hereof:
(A) the Corporation shall fail to pay when due any amount specified
under the terms of this Agreement, including, without limitation, amounts due
under the Reimbursement Loan Note;
(B) any representation or warranty made by the Corporation pursuant
to SECTION 5.1 hereof or under the Security Agreement or any certification made
by the Corporation hereunder shall prove to have been incorrect in any material
respect when made;
(C) the Corporation shall fail to perform or observe any other
term, covenant or agreement contained in this Agreement (other than those
specifically referenced in SECTION 7.l(a) and (b) above) and such failure shall
remain unremedied for thirty (30) days after written notice thereof shall have
been given to the Corporation, by Lender;
(D) an "event of default" (however defined or designated) under any
Transaction Document shall have occurred and be continuing;
(E) an event of default under any indebtedness of the Corporation
from time to time outstanding or under any agreement to which Borrower is a
party with a third party or parties resulting in a right by such third party or
parties, whether or not exercised, to accelerate the maturity of any
indebtedness in an amount in excess of Five Hundred Thousand Dollars ($500,000)
or that could materially and adversely affect the ability of the Corporation to
pay when due the principal of or any interest on the Reimbursement Loan Note.
(F) any material provision of this Agreement or the other
Transaction Documents shall at any time for any reason cease to be valid and
binding on the Corporation, or shall be declared to be null and void, or the
validity or enforceability thereof shall be contested by the Corporation or any
governmental agency or authority, and the happening of the events heretofore set
forth in this SUBSECTION (f) shall materially and adversely affect Lender's
rights under this Agreement or under any other Transaction Document, or the
Corporation shall deny that it has any or further liability or obligation under
this Agreement or any other Transaction Document;
13.
<PAGE> 18
(G) Lender shall fail to have a valid and enforceable perfected
first priority security interest under the Security Agreement, subject only to
the Permitted Liens;
(H) The occurrence of (or with the giving of notice, lapse of time,
determination of materiality or the fulfillment of any other applicable
condition or any combination of the foregoing, might constitute) a default by
Borrower under, or the termination of, the Credit Card Agreement; or
(I) an Act of Bankruptcy.
ARTICLE VIII
RIGHTS AND REMEDIES
SECTION 8.1 RIGHTS AND REMEDIES.
(A) DEFAULTS UNDER THIS AGREEMENT. Upon the occurrence of an Event
of Default hereunder, or at any time thereafter while such default continues,
Lender, in its sole discretion, may do any one or more of the following:
(I) send notice of such Event of Default to the Corporation;
(II) declare the Reimbursement Loan Note, if outstanding, and
any and all amounts due and owing under this Agreement or under the other
Transaction Documents, to be immediately due and payable;
(III) terminate the Letter of Credit; and
(IV) exercise any rights and remedies available to it by law or
under this Agreement, the Security Agreement, any other Transaction Document or
any other agreement, document or instrument contemplated hereby.
(B) DEFAULTS UNDER THE CREDIT CARD AGREEMENT. Lender may cure an
event of default under the Credit Card Agreement; provided, however, that
nothing contained herein shall obligate Lender to cure any such event of
default.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 MODIFICATION OF AGREEMENT. No modification or waiver of any
provision of this Agreement, and no consent to any departure by the Corporation
therefrom, shall be effective unless the same shall be in writing and signed by
Lender and the Corporation and no modification or waiver of any provision of the
Letter of Credit, and no consent to any departure by the Corporation or Bank
therefrom, shall in any event be effective unless the same shall be
14.
<PAGE> 19
in writing and signed by Lender. Any such waiver or consent shall be effective
only in the specific instance and for the purpose for which given. No notice to
or demand on the Corporation in any case shall entitle the Corporation to or any
other or further notice or demand in the same, similar or other circumstances.
SECTION 9.2 WAIVER OF RIGHTS BY LENDER; REMEDIES. No course of dealing or
failure or delay on the part of Lender in exercising any right, power or
privilege hereunder or under the Letter of Credit shall operate as a waiver
hereof or thereof, nor shall a single or partial exercise thereof preclude any
other or further exercise or the exercise of any other right, power or
privilege. The rights of Lender under this Agreement are cumulative and not
exclusive of any rights or remedies which Lender would otherwise have.
SECTION 9.3 NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed effectively
given: (i) upon personal delivery to the party to be notified; (ii) upon receipt
at the address specified below after having been sent by certified or registered
mail, return receipt requested, postage prepaid; or (iii) one (1) day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to the party to be notified at the address set forth below:
If to the Corporation:
Air South Airlines, Inc.
2625 Airport Boulevard
West Columbia, South Carolina 29170
Attention: John P. Tague, Chairman
Fax: (803) 822-4132
with a copy to:
David A. Monteith, Esq.
Monteith Law Offices
2805 Millwood Avenue
Columbia, South Carolina 29205
(which shall not constitute notice)
If to Lender:
Hambrecht & Quist California
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Attention: David Golden
Fax: (415) 339-4325
15.
<PAGE> 20
with a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attention: Patrick Pohlen
Telephone: (415) 326-0600
Facsimile No.: (415) 857-0663
(which shall not constitute notice)
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
SECTION 9.4 INDEMNIFICATION. In addition to other amounts payable by the
Corporation under this Agreement, the Corporation hereby agrees to the fullest
extent permitted by applicable law, to protect, defend, indemnify and hold
harmless Lender, its assignees, the Issuing Bank, and their respective
directors, officers, employees, agents, counsel, successors and assigns from and
against any and all claims, demands, judgments, damages, actions, injuries,
losses, liabilities, penalties, costs, charges and expenses whatsoever which
such Person may (or which may be claimed against such Person whatsoever),
including, without limitation, the fees and expenses of counsel for such Person
by reason of or in connection with: (a) the issuance of the Letter of Credit;
(b) any breach by Corporation of any representation, warranty, covenant, term or
condition in, or the occurrence of any default under this Agreement, the
Reimbursement Loan Note or the other Transaction Documents, including all
reasonable fees or expenses resulting from the settlement or defense of any
claims or liabilities arising as a result of any such breach or default;
provided, however, that the Corporation shall not be required to indemnify any
such Person for any claims, demands, damages, losses, liabilities, costs,
charges and expenses to the extent, but only to the extent, caused by (i) the
gross negligence of Lender, as determined by a court of competent jurisdiction,
in determining whether a sight draft or certificate presented under the Letter
of Credit complied with the terms of the Letter of Credit; (ii) Lender's willful
failure, as determined by a court of competent jurisdiction, to cause payment
under the Letter of Credit after the presentation to it by Lender of a sight
draft and all required certificates strictly complying with the terms and
conditions of the Letter of Credit. The indemnification obligations in this
SECTION 9.4 shall survive the expiration of this Agreement or the Letter of
Credit.
SECTION 9.5 LIABILITY OF LENDER. The Corporation assumes all risks of the
acts or omissions of Bank and any transferee of the Letter of Credit with
respect to its use of the Letter of Credit or the proceeds thereof; provided,
however, this assumption is not intended to, and shall not, preclude the
Corporation from pursuing such rights and remedies as it may have against Bank
at law or under the Credit Card Agreement or any other agreement. Neither the
Lender nor any Person participating in the Letter of Credit or the Reimbursement
Loan Note shall be liable or responsible for: (a) the use which may be made of
the Letter of Credit or the
16.
<PAGE> 21
proceeds thereof or for any acts or omissions of Bank and any transferee of the
Letter of Credit in connection therewith; (b) the validity, sufficiency or
genuineness of documents presented under the Letter of Credit, or of any
endorsement(s) thereon, even if such documents should in fact prove to be in any
or all respects invalid, insufficient, fraudulent or forged; provided, however,
(a) and (b) to the contrary notwithstanding, the Corporation shall have a claim
against the Lender, and the Lender shall be liable to the Corporation, to the
extent, but only to the extent, of any direct, as opposed to consequential,
damages suffered by the Corporation which the Corporation proves, as determined
by a court of competent jurisdiction, were caused by (i) Lender's gross
negligence or (ii) Lender's willful act that prevents payment under the Letter
of Credit after the presentation to Issuing Bank by the Bank (or a successor
under the Credit Card Agreement to whom the Letter of Credit has been
transferred in accordance with its terms) of a sight draft and all required
certificates strictly complying with the terms and conditions of the Letter of
Credit. In furtherance and not in limitation of the foregoing, the Lender may
accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary; provided, however, that if Lender shall receive
timely written notification from each of Bank or the Corporation and that
sufficiently identifies (in the reasonable opinion of Lender) documents that
thereafter may be presented to Issuing Bank or Lender which are not to be
honored, Lender agrees to use its best efforts to avoid honoring such documents
thereafter. Lender assumes no responsibility for any failure or delay in the
transmission to Bank of funds drawn under the Letter of Credit through the
federal funds wire system.
SECTION 9.6 PARTICIPATIONS. Lender may participate to other Persons and
institutions of the Lender's choosing all or any portion of its obligations
under the Letter of Credit and the obligations of the Corporation under the
Reimbursement Loan Note. No such participation shall relieve the Lender of its
obligations hereunder nor shall it cause an increase in Corporation's
obligations under this Agreement, including under SECTION 2.3(b) above.
SECTION 9.7 SATISFACTION REQUIREMENT. If any agreement, certificate or
other writing, or any action taken or to be taken, is by the terms of this
Agreement required to be satisfactory to the Lender, the determination of such
satisfaction shall be made by Lender in its sole and exclusive judgment
exercised in good faith.
SECTION 9.8 GOVERNING LAW. In all respects, including all matters of
construction, validity and performance, this Agreement, the Reimbursement Loan
Note and the other Transaction Documents, and any obligations arising hereunder
or thereunder, shall be governed by, and construed and enforced in accordance
with, the laws of the State of California applicable to contracts made and
performed in such state, without regard to the principles thereof regarding
conflict of laws.
SECTION 9.9 WAIVER OF JURY TRIAL. The Corporation hereby waives trial by
jury in any litigation in any court with respect to, in connection with, or
arising out of this Agreement, the Reimbursement Loan Note, the other
Transaction Documents or any instrument or document delivered pursuant to this
Agreement, the Reimbursement Loan Note or the other Transaction Documents, or
the validity, protection, interpretation, collection or enforcement thereof, or
any
17.
<PAGE> 22
other claim or dispute howsoever arising, between the Corporation, on the one
hand, and Lender, on the other hand.
SECTION 9.10 JURISDICTION: SERVICE OF PROCESS. The Corporation hereby
irrevocably consents to the jurisdiction of the Courts of the State of
California, County of San Francisco and of any Federal Court located in the
county of San Francisco California, and agree that venue in each of such Courts
is proper in connection with any action or proceeding arising out of or relating
to this Agreement, the other Transaction Documents, or any document or
instrument delivered pursuant to this Agreement or the other Transaction
Documents. Nothing herein shall affect the right of Lender to serve process in
any other manner permitted by law or to commence legal proceedings or otherwise
proceed against the Corporation in any other jurisdiction.
SECTION 9.11 SURVIVAL OF AGREEMENT. All covenants, agreements,
representations and warranties made in this Agreement shall survive the issuance
of the Letter of Credit by Issuing Bank and shall continue in full force and
effect so long as the Letter of Credit shall be unexpired or any sums drawn or
due hereunder or under the Reimbursement Loan Note shall be outstanding and
unpaid, regardless of any investigation made by any Person and so long as any
amount payable hereunder remains unpaid. Whenever in this Agreement Lender is
referred to, such reference shall be deemed to include the successors and
assigns of Lender, and all covenants, promises and agreements by or on behalf of
the Corporation which are contained in this Agreement shall inure to the benefit
of the successors and assigns of Lender and such other Persons as are
indemnified herein, subject to such limitations as are set forth in SECTION 9.6
above regarding participations. The rights and duties of the Corporation,
however, may not be assigned or transferred, except as specifically provided in
this Agreement or with the prior written consent of the Lender, and all
obligations of the Corporation shall continue in full force and effect
notwithstanding any assignment by the Corporation of any of their respective
rights or obligations under any of the Transaction Documents or the
Reimbursement Loan Note or any entering into, or consent by the Corporation
supplement or amendment to any of the Transaction Documents .
SECTION 9.12 SEVERABILITY. Any provision of this Security Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
SECTION 9.13 HEADINGS. The various headings in this Agreement are inserted
for convenience only and shall not affect the meaning or interpretation of this
agreement or any provisions hereof.
SECTION 9.14 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so delivered shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. Each
such agreement shall become effective upon the execution of a counterpart hereof
or thereof by each of the parties hereto and telephonic notification thereof has
been received by Corporation and Lender.
18.
<PAGE> 23
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and delivered by its duly authorized officer on the date first set
forth above.
CORPORATION: AIR SOUTH AIRLINES, INC.
By:/s/ Dennis B. Crosby
---------------------------------
Printed Name: Dennis B. Crosby
-------------------------
Title: Vice President
---------------------------------
ATTEST:
/s/ David Monteith
- - - ------------------------------------
Name: David Monteith
Title: Secretary
HAMBRECHT AND QUIST CALIFORNIA, a wholly
owned subsidiary of Hambrecht & Quist Group
By:/s/ Jackie Berterretche
-----------------------------------
Printed Name:/s/Jackie Berterretche
-------------------------
Title: Attorney in fact
--------------------------------
19.
<PAGE> 24
SCHEDULE OF EXCEPTIONS
SCHEDULE 3.1(F)
THE COMPANY IS CURRENTLY UNABLE TO PROVIDE AN INTERCREDITOR
AGREEMENT TO LENDER EXECUTED BY JEDA AND NATIONSBANK. THE COMPANY AGREES TO USE
ITS BEST EFFORTS TO PROVIDE SUCH AGREEMENT IN A FORM AND SUBSTANCE SATISFACTORY
TO LENDER ON OR BEFORE DECEMBER 31, 1996.
SCHEDULE 5.L(F)
THE COMPANY IS CURRENTLY IN DEFAULT UNDER THE FOLLOWING INSTRUMENTS
OR CONTRACTS:
(A) AIR SOUTH, INC. HUD SECTION 108 LOAN
(B) REVOLVING CREDIT FACILITY WITH NATIONSBANK, N.A.
SCHEDULE 6.1.(B)
IT IS UNDERSTOOD THAT THE COMPANY IS CURRENTLY AND GENERALLY IN ARREARS
ON ACCOUNTS PAYABLE TO NUMEROUS GENERAL CREDITORS NOT EXCEEDING $8,200,000.00.
SUCH ACCOUNTS ARE NOT EVIDENCED BY NOTES, BONDS, SECURITY AGREEMENTS, DEEDS OF
TRUST OR MORTGAGES.
<PAGE> 25
EXHIBIT A
FORM OF
REIMBURSEMENT LOAN NOTE
$4,000,000 San Francisco, California
December 3, 1996
FOR VALUE RECEIVED, AIR SOUTH AIRLINES, INC., a Delaware corporation (the
"Corporation") hereby unconditionally promises to pay to the order of HAMBRECHT
& QUIST CALIFORNIA, a wholly owned subsidiary of Hambrecht & Quist Group
("Lender"), or their assigns, in lawful money of the United States of America
and in immediately available funds, the sum of Four Million Dollars ($4,000,000)
or so much thereof as from time to time may be advanced hereunder pursuant to
Section 2.8 of that certain Reimbursement Agreement, dated as of December 3,
1996, by and among the Corporation and Lender, as amended from time to time (the
"Agreement"), in connection with drawings under that certain Letter of Credit
No. 3002578 dated December 4, 1996, issued by the BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION in favor of FIRST BANK NATIONAL ASSOCIATION (including
any amendment thereof or substitute therefor) (the "Letter of Credit") in
accordance with the terms and conditions set forth in the Agreement. Borrower
shall also pay interest (calculated on the basis of a 365 or 366 day year and
actual number of days elapsed) on such sum or the portion thereof from time to
time outstanding hereunder, monthly, at the rates and in accordance with the
terms and conditions set forth in the Agreement.
This Reimbursement Loan Note is issued under and is subject to the terms
and conditions of the Agreement. All definitions, terms, conditions, rights and
provisions set forth in the Agreement, are hereby incorporated herein in their
entirety.
Annexed hereto and made a part hereof is a schedule (the "Loan and
Repayment Schedule") on which shall be shown all advances by Lender pursuant to
the Agreement (each such advance, a "Reimbursement Loan") and all repayments of
principal made to Lender hereunder. The Corporation hereby appoints Lender as
its agent to endorse the date and the amount of each such Reimbursement Loan or
principal repayment made hereunder. Such endorsement shall constitute prima
facie evidence of the accuracy of the information endorsed; provided, however,
that failure to make any such endorsement (or any errors in notation) shall not
affect in any manner the obligations of Corporation with respect to the amounts
payment hereunder.
This Reimbursement Loan Note is subject to acceleration upon the occurrence
of certain events as provided in the Agreement. The Corporation shall have the
right to prepay this Reimbursement Loan Note in whole or in part, without
penalty or premium, at any time.
All payments or prepayments of principal of and interest on this
Reimbursement Loan Note shall be payable to the Account of Lender as specified
in Section 2.6 of the Agreement.
1.
<PAGE> 26
All payments and prepayments hereon shall be applied first, to costs and
expenses and other amounts due and owing to Lender under the Agreement; second,
to accrued interest then payable; and third to principal of the Reimbursement
Loans in chronological order of funding of the Reimbursement Loans and within
each Reimbursement Loan in inverse chronological order of principal
amortization.
The full amount of this Reimbursement Loan Note is secured by the
Collateral identified and described as security therefor in that certain
Security Agreement executed and delivered by Corporation as of December 3, 1996.
Corporation shall not, directly or indirectly, suffer or permit to be created or
to remain, and shall promptly discharge, any lien on or in the Collateral, or in
any portion thereof, except as permitted pursuant to the Security Agreement. In
addition, Corporation shall not suffer any other matter whereby an interest of
Lender under the Security Agreement in the collateral or in any lien pursuant to
the Security Agreement or any part of the foregoing might by impaired, except as
permitted pursuant to such Security Agreement .
The Corporation hereby waives presentment, demand, protest, notice of
protest or other notice of dishonor of any kind or of non-payment of this
Reimbursement Loan Note, and promises to pay all reasonable costs of collection
when incurred, including, without limitation, reasonable attorneys' fees, costs
and other expenses.
The right to plead any and all statutes of limitations as a defense to any
demands hereunder is hereby waived to the full extent permitted by law.
No extension of the time for the payment of this Reimbursement Loan Note or
any installment hereof made by agreement with any Person now or hereafter liable
for the payment of this Reimbursement Loan Note shall operate to release or
discharge the original liability under this Reimbursement Loan Note, either in
whole or in part, of the Corporation.
This Reimbursement Loan Note is to be construed according to the laws of
the State of California, without regard to principles of conflict of laws.
The provisions of this Note shall inure to the benefit of and be binding on
any successor to Lender and shall extend to any holder hereof.
CORPORATION: AIR SOUTH AIRLINES, INC.
By:_______________________________
Printed Name:_____________________
Title:____________________________
2.
<PAGE> 27
IRREVOCABLE STANDBY LETTER OF CREDIT
Draft
NO.__________
Copy
First Bank National Association
601 Second Ave So - MPFM0703
Minneapolis, MN 55402-4302
We hereby issue our irrevocable Standby Letter of Credit No._____in your favour
and for account of:
Air South, Inc.
1800 St. Julian Place, Suite 400
Columbia, SC 29204
for the aggregate amount of USD [$XXX,XXX,XXX (Spelled Amount)]
This Letter of Credit will have an initial expiration date of [Date], and is
automatically renewable for successive one year periods unless [Bank Name] shall
have notified you in writing 120 days before the initial or any subsequent
expiration date that they elect not to renew this Letter of Credit.
Funds under this Letter of Credit are available to you against one or more of
your sight draft(s) drawn on us, mentioning thereon our Letter of Credit
No.__________accompanied by your written drawing certification, purportedly
signed by a duly authorized officer, in the following form:
"DRAWING CERTIFICATION"
Date:__________________
To: [Bank Name]
[Bank Address]
Re: Irrevocable Standby Letter of Credit No.__________
Please be advised that we are hereby drawing under the above referenced letter
of credit and that:
First Bank National Association is making this drawing pursuant to the terms of
a merchant processing agreement between First Bank National Association and Air
South, Inc., dated July 12, 1994 and that we as the beneficiary are entitled to
the amount of the attached draft.
Signature:_______________________________
First Bank National Association
Signed by:
Title:
The amount which may be drawn by you under this Letter of Credit shall be
automatically reduced by the amount of any drawing hereunder. Partial drawings
are permitted.
We hereby engage with you that all drafts drawn and presented under and in
accordance with the terms of this Letter of Credit will be duly honored by us.
This Letter of Credit is subject to the Uniform Customs and Practice for
"Documentary Credits" (1993 Revision), International Chamber of Commerce
Publication no. 500.
Authorized Signature
_________________________________________
<PAGE> 28
EXHIBIT C
FORM OF
CERTIFICATE RELATING TO ACCURACY OF CERTAIN CORPORATION
REPRESENTATIONS CONTAINED IN, AND THE
AUTHORIZATION TO EXECUTE, CERTAIN DOCUMENTS
We, the undersigned, DO HEREBY CERTIFY to Hambrecht & Quist California, a
wholly owned subsidiary of Hambrecht & Quist Group (the "Lender") that:
1. We are the duly qualified and acting Vice President, and
Secretary, respectively, of Air South Airlines, Inc. (the "Corporation").
2. The statements contained in Sections 3.2 and 5.1 of the
Reimbursement Agreement (the "Agreement"), dated as of December 3, 1996 by and
among the Corporation and the Lender are true and correct as of the date hereof.
3. The names and true signatures of the officers of the Corporation
authorized to sign the Agreement, and the other documents to be delivered by the
Corporation under the Agreement, are as follows:
NAME SIGNATURE TITLE
John Tague ___________________________ Chairman of the
Board, President
and CEO
Thomas Volz ___________________________ Vice President
David Monteith ___________________________ Secretary
Dennis B. Crosby ___________________________ Vice President
4. All conditions precedent to the issuance of the Letter of Credit
have been satisfied by the Corporation.
5. No Event of Default has occurred and is continuing, or no event
which would result directly or indirectly from the execution and delivery of the
Agreement by the Corporation or the issuance of the Letter of Credit which
constitutes an Event of Default or which would constitute such an Event of
Default but for the requirement that notice be given or time elapse, or both.
6. All capitalized terms not otherwise defined shall have the
meaning ascribed thereto in the Agreement.
1.
<PAGE> 29
IN WITNESS WHEREOF, we have hereunto set our hands and the seal of the
Corporation on December 3, 1996.
AIR SOUTH AIRLINES, INC.
By:______________________________________
Printed Name: Dennis B. Crosby
Title: Vice President
By:______________________________________
Printed Name: David Monteith
Title: Secretary
2.
<PAGE> 30
EXHIBIT D
FORM OF WARRANT
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES LAWS OF
ANY STATE. ANY TRANSFER OF SUCH SECURITIES WILL BE INVALID UNLESS A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND AS REQUIRED BY BLUE SKY LAWS IS IN EFFECT
AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE
SECURITIES ACT AND BLUE SKY LAWS.
AIR SOUTH AIRLINES, LNC,
WARRANT FOR THE PURCHASE
OF SHARES OF COMMON STOCK
No. CW-__________ December 3, 1996
AIR SOUTH AIRLINES, INC., a Delaware corporation (the "COMPANY"), hereby
certifies that, for value received, HAMBRECHT & QUIST CALIFORNIA, a wholly owned
subsidiary of Hambrecht & Quist Group or any transferee who has received this
warrant (the "WARRANT") in compliance with applicable law and the terms hereof
(the "HOLDER"), is entitled, on the terms set forth below, to purchase from the
Company, on or before the Expiration Time (as defined in Section 18 below)
sixteen million (16,000,000) shares of Common Stock, par value $0.001 per share,
of the Company at a price of twenty-five cents ($0.25) per share, subject to
adjustment as provided below (the "EXERCISE PRICE").
1. REIMBURSEMENT AGREEMENT. This Warrant is the "Warrant" referred to in
Section 3.l(d) of that certain Reimbursement Agreement dated as of December 3,
1996, by and between the Company and Hambrecht & Quist California, a wholly
owned subsidiary of Hambrecht & Quist Group (the "REIMBURSEMENT AGREEMENT"). Any
capitalized term used but not defined herein shall have the meaning ascribed to
it in the Reimbursement Agreement.
2. EXERCISE OF WARRANT.
(A) INITIAL VESTING. The Holder may exercise this Warrant, in whole
or in part, at any time or from time to time on any business day prior to the
Expiration Date (as defined herein), for six million four hundred thousand
(6,400,000) shares of Common Stock.
(B) SUBSEQUENT VESTING. On any business day beginning 30 days after
the end of each Measurement Period (as defined below) and prior to the
Expiration Date, the Holder may exercise this Warrant, in whole or in part, at
any time or from time to time, as to an additional number of shares of Common
Stock equal to (i) the product of (A) the average daily Gross Exposure (as
defined in the Credit Card Agreement (or the schedules or exhibits thereto),
1.
<PAGE> 31
subject to Section 9(b) hereof) during the Measurement Period and (B) one-tenth
(0.1), divided by (ii) twenty-five cents ($0.25). Notwithstanding the preceding
sentence, in no event shall this Warrant be execrable for more than sixteen
million (16,000,000) shares of Common Stock. For the purposes of this Warrant,
"MEASUREMENT PERIOD" shall mean the 90 day period commencing on the date of this
Warrant and each succeeding 90 day period thereafter prior to the Termination
Date.
(C) The Holder may exercise any shares then execrable by surrendering
this Warrant to the Company at its principal office, with a duly executed
Subscription Form (in substantially the form attached hereto), together with
payment of the sum obtained by multiplying the number of shares of Common Stock
to be purchased by the Exercise Price then in effect. Promptly after such
exercise, the Company shall issue and deliver to or upon the order of the Holder
a certificate or certificates for the number of shares of Common Stock issuable
upon such exercise, and the Company will pay all issue or transfer taxes in
connection with the issue thereof. To the extent permitted by law, this Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the date of its surrender for exercise as provided herein, even if
the Company's stock transfer books are at that time closed, and the Holder shall
be treated for all purposes as the holder of record of the Common Stock to be
issued upon such exercise as of the close of business on such date. Upon any
partial exercise, the Company will issue to or upon the order of the Holder a
new Warrant for the number of shares of Common Stock as to which this Warrant
has not been exercised.
(D) NET ISSUE EXERCISE. Notwithstanding any provisions herein to the
contrary, if the fair market value of one share of the Common Stock subject to
this Warrant is greater than the Exercise Price (at the Date of Determination,
as defined below), in lieu of exercising this Warrant for cash, the Holder may
elect to receive shares equal to the value (as determined below) of this Warrant
(or the portion thereof being canceled) by surrender of this Warrant at the
principal office of the Company together with the properly endorsed Form of
Subscription and notice of such election (the date of such delivery being
referred to herein as the "DATE OF DETERMINATION") in which event the Company
shall issue to the Holder a number of shares of Common Stock computed using the
following formula:
X = Y(A-B)
-----
A
Where X = the number of shares of Common Stock to be issued to the
Holder
Y = the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being canceled (at
the Date of Determination)
A = the fair market value of one share of the Common Stock (at
the Date of Determination)
2.
<PAGE> 32
B = Exercise Price (as adjusted to the Date of Determination)
For purposes of the above calculation, fair market value of one share of Common
Stock shall be determined by the Company's Board of Directors in good faith as
of the Date of Determination; provided, however, when there is a public market
for the Company's Common Stock, the fair market value per share shall be the
average of the closing prices of the Company's Common Stock quoted on the Nasdaq
National Market or on the primary securities exchange on which the Common Stock
is then listed, whichever is applicable, as published in the Wall Street Journal
for the ten (10) trading days prior to the Date of Determination.
3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The
Exercise Price and the number of shares of Common Stock subject to this Warrant
(and all other adjustment to exercise price and shares herein as appropriate)
shall be subject to adjustment from time to time as follows:
(A) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If at any time the
Company:
(I) pays a dividend or makes a distribution on its Common Stock
in shares of its Common Stock;
(II) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(III) combines its outstanding shares of Common Stock into a
smaller number of shares;
(IV) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock; or
(V) issues by reclassification of its Common Stock any shares of
its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that the Holder may receive upon exercise of the Warrant and payment
of the same aggregate consideration the number of shares of capital stock of the
Company which the Holder would have owned immediately following such action if
the Holder had exercised the Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification.
3.
<PAGE> 33
(B) REORGANIZATION, CONSOLIDATION OR MERGER. In the event of any
consolidation or merger of the Company with or into another corporation (other
than a merger in which merger the Company is the continuing corporation and that
does not result in any reclassification, capital reorganization or other change
of outstanding shares of Common Stock issuable upon exercise of this Warrant) or
in the event of any sale, lease, transfer or conveyance to another corporation
of the property and assets of the Company as an entirety or substantially as an
entirety, the Company shall cause effective provisions to be made so that the
Holder shall have the right thereafter, by exercising this Warrant, to purchase
the kind and amount of shares of stock and other securities and property
(including cash) receivable upon such capital reorganization and other change,
consolidation, merger, sale, lease, transfer or conveyance by a holder of the
number of shares of Common Stock that might have been received upon exercise of
this Warrant immediately prior to such capital reorganization, change,
consolidation, merger, sale, lease, transfer or conveyance. Any such provision
shall include provisions for adjustments in respect of such shares of stock and
other securities and property that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Warrant. The foregoing
provisions of this Section 3(b) shall similarly apply to successive capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales, leases, transfers or conveyances. In the event
that in connection with any such capital reorganization, or change,
consolidation, merger, sale, lease, transfer or conveyance, additional shares of
Common Stock shall be issued in exchange, conversion, substitution or payment,
in whole or in part, for, or of, a security of the Company other than Common
Stock, any such issue shall be treated as an issue of Common Stock covered by
the provisions of Section 3(a) hereof.
(C) PRICE ADJUSTMENTS. If on any Price Adjustment Date (as defined
below) the number of shares of Common Stock of the Company authorized for
issuance pursuant to the Company's Certificate of Incorporation as in effect on
such date is insufficient to permit the valid issuance on such date of the total
number of shares of Common Stock issuable upon the direct or indirect exercise
and/or conversion of any and all securities of the Company then outstanding into
Common Stock, then the Exercise Price in effect on such date shall be reduced by
five cents ($0.05) per share, provided, that, in no event shall the Exercise
Price be reduced to less than the par value of the Common Stock per share. As
used in this Warrant, "PRICE ADJUSTMENT DATE" shall mean February 28, 1997 and
the last day of each succeeding month thereafter.
(D) MINIMAL ADJUSTMENTS. No adjustment in the Exercise Price and/or
the number of shares of Common Stock subject to this Warrant need be made if
such adjustment would result in a change in the Exercise Price of less than one
percent (1%) or the Exercise Price (the "ADJUSTMENT THRESHOLD AMOUNT") or a
change in the number of subject shares of less than one (1) share. Any
adjustment which is less than the Adjustment Threshold Amount and not made shall
be carried forward and shall be made, together with any subsequent adjustments,
at the time when (a) the aggregate amount of all such adjustments is equal to at
least the Adjustment Threshold Amount or (b) the Warrant is exercised.
(E) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in which an event
covered by this Section 3 shall require that an adjustment in the Exercise Price
be made effective as of
4.
<PAGE> 34
a record date, the Company may elect to defer until the occurrence of such event
(i) issuing to the Holder, if this Warrant is exercised after such record date,
the shares of Common Stock and other capital stock of the Company, if any,
issuable upon such exercise over and above the shares of Common Stock or other
capital stock of the Company, if any, issuable upon such exerice on the basis of
the Exercise Price in effect prior to such adjustment, and (ii) paying to the
Holder by check any amount in lieu of the issuance of fractional shares pursuant
to Section 7 hereof.
(F) WHEN NO ADJUSTMENT REQUIRED. No adjustment need be made for a
change in the par value or no par value of the Common Stock. To the extent the
Warrants become exercisable into cash, no adjustment need be made thereafter as
to the cash, and interest will not accrue on the cash.
(G) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Exercise Price pursuant to this Section 3, the
Company, at its expense, shall promptly compute such adjustment or readjustment
in accordance with the terms hereof and prepare and furnish to the Holder a
certificate setting forth such adjustment or readjustment and showing the facts
upon which such adjustment or readjustment is based. The Company shall, upon
written request at any time of the Holder, furnish or cause to be furnished to
the Holder a like certificate setting forth (a) such adjustments and
readjustments, (b) the then effective Exercise Price and number of shares of
Common Stock subject to the Warrant, and (c) the then effective amount of
securities (other than Common Stock) and other property, if any, which would be
received upon exercise of the Warrant.
4. REGISTRATION RIGHTS. Shares of the Company's Common Stock issued or
issuable pursuant to the exercise of this Warrant shall be deemed to be
"Registrable Securities" for purposes of that certain Warrant Purchase
Agreement, entered into as of April 26, 1996, by and between the Company and
Holder, as such agreement may be subsequently amended or restated or
consolidated with other similar agreements granting registration rights in the
securities of the Company.
5. RIGHTS OF THE HOLDER. The Holder shall not, solely by virtue of this
Warrant, be entitled to any rights of a stockholder in the Company, either at
law or equity, and the rights of the Holder are limited to those expressed in
this Warrant. Nothing contained in this Warrant shall be construed as conferring
upon the Holder hereof the right to vote or to consent or to receive notice as a
stockholder of the Company on any matters or with respect to any rights
whatsoever as a stockholder of the Company. No dividends or interest shall be
payable or accrued in respect of this Warrant or the interest represented hereby
or the shares of Common Stock purchasable hereunder until, and only to the
extent that, this Warrant shall have been exercised in accordance with its
terms.
6. NO IMPAIRMENT. The Company will not, by any voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this Warrant,
but will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as
5.
<PAGE> 35
may be necessary or appropriate in order to protect the rights of the Holder
against dilution or other impairment.
7. NO FRACTIONAL SHARES. No fractional share shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the Holder entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of exercise (as determined in good
faith by the Board of Directors of the Company). The fair market value of a
fraction of a share is determined by multiplying the fair market price of a full
share by the fraction of a share, rounded to the nearest cent.
8. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. The Company will
at all times reserve and keep available, solely for issuance and delivery upon
the exercise of this Warrant, all such shares of Common Stock or other shares of
capital stock, from time to time issuable upon the exercise of this Warrant. If
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the exercise of this Warrant, the Company will use
its best efforts to take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes. All
shares that may be issued upon exercise of the rights represented by this
Warrant and payment of the Exercise Price, all as set forth herein, will be free
from all taxes, liens and charges in respect of the issue of such shares (other
than taxes in respect of any transfer occurring contemporaneously with such
exercise and payment or otherwise specified herein). All such shares shall be
duly authorized and when issued, sold and delivered in accordance with the terms
of the Warrant for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable, and will be free of restrictions on
transfer other than restrictions on transfer set forth in this Warrant and
applicable state and federal securities laws.
9. COVENANTS OF THE COMPANY.
(A) The Company shall use its best efforts to amend the Articles of
Incorporation of the Company in such a manner so that no reduction of the
Exercise Price pursuant to Section 3(c) hereof shall occur at any time.
(B) The Company shall cause a report of the daily Gross Exposure in
each Measurement Period (each, an "EXPOSURE REPORT") to be delivered by First
Bank National Association to the Holder at the address specified in Section 14
hereof within 30 days of the end of such Measurement Period so long as this
Warrant remains subject to additional vesting. In the event that the Holder has
not received an Exposure Report within 30 days after the end or any Measuring
Period, then, notwithstanding anything else contained herein, for the purposes
of this Warrant, the daily Gross Exposure throughout such period shall be deemed
to be four million dollars ($4,000,000).
6.
<PAGE> 36
10. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to and for the benefit of the
Purchaser as follows:
(A) ORGANIZATION, GOOD STANDING, QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Delaware. The Company has full power and authority to own and
operate its properties and assets, and to carry on its business as currently
conducted and as currently proposed to be conducted. The Company is duly
qualified and is authorized to do business and is in good standing as a foreign
corporation in all jurisdictions in which the nature of its activities and of
its properties (both owned and leased) makes such qualification necessary,
except for those jurisdictions in which failure to do so would not have a
material adverse effect on the Company or its business.
(B) AUTHORIZATION. All corporate action on the part of the Company,
its directors and its stockholders necessary for the authorization, execution,
issuance and delivery by the Company of this Warrant and the performance of the
Company's obligations hereunder. This Warrant, when executed and delivered by
the Company, shall constitute a valid and binding obligation of the Company
enforceable in accordance with its terms. Assuming an amendment of the
Certificate of Incorporation of the Company to increase the number of authorized
shares of Common Stock (as so amended, the "Amended Certificate of
Incorporation"), the shares of Common Stock issuable upon exercise of this
Warrant, when issued in compliance with the provisions of this Warrant and the
Amended Certificate of Incorporation, will be validly issued, fully paid and
nonassessable and free of any liens or encumbrances.
(C) MATERIAL CONTRACTS. All material contracts, agreements and
instruments to which the Company is a party are in full force and effect in all
material respects, and are valid, binding and enforceable by the Company in
accordance with their respective terms, subject to the effect of applicable
bankruptcy and other similar laws affecting the rights of creditors generally,
and rules of law concerning equitable remedies and no event of default, and no
event which, with the passing of time or the giving of notice, or both, would
constitute an event of default has occurred or is continuing under any such
contract, agreement or instrument.
(D) COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation
of any term of its Certificate of Incorporation, By-Laws or any statute, rule or
regulation applicable to the Company. The execution, delivery and performance of
this Agreement, the creation and issuance of this Warrant and the issuance of
the shares of Common Stock pursuant to an exercise of the Warrant in accordance
with the Amended Certificate of Incorporation will not result in any such
violation, or be in conflict with or constitute a default under any such term,
or result in the creation of any mortgage, pledge, lien, encumbrance, or charge
upon any of the properties or assets of the Company or contravene any provision
of, or constitute a default under, any indenture, mortgage, contract or other
instrument to which it is a party or by which it is bound.
7.
<PAGE> 37
(E) GOVERNMENTAL CONSENTS. All consents, approvals, orders, or
authorizations of, or registrations, qualifications, designations, declarations,
or filings with, any governmental authority, required on the part of the Company
in accordance with the valid execution, delivery, offer, sale or issuance of
this Warrant and the capital stock issuable upon exercise of the Warrant, have
been obtained, except for the filing of notices pursuant to Regulation D under
the Securities Act, and any filing required under applicable state securities
laws which will be effective by the time required thereby.
(F) LITIGATION. There are no actions, suits, audits, investigations or
proceedings pending or, to the knowledge of the Company, threatened against or
affecting the Company in any court or before any governmental commission, board
or authority which, if adversely determined, will have a material adverse effect
on business, financial condition or prospects of the Company or the ability of
the Company to perform its obligations under this Agreement.
(G) OFFERING. Assuming the accuracy of the representations and
warranties of the Purchaser contained in Section 19 hereof, the offer, issue,
and sale of the Warrant are and will be exempt from the registration and
prospectus delivery requirements of the Securities Act, and have been registered
or qualified (or are exempt from registration and qualification) under the
registration, permit, or qualification requirements of all applicable state
securities laws.
11. NOTICES OF RECORD DATE. Upon (a) any taking by the Company of a record
of the holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or other distribution
or (b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger or
consolidation of the Company with or into any other corporation, or any transfer
of all or substantially all the assets of the Company to any other person, or
any voluntary or involuntary dissolution, liquidation or winding up of the
Company, the Company shall mail to the Holder at least twenty (20) days, or such
longer period as is required by law, prior to the record date, a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend or distribution and a description of such dividend or
distribution, (ii) the date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up is
expected to become effective, and (iii) the date, if any, that is to be fixed as
to when the holders of record of Common Stock (or other capital stock at that
time receivable upon exercise of the Warrant) shall be entitled to exchange
their shares of Common Stock (or such other stock or securities) for securities
or other property deliverable upon such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up.
12. EXCHANGES OF WARRANT. Upon surrender for exchange of this Warrant (in
negotiable form, if not surrendered by the Holder named on the face hereof) to
the Company at its principal office, the Company, at its expense, will issue and
deliver a new Warrant or Warrants calling in the aggregate for the same number
of shares of Common Stock, in the denomination or denominations requested, to or
on the order of such Holder upon payment by
8.
<PAGE> 38
such Holder of any applicable transfer taxes; provided that any transfer of the
Warrant shall be subject to the conditions on transfer set forth herein.
13. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) upon delivery of
an indemnity agreement in such reasonable amount as the Company may determine,
or (in the case of mutilation) upon surrender and cancellation hereof, the
Company, at its expense, shall issue a replacement.
14. NOTICES. Any notice required or permitted under this Agreement shall
be given in writing and shall be deemed effectively given upon personal delivery
or upon deposit with the United States Post Office, postage prepaid, addressed
to the Company at 2625 West Airport Boulevard, West Columbia, South Carolina
29170 or to the Holder at One Bush Street, San Francisco, California 94104,
Attention: David Golden, or at such other address as the Company or any Holder
may designate by ten (10) days advance written notice to the other party.
15. MODIFICATION; WAIVER. Except as provided in this Warrant, no
modification or waiver of any provision of this Warrant or consent to departure
therefrom shall be effective unless in writing and approved by the Company and
the Holder.
16. TITLES AND SUBTITLES. The titles and subtitles used in this Warrant
are used for convenience only and are not to be considered in construing or
interpreting this Warrant.
17. GOVERNING LAW. This Warrant shall be construed in accordance with and
governed by and under the laws of the State of California as applied to
contracts made and to be performed entirely within the State of California.
18. EXPIRATION TIME. This Warrant will be wholly void and of no effect
after 5:00 p.m. (San Francisco time) December 3, 2006 (the "EXPIRATION TIME").
19. TRANSFER RESTRICTIONS. The Company is relying upon an exemption from
registration of this Warrant and the shares of Common Stock issuable upon
exercise hereof under the Securities Act and applicable state securities laws.
The Holder by acceptance hereof represents that the Holder understands that
neither this Warrant nor the Common Stock issuable upon exercise hereof has been
registered with the Securities and Exchange Commission nor under any state
securities law. By acceptance hereof, the Holder represents and warrants that
(a) it is acquiring the Warrant (and the shares of Common Stock or other
securities issuable upon exercise hereof) for its own account for investment
purposes and not with a view to distribution, (b) has received all such
information as the Holder deems necessary and appropriate to enable the Holder
to evaluate the financial risk inherent in making an investment in the Company,
and satisfactory and complete information concerning the business and financial
condition of the Company in response to all inquiries in respect thereof, (c)
the Holder's acquisition of shares upon exercise hereof will be a highly
speculative investment, (d) the Holder is able, without impairing its financial
condition, to hold such shares for an indefinite period of time and to suffer a
complete loss of the Holder's investment, and (e) the Holder has such knowledge
and
9.
<PAGE> 39
experience in financial and business matters that it is capable of evaluating
the merits and risks of acquisition of this Warrant and the shares issuable upon
exercise hereof and of making an informed investment decision with respect
thereto.
This Warrant may not be exercised and neither this Warrant nor any of the
shares issuable upon exercise of the Warrant, nor any interest in either, may be
sold, assigned, pledged, hypothecated, encumbered or in any other manner
transferred or disposed of, in whole or in part, except in compliance with
applicable United States federal and state securities or Blue Sky laws and the
terms and conditions hereof. Each Warrant or each certificate representing
shares of Common Stock or other securities issued upon exercise of this Warrant
shall have conspicuously endorsed on its face, at the time of its issuance, such
legends as counsel to the Company deems necessary or appropriate, including
without limitation the legend set forth on the top of the first page of this
Warrant. Any certificate for any securities issued at any time in exchange or
substitution for any certificate for any shares of Common Stock bearing such
legend shall also bear such legend unless, in the opinion of counsel for the
Company, the securities represented thereby need no longer be subject to the
restriction contained herein.
Without in any way limiting the foregoing, the Holder agrees not to make
any disposition of all or any portion of the Securities unless and until:
A. There is then in effect a Registration Statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such Registration Statement; or
B. (i) The Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, the Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration under the Securities Act.
C. Notwithstanding the provisions of paragraphs (i) and (ii) above,
no such registration statement or opinion of counsel shall be necessary for a
transfer by the Holder to (i) an underwriter acceptable to the Company for
immediate exercise by such underwriter in connection with a fully underwritten
public offering of the Company's Common Stock underlying this Warrant (ii) a
partner (or retired partner) or "affiliate" (as defined under the Securities
Exchange Act of 1934) of Hambrecht & Quist Group or (iii) transfers by gift,
will or intestate succession to any spouse or lineal descendants or ancestors of
any such partner, retired partner or affiliate, if all transferees agree in
writing to be subject to the terms hereof to the same extent as if they were a
purchaser hereunder.
10.
<PAGE> 40
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and delivered on the date first set forth above.
AIR SOUTH AIRLINES, INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
WARRANT
<PAGE> 41
SUBSCRIPTION FORM
[To be executed if holder desires to exercise the Warrant]
The undersigned, holder of this Warrant, (1) hereby irrevocably elects to
exercise the right of purchase represented by this Warrant for, and to purchase
thereunder,__________ full shares of the Common Stock of Air South Airlines,
Inc. provided for therein, (2) makes payment in full (as permitted in Section 2
of the Warrant) of the purchase price of such shares, (3) requests that
certificates for such shares be issued in the name of
______________________________________________________________________
(Please print name and address)
______________________________________________________________________
(Please insert social security or other identifying number)
and (4) if said number of shares shall not be all the shares purchasable
thereunder, requests that a new Warrant for the unexercised portion of this
Warrant be issued in the name of and delivered to:
______________________________________________________________________
______________________________________________________________________
(Please print name and address)
Dated :________________________ _______________________________
By:____________________________
_______________________________
Title
<PAGE> 1
EXHIBIT 10.40
REIMBURSEMENT AGREEMENT
BY AND AMONG
AIR SOUTH AIRLINES, INC.
AND
HAMBRECHT & QUIST CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF
HAMBRECHT & QUIST GROUP
DATED AS OF JANUARY 31, 1997
RELATING TO THE ISSUANCE OF A
$2,000,000
LETTER OF CREDIT
TO
To NATIONAL BANK OF SOUTH CAROLINA
<PAGE> 2
TABLE OF CONTENTS Page
<TABLE>
<CAPTION>
ARTICLE I
<S> <C>
DEFINITIONS ............................................................ 2.
Section 1.1 Definitions ....................................... 2.
Section 1.2 Construction ...................................... 4.
ARTICLE II
LETTER OF CREDIT ...................................................... 4.
Section 2.1 Amount and Terms of Letter of Credit............... 4.
Section 2.2 Drawings and Reinstatement ........................ 4.
Section 2.3 Fees and Other Payment ............................ 5.
Section 2.4 Reimbursement ..................................... 6.
Section 2.5 Place of Payment .................................. 6.
Section 2.6 Termination of Agreement .......................... 6.
Section 2.7 Reimbursement Loans ............................... 6.
ARTICLE III
CONDITIONS PRECEDENT To ISSUANCE
OF LETTER OF CREDIT ...................................................... 7.
Section 3.1 Documents TO Be Received .......................... 7.
Section 3.2 Other Conditions Precedent ........................ 8.
ARTICLE IV
OBLIGATIONS OF THE CORPORATION ......................................... 9.
Section 4.1 Obligations of the Corporation ..................... 9.
ARTICLE V
REPRESENTATIONS AND WARRANTIES .......................................... 10.
Section 5.1 Representations and Warranties of the Corporation.... 10.
ARTICLE VI
COVENANTS OF THE CORPORATION ............................................ 11.
Section 6.1 Affirmative Covenants............................... 11.
Section 6.2 Negative Covenants ................................. 13.
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
ARTICLE VII
<S> <C>
EVENTS OF DEFAULT ......................................................... 13.
Section 7.1 Events of Default .................................. 13.
ARTICLE VIII
RIGHTS AND REMEDIES ..................................................... 14.
Section 8.1 Rights and Remedies ................................ 14.
ARTICLE IX
MISCELLANEOUS ............................................................ 14.
Section 9.1 Modification of Agreement .......................... 14.
Section 9.2 Waiver of Rights by Lender; Remedies................ 15.
Section 9.3 Notices............................................. 15.
Section 9.4 Indemnification..................................... 16.
Section 9.5 Liability of Lender................................. 16.
Section 9.6 Participations ..................................... 17.
Section 9.7 Satisfaction Requirement............................ 17.
Section 9.8 Governing Law ...................................... 17.
Section 9.9 Waiver of Jury Trial ............................... 17.
Section 9.10 Jurisdiction: Service of Process ................... 18.
Section 9.11 Survival of Agreement .............................. 18.
Section 9.12 Severability ....................................... 18.
Section 9.13 Headings ........................................... 18.
Section 9.14 Counterparts ....................................... 18.
</TABLE>
ii.
<PAGE> 4
EXHIBITS
EXHIBIT A Form of Reimbursement Loan Note
EXHIBIT B Form of Letter of Credit
EXHIBIT C Form of Certificate Relating to Accuracy of Certain
Corporation Representations Contained in, and the
Authorization to Execute, Certain Documents
EXHIBIT D Form of Warrant
EXHIBIT E Loan Agreement between The National Bank of South Carolina
and Air South, Inc.
iii.
<PAGE> 5
REIMBURSEMENT AGREEMENT
(NBSC LETTER OF CREDIT)
This REIMBURSEMENT AGREEMENT dated as of January 31, 1997, is made by and
between AIR SOUTH AIRLINES, INC., a Delaware corporation having its principal
place of business at 2625 Airport Boulevard, West Columbia, South Carolina,
29170 ("Corporation"), in favor of HAMBRECHT & QUIST CALIFORNIA, a wholly owned
subsidiary of Hambrecht & Quist Group ("Lender").
RECITALS
A. Corporation and The National Bank of South Carolina ("Bank") entered
into that certain Loan Agreement dated April 16, 1996 (the "Loan Agreement")
whereby Bank has loaned to Corporation Two Million Dollars ($2,000,000) (the
"Loan").
B. Substantially concurrently with the execution of the Loan Agreement,
Lender and Bank entered into that certain Guaranty, dated April 26, 1996 (the
"Guaranty"). Such Guaranty was entered into as a condition to Bank entering into
the Loan Agreement and to induce Bank to make the Loan.
C. The Loan expired on December 1, 1996 and has been extended until
January 15, 1997. Pursuant to a letter dated December 13, 1996 Bank has offered
to extend the Loan for an additional eighteen (18) months, but only on the
condition that a letter of credit be issued by an acceptable source to serve as
collateral for the Loan.
D. Corporation has requested that Lender arrange for the issuance of such
Letter of Credit in favor of Bank in the aggregate amount of Two Million Dollars
($2,000,000).
E. Lender is willing to arrange for the issuance of said Letter of
Credit, but only upon the condition, among others, that the Guaranty be
terminated and Corporation shall have executed and delivered to Lender this
Reimbursement Agreement.
AGREEMENT
NOW, THEREFORE, in order to induce Lender to cause the issuance of the
Letter of Credit and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, and intending to be legally bound,
the parties hereto represent, warrant, covenant and agree as follows:
<PAGE> 6
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS. Unless otherwise defined herein the following
terms shall have the following meanings (such meanings being equally applicable
to both the singular and plural forms of the terms defined):
"ACT OF BANKRUPTCY" shall mean the Corporation shall commence a
voluntary case or other proceeding in seeking liquidation, reorganization,
arrangement, readjustment of its debts or for any other relief under the federal
bankruptcy laws, including the Federal Bankruptcy Code, as amended, or under any
other insolvency act or law, state or federal, now or hereafter existing, or
shall take any other action indicating its consent to, approval of, or
acquiescence in, any such petition or proceedings; the Corporation shall apply
for, or consent to or acquiesce in, the appointment of a receiver, liquidator,
custodian, sequestrator, or a trustee for all or a substantial part of its
property; the Corporation shall make an assignment for the benefit of its
creditors; the Corporation shall be unable, or shall admit in writing its
inability, to pay its debts when due; or a petition in bankruptcy shall be filed
against the Corporation, as a debtor, under any applicable bankruptcy,
insolvency or similar law as now or hereafter in effect which shall not be
discharged by a court of competent jurisdiction within sixty (60) days of the
date of such filing.
"AIR SOUTH, INC." means Air South Airlines, Inc.
"AGREEMENT" shall mean this Reimbursement Agreement together with all
duly authorized and executed amendments thereto.
"APPLICATION" shall mean that certain Application and Agreement for
Standby Letter of Credit dated January 28, 1997 by and between Issuing Bank and
Lender.
"BANK" shall mean National Bank of South Carolina, a national banking
association with its principal office located at 1241 Main Street, Columbia,
South Carolina, or any surviving, resulting or transferee entity.
"BUSINESS DAY" shall mean any day other than (i) a Saturday or Sunday,
(ii) a day on which banking institutions in the States of California or South
Carolina are authorized or required by law or executive order not to be open for
the conduct of their commercial banking business, or (iii) a day on which the
federal reserve bank for the federal reserve district in which Bank is located
is closed.
"DATE OF DELIVERY" shall mean January 31, 1997 or any other date
agreed upon by the Corporation and Lender as the date upon which the initial
Letter of Credit shall be issued.
"DEFAULT RATE" shall mean a rate per annum equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
2.
<PAGE> 7
"DRAWING" shall mean a drawing under the Letter of Credit in
accordance with its terms.
"EVENT OF DEFAULT" shall have the meaning set forth in SECTION 7.1
hereof.
"GUARANTY" means that certain Guaranty by and between Lender and Bank,
dated April 26, 1996, as amended, supplemented or reaffirmed to the date of this
Agreement.
"INTEREST RATE" shall mean ten percent (10%) per annum.
"ISSUING BANK" shall mean Bank of America National Trust and Savings
Association acting through its Chicago branch, or any surviving, resulting or
transferee entity.
"LETTER OF CREDIT" shall mean the Letter of Credit arranged by Lender
and issued by Issuing Bank pursuant to the Application on the Date of Delivery,
as the same may from time to time be amended, modified, supplemented or
restated, and shall include any substitute Letter of Credit issued pursuant to
Lender's obligations hereunder.
"LOAN" shall mean the loan made by Bank to Borrower represented by
that certain promissory note dated April 26, 1996 in the principal amount of
$2,000,000 issued by Corporation to Bank pursuant to the Loan Agreement.
"LOAN AGREEMENT" shall mean that certain Loan Agreement dated April
26, 1996 by and between Corporation and Bank attached as EXHIBIT E hereto, as
the same may from time to time be amended, modified, supplemented or restated.
"MAXIMUM CREDIT" shall mean, as of any date of calculation, the
maximum amount available to be drawn under the Letter of Credit. Initially, the
Maximum Credit shall be $2,000,000.
"PERSON" shall mean any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock corporation, estate, entity or governmental agency.
"REIMBURSEMENT LOAN NOTE" shall mean the note evidencing the
Reimbursement Loans, substantially in the form attached hereto as EXHIBIT A.
"Reimbursement Loans" shall mean a reimbursement loan described in SECTION 2.8
hereof.
"TERMINATION DATE" shall mean the date determined in the manner
provided in SECTION 2.6 hereof.
3.
<PAGE> 8
"TRANSACTION DOCUMENTS" means, collectively, this Agreement, the
Reimbursement Loan Note, and any other agreement entered into between
Corporation and Lender, and any certificate or instrument executed by Lender, in
connection with said agreements and note, as the same may from time to time be
amended, modified, supplemented or restated.
SECTION 1.2 CONSTRUCTION. In this Agreement, unless the context otherwise
requires:
(A) Articles and Sections referred to by number shall mean the
corresponding Articles and Sections of this Agreement.
(B) The terms "hereby," "hereof," hereto," "herein," "hereunder," and
any similar terms, as used in this Agreement refer to this Agreement, and the
term "hereafter. shall mean after, and the term "heretofore" shall mean before
the date of execution of this Agreement.
(C) Words of the masculine gender shall be deemed and construed to
include correlative words of the feminine and neuter genders. Words importing
the singular number shall include the plural number and vice versa, and words
importing persons shall include corporations and associations, including public
bodies, as well as natural persons.
ARTICLE II
LETTER OF CREDIT
SECTION 2.1 AMOUNT AND TERMS OF LETTER OF CREDIT. At the request of
Corporation, Lender agrees, on the terms and subject to the conditions set forth
in this Agreement, including without limitation the conditions set forth in
ARTICLE III hereof, to on or before the Date of Delivery cause the issuance of
the Letter of Credit by Issuing Bank, in favor of Bank to secure, and to provide
a source of payment of, the Loan. The Letter of Credit will be issued in an
initial amount equal to the Maximum Credit. The Letter of Credit shall be issued
in favor of Bank substantially in the form of EXHIBIT B hereto.
SECTION 2.2 DRAWINGS AND REINSTATEMENT.
(A) Drawings under the Letter of Credit are intended to be made by
Bank and to be honored by Issuing Bank, all pursuant to the provisions, on the
terms and subject to the conditions set forth in the Letter of Credit. The
honoring of any Drawing shall automatically reduce by like amount the Maximum
Credit. No Drawing under the Letter of Credit shall behonored in an amount
exceeding the Maximum Credit.
(B) The Maximum Credit, or any lesser amount, may be reinstated by
Lender at its sole option, provided Lender has been reimbursed by Corporation
any such amounts to be reinstated.
4.
<PAGE> 9
SECTION 2.3 FEES AND OTHER PAYMENT.
(A) The Corporation hereby agrees to pay to or reimburse Lender:
(I) On or before the Date of Delivery, the origination fee paid
to Issuing Bank in an amount equal to $200.
(II) On or before the Date of Delivery, an amount equal to all
costs and expenses (including attorneys' fees and expenses) incurred by Lender
in connection with the preparation and negotiation of this Agreement, the
Reimbursement Loan Note, the other Transaction Documents and the closing of the
transactions contemplated hereby.
(III) On demand from time to time from Lender, any fees or other
amounts (not otherwise reimbursed by Corporation to Lender pursuant to SECTION
2.4 hereof) required to be paid by Lender to the Issuing Bank in connection with
the Letter of Credit, including, without limitation, a one percent (1%) per
annum fee, payable quarterly by Lender to Issuing Bank;
(IV) On demand from time to time by Lender, an amount equal to
all costs and expenses (including attorneys' fees and expenses) (not otherwise
reimbursed by Corporation to Lender pursuant to SECTION 2.4 hereof) incurred by
Lender relative to a Drawing under the Letter of Credit.
(V) On demand from time to time by Lender, an amount equal to
all costs and expenses (including attorneys' fees and expenses) incurred by
Lender relative to the Letter of Credit (not otherwise reimbursed by Corporation
to Lender pursuant to this SECTION 2.3 or SECTION 2.4) or each Reimbursement
Loan or the enforcement or preservation of any rights of Lender under this
Agreement, the other Transaction Documents, each Reimbursement Loan or the
Reimbursement Loan Note, or in connection with the exercise or waiver of any of
Lender's discretionary rights under this Agreement, the Reimbursement Loan Note
or under the other Transaction Documents;
(VI) On demand from time to time by Lender, interest, at the
Default Rate, on any and all amounts unpaid by the Corporation when due under
this Agreement or the Reimbursement Loan Note, but in no event shall such rates
exceed the maximum rate of nonusurious interest allowed from time to time by
law, as is now or, to the extent allowable by law, as hereinafter may be in
effect, to be paid by the Corporation;
Each such payment or reimbursement shall be deemed to be earned in
full on the date on which such amount is due and payable by the Corporation.
(B) The Corporation agrees to pay, on demand from time to time by the
Lender, all reasonable costs and expenses incurred by the Lender, in connection
with (i) any transfer or amendment of the Letter of Credit or amendment of this
Agreement, (ii) any review by the Lender of the documents necessary for Lender
to honor a Drawing under the Letter of
5.
<PAGE> 10
Credit, or relative to the Lender's curing of any event of default by Borrower
under any of the Transaction Documents, (iii) the exercise, enforcement or
preservation of any rights of Lender under this Agreement, (iv) any action or
proceeding relating to a court order, injunction, or other process or decree
restraining or seeking to restrain Lender from paying any amount under the
Letter of Credit, and (v) the waiver or amendment of any of the Lender's rights
under any of the Transaction Documents; provided, however, that no payment shall
be required under this SECTION 2.3(b) in respect of any cost or expense Lender
has incurred because of its gross negligence or willful misconduct if so
determined by a court of competent jurisdiction.
SECTION 2.4 REIMBURSEMENT. The Corporation agrees to pay to or reimburse
Lender in full for any and all Drawings made under the Letter of Credit on the
date any Drawing is made. Any amount drawn under the Letter of Credit shall be,
to the extent permitted by and in accordance with SECTION 2.7 hereof,
automatically converted into a Reimbursement Loan. A Reimbursement Loan, when
made, will satisfy the reimbursement obligation of the Corporation to Lender in
the principal amount of such Reimbursement Loan.
SECTION 2.5 PLACE OF PAYMENT. All payments to be made by the Corporation to
the Lender hereunder shall be made in lawful currency of the United States of
America and in immediately available funds by wire to the following account:
HAMBRECHT AND QUIST CALIFORNIA
c/o Citibank, F.S.B.
260 California Street
San Francisco, CA 94111
ABA: 321171184
Account #: 601022205
Account Name: H&Q Management Corporation
or at such other address as Lender may specify from time to time by notice to
the Corporation.
SECTION 2.6 TERMINATION OF AGREEMENT. This Agreement (except for the
obligations of the Corporation set forth in SECTIONS 2.3(B) and 9.4) shall
terminate at such time as the Letter of Credit shall have expired and when all
amounts due and payable to Lender hereunder shall be paid in full (the
"Termination Date").
SECTION 2.7 REIMBURSEMENT LOANS.
(A) Lender agrees, upon the terms, subject to the conditions and
relying upon the representations and warranties set forth in this Agreement and
the other Transaction Documents, that, unless an Event of Default shall have
occurred and be continuing Drawing under the Letter of Credit that is not repaid
in full by the Corporation on the date thereof shall automatically be converted
into a Reimbursement Loan. On and as of the date of the making of each
Reimbursement Loan: (i) the Corporation shall be deemed to have (A) remade,
ratified and confirmed all representations and warranties of the Corporation
contained in SECTION 5.1 of this Agreement, and (B) certified compliance with
all covenants contained in ARTICLE VI hereof;
6.
<PAGE> 11
(B) The principal amount of the Reimbursement Loans shall not
exceed the Maximum Credit available under the Letter of Credit on such date. All
the Reimbursement Loans shall be evidenced by a single Reimbursement Loan Note
substantially in the form of EXHIBIT A hereto with appropriate insertions, duly
executed and delivered by the Corporation to Lender, dated by Lender on the
attached schedule the date of each Drawing under the Letter of Credit that gives
rise to a Reimbursement Loan, and payable to Lender or its assigns in an amount
equal to the amount drawn on the Letter of Credit that is not reimbursed as
provided in the first sentence of SECTION 2.4 of this Agreement. The principal
amount of each Reimbursement Loan, together with any unpaid and accrued interest
thereon, shall be due and payable on demand.
(C) The Reimbursement Loans shall bear interest at the Interest
Rate. Such interest shall be calculated on the basis of a 365 or 366 day year
and actual number of days elapsed and shall be payable monthly while any
Reimbursement Loan is outstanding. Lender shall, and is hereby authorized by the
Corporation to, date the schedule attached to the Reimbursement Loan- Note the
date of any Drawing under the Letter of Credit that is not reimbursed as
provided in the first sentence of SECTION 2.4 of this Agreement and insert the
amount (or the portion thereof not so reimbursed, as the case may be), and
endorse on such schedule an appropriate notation evidencing the date and amount
of each repayment and any other information provided for on such schedule;
provided, however, that the failure of Lender to insert any such date or amount
or set forth such repayments and other information on such schedule shall not in
any manner affect the obligation of the Corporation to repay the related
Reimbursement Loans in accordance with the terms of this Agreement.
(D) Lender agrees that the Corporation may prepay a Reimbursement
Loan in whole or in part without premium or penalty at any time.
ARTICLE III
CONDITIONS PRECEDENT TO ISSUANCE
OF LETTER OF CREDIT
SECTION 3.1 DOCUMENTS TO BE RECEIVED. Lender's obligations to cause the
issuance of the Letter of Credit as set forth in SECTION 2.1 hereof are subject
to the conditions precedent that, on or prior to the Date of Delivery, Lender
shall receive the following documents, all in form and substance satisfactory to
Lender:
(A) executed counterparts of the this Agreement and the Reimbursement
Loan Note, which shall be duly executed and dated by the Corporation (except for
the schedule attached thereto, which shall be undated and blank as to amount);
(B) a certificate of the appropriate officer(s) of the Corporation
certifying (i) that the statements contained in SECTIONS 3.2(A) and 5.1 are true
and correct, (ii) the name and true signatures of the officers of the
Corporation authorized to sign this Agreement and the other
7.
<PAGE> 12
documents to be delivered by the Corporation hereunder and (iii) as to such
other matters as Lender shall determine, in substantially the form attached
hereto as EXHIBIT C;
(C) the Warrant duly executed and delivered by Corporation in the
form attached hereto as EXHIBIT D;
(D) proof of the termination of the Guaranty duly executed and
delivered by Bank;
(E) such other documents, certificates, instruments, approvals or
filings as Lender may reasonably deem necessary or appropriate.
SECTION 3.2 OTHER CONDITIONS PRECEDENT. The Lender's obligation to cause
the issuance of the Letter of Credit as set forth in SECTION 2.1 hereof shall be
subject to the additional conditions precedent that:
(A) the following statements shall be true and correct on the Date
of Delivery and Lender shall have received a certificate signed by a duly
authorized officer of the Corporation, dated the Date of Delivery to the
following effect and to such other effects as the Lender may request,
substantially in the form attached hereto as EXHIBIT C:
(I) the representations and warranties of the Corporation set
forth in SECTION 5.1 hereof and in the other Transaction Documents are true and
correct as of the Date of Delivery as though made on and as of such date;
(II) no event has occurred and is continuing, or would result
directly or indirectly from the issuance of the Letter of Credit, which
constitutes an Event of Default hereunder or which would constitute such an
Event of Default, but for the requirement that notice be given or time elapse,
or both; and
(III) no "event of default" (however defined or designated) has
occurred under any of the Transaction Documents, and no event has occurred and
is continuing which would constitute such an event of default, but for the
requirement that notice be given or time elapse, or both.
(B) On or before the Date of Delivery, the Corporation shall have
duly adopted a resolution authorizing the execution, delivery and performance by
the Corporation of the Transaction Documents to which it is a party, and on and
after the Date of Delivery such resolution shall continue to be in full force
and effect.
8.
<PAGE> 13
ARTICLE IV
OBLIGATIONS OF THE CORPORATION
SECTION 4.1 OBLIGATIONS OF THE CORPORATION.
(A) The obligations of the Corporation under this Agreement
shall be absolute, unconditional and irrevocable, and shall be performed
strictly in accordance with the terms of this Agreement, under all circumstances
whatsoever, including without limitation the following circumstances:
(I) any lack of validity or enforceability of any of the
Transaction Documents (other than this Agreement) or any other agreement or
instrument contemplated thereby or related thereto;
(II) any amendment or waiver of or any consent to departure
from all or any of the documents contemplated hereby;
(III) the existence of any claim, setoff, defense or other
rights which the Corporation may have at any time against any beneficiary or any
transferee of the Letter of Credit (or any persons or entities for whom such
beneficiary may be acting), the Lender or any other Person, whether in
connection with the Loan Agreement or any unrelated transaction;
(IV) any breach of contract or other dispute between the
Corporation and any beneficiary of the Letter of Credit (or any persons or
entities for whom any such beneficiary may be acting), Lender, Issuing Bank,
Bank or any other Person;
(V) any statement or any other document presented under the
Transaction Documents proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect whatsoever;
(VI) payment by the Issuing Bank under the Letter of Credit
against presentation of a sight draft or certificate which does not comply with
the terms of the Letter of Credit, provided that such payment shall not have
constituted an act of gross negligence or willful misconduct by Lender as
determined by a court of competent jurisdiction; or
(VII) any delay, extension of time, renewal, compromise or
other indulgence or modification granted or agreed to by Lender, with or without
notice to or approval by the Corporation, as the case may be, in respect of any
of the Corporation's indebtedness to Lender under this Agreement.
(B) Lender shall not be deemed to have waived or released any of
its rights or remedies (whether specified in or arising under this Agreement or
otherwise available to it by law or agreement) unless it signs a written waiver
or release. Delay or failure to act on the Lender's part shall not constitute a
waiver of or otherwise preclude enforcement of any of its
9.
<PAGE> 14
rights and remedies. All of Lender's rights and remedies shall be cumulative and
may be exercised singularly or concurrently. Lender need not resort to any
particular right or remedy before exercising or enforcing any other, and
Lender's resort to any right or remedy shall not preclude the exercise or
enforcement of each other right and remedy.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.1 REPRESENTATIONS AND WARRANTIES OF THE CORPORATION. The
Corporation represents and warrants as follows:
(A) ORGANIZATION AND POWERS. The Corporation is a corporation,
duly organized and validly existing under the laws of the State of Delaware and
is authorized to transact business and exercise its power under the applicable
laws of any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
(B) AUTHORIZATION AND ABSENCE OF CONFLICTS. The execution,
delivery and performance of the Transaction Documents (i) have been duly
authorized by all necessary action on the part of the Corporation, (ii) do not
and will not conflict with, or result in a violation of, any provision of law,
or any order, writ, rule or regulation of any court or governmental agency or
instrumentality binding upon or applicable to the Corporation and (iii) do not
and will not conflict with, result in a violation of, or constitute a default
under, any resolution, material agreement or instrument to which the Corporation
is a party or by which the Corporation or any of its property is bound.
(C) BINDING OBLIGATION. Each of the Transaction Documents will
be a valid and binding obligation of the Corporation enforceable in accordance
with its terms.
(D) GOVERNMENTAL CONSENT OR APPROVAL. No consent, approval,
permit, authorization or order of, or registration or filing with, any court or
governmental agency, authority or other instrumentality not already obtained,
given or made is required on the part of the Corporation for the execution,
delivery and performance by the Corporation of any of the Transaction Documents.
(E) ABSENCE OF LITIGATION. There is no action, suit, proceeding,
inquiry or investigation, at law or in equity, before or by any court,
arbitrator, governmental or other board, body or official, pending or, to the
best knowledge of the Corporation, threatened against or affecting the
Corporation, questioning the validity of any proceeding taken or to be taken by
the Corporation in connection with the execution, delivery and performance by
the Corporation of the Transaction Documents or seeking to prohibit, restrain or
enjoin the execution, delivery or performance by the Corporation of any of the
foregoing, nor, to the best knowledge of the Corporation, is there any basis
therefor, wherein an unfavorable decision, ruling or finding would (i) adversely
affect the validity or enforceability of, or the authority or ability of the
10.
<PAGE> 15
Corporation to perform its obligations under the Transaction Documents or (ii)
have a material adverse effect on the ability of the Corporation to conduct its
business as currently conducted or as proposed or contemplated to be conducted.
(F) NO DEFAULTS BY THE CORPORATION. Other than as set forth on
the Schedule of Exceptions attached hereto (the "Schedule"), the Corporation is
not in default in the performance, observance or fulfillment of any of the
obligations, covenants or conditions contained in any agreement or instrument to
which the Corporation is a party or by which the Corporation or any of its
property is bound, except for such defaults as would not have a material adverse
effect on the ability of the Corporation to conduct its business as currently
conducted or as proposed or contemplated to be conducted.
(G) INCORPORATION OF REPRESENTATIONS. The Corporation hereby
makes to the Lender the same representations and warranties as are made by the
Corporation and set forth in any other Transaction Documents, which
representations and warranties, as well as the defined terms contained therein
(or in such defined terms), are hereby incorporated by reference with the same
effect as if each and every such representation and warranty and defined term
were set forth herein in its entirety. No amendment to such representations and
warranties or defined terms made pursuant thereto shall be effective to amend
such representations and warranties and defined terms as incorporated by
reference herein without the consent of Lender.
(H) COMPLIANCE WITH LAWS. The Corporation is in material
compliance with all provisions of applicable law.
ARTICLE VI
COVENANTS OF THE CORPORATION
SECTION 6.1 AFFIRMATIVE COVENANTS. So long as the Termination Date has not
occurred or so long as any amount is due and owing to Lender hereunder, the
Corporation will, unless Lender otherwise shall consent in writing:
(A) DELIVERY OF INFORMATION AND REPORTS. Furnish to Lender the
following: (i) as soon as possible and in any event within two (2) Business Days
after the occurrence of (A) each Event of Default or any event or condition
that, with the passage of time or the giving of notice or both, would constitute
an Event of Default, under this Agreement, and (B) each "event of default"
(however defined or designated) or any event or condition that, with the passage
of time or the giving of notice or both, would constitute an "event of default"
under any Transaction Document, a statement of an officer of the Corporation
setting forth details thereof and the action which the Corporation proposes to
take with respect thereto; (ii) audited financial statements, if any, of the
Corporation within ten (10) days after the Corporation's receipt of the same
from the respective accountants; (iii) a copy of the annual budget, if any, for
the Corporation within ten (10) days after the adoption of such budget; and (iv)
as promptly as practicable, written notice to the Lender of all proceedings
before any court or governmental
11.
<PAGE> 16
authority which, if adversely determined, would materially and adversely affect
the ability of the Corporation to pay when due the principal of or any interest
on the Reimbursement Loan Note.
(B) PAYMENT OF INDEBTEDNESS. Other than as set forth on the
Schedule, duly and punctually pay or cause to be paid all principal and interest
on the indebtedness of the Corporation legally due and owing to third parties,
comply with and perform all conditions, terms and obligations of the notes or
bonds evidencing such indebtedness and the security agreements, deeds of trust
and mortgages securing such indebtedness, and upon being notified of a default
or having made a determination not to pay an indebtedness when due, promptly
inform Lender of any such default, or anticipated default, under any such note,
bond, security agreement, deed of trust or mortgage, and forward to the Lender a
copy of any notice of default or notice of an event that might result in default
under any such note, bond, security agreement, deed of trust or mortgage;
(C) ACCESS TO RECORDS AND AUDIT. Upon reasonable notice to
Corporation (unless an Event of Default has occurred and is continuing, in which
case no notice is necessary) Corporation shall permit Lender to at all times
have full and free access during normal business hours to all the books and
records and correspondence of Corporation, and Lender or any agents or
representatives of Lender may examine the same, take extracts therefrom and make
photocopies thereof, and Corporation agrees to render to Lender, at
Corporation's cost and expense, such clerical and other assistance as may be
reasonably requested with regard thereto.
(D) RELATED COVENANTS. Fully and faithfully perform each of the
covenants and agreements required of it pursuant to the provisions of the
Transaction Documents;
(E) FURTHER ACTION. At any and all times, insofar as it may be
authorized to do so by law, pass, make, do, execute, acknowledge and deliver all
and every such further resolutions, acts, deeds, conveyances, assignments,
recordings, filings, transfers and assurances as may be necessary or reasonably
desirable for the better assuring, conveying, granting, assigning and confirming
the amounts due hereunder and under the Reimbursement Loan Note, or intended so
to be, or which the Corporation may hereafter become bound to pledge or assign
thereto;
(F) COMPLIANCE WITH LAWS. Comply in all material respects with
all applicable (A) laws (including, rules, regulations, writs, decrees and
orders of all Federal, state, local or foreign courts or governmental agencies,
authorities, instrumentalities or regulatory bodies and (B) rules, regulations
and requirements necessary to maintain its operating and business licenses,
authorizations and permits; and
(G) INCORPORATION OF COVENANTS. The Corporation hereby makes to
Lender the same covenants as are made by the Corporation and set forth in any
other Transaction Document, which covenants, as well as the defined terms
contained therein (or in such defined terms), are hereby incorporated by
reference with the same effect as if each and every such covenant and defined
term were set forth herein in its entirety. No amendment to such
12.
<PAGE> 17
covenants or defined terms made pursuant thereto shall be effective to amend
such covenants and defined terms as incorporated by reference herein without the
consent of the Lender.
SECTION 6.2 NEGATIVE COVENANTS. Corporation shall not amend nor modify any
term, condition or provision of the Loan Agreement or any promissory note issued
pursuant thereto without the written consent of Lender.
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1 EVENTS OF DEFAULT. The occurrence of any of the following
events shall be an "Event of Default" hereunder unless waived by Lender pursuant
to SECTION 9.1 hereof:
(A) the Corporation shall fail to pay when due any amount
specified under the terms of this Agreement, including, without limitation,
amounts due under the Reimbursement Loan Note;
(B) any representation or warranty made by the Corporation pursuant
to SECTION 5.1 hereof or any certification made by the Corporation hereunder
shall prove to have been incorrect in any material respect when made;
(C) the Corporation and/or Bank shall amend or modify any term,
condition or provision of the Loan Agreement or any promissory note issued
pursuant thereto without the written consent of Lender.
(D) the Corporation shall fail to perform or observe any other
term, covenant or agreement contained in this Agreement (other than those
specifically referenced in SECTION 7.1(a), (b) and (c) above) and such failure
shall remain unremedied for thirty (30) days after written notice thereof shall
have been given to the Corporation, by Lender;
(E) an "event of default" (however defined or designated) under any
Transaction Document shall have occurred and be continuing;
(F) an event of default under any indebtedness of the Corporation
from time to time outstanding or under any agreement to which Borrower is a
party with a third party or parties resulting in a right by such third party or
parties, whether or not exercised, to accelerate the maturity of any
indebtedness in an amount in excess of Five Hundred Thousand Dollars ($500,000)
or that could materially and adversely affect the ability of the Corporation to
pay when due the principal of or any interest on the Reimbursement Loan Note.
(G) any material provision of this Agreement or the other
Transaction Documents shall at any time for any reason cease to be valid and
binding on the Corporation, or shall be declared to be null and void, or the
validity or enforceability thereof shall be
13.
<PAGE> 18
contested by the Corporation or any governmental agency or authority, and the
happening of the events heretofore set forth in this SUBSECTION (F) shall
materially and adversely affect Lender's rights under this Agreement or under
any other Transaction Document, or the Corporation shall deny that it has any or
further liability or obligation under this Agreement or any other Transaction
Document; or
(H) an Act of Bankruptcy.
ARTICLE VIII
RIGHTS AND REMEDIES
SECTION 8.1 RIGHTS AND REMEDIES.
(A) DEFAULTS UNDER THIS AGREEMENT. Upon the occurrence of an Event
of Default hereunder, or at any time thereafter while such default continues,
Lender, in its sole discretion, may do any one or more of the following:
(I) send notice of such Event of Default to the Corporation;
(II) declare the Reimbursement Loan Note, if outstanding, and
any and all amounts due and owing under this Agreement or under the other
Transaction Documents, to be immediately due and payable
(III) terminate the Letter of Credit; and
(IV) exercise any rights and remedies available to it by law
or under this Agreement, any other Transaction Document or any other agreement,
document or instrument contemplated hereby.
(B) DEFAULTS UNDER THE LOAN AGREEMENT. Lender may cure an event of
default under the Loan Agreement; provided, however, that nothing contained
herein shall obligate Lender to cure any such event of default.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 MODIFICATION OF AGREEMENT. No modification or waiver of any
provision of this Agreement, and no consent to any departure by the Corporation
therefrom, shall be effective unless the same shall be in writing and signed by
Lender and the Corporation and no modification or waiver of any provision of the
Letter of Credit, and no consent to any departure by the Corporation or Bank
therefrom, shall in any event be effective unless the same shall be
14.
<PAGE> 19
in writing and signed by Lender. Any such waiver or consent shall be effective
only in the specific instance and for the purpose for which given. No notice to
or demand on the Corporation in any case shall entitle the Corporation to or any
other or further notice or demand in the same, similar or other circumstances.
SECTION 9.2 WAIVER OF RIGHTS BY LENDER; REMEDIES. No course of dealing or
failure or delay on the part of Lender in exercising any right, power or
privilege hereunder or under the Letter of Credit shall operate as a waiver
hereof or thereof, nor shall a single or partial exercise thereof preclude any
other or further exercise or the exercise of any other right, power or
privilege. The rights of Lender under this Agreement are cumulative and not
exclusive of any rights or remedies which Lender would otherwise have.
SECTION 9.3 NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed effectively
given: (i) upon personal delivery to the party to be notified; (ii) upon receipt
at the address specified below after having been sent by certified or registered
mail, return receipt requested, postage prepaid; or (iii) one (1) day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to the party to be notified at the address set forth below:
If to the Corporation:
Air South Airlines, Inc.
2625 Airport Boulevard
West Columbia, South Carolina 29170
Attention: John P. Tague, Chairman
Fax: (803)822-4132
with a copy to:
David A. Monteith, Esq.
Monteith Law Offices
2805 Millwood Avenue
Columbia, South Carolina 29205
(which shall not constitute notice)
If to Lender:
HAMBRECHT & QUIST CALIFORNIA
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Attention: David Golden
Fax: (415)339-4325
15.
<PAGE> 20
with a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attention: Patrick Pohlen
Telephone: (415) 326-0600
Facsimile No.: (415) 857-0663
(which shall not constitute notice)
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
SECTION 9.4 INDEMNIFICATION. In addition to other amounts payable by the
Corporation under this Agreement, the Corporation hereby agrees to the fullest
extent permitted by applicable law, to protect, defend, indemnify and hold
harmless Lender, its assignees, the Issuing Bank, and their respective
directors, officers, employees, agents, counsel, successors and assigns from and
against any and all claims, demands, judgments, damages, actions, injuries,
losses, liabilities, penalties, costs, charges and expenses whatsoever which
such Person may (or which may be claimed against such Person whatsoever),
including, without limitation, the fees and expenses of counsel for such Person
by reason of or in connection with: (a) the issuance of the Letter of Credit;
(b) any breach by Corporation of any representation, warranty, covenant, term or
condition in, or the occurrence of any default under this Agreement, the
Reimbursement Loan Note or the other Transaction Documents, including all
reasonable fees or expenses resulting from the settlement or defense of any
claims or liabilities arising as a result of any such breach or default;
provided, however, that the Corporation shall not be required to indemnify any
such Person for any claims, demands, damages, losses, liabilities, costs,
charges and expenses to the extent, but only to the extent, caused by (i) the
gross negligence of Lender, as determined by a court of competent jurisdiction,
in determining whether a sight draft or certificate presented under the Letter
of Credit complied with the terms of the Letter of Credit; (ii) Lender's willful
failure, as determined by a court of competent jurisdiction, to cause payment
under the Letter of Credit after the presentation to it by Lender of a sight
draft and all required certificates strictly complying with the terms and
conditions of the Letter of Credit. The indemnification obligations in this
SECTION 9.4 shall survive the expiration of this Agreement or the Letter of
Credit.
SECTION 9.5 LIABILITY OF LENDER. The Corporation assumes all risks of the
acts or omissions of Bank and any transferee of the Letter of Credit with
respect to its use of the Letter of Credit or the proceeds thereof; provided,
however, this assumption is not intended to, and shall not, preclude the
Corporation from pursuing such rights and remedies as it may have against Bank
at law or under the Loan Agreement or any other agreement. Neither the Lender
nor any Person participating in the Letter of Credit or the Reimbursement Loan
Note shall be liable or responsible for: (a) the use which may be made of the
Letter of Credit or the proceeds
16.
<PAGE> 21
thereof or for any acts or omissions of Bank and any transferee of the Letter of
Credit in connection therewith; (b) the validity, sufficiency or genuineness of
documents presented under the Letter of Credit, or of any endorsement(s)
thereon, even if such documents should in fact prove to be in any or all
respects invalid, insufficient, fraudulent or forged; provided, however, (a) and
(b) to the contrary notwithstanding, the Corporation shall have a claim against
the Lender, and the Lender shall be liable to the Corporation, to the extent,
but only to the extent, of any direct, as opposed to consequential, damages
suffered by the Corporation which the Corporation proves, as determined by a
court of competent jurisdiction, were caused by (i) Lender's gross negligence or
(ii) Lender's willful act that prevents payment under the Letter of Credit after
the presentation to Issuing Bank by the Bank (or a successor under the Loan
Agreement to whom the Letter of Credit has been transferred in accordance with
its terms) of a sight draft and all required certificates strictly complying
with the terms and conditions of the Letter of Credit. In furtherance and not in
limitation of the foregoing, the Lender may accept documents that appear on
their face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary; provided, however, that
if Lender shall receive timely written notification from each of Bank or the
Corporation and that sufficiently identifies (in the reasonable opinion of
Lender) documents that thereafter may be presented to Issuing Bank or Lender
which are not to be honored, Lender agrees to use its best efforts to avoid
honoring such documents thereafter. Lender assumes no responsibility for any
failure or delay in the transmission to Bank of funds drawn under the Letter of
Credit through the federal funds wire system.
SECTION 9.6 PARTICIPATIONS. Lender may participate to other Persons and
institutions of the Lender's choosing all or any portion of its obligations
under the Letter of Credit and the obligations of the Corporation under the
Reimbursement Loan Note. No such participation shall relieve the Lender of its
obligations hereunder nor shall it cause an increase in Corporation's
obligations under this Agreement, including under SECTION 2.3(b) above.
SECTION 9.7 SATISFACTION REQUIREMENT. If any agreement, certificate or
other writing, or any action taken or to be taken, is by the terms of this
Agreement required to be satisfactory to the Lender, the determination of such
satisfaction shall be made by Lender in its sole and exclusive judgment
exercised in good faith.
SECTION 9.8 GOVERNING LAW. In all respects, including all matters of
construction, validity and performance, this Agreement, the Reimbursement Loan
Note and the other Transaction Documents, and any obligations arising hereunder
or thereunder, shall be governed by, and construed and enforced in accordance
with, the laws of the State of California applicable to contracts made and
performed in such state, without regard to the principles thereof regarding
conflict of laws.
SECTION 9.9 WAIVER OF JURY TRIAL. The Corporation hereby waives trial by
jury in any litigation in any court with respect to, in connection with, or
arising out of this Agreement, the Reimbursement Loan Note, the other
Transaction Documents or any instrument or document delivered pursuant to this
Agreement, the Reimbursement Loan Note or the other Transaction Documents, or
the validity, protection, interpretation, collection or enforcement thereof, or
any
17.
<PAGE> 22
other claim or dispute howsoever arising, between the Corporation, on the one
hand, and Lender, on the other hand.
SECTION 9.10 JURISDICTION: SERVICE OF PROCESS. The Corporation hereby
irrevocably consents to the jurisdiction of the Courts of the State of
California, County of San Francisco and of any Federal Court located in the
county of San Francisco California, and agree that venue in each of such Courts
is proper in connection with any action or proceeding arising out of or relating
to this Agreement, the other Transaction Documents, or any document or
instrument delivered pursuant to this Agreement or the other Transaction
Documents. Nothing herein shall affect the right of Lender to serve process in
any other manner permitted by law or to commence legal proceedings or otherwise
proceed against the Corporation in any other jurisdiction.
SECTION 9.11 SURVIVAL OF AGREEMENT. All covenants, agreements,
representations and warranties made in this Agreement shall survive the issuance
of the Letter of Credit by Issuing Bank and shall continue in full force and
effect so long as the Letter of Credit shall be unexpired or any sums drawn or
due hereunder or under the Reimbursement Loan Note shall be outstanding and
unpaid, regardless of any investigation made by any Person and so long as any
amount payable hereunder remains unpaid. Whenever in this Agreement Lender is
referred to, such reference shall be deemed to include the successors and
assigns of Lender, and all covenants, promises and agreements by or on behalf of
the Corporation which are contained in this Agreement shall inure to the benefit
of the successors and assigns of Lender and such other Persons as are
indemnified herein, subject to such limitations as are set forth in SECTION 9.6
above regarding participations. The rights and duties of the Corporation,
however, may not be assigned or transferred, except as specifically provided in
this Agreement or with the prior written consent of the Lender, and all
obligations of the Corporation shall continue in full force and effect
notwithstanding any assignment by the Corporation of any of their respective
rights or obligations under any of the Transaction Documents or the
Reimbursement Loan Note or any entering into, or consent by the Corporation
supplement or amendment to any of the Transaction Documents.
SECTION 9.12 SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
SECTION 9.13 HEADINGS. The various headings in this Agreement are inserted
for convenience only and shall not affect the meaning or interpretation of this
agreement or any provisions hereof.
SECTION 9.14 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so delivered shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. Each
such agreement shall become effective upon the execution of a counterpart hereof
or thereof by each of the parties hereto and telephonic notification thereof has
been received by Corporation and Lender.
18.
<PAGE> 23
In WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and delivered by its duly authorized officer on the date first set
forth above.
CORPORATION: AIR SOUTH AIRLINES, INC.
By:/s/John P. Tague
----------------------------------------
Printed Name: John P. Tague
------------------------------
Title: Chairman of the Board, President
-------------------------------------
and Chief Executive Officer
ATTEST:
/s/D Monteith
- - - -----------------------------------
Name: David Monteith
Title: Secretary
HAMBRECHT AND QUIST CALIFORNIA, a wholly
owned subsidiary of Hambrecht & Quist Group
By:/s/Jackie Berterretche
----------------------------------------
Printed Name:/s/Jackie Berterretche
------------------------------
Title: Attorney-in-Fact
-------------------------------------
19.
<PAGE> 24
SCHEDULE OF EXCEPTIONS
Schedule 5.1(f)
The Company is currently in default under the following instruments or
Contracts:
(a) Air South, Inc. HUD Section 108 Loan; such defaults have been
waived until September 30, 1997.
(b) Revolving Credit Facility with NationsBank, N.A.
(c) Aircraft leases for five Boeing 737-200 Aircrafts entered into by
the lessors through GE Credit Aviation Services, Inc.; however, such
defaults have been waived pending amendment of such leases.
(d) From time-to-time on a continuing basis the Company is in arrears
of payments owed to all the airports to which it flies. Such arrearages
could give rise to events of default under the Company's agreement with
such airports if not timely cured.
Schedule 6.1(h)
It is understood that the Company is currently and generally in
arrears on accounts payable to numerous general creditors not exceeding
$7,500,000. Such accounts are not evidenced by notes, bonds, security
agreements, deeds of trust or mortgages; some however are the subject of
written agreements with creditors for extended payment terms; others, in
amounts not material to the Company (less than $100,000 in the aggregate),
have been included in confessions of judgments by the Company which may be
entered only if the Company defaults in an agreed upon payment schedule.
<PAGE> 25
EXHIBIT A
FORM OF
REIMBURSEMENT LOAN NOTE
$2,OOO,OOO San Francisco, California
January___, 1997
FOR VALUE RECEIVED, AIR SOUTH AIRLINES, INC., a Delaware corporation (the
"Corporation") hereby unconditionally promises to pay to the order of HAMBRECHT
& QUIST CALIFORNIA, a wholly owned subsidiary of Hambrecht & Quist Group
("Lender"), or their assigns, in lawful money of the United States of America
and in immediately available funds, on demand the sum of Two Million Dollars
($2,000,000) or so much thereof as from time to time may be advanced hereunder
pursuant to Section 2.7 of that certain Reimbursement Agreement, dated as of
January___, 1997, by and among the Corporation and Lender, as amended from time
to time (the "Agreement"), in connection with drawings under that certain Letter
of Credit No.___ dated January___, 1997, issued by the BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION in favor of THE NATIONAL BANK OF SOUTH CAROLINA
(including any amendment thereof or substitute therefor) (the "Letter of
Credit") in accordance with the terms and conditions set forth in the Agreement.
Borrower shall also pay interest (calculated on the basis of a 365 or 366 day
year and actual number of days elapsed) on such sum or the portion thereof from
time to time outstanding hereunder, monthly, at the rates and in accordance with
the terms and conditions set forth in the Agreement. All accrued and unpaid
interest shall be due and payable at such time as demand is made under this
Reimbursement Loan Note. This Reimbursement Loan Note is issued under and is
subject to the terms and conditions of the Agreement. All definitions, terms,
conditions, rights and provisions set forth in the Agreement, are hereby
incorporated herein in their entirety.
Annexed hereto and made a part hereof is a schedule (the "Loan and
Repayment Schedule") on which shall be shown all advances by Lender pursuant to
the Agreement (each such advance, a "Reimbursement Loan") and all repayments of
principal made to Lender hereunder. The Corporation hereby appoints Lender as
its agent to endorse the date and the amount of each such Reimbursement Loan or
principal repayment made hereunder. Such endorsement shall constitute prima
facie evidence of the accuracy of the information endorsed; provided, however,
that failure to make any such endorsement (or any errors in notation) shall not
affect in any manner the obligations of Corporation with respect to the amounts
payment hereunder.
This Reimbursement Loan Note is subject to acceleration upon the occurrence
of certain events as provided in the Agreement. The Corporation shall have the
right to prepay this Reimbursement Loan Note in whole or in part, without
penalty or premium, at any time.
1.
<PAGE> 26
All payments or prepayments of principal of and interest on this
Reimbursement Loan Note shall be payable to the Account of Lender as specified
in Section 2.6 of the Agreement.
All payments and prepayments hereon shall be applied first, to costs and
expenses and other amounts due and owing to Lender under the Agreement; second,
to accrued interest then payable; and third to principal of the Reimbursement
Loans in chronological order of funding of the Reimbursement Loans and within
each Reimbursement Loan in inverse chronological order of principal
amortization.
The Corporation hereby waives presentment, demand, protest, notice of
protest or other notice of dishonor of any kind or of non-payment of this
Reimbursement Loan Note, and promises to pay all reasonable costs of collection
when incurred, including, without limitation, reasonable attorneys' fees, costs
and other expenses.
The right to plead any and all statutes of limitations as a defense to any
demands hereunder is hereby waived to the full extent permitted by law.
No extension of the time for the payment of this Reimbursement Loan Note or
any installment hereof made by agreement with any Person now or hereafter liable
for the payment of this Reimbursement Loan Note shall operate to release or
discharge the original liability under this Reimbursement Loan Note, either in
whole or in part, of the Corporation.
This Reimbursement Loan Note is to be construed according to the laws of
the State of California, without regard to principles of conflict of laws.
The provisions of this Note shall inure to the benefit of and be binding on
any successor to Lender and shall extend to any holder hereof.
CORPORATION: AIR SOUTH AIRLINES, INC.
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
2.
<PAGE> 27
EXHIBIT B
1.
<PAGE> 28
IRREVOCABLE STANDBY LETTER OF CREDIT
#__________
December __, 1996
APPLICANT: Air South Airlines, Inc.
1800 St. Julian Place
Columbia, South Carolina
BENEFICIARY: The National Bank of South Carolina
1241 Main Street
Columbia, South Carolina
MAXIMUM AMOUNT: $2,000,000.00 EXPIRY: July 1, 1998
We hereby issue this Irrevocable Standby Letter of Credit #____ in your favor
for the maximum amount shown above available against your draft at sight drawn
on (issuer) when accompanied by this letter and a statement from you (the
Beneficiary) signed by an officer of the Beneficiary stating:
"The Applicant, Air South Airlines, Inc., has failed to pay The National
Bank of South Carolina in accordance to the terms of their loan (to
include, but not be 1imited to, the maintenance of this Irrevocable
Standby Letter of Credit) and the loan is in default."
This letter of Credit shall be deemed automatically extended without amendment
for one year fit expiry date hereof, unless not less than sixty(60) days prior
to any such expiry date we shall notify you in writing that we elect not to
consider the Letter of Credit renewed for any such additional period.
Drafts drawn under this Letter of Credit must bear the phrase "Drawn under
(issuer) Irrevocable Letter of Credit No.____ dated December____ , 1996."
We engage with you that all drafts drawn under in compliance with the terms of
this Letter of Credit will be duly honored on delivery of documents as specified
it presented at this office on or before December ____, 1997 any automatically
extended date as provided above.
Except as otherwise expressly stated herein, this Irrevocable Standby Letter of
Credit is subject to the Uniform customs and Practices for Documentary Credit
(1993 Revision), International Chamber of Commerce Brochure 500 (the "Uniform
Customs") As to matters not governed by Uniform Customs, this Irrevocable
Standby Letter of Credit shall be governed and construed in, accordance with the
laws of the State of South Carolina.
Upon strict compliance with the terms of this Letter of Credit, the drafts
hereinabove referred to will be duly mored upon presentation.
- - - ---------------------------------
Authorized Signature
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1996 AND STATEMENT OF OPERATIONS FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS INCORPORATED IN AIR SOUTH AIRLINES, INC. REGISTRATION
STATEMENT ON FORM 10.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,070,063
<SECURITIES> 1,211,000
<RECEIVABLES> 671,825
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,475,064
<PP&E> 3,469,287
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,853,796
<CURRENT-LIABILITIES> (31,795,587)
<BONDS> (12,000,000)
0
(1,995)
<COMMON> (6,967)
<OTHER-SE> 40,241,875
<TOTAL-LIABILITY-AND-EQUITY> (9,853,796)
<SALES> 0
<TOTAL-REVENUES> (53,959,657)
<CGS> 0
<TOTAL-COSTS> 82,078,646
<OTHER-EXPENSES> (635,354)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,045,557
<INCOME-PRETAX> 28,529,192
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,529,192
<EPS-PRIMARY> (4.14)
<EPS-DILUTED> (4.14)
</TABLE>
