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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____TO____.
COMMISSION FILE NUMBER 0-22526
TOWER AIR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2621046
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
HANGAR NO. 17
J.F.K. INTERNATIONAL AIRPORT
JAMAICA, N.Y.
(Address of principal executive offices) 11430
(Zip Code)
(718) 553-4300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, par value $.01 per share NASDAQ National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [_]
The aggregate market value of the voting Common Stock, par value $.01 per
share, held by non-affiliates (based upon the closing sale price on the NASDAQ
National Market) on February 27, 1998 was approximately $21,904,188. As of
February 27, 1998, there were 15,319,700 shares of Common Stock, par value $.01
per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement in connection with the registrant's 1998
Annual Meeting of Stockholders to be filed within 120 days of the close of
registrant's fiscal year are incorporated by reference into Part III.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain statements contained herein under the captions Business, Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the Reform Act). Such
statements incorporate assumptions that entail uncertainties and unknown risks.
A variety of factors may cause the actual results and performance of the Company
or industry to differ materially from any future results or performance
expressed or implied by such forward-looking statements. These factors include,
among others, the following: general economic conditions affecting the industry
and the Company; competition within the industry; changes in consumer
preferences; regulatory changes; and political, social and economic conditions
in key markets.
ITEM 1. BUSINESS.
OVERVIEW
Tower Air, Inc. (Tower or the Company) was incorporated under the laws of the
State of Delaware in August 1982 and obtained an operating certificate from the
Civil Aeronautics Board effective October 1983. The Company's executive offices
are located at Hangar No. 17, John F. Kennedy International Airport (JFK),
Jamaica, New York 11430, and its telephone number is (718) 553-4300.
Tower provides primarily long-haul scheduled and charter passenger air service
in diverse international and domestic markets that the Company believes can be
profitably served by its fleet that consists entirely of Boeing 747 (B747)
aircraft. Scheduled international passenger routes include service between New
York and Tel Aviv, Israel; New York and Athens, Greece; New York and Paris,
France; and from New York to and between Athens and Tel Aviv. Scheduled domestic
passenger routes include service between New York and Las Vegas, Los Angeles,
Miami, San Francisco, and San Juan, Puerto Rico. The Company provides charter
air service for several major United States and foreign tour operators, and is a
major passenger charter service provider to the United States military and the
International Organization For Migration (IOM). During 1997, Tower also
operated all-cargo service primarily between New York and Hong Kong. For 1998,
Tower has entered into an agreement for the lease of two Tower Air cargo
aircraft with crew for a period of one year with a South American cargo airline,
extendible by mutual agreement. In addition, Tower provides ad hoc third party
maintenance service at its JFK facility.
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As of December 31, 1997, Tower operated a fleet of fifteen passenger aircraft
(six B747-100s and nine B747-200s) and two cargo aircraft (B747-100s). The
Company maintains offices and ground personnel in New York City, Miami, Las
Vegas, Los Angeles, San Francisco, San Juan, Athens, Tel Aviv and Paris.
BUSINESS STRATEGY
The Company's principal business strategy is to provide long-haul, low-fare
airline service in niche markets where the Company's low operating costs and
flexible operating structure permit profitable operations. Tower implements this
strategy by appealing to ethnic and family travelers in markets characterized by
normally stable demand (as demonstrated by the Company's scheduled services
between New York and Tel Aviv) or in markets in which seasonal fluctuations in
demand justify adjusting flight frequencies (as demonstrated by the Company's
expanded service between New York and Paris in the summer). Responding to
predictable variations in demand, the Company also seeks to take advantage of
counter-seasonal opportunities, for instance, by participating in the Hajj, a
seasonal religious pilgrimage to the Middle East, and by providing year-round
cargo service. The Company believes it benefits from several competitive
advantages, including the following:
. LOW COST STRUCTURE. Tower's operating costs in most markets are lower than
those of its competitors. The Company maintains its low cost structure
principally by tightly controlling its variable costs while also minimizing
certain fixed costs by sub-contracting ground handling and heavy maintenance
work. The Company achieves low labor costs through effective utilization of a
mix of part-time and full-time workers. The Company also achieves savings by
operating a fleet consisting entirely of B747 aircraft, which permits
efficiencies in crew training, maintenance and spares inventory. The Company's
low cost structure enables it to seek to increase market penetration by, among
other things, offering travel agents higher commissions and to operate in price
sensitive markets by using its aircraft cost-efficiently. Tower's low cost
structure is demonstrated by its operating expense per scheduled service
Available Seat Mile (ASM) statistics in recent years: 1997-$.0527; 1996-$.0538;
1995-$.0477; 1994-$.0463; 1993-$.0531.
. CUSTOMER APPEAL. Tower appeals to travelers primarily by offering low fares
with few or no restrictions (e.g. minimum stay or advance purchase requirements)
in its scheduled service markets, and by tailoring its service to the
requirements of each market. This market-focused philosophy was pioneered in the
Israel market, for which Tower provides Israel-based flight attendants and
Kosher meals. In the commercial charter market, Tower appeals to tour operators
by providing a low per-seat cost. Tower appeals to its military customers by
responding quickly to varying
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logistical demands. The Company emphasizes competitive prices and comfortable
aircraft with service comparable to that offered by carriers with higher fares.
On scheduled flights, the Company provides a business class section offering
approximately 46 wide, leather covered seats and upgraded inflight services, for
a fare that is generally less than business class fares charged by other
carriers.
. OPERATING FLEXIBILITY. The Company has achieved a high degree of operating
flexibility due to minimal capital investment requirements and a highly flexible
cost structure. Tower's fixed overhead expenses in 1997 were approximately
$120.3 million, or 26.1% of revenues. The Company's flexible cost structure has
been achieved through, among other measures, the efficient use of a part-time
workforce, the development of flexible work rules, the outsourcing of most
ground services and the ability to adjust flight routes and schedules to meet
demand. The Company's operating flexibility has allowed it to respond over its
15-year operating history to fluctuating fuel costs, increasingly price-
conscious consumers and the significant variability in demand experienced in
certain markets such as in its charter business.
SALES AND MARKETING
Tower's marketing strategy focuses on specific profitability goals in each
market. The Company's streamlined marketing structure encourages focused and
timely decision-making with respect to pricing, scheduling, distribution,
advertising, public relations and sales. This orientation allows Tower to
pursue market opportunities which may not be apparent to, or manageable by,
larger competitors, and permits Tower to adjust promptly to market conditions.
Tower's services are marketed through direct sales efforts and travel
intermediaries, including agents, tour operators, religious and other
organizations, and interline agreements with other airlines. This strategy
permits the Company to reach a broad customer base while focusing its marketing
resources in a cost effective manner. The Company maintains contacts with retail
and wholesale travel agencies in the United States, Puerto Rico, Israel, Greece
and France.
The Company's annual advertising plan includes direct advertising through
television, radio and print media to promote its product. The campaign focuses
on the Company's vast experience, its fleet and low fares, and promotes the
value of the service that the Company provides.
SERVICES OFFERED
The Company's business mix includes scheduled passenger service, commercial
charters, military charters, cargo service, and other operations. The following
table sets forth the Company's total revenues for each major service category:
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Scheduled passenger service $ 267.3 $ 247.2 $ 270.3
Commercial charter service 103.4 84.4 100.8
Military charter service 67.9 64.4 87.5
Cargo service 13.8 14.1 24.0
Other 9.1 7.7 7.9
-------------- ------------- ---------------
Total operating revenues $ 461.5 $ 417.8 $ 490.5
============== ============= ===============
</TABLE>
SCHEDULED PASSENGER SERVICE
As illustrated in the above table, scheduled passenger service represents the
largest portion of the Company's business and accounted for 57.9% of the
Company's total revenues for the year ended December 31, 1997. The following
table sets forth, for the periods indicated, the Company's scheduled passenger
service in dollars and as a percentage of total operating revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NY/Tel Aviv $ 112.8 24.4% $ 94.2 22.6% $ 99.2 20.2%
NY/Paris 24.7 5.3 23.7 5.7 26.7 5.5
NY and/or Miami/Sao Paulo/Rio de
Janeiro (1) 4.2 0.9 17.7 4.2 10.9 2.2
NY/Amsterdam/Bombay (2) -- -- 6.0 1.4 25.6 5.2
NY/Amsterdam/Delhi (3) -- -- -- -- 13.2 2.7
Miami/Los Angeles (4) -- -- -- -- 1.0 0.2
NY/Athens 8.2 1.8 -- -- -- --
NY/San Juan 30.7 6.7 21.2 5.1 17.7 3.6
NY/Miami 27.4 5.9 21.5 5.1 27.2 5.6
NY/Los Angeles 32.4 7.0 39.5 9.5 34.8 7.1
NY/Las Vegas 2.1 0.5 -- -- -- --
NY/San Francisco (5) 24.4 5.3 19.6 4.7 11.5 2.3
Miami/San Juan(6) 0.4 0.1 3.3 0.8 -- --
Other (7) -- -- 0.5 0.1 2.5 0.5
-------------------------------------------------------------------------
$ 267.3 57.9% $ 247.2 59.2% $ 270.3 55.1%
=========================================================================
</TABLE>
1) Service expanded in December 1995 with continuation to Rio de Janeiro.
Service to Rio de Janeiro discontinued August 1996. Tower's route authority
to Brazil expired in March 1997; Tower discontinued scheduled passenger
service to Brazil in March 1997.
2) Service commenced in December 1994 and discontinued in March 1996.
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3) Service commenced in April 1994 and discontinued in September 1995.
4) Service discontinued in January 1995.
5) Service to San Francisco discontinued April 1996 and was resumed in
April 1997; service to Oakland commenced April 1996 and was discontinued in
March 1997.
6) Service commenced in June 1996 and discontinued in February 1997.
7) Includes revenues generated by certain discontinued routes.
INTERNATIONAL MARKET - Tower operated 56.1% of its scheduled passenger service,
measured in 1997 revenues, between New York and various international
destinations, and between Athens and Tel Aviv. The frequency of Tower's flights
varies between the peak summer season and the off-season based on traffic
demand.
The Israel passenger market, Tower's largest scheduled passenger service revenue
source, is composed primarily of individuals and groups who travel for religious
reasons, vacations or business. This market historically has been characterized
by a relatively stable travel pattern. From time to time, security concerns in
Israel have resulted, and may continue to result, in temporary variations in
demand.
The Department of Transportation (DOT) decided not to renew Tower's route
authority to Brazil and it expired on March 31, 1997. The Company discontinued
all scheduled passenger service to Brazil effective March 13, 1997.
Tower was granted authority to operate scheduled service to and between Athens,
Greece and Tel Aviv, Israel. The Company received this authority in March 1997,
and commenced service on this route following receipt of foreign government
approvals.
Tower was granted an exemption to serve New York to Cairo on July 31, 1997, a
route permitted under the current US-Egypt bilateral. Tower has not yet
implemented this authority.
Tower was granted an exemption to serve New York to Kiev on September 20, 1997,
a route permitted under the current US-Ukraine bilateral. Tower has not yet
implemented this authority.
DOMESTIC MARKET - Tower operated 43.9% of its scheduled passenger services,
measured in 1997 revenues, within domestic markets.
Three major domestic routes (New York/San Juan, New York/Miami and New York/San
Francisco) had higher traffic in 1997 relative to 1996.
The Company resumed non-stop flights between New York and San Francisco in April
1997.
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The Company believes that by increasing its sales and marketing efforts,
including continued participation in additional global distribution systems
(e.g. Sabre, Amadeus, Galileo and Galileo International), it will be able to
expand its overall presence in price sensitive domestic markets.
COMMERCIAL CHARTER SERVICE
The Company provides charter service to and from a number of European and South
American destinations. For the year ended December 31, 1997, the charter market
represented approximately 22.4% of the Company's total revenues. Charters
provided to tour operators constitute a seasonal market, with the majority of
passengers traveling during each country's respective summer period. Tower also
supplies charter passenger service to the IOM.
The majority of the Company's commercial charter agreements are fixed-price-per-
flight agreements, negotiated and contracted in advance. The Company generally
establishes its pricing in such agreements based on the number of block hours
required to complete a flight.
Tower's charter operations represent a potential springboard for future
scheduled service operations. For example, Tower's scheduled service to Tel
Aviv, Paris and Athens each developed from strong charter operations to those
destinations.
Charter agreements also provide for the transport of religious pilgrims on the
Hajj pilgrimage to the Middle East that occurs once a year. From March through
May 1997, the Company operated nine aircraft for this purpose. The Company is
operating and expects to continue operating under charter agreements with two
airlines, seven aircraft from March through May 1998.
MILITARY CHARTER SERVICE
As an operator of charters for the United States military, the Company
transports armed forces, reserve personnel and cargo domestically and
internationally. The destinations of certain military charters are war risk
zones. This service is organized for the United States military by various
agencies of the Department of Defense (DOD), which contracts with private sector
airlines for the transportation of military personnel and their dependents, and
cargo service. The Company provides charter air travel service to the DOD
through the Air Mobility Command (AMC) and the Military Traffic Management
Command (MTMC), which organize international and domestic transportation
services for United States military personnel.
Between 1996 and 1997, the number of military passengers transported by the
Company for AMC and MTMC decreased 9.1% from approximately 176,000 to
approximately 160,000 as a result of
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weaker demand for military charters. For the year ended December 31, 1997, the
AMC and MTMC markets represented approximately 14.7% of the Company's total
revenues.
AMC business is awarded to carriers who participate in the Civil Reserve Air
Fleet (CRAF) program. Aircraft enlisted in CRAF are the only aircraft allowed
to provide service to AMC. The AMC contract requires that in case of a national
emergency, the enlisted aircraft be made available to the United States
government upon demand. Although many carriers consider CRAF availability
requirements an impediment to providing normal, scheduled service, Tower's
operating flexibility ensures the Company's ability to deliver CRAF aircraft
readily, thus creating a business opportunity.
AMC contract awards are of two types: (i) fixed award business, which is
scheduled in advance, and (ii) expansion business, the demand for which arises
upon shorter notice. Fixed business is awarded on the basis of "mobilization
points," the award of which is based on the number and type of aircraft
available from each airline.
MTMC purchases domestic air travel on a lowest bid basis from a broad group of
charter and scheduled service carriers. In general, this market is smaller and
more competitive than the AMC market. While Tower's low cost structure enables
the Company to compete for MTMC business, a significant portion of such business
is not suitable for the Company because the number of passengers to be carried
on given routes is too small to be served efficiently by B747 aircraft.
Military and other government flight activity has recently been, and is expected
to remain, a significant part of the Company's business. Due to an agreement
with United Airlines, Inc. (UAL), under which Tower acquired UAL's military
entitlement for one year periods commencing October 1, 1995, 1996 and 1997,
Tower's share of the military charter business continues to have the potential
to increase substantially. However, the market for military charter services
will be influenced by numerous factors, including changes in the overall level
of defense spending.
CARGO SERVICE
In 1997, Tower operated all-cargo service primarily between New York and Hong
Kong. For the year ended December 31, 1997, the cargo service market
represented approximately 3.0% of the Company's total revenues. For 1998, Tower
has entered into an agreement for the lease of two Tower Air cargo aircraft with
crew for a period of one year with a South American cargo airline, extendible by
mutual agreement. The Company's cargo aircraft fleet also enables Tower to
participate in the military cargo charter market.
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As of February 28, 1998, one of the Company's two cargo aircraft is temporarily
out of service to satisfy a certain Airworthiness Directive requirement. In
order to satisfy this requirement, the Company is still awaiting FAA-approved
technical specifications.
OTHER
The Company sells available cargo space on its passenger aircraft (belly cargo)
to other carriers and freight forwarders. The Company also derives revenues
from in-flight sales, including sales of duty-free merchandise. In addition,
since 1993, the Company has provided maintenance service to other carriers at
JFK on an ad hoc basis. For the year ended December 31, 1997, belly cargo and
other services contributed 2.0% of the Company's total revenues.
COMPETITION
The airline industry is highly competitive, therefore, carriers compete
primarily on the basis of price, routes and service. Tower's principal
competitors on scheduled passenger routes include major airlines in the United
States and abroad, many of whom have greater financial resources, larger fleets
and wider name recognition than the Company. Tower believes that it competes by
providing a product designed to satisfy the requirements of its target customer
groups and by maintaining a low-cost structure.
SCHEDULED SERVICES - Scheduled carriers compete for customers by adopting
strategies that can lead to significantly lower fares for passengers. Such
strategies include wholesaling discounted seats on scheduled flights to tour
operators; promoting prepackaged tours to travel agents for sale to retail
customers; selling discounted, excursion airfare-only products to the public;
and offering frequent flyer programs as incentives for flying on certain
airlines. As a result, the Company is sometimes required to compete for
customers against the lowest priced seats of other scheduled airlines.
The degree of competitiveness among international airlines is restricted by
limits placed on traffic capacity under government agreements. Such agreements
are negotiated by governments on behalf of their nations' air carriers. In
certain markets, these agreements set guidelines which determine the number of
airlines and flights that are permitted to be operated, as well as departure and
arrival points and pricing constraints within which airlines must operate.
Airlines and flights permitted by such agreements are also limited by the
scarcity of available landing slots, particularly at JFK and at certain European
airports. The lack of available landing slots may be an impediment to the
Company's international expansion.
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In the New York/Tel Aviv market, customized services such as Israel-based flight
attendants and Kosher meals have contributed to position Tower as a market
leader. The Company believes it is one of the largest providers of direct
scheduled passenger service between New York and Tel Aviv. The Company intends
to continue offering services tailored to its different markets.
COMMERCIAL CHARTERS - Tower competes with a number of United States and
international carriers in the commercial charter market. Several large scheduled
airlines offer discounted seats on regularly scheduled flights to tour
operators, thereby increasing competition in markets served by Tower's scheduled
passenger and charter operations. Tower's charter service competes with other
operators in this market based on reliability, quality of service and price.
MILITARY CHARTERS - In the market for military charter services, Tower competes
with a number of U.S. air carriers, each of which is eligible to provide air
travel service to the AMC and MTMC. With regard to AMC business, the majority
of these participants are grouped into team arrangements, each of which bids as
a unit for AMC business. The Company entered into a team arrangement with three
other air carriers to bid for the government contract years covering October 1,
1995 through September 30, 1998. The Company believes that its present capacity
for AMC business in conjunction with its historic operating record enables it to
compete effectively in this market.
REGULATORY ENVIRONMENT
REGULATION - The Company is an air carrier subject to the jurisdiction of, and
regulation by, the Department of Transportation (DOT) and the Federal Aviation
Administration (FAA) pursuant to Title 49 of the United States Code, Sections
40101 et seq. (the Aviation Statute) (formerly the Federal Aviation Act of 1958,
as amended (the Aviation Act)). The DOT is primarily responsible for regulating
economic issues affecting air service, including, among other things, air
carrier certification and fitness, insurance, leasing arrangements, allocation
of route rights and authorization of proposed scheduled and charter operations,
tariffs, consumer protection, unfair methods of competition, unjust
discrimination and deceptive practices. In 1983, the Company was granted a
certificate of public convenience and necessity under Section 401 of the
Aviation Act (now Section 41102 of the Aviation Statute), authorizing it to
engage in scheduled air transportation.
International air services are generally governed by a network of bilateral
civil air transport agreements in which traffic rights are exchanged between
governments which then select and designate air carriers authorized to exercise
such rights. In the absence
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of a bilateral agreement, such international air services are governed by
principles of comity and reciprocity. The provisions of such agreements
pertaining to charter services vary considerably depending on the country. Some
of the Company's scheduled international service is also subject to the
provisions of bilateral agreements, which may specify the city-pair markets that
may be served, restrict the number of carriers that may be designated, provide
for prior approval by one or both governments of the prices the carrier proposes
to charge, limit the amount of capacity to be offered in the market, and in
various other ways impose limitations on the operations of air carriers, such as
the Company. Most bilateral agreements to which the United States is a party
permit either country to terminate the agreement upon one year's notification to
the other party.
The DOT is responsible for evaluating airport security arrangements at U.S.
airports and at foreign airports served by U.S. carriers, such as the Company.
The DOT may prohibit service by carriers serving the U.S. to or from those
airports found not to administer safe and effective security measures. At
present, no airport regularly served by the Company is so affected.
As part of its consumer protection function, the DOT administers a number of
specific consumer protection regulations with which the Company is required to
comply and compiles and publishes statistics of consumer complaints received
regarding U.S. air carriers. During calendar year 1997, a period during which
the Company transported in excess of 1.93 million total passengers, the DOT
recorded a total of 143 consumer complaints concerning the Company, resulting in
a complaint rate of 7.42 per 100,000 passengers transported. This rate compares
with an average consumer complaint rate of .94 per 100,000 passengers for all
major airlines. Since December 1995, the Company has hired a consulting firm to
assist in the development of customer-oriented service procedures for its
station and inflight services. As these procedures take full effect, the
Company believes that it will continue to reduce consumer complaints on a going-
forward basis.
The Company is also subject to the jurisdiction of the FAA with respect to its
aircraft maintenance and operations. The Company currently holds an FAA
certificate and Operations Specifications under Part 121 of the Federal Aviation
Regulations with respect to the airports and aircraft used and routes flown by
the Company. The FAA has the authority to suspend temporarily or revoke
permanently the authority of the Company or its licensed personnel for failure
to comply with regulations promulgated by the FAA and to assess civil penalties
for such failures.
The FAA also has issued a series of Airworthiness Directives (ADs) under its
"Aging Aircraft" program which are applicable to the Company's aircraft. These
ADs call for extensive aircraft
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inspections and structural modifications to address the problems of corrosion
and structural fatigue. Additional ADs applicable to the Company's aircraft
could be issued in the future, generating compliance costs that cannot be
estimated at this point.
The Company believes it is in compliance with all requirements necessary to
maintain in good standing its operating authority granted by the DOT and its air
carrier operating certificate issued by the FAA.
Several aspects of airline operations are subject to regulation or oversight by
Federal agencies other than the DOT and FAA. The antitrust laws are enforced by
the United States Department of Justice. The United States Postal Service has
jurisdiction over certain aspects of the transportation of mail and related
services provided by the Company's cargo services. Labor relations in the air
transportation industry are generally regulated under the Railway Labor Act,
which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions arising under collective
bargaining agreements.
ENVIRONMENTAL REGULATION - Under the Airport Noise and Capacity Act of 1990 and
related FAA regulations, the Company's aircraft fleet must comply with certain
Stage III noise restrictions by certain specified deadlines. Presently, the
Company is in compliance with all FAA noise regulations.
In addition to the aircraft noise regulations administered by the FAA, the
Environmental Protection Agency (EPA) regulates operations, including air
carrier operations, which affect the quality of air in the United States. The
Company has made all necessary modifications to its operating fleet to meet fuel
venting requirements and smoke-emissions standards issued by the EPA.
At its aircraft line maintenance facility, the Company uses materials which are
regulated as hazardous under federal, state and local law. The Company is
required to maintain programs to protect the safety of its employees who use
these materials and to manage and dispose of any waste generated by the use of
these materials in compliance with all such laws. The Company is also subject
to federal, state and local regulations relating to protection of the
environment and discharge of materials into the environment.
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EMPLOYEES
As of December 31, 1997, the Company had 1,969 employees (including foreign
stations), 1,470 of which were full time and 499 of which were part time. The
Company considers its relations with its employees to be good.
In May 1989, Tower's U.S.-based cabin attendants voted to join the Association
of Flight Attendants (AFA). The Company negotiated a three-year contract with
the AFA in September 1993. On March 5, 1997, the Company reached a tentative
agreement to extend the contract with its U.S.-based flight attendants
represented by the AFA by up to two years until September 14, 1998. The
tentative agreement provides for no change in the 1993 rates of pay received by
Tower flight attendants. The agreement became effective on April 11, 1997.
The Company's pilots and flight engineers are members of an in-house union,
Tower Air Cockpit Crewmember Association, Inc. (TACCA). In August 1996,
negotiations commenced with TACCA for a contract to replace the existing
agreement dated September 1, 1993. Direct negotiations with TACCA continued
until July 1997. The Association then applied for Federal mediation during the
same month. Mediation is expected to continue well into 1998, however, the
Company expects mediation to conclude sometime during 1998.
All Company full time employees are covered by comprehensive health and life
insurance plans and all Company employees are eligible to participate in a
401(k) program. For part-time employees, the Company partially subsidizes the
cost of an optional comprehensive health benefit plan.
ITEM 2. PROPERTIES.
AIRCRAFT
As of February 28, 1998, the Company operated a fleet of seventeen B747 aircraft
(fifteen passenger aircraft and two cargo aircraft). The Company is going to
operate a fleet of nineteen B747 aircraft (sixteen passenger aircraft and three
cargo aircraft) during or beyond March 1998. The wide body B747 is the
workhorse of many of the world's flag carriers, and provides operators with high
levels of passenger comfort at low seat-mile costs. The B747 is well suited for
Tower's long-haul, high capacity routes and the cargo markets it serves. In
addition, because the Company's fleet consists entirely of B747 aircraft, the
Company benefits from efficiencies with regard to maintenance and crew training
costs and spares inventories. Tower's fleet presently consists of ten owned and
seven leased aircraft. One of the lease agreements is now under "power by the
hour" where the basic monthly rent is determined by multiplying the airframe
hours flown during the
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month by specified rates, as defined in the agreement, and this lease will be
converted to fixed monthly rental in November 1998. Under the terms of two of
the lease agreements, monthly rentals are at fixed rates, and one of these two
aircraft also requires an additional rent based on flight hours flown during the
month in excess of minimum monthly requirements, as defined in the agreement.
Under the terms of one lease agreement which required a fixed rent rate to a
rate per hour alternatively every six months until 1999 is now being converted
to a freighter and the lease term is amended to fifteen years with monthly
rental at a fixed rate commencing upon completion of the cargo conversion
which has occurred in March 1998. In addition, three aircraft are being leased
under a "sale leaseback transaction" where the monthly rentals are at fixed
rates.
In November and December 1997, respectively, the Company entered into two new
lease agreements with respect to two B747-200 passenger aircraft. Under the
terms of these new lease agreements, monthly rentals are at fixed rates.
For the year ended December 31, 1997, the Company's average daily utilization
for its aircraft was 9.6 hours per operating day, with an average flight
duration of 8.6 hours.
The following table summarizes relevant data regarding the ownership, dates
aircraft were placed on certificate and dates of manufacture of the aircraft
operated by the Company.
<TABLE>
<CAPTION>
Date
Aircraft was
Owned Placed on Date of
Aircraft/Series Leased Certificate Manufacture
--------------- ------ ----------- -----------
<S> <C> <C> <C>
Passenger Aircraft
B747-100 Owned 5/84 7/70
B747-100 Owned 12/85 3/70
B747-100 Owned 10/88 5/70
B747-100 Owned 3/91 3/72
B747-100 Owned 6/92 7/71
B747-100 Leased 3/92 4/70
B747-200 Leased 4/93 2/72
B747-200 Leased 5/93 5/72
B747-200 Owned 3/96 6/77
B747-200 Owned 3/96 3/76
B747-200 Leased 10/92 9/77
B747-200 Leased 3/93 10/71
B747-200 Owned 1/95 5/80
B747-200 Leased 3/95 2/80
B747-200* Leased -- 11/80
B747-200* Leased -- 10/81
B747-200** Leased 2/95 6/79
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cargo Aircraft
B747-100*** Owned 8/93 2/70
B747-100 Owned 8/95 3/70
</TABLE>
* Newly acquired leased aircraft to be placed on certificate
March 1998 and beyond.
** Converted to cargo aircraft, previously operated as
passenger aircraft
***Temporarily out of service to satisfy a certain AD requirement.
For information concerning aircraft subject to liens, see Note 2 to the
Financial Statements.
AIRCRAFT MAINTENANCE - The Company's maintenance and engineering facility is
located at its headquarters at Hangar 17. The building can accommodate two B747
aircraft simultaneously, permitting the Company to meet its own maintenance
needs and provide contracted support services to third parties on an ad hoc
basis. The Company believes that its location at JFK places it in a unique
position to service the ad hoc maintenance needs of the many other airlines
serving the airport. In addition to its in-house maintenance capabilities, the
Company out-sources certain services it is not equipped to perform or can obtain
more cost effectively from other parties. The Company uses FAA certified
facilities and repair stations of other major airlines for its heavy maintenance
and engine overhaul requirements.
GROUND FACILITIES AND SERVICES
The Company's principal facility is its headquarters at Hangar 17 at JFK in New
York. The Company rents this facility from the Port Authority of New York and
New Jersey under a lease which expires in 2003. This facility is being used for
executive offices and maintenance operations. The Company also entered into a
lease with the Port Authority for Terminal 213 at JFK, which is adjacent to
Hangar 17, and began utilization of such Terminal in November 1993. The terminal
facility lease expires in 2003. The Company also leases separate sales offices
in New York City, Miami, Los Angeles, Las Vegas, Tel Aviv, Paris and Athens.
ITEM 3. LEGAL PROCEEDINGS.
On October 31, 1995, the Company entered, subject to court approval, into a
settlement (the "Settlement") of consolidated class actions filed in March and
June 1994 entitled In re Tower Air, Inc. Securities Litigation (the "Securities
-------------------------------------------
Litigation") in the United States District Court for the Eastern District of New
York. The Securities Litigation arose out of the November 1993 initial public
offering of shares of the Company's common stock.
15
<PAGE>
The Settlement was approved by the district court on February 9, 1996.
In September 1994, William Branch ("Branch") commenced a separate action
containing related allegations in the United States District Court for the
Southern District of New York entitled Branch v. Tower Air, Inc. (the "Branch
-------------------------
Action"). The Branch Action was dismissed with prejudice by Order dated
December 10, 1996, from which no appeal was taken.
Branch objected to the settlement of the Securities Litigation and appealed from
the order of the district court approving the Settlement. On November 13, 1996,
the United States Court of Appeals for the Second Circuit affirmed the order and
judgment of the district court approving the Settlement.
On April 14, 1997, the Supreme Court of the United States denied Branch's
Petition for Writ of Certiorari, which sought review of that affirmance.
On or about March 20, 1997, the Company received a copy of a Verified Complaint
filed in the Supreme Court of the State of New York, County of Nassau. The
Complaint, entitled Hart to Hart Aircraft Detailing, Inc. v. Tower Air, Inc.
--------------------------------------------------------
alleges that the Company improperly terminated a contract (the "Contract") with
the plaintiff and failed to pay certain charges for aircraft cleaning allegedly
performed by the plaintiff. The Complaint also alleges that agents of the
Company defamed the plaintiff and divulged certain confidential information
regarding the terms of the Contract. Finally, the Complaint alleges that the
termination of the Contract resulted from certain complaints by the plaintiff.
The Complaint seeks damages in excess of $2.3 million for the breach of contract
claim, approximately $1.5 million on various tort theories and an unspecified
amount of punitive damages. On April 16, 1997, pursuant to a stipulation, the
plaintiff voluntarily withdrew a cause of action that alleged that the
termination of the Contract resulted from certain complaints by the plaintiff.
Such stipulation was entered into by the Company in connection with settlement
negotiations which ceased in June 1997. On July 1, 1997, the Company filed its
Answer to the Complaint along with Counterclaims against the plaintiff in
amounts equal to or exceeding the amount sought in the complaint. The Company
believes it has good defenses to each and every allegation in the Complaint and
has asserted counterclaims against the plaintiff in amounts equal to or
exceeding the amounts sought in the Complaint.
On or about August 8, 1997, the Company was served with a lawsuit filed in the
Superior Court for the State of Delaware in and for New Castle County, entitled
UNC Camco Incorporated, et. al. v. Tower Air, Inc. This action seeks damages of
- --------------------------------------------------
approximately $906,000 for the value of various repair and maintenance services
16
<PAGE>
allegedly performed by UNC Camco and certain of its affiliates (the "UNC
Plaintiffs") over a period of several years. The Company answered the Complaint
on October 14, 1997 and asserted counterclaims against the UNC Plaintiffs for,
among other things, failure to repair and/or overhaul certain component parts in
accordance with the manufacturer's specifications and using substandard parts.
No formal discovery has yet been conducted in this matter. The Court held a
preliminary scheduling conference on November 24, 1997 and set a tentative trial
date of February 8, 1999. Based on the Company's investigation to date, the
damages incurred by the Company as asserted in the counterclaims are equal to or
exceed the damages sought in the Complaint.
The Company is the defendant in a Tennessee State Court action filed August
1994, Federal Express Corporation v. Tower Air, Inc., in which plaintiff seeks
-----------------------------------------------
$7,646,216.47 in damages alleging breach of contract, breach of duty of good
faith and fair dealing, interference with contracted and business relations,
procurement of breach of contract and fraud. Treble and punitive damages are
also sought. The claims relate to military charter flights awarded to the
Company by the Military Airlift Command (MAC) which plaintiff contends it was
entitled to operate by virtue of its position in a joint venture in which the
Company was involved. The Company moved for a more definite statement of
plaintiff's claims and that motion was granted. Plaintiff, however, has not
amended its complaint to date. This litigation arises from the same basic
circumstances involved in the United States District Court for the Eastern
District of New York action filed December 1994, Tower Air, Inc. v. Federal
--------------------------
Express Corporation, in which contract and antitrust violations are alleged by
- --------------------
the Company. That court, in October 1996, denied Federal Express Corporation's
motion to dismiss. A tentative settlement of both of these cases was reached on
February 9, 1998.
During a snowstorm at JFK Airport on December 20, 1995, a Tower Air aircraft
bound for Miami slid off the runway during an aborted take-off attempt.
Approximately 35 passengers were taken to hospitals and discharged the same day.
One was kept overnight. The remaining approximately 415 passengers were not
injured. All claims and lawsuits are being handled by the Company's insurance
carrier. The Company believes that all claims resulting from this event remain
fully covered under the Company's insurance policies.
The Company was a Defendant in a Texas State Court action filed in May 1996,
entitled Dee Howard Company v. Tower Air, Inc., in which the plaintiff contended
--------------------------------------
that the Company did not pay it sufficient amounts for maintenance, repair and
modification work performed on the Company Aircraft. The amount claimed was
approximately $1,000,000. The case went to arbitration and a settlement was
entered into on August 1, 1997. The case has been dismissed with prejudice.
17
<PAGE>
The Company is the defendant in a New York State Court action filed October
1995, Hudson General Corporation v. Tower Air, Inc., in which plaintiff contends
----------------------------------------------
it is entitled to damages of $2,200,000.00 for snowclearing, deicing, cleaning,
building maintenance and baggage handling contracts which had been terminated by
the Company because of substandard service. Most of the amount claimed is for
services never performed. The case is still in the discovery stage. This case
is being vigorously contested by the Company.
The Company was a defendant in a New York State Court action filed in September
1995, entitled Pacific Harbor Capital, Inc. v. Tower Air, Inc., in which the
------------------------------------------------
plaintiff contended that one engine of an aircraft leased from it by the Company
was not returned in the condition required by the Lease Agreement. The dispute
was over which party, under the terms of the Lease, was responsible for the
damage. Plaintiff's claim, including requested attorneys' fees, was
approximately $2,300,000. The case went to trial in November 1997 and a verdict
was rendered by the Court in favor of the Company on December 2, 1997. As a
result, no monies have been paid or are due to Pacific Harbor Capital for its
claims. No appeal has been taken.
The Company is a third-party defendant in a New York State Court action filed
September 1995, Gal-Nur v. Hudson General Corp. v. Tower Air, Inc., in which
---------------------------------------------------
plaintiff, a former Tower Air employee, has sued Hudson General Corporation in
connection with an injury he claims to have sustained on steps from the plane.
Hudson General filed a Third Party Complaint against Tower Air in November 1996.
The plaintiff is seeking $10,000,000 in damages. An answer to the complaint has
been filed by the Company. Since plaintiff already receives workmen's
compensation for the same injury, the Company's insurance carrier will be
handling the defense.
The Company is the defendant in a U.S. Federal Court action filed in the Eastern
District of New York on or about March 20, 1997, Solar Travel v. Tower Air, Inc.
-------------------------------
in which plaintiff contends that the Company unlawfully cancelled its contract
as General Sales Agent for India when the Company ceased flying scheduled
service to India. Damages of $20 million are sought. The Company has
counterclaimed in the amount of $25 million for damages resulting from
plaintiff's failure to perform its duties under the agreement. The case is
still in the discovery stage.
The Company is the defendant in a U.S. Federal Court action filed in the Eastern
District of New York on or about January 8, 1998, Leticia Parra, individually
---------------------------
and on behalf of all persons similarly situated v. Tower Air, Inc., in which
- -------------------------------------------------------------------
plaintiff alleges she was denied boarding and seeks designation as
representative of a similarly situated class of over 1,000 persons. Claim is
made for $1,000,000 for each class member. The Company has filed a Motion
18
<PAGE>
to Dismiss for Lack of Subject Matter Jurisdiction and Failure to State a Claim
upon which Relief can be Granted. In response thereto, plaintiff has conceded
lack of federal jurisdiction and dismissal papers will be filed shortly. The
Company has been informed by plaintiff's counsel that the matter will be pursued
in state court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
19
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market under the
trading symbol TOWR. The approximate number of holders of record of the
Company's Common Stock at February 27, 1998 was 100. The quarterly price range
of the Company's Common Stock is shown in the following schedule:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ---------------------------------
QUARTER ENDED High Low High Low
------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
March 31 $ 4 3/16 $ 2 1/2 $ 7 5/8 $ 5 1/2
June 30 3 15/16 2 1/2 8 1/8 5
September 30 4 1/2 2 7/8 5 3/8 4 3/8
December 31 6 5/16 4 4 5/8 2 1/2
</TABLE>
The Company paid quarterly cash dividends in 1996 aggregating $.12 per share.
No dividend was declared or paid for the fourth quarter of 1996 or during 1997
in order to conserve cash. The Company paid quarterly dividends for 1995 and
1994 aggregating $.16 per share for each year.
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA.
The financial data presented on the following page should be read in conjunction
with the financial statements and notes thereto included elsewhere in this Form
10-K. The summary financial data for each of the five years in the period ended
December 31, 1997 are derived from the financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors.
The earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128 Earnings Per
Share. For further discussion of earnings per share and the impact of Statement
No. 128, see the notes to the consolidated financial statements beginning on
page F-7.
20
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
FINANCIAL DATA: 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Operating revenues $ 461,502 $ 417,819 $ 490,472 $ 367,984 $ 341,835
Operating expenses 454,050 441,345 476,956 363,192 317,357
---------- ---------- ---------- ---------- ----------
Operating income (loss) 7,452 (23,526) 13,516 4,792 24,478
Other (income) expenses 12,342 8,863 (5,903) 3,169 5,528
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (4,890) (32,389) 19,419 1,623 18,950
Income tax provision (benefit) (995) (11,506) 8,730 1,055 9,017
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (3,895) $ (20,833) $ 10,689 $ 568 $ 9,933
========== ========== ========== ========== ==========
Net income (loss) per share $ (0.25) $ (1.37) $ 0.70 $ 0.04 $ 0.78
At Period-end
Cash and cash equivalents $ 3,922 $ 2,968 $ 3,521 $ 14,824 $ 44,310
Working capital (deficiency) $ (139,979) $ (84,196) $ (28,744) $ (30,585) $ (2,625)
Property and equipment, net $ 266,395 $ 218,058 $ 147,202 $ 133,741 $ 120,266
Total assets $ 310,120 $ 263,255 $ 210,547 $ 177,877 $ 191,644
Long-term debt $ 63,321 $ 67,716 $ 23,594 $ 21,065 $ 30,656
Stockholders' equity $ 49,421 $ 53,316 $ 76,034 $ 67,792 $ 71,190
OPERATING DATA:
Total:
Block hours flown 43,092 41,336 47,186 34,221 30,736
Revenue per block hour (1) $ 10,499 $ 9,922 $ 10,227 $ 10,601 $ 11,017
Variable expense per block hour (2) $ 6,643 $ 8,014 $ 7,964 $ 8,411 $ 8,418
Scheduled Passenger Services:
Revenue passengers carried(000s) 1,308 1,194 1,194 925 594
Revenue passenger miles (RPMs)(000s) 3,578,714 3,332,477 3,601,323 2,758,753 1,867,827
Available seat miles(ASMs)(000s) 4,685,022 4,626,478 4,810,710 3,715,993 2,345,204
Passenger load factor 76% 72% 75% 74% 80%
Yield per RPM $ 0.0747 $ 0.0742 $ 0.0751 $ 0.0749 $ .0820
Block hours flown 21,949 21,991 22,094 17,172 10,916
Operating revenue per ASM $ 0.0571 $ 0.0534 $ 0.0562 $ 0.0556 $ 0.0653
Operating expense per ASM (3) $ 0.0527 $ 0.0538 $ 0.0477 $ 0.0463 $ 0.0531
Total expense per ASM (4) $ 0.0606 $ 0.0615 $ 0.0581 $ 0.0570 $ 0.0636
Employees (at period-end) 1,969 1,681 1,842 1,367 1,176
Number of aircraft in service
(at period-end) 17* 17* 17 16 15
</TABLE>
* "Number of aircraft in service (at period-end)" for the year ended December
31, 1997 and includes a cargo aircraft which is temporarily out of service to
satisfy a certain AD requirement.
- --------------------------------------------------------------------------------
(1) "Revenue per block hour" represents total revenue from scheduled passenger
service, charter service, military charter service and cargo service divided
by total block hours.
(2) "Variable expense per block hour" represents total direct variable costs,
which include passenger liability insurance, catering, crew costs,
commissions, fuel, landing and handling fees, maintenance, navigation fees
and insurance and "power by the hour" rent, divided by block hours.
(3) "Operating expense per ASM" represents certain direct variable costs for
scheduled passenger service, which include passenger liability insurance,
catering, crew costs, fuel, landing and handling fees, maintenance,
navigation fees, "power by the hour" rent, plus marketing and reservations,
and an allocation of other fixed costs based on block hours, divided by
total scheduled passenger service ASMs.
(4) "Total operating expense per ASM" represents operating expense per ASM plus
commission expense.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
YEAR 2000
The Company has determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company has also
initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the
extent to which its operations are vulnerable should those organizations fail
to remediate properly their computer systems.
The Company's comprehensive Year 2000 initiative is being managed by a team
of internal staff. The team's activities are designed to ensure that there
is no adverse effect on the Company's core business operation and that
transactions with customers, suppliers, and financial institutions are fully
supported. The Company is well under way with these efforts, which are
scheduled to be completed in early 1999. While the Company believes its
planning efforts are adequate to address its Year 2000 concerns, there can be
no guarantee that the systems of other companies on which the Company's
systems and operations rely will be converted on a timely basis and will not
have a material effect on the Company. The cost of the Year 2000 initiatives
is not expected to be material to the Company's results of operations or
financial position.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Company recorded a net loss of $3.9
million compared with a net loss of $20.9 million for the year ended December
31, 1996. The $17 million decrease in net loss was principally due to the
increase in revenue resulted from a strong Tel Aviv market, higher domestic
traffic and increased activities in commercial and military charters. In
addition, the 1997 loss was decreased due to renegotiated service contracts
which resulted in lower maintenance, passenger, and aircraft services costs,
partially offset by increased cost of flight equipment and engine rental to
support the Company's fleet in 1997. Overall operating margins increased from
(5.6%) in 1996 to 1.6% in 1997.
22
<PAGE>
OPERATING REVENUES. The Company's operating revenues for the year ended
December 31, 1997 increased $43.7 million, or 10.5%, to $461.5 million from
$417.8 for the year ended December 31, 1996.
Scheduled passenger service revenues for the year ended December 31, 1997
increased $20.1 million, or 8.1%, to $267.3 million from $247.2 million for
the year ended December 31, 1996. Scheduled passenger traffic (as measured in
revenue passenger miles) for 1997, increased by 7.4% on capacity, resulting
in a load factor of 76% compared to 72% for the year ended December 31, 1997.
Higher operating revenues for 1997 were attributable to increased frequencies
on existing routes which outperformed 1996 results. Tel Aviv market increased
demand contributed $18.6 million or 19.7% in revenue for 1997 over 1996. The
domestic markets such as Miami, San Juan and San Francisco also increased
during 1997 which resulted in an increase of $20.2 million or 32.4% in
revenue over 1996. The enhanced activities in these markets were partially
offset by discontinued Brazil scheduled service.
Commercial charter service revenues for 1997 increased $19 million, or 22.5%,
to $103.4 million from $84.4 million in 1996. Higher revenues for 1997 were
attributable to the Company's operation of nine aircraft, compared to eight
aircraft in 1996, while flying under charter agreements to transport seasonal
religious pilgrims to the Middle East.
Military charter service revenues for the year ended December 31, 1997
increased $3.4 million, or 5.3%, to $67.9 million from $64.5 million in 1996.
The military charter business depends in large part upon the deployment or
repatriation of troops and revenues from this market segment are subject to
significant fluctuation. The increase for the year is the result of an 8.1%
increase in AMC block hours partially offset by a decrease in MTMC block
hours flown on military charters.
Cargo service revenue for the year ended December 31, 1997 decreased $.3
million, or 1.8%, to $13.8 million from $14.1 million in 1996. The decrease
in cargo service revenue was primarily due to the grounding of one of the
Company's two B747-100 cargo aircraft to comply with restrictive
Airworthiness Directive (AD) requirements. In addition to the Company's
one B747-100 cargo aircraft, nine other cargo aircraft operated by other
carriers are also grounded and subject to the same AD. The return of the
grounded aircraft to full service is awaiting FAA approval of a repair
program and the production and installation of the necessary modifications.
OPERATING EXPENSES. The Company's operating expenses for the year ended
December 31, 1997 increased $12.7 million, or 2.9%, to $454.1 million from
$441.3 million for the year ended December 31, 1996. The increase in
operating expenses was primarily the result of an increase in block hours
flown of 4.2% during the
23
<PAGE>
year ended December 31, 19976. Operating expenses, excluding fuel and
depreciation, decreased by 1.3% in 1997. The decrease in operating expenses was
primarily due to the Company's improved financial controls, renegotiated service
contracts, fixed cost reductions and operational enhancements.
Aircraft fuel expenses for the year ended December 31, 1997 increased $3.2
million, or 3.9%, to $85.8 million from $82.6 million for the year ended
December 31, 1996. The variances resulted primarily from an 8.1% increase in
volume of gallons consumed, offset by a 4.0% decrease in the average cost per
gallon in 1997. The fuel consumption increase in 1997 resulted primarily
from a 4.2% increase in block hours.
Flight equipment rentals and insurance expenses for the year ended December
31, 1997 increased $5.1 million, or 25.6%, to $24.8 million from $19.7
million for the year ended December 31, 1996. The increases primarily
resulted from aircraft rentals associated with the sale and leaseback of
three Boeing 747 aircraft in October 1996 and charges associated with the
rental of additional spare engines to support the Company's fleet in 1997.
Maintenance costs for the year ended December 31, 1997 decreased $4.5
million, or 8.6%, to $48.5 million from $53.0 million for the year ended
December 31, 1996. The decrease was attributable to lower level of expenses
associated with parts repairs, loans, and exchanges due to renegotiated
contracts signed by the Company with various maintenance vendors in an effort
to control costs, partially offset by higher maintenance reserves associated
with engine rentals required to support the Company's fleet.
Crew costs and other expenses for the year ended December 31, 1997 increased
$2.6 million, or 10%, to $28.6 million from $26.0 million for the year ended
December 31, 1996. The increase was primarily due to the increase in overall
block hours flown and increases in pay rates as a result of longevity with
the Company.
Aircraft and traffic servicing expenses for the year ended December 31, 1997
decreased $6.9 million, or 8.3%, to $76.8 million from $83.7 million for the
year ended December 31, 1996. The decrease was attributable to
renegotiated ground handling and servicing contracts.
Passenger servicing expenses for the year ended December 31, 1997 decreased
$5.3 million, or 9.5% to $50.4 million from $55.6 million for the year ended
December 31, 1996. Decreases in passenger servicing expenses were the result
of the Company's cost control efforts which included a rationalization of its
domestic food service resulting in reduced catering costs and improved
catering inventory controls.
24
<PAGE>
Promotion, sales and commission expenses for the year ended December 31, 1997
increased $5.5 million, or 9.1%, to $66.2 million from $60.7 million for the
year ended December 31, 1996. The increases in promotion, sales and
commission expenses were the result of higher commission expenses due to
higher scheduled passenger service revenues and commercial charter service
Hajj revenues.
General and administrative expenses for the year ended December 31, 1997
decreased $.5 million, or 2.5%, to $20.7 million from $21.2 million for the
year ended December 31, 1996. As a percentage of operating revenue, general
and administrative expenses for 1997 were 4.5% compared with 5.1% for 1996.
Depreciation and amortization expense for the year ended December 31, 1997
increased $13.6 million, or 34.9%, to $52.4 million from $38.9 million for
the year ended December 31, 1996. The increase was principally due to the
purchase of ten spare engines, capitalized engine overhauls and heavy
airframe maintenance.
OTHER EXPENSES AND INCOME. Interest expense for the year ended December 31,
1997 increased $4.2 million, or 51.3%, to $12.3 million from $8.1 million for
the year ended December 31, 1996. The increase in interest expense reflects a
higher average outstanding debt balance in 1997 resulting from the use of
the line of credit established in December 1996 and additional borrowings
during 1997. Other income for the year ended December 31, 1997 decreased
$0.7 million, or 90.8%, to $0.7 million of expense in 1996.
INCOME TAX BENEFIT. The income tax benefit for the year ended December 31,
1997 was $1 million as compared to the income tax benefit of $11.5 million
for the year ended December 31, 1996. The decrease in tax benefit is
principally attributable to the decreased loss in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
RESULTS OF OPERATIONS
For the year ended December 31, 1996 the Company recorded a net loss of $20.9
million compared with net income of $10.7 million for the year ended December
31, 1995. The $31.6 million decrease in net income was principally due to a
decrease in military business, the grounding of a cargo aircraft to comply
with newly restrictive Airworthiness Directive requirements, a weak Tel Aviv
market due to security concerns, and lower domestic traffic. In addition,
the 1996 results were affected by a sharp increase in fuel prices, the cost
associated with the cessation of scheduled services to India in the first
quarter of 1996 and extreme winter conditions in the Northeast which resulted
in significant de-
25
<PAGE>
icing costs and rescheduling related expenses as well as higher passenger
servicing, maintenance cost and interest expense.
Overall operating margins decreased from 2.8% in 1995 to (5.6%) in 1996.
OPERATING REVENUES. The Company's operating revenues for the year ended
December 31, 1996 decreased $72.7 million, or 14.8%, to $417.8 million from
$490.5 for the year ended December 31, 1995.
Scheduled passenger service revenues for the year ended December 31, 1996
decreased $23.1 million, or 8.5%, to $247.2 million from $270.3 million for
the year ended December 31, 1995. Scheduled passenger traffic (as measured in
revenue passenger miles) for 1996, decreased by 7.5% on capacity, resulting
in a load factor of 72% compared to 75% for the year ended December 31, 1995.
Lower operating revenues for 1996 were attributable to lower revenues in the
Tel Aviv market and the withdrawal from the India market in early 1996.
Commercial charter service revenues for 1996 decreased $16.4 million, or
16.3%, to $84.4 million from $100.8 million for 1995. Lower revenues were
attributable primarily to certain of the Hajj contracts wherein fuel costs
were the responsibility of the contracting operators rather than Tower Air,
resulting in both lower revenues and costs per block hour than for the 1995
Hajj and reduced United Nations charter business.
Military charter service revenues for the year ended December 31, 1996
decreased $ 23.1 million, or 26.4%, to $64.4 million from $87.5 million in
1995. The military charter business depends in large part upon the deployment
or repatriation of troops and revenues from this market segment are subject
to significant fluctuation. The decrease for the year is the result of a 34.3%
decrease in block hours flown on military charters.
Cargo service revenue for the year ended December 31, 1996 decreased $9.9
million, or 41.2%, to $14.1 million from $23.9 million in 1995. The decrease
in cargo service revenue was primarily due to the grounding of a cargo
aircraft beginning in February 1996 to comply with newly restrictive
Airworthiness Directive requirements. The Company expects the aircraft to
undergo modification necessary for its return to service by year end 1997.
OPERATING EXPENSES. The Company's operating expenses for the year ended
December 31, 1996 decreased $35.6 million, or 7.5%, to $441.3 million from
$477.0 million for the year ended December 31, 1995. The decline in operating
expenses was primarily the result of a decrease in block hours flown of 12.4%
during the year ended December 31, 1996.
26
<PAGE>
Aircraft fuel expenses for the year ended December 31, 1996 decreased $7.0
million, or 7.9%, to $82.6 million from $89.6 million for the year ended
December 31, 1995. The variances resulted primarily from a 17.4% decrease in
volume of gallons consumed, offset by an 11.5% increase in the average cost
per gallon in 1996. The fuel consumption decreases in 1996 resulted
primarily from a decrease in block hours of 12.4%.
Flight equipment rentals and insurance expenses for the year ended December
31, 1996 decreased $8.7 million, or 30.7%, to $19.7 million from $28.4
million for the year ended December 31, 1995. The decrease was attributable
to a substantial decrease in aircraft rental resulting from the purchase of
six B747 aircraft in the first half of 1996, partially offset by cost
associated with the rental of additional engines to support the Company?s
fleet.
Maintenance costs for the year ended December 31, 1996 decreased $7.8
million, or 12.8%, to $53.0 million from $60.7 million for the year ended
December 31, 1995. Lower maintenance reserves associated with leased aircraft
due to the purchase of six B747 aircraft in the first half of 1996, were
partially offset by an increase in the volume of component repairs, an
increase in the repair costs of these components, higher level of parts loan
and exchanges, and an increase in maintenance reserves associated with engine
rentals required to support the Company?s fleet. Recent actions taken to
address maintenance costs include the announced engine maintenance agreement
with General Electric Aircraft Engine Service, Ltd. In addition, contracts
were signed in early 1997 with various parts repair vendors with respect to
component repairs and other maintenance support services.
Crew costs and other expenses for the year ended December 31, 1996 decreased
$2.4 million, or 8.4%, to $26.0 million from $28.4 million for the year ended
December 31, 1995. The decreases were primarily due to the 12.4% decrease in
block hours flown offset partly by pay rate increases.
Aircraft and traffic servicing expenses for the year ended December 31, 1996
increased $0.1 million, or 0.1%, to $83.7 million from $83.6 million for the
year ended December 31, 1995. The increase was attributable to the change in
business mix offset by the decrease in the number of departures of 10%. This
change included higher handling costs incurred in connection with scheduled
services activity versus military charter activity coupled with expenses
resulting from severe winter weather conditions in the Northeast.
Passenger servicing expenses for the year ended December 31, 1996 increased
$2.4 million, or 4.6% to $55.6 million from $53.2 million for the year ended
December 31, 1995. Increases in passenger servicing expenses for both
periods primarily relate to increased catering costs due to improvements in
the service
27
<PAGE>
product. The Company has embarked on a rationalization of its domestic food
service due to anticipated flight schedule changes which is expected to
result in reduced catering costs.
Promotion, sales and commission expenses for the year ended December 31, 1996
decreased $15.6 million, or 20.4%, to $60.7 million from $76.3 million for
the year ended December 31, 1995. The decreases in promotion, sales and
commission expenses were the result of lower revenues and the elimination of
higher commission expenses on the New Delhi and Bombay routes which were
discontinued in September 1995 and March 1996, respectively.
General and administrative expenses for the year ended December 31, 1996
decreased $1.2 million, or 5.2%, to $21.2 million from $22.3 million for the
year ended December 31, 1995. As a percentage of operating revenue, general
and administrative expenses for 1996 were 5.1% compared with 4.6% for 1995.
Depreciation and amortization expense for the year ended December 31, 1996
increased $4.5 million, or 13.2%, to $38.9 million from $34.3 million for the
year ended December 31, 1995. The increase was principally due to the
purchase of six B747 aircraft and related spare inventory in the first half
of 1996.
Unit operating expense (per available seat mile) rose by 12.8% in 1996 versus
1995 driven by a 3.8% decline in seat miles and the factors discussed above.
The Company has embarked upon an aggressive restructuring of costs and
upgrade of financial controls. Significant cost reductions are anticipated.
OTHER EXPENSES AND INCOME. Interest expense for the year ended December 31,
1996 increased $4.1 million, or 103.4%, to $8.1 million from $4.0 million
for the year ended December 31, 1995. The increase in interest expense
reflects a higher average outstanding debt balance in 1996 resulting from the
financing of aircraft acquisitions. Other income for the year ended December
31, 1996 decreased $10.6 million, or 107.6%, to $0.7 million of expense from
$9.9 million of income in 1995. The decrease in other income reflects the
gain resulting from the excess of insurance proceeds over the net book value
of certain flight equipment related to the loss of an owned aircraft.
INCOME TAX PROVISION. The income tax benefit for the year ended December 31,
1996 was $11.5 million as compared to the income tax provision of $8.7
million for the year ended December 31, 1995. The decrease was based on
Tower's pretax loss for 1996, partially offset by the decrease in its annual
effective rate to 35.5% in 1996.
28
<PAGE>
QUARTERLY RESULTS (UNAUDITED)
The Company's business is significantly affected by seasonal factors.
Typically, the Company has experienced reduced demand for scheduled passenger
and charter services from November to March.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------- ---------- ---------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1997
Operating revenue $ 78,010 $112,576 $162,260 $ 108,656 $461,502
Operating income (loss) $( 7,074) $ 9,512 $ 17,627 $ (12,613) $ 7,452
Net income (loss) $ (5,425) $ 3,583 $ 8,495 $ (10,548) $ (3,895)
Block hours 7,776 12,088 13,104 10,124 43,092
1996
Operating revenue $ 85,824 $113,910 $148,858 $ 69,227 $417,819
Operating income (loss) $(13,139) $ 5,146 $ 3,479 $ (19,012) $(23,526)
Net income (loss) $ (8,134) $ 2,923 $ (1,596) $ (14,076) $(20,883)
Block hours 9,016 12,649 12,907 6,764 41,336
1995
Operating revenue $ 82,093 $127,555 $169,502 $ 111,322 $490,472
Operating income (loss) $ (6,649) $ 8,838 $ 21,086 $ (9,759) $ 13,516
Net income (loss) $ (3,581) $ 4,010 $ 11,141 $ (881) (1) $ 10,689
Block hours 8,293 13,223 14,083 11,587 47,186
</TABLE>
(1) Includes $5,520 after tax non-operating gain resulting from an excess of
insurance proceeds over the net book value of certain flight equipment
related to the loss of an owned aircraft.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its working capital and capital
expenditure requirements with cash flows generated from operations and through
lease, debt and equity financing.
The Company's cash, cash equivalents and short-term investments at December 31,
1997, December 31, 1996 and December 31, 1995 were $6.3 million, $3.2 million
and $4.2 million, respectively. The Company generated cash from operations for
1997, 1996 and 1995 of $67.2 million, $29.6 million and $46.9 million,
respectively.
Net cash used in investing activities was $76.3 million for 1997, $20.9 million
for 1996 and $61.2 million for 1995. The Company's expenditures for flight
equipment were $72.7 million for 1997, $49.7 million for 1996 and $50.4 million
for 1995. Expenditures for flight equipment in 1997 included the purchase of ten
spare engines, capitalized engine overhauls and heavy airframe maintenance (See
Note 2 of Financial Statements for additional information regarding the
financing of certain flight equipment expenditures).
As of December 31, 1997, the Company had negative working capital of $140.0
million compared to negative working capital of $84.2 million as of December 31,
1996. Historically, the Company has operated with a working capital deficit.
The Company established a new $12.5 million secured line of credit with a
financial institution in December 1996. The line was increased to $18.0 million
in January 1997 and then to $20.0 million in March 1997. In September 1997, the
Company extended the line of credit to $25.0 million with the same commercial
financial institution. The line of credit is secured by trade receivables and
inventory, and the interest rate is prime plus 0.75% (9.25% at December 31,
1997). Under this line, $1.96 million in letters of credit have been issued to
various suppliers and insurance companies. As of December 31, 1997, the Company
has borrowed $21.0 million for the line of credit in addition to letters of
credit.
In January 1998, the Company entered into an agreement secured by twelve JT9D
engines with a commercial financial institution for $15.0 million of which $11.7
million was paid towards the balance remaining on two previous agreements with
the same commercial financial institution and $1.4 million is going to be paid
towards engines currently under repair.
In February and March 1998, the Company borrowed $6,000,000 from Funding
Enterprises, LLC, a limited liability company in which the Chairman and
President are members. The $6,000,000 is payable on July 1, 1998 with interest
at 12% per annum. In
30
<PAGE>
connection with the borrowing, warrants for the purchase of 1,200,000 shares of
common stock were issued with an exercise price of $5. The warrants expire in
February 2008.
The Company believes that cash generated from operations as well as from the
line of credit is sufficient to finance working capital needs, capital
expenditures and debt repayments. Discussions are currently in progress with
financial institutions to restructure borrowings secured by owned assets.
The Company has been negotiating revised payment terms with vendors and other
creditors for settlement of current obligations, some of which are secured.
Payment arrangements have been made with major vendors and with several other
vendors.
In an effort to conserve cash, the Company did not pay cash dividends on its
Common Stock for the year ended December 31, 1997.
INCOME TAXES
At December 31, 1997, for federal and state tax reporting purposes, the Company
had approximately $2,600,000 of alternative minimum tax credit carryforwards and
approximately $73,400,000 of net operating loss carryforwards available to
offset future federal tax liabilities.
INFLATION
Inflation has not had a significant impact on the Company's operations, and the
Company does not expect any significant near-term inflationary impact.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See financial statements and schedules beginning on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
31
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth the names, ages, present positions and business
experience of all the directors and executive officers of the Company. Officers
are appointed to serve until the meeting of the Board of Directors following the
next Annual Meeting of Stockholders and until their successors have been elected
and have been qualified.
At December 31, 1997, the directors, officers and key employees of the Company
were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Morris K. Nachtomi*...................... 61 President, Chief Executive
Officer and Chairman of the Board
Stephen L. Gelband....................... 66 Director and Secretary
Stephen A. Osborn........................ 47 Director
Henry P. Baer............................ 62 Director
Leo-Arthur Kelmenson..................... 71 Director
Ramesh Punwani**......................... 55 Chief Financial Officer/Vice
President-Finance
Guy A. Nachtomi*......................... 25 Vice President-Operations
John J. Ruzich***........................ 51 Vice President-Marketing & Sales
Vincent J. Vitale........................ 59 Vice President-Maintenance
</TABLE>
*On January 12, 1998 Mr. M. Nachtomi and Mr. G. Nachtomi relinquished the
positions of President and Vice President-Operations, respectively and Mr. Terry
V. Hallcom became President and Executive Vice President-Operations.
**Mr. Punwani's employment with Tower Air ended on January 13, 1998.
***Mr. Ruzich's employment with Tower Air ended on March 4, 1998.
Mr. Morris Nachtomi co-founded the Company in 1982 of which he became a Director
and has been President of the Company since 1986 and Chief Executive Officer and
Chairman of the Board since 1989. After a thirty-year career at El Al Israel
Airlines, Mr. Nachtomi became Executive Vice President of Tower Travel
Corporation, and helped establish M.Z.M. Aviation Inc. and Metro International
Airways, G.S.A. Before 1982, Mr. Nachtomi served as President of M.Z.M.
Aviation Inc. and Metro International Airways, G.S.A. In January, 1998 he
relinquished the title of President.
Mr. Gelband has been a Director and Secretary of the Company since December 1985
and February 1988 respectively. He has been General Counsel for the Company
since 1988. Mr. Gelband is a founder and
32
<PAGE>
Director of the Washington Airports Task Force, a coalition of local and state
governments and private businesses promoting service to Washington National
Airport and Dulles International Airport. He is also a founder and Director of
the Air and Space Heritage Council which promotes the expansion of the National
Air and Space Museum at Washington Dulles International Airport. Mr. Gelband
served as Trial Attorney at the Civil Aeronautics Board from 1957 to 1960, and
has been in private practice of law since 1960. Mr. Gelband is a Vice President
of the law firm of Hewes, Gelband, Lambert & Dann, P.C., Washington, D.C., and
provides legal services to the Company, principally in the area of corporate and
federal aviation law. Mr. Gelband holds degrees from Yale College and Harvard
Law School.
Mr. Osborn has been a Director of the Company from September 1988 until December
1992, and from May 1993 until present. Mr. Osborn is a Managing Director in the
Private Securities Division of CIGNA Investments, Inc., the investment
management affiliate of CIGNA Corporation, a position he has held for more than
five years. Prior to 1990, Mr. Osborn managed the investment activities of CIGNA
Venture Capital, Inc. He holds a B.A. degree from Trinity College and an M.B.A.
degree from the Johnson School of Management at Cornell University.
Mr. Baer has been a Director of the Company since January 1993. Since 1990, Mr.
Baer has been of counsel to the law firm of Skadden, Arps, Slate, Meagher & Flom
LLP. From January 1978 through June 1990, Mr. Baer was a partner in Skadden,
Arps, Slate, Meagher & Flom, where he headed the firm's labor and employment law
practice between 1982 and 1990. Mr. Baer served as an adjunct professor of law
at Fordham University School of Law in New York City from 1990 to 1994. He
holds a B.A. degree from Brown University and a J.D. degree from Harvard Law
School.
Mr. Kelmenson has been a Director of the Company since May 1997. Mr. Kelmenson
is currently the Chairman of the Board of Directors of Bozell, Jacobs, Kenyon &
Eckhardt, Inc. ("BJK&E"). Since 1968, he has served as an executive officer of
Kenyon & Eckhardt, the predecessor firm of BJK&E, first as the Chief Executive
Officer, and later as the President, Chairman and Chief Executive Officer. He is
a graduate of Columbia University, the Career Diplomate School of the University
of Geneva (Switzerland) and the University of Mexico. Mr. Kelmenson was
appointed to replace Mr. Stanley S. Shuman who resigned on May 20, 1997.
Mr. Punwani was Chief Financial Officer and Vice President-Finance from
September 1996 until January 1998. From 1993 to 1996, he was Senior Vice
President and Chief Financial Officer of Empire Blue Cross Blue Shield. Prior
to that, he held senior finance and planning positions at PanAm and Trans World
Airlines. His last airline position was Senior Vice President and Chief
Financial Officer of PanAm. Mr. Punwani holds an M.B.A. degree from New
33
<PAGE>
York University and a Masters in Industrial Engineering and Operation Research
from Cornell University. Mr. Punwani's employment with Tower Air ended on
January 13, 1998.
Mr. Guy Nachtomi has been Vice President of Operations since he rejoined the
Company in November 1995. From 1994 to 1995, Mr. Guy Nachtomi worked in
International Film Marketing and Distribution at Twentieth Century Fox. From
June 1993 to April 1994, he served as Vice President of the Company. Mr. Guy
Nachtomi has a B.A. degree from Williams College. Effective January 12, 1998,
Mr. Guy Nachtomi relinquished the title of Vice President-Operations and assumed
the position of Vice President-Office of the Chairman. Mr. Guy Nachtomi is the
son of Mr. Morris Nachtomi.
Mr. John J. Ruzich was Vice President-Marketing & Sales from June 1997 until
March 1998. From 1968 to 1996, Mr. Ruzich held various sales and marketing
positions with Eastern Airlines, Inc. (1968-1984); British Caledonian Airways
(1984-1988); Pan American World Airways, Inc. (1988-1992); United Marketing
Enterprises, Inc.(1992-1993); Regency Cruise Lines Inc. (1993-1996); and Go
America Tours, Inc./LTU International Airways (1996-1997). Queen Elizabeth
conferred on him the OBE (Officer of the British Empire) award in 1994. He
attended St. Petersburg Jr. College and Middlesex County College. Mr. Ruzich's
employment with Tower Air ended on March 4, 1998.
Mr. Vincent Vitale has been Vice President-Maintenance since February 1997.
From 1968 to 1991, Mr. Vitale held positions of increasing responsibility in
aircraft and engine maintenance at PanAm. His last position was System Director
of station maintenance. Mr. Vitale was Vice President of Maintenance for PanAm
Express until 1992, Vice President of Customer Support for Jetstream Aircraft
from 1992 to 1995 and Vice President of Maintenance for Airtran Airways from
1995 to 1996. He holds an FAA Airframe and Powerplant License. He attended the
State University of New York, Farmingdale and majored in Business Administration
and also graduated from the Manhattan High School of Aviation Trades.
Mr. Terry V. Hallcom has been President and Executive Vice President-Operations
since January 12, 1998. Mr. Hallcom, prior to joining Tower Air, was President
and CEO of the U.S. Airways Shuttle. From 1991 to April 1992, Mr. Hallcom was
President and COO of the Trump Shuttle. From 1989 to 1991, Mr. Hallcom, as well
as playing a senior role in creating the Trump Shuttle certificate, served in
various senior management positions including Vice President of Operations prior
to becoming the President and COO. Prior to forming the Trump Shuttle, from
1968 to 1989, Mr. Hallcom served in various management positions in Flight
Operations at Eastern Airlines. Prior to Eastern Airlines, from 1960 to 1968,
Mr. Hallcom served as a Naval Carrier Pilot and
34
<PAGE>
an Engineering Test Pilot. Mr. Hallcom graduated from Rose Polytechnic
University with a BS in Mechanical Engineering.
Additional information is contained in the Registrant's 1998 Proxy Statement,
pursuant to Regulation 14A, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required under this Item is contained in the Registrant's 1998 Proxy
Statement, pursuant to Regulation 14A, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information required under this Item is contained in the Registrant's 1998 Proxy
Statement, pursuant to Regulation 14A, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this Item is contained in the Registrant's 1998 Proxy
Statement, pursuant to Regulation 14A, which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS
ON FORM 8-K.
Item 14(a)1 and 2. Financial Statements and Schedules. See "Index to Financial
Statements and Financial Statement Schedules" on p.F-1.
Item 14(a)3. Exhibits
3(1)* Restated Certificate of Incorporation of the Company
3(2)* By-Laws of the Company
10(1)* Employment Agreement between the Company and Morris K. Nachtomi
10(2)* Employment Agreement between the Company and Ramesh Punwani
10(3)* Tower Air 1993 Long-Term Incentive Plan
10(4)* Tower Air, Inc. Executive Annual Incentive Plan
10(5)* Heller Financial Inc.- Loan and Security Agreement, Dated December
1, 1996
10(6)* Heller Financial Inc.- First Amendment to Loan and Security
Agreement, Dated January 31, 1997
35
<PAGE>
10(7)* Heller Financial Inc.- Second Amendment to Loan and
Security Agreement, Dated March 13, 1997
10(8)* Sanwa Business Credit Corp.- Trust Agreement and
Supplement, Dated October 1, 1996
10(9)* First Security Bank, National Association - Aircraft
and Airframe Purchase and Sale Agreement,
Dated October 1, 1996
10(10)* Finova Capital Corporation - Consolidated Aircraft
and Engine Loan and Security Agreement,
Dated March 25, 1996
10(11)* Finova Capital Corporation - $20,000,000 Loan
Secured by Two B747 Aircraft and Eight Engines,
Dated January 30, 1996
10(12)* Finova Capital Corporation- First Amendment to
Consolidated Aircraft and Engine Loan and Security
Agreement, Dated May 8, 1996
10(13)* Heller Financial Inc. - Third Amendment to Loan and
Security Agreement, Dated June 16, 1997
10(14)* Transamerica Business Credit Corporation - Loan and
Security Agreement, Dated August 16, 1997
10(15)* Heller Financial, Inc. - Amended & Restated Loan &
Security Agreement, Dated September 1, 1997
10(16) Finova Capital Corporation- Fourth Amendment to
Consolidated Aircraft and Engine Loan and Security
Agreement, Dated January 17, 1997
10(17) Finova Capital Corporation- Fifth Amendment to
Consolidated Aircraft and Engine Loan and Security
Agreement, Dated December 24, 1997
10(18) Protective Asset Management Loan and Security
Agreement, Dated November 21, 1997
10(19) Transamerica Business Credit Corporation - Security
Agreement, Dated January 9, 1998
10(20) Transamerica Business Credit Corporation - First
Amendment to Security Agreement, Dated
January 11, 1998
10(21) Funding Enterprises, LLC Loan Agreement, Dated
February 6, 1998
10(22) Employment Agreement between the Company and Terry
V. Hallcom
23 Consent of Ernst & Young LLP, Independent Auditors
36
<PAGE>
27 Financial Data Schedule for the year ended
December 31, 1997
______________________
*Previously filed as an Exhibit to the Registrant's Registration Statement on
Form S-1 (File No. 33-69148) or amendments thereto and incorporated by reference
herein.
Item 14(b). Registrant filed no Form 8-K during the last quarter of the period
covered by this report.
37
<PAGE>
<TABLE>
<CAPTION>
Page
----
Item 14(a) (1) and (2)
Tower Air, Inc.
Index of Financial Statements and Financial Statement Schedules
The following financial statements of Tower Air, Inc. are included in Item 8:
<S> <C>
Report of Independent Auditors.............................................................................. F-2
Balance Sheets as of December 31, 1997 and 1996............................................................. F-3
Statements of Operations for the years ended December 31, 1997, 1996
and 1995................................................................................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995.............................................................................................. F-5
Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995................................................................................................... F-6
Notes to Financial Statements............................................................................... F-7
The following financial statement schedule of Tower Air, Inc. is included in Item 14(a):
Schedule II-Valuation and Qualifying Account................................................................ F-20
</TABLE>
All other Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Tower Air, Inc.
We have audited the accompanying balance sheets of Tower Air, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tower Air, Inc. at December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Melville, New York
February 16, 1998, except for
the ninth paragraph of Note 2,
as to which the date is March 9, 1998
F-2
<PAGE>
TOWER AIR, INC.TOWER AIR, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS December 31,
- ------ ------------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,922 $ 2,968
Certificates of deposit, at cost, which
approximates market 2,407 275
Receivables, net of allowance for doubtful
accounts of $1,474 and $1,201, respectively 28,151 27,912
Income tax receivable 3,850 6,397
Prepaid expenses and other current assets 880 5,102
------------ ------------
Total current assets 39,210 42,654
Property and Equipment, at cost:
Flight equipment 419,851 321,240
Ground property and equipment 33,489 32,285
------------ ------------
453,340 353,525
Less accumulated depreciation and amortization 186,945 135,467
------------ ------------
266,395 218,058
Other assets 4,515 2,543
------------ ------------
$ 310,120 $ 263,255
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Note payable $ 21,038 $ 4,545
Accounts payable 55,313 46,958
Accrued liabilities 40,698 40,043
Air traffic liability 18,867 18,010
Current maturities of long-term debt 43,273 17,294
----------- ------------
Total current liabilities 179,189 126,850
Long-Term debt 63,321 67,716
Deferred income taxes 16,399 13,545
Deferred rent 1,790 1,828
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized; none issued -- --
Common stock, $.01 par value;
35,000,000 shares authorized;
15,500,006 issued 155 155
Additional paid-in capital 43,885 43,885
Retained earnings 6,892 10,787
Less treasury stock, at cost (210,000 shares) (1,511) (1,511)
----------- ------------
Total stockholders' equity 49,421 53,316
----------- ------------
$ 310,120 $ 263,255
=========== ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
TOWER AIR, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- -------------- ---------------
<S> <C> <C> <C>
OPERATING REVENUES:
Scheduled Passenger Service $ 267,326 $ 247,190 $ 270,282
Commercial Charter Service 103,358 84,389 100,827
Military Charter Service 67,896 64,460 87,534
Cargo Service 13,826 14,085 23,939
Other 9,096 7,695 7,890
--------------- ----------- -----------
Total operating revenues 461,502 417,819 490,472
OPERATING EXPENSES:
Fuel 85,803 82,561 89,620
Flight equipment rentals and
insurance 24,770 19,721 28,441
Maintenance 48,450 52,981 60,735
Crew costs and other 28,646 26,031 28,413
Aircraft and traffic servicing 76,772 83,704 83,580
Passenger servicing 50,370 55,645 53,222
Promotion, sales and commissions 66,167 60,669 76,262
General and administrative 20,658 21,178 22,344
Depreciation and amortization 52,414 38,855 34,339
--------------- ----------- -----------
Total operating expenses 454,050 441,345 476,956
--------------- ----------- -----------
OPERATING INCOME (LOSS) 7,452 (23,526) 13,516
OTHER (INCOME) EXPENSES:
Other (income) expense 69 749 (9,893)
Interest expense 12,273 8,114 3,990
--------------- ----------- -----------
Total other (income) expenses 12,342 8,863 (5,903)
--------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (4,890) (32,389) 19,419
Income Tax Provision (Benefit) (995) (11,506) 8,730
--------------- ----------- -----------
NET INCOME (LOSS) $ (3,895) $ (20,883) $ 10,689
=============== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ (.25) $ (1.37) $ .70
=============== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
ASSUMING DILUTION $ (.25) $ (1.37) $ .70
=============== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 15,290 15,290 15,305
=============== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
TOWER AIR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
----------------------- ---------------------
Paid-In Retained Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 15,500 $ 155 $ 43,885 $ 25,263 (210) $ (1,511) $ 67,792
Cash dividends paid ($.16 per
share) -- -- -- (2,447) -- -- (2,447)
Net income - 1995 -- -- -- 10,689 -- -- 10,689
-------------------------------------------------------------------------------------------
Balance at December 31, 1995 15,500 155 43,885 33,505 (210) (1,511) 76,034
Cash dividends paid ($.12 per
share) -- -- -- (1,835) -- -- (1,835)
Net loss - 1996 -- -- -- (20,883) -- -- (20,883)
-------------------------------------------------------------------------------------------
Balance at December 31, 1996 15,500 155 43,885 10,787 (210) (1,511) 53,316
Net loss - 1997 -- -- -- (3,895) -- -- (3,895)
-------------------------------------------------------------------------------------------
Balance at December 31, 1997 15,500 $ 155 $ 43,885 $ 6,892 (210) $ (1,511) $ 49,421
===========================================================================================
</TABLE>
See notes to financial statements.
F-5
<PAGE>
TOWER AIR, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1996 1995
--------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,895) $ (20,883) $ 10,689
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 52,414 38,855 34,339
Provision for doubtful accounts 775 1,009 1,634
Deferred income taxes 2,854 (5,109) 4,824
Deferred rent (38) 320 328
(Gain) loss on disposal of
property and equipment 153 403 (9,571)
Changes in certain assets and liabilities:
Receivables (1,014) 3,135 (6,864)
Income tax receivable 2,547 (6,397) --
Prepaid expenses and other assets 2,235 (449) (292)
Accounts payable and accrued liabilities 10,284 20,584 11,238
Air traffic liability 857 (1,868) 598
----------- ----------- -----------
Net cash provided by operating activities 67,172 29,600 46,923
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of flight equipment (72,696) (49,735) (50,387)
Purchases of ground property and equipment (1,572) (2,850) (11,662)
Proceeds from sale of flight equipment -- 6,191 --
Proceeds from sale of ground property and equipment 100 47 657
Proceeds from insurance company -- 25,000 --
Decrease (increase) in certificates of deposit (2,132) 425 200
----------- ----------- -----------
Net cash used in investing activities (76,300) (20,922) (61,192)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 464,260 41,875 16,899
Principal payments on borrowings (453,372) (47,884) (11,205)
Payment of cash dividends -- (1,835) (2,447)
Other (806) (1,387) (281)
----------- ----------- -----------
Net cash provided by (used in) financing activities 10,082 (9,231) 2,966
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents 954 (553) (11,303)
Cash and cash equivalents at beginning of year 2,968 3,521 14,824
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,922 $ 2,968 $ 3,521
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 11,221 $ 8,022 $ 3,993
Cash paid during the period for income taxes $ 52 $ 442 $ 6,721
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of flight equipment accrued but not paid $ 14,238 $ 15,512 $ 5,604
Purchase of flight equipment financed through debt $ 27,189 $ 57,600 $ --
</TABLE>
See notes to financial statements.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
ORGANIZATION
Tower Air, Inc. (the Company) was organized in the State of Delaware on August
13, 1982 and was issued an operating certificate by the Civil Aeronautics Board
effective October 27, 1983. The Company provides long-haul scheduled and
charter passenger and cargo air service in diverse domestic and international
markets.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits with banks and highly
liquid financial instruments, including money market funds, having maturity
dates of three months or less when purchased.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is provided using the straight-line
method as follows: Boeing 747 aircraft-seven to twenty years; other flight and
ground property and equipment - two to ten years. One of the Company's Boeing
747 aircraft has a salvage value of $8,000,000 and four of the Company's Boeing
747 aircraft each have a salvage value of $5,000,000. Leasehold improvements
are amortized over the lesser of their useful lives or the term of the related
lease.
AIRCRAFT AND ENGINE MAINTENANCE
The costs of major airframe and engine overhauls are capitalized and amortized
over the period benefited for both owned and leased aircraft. Other maintenance
costs are charged to operating expense as incurred.
REVENUE RECOGNITION
Revenue is recognized when the transportation is provided. Tickets sold but not
yet used are recorded as current liabilities in the "Air traffic liability"
account.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign station operations, which are immaterial, have
been translated at exchange rates in effect at the balance sheet dates, except
property and equipment which was translated at rates of exchange in effect at
the time of acquisition. Revenues and expenses were translated at average
monthly rates prevailing during the given period, except for depreciation which
was translated at the rate in effect at the time the related asset was acquired.
Foreign exchange gains and losses, which were immaterial, were included in
"Interest and other income".
STOCK OPTIONS
Financial Accounting Standards No. 123, "Accounting for Stock-Based-
Compensation" encourages, but does not require, companies to adopt a fair value
method of accounting for stock-based compensation, as opposed to the intrinsic
value method prescribed by Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company has elected
to continue following the expense recognition provisions of APB 25.
F-7
<PAGE>
EARNINGS PER SHARE
In 1997, The Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate restated, to conform to
the Statement 128 requirements.
CERTIFICATES OF DEPOSIT
The Company has determined that all of its certificates of deposit are
classified as "held to maturity securities." Held to maturity securities are
carried at amortized cost which approximates market value. All held to maturity
securities are due to mature within one year and there are no gross unrealized
gains or losses related to such securities at December 31, 1997, 1996 or 1995.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of short-term investments, which are classified as cash
equivalents and certificates of deposit, approximate fair value. The fair
values of the Company's debt, including current maturities, are estimated using
discounted cash flow analyses, based on the estimated current incremental
borrowing rates for similar types of borrowing arrangements. The carrying
amounts of the Company's debt at December 31, 1997 and 1996 approximate fair
value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. Statement No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances form
nonowner sources. Statement No. 130 is effective for fiscal years beginning
after December 15, 1997. The Company will adopt this statement for 1998 and
such adoption is not expected to have a material effect on the financial
statements.
In July 1997, the Financial Accountant Standards Board issued Statement No. 131,
Disclosures About segments of an Enterprise and Related Information. Statement
No. 131 requires certain financial and supplementary information to be disclosed
on an annual and interim basis for each reportable segment of an enterprise.
Statement No. 131 is effective for fiscal years beginning after December 31,
1997. Unless impracticable, companies would be required to restate prior period
information upon adoption. The Company will adopt this statement for 1998 and
such adoption is not expected to have a material effect on the financial
statements.
F-8
<PAGE>
2. LONG-TERM DEBT AND NOTE PAYABLE
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
8.5% - 9.45% Loans Payable, due in monthly
installments through September 2013 $ 7,750 $ 8,988
LIBOR plus 1.75% Note, due in monthly installments
through March 1998 --- 4,166
9.283% Note, due in monthly installments through
June 1997 --- 3,000
10.12% Note, due in monthly installments through
December 2001 42,851 46,963
10.27% Note, due in monthly installments
through February 2002 18,238 19,893
10.27% Note, due in monthly installments
through December 1997 --- 2,000
10.27% Note, due in monthly installments
through September 1998 4,032 ---
Prime plus 2.5% Note, due in monthly installments
through November 2000 9,520 ---
Prime plus 2.75% Notes, due in monthly installments
through February 1999 11,257 ---
Prime plus 2.0% Notes, due in monthly installments
through May 1999 12,946 ---
------------------- -------------------
106,594 85,010
Less current maturities 43,273 17,294
------------------- -------------------
$ 63,321 $ 67,716
=================== ===================
</TABLE>
In March 1996, the Company refinanced the outstanding balance of certain Notes
bearing interest at prime plus 2% due in monthly installments through October
1996, Notes bearing interest at prime plus 2.25% due in monthly installments
through August 1996, and Notes bearing interest at prime plus 2.0% due in
February 1997, in addition to the $20,000,000 note issued in January 1996, with
the same financial institution. In addition, the Company borrowed an additional
$17,000,000 which is secured by the two Boeing 747 aircraft purchased in January
1996. The new loan balance, which aggregates $50,200,000, bears interest at
10.12% and requires monthly installments of principal and interest of
approximately $1,050,000 through March 2001. In September 1996, the lender
agreed to defer the principal portion of the monthly payment for a period of
nine months, reducing the monthly payment during the period by approximately
$600,000. Accordingly, the maturity date of the loan has been extended to
December 2001. At December 31, 1997 and 1996, there was approximately
$42,851,000 and $46,963,000 outstanding, respectively.
In 1993, the Port Authority of New York and New Jersey (Port Authority) financed
certain renovations of the terminal facility and terminal ramp. In connection
with this financing, the Company is required to pay principal and interest on
the terminal building renovation of approximately $111,000 per month through
September 1998, which bears interest at 8.93% per annum. In addition, the
Company is required to pay principal and interest on the terminal ramp
renovation financing of approximately $13,000 per month through September
2013, which bears interest at 9.45% per annum. In 1995, the Company completed
a terminal facility expansion project at John F. Kennedy International Airport
at a cost of approximately $10,000,000. The Company had a commitment from the
Port Authority for $5,500,000 million of five-year financing at a fixed interest
rate of 8.5% for this project. As of December 31, 1997 and 1996, $7,750,000 and
$8,988,000, respectively, was outstanding.
F-9
<PAGE>
In November 1997, the Company prepaid the entire $1,450,000 outstanding balance
of the LIBOR plus 1.75% Note.
In November 1996, the Company borrowed $2,000,000 from a commercial finance
institution. The note bears interest at 10.27% and was due December 1997. In
January 1997, the Company borrowed an additional $2,000,000 from the same
commercial finance institution. In December 1997, the loan agreement was
amended and restated whereas the financial institution made an additional loan
of approximately $3,365,000. The amended note bears interest at a rate of 10.27%
per annum and is due in September 1998. Monthly principal and interest payments
required under the amended note approximate $650,000. At December 31, 1997, the
amount outstanding was approximately $4,032,000.
In February 1997, the Company purchased six engines for an aggregate purchase
price of $11,900,000. In connection with this purchase, the Company agreed to
exchange engines with an aggregate value of $1,800,000 and issue to the seller
$1,100,000 of credits toward the purchase of aircraft and engine parts. In
addition, the Company issued a $9,000,000 promissory note to the seller which
bears an interest rate of prime plus 2.75% and is payable over a term of twenty-
four months. However, in May 1997, the Company amended this contract to
purchase only four engines for an aggregate price of $7,700,000 and to exchange
engines with an aggregate value of $1,200,000, and issued to the seller $633,333
of credits towards its purchase of aircraft and engine parts. In connection
with this amended agreement, the amount of the promissory note was reduced to
$5,867,000 of which $3,757,000 was outstanding as of December 31, 1997. The
amount relating to the exchanged engines was paid by the Company in lieu of
exchanging engines. However, the amount for purchase credits of aircraft and
engine parts remains unpaid.
In May 1996, the Company purchased one Boeing 747 aircraft for an aggregate
purchase price of $21,000,000. In connection with this purchase, the Company
issued a $21,000,000 note to a commercial finance company. This loan bears
interest at a rate of 10.27% per annum and requires monthly payments of
approximately $400,000 through May 2001. In September 1996, the lender agreed to
defer the principal portion of the monthly payment for a period of nine months,
reducing the monthly payment during the period by approximately $250,000.
Accordingly, the maturity date of the loan has been extended to February 2002.
At December 31, 1997 and 1996, there was approximately $18,238,000 and
$19,893,000 outstanding, respectively.
In June 1997, the Company borrowed $1,000,000 from its Chairman and paid back
this amount with interest in August 1997.
In February and March 1998, the Company borrowed $3,000,000 and $1,000,000 from
its Chairman and President, respectively. Such amounts are payable on July 1,
1998 with interest per annum plus warrants for the purchase of 800,000 shares of
common stock were issued with an exercise price of $5. The warrants expire in
February 2008.
In August 1997, the Company borrowed $9,000,000 from a commercial finance
institution. To secure this loan, the Company used eight Pratt & Whitney
engines as collateral. Interest on this loan accrues at a rate of prime plus
2.75% and is due in monthly installments of approximately $500,000. At December
31, 1997, there was approximately $7,500,000 outstanding.
In November 1997, the Company acquired four leased engines for an aggregate
purchase price of $9,750,000. In connection with this transaction, the Company
issued a promissory note for the full purchase price. The interest rate
associated with the note accrues at a rate of prime plus 2.5% per annum and
requires monthly installments of principal and interest of approximately
$320,000
F-10
<PAGE>
through November 2000. Additionally, per the loan agreement, the
proceeds from the note shall be utilized for repair work performed on the non-
serviceable leased engines. If such repairs are not performed within six months
from the closing date, interest shall begin accruing at a rate of prime plus
4.5% on the unpaid principal balance. The balance outstanding as of December
31, 1997 was approximately $9,520,000.
The Company entered into a finance agreement in September 1997 involving the
conversion and refurbishment of four Pratt & Whitney JT9 engines. In connection
with this transaction, four promissory notes were issued, totalling $14,109,530.
The notes mature on various dates through May, 1999. Related interest accrues
at prime plus 2% per annum on the outstanding principal balance and required
monthly payments approximate $850,000. The aggregate balance outstanding on the
notes at December 31, 1997 was approximately $12,946,000.
At December 31, 1997, the aggregate annual maturities of long-term debt during
the next five years are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $43,273
1999 $23,455
2000 $20,684
2001 $17,151
2002 $ 957
</TABLE>
Certain debt is secured by aircraft having a net book value of approximately
$94,718,000 at December, 1997.
The Company has a $25,000,000 line of credit with a financial institution which
may be used for short term borrowings or letters of credit. The agreement, as
amended in September 1997, expires on September 30, 1999. Interest accrues on
the outstanding credit line at a "base rate" equal to the higher of the Federal
Reserve System prime loan rate or the Federal Funds effective rate (9.25% as of
December 31, 1997). As of December 31, 1997, the Company had borrowings of
approximately $21,000,000 and letters of credit of $1,962,000 outstanding. The
credit line is primarily secured by the Company's trade receivables and
inventory.
In January 1998, the Company entered into an agreement with a financial
institution to borrow $15,000,000. The note bears interest at prime plus 2.75%
and is due in January 2000. The note is secured by twelve JT9D engines.
3. Income Taxes
The (benefit) provision for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Current:
Federal $ (3,849) $ (6,397) $ 3,603
State and local -- -- 303
------------------- ------------------- -------------------
(3,849) (6,397) 3,906
------------------- ------------------- -------------------
Deferred:
Federal (3,086) 3,541 3,267
State and local (232) (1,568) 1,557
------------------- ------------------- -------------------
2,854 (5,109) 4,824
------------------- ------------------- -------------------
Provision (benefit) for income taxes $ (995) $ (11,506) $ 8,730
=================== =================== ===================
</TABLE>
F-11
<PAGE>
Deferred tax expense (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------ ---------
<S> <C> <C> <C>
Tax depreciation greater than
book depreciation $ 12,218 $ 4,056 $ 5,304
Utilization of net operating loss
carryforwards -- 533
Tax benefit of net operating loss
carryforwards (15,023) (13,792) --
Tax (benefit) utilization of
alternative minimum tax credit
carryforwards 3,867 3,572 (1,013)
Other 1,792 1,055 --
---------------- -------------- ----------
$ 2,854 $ (5,109) $ 4,824
================ ============== ==========
</TABLE>
The income tax provisions were at rates different from the U.S. federal
statutory rates for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- ------------
<S> <C> <C> <C>
Statutory rate (35.0) % (35.0) % 35.0 %
State and local income tax
(benefit), net of federal tax benefit (3.1) (3.0) 6.2
Nondeductible items 19.7 2.5 4.6
Other (1.9) -- (.8)
----------------- ---------------- -------------
Effective tax rate (20.3) % (35.5) % 45.0 %
================= ================ =============
</TABLE>
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Deferred income tax liability components are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1996
------------------------------------------
<S> <C> <C>
Deferred tax liabilities for taxable temporary differences:
Tax depreciation in excess of book depreciation $ 44,926 $ 32,708
Other 2,847 1,055*
------------------------------------------
Total deferred tax liabilities 47,773 33,763
Deferred tax assets:
Tax benefit of net operating loss carryforwards 28,815 13,792
Alternative minimum tax credit carryforwards 2,559 6,426
------------------------------------------
Total deferred tax assets 31,374 20,218
------------------------------------------
Net noncurrent liability $ 16,399 $ 13,545
==========================================
</TABLE>
* Reclassified
F-12
<PAGE>
At December 31, 1997, for federal reporting purposes, the Company had
approximately $73,433,000 of net operating loss carryforwards available to
offset future federal tax liabilities.
4. COMMITMENTS
At December 31, 1997, the Company had seven Boeing 747 aircraft under operating
leases. Three aircraft are under the terms of the same lease agreement which
provides rentals at fixed rates with provisions for increases based on the
performance of certain maintenance work, as defined. Under the terms of two of
the lease agreements, monthly rent is at a fixed rate. One aircraft is being
leased at fixed monthly rentals plus additional rent based on flight hours, as
defined. In addition, one aircraft is being leased at a power by the hour rate,
as defined.
In October 1997, the Company amended one of its leases that previously included
monthly rent which alternated from a fixed rate to a rate per hour every six
months until 1999. The aircraft is being converted to a freighter and the cost
of the conversion will be paid by the lessor up to $10 million. Any costs in
excess of $10 million will be paid by the Company. The amended lease term is
fifteen years with monthly rentals at a fixed rate commencing upon completion of
the cargo conversion. The cargo conversion is expected to be completed during
the first quarter of 1998.
In October 1997, the Company amended one lease with a rental based on a fixed
rate per hour plus additional rent based on flight hours to a fixed rate per
hour rental. In December 1997, the lease was amended again to a fixed monthly
rentals commencing January 1, 1998 through January 31, 2001.
In December 1997, the Company amended one of the fixed rate per hour leases to a
power by the hour rate lease commencing November 1, 1997 through October 31,
1998. Starting November 1, 1998, this lease will be converted to a fixed
monthly rate.
In November 1997, the Company entered into a ten year lease for a 747 aircraft
which will commence upon delivery of the aircraft expected in March 1998.
Monthly rentals will be at a fixed rate.
In December 1997, the Company entered into a six year lease for a 747 aircraft
which will commence upon delivery of the aircraft expected in March 1998.
Monthly rentals will be at a fixed rate.
Substantially all of its aircraft leases require that the Company pay the lessor
for maintenance reserves based on the number of airframe and engine flight hours
accumulated at specified rates per hour, as defined in the agreements.
At December 31, 1997, minimum annual rental commitments under noncancelable
operating leases were approximately as follows (in thousands):
<TABLE>
<CAPTION>
Flight Ground Property
Equipment and Equipment Total
------------------------------------
<S> <C> <C> <C>
1998 $ 24,811 4,916 29,727
1999 22,286 5,107 27,393
2000 20,307 5,066 25,373
2001 15,180 5,066 20,246
2002 15,180 5,066 20,246
Thereafter 30,950 2,103 33,053
-----------------------------------
$128,714 $27,324 $156,038
===================================
</TABLE>
F-13
<PAGE>
Rent expense amounted to approximately $28,500,000, $22,600,000 and $31,300,000
for the years ended December 31, 1997, 1996 and 1995, respectively. These
amounts include flight equipment rental expense of $22,700,000, $17,100,000 and
$25,800,000 and ground property and equipment rentals of $5,800,000, $5,500,000
and $5,500,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
In September 1993, the Company entered into a five-year lease agreement with the
Port Authority for a terminal facility at John F. Kennedy International Airport.
Under the terms of the lease, the Company pays a base rent plus additional
rentals based on the number of arriving and departing passengers above an annual
exemption amount and percentages of additional terminal revenues, as defined in
the agreement. For the period from November 17, 1995 through November 16, 1998,
the Company will only be responsible for the base rent. In January 1995, the
Port Authority extended the lease term through April 30, 2003.
The Company has an employment agreement with an officer which has a term of five
years commencing in October 1993. Base salary is set at $1,000,000 per annum.
The contract is automatically extended for additional terms of one year unless
the officer or the Company elects that there shall be no such extension. In
addition, if a change in control (as defined in the agreement) occurs during the
five-year term of the agreement, such term shall automatically be extended to
include the five-year period commencing on the date on which the change in
control occurs. The agreement further provides that if, prior to a change in
control, the Company terminates the officer's employment, then the Company will
pay him his base salary through such termination date plus the product of the
sum of the officer's annual base salary and the average of the annual bonuses,
if any, actually paid to the officer with respect to the two years of his term
immediately preceding the year of the term in which the date of termination
occurs, and the number of years (including partial years) remaining in the term.
If, subsequent to a change in control, the Company terminates the officer or if
the officer resigns, then the Company will pay his base salary through such
termination date and an amount equal to the product of 2.99 and the officer's
base amount as defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended.
As of December 31, 1997, the Company had 1,969 employees, 1,470 of which were
full time and 499 of which were part time. Of the full time employees, 561
belong to the Association of Flight Attendants (AFA) and 197 are members of an
in-house union, Tower Air Cockpit Crew Association, Inc. (TACCA).
Effective March 5, 1997, the Company reached a tentative agreement to extend the
contract with its flight attendants by the AFA up to two years until September
14, 1998. The tentative agreement provides for no wage increases. In August
1996, negotiations commenced with TACCA for a contract to replace the existing
agreement dated September 1, 1993. Negotiations with the TACCA continued until
July 1997 with no resolution and as a result the TACCA applied for Federal
mediation. Management expects mediation to conclude in 1998.
The Company utilized standby letters of credit to secure performance guarantees
in the normal course of business. The Company provides cash collateral for all
of these letters of credit. As of December 31, 1997 and 1996, cash collateral
amounted to $2,407,000 and $275,000. These amounts are included in Certificates
of Deposit in the accompanying balance sheets.
5. SAVINGS AND RETIREMENT PLAN
The Company sponsors a number of defined contribution pension plans which are
available to substantially all full-time employees. For the years ended
December 31, 1997, 1996 and 1995, the Company's contributions, which are
principally based on a percentage of an employee's annual compensation, amounted
to approximately $319,000, $309,000 and $570,000, respectively.
F-14
<PAGE>
Effective January 1995, the Company also had a nonqualified deferred
compensation plan which contained a Company match portion and permitted highly
compensated employees as defined in the plan to annually elect to defer a
portion of their compensation until their retirement. Effective December 31,
1996, the Company terminated this plan.
6. BUSINESS SEGMENTS AND CONCENTRATION OF CREDIT RISK
The Company operates in one business segment which is the common carriage of
passengers, freight and mail over various worldwide routes authorized by the
Civil Aeronautics Board.
The assets of the Company, principally flight equipment, support the entire
worldwide transportation system and are not readily identifiable by geographic
area. Total ground property and equipment situated in foreign locations is not
significant.
Sales with foreign destinations and/or arrivals accounted for 69%, 70% and 77%
of total revenues for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Israel market, Tower's largest scheduled passenger service revenue source,
is composed primarily of individuals and groups who travel for religious
reasons, vacations or business. This market historically has been characterized
by a relatively stable travel pattern. From time to time, security concerns in
Israel have resulted, and may continue to result, in oscillations in demand.
The U.S. Government and its agencies accounted for all revenue from military
charters. At December 31, 1997 and 1996 accounts receivable from the U.S.
government and its agencies were approximately $2,500,000 and $1,300,000
respectively.
The Company utilizes software and related technologies throughout its business
that will be affected by the date change in the year 2000. System modifications
or replacements are underway or planned which should make all significant
computer systems at the Company compliant with the year 2000 requirement.
Anticipated spending for these modifications will be expensed as incurred and is
not expected to have a material effect on the Company's ongoing results of
operations.
7. STOCK OPTION PLANS
The Company has elected to follow Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based-Compensation" ("Statement 123"),
requires the use of option valuation models that were not developed for use in
valuing stock options.
The Company has authorized 1,400,000 shares of common stock for issuance of
awards under a Long-Term Incentive Plan (the "Plan"). Generally, options will
be granted with an exercise price not less than the fair market value, as
defined in the plan, on the date of grant.
F-15
<PAGE>
The following table summarizes the activity under these plans (shares in
millions):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- --------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ------- -------------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 733,850 $7.89 424,398 $10.13 271,312 $11.21
Granted 998,157 $2.83 448,067 $ 6.45 277,288 $ 8.14
Cancelled (625,871) $7.72 (138,615) $10.09 (124,202) $ 8.08
---------- ----- -------- ------ -------- ------
End of Year 1,106,136 $3.75 733,850 $ 7.89 424,398 $10.13
Options exercisable at
end of year 104,834 $8.99 169,302 $11.37 86,885 $12.84
</TABLE>
The following table summarizes information about these plans at December 31,
1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
----------------------------------------- ------------------ ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.69-$ 5.00 911,468 2.8 years $ 2.84 -- --
$ 5.01-$ 7.50 149,668 1.4 years $ 6.76 64,784 $ 6.81
$ 7.51-$ 10.00 15,000 .5 years $ 8.50 10,050 $ 8.50
$10.01- $ 12.50 -- -- -- -- --
$12.51- $ 14.50 30,000 0 $13.88 30,000 $13.88
------------ ------------
1,106,136 104,834
</TABLE>
The outstanding options expire at various times during the period from January
1999 through October 2006.
The weighted-average fair value at date of grant for options granted in 1997,
1996 and 1995 were $1.28, $2.36 and $3.60, respectively.
Pro forma information regarding net loss and net loss per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its stock options granted subsequent to January 1,
1995 under the fair value method of the Statement. The fair value for these
options was estimated using a Black-Scholes option pricing model with the
following weighted-average assumptions for the year ended December 31, 1997:
risk-free interest rate of 6%, volatility factor of .434, a weighted-average
expected life of the option of 3 years for employees and 10 years for officers
and no dividend yields.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The company's pro
forma information is as follows:
F-16
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Pro forma net loss $(4,451,467)
Pro forma net loss per share $ (.29)
</TABLE>
If the Company had elected to present the pro forma effects of applying
Statement 123 for the years ended December 31, 1996 and 1995, no material
difference in net loss or income, respectively, would have resulted.
The compensation expense and pro forma net income (loss) may not be indicative
of amounts to be included in future periods.
8. ACCRUED LIABILITIES
The components of accrued liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-----------------
<S> <C> <C>
Accrued maintenance $16,652 $22,975
Other accrued operating expenses 7,154 9,396
Accrued salaries 5,056 3,191
Accrued interest 1,161 109
Accrued rent 1,675 1,606
Other 9,000 2,766
----------------
$40,698 $40,043
================
</TABLE>
9. CONTINGENCIES
On October 31, 1995, the Company entered into a settlement (the "Settlement") of
an action entitled In Re Tower Air, Inc. Securities Litigation (the "Securities
-------------------------------------------
Litigation"), a consolidated class action filed in the U.S. District Court for
the Eastern District of New York. The Securities Litigation arose out of the
November 1993 initial public offering of shares of the Company's common stock.
The Settlement was approved by the District Court on February 9, 1996.
William Branch, the plaintiff in another action containing similar allegations,
which action was dismissed in conjunction with the Settlement of the Securities
Litigation, objected to the Settlement and appealed from the order of the
District Court approving it.
On November 13, 1996, the United States Court of Appeals for the Second Circuit
affirmed the judgment of the District Court approving the Settlement. On
February 11, 1997, Branch filed a Petition for a Writ of Certiorari with the
Supreme Court of the United States. On March 14, 1997, the Company filed a brief
opposing Branch's Petition. On April 14, 1997, the Supreme Court of the United
States denied Branch's Petition for Writ of Certiorari, which sought review of
that affirmance.
A Tower Air aircraft slid off the runway on takeoff on December 20, 1995, and
came to a stop. Approximately 35 passengers were taken to hospitals and
discharged the same day. One was kept overnight. The remaining approximately
415 passengers were not injured. All claims and lawsuits are being handled by
the Company's insurance carrier. The Company believes that all claims resulting
from this event remain fully covered under the Company's insurance policies.
The Company is a party to various litigations which arise in the ordinary
conduct of its business. The Company believes that these actions will not have
a material adverse effect on the Company's financial position or results of
operations.
F-17
<PAGE>
10. OTHER EXPENSES (INCOME)
Interest and other income includes a non-operating gain of $9,200,000
($5,520,000 net of tax expense), recorded in the fourth quarter of 1995,
resulting from an excess of insurance proceeds over the net book value of
certain flight equipment related to the loss of an owned aircraft operated by
the Company.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly financial data for 1997 and 1996 is as follows (in thousands
except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------------------------------------------------
<S> <C> <C> <C> <C>
1997
----
Operating revenues $ 78,010 $112,576 $162,260 $108,656
=========================================================
Operating income (loss) $ (7,074) $ 9,512 $ 17,627 $(12,613)
=========================================================
Net income (loss) $ (5,425) $ 3,583 $ 8,495 $(10,548)
=========================================================
Net income (loss) per
common share $ (.35) $ .23 $ .56 $ (.69)
=========================================================
Net income (loss) per
common share assuming
dilution $ (.35) $ .23 $ .55 $ (.69)
=========================================================
1996
----
Operating revenues $ 85,824 $113,910 $148,858 $ 69,227
=========================================================
Operating income (loss) $(13,139) $ 5,146 $ 3,479 $(19,012)
=========================================================
Net income (loss) $ (8,134) $ 2,923 $ (1,596) $(14,076)
=========================================================
Net income (loss) per
common share $ (.53) $ .19 $ (.10) $ (.92)
=========================================================
Net income (loss) per
common share assuming
dilution $ (.53) $ .19 $ (.10) $ (.92)
=========================================================
</TABLE>
F-18
<PAGE>
12. RECEIVABLES
The components of receivables were as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1996
-------------------------------------------
<S> <C> <C>
Trade receivables $ 28,985 $ 20,517
Maintenance receivables 640 8,596
-------------------------------------------
29,625 29,113
Less: Allowance for doubtful accounts (1,474) (1,201)
-------------------------------------------
$ 28,151 $ 27,912
===========================================
</TABLE>
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C>
Numerator for basic earnings per share - (loss) income
available to common stockholders (3,895) (20,883) 10,689
Numerator for diluted earnings per share-(loss) income
available to common stockholders after assumed
conversions (3,895) (20,883) 10,689
Denominator:
Denominator for basic earnings per share-weighted
average shares 15,290 15,290 15,290
Effect of dilutive securities:
Employee stock options -- -- 15
------------------------------------------------------------------
Dilutive potential common shares -- -- 15
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 15,290 15,290 15,305
==================================================================
Basic earnings per share ($0.25) ($1.37) $ 0.70
==================================================================
Diluted earnings per share ($0.25) ($1.37) $ 0.70
==================================================================
</TABLE>
F-19
<PAGE>
SCHEDULE II
TOWER AIR, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1995, 1996 and 1997
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to
beginning of Costs and Balance at
Allowance for doubtful accounts period Expenses Deductions(a) end of period
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995 $ 397 $ 1,634 $ 543 $ 1,488
Year ended December 31, 1996 $ 1,488 $ 1,009 $ 1,296 $ 1,201
Year ended December 31, 1997 $ 1,201 $ 775 $ 502 $ 1,474
</TABLE>
(a) Uncollectible accounts written off, net of recoveries.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 1998 TOWER AIR, INC.
By:/s/ MORRIS K. NACHTOMI
----------------------------
Morris K. Nachtomi
Chief Executive Officer
and Chairman of the
Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on March __, 1998 on behalf of the
Registrant and in the capacities indicated.
/s/ MORRIS K. NACHTOMI Chief Executive
- -----------------------------------
Morris K. Nachtomi Officer and Chairman of the
Board of Directors (Principal
Executive Officer)
/s/ TERRY V. HALLCOM President & Executive Vice
- -----------------------------------
Terry V. Hallcom President-Operations (Acting
Principal Financial Officer)
/s/ STEPHEN L. GELBAND Director
- -----------------------------------
Stephen L. Gelband
/s/ STEPHEN A. OSBORN Director
- -----------------------------------
Stephen A. Osborn
/s/ HENRY P. BAER Director
- -----------------------------------
Henry P. Baer
/s/ LEO-ARTHUR KELMENSON Director
- -----------------------------------
Leo-Arthur Kelmenson
<PAGE>
INDEX TO EXHIBITS
-----------------
3(1)* Restated Certificate of Incorporation of the Company
3(2)* By-Laws of the Company
10(1)* Employment Agreement between the Company and Morris K. Nachtom
10(2)* Employment Agreement between the Company and Ramesh Punwani
10(3)* Tower Air 1993 Long-Term Incentive Plan
10(4)* Tower Air, Inc. Executive Annual Incentive Plan
10(5)* Heller Financial Inc.- Loan and Security Agreement, Dated
December 1, 1996
10(6)* Heller Financial Inc.- First Amendment to Loan and Security
Agreement, Dated January 31, 1997
10(7)* Heller Financial Inc. - Second Amendment to Loan and Security
Agreement, Dated March 13, 1997
10(8)* Sanwa Business Credit Corp.- Trust Agreement and Supplement,
Dated October 1, 1996
10(9)* First Security Bank, National Association -Aircraft and Airframe
Purchase and Sale Agreement, Dated October 1, 1996
10(10)* Finova Capital Corporation - Consolidated Aircraft and Engine
Loan and Security Agreement, Dated March 25, 1996
10(11)* Finova Capital Corporation - $20,000,000 Loan Secured by Two B747
Aircraft and Eight Engines, Dated January 30, 1996
10(12)* Finova Capital Corporation - First Amendment to Consolidated
Aircraft and Engine Loan and Security Agreement, Dated May 8,
1996
10(13)* Heller Financial, Inc. - Third Amendment to Loan and Security
Agreement, Dated June 16, 1997
10(14)* Transamerica Business Corporation - Loan and Security Agreement,
Dated August 16, 1997
10(15)* Heller Financial, Inc. - Amended and Restated Loan and Security
Agreement, Dated September 1, 1997
10(16)** Finova Capital Corporation - Fourth Amendment to Consolidated
Aircraft and Engine Loan and Security Agreement, Dated January
17, 1997
10(17)** Finova Capital Corporation - Fifth Amendment to Consolidated
Aircraft and Engine Loan and Security Agreement, Dated December
24, 1997
10(18)** Protective Asset Management Loan and Security Agreement, Dated
November 21, 1997
10(19)** Transamerica Business Credit Corporation - Security Agreement,
Dated January 9, 1998
10(20)** Transamerica Business Credit Corporation - First Amendment to
Security Agreement, Dated January 11, 1998
10(21)** Funding Enterprises, LLC Loan Agreement, Dated February 6, 1998
10(22)** Employment Agreement between the Company and Terry V. Hallcom
<PAGE>
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule for the year ended December 31, 1997
___________________
*Previously filed as an Exhibit to the Registrant's Registration Statement on
Form S-1 (File No. 33-69148) or amendments thereto and incorporated by reference
herein.
**Filed herewith.
<PAGE>
Finova Capital Corporation-Fourth
Amendment to Consolidated Aircraft
and Engine Loan and Security
Agreement, Dated January 17, 1997
FOURTH AMENDMENT TO
CONSOLIDATED, AMENDED AND RESTATED
AIRCRAFT AND ENGINE LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO CONSOLIDATED, AMENDED AND RESTATED AIRCRAFT AND
ENGINE LOAN AND SECURITY AGREEMENT (this "Amendment") made and entered into this
16th day of January, 1997 by and between FINOVA CAPITAL CORPORATION (formerly
GREYHOUND FINANCIAL CORPORATION) (the "Lender") , a corporation organized and
existing under the laws of the State of Delaware, with its chief executive
office and principal place of business at 1850 North Central Avenue, Phoenix,
Arizona 85002 and TOWER AIR, INC. (the "Borrower"), a corporation organized and
existing under the laws of the State of Delaware, with its chief executive
office and principal place of business at Hangar No. 17, John F. Kennedy
International Airport, Jamaica, New York 11430.
W I T N E S S E T H:
--------------------
WHEREAS, the Borrower and the Lender have previously entered into the
Consolidated, Amended and Restated Aircraft and Engine Loan and Security
Agreement dated as of March 25, 1996, as amended by the First Amendment to
Consolidated, Amended and Restated Aircraft and Engine Loan and Security
Agreement dated as of May 8, 1996, the Second Amendment to Consolidated, Amended
and Restated Aircraft and Engine Loan and Security Agreement dated as of
September 25, 1996 and the Third Amendment to Engine Loan and Security Agreement
dated as of November 27, 1996 (collectively, the "Loan Agreement");
WHEREAS, the Borrower requests that the Lender make an additional loan to
the Borrower in the amount of $2,000,000.00;
NOW THEREFORE, the undersigned hereto agree as follows:
1. DEFINITIONS.
------------
Capitalized terms used herein unless otherwise defined herein shall have
the meaning ascribed to such terms in the Loan Agreement.
<PAGE>
2. AMENDMENTS TO LOAN AGREEMENT.
-----------------------------
2.1 Section 1.1 of the Loan Agreement is amended by deleting the
definition "Engine ["62962"] and inserting in place thereof the following:
"Engine [66292]: collectively, one (1) Pratt & Whitney Model
JT9D-7A engine bearing Manufacturer's Serial No. P662962N and one (1)
Pratt Whitney Model JT9D-7A Engine bearing manufacturer's serial number
P662864 together with any and all attachments, accessories,
improvements and betterments thereto and replacements thereof and all
general intangibles and contract rights, including, but not limited to,
all rights, issues, proceeds, insurance proceeds, properties, revenues
and other income in respect of such engines."
2.2 Section 1.1 of the Loan Agreement is amended by deleting the
definitions "November 1996 Note" and "November 1996 Loan" and inserting the
following in place thereof:
"November 1996 Note: that certain Promissory Note dated November
27, 1996 issued by the Borrower to the Lender in the principal amount
of $2,000,000.00 as amended and restated by that certain Amended and
Restated Promissory Note dated January 15, 1997 issued by the Borrower
to the Lender in the principal amount of $4,000,000.00, as at any time
amended, supplemented or restated."
"November 1996 Loan: collectively USD2,000,000.00, which was
advanced by the Lender to the Borrower on November 27, 1996 and US
2,000,000.00 which was advanced by the Lender to the Borrower on
January 15, 1997, and any other amounts advanced by the Lender to the
Borrower at any other time."
2.3 Section 1.1 of the Loan agreement is amended by deleting the
definition of "Second Funding Date" and inserting the following in place
thereof:
"Second Funding Date: the date or dates to be agreed upon by the
Borrower and the Lender upon which the November 1996 Loan shall be
advanced by the Lender to the Borrower."
-2-
<PAGE>
2.4 Clause (c) of Section 3.4 is deleted in its entirety and replaced
by the following:
"(c) The unpaid principal amount of that portion of the Loan
equal to the November 1996 Loan together with any unpaid accrued
interest thereon shall be repaid by the Borrower in full on December
16, 1997 and the unpaid principal amount of that portion of the Loan
equal to the November 1996 Loan together with any unpaid accrued
interest thereon and all other amounts owing hereunder shall be repaid
by the Borrower in full on December 26, 2001."
2.5 New subparagraph (f) and (g) are inserted at the end of Section
6.9 which reads as follows:
"(f) Notwithstanding paragraph (e) of this Section 6.9, on the
first day of each month the Borrower shall deliver to Lender each of
the following:
(i) the Aircraft/Engine Status and Maintenance Summary
Reports in the form of Exhibit "A" for each of the Aircraft
and the Spare Engines;
(ii) a budget for such month along with a cash flow
statement for the prior month; and
(iii) a status update for the Upgrade Engines, stating,
among other things, the estimated time for the completion
of the modifications to each of the Upgrade Engines."
"(g) During each calendar quarter, the Lender shall be permitted
to inspect the financial records of the Borrower and the logs and
records of the Borrower relating to the Aircraft and Engines and to
perform a physical inspection of the Aircraft and the Engines. All
inspections conducted by the Lender shall be at the sole cost and
expense of the Borrower."
2.6 A new Exhibit "A" in the form of Exhibit "A' attached hereto is
appended to the end of the Loan Agreement.
-3-
<PAGE>
3. REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower restates the representations and warranties set forth in
Section 7 of the Loan Agreement as if such representations and warranties were
set forth in full herein, provided, however that every reference in such
representations and warranties to the term "Documents" shall be deemed to
include this Amendment and the November 1996 Promissory Note (collectively, the
"Loan Document Amendments").
4. CONDITIONS PRECEDENT
--------------------
4.1 Notwithstanding anything contained in this Amendment or the
other Loan Document Amendments to the contrary, the obligation of the Lender to
advance that the additional $2,000,000.00 of the November 1996 Loan or any part
thereof is expressly contingent on the fulfillment and/or satisfaction in the
sole discretion of the Lender of the following conditions precedent and the
receipt by the Lender (in form and substance satisfactory to the Lender) of such
documents and instruments, if any, therein required or deemed necessary by the
Lender to evidence the fulfillment and/or satisfaction of said conditions
precedent:
(a) The Borrower and the Lender have executed and delivered
this Amendment or have caused the same to be done;
(b) The Borrower has executed and delivered to the Lender the
Amended and Restated Promissory Note dated January 15, 1997 in the principal
amount of $4,000,000.00 (the "New Note");
(c) The Lender has received a Certificate of Resolutions,
certified by the corporate secretary of the Borrower and setting forth a true,
complete and accurate copy of the resolutions approved by the Board of
Directors, of the Borrower authorizing the entering into, execution and delivery
of this Amendment and the New Note by the Borrower thereunder;
(d) The Lender has received an Opinion of Counsel for the
Borrower's counsel in form and substance acceptable to the Lender;
(e) The Lender has received an Officer's Certificate setting
forth the following: (i) the name of each of the duly elected and acting
officers of the Borrower together with the title of each office each holds; (ii)
the name and title of each officer of the Borrower who is authorized by the
Board of Directors of the Borrower to
-4-
<PAGE>
enter into, execute and deliver the Documents on behalf of the Borrower and a
specimen signature of each of said officers and (iii) a certified copy of a
current Certificate of Good Standing of the Borrower certified by the Secretary
of State of the State of Delaware;
(f) The Lender has received a copy of the Borrower's articles
of incorporation;
(g) The Lender has received a copy of the by-laws, as amended,
of the Borrower;
(h) The Borrower shall have paid to the Lender the Loan Fee
(defined below); and
(i) Such other agreements, certificates instruments or legal
opinions in writing as shall be deemed by the Lender or its counsel necessary or
desirable in order to more fully and completely service, protect, perfect or
preserve the Lender's Security Interests and other interests in and to the
Aircraft, and otherwise under the Documents and the Mortgage.
5. ACKNOWLEDGMENTS AND CONFIRMATIONS
---------------------------------
5.1 All references in the Loan Agreement and every other agreement,
instrument and document executed and delivered by Borrower in connection
therewith, to the "Loan Agreement" shall be deemed to refer to the Loan
Agreement as amended hereby.
5.2. The Loan Agreement and all agreements, instruments and documents
executed and delivered in connection with any of the foregoing, shall each be
deemed amended hereby to the extent necessary, if any, to give effect to the
provisions of this Amendment.
6. MISCELLANEOUS
-------------
6.1 The Borrower will upon receipt of invoices by Lender or upon
Lender's demand, pay to or reimburse Lender for all reasonable out-of-pocket
expenses of Lender incurred in connection with the negotiation, execution and
delivery of this Amendment and each of the other Loan Document Amendments
contemplated hereby, including, without limitation, all reasonable legal fees
and disbursements of Lender's
-5-
<PAGE>
counsel incurred in connection with all professional services rendered and
disbursements incurred by said lawyers with respect thereto.
6.2 The Borrower shall pay to Lender on or before January 15, 1997 a
loan fee equal to $20,000.00 (the "Loan Fee").
6.3 Except as specifically amended hereby, the Loan Agreement shall
remain in full force and effect in accordance with its terms, and each of the
Borrower and Lender hereby ratify and affirm all of the terms and conditions of
the Loan Agreement as amended hereby.
6.4 THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF ARIZONA.
6.5 This Amendment shall be binding upon and inure to the benefit of
the Borrower and the Lender and their respective successors and assigns. The
rights and obligations of the Borrower under this amendment shall not be
assigned or delegated without the prior written consent of Lender, and any
purported assignment or delegation without such consent shall be void.
6.6 Time is of the essence with respect to the terms and provisions of
this Amendment.
6.7 This Amendment may be executed in any number of counter parts, and
each of such counterpart shall for all purposes be deemed to be an original, and
all such counterparts shall together constitute but one and the same Amendment.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amendment
to Consolidated, Amended and Restated Aircraft and Engine Loan and Security
Agreement as of the day and year first above written.
TOWER AIR, INC.
By
------------------------------
Title
Tax ID No.: 11-262-1046
FINOVA CAPITAL CORPORATION
By
------------------------------
Title
-7-
<PAGE>
AMENDED AND RESTATED
PROMISSORY NOTE
---------------
USD 4,000,000.00 January 15, 1997
FOR VALUE RECEIVED, TOWER AIR, INC. (the "Maker"), a Delaware corporation,
having its principal place of business and chief executive office at Hangar No.
8, John F. Kennedy International Airport, Jamaica, New York 11430, does hereby
unconditionally promise to pay to FINOVA CAPITAL CORPORATION (the "Holder") or
its order, at the Holder's principal place of business at 1850 North Central
Avenue, Phoenix, Arizona 85002, or at such other place as the Holder may from
time to time in writing direct, the principal sum of USD 4,000,000.00 (the
"Loan"), in consecutive monthly installments consisting, in some cases, of
interest only and, in other cases, of principal and interest (an "Installment"),
on the days and in the amounts set forth on Schedule I attached hereto and made
a part hereof; provided, however, that the last such Installment shall be in the
-------- -------
amount necessary to pay all amounts due and owing to the Holder under the Loan
Agreement. Each date on which an Installment is due is hereinafter referred to
as a "Due Date." Interest shall accrue on any and all principal amounts
remaining unpaid hereunder from time to time outstanding from the date hereof
until such principal amounts are paid in full, at a fixed rate per annum of
10.27% computed from the date hereof. If any Due Date shall fall on a date which
is not a Business Day, the amount due on such date shall be paid on the
immediately succeeding Business Day.
Capitalized terms used herein and not otherwise defined shall have the same
meaning as is ascribed to such terms in that certain Consolidated, Amended and
Restated Aircraft and Engine Loan and Security Agreement dated March 25, 1996,
as at any time amended (the "Loan Agreement"), between the Maker, as borrower
therein, and the Holder, as lender therein.
This Amended and Restated Promissory Note (the "Note"): (i) amends and
restates the Promissory Note dated November 27, 1996 in the principal amount of
$2,000,000.00 which was issued by the Maker to the Holder and (ii) is made
pursuant and subject to the terms and conditions of the Loan Agreement,
providing, among other things, for the acceleration of the maturity hereof upon
the happening of certain stated events and for the prepayment of the Loan by the
Maker. This Note is secured, among other things, by a lien and security
interest granted to the Holder in the Aircraft and the Engines by the Loan
Agreement and the Mortgage, to which reference is made for a
<PAGE>
description of the Aircraft and the Engines and the rights of the parties with
respect thereto.
If any amount or portion thereof payable hereunder is not paid when due,
the Maker shall pay interest thereon at the Overdue Rate from the Due Date
thereof to and including the earlier to occur of (i) the date(s) of payment in
full of such overdue amount or portion thereof or (ii) the date the Unpaid
Amount is declared due and payable.
Interest calculations under this Note shall be made on a 360 day year based
on the actual number of days elapsed.
In the event (i) the Maker fails to pay any amount when due hereunder and
such failure continues for five (5) days after receipt by the Maker of written
notice thereof, or (ii) an Event of Default occurs under the Loan Agreement or
the other Documents, then, upon such occurrence, the Holder may, at the Holder's
option, declare this Note immediately due and payable; whereupon, this Note
shall be due and payable and the Maker shall immediately pay to the Holder the
Unpaid Amount plus all costs and expenses, including, but not limited to,
reasonable attorneys' fees, suffered or incurred in connection with the
enforcement of this Note.
Amounts due hereunder shall be paid (i) without set-off, counterclaim,
recoupment, abatement, demand, deduction, defense or any other circumstance of
whatsoever kind and (ii) free and clear of and without deduction for any present
or future taxes, restrictions or conditions of whatsoever kind.
Notwithstanding any provisions to the contrary herein contained, the Holder
shall not collect a rate of interest on any obligation owing by Maker to the
Holder in excess of the maximum rate of interest permitted by applicable law.
Maker understands and believes that the obligations evidenced by this Note
comply with all applicable usury laws; however, if any interest or other charges
in connection with the obligations evidenced by this Note are ever determined to
exceed the maximum amount permitted by law, then Maker agrees that (a) the
amount of interest or charges payable pursuant to this Note shall be reduced to
the maximum amount permitted by law and (b) any excess amounts previously
collected from Maker in connection with this Note that exceeded the maximum
amount permitted by law shall be credited against the principal balance of this
Note then outstanding. If the outstanding principal balance hereunder has been
paid in full, the excess amount shall be refunded to the Maker.
The contracted for rate of interest with respect to the obligations
evidenced by this Note shall include, without limitation, the following:
-2-
<PAGE>
(i) The interest rate calculated and applied to the principal balance of
this Note in accordance with the provisions hereof;
(ii) Post-maturity interest, calculated and applied to the principal
balance of this Note in accordance with the provisions hereof; and
(iii) All fees, charges, goods, things in action or any sum or things of
value ("Additional Sums") paid or payable by Maker in accordance with the
provisions of the Loan Agreement or this Note, howsoever described. If any such
Additional Sums may, under applicable law, be deemed to be interest with respect
to the lending transaction which is the subject of this Note and the Loan
Agreement, then, for the purpose of any applicable law that may limit the amount
of interest to be charged with respect to the lending transaction which is the
subject of this Note and Loan Agreement, such Additional Sums shall be payable
by Maker as, and shall be deemed to be, Additional Interest, and, for such
purposes only, the agreed upon and "contracted for rate of interest" of this
transaction shall be deemed to be increased by the rate of interest resulting
from the Additional Sums.
The Maker hereby waives diligence, presentment, demand, protest and notice
of any kind whatsoever. The non-exercise by the Holder of its rights hereunder
in any particular instance shall not constitute a waiver thereof in that or any
subsequent instance.
This Note shall be governed by and construed in accordance with the laws of
the State of Arizona.
The Maker waives the benefit of any statute of limitations affecting its
liability hereunder.
The Maker hereby irrevocably submits to the jurisdiction of the Superior
Court of Maricopa County, State of Arizona, or any successor to said Court, and
to the jurisdiction of the United States District Court for the District of
Arizona, or any successor to said Court, for purposes of any suit, action or
proceeding which relates to this Note. The Maker hereby waives and agrees, to
the extent permitted by applicable law, not to assert, by way of motion as a
defense or otherwise in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of the Arizona Courts, that the
suit, action or proceeding is brought in an inconvenient forum, that the venue
of the suit, action or proceeding is improper or that this Note or any
transaction provided for or contemplated herein may not be enforced in or by the
Arizona Courts. The Maker hereby agrees not to seek, and hereby waives, any
collateral review by any other court which may be called upon to enforce
judgment of any Arizona Courts of
-3-
<PAGE>
the merits of any such suit, action or proceeding or the jurisdiction of said
Arizona Courts. Nothing herein shall limit the Holder's right to bring any suit,
action or other proceeding against the Maker in any other appropriate
jurisdiction or forum or to serve process on the Maker by any means authorized
by applicable law.
The Maker hereby waives, to the fullest extent possible under applicable
law, the right to trial by jury in any action, suit or proceeding brought by the
Holder to enforce its rights hereunder.
Time is of the essence with respect to the terms and provisions of this
Note.
TOWER AIR, INC.
By: /s/ R.K. Punwani
---------------------------
Title: VP - Finance
Tax ID No.: 11-262-1046
-4-
<PAGE>
EXHIBIT 10.17
FIFTH AMENDMENT TO
CONSOLIDATED, AMENDED AND RESTATED
AIRCRAFT AND ENGINE LOAN AND SECURITY AGREEMENT
THIS FIFTH AMENDMENT TO CONSOLIDATED, AMENDED AND RESTATED AIRCRAFT AND
ENGINE LOAN AND SECURITY AGREEMENT (this "Amendment") made and entered into this
24/th/ day of December, 1997 by and between FINOVA CAPITAL CORPORATION (formerly
GREYHOUND FINANCIAL CORPORATION) (the "Lender"), a corporation organized and
existing under the laws of the State of Delaware, with its chief executive
office and principal place of business at 1850 North Central Avenue, Phoenix,
Arizona 85002 and TOWER AIR, INC. (the "Borrower"), a corporation organized and
existing under the laws of the State of Delaware, with its chief executive
office and principal place of business at Hangar No. 17, John F. Kennedy
International Airport, Jamaica, New York 11430.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower and the Lender have previously entered into the
Consolidated, Amended and Restated Aircraft and Engine Loan and Security
Agreement dated as of March 25, 1996, as amended by the First Amendment to
Consolidated, Amended and Restated Aircraft and Engine Loan and Security
Agreement dated as of May 8, 1996, the Second Amendment to Consolidated, Amended
and Restated Aircraft and Engine Loan and Security Agreement dated as of
September 25, 1996, the Third Amendment to Consolidated, Amended and Restated
Aircraft Engine Loan and Security Agreement dated as of November 27, 1996, and
Fourth Amendment to Consolidated, Amended and Restated Aircraft and Engine Loan
and Security Agreement dated as of January 17, 1997 (collectively, the "Loan
Agreement");
WHEREAS, the Borrower has requested that (a) the Lender grant to the
Borrower a deferral of the payment of principal for a period not to exceed three
months commencing December 1, 1997, (b) the Lender make an additional loan to
the Borrower in the amount of $3,363,213.48, of which the Lender will pay the
sum of $2,913,000.00 directly to China Airlines Ltd. in connection with a "D"
check performed on Aircraft [N619FF] (as defined in the N616FF Loan Agreement),
the sum of $443,923.88, which will be retained by the Lender as the payment
which the Borrower was required to pay to the Lender on November 28, 1997 in
connection with Amended and Restated Promissory Note dated May 8, 1996, and the
sum of $6,289.60 which will be retained by the Lender as interest due in respect
of the Amended and Restated Promissory Note dated January
<PAGE>
15, 1997, and (c) the Lender commit to make an additional loan in the sum of
$636,786.52 to be used in connection with a "D" check performed on Aircraft
[N620FF], which amount shall be paid directly to the third- party vendor
performing the work on Aircraft [N620FF].
NOW THEREFORE, the undersigned hereto agree as follows:
1. DEFINITIONS.
-----------
Capitalized terms used herein unless otherwise defined herein shall
have the meaning ascribed to such terms in the Loan Agreement.
2. AMENDMENTS TO LOAN AGREEMENT.
------------------------------
2.1 Section 1.1 of the Loan Agreement is amended by deleting the
definitions "November 1996 Note" and "November 1996 Loan" and inserting the
following in place thereof:
"NOVEMBER 1996 NOTE: shall mean that certain Promissory Note
dated November 27, 1996 issued by the Borrower to the Lender in the
principal amount of $2,000,000.00 as amended and restated by that
certain Amended and Restated Promissory Note dated January 15, 1997
issued by the Borrower to the Lender in the principal amount of
$4,000,000.00, as further amended and restated by that certain Amended
and Restated Promissory Note dated December 24, 1997 issued by the
Borrower to the Lender in the principal amount of $4,031,616.68, as at
any time further amended, supplemented or restated."
"NOVEMBER 1996 LOAN: shall mean collectively, (a) USD
2,000,000.00 which was advanced by the Lender to the Borrower on
November 27, 1996; (b) USD 2,000,000.00 which was advanced by the
Lender to the Borrower on January 15, 1997; (c) USD $3,363,213.48
which was advanced by the Lender to the Borrower on December 24, 1997;
(d) USD $636,786.52 which is to be advanced by the Lender to the
Borrower on or about February 15, 1998 and (e) any other amounts at
any time advanced by the Lender to the Borrower pursuant to the terms
of the Loan Agreement or any amendments thereto."
-2-
<PAGE>
2.2 Subparagraph (g) is inserted at the end of Section 6.9 which
reads as follows:
"(g) During each month, the Lender shall be permitted to
inspect the financial records of the Borrower and the logs and
records of the Borrower relating to the Aircraft and Engines
and to perform a physical inspection of the Aircraft and the
Engines. All inspections conducted by the Lender shall be at
the sole cost and expense of the Borrower."
3. REPRESENTATIONS AND WARRANTIES.
------------------------------
The Borrower restates the representations and warranties set forth in
Section 7 of the Loan Agreement as if such representations and warranties were
set forth in full herein, provided, however that every reference in such
representations and warranties to the term "Documents" shall be deemed to
include this Amendment and the New Note, the Consolidated Note, the Amended
Note and the Second Amendment (collectively, the "Loan Document Amendments").
4. CONDITIONS PRECEDENT
--------------------
4.1 Notwithstanding anything contained in this Amendment or the other
Loan Document Amendments to the contrary, the obligation of the Lender to
advance the additional $4,000,000.00 contemplated by the terms hereof or any
part thereof is expressly contingent on the fulfillment and/or satisfaction in
the sole discretion of the Lender of the following conditions precedent and the
receipt by the Lender (in form and substance satisfactory to the Lender) of such
documents and instruments, if any, therein required or deemed necessary by the
Lender to evidence the fulfillment and/or satisfaction of said conditions
precedent:
(a) The Borrower and the Lender have executed and delivered this
Amendment or have caused the same to be done;
(b) The Borrower has executed and delivered to the Lender the
Amended and Restated Promissory Note dated December 24, 1997 in the principal
amount of $4,031,616.68 (the "New Note"), the Consolidated, Amended and Restated
Promissory Note dated December 24,1997 in the principal amount of $42,851,030.82
-3-
<PAGE>
(The "Consolidated Note"), and the Amended and Restated Promissory Note in the
principal amount of $18,234,098.22 (the "Amended Note");
(c) The Lender has received a Certificate of Resolutions, certified by
the corporate secretary of the Borrower and setting forth a true, complete and
accurate copy of the resolutions approved by the Board of Directors of the
Borrower authorizing the entering into, execution and delivery of this Amendment
and the New Note, the Consolidated Note, the Amended Note and the Second
Amendment, by the Borrower thereunder;
(d) The Lender has received an Opinion of Counsel from the Borrower's
counsel in form and substance acceptable to the Lender;
(e) The Lender has received an Officer's Certificate setting forth the
following: (i) the name of each of the duly elected and acting officers of the
Borrower together with the title of the office each holds; (ii) the name and
title of each officer of the Borrower who is authorized by the Board of
Directors of the Borrower to enter into, execute and deliver the Documents on
behalf of the Borrower and a specimen signature of each of said officers and
(iii) a certified copy of a current Certificate of Good Standing of the Borrower
certified by the Secretary of State of the State of Delaware;
(f) The Lender has received a copy of the Borrower's articles of
incorporation;
(g) The Lender has received a copy of the by-laws, as amended, of the
Borrower; and
(h) Such other agreements, certificates instruments or legal opinions
in writing as shall be deemed by the Lender or its counsel necessary or
desirable in order to more fully and completely service, protect, perfect or
preserve the Lender's Security Interests and other interests in and to the
Aircraft, and otherwise under the Documents and the Mortgage.
5. ACKNOWLEDGMENTS AND CONFIRMATIONS.
---------------------------------
5.1 All references in the Loan Agreement and every other agreement,
instrument and document executed and delivered by Borrower in connection
therewith, to the "Loan Agreement" shall be deemed to refer to the Loan
Agreement as amended hereby.
-4-
<PAGE>
5.2 The Loan Agreement and all agreements, instruments and documents
executed and delivered in connection with any of the foregoing, shall each be
deemed amended hereby to the extent necessary, if any, to give effect to the
provisions of this Amendment.
6. MISCELLANEOUS.
-------------
6.1 The Borrower will upon receipt of invoices by Lender or upon
Lender's demand, pay to or reimburse Lender for all reasonable out-of-pocket
expenses of Lender incurred in connection with the negotiation, execution and
delivery of this Amendment and each of the other Loan Document Amendments
contemplated hereby, including, without limitation, all reasonable legal fees
and disbursements of Lender's counsel incurred in connection with all
professional services rendered and disbursements incurred by said lawyers with
respect thereto.
6.2 Except as specifically amended hereby, the Loan Agreement shall
remain in full force and effect in accordance with its terms, and each of the
Borrower and Lender hereby ratify and affirm all of the terms and conditions of
the Loan Agreement as amended hereby.
6.3 THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ARIZONA.
6.4 This Amendment shall be binding upon and inure to the benefit of
the Borrower and the Lender and their respective successors and assigns. The
rights and obligations of the Borrower under this Amendment shall not be
assigned or delegated without the prior written consent of Lender, and any
purported assignment or delegation without such consent shall be void.
6.5 Time is of the essence with respect to the terms and provisions
of this Amendment.
6.6 This Amendment may be executed in any number of counterparts, and
each of such counterparts shall for all purposes be deemed to be an original,
and all such counterparts shall together constitute but one and the same
Amendment.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Fifth Amendment
to Consolidated, Amended and Restated Aircraft and Engine Loan and Security
Agreement as of the day and year first above written.
TOWER AIR, INC.
By /s/ R.K. PUNWANI
-------------------------------------------
Title Vice President-Finance
Tax ID No.: 11-262-1046
FINOVA CAPITAL CORPORATION
By /s/ Sandra K. McDonough
-------------------------------------------
Title Vice President
-6-
<PAGE>
EXHIBIT 10.18
LOAN AGREEMENT
--------------
THIS LOAN AGREEMENT (this "Agreement") is entered into this 21st day of
November, 1997 by TOWER AIR, INC., a Delaware corporation ("Borrower"), and
RANGER ASSET MANAGEMENT, L.P., a Delaware limited partnership which is doing
business as Protective Asset Management Company, ("Lender").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrower has requested that Lender (a) provide purchase money
financing with respect to its purchase of certain Leased Engines (hereinafter
defined), (b) provide financing for repairs of certain Non-Serviceable Leased
Engines (hereinafter defined) and (c) provide certain additional working capital
financing to Borrower, as more particularly described below; and
WHEREAS, Lender is willing to provide the foregoing financing to Borrower,
all in accordance with the terms hereof upon the execution of this Agreement by
Borrower, compliance by Borrower with all of the terms and provisions of this
Agreement and fulfillment of all of the conditions precedent to Lender's
obligations herein contained;
NOW, THEREFORE, FOR AND IN CONSIDERATION OF the sum of Ten and No/100
Dollars ($10.00), and for other good and valuable consideration, the receipt,
adequacy, and sufficiency of which are hereby acknowledged, and for the purpose
of seeking to induce Lender to extend credit to or for the benefit of Borrower,
Lender and Borrower hereby agree as follows:
ARTICLE I -- DEFINITIONS
------------------------
1.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms
---------------------
shall have the following meanings:
"Air Carrier Operating Certificate" shall mean an Air Carrier Operating
---------------------------------
Certificate, issued by the FAA pursuant to 14 CFR Part 121.
"Airframe" shall mean that certain Boeing 747-100 airframe, bearing
--------
Manufacturer's Serial No. 20273 and Registration No. N606FF, together with any
and all parts, accessories, components, instruments, avionics (including without
limitation, radio, radar, navigation systems or other electronic equipment) and
other equipment now or hereafter installed therein or thereon and together with
all manuals, logs and maintenance records relating thereto, regardless of their
form.
"Affiliate" shall mean, with respect to any person or Business Entity, any
---------
person or Business Entity directly or indirectly controlling, controlled by, or
under direct or indirect common control with, such person or Business Entity.
<PAGE>
"Approved Repair Facility" shall mean the repair facility of GE Aircraft
------------------------
Engine Services Ltd. located on the Island of Wales, U.K.
"Business Entity" shall mean any corporation, partnership, limited
---------------
liability company, trust or any other business entity of any kind or nature
whatsoever.
"Certificate of Public Convenience and Necessity" shall mean a Certificate
-----------------------------------------------
of Public Convenience and Necessity issued by the United States Department of
Transportation pursuant to the Aviation Act of 1958, as amended, and the
regulations thereunder.
"Closing Date" shall mean the date on which the Loan is funded.
------------
"Collateral" shall mean any and all items of collateral now or hereafter
----------
pledged by Borrower to Lender pursuant to the Security Agreement or otherwise as
security for the Loan, including without limitation, the Engines, the Airframe
and all proceeds (including without limitation, insurance proceeds) with respect
to any of the foregoing.
"Default" shall mean any event that, with the passage of time, the giving
-------
of notice or both, could constitute an Event of Default hereunder.
"Engine Leases" shall mean, collectively, those certain Engine Lease
-------------
Agreements listed on Schedule "1" attached hereto and incorporated herein by
------------
reference between Borrower, as lessee, and Seller/Lessor, as lessor, together
with any and all amendments thereto.
"Engines" shall mean, collectively, the Leased Engines and the Owned
-------
Engines.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
such Act may be amended from time to time.
"FAA" shall mean the Federal Aviation Administration.
---
"GAAP" shall mean, as in effect from time to time, generally accepted
----
accounting principles consistently applied.
"Indebtedness" shall mean, with respect to Borrower, (i) all items, except
------------
items of capital stock or of surplus or of general contingency or deferred tax
reserves, which in accordance with GAAP would be included in determining total
liabilities as shown on the liability side of a balance sheet of Borrower, (ii)
to the extent not otherwise included, all obligations secured by any Lien to
which any property or asset owned by Borrower is subject, whether or not the
obligation secured thereby shall have been assumed,
-2-
<PAGE>
(iii) to the extent not otherwise included, all obligations of other persons or
Business Entities which Borrower has guaranteed, including but not limited to,
all obligations of consisting of recourse liability with respect to accounts
receivable sold or otherwise included, and (iv) all capitalized lease
obligations of Borrower and all obligations with respect to leases constituting
part of a sale and lease-back arrangement.
"Lease Termination Agreement" shall mean that certain Lease Termination
---------------------------
Agreement, substantially in the form of Exhibit "B" hereto, to be executed by
-----------
Borrower and Seller/Lessor in connection with the Engine Leases.
"Leased Engines" shall mean, collectively, four (4) JT9D-7A aircraft
--------------
engines, bearing serial numbers 662294, 662305, 685747 and 685695, respectively,
together with any and all parts, accessories and other equipment now or
hereafter installed therein or thereon and together with all manuals, logs and
maintenance records relating thereto, regardless of their form.
"Lien" shall mean, with respect to any property, any mortgage, lien,
----
pledge, assignment, charge, security interest, title retention agreement, levy,
execution, seizure, attachment, garnishment or other encumbrance of any kind
with respect to such property.
"Loan" shall mean the $9,750,000.00 term loan to be extended by Lender to
----
Borrower pursuant to Section 2.1 hereof, as the same may be modified, amended or
extended from time to time.
"Loan Documents" shall mean, collectively, this Agreement, the Note, the
--------------
Security Agreement, all Uniform Commercial Code financing statements and all
other documents, agreements, certificates, reports and instruments called for
herein or executed in connection herewith or contemplated hereby, together with
any modifications, renewals or extensions of any of the foregoing.
"Materially Adverse Effect" shall mean any event which could reasonably be
-------------------------
expected to have a material and adverse effect on the ability of Borrower to pay
any amount now or hereafter due under this Agreement or any other Loan Document,
or to otherwise perform its obligations hereunder or thereunder.
"Maturity Date" shall mean, with respect to the Loan, the "Maturity Date"
-------------
set forth in the Note, or such earlier date on which the indebtedness evidenced
by the Note shall become due and payable in full (whether upon acceleration or
otherwise).
"Non-Serviceable Leased Engines" shall mean, collectively, those Leased
------------------------------
Engines bearing serial numbers 662294 and 685747.
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<PAGE>
"Non-Serviceable Engines" shall mean, collectively, the Non-Serviceable
-----------------------
Leased Engines and that Owned Engine bearing serial number 662504.
"Note" shall mean the Term Promissory Note, substantially in the form of
----
Exhibit "A" attached hereto, to be issued by Borrower to Lender in connection
- -----------
with the Loan.
"Obligations" shall mean all existing and future payment and performance
-----------
duties, liabilities and obligations of Borrower to Lender whatsoever, including
without limitation all such duties. liabilities and obligations of Borrower to
Lender under this Agreement, the Note or any of the other Loan Documents,
whether now existing or hereafter created, incurred or arising, together with
any and all amendments, modifications, extensions or renewals of any of the
foregoing.
"Owned Engines" shall mean, collectively, those certain three (3) JT9D-7A
-------------
aircraft engines, bearing serial numbers 662504, 685870, 662569, respectively,
together with any and all parts, accessories and other equipment now or
hereafter installed therein or thereon and together with all manuals, logs and
maintenance records relating thereto, regardless of their form.
"Permitted Liens" shall mean:
---------------
(a) Liens for taxes, assessments and other governmental charges or levies
either not yet due and payable or being contested in good faith by
appropriate proceedings (and for the payment of which adequate reserves
have been provided) by appropriate proceedings, but only so long as
such proceedings, or the continued existence of such Lien, do not give
rise to any likelihood of the sale, forfeiture or other loss of the
relevant item of the Collateral;
(b) suppliers', mechanics', workers', repairmen's, 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, but only so long as such
proceedings, or the continued existence of such Lien, do not give rise
to any likelihood of the sale, forfeiture or other loss of the relevant
item of the Collateral;
(d) salvage or similar rights of insurers under insurance policies
maintained pursuant to the requirements hereof and of the Security
Agreement;
-4-
<PAGE>
(e) other Liens approved by Lender in writing from time to time; and
(f) Liens in favor of Lender.
"Prime Rate" shall mean the rate from time to time announced by Chase
----------
Manhattan Bank, New York, New York ("Chase") as its "Prime Rate." If at any
time, or from time to time, the Prime Rate, as announced by Chase, increases or
decreases, then the "Prime Rate" hereunder and under the Note shall be
correspondingly increased or decreased effective on the day on which any such
increase or decrease of the Prime Rate is announced. In the event that Chase,
during the term hereof, shall abolish or abandon the practice of announcing such
Prime Rate, or should the same become unascertainable, Lender shall designate a
comparable reference rate which shall be deemed to be the "Prime Rate."
"Purchase Agreement" shall mean that certain Aircraft Engine Purchase
------------------
Agreement dated of even date herewith by and between Seller/Lessor and Borrower
with respect to the Leased Engines, as the same may be amended from time to
time.
"Security Agreement" shall mean that certain Security Agreement, dated as
------------------
of even date herewith, by and between Lender and Borrower.
"Seller/Lessor" shall mean First Security Bank, N.A., not in its individual
-------------
capacity, but solely as Owner Trustee under that certain Trust Agreement dated
November 20, 1996.
"Solvent" shall mean, as to Borrower, that Borrower has capital sufficient
-------
to carry on its business and transactions in which it is about to engage and is
able to pay its debts as they mature and owns property having a value, both at
fair valuation and at present fair salable value, greater than the amount
required to pay its debts.
"Subsidiary" shall mean any Business Entity in which Borrower owns,
----------
directly or indirectly, 50 percent or more of the outstanding partnership
interests, membership interests, capital stock or other ownership interests of
such Business Entity.
Each definition of a document in this Article 1 shall include such
documents as modified, amended, extended or supplemented from time to time, and
except where the context otherwise requires, definitions imparting the singular
shall include the plural and vice versa.
ARTICLE II - THE LOAN
---------------------
2.1 LOAN FACILITY. Subject to Section 3.1 hereof, Lender shall extend the
-------------
Loan to Borrower in the principal amount of
-5-
<PAGE>
$9,750,000.00. The proceeds of the Loan shall be used by Borrower (a) to acquire
the Leased Engines from the Seller/Lessor pursuant to the Purchase Agreement,
(b) to pay for the repair work to be performed on the Non-Serviceable Leased
Engines and (c) for working capital requirements. Amounts repaid with respect to
the Loan may not be reborrowed. The Loan shall be evidenced by the Note,
substantially in the form of Exhibit "A" hereto, and shall be repayable over a
-----------
period of 36 months in accordance with the terms and provisions set
forth herein and therein.
2.2 INTEREST.
--------
(a) Basic Rate. Interest shall accrue on the unpaid principal balance
----------
of the Loan at a fluctuating interest rate per annum rate equal to the Prime
Rate plus 2.5 percentage points (the "Basic Rate"). Interest shall be payable
monthly in arrears (i) together with principal payments as set forth in Section
2.4 hereof and (ii) on the Maturity Date.
(b) Supplemental Rate. If, on the date which is six (6) months after
-----------------
the Closing Date, repairs to at least two of the Non-Serviceable Engines have
not been completed, then interest shall accrue on the outstanding principal
balance of the Loan at a rate equal to the Prime Rate plus 4.5 percentage points
until such time as repairs to at least two of the Non-Serviceable Engines have
been completed. As used in this Section 2.2(b), the term "completed" shall mean
that repairs to the relevant Engine have been completed and paid for in full
such that such Engine (i) is serviceable in accordance with Borrower's then-
existing maintenance program, (ii) is free and clear of all Liens, except for
Permitted Liens and (iii) is subject to immediate release, or has previously
been released, from the relevant repair facility. Whenever the Loan shall be
accruing interest at the supplemental rate set forth above, Lender shall provide
Borrower with a monthly invoice as to the amount of such supplemental interest
payable hereunder.
(c) Default Rate. If Borrower shall fail to pay principal on the Loan
------------
when due (whether at maturity, by reason of acceleration or otherwise), such
unpaid principal amounts shall bear interest for each day from the date such
unpaid amounts became due until paid in full (both before and after judgment),
payable on demand, at a rate per annum equal to two (2) percentage points over
the otherwise applicable rate (the "Default Rate"). In addition, if Lender
shall have issued a notice of default to Borrower pursuant to Section 6.1 hereof
or if an Event of Default has otherwise occurred, interest shall accrue on the
unpaid principal balance of the Loan at the Default Rate until the relevant
Default or Event of Default has been cured to Lender's reasonable satisfaction,
whereupon the rate of interest with respect to the Loan shall be as set forth in
subparagraph (a) or (b) above, as then applicable.
-6-
<PAGE>
(d) Basis of Calculation. All interest due and payable hereunder or
--------------------
under the Note shall be computed on the basis of a 360-day year and the actual
number of days elapsed.
2.3 DISBURSEMENT OF FUNDS. Subject to the provisions of Section 3.1
---------------------
hereof, Lender shall disburse the entire amount of the Loan on the Closing Date
by (i) wire transfer directly to Seller/Lessor of the net proceeds payable to
Seller/Lessor for the Leased Engines pursuant to the Purchase Agreement and (ii)
wire transfer of the balance of the Loan directly to Borrower.
2.4 REPAYMENT. The principal amount of the Loan shall be repayable over a
---------
36-month term in 36 consecutive monthly installments of principal and interest
in an amount sufficient to fully amortize the Loan over the term thereof at the
then applicable Basic Rate, payable on the 15th day of each month over the term
of the Loan, all as more particularly set forth in the Note. The initial
amortization schedule is attached to the Note. In connection with any change in
the Basic Rate, Lender shall prepare and deliver to Borrower a new amortization
schedule which shall provide for amortization of the then outstanding principal
balance of the Loan over the then-remaining term thereof at the then-applicable
Base Rate.
2.5 PREPAYMENTS.
-----------
(a) Generally. Until such time as repairs to both of the Non-
---------
Serviceable Leased Engines have been completed and except as provided in
Subparagraph (b) hereof, the principal amount of the Loan may be prepaid in full
or in part only upon payment by Borrower of a prepayment premium in an amount
equal to one (1%) percent of the principal amount prepaid; provided, however,
-------- -------
that such prepayment premium shall be waived by Lender in connection with any
prepayment which is the result of a casualty to any item of the Collateral. At
any time when repairs to both of the Non-Serviceable Leased Engines have been
completed, the principal amount of the Loan may be prepaid in full or in part at
any time without premium or penalty. As used in this Section 2.5(a), the term
"completed" shall have the meaning set forth in Section 2.2(b) hereof.
(b) Mandatory Prepayment. If, on the date which is six (6) months
--------------------
after the Closing Date, repairs to both of the Non-Serviceable Leased Engines
have not been completed (as that term is defined in Section 2.2(b) hereof), then
Borrower shall, on demand by Lender, make a mandatory prepayment of the
principal amount of the Loan in the amount of $1,750,000.00. Such mandatory
prepayment shall not be subject to the prepayment premium set forth in
subparagraph (a) above.
2.6 LOAN ACCOUNT. Lender shall open and maintain on its books in the
------------
name of Borrower a loan account with respect to the
-7-
<PAGE>
Loan. Lender shall reflect a debit for the principal amount of the Loan and
accrued interest thereon, and shall reflect a credit for each payment on account
of such principal and interest. The records of Lender with respect to such
account shall, absent manifest error, be prima facie evidence of the Loan and of
accrued interest thereon.
2.7 AMOUNT AND MANNER OF PAYMENTS. All payments (including any
-----------------------------
prepayments) received by Lender shall be applied as follows: (a) to the payment
of any prepayment premium due in connection with such payment, (b) to the
payment of any outstanding expenses then due and payable with respect to the
Loan, (c) to the payment of accrued and unpaid interest on the Loan, (d) to the
payment of the outstanding principal balance of the Loan, until the Loan has
been repaid in full. Notwithstanding the foregoing, if a Default or Event of
Default shall have occurred and be continuing, Lender shall apply any and all
amounts received from Lessee or Borrower to such Obligations of Borrower and in
such priority as Lender shall determine in its sole and absolute discretion.
2.8 NO SET-OFF. Borrower agrees to pay principal, interest, fees and all
----------
other amounts due hereunder or under the Note or any other Loan Document without
set-off, counterclaim or other deduction whatsoever.
ARTICLE III - CONDITIONS PRECEDENT
----------------------------------
3.1 TERM LOAN. The obligation of Lender to fund the Loan is subject to
---------
the satisfaction of each of the following conditions precedent, on or prior to
the Closing Date:
(a) Documents. Each of the following documents (in form and substance
---------
reasonably satisfactory to Lender) shall have been duly executed (if applicable)
and delivered to Lender:
(i) the Note, substantially in the form attached hereto as
Exhibit "A";
- -------
(ii) the Security Agreement, in proper form for recordation with
the FAA;
(iii) financing statements to be filed in all locations deemed
necessary by Lender;
(iv) copies of Borrower's certificate of incorporation and by-
laws, together with evidence as to the due existence and good standing of
Borrower in the State of Delaware, qualification of Borrower to do business as a
foreign corporation in New York, and the authorization of Borrower to enter into
the Loan Documents;
-8-
<PAGE>
(v) a certificate of incumbency as to the officers of Borrower
who execute and deliver the Loan Documents on behalf of Borrower;
(vi) a copy of the Certificate of Airworthiness with respect to
the Airframe;
(vii) a copy of Borrower's current Certificate of Convenience
and Public Necessity and Air Carrier Operating Certificate;
(viii) such opinions of counsel as Lender may reasonably request,
including without limitation, an opinion of FAA counsel as contemplated in the
Security Agreement; and
(ix) such other documents, certificates and other information
as Lender may reasonably request.
(b) Other Conditions. Lender shall have received evidence reasonably
----------------
satisfactory to it that each of the following additional conditions has been
satisfied:
(i) Borrower shall have performed all of its obligations under
the Lease Termination Agreement.
(ii) Borrower shall have acquired (or will, upon funding of the
Loan, shall acquire) title to each of the Leased Engines free and clear of all
Liens, except for Permitted Liens, and Borrower shall have title to each of the
Owned Engines and the Airframe, free and clear of all Liens, except for
Permitted Liens. Lender shall have received the results of a lien search with
respect to the Engines and the Airframe, dated no later than the Closing Date,
which lien search shall reveal no Liens on such respective items except for
Liens to be discharged on or prior to the Closing Date pursuant to documentation
satisfactory to Lender;
(iii) the Airframe shall be registered in the name of Borrower as
owner on the United States Civil Aircraft Registry, free and clear of all Liens,
except for Permitted Liens.
(iv) all insurance required to be maintained with respect to the
Collateral is in place, as evidenced by insurance certificates and/or policies
satisfactory to Lender;
(v) all governmental and third party approvals and consents
necessary or, in Lender's discretion, advisable in connection with the
transactions contemplated hereby and the continuing operations of Borrower shall
have been obtained and shall be in full force and effect;
-9-
<PAGE>
(vi) all other representations and warranties of Borrower set
forth in Article IV hereof shall be true and correct in all material respects on
the Closing Date; and
(vii) Borrower shall have complied with all of its covenants and
agreements set forth herein which are to be performed on or prior to the Closing
Date.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES
-------------------------------------------
Borrower represents and warrants to Lender as follows:
4.1 FORMATION; QUALIFICATION. Borrower is a corporation duly organized,
------------------------
validly existing and in good standing under the laws of the state of its
incorporation, has the power and authority, corporate and otherwise, to own or
lease and operate its properties and to carry on its business as now being and
hereafter proposed to be conducted and is duly qualified and is in good standing
as a foreign corporation, and authorized to do business, in the State of New
York and each other jurisdiction in which the character of its properties or the
nature of its business requires such qualification or authorization. Borrower's
principal office is located at Hangar 17, JFK International Airport, Jamaica,
New York 11430. Borrower has no Subsidiaries.
4.2 POWER AND AUTHORITY. Borrower has the power and has taken all
-------------------
necessary corporate and other action to authorize it to execute, deliver and
perform this Agreement and each of the other Loan Documents in accordance with
the terms thereof and to consummate the transactions contemplated hereby and
thereby.
4.3 REGISTRATION AND APPROVALS. All approvals, licenses and
--------------------------
authorizations of, and all filings and registrations with, any governmental
agency or authority necessary for the due execution, delivery, performance or
enforceability of the Loan Documents have been obtained and are in full force
and effect.
4.4 BORROWER'S OPERATIONAL AUTHORITY. Borrower is the holder of a current
--------------------------------
Certificate of Public Convenience and Necessity and a current Air Operating
Certificate, which certificates are validly issued and outstanding. Neither of
said certificates is the subject of any pending or, to the best of Borrower's
knowledge, threatened attack or revocation.
4.5 AGREEMENT BINDING. This Agreement has been duly executed and
-----------------
delivered by Borrower, and is, and each of the other Loan Documents is, a legal,
valid and binding obligation of Borrower enforceable in accordance with its
terms, as such enforcement may be limited by bankruptcy, insolvency or similar
laws affecting the enforcement of creditors rights generally. The execution,
delivery and performance of this Agreement and the other Loan Documents and the
payment of all sums payable thereunder: (a) to the best
-10-
<PAGE>
knowledge of Borrower, does not violate any statute, other regulation, or other
provision of law, (b) does not contravene any provision of the certificate of
incorporation or by-laws of Borrower and (c) does not result in the breach of or
default under any agreement to which Borrower is a party or by which Borrower or
any of its properties may be bound. The Security Agreement creates in favor of
Lender a valid and enforceable security interest in the items of Collateral
described therein.
4.6 ABSENCE OF DEFAULT. Borrower is not in default under any material
------------------
agreement to which it is a party or by which it or any of its property is bound,
which default could reasonably be expected to have a Material Adverse Effect
upon its business or operations.
4.7 LITIGATION. There are no pending or, to the best knowledge of
----------
Borrower, threatened legal actions, arbitrations or other proceedings against
Borrower, which, if adversely determined, could reasonably be expected to impair
the ability of Borrower to carry on its business as now conducted or its ability
to pay any amounts due under this Agreement or any other Loan Document, nor are
there any pending or threatened proceedings as to the unpaid or disputed tax
liabilities of Borrower.
4.8 TAXES. All federal, state and other tax returns of Borrower required
-----
by law to be filed have been duly filed (including without limitation, all
returns with respect to passenger excise taxes and passenger facility charges),
and all federal, state and other taxes, assessments and other governmental
charges or levies upon Borrower and any of its properties, operations (including
without limitation, all passenger excise taxes and passenger facility charges),
income, profits and assets, which are due and payable, have been paid, except
any such the payment of which Borrower is contesting in good faith by
appropriate proceedings and for which adequate reserves have been provided on
the books of Borrower and as to which neither any Lien has attached nor any
foreclosure, distraint, sale or similar proceedings have been commenced. The
charges, accruals and reserves on the books of Borrower in respect of taxes are,
in the reasonable judgment of Borrower, adequate. Borrower has filed all
required federal, state and other tax returns required to be filed, and all
taxes, assessments and other such governmental charges due from Borrower have
been fully paid.
4.9 TITLE TO PROPERTY. Borrower has good, marketable and legal title to
-----------------
each of the Owned Engines and the Airframe, subject to no Liens except Permitted
Liens. The Airframe is currently registered in the name of Borrower as owner on
the United States Civil Aircraft Registry, free and clear of all Liens, except
for Permitted Liens. Except for financing statements in favor of Lender, no
financing statement under the Uniform Commercial Code and no other filing which
names Borrower as debtor or which covers or purports to cover any of the Owned
Engines the Airframe or
-11-
<PAGE>
Borrower's interest in the Leased Engines is on file or of record in any state
or any jurisdiction and Borrower has not signed any such financial statement or
filing, except in favor of Lender.
4.10 FINANCIAL STATEMENTS. Borrower has furnished, or has caused to be
--------------------
furnished, to Lender financial statements for Borrower which are complete and
correct in all material respects and present fairly in accordance with G.A.A.P.
the financial position of Borrower as of December 31, 1996 and the results of
operations for the period then ended. Except as disclosed in such financial
statements, Borrower did not have any material liabilities, contingent or
otherwise, and there are no material unrealized or anticipated losses of
Borrower which have not heretofore been disclosed in writing to Lender.
4.11 INVESTMENTS AND GUARANTEES. Borrower has not made any investments in,
--------------------------
advances to, or guarantees of, the obligations of any person or Business Entity,
except as reflected in the financial statements referred to in Section 4.10
above or as otherwise disclosed to Lender in writing.
4.12 ACCURACY AND COMPLETENESS OF INFORMATION. All information, reports
----------------------------------------
and other papers and data relating to Borrower and/or any item of the Collateral
(including without limitation, maintenance and usage information with respect to
the Collateral), as furnished to Lender were, at the time the same were so
furnished, complete and correct in all material respects.
4.13 SOLVENCY. Borrower is Solvent.
--------
4.14 NAME OF BORROWER. Borrower has not changed its name within the
----------------
preceding five years from the date hereof, and has not transacted business under
any other trade or tradename.
4.15 NO ADVERSE CHANGE. There has occurred no event which could have a
-----------------
Materially Adverse Effect and no fact is currently known to Borrower which has
or in Borrower's reasonable opinion could be reasonably expected to have a
Materially Adverse Effect.
ARTICLE V -- AFFIRMATIVE AND NEGATIVE COVENANTS
-----------------------------------------------
5.1 AFFIRMATIVE COVENANTS. So long as any portion of the Obligations is
---------------------
outstanding:
(a) Status of Non-Serviceable Engines. Borrower shall give Lender
---------------------------------
prompt written notice of the completion of repairs to each of the Non-
Serviceable Engines, together with Borrower's schedule for the placement of each
such Engine into service.
(b) Records Regarding Collateral Usage. Borrower shall deliver to
----------------------------------
Lender, upon Lender's request, such information
-12-
<PAGE>
regarding usage of the Engines and the Airframe as may be requested by Lender
from time to time pursuant to the Security Agreement.
(c) Preservation of Existence and Similar Matters. Borrower will (i)
---------------------------------------------
preserve and maintain its existence, rights, franchises, licenses and privileges
in its state of formation, and (ii) qualify and remain qualified and authorized
to do business in each jurisdiction in which failure to be so qualified could
reasonably be expected to have a Materially Adverse Effect.
(d) Compliance with Applicable Law. Borrower will comply with the
------------------------------
requirements of all applicable laws, including without limitation, all
requirements imposed upon Borrower's operations pursuant to Borrower's
Certificate of Public Convenience and Necessity and its Air Operator's
Certificate.
(e) Accounting Methods and Financial Records. Borrower shall maintain
----------------------------------------
a system of accounting established and administered in accordance with GAAP,
consistently applied.
(f) Insurance. Borrower shall, at its own expense, (i) maintain
---------
insurance including, but not limited to, public liability insurance from
responsible companies in such amounts and against such risks as shall be
reasonably acceptable to Lender, and (ii) keep the Collateral insured on the
terms and in the manner required by the Security Agreement. Each such policy
shall in addition name Lender as an additional insured or loss payee, as the
case may be, and provide that at least 30 days' prior written notice of
cancellation or of lapse of such policy shall be given to Lender by the insurer.
(g) Payment of Taxes and Claims. Borrower will pay and discharge all
---------------------------
taxes, assessments and governmental charges or levies imposed upon it or upon
its income, operations or profits or upon any properties belonging to it prior
to the date on which penalties attach thereto, which, if unpaid, might become a
Lien upon any of its properties; except for any such item which is being
contested in good faith by appropriate proceedings and for which adequate
reserves shall have been set aside. Borrower shall timely file all information
returns required by federal state or local tax authorities. Without limiting
the generality of this paragraph, the foregoing requirements shall also apply to
Borrower's obligations with respect to passenger excise taxes and passenger
facility charges.
(h) Visits and Inspections. Borrower shall permit Lender, upon
----------------------
reasonable notice, to have access to and examine at all reasonable times during
normal business hours the properties, records and financial records of Borrower,
together with the technical records relating to the Collateral.
-13-
<PAGE>
(i) Further Assurances. Borrower shall promptly cure, or cause to be
------------------
cured, any defects in the creation and issuance of the Note, or either of them,
and the execution and delivery of the other Loan Documents resulting from any
act or failure to act by Borrower, including, without limitation, the
perfection of any Liens in favor of Lender. Borrower, at its expense, will
promptly execute and deliver to Lender, all such other and further documents,
agreements and instruments in compliance with or accomplishment of the covenants
and agreements of Borrower herein and in the other Loan Documents, or to further
evidence and more fully describe any Collateral intended as security for the
Note, or either of them, or to correct any omission in the Loan Documents, or
more fully to state the obligations set out herein or in any of the Loan
Documents, or to perfect, protect or preserve any Liens created pursuant to any
of the Loan Documents, or to make any recordings, to file any notices, or to
obtain any consents, all as may be necessary or appropriate in connection
therewith as may be reasonably requested.
(j) Payment of Indebtedness. Borrower shall pay its Indebtedness when
-----------------------
and as the same becomes due, other than amounts duly disputed in good faith and
non-payment of which would not have a Materially Adverse Effect.
(k) ERISA. Borrower shall at all times make, or cause to be made,
-----
prompt payment of contributions required to meet the minimum funding standards
set forth in ERISA with respect to any plans now or hereafter maintained.
(l) Major Maintenance. Borrower shall consult with Lender regarding
-----------------
any maintenance to be performed on any Engine or the Airframe.
5.2 NEGATIVE COVENANTS. So long as any portion of the Obligations is
------------------
outstanding:
(a) Liquidation or Dissolution. Borrower shall not liquidate or
--------------------------
dissolve itself (or suffer any liquidation or dissolution) or otherwise wind up;
(b) Merger or Consolidation. Borrower shall not merge or consolidate
-----------------------
with any other entity without giving Lender at least thirty (30) days' prior
written notice of its intention to do so and complying with all reasonable
requirements of Lender relating to the preservation of Lender's security
interest in the Collateral and the formal assumption of the Obligations by the
surviving entity;
(c) Name Change. Borrower shall not change its name or begin to
-----------
operate under a new tradename without giving Lender at least thirty (30) days'
prior written notice of its intention to do so and complying with all reasonable
requirements of Lender
-14-
<PAGE>
relating to the preservation of Lender's security interest in the Collateral;
(d) Sale of Collateral. Borrower shall not sell, transfer, convey,
------------------
exchange, assign or otherwise dispose of any item of the Collateral;
(e) Creation of Liens. Borrower shall not create, grant or permit to
-----------------
exist any Lien (whether voluntarily or involuntarily created), security
interest, claim, demand or encumbrance of any kind or nature against any item of
the Collateral or any part thereof, except for Permitted Liens;
(f) Affiliate Transactions. Borrower Party shall not at any time
----------------------
engage in any transaction with an Affiliate on terms generally less advantageous
to Borrower than would be the case if such transaction had been effected at an
arm's-length transaction with a non-Affiliate.
(g) Loan to Shareholders and Affiliates. Borrower shall not make any
-----------------------------------
loans or advances to any of its existing or future shareholders or Affiliates,
nor shall Borrower increase the principal amount of any such loans which may
exist on the date hereof.
(h) Subsidiaries. Borrower shall not create any Subsidiary without
------------
giving Lender at least thirty (30) days' prior written notice of its intention
to do so and complying with all reasonable requirements of Lender relating to
the preservation of Lender's security interest in the Collateral.
ARTICLE VI - INFORMATION COVENANTS
----------------------------------
So long as any portion of the Obligations is outstanding and unpaid,
Borrower will furnish or cause to be furnished to Lender:
6.1 Audited Annual Financial Statements and Information; Certificate of No
----------------------------------------------------------------------
Default. Within ninety (90) days after the end of each fiscal year of Borrower,
- -------
the balance sheets of Borrower as at the end of such fiscal year, and the
related statements of income, retained earnings and cash flow statements of
Borrower for such fiscal year, setting forth in comparative form the figures as
at the end of and for the previous fiscal year and unqualifiedly certified or
certified with only such qualifications as shall be acceptable to Lender by
independent certified public accountants of recognized standing reasonably
satisfactory to Lender, whose opinion shall be in scope and substance
satisfactory to Lender and include a statement certifying that no Default or
Event of Default was detected following the examination of Borrower, and who
shall have authorized Borrower to deliver such financial statements and opinions
thereon to Lender pursuant to this Agreement.
-15-
<PAGE>
6.2 Quarterly Financial Statements, Performance Certificates and
------------------------------------------------------------
Information.
- -----------
(a) As soon as available and in any event within 45 days after the
last day of each fiscal quarter, the balance sheets of Borrower as at the end of
such month and the related statements of income and retained earnings of
Borrower for such month and for the elapsed portion of the year ended with the
last day of such month, and all of which shall be certified by an authorized
signatory of Borrower, to be, in his opinion, complete and correct in all
material respects and to present fairly, in accordance with GAAP, the statements
of financial position of Borrower as at the end of each period and the results
of operations for such period, and for the elapsed portion of the year ended
with the last day of such period, subject only to normal year-end adjustments.
(b) Within forty-five (45) days after the last day of each of the
first three quarters in each year, and within ninety (90) days after the last
day of the fourth quarter of the such year, a certificate of an authorized
signatory of Borrower, stating that, to the best of his knowledge, no Default or
Event of Default has occurred as at the end of such quarterly period or year, as
the case may be, or, if a Default or an Event of Default has occurred,
disclosing each such Default or an Event of Default and its nature, when it
occurred, whether it is continuing and the steps being taken by Borrower with
respect to such Default or Event of Default.
6.3 Copies of Other Reports.
-----------------------
(a) Promptly upon receipt thereof, copies of all reports, if any,
submitted to Borrower by its independent public accountants regarding Borrower,
including, without limitation, any management report prepared in connection with
the annual audit referred to in Section 6.1 hereof.
(b) From time to time and promptly upon each request, such data,
certificates, reports, statements, opinions of counsel, documents or further
information regarding the Collateral or the business, assets, liabilities,
financial position, projections, results of operations or business prospects of
Borrower as Lender reasonably may request.
6.4 Notice of Litigation, Default and Other Matters. Prompt notice of the
-----------------------------------------------
following events after Borrower has, or in the exercise of reasonable diligence
should have, received notice thereof:
(a) The commencement of all proceedings and investigations by or
before any governmental body and all actions and proceedings in any court or
before any arbitrator (A) against, or (B) (to the extent known to Borrower) in
any other way relating adversely to, Borrower, or any of its assets which, if
adversely
-16-
<PAGE>
determined, would singly or when aggregated with all other such proceedings,
investigations and actions, if adversely determined, have a Materially Adverse
Effect;
(b) any material adverse change with respect to the business, assets,
liabilities, financial position, results of operations or business prospects of
Borrower, other than changes in the ordinary course of business the effects of
which have not had a Materially Adverse Effect; and
(c) any Default or Event of Default or the occurrence or non-
occurrence of any event which constitutes, or which with the passage of time or
giving of notice or both would constitute a default by Borrower under any
material agreement other than this Agreement to which Borrower is a party or by
which any of its properties may be bound, which default would have a Materially
Adverse Effect, giving in each case the details thereof and specifying the
action proposed to be taken with respect thereto.
ARTICLE VII - EVENTS OF DEFAULT
-------------------------------
7.1 EVENTS OF DEFAULT. Each of the following events shall constitute an
-----------------
"Event of Default" hereunder:
(a) Borrower shall fail to pay or cause to be paid to Lender on the
date due any amount payable to Lender hereunder or under the Note, or Borrower
shall fail to pay the mandatory prepayment contemplated by Section 2.5(b) within
two (2) days after receipt of written demand from Lender;
(b) Borrower shall default in the performance or observance of any
other agreement or covenant contained in this Agreement not specifically
referred to elsewhere in this Section 7.1, and such default shall not be cured
to Lender' reasonable satisfaction within a period of fifteen (15) days after
notice thereof by Lender to Borrower;
(c) An Event of Default (as therein defined) shall occur under the
Lease Termination Agreement, or Borrower shall fail to observe or perform any of
its obligations under any of the Engine Leases which survive the termination
thereof;
(d) If either of the Non-Serviceable Leased Engines shall not have
been positioned at the Approved Repair Facility within 30 days after the Closing
Date;
(e) Borrower is liquidated or dissolved or its charter expires or is
revoked;
(f) Borrower shall in any way challenge, or any proceeding shall in
any way be brought to challenge (and, in the case of the proceeding brought by
someone other than Borrower,
-17-
<PAGE>
shall continue unstayed for a period of 30 days), the prior and perfected status
of Lender's security interest with respect to any of the Collateral or the
validity or enforceability of such security interests as provided herein;
(g) Any Lien other than a Permitted Lien shall exist with respect to
any item of the Collateral, or Borrower shall sell or transfer any item of the
Collateral;
(h) Borrower's Certificate of Public Convenience and Necessity or its
Air Operating Certificate is revoked or suspended by the issuing authority, or
Borrower shall otherwise voluntarily cease operations;
(i) Any item of the Collateral is confiscated, detained or seized by
any governmental authority, lender, lessor or other creditor, including, without
limitation, seizure of any airframe on which any of the Engines is attached;
(j) Borrower shall fail to observe any covenant set forth in Section
5.2 hereof;
(k) Borrower shall in any way challenge, or any proceeding shall in
any way be brought to challenge (and, in the case of a proceeding brought by an
entity other than Borrower, shall continue unstayed for a period of 30 days),
the prior and perfected status of Lender's security interest with respect to the
Collateral or any portion thereof or the validity or enforceability of such
security interests as provided herein;
(l) Any representation or warranty set forth herein or in any other
Loan Document proves to have been materially incorrect or misleading when
issued; or
(m) Borrower shall default in the repayment to any third-party (other
than Lender) of any Indebtedness to such third-party for borrowed money in
excess of $5,000,000.00, which default shall entitle the holder of such
Indebtedness to accelerate the same;
(n) There shall be entered a decree or order by a court having
jurisdiction constituting an order for relief in respect of Borrower under Title
11 of the United States Code, as now constituted or hereafter amended, or any
other applicable Federal or State bankruptcy law or other similar law, or
appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or
similar official of Borrower or of any substantial part of its properties, or
ordering the winding-up or liquidation of the affairs of Borrower, and any such
decree or order shall continue in effect for a period of sixty (60) consecutive
days;
-18-
<PAGE>
(o) Borrower shall file a petition, answer or consent seeking relief
under Title 11 of the United States Code, as now constituted or hereafter
amended, or any other applicable Federal or state bankruptcy law or other
similar law, or Borrower shall consent to the institution of proceedings
thereunder or to the filing of any such petition or to the appointment or taking
of possession of a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official of Borrower or of any substantial part of
its properties, or Borrower shall fail generally to pay its debts as such debts
become due, or Borrower shall take any corporate action in furtherance of any
such action;
(p) A final judgment shall be entered by any court against Borrower
for the payment of money in excess of $5,000,000 (i) for which Borrower, carries
no applicable liability insurance and (ii) which remains unpaid beyond the date
on which such judgment was due and payable under applicable law; or
(q) Any of the policies evidencing insurance required to be maintained
by Borrower hereunder or under the Security Agreement shall not be renewed or
replaced at least ten (10) days prior to their scheduled expiration date, or
shall otherwise terminate without having been replaced to Lender's sole
satisfaction.
7.2 ACCELERATION AND TERMINATION. If any Event of Default shall occur,
----------------------------
the Loan, together with accrued interest and all other sums payable hereunder,
shall upon notice from Lender to Borrower, become immediately due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by Borrower, and Lender's obligation, if any, to
give additional financial accommodations of any kind to Borrower shall
immediately terminate. The foregoing remedy is in addition to the other rights
and remedies granted to Lender under the other Loan Documents and under
applicable law.
ARTICLE VII - MISCELLANEOUS
---------------------------
8.1 NOTICES.
-------
(a) All notices, requests, demands, consents and other communications
hereunder shall be in writing and may be given by hand, by certified United
States mail (postage pre-paid, return receipt requested), by telecopier
(confirmed with hard copy by certified United States mail) or by Federal
Express, U.P.S. or other nationally recognized overnight courier service at the
respective address or telecopy number of the parties as set forth below.
(b) Any notice given in a manner described in this Section 8.1 shall
be deemed received for all purposes hereof (i) if given by hand, mail or
overnight courier, upon delivery or, if delivery is refused, upon tender and
(ii) if given by telecopier,
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<PAGE>
upon confirmation of transmission to the party-addressee (or if such day is not
a business day, on the business day next following confirmation of such
transmission).
(c) All notices and other communications under this Agreement shall be
given to the parties hereto at the following addresses:
Protective Asset Management Company
1150 Two Galleria Tower
13455 Noel Road, LB No. 45
Dallas, Texas 75240
Attn: Mr. Todd Travers
Tower Air, Inc.
JFK International Airport
Hangar 17
Jamaica, New York 11430
Attn: Chief Financial Officer
Service of any such notice or demand so made shall be deemed effective on the
day of actual delivery. Either party hereto may, from time to time, by notice
in writing served upon the other as aforesaid, designate a different mailing
address or a different person to which all such notices or demands are
thereafter to be addressed.
8.2 INDEMNIFICATION. Borrower hereby agrees to indemnify and hold
---------------
harmless Lender, its beneficiaries and their respective shareholders, members,
directors, officers, managers, agents and employees, and all of their respective
successors, assigns and heirs, from and against any and all liabilities,
obligations, penalties, actions, suits, losses, damages, injuries, claims,
demands and expenses, including reasonable attorneys' fees and disbursements,
arising out of (i) any act or omission of any Borrower in performance or in
breach of this Agreement or any agreement contemplated thereby, (ii) the use,
condition or operation of the Collateral or any of it, at any time, by
whomsoever used or operated, and (iii) the exercise by Lender of any of its
rights under this Agreement in accordance with the terms thereof and with
applicable law. Such obligations of Borrower shall continue in full force and
effect notwithstanding the termination of Lender's obligations hereunder and the
payment to Lender of principal of and interest on each Loan and all other
amounts payable to Lender under this Agreement. Lender shall give Borrower
written notice of any matter as to which it intends to claim indemnity from
Borrower pursuant to this Section.
8.3 EXPENSES. Borrower shall pay, on demand (a) all out-of-pocket
--------
expenses of Lender, up to $7,500, in connection with the preparation,
negotiation, execution and delivery of the Loan Documents (which amounts shall
be payable with proceeds of the
-20-
<PAGE>
Loan), (b) all out-of-pocket expenses of Lender in connection with the
preparation, negotiation, execution and delivery of any documentation executed
in connection with any waiver, amendment or consent by Lender relating to this
Agreement or the other Loan Documents, including, but not limited to, the
reasonable attorneys' fees and disbursements of counsel for Lender and (c) all
reasonable costs and out-of-pocket expenses of obtaining performance under this
Agreement or the other Loan Documents and all costs and out-of-pocket expenses
of collection if default is made in the payment of the Note, including the
reasonable fees and expenses of counsel for Lender.
8.4 JURISDICTION. Borrower hereby (a) submits to the non-exclusive
------------
personal jurisdiction in the State of Texas for the enforcement of the Loan
Documents and (b) waives any and all personal rights under the law of any state
to object to jurisdiction within the State of Texas for the purposes of
litigation to enforce the Loan Documents, whether on grounds of forum non
----- ---
conveniens or otherwise. Nothing contained herein, however, shall prevent
- ----------
Lender from bringing any action or exercising any rights against any security or
against Borrower personally, or against any property of Borrower, within any
other state. Initiating such proceeding or taking such action in any other
state shall in no event constitute a waiver of the agreement contained herein
that the law of the State of New York shall govern the rights and obligations of
Borrower and Lender hereunder or of the submission herein made by Borrower to
personal jurisdiction within the State of Texas. Borrower hereby irrevocably
and unconditionally appoints CT Corporation, Austin, Texas, as its agent for
service of process in the State of Texas. The aforesaid means of obtaining
personal jurisdiction and perfecting service of process are not intended to be
exclusive but are cumulative and in addition to all other means of obtaining
personal jurisdiction and perfecting service of process now or hereafter
provided by the law of the State of Texas or any other state.
8.5 WAIVERS. The rights and remedies of Lender under this Agreement and
-------
the other Loan Documents shall be cumulative and not exclusive of any rights or
remedies which it would otherwise have. No failure or delay by Lender in
exercising any right shall operate as a waiver of it. Any waiver or indulgence
granted by Lender shall not constitute a modification of this Agreement, except
to the extent expressly provided in such waiver or indulgence, or constitute a
course of dealing by Lender at variance with the terms of this Agreement such as
to require further notice by Lender of Lender's intent to require strict
adherence to the terms of this Agreement in the future.
8.6 ASSIGNMENT. Borrower may not assign or transfer any of its rights or
----------
obligations hereunder or under the Note without the prior written consent of
Lender. Lender may at any time grant participation in or sell, assign, transfer
or otherwise dispose of,
-21-
<PAGE>
all or any portion of the indebtedness of Borrower outstanding pursuant to this
Agreement and the Note.
8.7 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute but one and the same instrument.
8.8 GOVERNING LAW. The parties hereby acknowledge and agree that this
-------------
Agreement and the Note shall be construed in accordance with and governed by the
law of the State of New York.
8.9 SEVERABILITY. Any provision of this Agreement which is prohibited or
------------
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof in that
jurisdiction or affecting the validity or enforceability of such provision in
any other jurisdiction.
8.10 ENTIRE AGREEMENT. This Agreement and the Loan Documents represent the
----------------
entire agreement among the parties as to the subject matter hereof. This
Agreement may only be amended by a writing signed by all parties hereto.
8.11 INVOICES. Lender's failure to provide any invoice or amortization
--------
schedule contemplated hereunder shall not constitute a waiver or release of any
of Lender's rights hereunder or under the Note.
-22-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective duly authorized signatories as of the
day and year first written above.
RANGER ASSET MANAGEMENT, L.P.,
a Delaware Limited Partnership which
is doing business as Protective Asset
Management Company
By: /s/
---------------------------------------
Title:
---------------------------------
TOWER AIR, INC.
By: /s/ R.K. Punwani
---------------------------------------
Title: Vice President-Finance
---------------------------------
-23-
<PAGE>
EXHIBIT "A"
TERM PROMISSORY NOTE
$9,750,000.00 Dated: November __, 1997
FOR VALUE RECEIVED, the undersigned, TOWER AIR, INC., a Delaware
corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of RANGER ASSET
MANAGEMENT, L.P., a Delaware limited partnership which is doing business as
Protective Asset Management Company ("Lender"), the principal sum of NINE
MILLION SEVEN HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($9,750,000.00) or, if
less, so much thereof as has been advanced and is outstanding hereunder,
together with interest thereon as hereinafter set forth.
This Note is the "Note," as defined in that certain Loan Agreement dated of
even date herewith between Borrower and Lender (as the same may be amended from
time to time, the "Loan Agreement"), the terms of which are incorporated by
reference herein. Capitalized terms used herein without definition shall have
the meanings set forth in the Loan Agreement.
Except as otherwise provided in the Loan Agreement, the Borrower shall pay
interest from the date hereof on the daily amount of the unpaid principal
balance hereof from time to time outstanding at a fluctuating per annum rate
equal to the Prime Rate plus 2.50 percentage points, each change in the
fluctuating interest rate during the entire term of this Note to take effect
simultaneously with the corresponding change in the Prime Rate. On the date
hereof, the Prime Rate is eight and one-half (8.5%) percent per annum, and
consequently, the rate of interest hereunder expressed in simple interest terms
for this date is eleven (11.0%) percent per annum. After this date, the rate of
interest will increase or decrease as provided above.
The principal amount of this Note shall be repaid in thirty-six (36)
consecutive monthly installments of principal and interest in an amount
sufficient to fully amortize the principal amount hereof over the term hereof,
commencing on December 15, 1997 and continuing on the last day of each month
thereafter, through and including November 15, 2000 (together with such earlier
date on which the indebtedness evidenced hereby shall become due and payable in
full, the "Maturity Date"). As of the date hereof, the amount of the monthly
payment of principal and interest hereunder shall be $319,202, as more
particularly set forth on the amortization schedule attached as Schedule 1
----------
hereto. In connection with the change, at any time and from time to time, of
the Prime Rate, the amount of the monthly payment due hereunder shall be
adjusted to an amount sufficient to fully amortize the then outstanding
principal balance hereof over the remaining term hereof at the applicable rate
of interest hereunder. Upon any such change in the Prime Rate, Lender shall
provide a new amortization schedule to Borrower and Borrower shall make monthly
payments of principal
<PAGE>
and interest hereunder pursuant to such schedule until receipt of further notice
from Lender. Notwithstanding anything herein to the contrary, the installment of
principal and interest which is due on the Maturity Date shall be in an amount
equal to the then outstanding principal balance hereof, together with all
accrued and unpaid interest thereon, together with all other amounts then
outstanding hereunder.
All payments received hereunder shall be applied by Lender as set forth in
the Loan Agreement. Amounts repaid may not be reborrowed hereunder.
Interest hereunder shall be calculated on the basis of a year of 360 days
for the actual number of days elapsed.
Borrower hereby agrees that time is of the essence. Both principal and
interest are payable in lawful money of the United States of America to Lender
at 1150 Two Galleria Tower, 13455 Noel Road - LB No. 45, Dallas, Texas 75240
(or to such other location(s) or account(s) as Lender may designate to Borrower
in writing), in same day funds. Lender shall maintain an account evidencing all
advances made hereunder and the amounts of principal and interest payable and
paid from time to time hereunder. In any legal action or proceeding in respect
of this Note or the Loan Agreement, the entries made in such account shall be
prima facie evidence of the existence and amounts of the obligations of Borrower
hereunder.
This Note is entitled to the benefits of the Loan Agreement, which Loan
Agreement, among other things, contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events. This Note is
secured by, without limitation, the Security Agreement.
The principal amount hereof may be prepaid only as provided in the Loan
Agreement.
In no event shall the amount of interest due or payable hereunder exceed
the maximum rate of interest allowed by applicable law, and in the event any
such payment is inadvertently paid by Borrower or received by Lender, then such
excess sum shall be credited as a payment of principal, unless Borrower shall
notify Lender, in writing, that Borrower elects to have such excess sum returned
to it forthwith. It is the express intent hereof that Borrower not pay and
Lender not receive, directly or indirectly in any manner whatsoever, interest in
excess of that which may be legally paid by Borrower under applicable law. In
determining whether the amount of interest charged and paid hereunder might
otherwise exceed the limit prescribed by law, Borrower and Lender intend and
agree that interest shall be computed upon the assumption that this Note will be
paid according to the agreed terms.
2
<PAGE>
Borrower hereby waives presentment for payment, demand, notice of non-
payment and demand, protest and notice of protest.
This Note shall be binding upon and shall inure to the benefit of Borrower,
Lender and their successors, successors-in-interest, participants and assigns;
provided, however, that Borrower shall not be permitted to assign any of its
- -------- -------
obligations hereunder.
This Note shall be governed by the laws of the State of New York.
The ownership interest of Lender, its successors, successors-in-interest,
participants and assigns in this Note shall be reflected in a book entry system
to be maintained by Lender, as agent for Borrower and Borrower hereby appoints
Lender as Borrower's true and lawful agent and attorney-in-fact for the purpose
of maintaining such book entry system. The foregoing appointment is irrevocable
and is coupled with an interest. Notwithstanding anything herein to the
contrary, any assignment, transfer or grant of a participation interest in
Lender's interest herein, or any portion thereof, shall be effective only upon
the entry of such assignment, transfer or participation, as the case may be, in
such book entry system. It is the express intent of the foregoing provision that
this Note be deemed to be in registered form, as contemplated by IRC Ssection
881 and the regulations issused thereunder and those contempated thereby.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Note to be
executed by its duly authorized officers under seal this ____ day of November,
1997.
TOWER AIR, INC.
By:________________________________
Title:__________________________
3
<PAGE>
EXHIBIT "B"
LEASE TERMINATION AGREEMENT
---------------------------
Reference is hereby made to the following four (4) Engine Lease Agreements,
each between FIRST SECURITY BANK, N.A., not individually but solely as Owner
Trustee under that certain Trust Agreement dated November 20, 1996 ("Lessor"),
and TOWER AIR, INC., a Delaware corporation ("Lessee"), each involving the
rental of one (1) used Pratt & Whitney JT9D-7A aircraft engine, together with
the other properties therein described:
Date of Engine
Lease Agreement Engine MSN
--------------- ----------
November 20, 1996 662305 (the "662305 Lease")
November 20, 1996 662294 (the "662294 Lease")
December 10, 1996 685747 (the "685747 Lease")
December 13, 1996 685696 (the "685696 Lease")
(collectively the "Leases")
Lessor and Lessee now wish to terminate certain provisions of the Leases
prior to their respective expiration dates and, accordingly, in consideration of
the premises and the mutual covenants and agreements hereinafter set forth, and
for other good and valuable consideration, the receipt, sufficiency and adequacy
of which are hereby acknowledged, the parties hereto, each intending to be
legally bound hereby, agree as follows (capitalized terms used in this Agreement
shall have the same terms ascribed to them in the relevant Lease or Leases,
unless otherwise defined herein):
1. Payment of Outstanding Rents.
----------------------------
(a) October 1997 Rents. The parties hereby agree that, as of the
------------------
date hereof (subject only to Lessor's verification of the
<PAGE>
applicable hours and cycles registered on the Engines), Lessee owes Lessor Rent
for the month of October, 1997, in the aggregate amount of $79,359.36 (the
"October Rent"), as follows:
Lease Outstanding October 1997 Rent
----- -----------------------------
662305 Lease $34,372.63
662294 Lease 1,770.13
685747 Lease 1,663.92
685696 Lease 40,408.92
Late Payments 1,143.76
----------
Total October 1997
Rent Due: $79,359.36
==========
Lessee agrees that it shall pay to Lessor the full amount of the October Rent
via bank wire transfer to an account or accounts designated in writing to Lessee
by Lessor ("Lessor's Account") concurrently with the execution and delivery of
this Agreement by the parties.
(b) November 1997 Rent. The parties acknowledge and agree that
------------------
Lessee owes Rent to Lessor under each of the Leases for the period November 1,
1997 through the date hereof, inclusive, and that such Rents are to be
calculated in accordance with the respective Leases (together, the "November
Rent"). Lessee hereby agrees to pay to Lessor the November Rent via bank wire
transfer to Lessor's Account no later than Friday, December 5, 1997. The failure
to pay the November Rent by the close of business on December 5, 1997 shall
constitute an Event of Default hereunder.
2. Termination of Certain Provisions of the Leases.
-----------------------------------------------
Upon the execution and delivery of this Agreement, the parties hereby
terminate the Leases, other than the provisions of Articles 14, 21, 22 and 27
through 38, inclusive, of each of the
2
<PAGE>
Leases, which Articles shall survive the execution and delivery of this
Agreement and continue in full force and effect in accordance with their
respective terms.
3. Miscellaneous.
-------------
This Agreement (a) shall be governed by and construed in accordance with
the substantive laws of the State of New York; (b) represents the entire
agreement between the parties hereto with respect to the subject matter hereof;
(c) may not be altered or amended except pursuant to a written agreement signed
and delivered by each of the parties hereto; (d) may be executed in multiple
counterparts; and (e) shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. TIME IS
OF THE ESSENCE IN THE PERFORMANCE OF THIS AGREEMENT. All payments now or
hereafter due and payable under this Agreement shall not be subject to offset or
deduction for any reason whatsoever. Neither party shall have any right to
assign any rights, or delegate any duties, arising under or pursuant to this
Agreement, without the prior written consent of the other party hereto, which
consent may be granted or denied in the sole discretion of such party. The
parties hereby submit themselves and their respective properties to the
jurisdiction of the courts of the State of Texas (and the federal district
courts of the United States of America situated in Texas) in connection with
any litigation involving the enforcement of this Agreement and agree that
such litigation may be brought in any such courts on a non-exclusive basis.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement, this ____
day of November, 1997.
"Lessor"
FIRST SECURITY BANK, N.A., not
individually but as Owner
Trustee under that certain Trust
Agreement dated November 20, 1996
By:
-----------------------------------
Title:
-----------------------------
"Lessee"
TOWER AIR, INC.
By:
-----------------------------------
Title:
-----------------------------
4
<PAGE>
SCHEDULE 1
Four (4) Engine Lease Agreements, each between FIRST SECURITY BANK, N.A.,
not individually but solely as Owner Trustee under that certain Trust Agreement
dated November 20, 1996, as lessor, and TOWER AIR, INC., a Delaware corporation,
as lessee, each involving the rental of one (1) used Pratt & Whitney JT9D-7A
aircraft engine, together with the other properties therein described:
Date of Engine
Lease Agreement Engine MSN
--------------- ----------
November 20, 1996 662305 (the "662305 Lease")
November 20, 1996 662294 (the "662294 Lease")
December 10, 1996 685747 (the "685747 Lease")
December 13, 1996 685696 (the "685696 Lease")
(collectively the "Leases")
<PAGE>
TERM PROMISSORY NOTE
$9,750,000.00 Dated: November 21, 1997
FOR VALUE RECEIVED, the undersigned, TOWER AIR, INC., a Delaware
corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of RANGER ASSET
MANAGEMENT, L.P., a Delaware limited partnership which is doing business as
Protective Asset Management Company ("Lender"), the principal sum of NINE
MILLION SEVEN HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($9,750,000.00) or, if
less, so much thereof as has been advanced and is outstanding hereunder,
together with interest thereon as hereinafter set forth.
This Note is the "Note," as defined in that certain Loan Agreement dated of
even date herewith between Borrower and Lender (as the same may be amended from
time to time, the "Loan Agreement"), the terms of which are incorporated by
reference herein. Capitalized terms used herein without definition shall have
the meanings set forth in the Loan Agreement.
Except as otherwise provided in the Loan Agreement, the Borrower shall pay
interest from the date hereof on the daily amount of the unpaid principal
balance hereof from time to time outstanding at a fluctuating per annum rate
equal to the Prime Rate plus 2.50 percentage points, each change in the
fluctuating interest rate during the entire term of this Note to take effect
simultaneously with the corresponding change in the Prime Rate. On the date
hereof, the Prime Rate is eight and one-half (8.5%) percent per annum, and
consequently, the rate of interest hereunder expressed in simple interest terms
for this date is eleven (11.0%) percent per annum. After this date, the rate of
interest will increase or decrease as provided above.
The principal amount of this Note shall be repaid in thirty-six (36)
consecutive monthly installments of principal and interest in an amount
sufficient to fully amortize the principal amount hereof over the term hereof,
commencing on December 15, 1997 and continuing on the last day of each month
thereafter, through and including November 15, 2000 (together with such earlier
date on which the indebtedness evidenced hereby shall become due and payable in
full, the "Maturity Date"). As of the date hereof, the amount of the monthly
payment of principal and interest hereunder shall be $319,202, as more
particularly set forth on the amortization schedule attached as Schedule 1
----------
hereto. In connection with the change, at any time and from time to time, of
the Prime Rate, the amount of the monthly payment due hereunder shall be
adjusted to an amount sufficient to fully amortize the then outstanding
principal balance hereof over the remaining term hereof at the applicable rate
of interest hereunder. Upon any such change in the Prime Rate, Lender shall
provide a new amortization schedule to Borrower and Borrower shall make monthly
payments of principal and interest hereunder pursuant to such schedule until
receipt of
<PAGE>
further notice from Lender. Notwithstanding anything herein to the contrary, the
installment of principal and interest which is due on the Maturity Date shall be
in an amount equal to the then outstanding principal balance hereof, together
with all accrued and unpaid interest thereon, together with all other amounts
then outstanding hereunder.
All payments received hereunder shall be applied by Lender as set forth in
the Loan Agreement. Amounts repaid may not be reborrowed hereunder.
Interest hereunder shall be calculated on the basis of a year of 360 days
for the actual number of days elapsed.
Borrower hereby agrees that time is of the essence. Both principal and
interest are payable in lawful money of the United States of America to Lender
at 1150 Two Galleria Tower, 13455 Noel Road - LB No. 45, Dallas, Texas 75240
(or to such other location(s) or account(s) as Lender may designate to Borrower
in writing), in same day funds. Lender shall maintain an account evidencing all
advances made hereunder and the amounts of principal and interest payable and
paid from time to time hereunder. In any legal action or proceeding in respect
of this Note or the Loan Agreement, the entries made in such account shall be
prima facie evidence of the existence and amounts of the obligations of Borrower
hereunder.
This Note is entitled to the benefits of the Loan Agreement, which Loan
Agreement, among other things, contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events. This Note is
secured by, without limitation, the Security Agreement.
The principal amount hereof may be prepaid only as provided in the Loan
Agreement.
In no event shall the amount of interest due or payable hereunder exceed
the maximum rate of interest allowed by applicable law, and in the event any
such payment is inadvertently paid by Borrower or received by Lender, then such
excess sum shall be credited as a payment of principal, unless Borrower shall
notify Lender, in writing, that Borrower elects to have such excess sum returned
to it forthwith. It is the express intent hereof that Borrower not pay and
Lender not receive, directly or indirectly in any manner whatsoever, interest in
excess of that which may be legally paid by Borrower under applicable law. In
determining whether the amount of interest charged and paid hereunder might
otherwise exceed the limit prescribed by law, Borrower and Lender intend and
agree that interest shall be computed upon the assumption that this Note will be
paid according to the agreed terms.
2
<PAGE>
Borrower hereby waives presentment for payment, demand, notice of non-
payment and demand, protest and notice of protest.
This Note shall be binding upon and shall inure to the benefit of Borrower,
Lender and their successors, successors-in-interest, participants and assigns;
provided, however, that Borrower shall not be permitted to assign any of its
- -------- -------
obligations hereunder.
This Note shall be governed by the laws of the State of New York.
The ownership interest of Lender, its successors, successors-in-interest,
participants and assigns in this Note shall be reflected in a book entry system
to be maintained by Lender, as agent for Borrower and Borrower hereby appoints
Lender as Borrower's true and lawful agent and attorney-in-fact for the purpose
of maintaining such book entry system. The foregoing appointment is irrevocable
and is coupled with an interest. Notwithstanding anything herein to the
contrary, any assignment, transfer or grant of a participation interest in
Lender's interest herein, or any portion thereof, shall be effective only upon
the entry of such assignment, transfer or participation, as the case may be, in
such book entry system. It is the express intent of the foregoing provision that
this Note be deemed to be in registered form, as contemplated by IRC Section
881 and the regulations issused thereunder and those contempated thereby.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Note to be
executed by its duly authorized officers under seal this 21 day of November,
1997.
TOWER AIR, INC.
By: /s/ R.K. Punwani
________________________________
Title: V.P. Finance
--------------------------
3
<PAGE>
EXHIBIT 10.19
SECURITY AGREEMENT
------------------
This SECURITY AGREEMENT dated as of January 9, 1998 (this "Agreement") is
by and between TOWER AIR, INC., a Delaware corporation ("Debtor"), and
TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation (together with
its successors and assigns, the "Secured Party").
WITNESSETH:
-----------
WHEREAS, Debtor is the owner of the twelve (12) Pratt & Whitney JT9D
engines described herein and desires to have Secured Party provide it with a
loan on the terms provided herein, the proceeds of which will be applied to
refinance the indebtedness currently existing with respect to certain engines
and for other corporate purposes; and
WHEREAS, Secured Party has required as a condition to the making of its
initial Loan (as defined below) that Debtor grant to Secured Party a security
interest in the Collateral (as defined below) to secure Debtor's obligations to
Secured Party in connection with the Note (as defined below); and
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants contained herein, the parties hereto agree as follows:
1. Definitions. The following definitions apply to the Agreement:
-----------
a. "AAR FAA Releases" means collectively, all necessary or desirable
documentation to reflect, for FAA recording purposes, the release
by AAR Engine Group, Inc. of its security interest in certain of
the Engines, in each case in form necessary to file such release
with the FAA.
b. "Aggregate Original Amount" has the meaning specified in Article
2(b).
c. "Business Day" means any day other than a day on which banking
institutions in Chicago, Illinois or New York City, New York are
authorized by law to close.
d. "Closing Date" means the date on which the conditions precedent
specified in Article 4 herein have been satisfied (or waived in
writing by Secured Party) and Secured Party has made the initial
Loan.
e. "Collateral" means (i) each Engine, (ii) all Parts of whatever
nature, which
<PAGE>
are from time to time incorporated or installed in or attached to
the Engines (including any QEC related thereto), whether now
owned or hereafter acquired, and all substitutions, renewals and
replacements of and additions, improvements, accessions and
accumulations to the Engines, (iii) all Engine Documents, (iv)
all insurance policies relating to the Engines, (v) all right,
title, interest, claims and demands of Debtor, in to and under
any purchase agreement, any bills of sale and any other agreement
to which Debtor is now or may hereafter be a party, with respect
to the Engines or any other Collateral, together with all rights,
powers, privileges, licenses, easements, options and other
benefits of the Debtor under each purchase agreement, bill of
sale or any other agreement or contract, (vi) all rents, issues,
profits, revenues and other income of the property subjected or
required to be subjected to the Lien of this Security Agreement,
including all payments or proceeds as the result of the sale,
lease or other disposition thereof, (vii) the Other Collateral,
and (viii) all proceeds of the foregoing.
f. "Default" means an event which, with the passage of time or the
giving of notice or both, would constitute an Event of Default.
g. "Documents" means this Agreement (and any supplements hereto),
the Note, the Other Security Agreements and any other documents
entered into in connection with the transactions contemplated
hereby or under the Other Security Agreements.
h. "Drawdown Date" means, with respect to each advance under the
Loan to be made hereunder, the date the Secured Party advances
such Loan to Debtor, the first such advance to take place on the
Closing Date and any subsequent advances to take place upon
satisfaction (or waiver in writing by Secured Party) of the
conditions specified in Article 5 hereof.
i. "Engine" means and includes (i) each of the (A) three (3) Pratt &
Whitney Model JT9D-7J engines; (B) eight (8) Pratt & Whitney
Model JT9D-7A engines; and (C) one (1) Pratt & Whitney Model
JT9D-7Q secured hereby as more particularly described in a
security agreement supplement in substantially the form of
Attachment 1 hereto (which has 750 or more rated take-off
horsepower or the equivalent thereof) and (ii) any and all Parts
related thereto.
j. "Engine Documents" means all books, manuals, logs, records,
writings, data, information and other like property relating to
the Engines or any Part (including, without limitation, any
warranties and all such logs, manuals, data
2
<PAGE>
and records required to be maintained by the FAA or by the
applicable regulatory agency or body or any manufacturer or
supplier).
k. "Engine Original Amount" has the meaning specified on Attachment
3.
l. "Event of Default" has the meaning specified in Article 11.
m. "Event of Loss" means, with respect to any Engine, any of the
following events with respect to such property: (i) the loss of
such property or the use thereof due to the destruction of or
damage to such property which renders repair uneconomic or which
renders such property permanently unfit for normal use for any
reason whatsoever; (ii) any damage to such property which results
in an insurance settlement with respect to such property on the
basis of a total loss, or a constructive or compromised total
loss; (iii) the theft or disappearance of such property; (iv) the
confiscation, condemnation, or seizure of, or requisition of
title to, or use of, such property by any governmental or
purported governmental authority, which in the case of any
requisition of use of such property referred to in such clause
(iv) shall have resulted in the loss of possession of such
property by Debtor for a period in excess of thirty (30)
consecutive days; and (v) as a result of any law, rule,
regulation, order or other action by the FAA or other
governmental body asserting jurisdiction over such property, use
of such property in the normal course of the business of air
transportation shall have been prohibited for a period of thirty
(30) consecutive days.
n. "Event of Loss Prepayment Fee" has the meaning specified in
Attachment 3.
o. "FAA" or "Federal Aviation Administration" means the Federal
Aviation Administration of the United States of America and any
successor governmental authority.
p. "Federal Aviation Act" means the Sections of Title 49 of the
United States Code relating to aviation, as amended.
q. "Interest Period" means, with respect to the Note, successive
periods commencing on (and including) the applicable Drawdown
Date with respect to such Note to (but excluding) the immediately
following Payment Date and thereafter from (and including) such
Payment Date to (but excluding) the immediately following Payment
Date.
r. "Interest Rate" has the meaning specified in Attachment 3.
3
<PAGE>
s. "Lien" means any mortgage, charge, pledge, security interest,
hypothecation, assignment, claim, right, deposit arrangement,
right or possession or detention, right of set-off (but excluding
any right of set-off, consolidation, merger or combination of
accounts arising in favor of a bank by operation of law),
encumbrance, lien (statutory or other), preference, priority or
other security agreement or preferential arrangement of any kind
or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement, any lease
having substantially the same economic effect as any of the
foregoing, and the filing of any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction in
respect of any of the foregoing).
t. "Loan" has the meaning specified in Article 2(a) hereof.
u. "Loan Fee" has the meaning specified in Attachment 3.
v. "Margin" has the meaning specified in Attachment 3.
w. "Maturity Date" has the meaning specified in Attachment 3.
x. "Maximum Aggregate Original Amount" has the meaning specified in
Attachment 3.
y. "Maximum Original Amount" means, with respect to any applicable
Engine, the amount specified as such in Attachment 3.
z. "Note" means that certain promissory note dated the date hereof
and executed by Debtor to Secured Party, the form of which is
attached hereto as Attachment 2, and any replacement Note issued
in exchange or replacement therefor pursuant to the provisions
hereof.
aa. "Obligations" means (a) the amount of principal and interest (if
any) and the Prepayment Fee (if any) and all other amounts due
and owing, from time to time, on the Note (including, without
limitation, interest accruing after the maturity of the Loan and
interest accruing after the filing of any petition in bankruptcy,
or the commencement of any insolvency, reorganization or like
proceeding, relating to the Debtor, whether or not a claim for
post-filing or post-petition interest is allowed in such
proceeding) outstanding from time to time; (b) any and all other
obligations and liabilities any time due and owing from or
required to be paid by Debtor now existing or hereinafter
incurred which may arise under, out of, or in connection with,
this Agreement or any other Document; (c) any expenses
(including, but not
4
<PAGE>
limited to, reasonable attorneys fees) incurred by Secured Party
in enforcing its rights hereunder; and (d) any other covenants,
duties, agreements and obligations of Debtor to Secured Party
hereunder or under any other Document.
bb. "Other Collateral" means, with respect to any Other Security
Agreement, the "Collateral" described under such Other Security
Agreement.
cc. "Other Security Agreement" means any other agreement pursuant to
which Secured Party provides Debtor with a loan secured by, among
other things, the Other Collateral.
dd. "Overdue Rate" has the meaning specified in Attachment 3.
ee. "Parts" means any and all appliances, parts, instruments,
appurtenances, accessories, furnishings, quick engine change kits
and other equipment of whatever nature (other than complete
Engines or Engine) which are from time to time incorporated or
installed in or attached to any Engine or which have been removed
therefrom but where title to which remains vested in the Debtor.
ff. "Payment Date" has the meaning specified in Attachment 3.
gg. "Person" means an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association,
joint venture governmental authority or other entity of whatever
nature.
hh. "Prepayment Fee" has the meaning specified in Attachment 3.
ii. "Prime Rate" has the meaning specified in Article 2(d) hereof.
jj. "Principal Amount" with respect to the Note, means the aggregate
amount of principal unpaid from time to time under the Note.
kk. "UCC" means Uniform Commercial Code as enacted in the State of
Illinois, as amended at the time in question.
5
<PAGE>
2. Amount and Terms of Loan.
------------------------
(a) Loan. Subject to the terms and conditions hereof, Secured Party
----
agrees to make a loan in the maximum aggregate principal amount of FIFTEEN
MILLION DOLLARS ($15,000,000) (the "Loan") in one or more advances to Debtor on
such dates as Debtor may specify in writing to Secured Party (each, a "Drawdown
Date"), which advances shall under no circumstances exceed an aggregate
principal amount equal to the Maximum Aggregate Original Amount or, unless
otherwise agreed in writing by Secured Party, be advanced after February 28,
1998 (the "Commitment Cut-off Date"). Debtor agrees to provide the Secured
Party with a written request for any drawdown of the Loan hereunder (a "Request
for Drawdown") at least three (3) Business Days prior to the proposed Drawdown
Date, which notice shall specify the proposed Drawdown Date and the principal
amount to be advanced on such date; provided however that (i) the principal
amount of the amount to be advanced on any Drawdown Date shall not exceed the
Maximum Original Amount with respect to the applicable Engine or, together with
all other amounts advanced on prior Drawdown Dates, exceed the Maximum Aggregate
Original Amount; (ii) each advance shall amortize over the remaining Payment
Dates and mature on the Maturity Date; (iii) the Loan shall not be advanced in
more than four fundings; and (iv) no amount shall, unless otherwise agreed in
writing by Secured Party, be advanced after the Commitment Cut-off Date. In
order to induce the Secured Party to make its Loan available hereunder, the
Debtor has agreed to pay the Secured Party a fee equal to the Loan Fee. Whether
or not the transactions contemplated hereby shall be consummated on the Closing
Date, the Debtor agrees that the Loan Fee will be earned by the Secured Party as
a processing fee; provided, however, that if the transactions contemplated
-------- -------
hereby shall fail to be consummated solely on the Closing Date due to Secured
Party's failure to provide the initial advance after satisfaction of all other
conditions precedent set forth herein, Secured Party agrees to refund the Loan
Fee less an amount equal to the costs and expenses (including, without
limitation, legal fees and expenses and the fees of the appraiser who prepared
the appraisal referred to in Articles 4(t) and 5(h) hereof) incurred by the
Secured Party in connection with the negotiation and documentation of the
transactions contemplated hereby.
(b) Note. On the Closing Date, Debtor will furnish to Secured Party
----
the Note substantially in the form of Attachment 2 hereto, dated the Closing
Date and in an amount equal to the initial loan advance which will be made on
the Closing Date. Debtor hereby agrees to execute and deliver to Secured Party,
on each subsequent Drawdown Date, a replacement Note in an aggregate principal
amount equal to the sum of all loan advances made on or prior to such Drawdown
Date. The Note issued on the final Drawdown Date shall be in an aggregate
principal amount of FIFTEEN MILLION DOLLARS ($15,000,000) ("Aggregate Original
Amount"). Secured Party is hereby authorized to record the date and amount of
each payment applied to principal and interest on the Note on the schedule
annexed to and constituting a part of the Note, and any such recordation shall
constitute prima facie (but not conclusive) evidence of the accuracy of the
-----------
information so recorded. No failure to make any such notations shall affect the
validity of Debtor's obligations to repay the full unpaid principal amount of
the Note or the duties of Debtor hereunder or thereunder. The Note shall be
stated to be repaid in consecutive monthly principal installments commencing on
the 1st day of the month immediately succeeding the Closing Date and thereafter
on the 1st day of each month through (and including) the Maturity Date (each, a
6
<PAGE>
"Payment Date"). Accrued and unpaid interest with respect to the Note shall be
due and payable on each Payment Date..
(c) Prepayments.
-----------
(i) Debtor may prepay all (but not less than all) of the Note
by payment of 100% of the outstanding Principal Amount of the Note and
accrued interest thereon to the date of such prepayment plus the Prepayment
Fee, together with all other amounts due hereunder and under the Note and
the other Documents; provided, that Debtor will provide Secured Party at
--------
least 30 days' prior irrevocable written notice of any such prepayment
(which notice shall specify the date of prepayment and the principal,
interest and Prepayment Fee to be paid on such date).
(ii) If an Event of Loss with respect to any Engine shall occur,
then on the date on which Debtor is required to make payment of the amounts
specified in Article 10 hereof, Debtor shall prepay a portion of the
outstanding Principal Amount of the Note by payment to the Secured Party of
the amounts specified in Article 10 hereof.
(iii) Debtor shall pay, with respect to the Note, the principal
amount of the Note on the dates and in the amounts set forth in Annex A to
the Note.
(iv) As used herein, "Prepayment Fee" means either (A) with
respect to any prepayment of a portion of the Note due solely to an Event
of Loss with respect to an Engine, an amount equal to the Event of Loss
Prepayment Fee or (B) with respect to any other prepayment of the Note, an
amount equal to the Prepayment Fee specified as such on Attachment 3.
(v) Amounts prepaid on account of the Loan may not be
reborrowed.
(vi) The Note may not be prepaid in whole or in part except in
accordance with this Article 2(c) or in connection with the exercise of
remedies by Secured Party hereunder.
(d) Interest Rate and Payment Dates. (a) Amounts advanced pursuant to
-------------------------------
this Agreement shall bear interest at a rate with respect to each Interest
Period equal to the lesser of (a) as of any date of determination, the highest
published prime rate which appears in the Money Rates section of The Wall Street
---------------
Journal on the applicable Drawdown Date (with respect to the first Interest
- -------
Period) and three Business Days prior to each Payment Date (with respect to each
subsequent Interest Period) (the "Prime Rate") plus the Margin and (b) the
maximum rate allowed under applicable law (the "Interest Rate") on the unpaid
principal amount thereof from time to time outstanding, payable in arrears on
each Payment Date until the Maturity Date, provided, however such interest rate
is subject to adjustment pursuant to Article 7(e) hereof. In the event that a
court
7
<PAGE>
determines that Secured Party has received interest hereunder in excess of
the maximum amount permitted by law, (i) Secured Party shall apply such excess
to any unpaid principal owed by Debtor to Secured Party or, if the amount of
such excess exceeds the unpaid balance of such principal, Secured Party shall
promptly refund such excess interest to the Debtor and (ii) the provisions
hereof shall be deemed amended to provided for such permissible rate. All sums
paid, or agreed to be paid, by Debtor which are, or hereafter may be construed
to be, compensation for the use, forbearance or detention of money shall, to the
extent permitted by applicable law, be amortized, prorated, spread and allocated
throughout the full term of all such indebtedness until the indebtedness is paid
in full.
Notwithstanding the foregoing, the final payment made under the Note shall
be in an amount sufficient to discharge in full the unpaid principal amount, and
all accrued and unpaid interest on, and any other amounts due under, the Note
and the other Documents. Debtor shall pay Secured Party, on demand, interest at
Overdue Rate on any part of the principal amount, Prepayment Fee, if any, and to
the extent permitted by applicable law, interest and any other amounts payable
hereunder or under the Note or any other Document not paid when due for any
period during which the same shall be overdue, in each case for the period the
same is overdue. Amounts shall be overdue if not paid when due (whether stated
maturity, by acceleration or otherwise).
Each payment made by Debtor under the Note shall be distributed as follows:
First, so much of such funds as shall be required for the purpose
-----
shall be distributed and paid to Secured Party to pay any fees, costs,
charges, or expenses (including interest on overdue amounts and Prepayment
Fee, if any) due and payable to Secured Party hereunder or under any other
Document;
Second, if any amounts shall remain after satisfying the amounts
------
specified in clause First, above, so much of such funds as shall be
-----
required for the purpose shall be distributed and paid to Secured Party to
pay in full the aggregate amount of interest and Prepayment Fee, if any,
then due under the Note;
Third, if any amounts shall remain after satisfying the amounts
-----
specified in clauses First and Second above, such remaining amounts shall
----- ------
to the extent available be applied to pay the due and owing principal
payments under the Note; and
Fourth, if any amounts shall remain after satisfying the amounts
------
specified in clauses, First, Second, and Third above, so much of such funds
----- ------ -----
as shall be required for the purpose shall be distributed and paid to
Secured Party to pay in full all other amounts due and owing to such party
hereunder or under any other Document on a pro rata basis.
(e) Payments. All payments (including prepayments) to be made by
--------
Debtor hereunder, under the Note, and under any other Document, whether on
account of principal, interest, fees or otherwise, shall be made without set-
off, counterclaim or withholding of any kind by wire
8
<PAGE>
transfer of good, unrestricted and immediately available bank funds to Secured
party's account number 55-41948, ABA #071000013, Reference: Transamerica
Equipment Finance and Leasing, Attention: Tim Milazzo, at The First National
Bank of Chicago, One First National Plaza, Chicago, Illinois 60670 (or such
other accounts as Secured Party may specify to Debtor) and shall be made prior
to 12:00 Noon, Chicago time, on the due date thereof. If any payment hereunder
becomes due and payable on a day other than a Business Day, then such payment
shall be made on next succeeding Business Day and if such payment is made on the
next succeeding Business Day, no interest shall accrue on the amount of such
payment during such extension; provided, however, that any such "extension day"
shall be included in the interest calculation in connection with the next
payment under the Note.
(f) Mutilation, Destruction, Loss or Theft. If the Note shall become
--------------------------------------
mutilated, destroyed, lost or stolen, Debtor shall, upon the written request and
at the expense of Secured Party execute and deliver to Secured Party, in
replacement thereof, a new Note in the same face amount and dated the same date
as the Note so mutilated, destroyed, lost or stolen. If the Note being replaced
has become mutilated, such Note shall be surrendered to Debtor. If the Note
being replaced has been destroyed, lost or stolen, Secured Party shall furnish
to Debtor such security or indemnity as may reasonably be required by it to save
it harmless and evidence reasonably satisfactory to Debtor of the destruction,
loss or theft of such Note and the ownership thereof; provided, however, that if
Secured Party is Transamerica Business Credit Corporation or any institutional
investor, the written undertaking of such holder delivered to Debtor shall be
sufficient security and indemnity.
3. Security Interest. In order to secure the full and complete payment
-----------------
and performance of the Obligations when due, and in consideration of the
premises and of the premises and of the covenants herein and in the other
Documents, Debtor hereby grants, transfers, assigns, bargains, sells, conveys,
mortgages, hypothecates and pledges to Secured Party a valid and perfected first
priority security interest in and Lien on all right, title and interest of
Debtor in and to the Collateral. The Lien granted by this Agreement is granted
as security only and shall not offset or modify any Obligations of Debtor with
respect to any of the Collateral or any transaction involving or giving rise
thereto and the Secured Party shall have no obligation or liability by reason of
or arising out of the assignment hereunder, nor shall the Secured Party be
required or obligated to perform or fulfill any obligations of Debtor under any
other Document.
Debtor hereby constitutes the Secured Party the true and lawful attorney of
Debtor, irrevocably, coupled with an interest and with full power of
substitution, and with full power (in the name of Debtor or otherwise) to ask
for, require, demand, and receive, any and all monies and claims for monies (in
each case including insurance and requisition proceeds) due and to be come due
under or arising out of any agreement assigned or pledged hereunder and all
other property which now or hereafter constitutes part of the Collateral, to
endorse any checks or other instruments or orders in connection there with and
to file any claims or to take any action or to institute any proceedings which
the Secured Party may deem to be necessary or advisable in the circumstances.
Without limiting the provisions of the foregoing and subject to the terms
hereof, the Secured Party
9
<PAGE>
shall have the right under such power of attorney to sue for, compound and give
acquittance for, to accept any offer of any purchaser to purchase the Engines as
provided herein and upon such purchase to execute and deliver in the name of and
on behalf of Debtor an appropriate bill of sale and other instruments of
transfer relating to the Engines, when purchased by such purchaser, and to
perform all other necessary or appropriate acts with respect to any such
purchase, and in its discretion to file any claim or take any other action or
proceedings, either in its own name or in the name of Debtor or otherwise, which
the Secured Party may reasonably deem necessary or appropriate to protect and
preserve the right, title and interest of the Secured Party in and to such rents
and other sums and the security intended to be afforded hereby.
It is hereby further agreed that any and all property described or referred
to in the definition of Collateral which is hereafter acquired by Debtor shall
ipso facto, and without any further conveyance, assignment or act on the part of
Debtor or the Secured Party, become and be subject to the Lien and security
interest herein granted as fully and completely as though specifically described
herein.
4. Conditions Precedent to Closing Date. The agreement of Secured Party
------------------------------------
to make the initial Loan to Debtor and to enter into this Agreement and each of
the other Documents to which it is a party on the Closing Date is subject to the
satisfaction (or written waiver by Secured Party) of the following conditions
precedent:
(a) Secured Party shall have received each of the following documents,
duly authorized, executed and delivered by all parties thereto, in form and
substance satisfactory to the Secured Party:
(i) this Agreement and the Supplement hereto dated the Closing
Date; and
(ii) the Note;
(b) the Secured Party shall have received a duly executed officer's
incumbency certificate of Debtor, in form and substance satisfactory to the
Secured Party;
(c) the Secured Party shall have received independent insurance
certificates and broker's undertaker letter, in form and substance satisfactory
to the Secured Party relating to the Engines;
(d) the Secured Party each shall have received true and complete
copies of (i) the Articles of Incorporation of Debtor; (ii) the By-laws of
Debtor; (iii) the resolutions of the Board of Directors or other competent
authority of Debtor with respect to the due authorization of the transactions
contemplated by this Agreement and the other Operative Documents; and (iv) good
10
<PAGE>
standing certificates for Debtor in the States of Delaware and New York,
certified by the Secretary of Debtor;
(e) the Secured Party shall have received the legal opinions of (i)
Hewes, Gelband, Lambert & Dann, counsel to Debtor and (ii) Daugherty, Fowler &
Peregrin, special counsel in Oklahoma City, Oklahoma, in each case, in form and
substance satisfactory to the Secured Party and addressed to the Secured Party;
(f) Debtor shall provide Secured Party with a copy of the servicing
agreement between Debtor and GE Aircraft Engine Services with respect to Engine
bearing manufacturer serial number 662338;
(g) the Secured Party shall have received a copy, certified as true
and correct by an officer of Debtor of each approval and consent, if any, of any
governmental or other regulatory authorities in the United States, which are
necessary for the execution, performance and delivery of each of the Documents
by each of the parties thereto;
(h) the Secured Party shall have received evidence satisfactory to it
that the Engines and all other Mortgaged Property are the property of Debtor
free and clear of all Liens and adverse claims or rights and that the Secured
Party has, or will on the Closing Date have, a first priority perfected Lien
therein;
(i) no Default or Event of Default shall have occurred and be
continuing and no Event of Loss or event which, with the passage of time or the
giving of notice or both, would constitute an Event of Loss with respect to any
Engine shall have occurred;
(j) no action or proceeding shall have been instituted nor shall any
governmental action be threatened before any court or governmental agency, nor
shall any order, judgment or decree have been issued or proposed to be issued by
any court or governmental agency pertaining in any way to the Engines or the
transactions contemplated by this Agreement;
(k) there shall not have been, in the opinion of the Secured Party,
any material adverse change in the business, operations, property or condition
(financial or other) of Debtor;
(l) the representations and warranties made by Debtor in this
Agreement and each other Document shall be true and correct on and as of the
Closing Date and the Debtor shall provide a certificate of an appropriate
officer of Debtor to such effect;
(m) on the Closing Date, the following statements shall be true and
the Secured Party shall have received evidence satisfactory to it to the effect
that:
11
<PAGE>
(i) Debtor has authority to operate the Engines and the
aircraft on which the Engines are installed; and
(ii) this Agreement and the Supplement have been duly filed with
the FAA for recordation;
(n) a Uniform Commercial Code financing statement or statements
covering all the security interests created by this Agreement shall have been
executed and delivered by Debtor, and such financing statement or statements
shall have been duly filed in all places necessary or advisable, and any
additional Uniform Commercial Code financing statements deemed advisable by the
Secured Party shall have been executed and delivered by Debtor and duly filed;
(o) the Secured Party shall have received evidence satisfactory to it
that (i) the AAR FAA Releases have been duly executed and delivered by the
parties thereto, (ii) any other Liens with respect to the Engines shall have
been released and (iii) any other necessary release documentation shall have
been filed with the FAA or other applicable agency.
(p) all appropriate action required to have been taken prior to such
Drawdown Date by the Federal Aviation Administration or any governmental or
political agency, subdivision or instrumentality of the United States in
connection with the transactions contemplated hereby shall have been taken and
all orders, permits, waivers, authorizations, exemptions and approvals of such
entities required to be in effect on such Drawdown Date in connection with the
transactions contemplated hereby shall have been issued, and all such orders,
permits, waivers, authorizations, exemptions and approvals shall be in full
force and effect on the date hereof and on such Drawdown Date;
(q) Secured Party shall have received proof of ownership, satisfactory
to Secured Party, from Debtor as to Debtor's ownership of the Engines, including
bills of sale for such Engines;
(r) Secured Party shall have received the current engine status
reports for each Engine, certified by a vice president of quality assurance of
Debtor as being "true, accurate and correct";
(s) the Secured Party shall have received an appraisal and inspection
report;
(t) Secured Party shall have received the Loan Fee; and
(u) the Secured Party shall have received such further documents,
instruments and agreements as it shall reasonably require in connection with the
transactions contemplated by the Documents.
12
<PAGE>
5. Conditions Precedent to Subsequent Drawdown Dates. The agreement of
--------------------------------------------------
Secured Party to make subsequent advances of the Loan to Debtor is subject to
the satisfaction (or written waiver by Secured Party) of the following
conditions precedent:
(a) Secured Party shall have received a certificate signed by an
Officer of Debtor stating that the maintenance work to be performed in
connection with such advance has been performed and that Debtor has irrevocably
accepted such work and that either (i) all amounts to be paid by Debtor in
connection with such maintenance have been paid or (ii) such financing has been
obtained from such maintenance provider without the granting of any Lien by
Debtor to such maintenance provider;
(b) Secured Party shall have received from any maintenance provider
providing maintenance in connection with such advance a letter stating that all
such maintenance has been completed and accepted as satisfactory by Debtor and
that any amounts due from Debtor have been either (i) paid in full or (ii) are
subject to a financing agreement between Debtor and such maintenance provider
and, if subject to a financing agreement, the maintenance provider has not and
shall not obtain a Lien on the relevant Engine;
(c) no Default or Event of Default shall have occurred and be
continuing and no Event of Loss or event which, with the passage of time or the
giving of notice or both, would constitute an Event of Loss with respect to any
Engine shall have occurred;
(d) no action or proceeding shall have been instituted nor shall any
governmental action be threatened before any court or governmental agency, nor
shall any order, judgment or decree have been issued or proposed to be issued by
any court or governmental agency pertaining in any way to the Engines or the
transactions contemplated by this Agreement;
(e) there shall not have been, in the opinion of the Secured Party,
any material adverse change in the business, operations, property or condition
(financial or other) of Debtor;
(f) the representations and warranties made by Debtor in this
Agreement and each other Document shall be true and correct on and as of the
Closing Date and the Debtor shall provide a certificate of an appropriate
officer of Debtor to such effect;
(g) all appropriate action required to have been taken prior to such
Drawdown Date by the Federal Aviation Administration or any governmental or
political agency; subdivision or instrumentality of the United States in
connection with the transactions contemplated hereby shall have been taken and
all orders, permits, waivers, authorizations, exemptions and approvals of such
entities required to be in effect on such Drawdown Date in connection with the
transactions contemplated hereby shall have been issued, and all such order,
permits, waivers, authorizations, exemptions and approvals shall be in full
force and effect on the date hereof and on such Drawdown Date;
13
<PAGE>
(h) the Secured Party shall have received an appraisal and such
appraisal, if required, shall be in form and substance (including, without
limitation, the values set forth in such appraisal) satisfactory to Secured
Party and evidence of the satisfactory completion of the maintenance work being
performed with respect to one or more of the Engines bearing manufacturer serial
numbers 662323, 686106 or 702083;
(i) the Secured Party shall have received a letter from Debtor setting
forth the payee and its wire transfer instructions;
(j) the Secured Party shall have received a Note, substantially in the
form of Attachment 2 hereto, duly executed, authorized and delivered by Debtor
in favor of Secured Party and in an aggregate principal amount equal to the sum
of all advances made on or prior to such Drawdown Date; and
(k) the Secured Party shall have received such further documents,
instruments and agreements as it shall reasonably require in connection with the
transactions contemplated by the Documents.
6. Representations and Warranties of Debtor Debtor represents and
----------------------------------------
warrants to Secured Party as of the date hereof and each Drawdown Date that:
(a) It has (i) good and marketable title to the Collateral, free and
clear of all Liens, charges, mortgages, and encumbrances except for the Lien
granted hereby; (ii) full power and authority to give, sell, transfer, convey,
mortgage, and grant the Lien in the Collateral as herein provided; and (iii)
obtained any and all consents necessary to create the Lien in the Collateral
granted pursuant to this Agreement.
(b) The Documents have been duly authorized, executed and delivered by
Debtor and constitute the legal, valid and binding obligations of Debtor,
enforceable against Debtor in accordance with their respective terms.
(c) It (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, (ii) has the power and
authority, and the legal right, to conduct the business in which it is currently
engaged, (iii) is in compliance with its organizational documents, (iv) is in
compliance with all laws, treaties, rules, regulations and determinations of any
arbitrator, court or governmental authority applicable to or binding upon it and
holds all licenses, certificates, approvals and permits from the Federal
governmental authorities of the United States to use and operate the Engines in
accordance with this Agreement and applicable law and (v) is a "citizen of the
United States" as defined in Section 40102(a)(15) of the Federal Aviation Act
holding a carrier operating certificate issued by the Secretary of
Transportation pursuant to Section 44705 of the Federal Aviation Act for
aircraft capable of carrying ten or more individuals or 6,000 pounds or more of
cargo.
14
<PAGE>
(d) It has the power and authority to make, deliver and perform the
transactions contemplated in the Documents. No consent or authorization of,
filing with or notice to or approval or other act by or in respect of any
governmental authority is required in connection with the borrowing hereunder or
with the execution, delivery, performance, validity or enforceability of the
Documents except the filing of this Agreement (and any supplements hereto) with
the FAA and any necessary or relevant UCC Filings.
(e) The execution, delivery and performance of the Documents, the
borrowings hereunder and the use of the proceeds thereof and the creation of the
Liens under the Documents will not violate any laws, treaties, rules,
regulations and determinations of any arbitrator, court or governmental
authority applicable to or binding upon it or any lease, mortgage or other
contract binding on Debtor or the organizational documents of Debtor and to the
best of Debtor's knowledge will not result in, or require, the creation or
imposition of any Lien on any of its or its properties or revenues.
(f) No event has occurred which constitutes, or with the giving of
notice and/or the passage of time and/or a relevant determination would
constitute, a contravention of, or default under, any lease, montage or other
contract binding on Debtor. No Default or Event of Default has occurred or will
occur as a result of the consummation of the transactions contemplated hereby.
(g) There is no pending or, to the best of Debtor's knowledge,
threatened action or proceeding affecting Debtor before any court, tribunal,
governmental agency or arbitrator which may adversely affect the financial
condition or operations of Debtor or the ability of Debtor to perform its
obligations under the Documents or the Engines or any other Collateral.
(h) The chief executive office and principal place of business (as
such terms are defined in the UCC) of Debtor are located at Hangar 17, JFK
International Airport, Jamaica, NY 11430.
(i) The Secured Party is entitled to the benefits of Section 1110 of
the United States Bankruptcy Code with respect to the right to repossess the
Engines and Parts.
7. Covenants. So long as the Obligations are, or any part thereof is,
---------
outstanding, Debtor hereby covenants that, at its own cost and expense:
(a) Debtor shall make due and punctual payment of the principal and
interest and Prepayment Fee, if any, on the Note and perform all covenants and
agreements hereunder.
(b) Debtor shall not permit the Collateral to become subject to any
Lien of any kind or character other than the Lien granted herein and it will
promptly at its own expense, take such action as may be necessary duly to
discharge any such Lien with respect to the Collateral and
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it will indemnify and hold harmless the Secured Party against any and all
liabilities, obligations, losses, damages, penalties, claims, actions, costs,
expenses and disbursements incurred or suffered in connection with the existence
of such Lien or the removal thereof.
(c) Debtor shall promptly notify Secured Party of any claim, action or
proceeding affecting title to all or any portion of the Collateral, or the Lien
granted hereby, and at the request of Secured Party appear in and defend, at
Debtor's expense, any such action or proceeding.
(d) Debtor shall keep the Collateral in as good condition and repair
as the same now is, ordinary wear and tear excepted.
(e) Debtor shall promptly either (A) pay all amounts owed by Debtor to
any maintenance provider with respect to maintenance relating to any of the
Engines and if any such amount due to any such maintenance provider from Debtor
is not paid in full by Debtor within thirty (30) days of receipt of an invoice
or any other notice from any maintenance provider of payment being due by Debtor
for such maintenance, an Event of Default shall have occurred and interest on
all outstanding amounts due under the Note shall accrue at the Overdue Rate or
(B) enter into a financing agreement providing for the financing by the relevant
maintenance provider of such maintenance work and provide to Secured Party,
within three (3) Business Days of entering into such financing agreement, a
certificate of Debtor containing the representation described in Article
5(a)(ii) and a letter from the applicable maintenance provider containing the
representation described in Article 5(b)(ii), and, if Debtor fails to provide
either such certificates or letters to Secured Party within such three (3)
Business Day Period, an Event of Default shall have occurred and interest on all
outstanding amounts due under the Note shall accrue at the Overdue Rate.
(f) Debtor shall install and keep affixed to each Engine a placard in
the following form:
"This Engine is subject to a security interest in favor of
TRANSAMERICA BUSINESS CREDIT CORPORATION, 13760 Noel Road, Suite 1100,
Dallas, Texas, 75240"
(such placard to be replaced, if necessary, with a nameplate reflecting the name
of any successor Secured Party).
(g) Debtor shall keep the Collateral insured with policies of
insurance of the type and in the minimum amounts stated below with insurers and
under terms satisfactory to Secured Party; and, prior to the Closing Date and
upon each annual anniversary thereafter so long as the Obligations remain
outstanding, Debtor will furnish to Secured Party certificates of insurance (and
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a report of an independent insurance broker, which broker and report shall be
satisfactory to Secured Party) evidencing such coverage; provided, however, that
such insurance policies shall not provide any party with any recourse against
Secured Party for payment of any premium or any other costs related thereto.
(i) Comprehensive Airline Liability Insurance with an aggregate
limit of not less than Seven Hundred and Fifty Million Dollars
($750,000,000), naming Secured Party, its directors, officers, agents,
employees, successors and assigns as additional insureds, such insurance
covering, among other things, Debtor's indemnification obligations under
this Agreement.
(ii) Aircraft hull insurance covering all risks, ground and
flight, with respect to each Engine, in a minimum amount not less than the
applicable Engine Original Amount (it being agreed and understood that when
an Engine is on wing, such minimum amount is in addition to any insurance
maintained in respect of the aircraft on which such Engine is installed and
that such minimum amount is maintained for the sole benefit of Secured
Party); provided, however that with respect to all Engines, such hull
insurance shall be in a minimum amount of not less than one hundred five
percent (105%) of the principal and interest outstanding on the Note. Such
policy will include Secured Party as first loss payee to the extent that
the Obligations are outstanding.
(iii) All risk spares insurance, including in transit coverage,
on the Engines covering any damage which may occur while in Debtor's care,
custody, and control but not then attached to an aircraft in a minimum
amount not less than the amount stated in paragraph f(ii) above. Such
policy will include Secured Party as first loss payee to the extent that
the Obligations are outstanding.
(iv) All insurance coverages listed above will include war risk,
hijack, and confiscation coverage in the amounts listed therein.
(v) All policies will provide that all insurance carriers,
including the hull insurance carrier for the Engines, waive any and all
rights of subrogation that such carriers may or could have against Secured
Party, its directors, officers, agents, and employees by virtue of such
insurance contracts.
(vi) The hull insurance deductible shall not exceed $500,000
when an Engine is on wing and $10,000 when an Engine is off wing. Any
permitted deductibles in the insurance coverage described in this Article
7(f) are the sole responsibility of Debtor and will be paid to Secured
Party by Debtor in the event of a loss or claim as Secured Party's
interests may appear.
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(vii) All of the policies of insurance required of Debtor
will include breach of warranty protection in favor of Secured Party.
(viii) All policies required of Debtor will provide that such
insurance will be primary insurance and that any other insurance of Secured
Party is secondary or excess insurance.
(ix) All policies will provide that Secured Party will be
given thirty (30) days' prior written notice by the insurers of policy
cancellation or material change thereof except for coverages in Article
7(f)(iv) which will require seven (7) days prior written notice.
(x) All losses will be adjusted with Secured Party and
Debtor.
(xi) All hull insurance policies will contain a fifty-fifty
(50/50) clause.
(h) Debtor shall not transfer, lease, sell, assign, pledge or
otherwise transfer possession of the Collateral or any part thereof without the
prior written consent of Secured Party.
(i) Debtor shall not maintain, use, service, repair, overhaul or
operate the Collateral or any aircraft on which the Collateral is installed in
violation of any law, regulation, or ordinance of any governmental authority or
in violation of any airworthiness certification, or policy of insurance
affecting the maintenance or use of such Collateral or such aircraft.
(j) Debtor shall maintain, service, repair and overhaul the Engines
so as to keep the Engines in as good operating condition as when originally
subjected to the Lien hereof and in such manner as may be necessary to enable
the applicable airworthiness certification for the Engines to be maintained in
good standing at all times under the Federal Aviation Act, and in substantially
the same manner as Debtor maintains, services, repairs and overhauls similar
engines operated by Debtor in similar circumstances and without in any way
discriminating against the Engines.
(k) Debtor shall maintain (in English) all records, logs, and other
materials required by the FAA to be maintained in respect of the Engines.
(l) Debtor shall perform or cause to be performed all FAA
airworthiness directives or any other mandatory or recommended regulation,
directive or instruction (including manufacturer's changes, notices and/service
bulletins) issued by the manufacturer, the FAA or any other governmental agency
or authority asserting jurisdiction over the Engines or their use, operation or
maintenance which may from time to time be issued affecting engines of the same
type as the Engines (collectively, "Airworthiness Directives").
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(m) Debtor shall at all times (i) preserve and maintain in full force
and effect its existence as a Delaware corporation under the laws of the State
of Delaware and its qualification to do business in each jurisdiction in which
the conduct of its business requires such qualification, (ii) obtain and
maintain in full force and effect all consents, approvals, licenses and
franchises required at any time in connection with the registration, ownership
or operation of the Engines and its other properties and businesses and (iii) be
a "citizen of the United States" as defined in Section 40102(a)(15) of the
Federal Aviation Act holding a carrier operating certificate issued by the
Secretary of Transportation pursuant to Section 44705 of the Federal Aviation
Act, for aircraft capable of carrying then or more individuals or 6,000 pounds
or more of cargo.
(n) Debtor shall promptly replace or cause to be replaced all Parts
which may from time to time become worn out, lost, stolen, destroyed, seized,
confiscated, damaged beyond repair or permanently rendered unfit for use for any
reason whatsoever, with replacement Parts owned by Debtor free and clear of all
Liens in as good an operating condition as and having a value and utility
substantially equal to the Parts replaced assuming such replaced Parts were in
the condition and repair required to be maintained by the terms hereof. All
Parts at any time removed from any Engine shall remain the property of Debtor,
no matter where located, until such time as such Parts shall be replaced by
Parts which meet the requirements for replacement Parts specified above.
(o) Debtor shall make such alterations and modifications in and
additions to the Engines as may be required to meet the applicable standards of
the FAA or any applicable regulatory agency or body of any other governmental
body asserting jurisdiction over the Engines.
(p) Debtor shall not, without the prior written consent of Secured
Party, submit any or all of the Engines for servicing or maintenance under any
engine servicing agreement applicable to such Engine or Engines (it being
understood and agreed that Secured Party consents to the maintenance being
performed (or proposed to be performed) by Greenwich Air Services with respect
to Engines bearing manufacturer's serial numbers 662323, 686106; GE Aircraft
Engine Services with respect to Engine bearing manufacturer's serial number
662338; and SIA Engineering Company with respect to Engine bearing
manufacturer's serial number 702083, as of the Closing Date; provided, however,
that no Lien shall attach to any Engine in connection with any such
maintenance).
(q) Debtor shall maintain at all times the lien of and first priority
perfected security interest in the Collateral created by this Agreement.
(r) Debtor shall cause any lessor or secured party of any airframe
leased to Debtor or purchased by Debtor subject to a conditional sale or other
security agreement or any mortgagee of or any other holder of a security
interest in an airframe owned by Debtor, to expressly agree in writing (which
agreement may be contained in such lease, conditional sale or other security
agreement or mortgage) that neither it nor its successors or assigns will
acquire, as against Secured
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Party, any right, title or interest in an Engine as a result of such Engine
being installed on such airframe.
(s) Debtor shall furnish to Secured Party:
(i) As soon as practicable after the end of the first, second
and third quarterly fiscal periods in each fiscal year of Debtor, and in
any event within 60 days thereafter, duplicate copies of:
(x) a balance sheet of Debtor as at the end of such quarter
setting forth in comparative form the amount for the end of the
corresponding period of the preceding fiscal year,
(y) statements of income and retained earnings of Debtor for
such quarterly period, and
(z) statements of cash flow of Debtor for the portion of the
fiscal year ending with said quarter;
in each case prepared in accordance with generally accepted accounting
principles in the United States of America in effect from time to time and
consistently applied ("GAAP") and certified by the Chief Financial Officer
of Debtor as having been prepared in accordance with GAAP; and
(ii) As soon as practicable after the end of each fiscal year of
Debtor, and in any event within 90 days thereafter, duplicate copies of:
(x) a balance sheet of Debtor as at the end of such year,
(y) statements of income and retained earnings of Debtor for
such year, and
(z) statements of cash flow of Debtor as at the end of such
year,
in each case prepared in accordance with generally accepted accounting
principles in the United States of America in effect from time to time and
consistently applied and setting forth in each case in comparative form the
figures for the previous fiscal year and accompanied by an unqualified
auditor's report of a firm of independent certified public accountants of
recognized national standing satisfactory to the Secured Party stating that
such balance sheet and combined and combining statements have been prepared
in accordance with GAAP;
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(iii) Concurrently with the delivery of the financial statements
referred to in clauses (i) and (ii) above, Debtor will deliver to Secured
Party a certificate of Debtor, signed by the President, a Vice President,
the Chief Financial Officer or the principal accounting officer of Debtor
to the effect that the signer is familiar with or has reviewed the relevant
terms of each of the Documents and the signer does not have knowledge of
the existence, as of the date of such certificate, of any condition or
event which constitutes a Default or an Event of Default;
(iv) Debtor shall, upon request from Secured Party, promptly
provide Secured Party with any additional information Secured Party may
deem necessary or appropriate to protect its interest in the Engines, the
Documents or any other portion of the Collateral.
(t) Debtor shall not consolidate with or merge into any other
corporation or convey, transfer or lease all or substantially all of its assets
as an entirety to any person unless:
(i) the corporation formed by such consolidation or into which
Debtor is merged or the person which acquires by conveyance, transfer or
lease all or substantially all of the assets of Debtor as an entirety (the
"Successor") shall be an "air carrier" and a "citizen of the United
States", as such terms are defined in Section 40102(a) of the Federal
Aviation Act, operating under certificates issued under Sections 41102 and
44705 of the Federal Aviation Act and shall have a tangible net worth not
less than the tangible net worth of Debtor immediately prior to such
merger, conveyance, transfer or lease;
(ii) Successor shall execute and deliver to Secured Party a duly
authorized, valid, binding and enforceable agreement in form and substance
reasonably satisfactory to Debtor containing an assumption by the Successor
of the due and punctual performance and observance of each covenant and
condition of the Documents to be performed or observed by Debtor;
(iii) immediately after giving effect to such transaction and as
a result of giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; and
(iv) Debtor shall have delivered to Secured Party a certificate
signed by the President or any Vice President of Debtor, and an opinion of
counsel satisfactory to Secured Party, each stating that such
consolidation, merger, conveyance, transfer or lease and the assumption
agreement mentioned in clause (ii) above comply with this Article 7(s) and
that all conditions precedent herein provided for relating to such
transaction have been complied with.
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Upon any consolidation or merger, or any conveyance, transfer or lease of all or
substantially all of the assets of Debtor in accordance with this Article 7(s),
the Successor shall succeed to, and be substituted for, and may exercise every
right and power of, and shall have every obligation to the same extent as,
Debtor under this Agreement with the same effect as if such Successor had been
named as Debtor herein. No such conveyance, transfer or lease of all or
substantially all of the assets of Debtor as an entirety shall have the effect
of releasing Debtor or any Successor which shall theretofore have become such in
the manner prescribed in this Article 7(s) from its liability in respect of any
Document to which it is a party.
(u) Debtor shall furnish to Secured Party:
(i) Within 15 days after the end of each month and with respect
to each Engine, (A) if requested by Secured Party, a report containing the
information and certification described in Article 4(r) hereof, and (B) a
maintenance status report identifying engine time and cycles since new,
since overhaul, since hot section, and since gear box inspection (if
required), a list of major components removed for repair/overhaul during
the previous month; the location of Engines and a list of major repairs or
modifications performed during the previous month (reports under this
paragraph will be based on information and reports ordinarily compiled by
and reasonably available to Debtor).
(ii) If requested by Secured Party, within 15 days after the end
of each calendar month and with respect to each Engine, a maintenance
status report identifying current status of all major time controlled or
life components relative to Debtor's approved maintenance program and
schedule, including engine/turbine wheel and discs, cooling/air cycle
machines; current status and frequency of maintenance inspections as per
Debtor's approved maintenance program; a listing of Manufacturer's Service
Bulletins that have been embodied during the previous quarter; a listing of
the Airworthiness Directives that have been embodied or complied with
during the previous month, annotated by method of compliance (reports under
this paragraph will be based on information and reports ordinarily complied
by and reasonably available to Debtor).
8. US Government Indemnification. Secured Party agrees to accept
-----------------------------
indemnification by the United States Government in lieu of the insurance
required pursuant to Article 7(f) so long as the Obligations are outstanding, if
Debtor is unable to provide the insurance required pursuant to Article 7(f);
provided, however, that such indemnification shall provide substantially the
same coverage as the insurance required pursuant to Article 7(f) shall not be an
Event of Default hereunder so long as such indemnification is in effect.
9. Further Agreements of Debtor. Debtor further agrees as follows:
----------------------------
(a) to defend at Debtor's own cost any action, proceeding, or claim
affecting the Collateral;
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(b) to pay reasonable attorneys' fees and other expenses incurred by
Secured Party in enforcing its rights (including collection rights) under this
Agreement, the Note and the other Documents;
(c) to reimburse Secured Party for all expenses (including reasonable
attorneys' fees) incurred by Secured Party in connection with the preparation,
negotiation, review, and recordation of this Agreement and other Documents,
filing financing statements, and searches of any appropriate records including
the FAA records;
(d) to pay when due all taxes, assessments, license fees, and other
public or private charges when levied or assessed against the Collateral, and
the security interest of Secured Party in the Collateral, so that the lien of
and first priority perfected security interest created by this Agreement in the
Collateral shall at all times be wholly preserved at the cost of Debtor and
without expense to Secured Party;
(e) that the Collateral will be used at all times in accordance with
the laws, rules, regulations, and ordinances of the Unites States, the several
states and municipalities thereof, and any other foreign jurisdictions in which
the Collateral may be used;
(f) that under no circumstances will the Collateral be operated at any
time when the full amount of insurance required under Article 7(f) is not in
effect, or in any area excluded from coverage of any insurance in effect, or in
violation of any term of any policy of insurance in effect;
(g) that Debtor shall not change its corporate name or the location of
its chief executive office without providing at least thirty (30) Business Days'
prior written notice thereof to Secured Party;
(h) that Debtor shall notify Secured Party within four (4) days after
each and every occasion the domicile location of the Collateral (or any portion
thereof) has changed and advise Secured Party of such new domicile location (for
the purposes hereof, domicile location of the Collateral means the location
where the Collateral is based);
(i) that Debtor shall promptly give Secured Party notice of any Event
of Default, as hereinafter defined, or any event which, after notice or lapse of
time or both, would cause an Event of Default; and
(j) at all reasonable times, and upon at least five (5) days' prior
written notice to Debtor (except during the continuance of a Default or Event of
Default when the inspections do not have to be at reasonable times and do not
require prior written notice), Secured Party may inspect the Collateral and
inspect and make copies (at Secured Party's expense) of the books and records of
Debtor relating to maintenance of the Collateral; provided, however, that any
such
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inspection shall be limited to a visual, walk around inspection and shall not
include opening any panels or the like (e.g. borescope) without the express
consent of Debtor, which consent shall not be unreasonably withheld. Debtor will
give Secured Party not less than fifteen (15) days' notice of any scheduled
Engine removals. The Secured Party shall not have any duty to make any such
inspection and shall not incur any liability or obligation by reason of not
making any such inspection.
10. Event of Loss. Upon the occurrence of an Event of Loss with respect
-------------
to any Engine, Debtor shall (a) forthwith (and in any event, within ten (10)
days after such occurrence) give the Secured Party written notice of such Event
of Loss and (b) not later than the earlier of (x) the Business Day next
succeeding the 60th day following the occurrence of such Event of Loss, to the
extent not previously paid to Secured Party as insurance proceeds, and (y) two
(2) Business Days following receipt by Debtor of insurance/requisition proceeds,
pay or cause to be paid to Secured Party (i) a portion of the outstanding
Principal Amount of the Note equal to the Engine Original Amount with respect to
the Engine that suffered the Event of Loss; (ii) that portion of accrued and
unpaid interest with respect to the Principal Amount of the Note to be repaid as
of the Loss Payment Date; (iii) the Event of Loss Prepayment Fee with respect to
the Principal Amount of the Note to be prepaid; and (iv) all other Obligations
due and owing hereunder and under the other Documents with respect to (A) such
Engine and (B) the Principal Amount of the Note to be prepaid. At such time as
Secured Party shall have received the amount specified in the immediately
preceding sentence, together with all other amounts that then may be due
hereunder and under the other Documents (y) this Agreement shall terminate
solely with respect to the Engine which was subject to such Event of Loss and
(z) Debtor will be subrogated to all claims of Secured Party, if any, against
third parties to the extent the same relate to physical damage to or loss of
such Engine.
11. Events of Default. The occurrence of any of the following events of
-----------------
default (each, an "Event of Default"), including but not limited to the Events
of Default set forth in clause (a) below, shall permit Secured Party to declare
the principal of, and accrued interest (if any) and Prepayment Fee (if any) on
the Note to be immediately due and payable in full, whereupon the same shall
immediately become due and payable in full without presentment, demand, protest,
or other notice of any kind (including without limitation notice of intention to
accelerate or notice of acceleration) all of which are hereby waived by Debtor;
provided, however, that if any of the Events of Default set forth in clauses
(a), (f) or (g) below shall occur, then the principal of and accrued interest
(if any) and Prepayment Fee (if any) on the Note shall automatically, without
any action of Secured Party, become immediately due and payable in full, without
presentment, demand, protest or other notice of any kind (including without
limitation, notice of intention to accelerate or notice of acceleration) all of
which are hereby waived by Debtor:
(a) Debtor fails to pay when due, whether at maturity, by acceleration
or otherwise, and payment of principal or interest (if any) and Prepayment Fee
(if any) on the Note or any other amount due hereunder or under any other
Document;
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(b) Debtor fails to observe or perform any agreement or covenant
contained in Article 7(b), 7(f), 9(d) or 9(f) above;
(c) Debtor fails to observe to perform any agreement or covenant
contained in this Agreement or the Note or any other Document (other than an
agreement or covenant contained in the provisions referred to in Article 11(b)
above) and such failure continues for ten (10) days after written notice thereof
to Debtor from Secured Party;
(d) Any statement, representation, warranty, or certificate made or
furnished by Debtor to Secured Party in connection with this Agreement, the Note
or any other Document, or as inducement to Secured Party to enter into this
Agreement or any other Document or to accept the Note, shall have been false,
incorrect, or incomplete in any material respect when made, or shall have
contained a misstatement, or shall have omitted to state a fact necessary to
make such statement, representation, warranty, or certificate not misleading,
which falsehood, misstatement or omission shall remain at the time in question;
(e) A default occurs under any material agreement to which Debtor is a
party with a third party (or parties) resulting in a right of such third party
(or parties) to declare any indebtedness thereunder due and payable before its
stated maturity, whether or not acceleration occurs;
(f) Debtor (i) becomes generally unable or admits in writing its
inability to pay its debts as they become due, (ii) makes an assignment for the
benefit of creditors, (iii) is adjudicated insolvent or bankrupt, (iv) files a
petition in bankruptcy, (v) petitions or applies for the appointment or any
taking of possession by a receiver, custodian, trustee, or liquidator of itself
or of all or a substantial part of its property, (vi) commences any case,
proceeding or other action relating to Debtor under any bankruptcy,
reorganization, arrangement, readjustment of debt, dissolution or liquidation
law or state of any jurisdiction (domestic or foreign), whether now or hereafter
in effect;
(g) There is commenced against Debtor any proceedings described in
Article 11(f)(iv), (v) or (vi) above, and Debtor acquiesces or consents thereto
or such proceedings remain undismissed for a period of sixty (60) days;
(h) Debtor suffers a final judgment for payment of money aggregating
in excess of $250,000 and does not discharge the same within a period of thirty
(30) days, unless execution of such judgment has been effectively stayed or
fully bonded;
(i) Secured Party shall not have a first priority perfected security
interest in the Collateral; or
(j) Debtor shall default under any other agreement between Debtor and
Secured Party, including without limitation, any Other Security Agreements.
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12. Remedies.
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(a) After the occurrence of an Event of Default, Secured Party shall
have all of the rights and remedies available to a secured party under the
Uniform Commercial Code of any applicable jurisdiction, and all rights and
remedies available to it under any other law or otherwise available to it,
including, without limitation, the right to: (i) without notice, demand or
legal process enter upon any premises of Debtor and take possession of all or
any part of the Collateral, (ii) require Debtor to assemble, at Debtor's
expense, the Collateral at any place designated by Secured Party and to make the
same available to Secured Party for repossession or otherwise, and (iii) without
demand of performance and, to the extent permitted by applicable law, without
notice of instruction to sell or of time or place of sale or of redemption or
other notice or demand whatsoever to Debtor, all of which are hereby expressly
waived, sell, lease, assign, transfer, and deliver all or any part of the
Collateral at public or private sale for cash, upon credit or for other
property, for immediate or future delivery, for such price or prices and on such
terms as Secured Party in its sole discretion shall deem appropriate. Upon
consummation of any such sale, Secured Party shall have the right to assign,
transfer, and deliver the applicable Collateral to the purchaser thereof. Such
purchaser at any such sale shall hold the property so sold absolutely free from
any claim or right on the part of Debtor, and Debtor does hereby waive (to the
extent permitted by law) all rights of redemption, stay and appraisal which
Debtor now has or may at any time in the future have under any rule of law,
statute, or otherwise now existing or hereafter enacted;
(b) Any notice required to be given by Secured Party or other
disposition or other intended action by Secured Party with respect to any of the
Collateral which is deposited in the United States mails, postage prepaid and
duly addressed to Debtor at the address specified in Article 18 hereof, at least
ten (10) Business Days prior to such proposed action shall constitute fair and
reasonable notice to Debtor of any such action. Secured Party shall not be
obligated to make any sale of the Collateral if it shall determine not to do so,
regardless of the fact that notice of sale of the Collateral may have been
given;
(c) Secured Party may, without notice or publication, adjourn any
public or private sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for sale, and such sale may, without
further notice, be made at the time and place to which the same was so
adjourned. In case sale of the Collateral is made on credit or for future
delivery, the Collateral so sold may be retained by Secured Party until the sale
price is paid by the purchaser or purchasers thereof, but Secured Party shall
not incur any liability in case any such purchaser or purchasers shall fail to
take up and pay for the Collateral so sold and, in case of any such failure,
such Collateral may be sold again by Secured Party;
(d) At any sale made pursuant to this Article 11, Secured Party may
bid for or purchase, free (to the extent permitted by law) from any right of
redemption, stay and appraisal of the part of Debtor (all said rights being
hereby waived and released to the extent permitted by law),
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any portion of or all the Collateral offered for sale and may make payment on
account thereof by using any of the obligations, or any portion thereof, then
due and payable to Secured Party from Debtor as a credit against the purchase
price;
(e) As an alternative to exercising the power of sale herein conferred
upon it, Secured Party may proceed by suit or suits at law or in equity to
foreclose the security interest created under this Agreement or otherwise
enforce its rights with respect to the Collateral, and sell the Collateral
pursuant to judgment or decree of any court having competent jurisdiction; and
(f) Each and every right, power and remedy given to the Secured Party
specifically or otherwise in this Agreement shall be cumulative and shall be in
addition to every other right, power and remedy herein specifically given or now
or hereafter existing at law, in equity or by statute, and each and every right,
power and remedy whether specifically herein given or otherwise existing may be
exercised from time to time and as often and in such order as may be deemed
expedient by the Secured Party, and the exercise or the beginning of the
exercise of any power or remedy shall not be construed to be a waiver of the
right to exercise at the same time or thereafter any other right, power or
remedy. No delay or omission by the Secured Party in the exercise of any right,
remedy or power or in the pursuance of any remedy shall impair any such right,
power or remedy or be construed to be a waiver of any default on the part of the
Debtor or to be an acquiescence therein.
13. Payment. Upon satisfaction in full of the Obligations, Secured Party
-------
will, at the Debtor's sole cost and expense, take such steps as are necessary to
release the Collateral. Upon payment in full of the Obligations, the security
interests granted hereby shall cease and become null and void.
14. Section 1110. It is the intention of the parties hereto that Secured
------------
Party shall be entitled to the benefits of Section 1110 of the United States
Bankruptcy Code with respect to the right to repossess the Engines and 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. Debtor further agrees
that neither it nor any successor will take a contrary position in any
bankruptcy proceedings, nor will it take any action to interfere with Secured
Party's rights under such Section 1110.
15. Indemnification, Release and Waiver.
------------------------------------
(a) Debtor hereby releases, and agrees to indemnify, defend and hold
harmless, on an after-tax basis, Secured Party and its assignee, if any, their
directors, officers, employees and agents ("Indemnitee(s)") from and against any
and all liabilities, damages, losses, expenses, demands, claims, suits or
judgments of any kind whatsoever (including reasonable attorneys' fees, costs
and expenses in connection therewith or incident thereto), in any way relating
to or arising out
27
<PAGE>
of or which would not have occurred but for (i) this Agreement, the other
Documents or any documents contemplated hereby or thereby or any amendments,
supplements or modifications hereto or thereto (including any misrepresentations
or breach of warranty of Debtor contained herein or therein and the breach by
Debtor of any covenant or agreement contained herein or therein) or the
enforcement of any of the terms of any thereof; (ii) the manufacture, purchase
or acceptance of any Engine; (iii) any Engine whether or not arising out of the
finance, ownership, delivery, nondelivery, storage, lease, sublease, possession,
use, non-use, operation, maintenance, modification, alteration, condition,
replacement, repair, substitution, sale, return, transfer of title or other
disposition, registration, re-registration or airworthiness of any Engine,
including, without limitation, latent or other defects, whether or not
discoverable, strict tort liability and any claim for patent, trademark or
copyright infringement; (iv) any payment or prepayment of the principal of, and
interest on, or Prepayment Fee, if any, on the Note or any other amounts payable
hereunder or under the other Documents; (v) the offer, sale or delivery of the
Note (the indemnity in this clause (v) to extend also to any person who controls
an Indemnitee, its successors, assigns, employees, servants and agents within
the meaning of Section 15 of the Securities Act of 1933, as amended); or (vi)
deaths of or injuries to any persons whomsoever, and for the loss of, damage to,
delay in delivery of or destruction of any property whatsoever (including
without any limitation the Collateral, and any property installed on or
contained in the Collateral), in any manner arising out of or in any way
connected with the Collateral sold hereunder or the use of any such Collateral
by Debtor, or by Debtor's assignees, or by any third party with Debtor's
consent, regardless of the negligence, active or passive, of any Indemnitee,
except to the extent caused by the willful or wanton misconduct of any
Indemnitee. Debtor will, at the request of Secured Party, negotiate any claim or
defend any action or suit brought against Secured Party, based upon any matters
for which Debtor has indemnified any Indemnitee as hereinabove provided.
(b) IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY REASON FOR
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, SUCH AS LOST REVENUES, LOST
PROFITS, OR LOSS OF PROSPECTIVE ECONOMIC ADVANTAGE.
(c) It is intended that Debtor shall pay all costs and expenses of
every character, whether foreseen or unforeseen, ordinary or extraordinary or
structural or nonstructural, in connection with the use, operation, maintenance,
repair, replacement of Parts, taxes and required alterations and modifications
of, on or in respect of the Engines by Debtor, including the costs and expenses
particularly set forth in this Agreement and the other Documents. The principal
amount of, all interest on and Prepayment Fee, if any, with respect to the Note
and all other amounts which Debtor is obligated to pay shall be paid without
notice or demand and without set-off, counterclaim, abatement, suspension,
deduction or defense or any other right which Debtor may have against Secured
Party for any reason whatsoever.
(d) Except as otherwise expressly provided, this Agreement shall not
terminate, nor shall Debtor have any right to terminate this Agreement or the
other Documents or be entitled to abatement, suspension, deferment or reduction
of the principal amount of, any interest on, or
28
<PAGE>
Prepayment Fee, if any, or other amount which Debtor is obligated to pay
hereunder or thereunder, nor shall the obligations hereunder of Debtor be
affected, by reason of (A) any damage to or the destruction or loss of all or
any portion of any Engine or Part from whatever cause, (B) the loss, theft or
inaccessibility of any portion of any Engine or Part, (C) the taking of any
Engine or Part or any portion thereof by condemnation, confiscation, requisition
or otherwise, (D) the prohibition, limitation or restriction of Debtor's use of
all or any part of any Engine or Part, or the interference with such use by any
person, (E) the inadequacy or incorrectness of the description of any portion of
any Engine or Part, (F) Debtor's ownership of all or any part of any Engine or
Part, (G) any defect in compliance with specifications, condition,
merchantability, design, airworthiness, quality, durability, operation or
fitness for use or any purpose of any Engine or Part or any portion thereof, (H)
any defect in the title to, or registration of or the existence of any Liens or
rights of others whatsoever with respect to, any Engine or Part or any portion
thereof, (I) any insolvency, bankruptcy, reorganization or similar proceedings
by or against Debtor or any other person, (J) any breach, default or
misrepresentation by the Secured Party under this Agreement or any other
Document or any of the documents referred to herein or therein, (K) any
invalidity or unenforceability, in whole or in part, of this Agreement or any
other Document or any of the documents referred to herein or therein, or any
other infirmity herein or therein, or any lack of power or authority of any
party to this Agreement or any other Document or any such documents to enter
into the same or any termination of this Agreement by operation of law, or (L)
any other circumstance, happening or act whatsoever, whether or not foreseen or
similar to any of the foregoing, it being the intention of the parties hereto
that the obligations of Debtor shall be absolute and unconditional and shall be
separate and independent covenants and agreements and shall continue unaffected
unless and until the covenants have been terminated pursuant to an express
provision of this Agreement.
Except as expressly provided herein, Debtor waives all rights now or
hereafter conferred by law (x) to quit, terminate, rescind or surrender this
Agreement or any Engine or any part thereof, or (y) to any abatement,
suspension, deferment, return or reduction of the outstanding principal amount
of the Note, accrued and unpaid interest thereon, or Prepayment Fee, if any.
16. Other Documents and Further Assurances.
--------------------------------------
(a) Secured Party shall be entitled at any time to file a financing
statement or the Agreement or a facsimile or other reproduction of the Agreement
as a financing statement, but the failure of Secured Party to do so shall not
impair the validity or enforceability of the Agreement. Debtor will execute, at
the closing, a UCC-1 form applicable to the transaction. Debtor will reimburse
Secured Party for all documentary stamp taxes, filing fees, and recording fees
associated with the perfection of Secured Party's security interest in the
Collateral.
(b) Debtor shall, from time to time, do and perform such other and
further acts and execute and delivery such other instruments as may be required
by law or reasonably requested
29
<PAGE>
by Secured Party, including a UCC-1 financing statement, to establish, maintain
or protect Secured Party's rights and remedies or to carry out and effect the
intent and purpose of this Agreement.
(c) Debtor agrees that it will execute and deliver all amendments or
supplements to this Agreement and the Other Security Agreements in order to
effectuate the intent of the parties hereto to cross-collateralize this
Agreement and the Other Security Agreements.
(d) Secured Party may carry for its own account at its sole cost and
expense insurance with respect to its interest in the Engines.
17. Governing Law. THE TERMS AND PROVISIONS OF THIS AGREEMENT WILL BE
-------------
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND ANY DISPUTE ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT, WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICT
OF LAWS.
THIS AGREEMENT HAS BEEN DELIVERED IN CHICAGO, ILLINOIS. EACH OF DEBTOR AND
SECURED PARTY HEREBY (I) WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION TO
ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT OR THE
OTHER DOCUMENTS; (II) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED IN COOK COUNTY, ILLINOIS, OVER ANY ACTION OR PROCEEDING TO
ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT OR THE
OTHER DOCUMENTS; (III) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF
ANY SUCH ACTION OR PROCEEDING; (IV) AGREES THAT A FINAL JUDGMENT IN ANY SUCH
ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER
JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW;
AND (V) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST ANY OTHER
PARTY HERETO OR ANY OF SUCH PARTY'S DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR
PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT IN
ANY COURT OTHER THAN ONE LOCATED IN COOK COUNTY, ILLINOIS.
18. Notices. Notices under the terms of this Agreement will be in writing
-------
and sent by prepaid certified mail, return receipt requested, or by telegram,
telex, or facsimile to the following:
30
<PAGE>
To Secured Party: TRANSAMERICA BUSINESS CREDIT CORPORATION
Equipment Finance and Lease Division
13760 Noel Road, Suite 1100
Dallas, TX 75240
Attn: IFG Region Manager and Legal Department
Fax: (972) 458-5959
With a copy to: VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, Illinois 60601
Attn: Patricia J. Moore, Esq.
Fax: (312) 609-5005
To Debtor: TOWER AIR, INC.
Hangar #17
JFK International Airport
Jamaica, NY 11430
Attn: Ramesh Punwani, Vice President, Finance
Facsimile: 718-553-4387
(or such other address as either party shall inform the other party). Notices
will be effective on the first Business Day following receipt thereof. Notices
sent by certified mail will be deemed received on the date of delivery as
indicated on the return receipt; notices sent by telegram, telex or facsimile
will be deemed received on the date transmitted.
19. Waiver. No waiver by either party of any default or breach by the
------
other party of any provision of this Agreement will operate as or be deemed a
waiver of any subsequent default or breach.
20. Assignment. Debtor shall not assign this Agreement, in whole or in
----------
part, to anyone for any purpose. Secured Party, without the consent of Debtor,
may from time to time assign all or any portion of its right, title and interest
in and to this Agreement, including but not limited to the Note, or grant an
interest in or assign all or any portion or portions of its security interest in
this Agreement and the Collateral, in whole or part, to various assignees, their
agents or trustees (each and any one hereinafter referred to as an "Assignee").
Any such Assignee shall have all of the assigned rights of Secured Party under
this Agreement. Any assignment of any of Secured Party's right, title or
interest in this Agreement or the Collateral shall be effective without notice
to or consent of Debtor. DEBTOR AGREES THAT, UPON NOTICE OF ASSIGNMENT AND IF
SO INSTRUCTED, IT SHALL PAY DIRECTLY TO THE ASSIGNEE OR ITS TRUSTEE OR AGENT,
WITHOUT ABATEMENT, DEDUCTION OR SET-OFF, ALL AMOUNTS WHICH BECOME DUE HEREUNDER.
DEBTOR FURTHER AGREES THAT IT SHALL NOT ASSERT AGAINST ANY ASSIGNEE, TRUSTEE OR
AGENT ANY DEFENSE, CLAIM,
31
<PAGE>
COUNTERCLAIM OR SET-OFF ON ACCOUNT OF ANY REASON WHATSOEVER WITH RESPECT TO ANY
PAYMENTS OR OTHER AMOUNTS DUE HEREUNDER OR WITH RESPECT TO ANY ACTION BROUGHT TO
OBTAIN POSSESSION OF THE ENGINE PURSUANT TO THIS AGREEMENT.
21. Counterparts. This Agreement may be executed in any number of
------------
separate counterparts, each of which will be deemed to be an original but which
together shall constitute one and the same instrument. A facsimile signature on
any counterpart hereto will be deemed an original for all purposes.
22. 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 provisions in any
other jurisdiction.
23. Amendments. This Agreement may be changed, modified or amended from
----------
time to time only by express written agreement of the parties executed by their
authorized representatives.
24. Entire Agreement. This Agreement constitutes the entire agreement and
----------------
understanding of the parties hereto with respect to the transactions
contemplated hereby, supersedes any and all prior agreements and understandings
related to the subject matter hereof, and may not be modified or amended except
in writing signed by all of the parties hereto. The attachments hereto form an
integral part of this Agreement. If there is any actual or apparent conflict
between the term of any attachments hereto and the body of this Agreement, the
provisions of the attachment shall apply.
25. Headings. The headings contained in this Agreement are inserted for
--------
convenience of reference only and will not affect the meaning or interpretation
of this Agreement.
26. Payment of Expenses and Taxes. Regardless of whether or not the
-----------------------------
transactions contemplated hereby are consummated, Debtor agrees (a) to pay or
reimburse the Secured Party for all of its out-of-pocket costs and expenses
incurred in connection with the development, preparation and execution of this
Agreement and the Note and the other Documents and any other documents prepared
in connection herewith or therewith, and the consummation of the transactions
contemplated hereby and thereby, including, without limitation, the reasonable
fees and disbursements of special counsel to the Secured Party, of FAA counsel
and of the appraiser who prepared the appraisal referred to in Sections 4(t) and
5(h), (b) to pay or reimburse the Secured Party for all of its out-of-pocket
costs and expenses incurred in connection with any amendment, supplement or
modification to this Agreement, the Note, and the other Documents, including
without limitation, the reasonable fees and disbursements of their respective
counsel, (c) to pay or reimburse the Secured Party for all its costs and
expenses incurred in connection with the enforcement or
32
<PAGE>
preservation of any rights under this Agreement, the Note, the other Documents
and any such other documents, including, without limitation, reasonable fees and
disbursements of their respective counsel, and (d) to pay, indemnify, and hold
the Secured Party harmless from, any and all recording and filing fees and any
and all liabilities with respect to, or resulting from any delay in paying,
stamp, excise and other taxes, if any, which may be payable or determined to be
payable in connection with the execution and delivery of, or consummation of any
of the transactions contemplated by, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, this
Agreement, the Note, the other Documents and any such other documents. The
agreements in this Section 26 shall survive repayment of the Note and all other
amounts payable hereunder.
* * *
33
<PAGE>
IN WITNESS WHEREOF, the Debtor and the Secured Party have executed this
Security Agreement as of the day and year first above written.
TOWER AIR, INC.,
Debtor
By: /s/ R. K. Qunuani
---------------------------
Its: V.P. - Finance
--------------------------
TRANSAMERICA BUSINESS CREDIT
CORPORATION,
Secured Party
By: /s/ Dave B. Fate
---------------------------
Its: Senior Vice President
--------------------------
<PAGE>
ATTACHMENT 1
TO SECURITY AGREEMENT BETWEEN
TRANSAMERICA BUSINESS CREDIT CORPORATION AND
TOWER AIR, INC.
SECURITY AGREEMENT SUPPLEMENT NO.
-------------------------------------
Security Agreement Supplement No. _____ dated __________________, between
Tower Air, Inc., a Delaware corporation having its general office at Hangar
17, JFK International Airport, Jamaica, New York 11430 (the "Debtor") and
Transamerica Business Credit Corporation, a Delaware corporation with
offices at 13760 Noel Road, Suite 1100, Dallas, Texas 75240 (together with
its successors and assigns, the "Secured Party").
WHEREAS, the Debtor and the Secured Party, having heretofore entered into a
Security Agreement dated as of January __, 1998, which security agreement is
being filed concurrently herewith (the "Security Agreement" and the defined
terms therein, unless otherwise noted, being hereinafter used with the same
meaning). The Security Agreement provides for the execution and delivery from
time to time of Security Agreement Supplements, each substantially in the form
hereof, for the purpose of mortgaging and granting a security interest to the
Secured Party in specific Collateral under the Security Agreement.
The Security Agreement relates to the Collateral described below.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, the Debtor and the Secured Party hereby agree as
follows:
1. The Debtor does hereby grant, transfer, assign, bargain, sell, convey,
mortgage, hypothecate and pledge unto the Secured Party, its successors and
assigns, a valid and perfected first priority security interest in and lien on
all right, title and interest of Debtor in and to the Collateral (as defined
below) under the Security Agreement and the Secured Party does hereby accept
such security interest under the Security Agreement in the following Engines:
(a) Three (3) Pratt & Whitney Model JT9D-7J engines, bearing
manufacturer's serial numbers 662323, 662751 and 686106;
(b) Eight (8) Pratt & Whitney model JT9D-7A engines, bearing
manufacturer's serial numbers 662993, 662550, 662338, 662838, 662270,
662498, 662420, 662749;
35
<PAGE>
(c) One (1) Pratt & Whitney Model JT9D-7Q engine, bearing
manufacturer's serial number 702083.
(together with all Parts of whatever nature which are from time to
time incorporated or installed in or attached to the Engines),
(including any QEC related thereto, whether now owned or hereafter
acquired, and all substitutions, renewals and replacements of and
additions, improvements, accessions and accumulations to the Engines)
(each of which engines described in subparagraphs (a), (b) and (c)
above has 750 or more rated takeoff horsepower or the equivalent of
such horsepower).
2. The Debtor hereby represents and warrants that it is an air carrier as
defined in Section 40102(a) of Title 49 of the US Code.
3. All of the terms and provisions of the Security Agreement are hereby
incorporated by reference in this Security Agreement Supplement to the same
extent as if fully set forth herein.
* * *
36
<PAGE>
IN WITNESS WHEREOF, the Debtor and the Secured Party have caused this
Security Agreement Supplement to be duly executed as of the day and year first
above written.
TOWER AIR INC.,
Debtor
By:
-------------------------------------
Its:
-------------------------------------
TRANSAMERICA BUSINESS CREDIT
CORPORATION,
Secured Party
By:
-------------------------------------
Its:
-------------------------------------
37
<PAGE>
ATTACHMENT 2
TO SECURITY AGREEMENT BETWEEN
TRANSAMERICA BUSINESS CREDIT CORPORATION AND
TOWER AIR, INC.
THIS NOTE HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR PURSUANT TO THE SECURITIES LAWS OF ANY STATE.
ACCORDINGLY, THIS NOTE MAY NOT BE SOLD UNLESS EITHER REGISTERED UNDER THE ACT
AND SUCH APPLICABLE STATE LAWS OR AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. THIS NOTE IS SENIOR IN ALL RESPECTS TO THE NOTE ISSUED UNDER THE
JUNIOR SECURITY AGREEMENT BETWEEN DEBTOR AND SECURED PARTY.
Note
----
$ _______________ _________________________(City, State)
Date: January 9, 1998
FOR VALUE RECEIVED, the undersigned, Tower Air, Inc. (the "Debtor"),
hereby promises to pay to the order of Transamerica Business Credit Corporation
(together with its successors and assigns "Secured Party"), at its office at
13760 Noel Road, Suite 1100, Dallas, Texas 75240, or at such other place as the
holder of this Note shall specify in immediately available funds, the principal
sum of _________________________ ($___________), plus interest at a rate with
respect to each Interest Period equal to the lesser of (a) as of any date of
determination, the highest published prime rate which appears in the Money Rates
section of The Wall Street Journal on the applicable Drawdown Date (with respect
-----------------------
to the first Interest Period) and three Business Days prior to each Payment Date
(with respect to each subsequent Interest Period) (the "Prime Rate") plus
__________________ and (b) the maximum rate allowed under applicable law (the
"Interest Rate"). This Note is referred to in, and was executed and delivered
pursuant to that certain Security Agreement dated as of January 9, 1998 between
Debtor and Secured Party (the "Security Agreement"), to which reference is
hereby made. The holder of this Note is entitled to the benefits of the
Security Agreement. Capitalized terms used herein without definition shall have
the meanings attributed thereto in the Security Agreement.
The principal indebtedness evidenced hereby shall be due and payable
in consecutive monthly principal installments commencing February 1, 1998 and
the 1st day of each month thereafter through (and including) January 1, 2000
(each a "Payment Date").
38
<PAGE>
Accrued and unpaid interest shall be due and payable on each Payment Date. Any
principal or interest, Prepayment Fee or other amount of this Note or any other
amount due under the Security Agreement or any other Document from Debtor to
Secured Party which is not paid when due (whether at maturity, by acceleration
or otherwise), shall bear interest at the Overdue Rate.
Notwithstanding the foregoing, the final payment made on this Note
hall be in an amount sufficient to discharge in full the unpaid principal amount
and all accrued and unpaid interest on, and any other amounts due under, this
Note and the other Documents. Notwithstanding anything to the contrary contained
herein, if any date on which a payment under this Note becomes due and payable
is not a Business Day then such payment shall be made on the next succeeding
Business Day and, if such payment is made on the next succeeding Business Day,
no interest shall accrue on the amount of such payment during such extension;
provided, however, that any such "extension day" shall be included in the
interest calculation in connection with the next payment under this Note.
In no event whatsoever shall interest charged hereunder, however such
interest may be characterized or computed, exceed the lawful limit and, if any
amount in excess of such limit shall have been paid, then such amount shall be
applied to the unpaid principal amount of this Note or be refunded so that under
no circumstances shall the interest required to be paid by Debtor hereunder
exceed the maximum amount allowed by applicable law.
The Debtor may prepay this Note, in whole or in part, but only on the
terms specified in the Security Agreement and upon payment of the Prepayment Fee
referred to therein.
Upon and after the occurrence of an Event of Default (as defined in
Article 11 of the Security Agreement) the entire unpaid principal amount of this
Note, together with accrued and unpaid interest hereon and the Prepayment Fee
shall immediately and automatically, without notice of any kind (including
notice of intention to accelerate or notice of acceleration), be due and
payable.
Payments received by Secured Party from the Debtor on this Note shall
be applied first to the payment of any and all collection costs and only
thereafter to the payment of outstanding interest and Prepayment Fee and then
the principal balance.
Presentment, protest, and notice of nonpayment and protest are hereby
waived by the Debtor.
This Note shall be interpreted and the rights and the liabilities of
the parties hereto determined in accordance with the laws of the State of
Illinois. Whenever possible, each provision of this Note shall be interpreted
in such manner as to be effective and valid under
39
<PAGE>
applicable law, but if any provision of this Note shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Note.
* * *
40
<PAGE>
The provisions of this Note shall be binding upon Debtor and its
successors and assigns, and shall inure to the benefit of the Secured Party and
its successors and assigns.
TOWER AIR, INC.
By:
-------------------------------------
Name:
Title:
41
<PAGE>
ANNEX A
TO NOTE
-------
[THIS ATTACHMENT IS INTENTIONALLY BLANK
FOR FAA RECORDING PURPOSES]
42
<PAGE>
ATTACHMENT 3
TO SECURITY AGREEMENT BETWEEN
TRANSAMERICA BUSINESS CREDIT
CORPORATION AND TOWER AIR, INC.
CERTAIN ECONOMIC TERMS
----------------------
Engine Original Amount: means, originally, $3,500,000 with respect to that
certain Pratt & Whitney model JT9D-7J Engine with
serial number 662323; $2,750,000 with respect to
that certain Pratt & Whitney model JT9D-7J Engine
with serial number 662751; $3,500,000, with
respect to that certain Pratt & Whitney model
JT9D-7J Engine with serial number 686106;
$1,250,000 with respect to that certain Pratt &
Whitney model JT9D-7A Engine with serial number
662993; $1,450,000 with respect to that certain
Pratt & Whitney model JT9D-7A Engine with serial
number 662270;$1,850,000 with respect to that
certain Pratt & Whitney model JT9D-7A Engine with
serial number 662498; $1,750,000 with respect to
that certain Pratt & Whitney model JT9D-7A Engine
with serial number 662420; $1,450,000 with respect
to that certain Pratt & Whitney model JT9D-7A with
serial number 662749; $1,250,000 with respect to
that certain Pratt & Whitney model JT9D-7A Engine
with serial number 662550; $1,250,000 with respect
to that certain Pratt & Whitney model JT9D-7A
Engine with serial number 662338; $1,250,000 with
respect to that certain Pratt & Whitney model
JT9D-7A Engine with serial number 662838; and
$2,800,000 with respect to that certain Pratt &
Whitney model JT9D-7Q Engine with serial number
702083.
Event of Loss Prepayment Fee with respect to any prepayment of a portion of the
Note due solely to an Event of Loss with respect
to an Engine, 0.5% of the portion of the Principal
Amount of the Note to be prepaid
Interest Rate: has the meaning specified in Article 2(d) hereof
Loan Fee: $150,000
43
<PAGE>
Overdue Rate: a rate per annum equal to the Interest Rate plus
7.0% (calculated on the basis of a 360-day year
comprised of twelve thirty-day months)
Maturity Date January 1, 2000
Margin: two point seven five percent (2.75%) per annum
(calculated on the basis of a 360-day year
comprised of twelve 30-day months)
Maximum Aggregate
Original Amount: $15,000,000
Maximum Original Amount: amounts to be advanced under the Loan, except for
the Aggregate Original Amount, on the Drawdown
Dates with respect to the Engines bearing
manufacturer's serial numbers 702083, 662323 and
686106; provided that such amounts will in no
event exceed $800,000 advanced for 702083;
$488,000 for 662323; and $560,000 for 686106 and
provided that in no case shall the amounts
advanced on any Engine together with any amounts
previously advanced (including the Aggregate
Original Amount) exceed the Maximum Aggregate
Original Amount.
Payment Dates February 1, 1998 and the 1st day of each month
thereafter through (and including) the Maturity
Date
Prepayment Fee: an amount equal to (i) 2% of the then outstanding
Principal Amount of the Note to be prepaid if such
prepayment occurs on or prior to the first
anniversary of the Closing Date or (ii) 1% of the
then outstanding Principal Amount of the Note if
such prepayment occurs at any time thereafter.
44
<PAGE>
ATTACHMENT 3
TO SECURITY AGREEMENT BETWEEN
TRANSAMERICA BUSINESS CREDIT CORPORATION AND
TOWER AIR, INC.
CERTAIN ECONOMIC TERMS
----------------------
[THIS ATTACHMENT IS INTENTIONALLY BLANK FOR FAA RECORDING PURPOSES]
45
<PAGE>
FIRST AMENDMENT TO SECURITY AGREEMENT
THIS FIRST AMENDMENT TO SECURITY AGREEMENT dated as of January 11, 1998
(this "Amendment") by and between TOWER AIR, INC., a Delaware corporation
("Debtor"), and TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation
(together with its successors and assigns, the "Secured Party"), amends that
certain Security Agreement dated as of January 9, 1998 (the "Original Agreement"
and as supplemented by Supplement No. 1 (defined below) the "Agreement") by and
between Debtor and Secured Party. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings ascribed to such terms in the
Agreement.
W I T N E S S E T H:
--------------------
WHEREAS, pursuant to the Agreement, Debtor granted to Secured Party a
security interest in, and first priority mortgage over, the Collateral specified
in the Original Agreement, which Collateral includes, among other things, three
(3) Pratt & Whitney model JT9D-7J engines bearing manufacturer's serial numbers
662323, 662751 and 686106; eight (8) Pratt & Whitney model JT9D-7A engines
bearing manufacturer's serial numbers 662993, 662550, 662338, 662838, 662270,
662498, 662420, 662749 and one (1) Pratt & Whitney model JT9D-7Q engine bearing
manufacturer's serial number 702083 (each of which has 750 or more rated takeoff
horsepower or the equivalent thereof); and
WHEREAS, a counterpart of the Original Agreement, as supplemented by
Security Agreement Supplement No. 1 dated January 9, 1998 ("Supplement No. 1")
was filed with the FAA on January 9, 1998 and has not yet been assigned a
conveyance number; and
WHEREAS, Debtor and Secured Party desire to amend the Agreement in certain
respects;
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Amendments to Article 1. Article 1 of the Agreement is hereby amended
-----------------------
in the following manner: (a) The definition of "Drawdown Date" contained in
Article 1 of the Agreement is hereby amended to be and read in its entirety as
follows:
""Drawdown Date" means, with respect to each advance under the Loan to
be made hereunder, the date the Secured Party advances such Loan to
Debtor, the first such advance to take place on the Closing Date and
any subsequent advances to take place upon satisfaction (or waiver in
writing by Secured Party) of the conditions specified in Article 5
hereof."
<PAGE>
""Principal Amount" with respect to the Note, means the aggregate
amount of principal unpaid from time to time under the Note."
2. Amendments to Article 2. Article 2 of the Agreement is hereby amended
-----------------------
in the following manner:
(a) Article 2(a) of the Agreement is hereby amended by (i) inserting the
words "in the maximum aggregate principal amount of FIFTEEN MILLION
DOLLARS ($15,000,000)" immediately after the word "loan" in the second
line of such Article 2(a); (ii) inserting the words ", unless
otherwise agreed in writing by the Secured Party, " immediately after
the words "Amount or" in line five of such Article 2(a); (iii)
inserting the words ", unless otherwise agreed in writing by the
Secured Party," immediately after the words "no amount shall" and
before the words "be advanced after" in line 14 of such Article 2(a);
and (iv) deleting the words "Initial Loan" in line 20 of such Article
2(a) and inserting in lieu thereof the words "initial advance".
(b) Article 2(b) of the Agreement is hereby amended by deleting the third
sentence.
3. Amendments to Article 5. Article 5(j) of the Agreement is hereby
-----------------------
amended by (i) inserting ", substantially in the form of Attachment 2 hereto,"
immediately before the word "duly" in the first line of such Article 5(j); and
(ii) deleting the words "evidencing in an aggregate" and inserting in lieu
thereof the words "and in an aggregate principal" in line 2 of such Article
5(j).
4. Amendments to Article 7. Article 7(e) of the Agreement is hereby
-----------------------
amended by deleting the words "provide Secured Party with such certificate as is
described in Article 5(a)(ii) hereof and if any such amount due to any such
maintenance provider form Debtor is not paid in full by Debtor within thirty
(30) days of receipt of an invoice or any other notice from any maintenance
provider of payment being due by Debtor for such maintenance" which appear in
lines 11 through 15 of such Article 7(e) and inserting in lieu thereof the words
", and, if Debtor fails to provide either such certificate or letter to Secured
Party within such three (3) Business Day Period,".
5. Amendment to Attachment 1. Attachment 1 of the Agreement is hereby
-------------------------
amended by deleting the number "3" which appears immediately after the letter
"Q" in Section 1(c).
6. Amendment to Attachment 2. Attachment 2 of the Agreement is hereby
-------------------------
amended by inserting the words "and in the amounts set forth in Annex A hereto"
immediately after the parenthetical phrase "(each a "Payment Date")" and before
the words "accrued and unpaid" in line 3 of the second paragraph of such
Attachment 2.
7. Debtor Representations and Warranties. Debtor hereby confirms the
-------------------------------------
representations and warranties of Debtor contained in the Agreement. Such
representations and warranties are true and correct as of the date of this
Amendment as though made on and as of the date of this
2
<PAGE>
Amendment (except to the extent any such representation or warranty relates
solely to an earlier date, in which case such representation or warranty was
true as of such earlier date).
8. Ratification. Except as amended hereby, the Agreement continues and
------------
shall remain in full force and effect in all respects, and any and all
references to the "Agreement" or "Security Agreement" in any of the Documents
shall be deemed to refer to the Agreement as amended hereby.
9. Governing Law. THE TERMS AND PROVISIONS OF THIS AMENDMENT WILL BE
-------------
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND ANY DISPUTE ARISING OUT OF OR IN
CONNECTION WITH THIS AMENDMENT, WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICT
OF LAWS.
THIS AMENDMENT HAS BEEN DELIVERED IN CHICAGO, ILLINOIS. EACH OF DEBTOR AND
SECURED PARTY HEREBY (I) WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION TO
ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AMENDMENT; (II)
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN
COOK COUNTY, ILLINOIS, OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY
MATTER ARISING FROM OR RELATED TO THIS AMENDMENT; (III) IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT
FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING; (IV) AGREES THAT A
FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN ANY OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER
MANNER PROVIDED BY LAW; AND (V) AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR
PROCEEDING AGAINST ANY OTHER PARTY HERETO OR ANY OF SUCH PARTY'S DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR
RELATING TO THIS AMENDMENT IN ANY COURT OTHER THAN ONE LOCATED IN COOK COUNTY,
ILLINOIS.
10. Counterparts. This Amendment may be executed in any number of
------------
separate counterparts, each of which shall be deemed to be an original but all
of which together shall constitute one and the same instrument. A facsimile
signature on any counterpart hereto will be deemed an original for all purposes.
11. Amendments. This Amendment may be changed, modified or amended from
----------
time to time only by express written agreement of the parties executed by their
authorized representatives.
12. Headings. The headings contained in this Amendment are inserted for
--------
convenience of reference only and shall not affect the meaning or interpretation
of this Amendment.
13. Payment of Expenses. Regardless of whether or not the transactions
-------------------
contemplated hereby are consummated, Debtor agrees to pay or reimburse Secured
Party for all of its out-of-pocket costs and expenses incurred in connection
with the documentation, negotiation and
3
<PAGE>
execution of this Amendment and any other documents prepared in connection
herewith and the consummation of the transactions contemplated hereby,
including, without limitation, the reasonable fees and disbursements of special
counsel to Secured Party and of FAA counsel.
4
<PAGE>
IN WITNESS WHEREOF, Debtor and Secured Party have executed this First
Amendment to Security Agreement as of the day and year first above written.
TOWER AIR, INC.,
Debtor
By:
--------------------------------
Name: Morris K. Nachtoni
------------------------------
Title: Chairman/CEO
-----------------------------
TRANSAMERICA BUSINESS CREDIT CORPORATION,
Secured Party
By: /s/ Dave B. Fate
--------------------------------
Name: Dave B. Fate
------------------------------
Title: Senior Vice President
-----------------------------
5
<PAGE>
[LETTERHEAD OF SALISBURY & RYAN LLP APPEARS HERE]
March 24, 1998
VIA FEDERAL EXPRESS
- -------------------
Mr. Terry V. Hallcom
President
Tower Air, Inc.
Hangar No. 17
JFK International Airport
Jamaica, New York 11430
Dear Terry:
Enclosed please find the following documents, which constitute a complete
set of the financing documents on the Funding Enterprises transaction;
(1) $2.0 million subordinated promissory note;
(2) $2.0 million unsubordinated promissory note;
(3) $2.0 million unsubordinated promissory note;
(4) Warrant No. 1 for 200,000 warrants issued to you;
(5) Warrant No. 2 for 100,000 warrants issued to VBG;
(6) Warrant No. 3 for 300,000 warrants issued to Althea Limited
Partnership (Stratton's company):
(7) Warrant No. 4 issued to Mr. Nachtomi for 600,000 warrants:
(8) Operating Agreement with Funding Enterprises.
Please send me original signed notes, the original signed Warrants for VBG
and Althea and signed copies of the remainder of the documents.
If you have any questions, please contact me.
Sincerely,
/s/ Patrick P. Salisbury
Patrick P. Salisbury
PPS/gek
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
APPLICABLE STATE SECURITIES LAWS, AND CANNOT BE TRANSFERRED EXCEPT UPON
SUCH REGISTRATION UNLESS, IN THE OPINION OF THE OBLIGOR'S COUNSEL OR OTHER
COUNSEL REASONABLY ACCEPTABLE TO OBLIGOR, EXEMPTIONS FROM SUCH REGISTRATION
REQUIREMENTS ARE AVAILABLE.
THIS NOTE IS SUBJECT TO A SUBORDINATION AGREEMENT, DATED AS OF FEBRUARY __,
1998 AMONG HELLER FINANCIAL, INC., A DELAWARE CORPORATION, TOWER AIR, INC.,
A DELAWARE CORPORATION AND FUNDING ENTERPRISES LLC, A DELAWARE LIMITED
LIABILITY COMPANY. THIS NOTE IS SUBORDINATED IN RIGHT AND TIME OF PAYMENT
TO THE PRIOR INDEFEASIBLE PAYMENT IN FULL IN CASH OF ALL SENIOR DEBT (AS
DEFINED THEREIN) IN ACCORDANCE WITH THE TERMS OF SUCH SUBORDINATION
AGREEMENT AND EACH HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF,
IRREVOCABLY AGREES TO BE BOUND BY THE TERMS AND PROVISIONS OF SUCH
SUBORDINATION AGREEMENT.
UNSECURED SUBORDINATED PROMISSORY NOTE
--------------------------------------
$2,000,000.00 New York, New York
as of February 6, 1998
FOR VALUE RECEIVED, TOWER AIR, INC., a Delaware corporation (the
"Obligor"), DOES HEREBY PROMISE TO PAY to the order of FUNDING ENTERPRISES LLC
(the "Lender") in lawful money of the United States of America in immediately
available funds, the principal amount of TWO MILLION AND NO\100 DOLLARS
($2,000,000.00) on July 1, 1998, and to pay interest on the unpaid principal
amount outstanding hereunder, in like money, at the rate of 12% per annum, such
interest to be paid on July 1, 1998 provided, however, that in the event this
Note is not paid in full on such date for any reason, interest shall accrue
thereafter at a rate of 15% per annum, payable on demand of the Lender, until
such date as this Note has been paid in full.
The Obligor and any and all sureties, guarantors and endorsers of this
Note and all other parties now or hereafter liable hereon severally waive grace,
demand, presentment for payment, protest, notice of any kind (including, but not
limited to, notice of dishonor, notice of protest, notice of intention to
accelerate, notice of acceleration) and diligence in collecting and bringing
suit against any party hereto, and agree to the extent permitted by applicable
law (i) to all extensions and partial payments, with or without notice, before
or after maturity, (ii) to any substitution, exchange or release of any security
now or hereafter given for this Note, (iii) to the release of any party
primarily or secondarily liable hereon, and (iv) that it will not be necessary
for any holder of this Note, in order to enforce payment of this Note against
any surety, guarantor or endorser, to first institute or exhaust such holder's
remedies against any security for this Note. The nonexercise by the holder of
any of
<PAGE>
its rights hereunder in any particular instance shall not constitute a waiver
thereof in that or any subsequent instance.
If the Obligor shall (i) make a general assignment for the benefit of
creditors; (ii) be adjudicated a bankrupt or insolvent; (iii) file a voluntary
petition in bankruptcy; (iv) take advantage of any bankruptcy or insolvency law
or statute of the United States of America or any state or jurisdiction thereof
now or hereafter in effect; (v) have a petition or proceeding filed against the
Obligor under any bankruptcy or insolvency law or statute of the United States
of America or any state or jurisdiction thereof; (vi) have a receiver, trustee,
custodian, conservator or other person appointed by any court to take charge of
the Obligor's affairs, assets or business; (vii) sell or otherwise dispose of
substantially all of its assets or merge or consolidate with any other business
organization except where Obligor is the surviving entity of such merger or
consolidation; or (viii) terminate, dissolve, liquidate or wind up its business
operation; then, and upon the happening of any such event, the Lender at
Lender's option, by written notice to the Obligor, may declare the entire
indebtedness then evidenced by this Note immediately due and payable, whereupon
the same shall forthwith mature and become immediately due and payable without
presentment, demand, protest or further notice.
No consent or waiver by the Lender with respect to any action or failure
to act by Obligor which, without such consent or waiver, would constitute a
breach of any provision of this Note shall be valid and binding unless in
writing and signed by the Lender. No such consent or waiver given by Lender on
any one occasion shall be construed to constitute a consent or waiver by Lender
on any subsequent occasion. No forbearance in the exercise of any right or
remedy of Lender shall be construed as a waiver of such right or remedy.
If any provision of the Note is invalid, illegal, or incapable of being
enforced by reason of any rule of law or public policy, all other covenants and
provisions of the Note shall nevertheless remain in full force and effect, and
no covenant or provision shall be deemed dependent upon any other covenant or
provision.
This Note shall be binding upon and inure to the benefit of the Obligor
and the Lender, and their respective successors and assigns.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE
LAWS OF THE STATE OF NEW YORK.
TOWER AIR, INC.
By:____________________________________
Name:
Title:
2
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 OR APPLICABLE STATE SECURITIES LAWS, AND CANNOT BE
TRANSFERRED EXCEPT UPON SUCH REGISTRATION UNLESS, IN THE
OPINION OF THE OBLIGOR'S COUNSEL OR OTHER COUNSEL REASONABLY
ACCEPTABLE TO OBLIGOR, EXEMPTIONS FROM SUCH REGISTRATION
REQUIREMENTS ARE AVAILABLE.
UNSECURED PROMISSORY NOTE
-------------------------
$2,000,000.00 New York, New York
as of February 6, 1998
FOR VALUE RECEIVED, TOWER AIR, INC., a Delaware corporation (the
"Obligor"), DOES HEREBY PROMISE TO PAY to the order of FUNDING ENTERPRISES LLC
(the "Lender") in lawful money of the United States of America in immediately
available funds, the principal amount of TWO MILLION AND NO\100 DOLLARS
($2,000,000.00) on July 1, 1998, and to pay interest on the unpaid principal
amount outstanding hereunder, in like money, at the rate of 12% per annum, such
interest to be paid on July 1, 1998 provided, however, that in the event this
Note is not paid in full on such date for any reason, interest shall accrue
thereafter at a rate of 15% per annum, payable on demand of the Lender, until
such date as this Note has been paid in full.
The Obligor and any and all sureties, guarantors and endorsers of this Note
and all other parties now or hereafter liable hereon severally waive grace,
demand, presentment for payment, protest, notice of any kind (including, but not
limited to, notice of dishonor, notice of protest, notice of intention to
accelerate, notice of acceleration) and diligence in collecting and bringing
suit against any party hereto, and agree to the extent permitted by applicable
law (i) to all extensions and partial payments, with or without notice, before
or after maturity, (ii) to any substitution, exchange or release of any security
now or hereafter given for this Note, (iii) to the release of any party
primarily or secondarily liable hereon, and (iv) that it will not be necessary
for any holder of this Note, in order to enforce payment of this Note against
any surety, guarantor or endorser, to first institute or exhaust such holder's
remedies against any security for this Note. The nonexercise by the holder of
any of its rights hereunder in any particular instance shall not constitute a
waiver thereof in that or any subsequent instance.
If the Obligor shall (i) make a general assignment for the benefit of
creditors; (ii) be adjudicated a bankrupt or insolvent; (iii) file a voluntary
petition in bankruptcy; (iv) take advantage of any bankruptcy or insolvency law
or statute of the United States of America or any
<PAGE>
state or jurisdiction thereof now or hereafter in effect; (v) have a petition or
proceeding filed against the Obligor under any bankruptcy or insolvency law or
statute of the United States of America or any state or jurisdiction thereof;
(vi) have a receiver, trustee, custodian, conservator or other person appointed
by any court to take charge of the Obligor's affairs, assets or business; (vii)
sell or otherwise dispose of substantially all of its assets or merge or
consolidate with any other business organization except where Obligor is the
surviving entity of such merger or consolidation; or (viii) terminate, dissolve,
liquidate or wind up its business operation; then, and upon the happening of any
such event, the Lender at Lender's option, by written notice to the Obligor, may
declare the entire indebtedness then evidenced by this Note immediately due and
payable, whereupon the same shall forthwith mature and become immediately due
and payable without presentment, demand, protest or further notice.
No consent or waiver by the Lender with respect to any action or failure to
act by Obligor which, without such consent or waiver, would constitute a breach
of any provision of this Note shall be valid and binding unless in writing and
signed by the Lender. No such consent or waiver given by Lender on any one
occasion shall be construed to constitute a consent or waiver by Lender on any
subsequent occasion. No forbearance in the exercise of any right or remedy of
Lender shall be construed as a waiver of such right or remedy.
If any provision of the Note is invalid, illegal, or incapable of being
enforced by reason of any rule of law or public policy, all other covenants and
provisions of the Note shall nevertheless remain in full force and effect, and
no covenant or provision shall be deemed dependent upon any other covenant or
provision.
This Note shall be binding upon and inure to the benefit of the Obligor and
the Lender, and their respective successors and assigns.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS
OF THE STATE OF NEW YORK.
TOWER AIR, INC.
By:____________________________________
Name:
Title:
2
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 OR APPLICABLE STATE SECURITIES LAWS, AND CANNOT BE
TRANSFERRED EXCEPT UPON SUCH REGISTRATION UNLESS, IN THE
OPINION OF THE OBLIGOR'S COUNSEL OR OTHER COUNSEL REASONABLY
ACCEPTABLE TO OBLIGOR, EXEMPTIONS FROM SUCH REGISTRATION
REQUIREMENTS ARE AVAILABLE.
UNSECURED PROMISSORY NOTE
-------------------------
$2,000,000.00 New York, New York
as of February 6, 1998
FOR VALUE RECEIVED, TOWER AIR, INC., a Delaware corporation (the
"Obligor"), DOES HEREBY PROMISE TO PAY to the order of FUNDING ENTERPRISES LLC
(the "Lender") in lawful money of the United States of America in immediately
available funds, the principal amount of TWO MILLION AND NO\100 DOLLARS
($2,000,000.00) on July 1, 1998, and to pay interest on the unpaid principal
amount outstanding hereunder, in like money, at the rate of 12% per annum, such
interest to be paid on July 1, 1998 provided, however, that in the event this
Note is not paid in full on such date for any reason, interest shall accrue
thereafter at a rate of 15% per annum, payable on demand of the Lender, until
such date as this Note has been paid in full.
The Obligor and any and all sureties, guarantors and endorsers of this Note
and all other parties now or hereafter liable hereon severally waive grace,
demand, presentment for payment, protest, notice of any kind (including, but not
limited to, notice of dishonor, notice of protest, notice of intention to
accelerate, notice of acceleration) and diligence in collecting and bringing
suit against any party hereto, and agree to the extent permitted by applicable
law (i) to all extensions and partial payments, with or without notice, before
or after maturity, (ii) to any substitution, exchange or release of any security
now or hereafter given for this Note, (iii) to the release of any party
primarily or secondarily liable hereon, and (iv) that it will not be necessary
for any holder of this Note, in order to enforce payment of this Note against
any surety, guarantor or endorser, to first institute or exhaust such holder's
remedies against any security for this Note. The nonexercise by the holder of
any of its rights hereunder in any particular instance shall not constitute a
waiver thereof in that or any subsequent instance.
If the Obligor shall (i) make a general assignment for the benefit of
creditors; (ii) be adjudicated a bankrupt or insolvent; (iii) file a voluntary
petition in bankruptcy; (iv) take advantage of any bankruptcy or insolvency law
or statute of the United States of America or any
<PAGE>
state or jurisdiction thereof now or hereafter in effect; (v) have a petition or
proceeding filed against the Obligor under any bankruptcy or insolvency law or
statute of the United States of America or any state or jurisdiction thereof;
(vi) have a receiver, trustee, custodian, conservator or other person appointed
by any court to take charge of the Obligor's affairs, assets or business; (vii)
sell or otherwise dispose of substantially all of its assets or merge or
consolidate with any other business organization except where Obligor is the
surviving entity of such merger or consolidation; or (viii) terminate, dissolve,
liquidate or wind up its business operation; then, and upon the happening of any
such event, the Lender at Lenders option, by written notice to the Obligor, may
declare the entire indebtedness then evidenced by this Note immediately due and
payable, whereupon the same shall forthwith mature and become immediately due
and payable without presentment, demand, protest or further notice.
No consent or waiver by the Lender with respect to any action or failure to
act by Obligor which, without such consent or waiver, would constitute a breach
of any provision of this Note shall be valid and binding unless in writing and
signed by the Lender. No such consent or waiver given by Lender on any one
occasion shall be construed to constitute a consent or waiver by Lender on any
subsequent occasion. No forbearance in the exercise of any right or remedy of
Lender shall be construed as a waiver of such right or remedy.
If any provision of the Note is invalid, illegal, or incapable of being
enforced by reason of any rule of law or public policy, all other covenants and
provisions of the Note shall nevertheless remain in full force and effect, and
no covenant or provision shall be deemed dependent upon any other covenant or
provision.
This Note shall be binding upon and inure to the benefit of the Obligor and
the Lender, and their respective successors and assigns.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS
OF THE STATE OF NEW YORK.
TOWER AIR, INC.
By:____________________________________
Name:
Title:
2
<PAGE>
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
TOWER AIR, INC.
WARRANT NO. 1
NO. OF SHARES OF
COMMON STOCK: 200,000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1. DEFINITIONS......................................................... 1
2. EXERCISE OF WARRANT................................................. 2
2.1. Exercise of Warrant................................. 2
2.2. Method of Exercise; Payment of Exercise Price....... 2
2.3. Compliance with Securities Act...................... 2
3. ADJUSTMENTS......................................................... 3
3.1. Adjustments......................................... 3
3.2. Notice of Adjustment................................ 6
3.3. Statement on Warrants............................... 6
3.4. Fractional Interest................................. 6
3.5. Minimum Exercise Price.............................. 7
4. WARRANT TRANSFER BOOKS.............................................. 7
5. NO VOTING RIGHTS; LIMITATION OF LIABILITY........................... 8
6. RESERVATION OF COMMON STOCK FOR ISSUANCE ON EXERCISE OF
WARRANTS; NO IMPAIRMENT............................................. 8
7. MISCELLANEOUS....................................................... 9
7.2. Payments to the Holder.............................. 9
7.3. Payment of Taxes.................................... 9
7.4. Surrender of Certificates........................... 9
7.5. Mutilated, Destroyed, Lost or Stolen Warrant........ 9
7.6. Notices............................................. 10
7.7. Applicable Law...................................... 10
7.8. Persons Benefitting................................. 10
7.9. Headings............................................ 11
</TABLE>
i
<PAGE>
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND NEITHER
THE WARRANTS NOR ANY INTEREST THEREIN MAY BE SOLD OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREUNDER.
WARRANT TO PURCHASE SHARES OF
COMMON STOCK OF TOWER AIR
No. of shares of
Common Stock: 200,000 Warrant No. 1
This certifies that TERRY V. HALLCOM or registered assigns, is
entitled to purchase from TOWER AIR, INC. a Delaware corporation (the "Company")
-------
TWO HUNDRED THOUSAND (200,000) shares of Common Stock, par value $.01, of the
Company, at the exercise price of $5.00 per share (the "Exercise Price"),
--------------
subject to adjustment as provided herein, all on the terms and conditions and
pursuant to the provisions hereinafter set forth.
1. DEFINITIONS.
Capitalized terms used herein have the following meanings (such
definitions to be equally applicable to both the singular and plural forms of
the terms defined):
Common Stock: voting Common Stock of the Company and any other capital
------------
stock of the Company into which such shares of common stock may be converted or
reclassified or that may be issued in respect of, in exchange for, or in
substitution of, such shares of common stock by reason of any stock splits,
stock dividends, distributions, mergers, consolidations or other like events.
Company: the meaning set forth in the preamble to this Warrant and its
-------
successors and assigns.
Exercise Price: the meaning set forth in the preamble hereto, as the
--------------
same may be adjusted pursuant to the terms hereof.
Expiration Date: means February 5, 2008.
---------------
Holders: from time to time, the holders of the Warrants.
-------
Underlying Shares: the shares of Common Stock issuable or issued upon
-----------------
the exercise of this Warrant.
<PAGE>
2. EXERCISE OF WARRANT.
2.1. Exercise of Warrant . Subject to the terms and conditions set
-------------------
forth herein, this Warrant shall be exercisable, whole or in part, at any time
or from time to time on any Business Day and until 5:00 p.m., New York time, on
the Expiration Date.
2.2. Method of Exercise; Payment of Exercise Price . In order to
------------------
exercise this Warrant in whole or in part, the Holder of this Warrant must
surrender this Warrant to the Company at its principal office at Hangar No. 17,
JFK International Airport, Jamaica, NY 11430 or at the office or agency
designated by the Company of which the Holder has been notified in accordance
with Section 7.6, with a duly executed subscription in the form attached to this
Warrant, together with payment in full of the Exercise Price for the shares of
Underlying Common Stock as to which this Warrant is submitted for exercise. Any
such payment of the Exercise Price shall be in cash or by check payable to the
order of the Company.
If this Warrant is exercised for less than all of the Underlying
Shares, this Warrant shall be surrendered and a new Warrant of the same tenor
and date and for the remaining number of Underlying Shares shall be executed by
the Company, which shall register such new Warrant in such name or names as may
be directed in writing by the Holder and deliver the new Warrant to the Person
or Persons entitled to receive the same.
Upon surrender of this Warrant in conformity with the foregoing
provisions, the Company shall transfer to the Holder of this Warrant appropriate
evidence of ownership of any Underlying Shares or other securities or property
(including any money) to which the Holder is entitled, registered or otherwise
placed in, or payable to the order of, such name or names as may be directed in
writing by the Holder, and shall deliver such evidence of ownership and any
other securities or property (including any money) to the Person or Persons
entitled to receive the same.
Notwithstanding anything to the contrary contained herein, upon
exercise of this Warrant by any Holder, in lieu of delivery to the Holder of the
Underlying Shares issuable on account thereof pursuant to the terms hereof, the
Company may, in its discretion, pay the Holder in cash in immediately available
funds the Fair Market Value (as defined in Section 3.1(f) hereof) of such
Underlying Shares.
2.3. Compliance with Securities Act.
------------------------------
(a) This Warrant may not be exercised and neither this Warrant nor
any Underlying Shares may be sold, transferred or otherwise disposed of (any
such sale, transfer or other disposition, a "sale"), except in compliance with
----
this Section 2.3.
(b) A Holder may exercise this Warrant if it is an "accredited (a)
investor", as defined in Regulation D under the Securities Act, and, subject to
the provisions of Section 2.4
2
<PAGE>
hereof, a Holder may sell this Warrant or Underlying Shares to any entity which
is a member of Funding Enterprises LLC or any transferee that is an "accredited
investor", provided that:
(i) such transferee represents that it is acquiring the Underlying
Shares (in the case of an exercise) or this Warrant or Underlying Shares
(in the case of a sale) for its own account and that it is not acquiring
such Underlying Shares or this Warrant with a view to, or for offer or sale
in connection with, any distribution thereof (within the meaning of the
Securities Act) that would be in violation of the securities laws of the
United States or any state thereof, but subject, nevertheless, to the
disposition of its property being at all times within its control; and
(ii) such transferee agrees to be bound by the provisions of this
Section 2.3 with respect to any exercise of this Warrant and any sale of
this Warrant or Underlying Shares.
(c) In the event of a proposed exercise or sale that does not qualify
under Section 2.3(b), a Holder may exercise this Warrant or sell this Warrant or
Underlying Shares only if:
(i) such Holder gives written notice to the Company of its intention
to exercise or effect such sale, which notice (A) shall describe the manner
of circumstances of the proposed transaction in reasonable detail and (B)
shall designate the counsel for such Holder; and
(ii) counsel for the Holder and counsel for the Company shall render
an opinion to the effect that such proposed exercise or sale may be
effected without registration under the Securities Act or under
applicable blue sky laws.
3. ADJUSTMENTS.
3.1. Adjustments . The Exercise Price and the number of Underlying
-----------
Shares issuable upon exercise of this Warrant shall be subject to adjustment
from time to time as follows:
(a) Stock Dividends; Stock Splits; Reverse Stock Splits;
---------------------------------------------------
Reclassifications. In case the Company shall (i) pay a dividend or make any
- -----------------
other distribution with respect to any class of Common Stock in shares of its
capital stock, (ii) subdivide any class of the Common Stock, (iii) combine any
class of the Common Stock into a smaller number of shares, or (iv) issue any
shares of its capital stock in a reclassification of any class of Common Stock
(including any such reclassification in connection with a merger, consolidation
or other business combination in which the Company is the continuing
corporation) the number of Underlying Shares issuable upon exercise of this
Warrant immediately prior to the record date for such dividend or distribution
or the effective date of such subdivision or combination shall be adjusted so
that the
3
<PAGE>
holder of this Warrant shall thereafter be entitled to receive the kind and
number of shares of Common Stock or other securities of the Company that such
Holder would have owned or have been entitled to receive after the happening of
any of the events described above, had this Warrant been exercised immediately
prior to the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this Section 3.1(a) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) Rights; Options; Warrants. In case the Company shall issue
-------------------------
rights, options, warrants or convertible or exchangeable securities (other than
a convertible or exchangeable security subject to Section 3.1(a)) to all holders
of any class of the Common Stock then outstanding, entitling them to subscribe
for or purchase Common Stock at a price per share that is lower (at the record
date for such issuance) than the Fair Market Value per share of such Common
Stock, the number of shares of Common Stock thereafter issuable upon the
exercise of this Warrant shall be determined by adding the number of shares of
Common Stock theretofore issuable upon exercise of this Warrant to the product
of (x) the Cheap Stock Issued, multiplied by (y) the Ownership Ratio. Such
adjustment shall be made whenever such rights, options, warrants or convertible
or exchangeable securities are issued, and shall become effective retroactively
immediately after the record date for the determination of stockholders entitled
to receive such rights, options, warrants or convertible or exchangeable
securities.
For purposes of this Section 3.1(b), (i) the "Cheap Stock Issued"
------------------
shall be the number of additional shares of any Common Stock offered by the
Company for subscription or purchase as described above minus the number of
shares of Common Stock that the aggregate offering price of the total number of
shares of Common Stock so offered would purchase at the then Fair Market Value
per share of Common Stock and (ii) the "Ownership Ratio" shall be a fraction,
---------------
the numerator of which shall be the number of shares of Common Stock theretofore
issuable upon exercise of this Warrant and the denominator of which shall be the
number of shares of Common Stock then outstanding on the date of issuance of
(and entitled to receive) such rights, options, warrants or convertible or
exchangeable securities.
(c) Mergers; Consolidations; Asset Sales. In case of the
------------------------------------
consolidation of the Company with or the merger of the Company with or into any
other Person or any other business combination of the Company with any other
Person, other than those described in Section 3.1(a), or the sale of all or
substantially all of the properties and assets of the Company to any other
Person, this Warrant shall thereupon be exercisable, upon the terms and
conditions specified herein and upon payment of the Exercise Price, for the
number of shares of stock or other securities or property to which the
Underlying Shares issuable upon exercise of this Warrant at the time of such
event would have been entitled if such exercise had taken place, and, if
necessary, the provisions set forth in this Section 3.1 shall be deemed adjusted
so as to be applicable, as nearly as may reasonably be, to any shares of stock
or other securities or property thereafter deliverable on the exercise of this
Warrant
4
<PAGE>
(d) Distribution of Debt, Assets, Subscription Rights or Convertible
----------------------------------------------------------------
Securities. In case the Company shall fix a record date for the making of a
- ----------
distribution to all holders of shares of its Common Stock of evidence of
indebtedness of the Company, of assets (other than cash dividends payable out of
earnings and profits arising after the date hereof) or securities (excluding
those referred to in Sections 31.(a) and 3.1(b)) (any such evidence of
indebtedness, assets or securities, the "assets or securities"), then in each
--------------------
case the Holder upon the exercise of this Warrant, shall be entitled to receive
in addition to the Underlying Shares, (i) the assets or securities to which such
Holder would have been entitled as a holder of Common Stock if such Holder had
exercised this Warrant immediately prior to the record date for such
distribution and (ii) any income earned on the assets or securities distributed
from the distribution date to the date of exercise or repurchase, as the case
may be, less the Exercise Price then in effect. At the time of any such
distribution, the Company shall either (A) deposit the assets or securities
payable to the Holder pursuant hereto in trust for the Holder with an 'eligible
institution' with instructions as to the investment of such property and any
proceeds therefrom so as to protect the value of such property for the Holder or
(B) distribute to the Holder the assets or securities to which it would be
entitled upon exercise and, upon any such distribution pursuant to this Clause
(B), the provisions of this Section 3.1(d) shall no longer apply to such event.
Such election shall be made by the Company giving written notice thereof to the
Holder.
For purposes of this Section 3.1(d), the term "eligible institution"
--------------------
shall mean a corporation organized and doing business under the laws of the
United States of America or of any state thereof, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $50,000,000, and subject to the supervision or examination by Federal or
state authority.
(e) Expiration of Rights, Options and Conversion Privileges. Upon the
-------------------------------------------------------
expiration of any rights, options, warrants or conversion or exchange privileges
that have previously resulted in an adjustment hereunder, if any thereof shall
not have been exercised, the Exercise Price and the number of Underlying Shares
issuable upon the exercise of this Warrant shall, upon such expiration, be
readjusted and shall thereafter, upon any future exercise, be such as they would
have been had they been originally adjusted (or had the original adjustment not
been required, as the case may be) as if (i) the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options, warrants or conversion or exchange rights and
(ii) such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise plus the
consideration, if any, actually received by the Company for issuance, sale or
grant of all such rights, options, warrants or conversion or exchange rights
whether or not exercised; provided further that no such readjustment shall have
----------------
the effect or increasing the Exercise Price by an amount, or decreasing the
number of Underlying Shares issuable upon exercise of this Warrant by a number,
in excess of the amount or number of the adjustment initially made in respect to
the issuance, sale or grant of such rights, options, warrants or conversion or
exchange rights.
5
<PAGE>
(f) Fair Market Value. For the purposes of any computation
-----------------
hereunder, the Fair Market Value per share of Common Stock or of any other
equity security (herein collectively referred to as a "security") at the date
--------
herein specified shall be the value of the security (i) determined in good faith
by the last reported closing sale price of the Common Stock in an arm's length
transaction the closing of which shall have occurred within the six months
preceding such date, or (ii) if no such transaction shall have occurred within
such sixmonth period, determined as of such date by an independent investment
banking firm.
(g) Adjustment of Exercise Price. Whenever the number of shares of
----------------------------
Common Stock purchasable upon the exercise of this Warrant is adjusted, as
provided in Section 3.1(a) and (b), the Exercise Price for each Underlying Share
payable upon exercise of this Warrant shall be adjusted (calculated to the
nearest $.0001) so that it shall equal the price determined by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, the numerator
of which shall be the number of Underlying Shares issuable upon the exercise of
this Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Underlying Shares so issuable immediately thereafter.
(h) De Minimis Adjustments. No adjustment in the number of shares of
----------------------
Common Stock issuable hereunder shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the number of
Underlying Shares purchasable upon an exercise of this Warrant; provided,
--------
however, that any adjustments which by reason of this Section 3.1(h) are not
- -------
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest one
thousandth of a share.
3.2. Notice of Adjustment . Whenever the number of Underlying Shares
--------------------
or other stock or propertyissuable upon the exercise of this Warrant
or the Exercise Price is adjusted, as herein provided, the Company shall
promptly mail by first class mail, postage prepaid, to the Holder notice of such
adjustment or adjustments and shall deliver to the Holder a certificate of a
firm of independent public accountants selected by the Board of Directors of the
Company (who may be the regular accountants employed by the Company) setting
forth the number of Underlying Shares or other stock or property issuable upon
the exercise of this Warrant and the Exercise Price after such adjustment,
setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made.
3.3. Statement on Warrants . Irrespective of any adjustment in the
---------------------
Exercise Price or the number or kind of shares issuable upon the exercise of
this Warrant, Warrants theretofore or thereafter issued in respect hereof may
continue to express the same price and number and kind of shares as are stated
herein.
3.4. Fractional Interest . The Company shall issue fractional shares
-------------------
of Common Stock on the exercise of this Warrant. If more than one
Warrant shall be presented for exercise
6
<PAGE>
in full at the same time by the same Holder, the number of full shares of Common
Stock which shall be issuable upon such exercise thereof shall be computed on
the basis of the aggregate number of shares of Common Stock acquirable on
exercise of the Warrants so presented.
3.5. Minimum Exercise Price . Notwithstanding the foregoing, the
----------------------
Exercise Price shall not be less than the par value of the Common Stock for
which this Warrant is exercisable.
4. WARRANT TRANSFER BOOKS.
This Warrant shall be issued in registered form only. The Company
shall keep at its principal office at Hangar No. 17, JFK International Airport,
Jamaica, NY 11430, or at the office or agency designated by the Company and
notified to the Holder in accordance with Section 7.6, a register in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Warrants and of transfers or exchanges of
Warrants as herein provided.
At the option of the Holder, this Warrant may be exchanged at such
office, and upon payment of the charges hereinafter provided. Whenever this
Warrant is so surrendered for exchange, the Company shall execute and deliver
the Warrant or Warrants that the Holder making the exchange is entitled to
receive.
All Warrants issued upon any registration of transfer or exchange of
this Warrant shall be the valid obligations of the Company, evidencing the same
obligations, and entitled to the same benefits as this Warrant.
This Warrant, if surrendered for registration of transfer or exchange,
shall (if so required by the Company) be duly endorsed, or be accompanied by a
written instrument of assignment in the form attached hereto or otherwise
satisfactory to the Company, duly executed by the Holder or his attorney duly
authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of this Warrant. The Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of this Warrant.
This Warrant, when duly endorsed in blank, shall be deemed negotiable
and when this Warrant shall have been so endorsed, the Holder thereof may be
treated by the Company and all other persons dealing therewith as the absolute
owner thereof for any purpose and as the Person entitled to exercise the rights
represented thereby, or to the transfer thereof on the register of the Company,
any notice to the contrary notwithstanding; but until such transfer on such
register, the Company may treat the registered Holder thereof as the owner for
all purposes.
7
<PAGE>
5. NO VOTING RIGHTS; LIMITATION OF LIABILITY.
Prior to the exercise of this Warrant, the Holder, as such, shall not
be entitled to any rights of a stockholder or the Company, including, without
limitation, the right to vote, to consent, to exercise any preemptive right, to
receive any notices of meetings of stockholders for the election of directors of
the Company or any other matter or to receive any notice of any proceedings of
the Company, except as may be specifically provided for herein or in any other
agreement between the Holder and the Company.
No provision hereof, in the absence of affirmative action by the
Holder to purchase shares of Common Stock, and no enumeration herein of the
rights or privileges of the Holder hereof, shall give rise to any liability of
the Holder for the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by the creditors
of the Company.
6. RESERVATION OF COMMON STOCK FOR ISSUANCE ON EXERCISE OF WARRANTS; NO
IMPAIRMENT.
The Company covenants that it will at all times reserve and keep
available, free from preemptive rights out of its authorized but unissued
Common Stock, solely for the purpose of issue upon exercise of this Warrant as
herein provided, such number of shares of Common Stock as shall then be issuable
upon the exercise of this Warrant. The Company covenants that all shares of
Common Stock which shall be so issuable shall, upon such issue, be duly and
validly issued and fully paid and nonassessable.
The Company shall not by any action including, without limitation,
amending 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 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 actions as may be necessary or appropriate to protect the rights of the
Holder against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Before taking any action which would cause an adjustment reducing the
Exercise Price below the then par value, if any, of the shares of Common Stock
issuable upon exercise of this Warrant, the Company shall take any corporate
action which may be necessary in order that
8
<PAGE>
the Company may validly and legally issue fully paid and nonassessable shares
of such Common Stock at such adjusted Exercise Price.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
7. MISCELLANEOUS.
7.1. Notice Upon Payment of Dividends or Distributions. Prior to the
-------------------------------------------------
record date for any dividend or other distribution payable in cash, property, or
capital stock of the Company, or any division of the net assets of the Company,
or any division of the net assets of the Company among the holders of Common
Stock in the event of the liquidation, dissolution or winding up of the Company,
the Company shall provide written notice thereof to each holder of Warrants and
each such holder shall have a reasonable opportunity to exercise such Warrants
prior to such record date and any shares of Common Stock issued upon the
exercise of such Warrants shall be considered to be issued and outstanding as of
such record date.
7.2. Payments to the Holder. Unless otherwise specifically provided
----------------------
herein, the Company shall distribute any money due and owing to the Holder by
mailing by firstclass mail a check in such amount as is appropriate, to the
Holder at the address shown on the Warrant register of the Company, or as it may
be otherwise directed in writing by the Holder, upon surrender of the
Holder's Warrant.
7.3. Payment of Taxes. The Company shall pay all taxes and other
----------------
governmental charges that may be imposed on the Company or on this Warrant or on
any securities deliverable upon exercise of this Warrant (other than taxes based
on net income). The Company shall not be required, however, to pay any tax or
other charge imposed in connection with any transfer involved in the issue of
any certificate for Underlying Shares or other securities underlying this
Warrant or payment of cash to any Person other than the Holder of this Warrant
when it is upon the exercise of this Warrant, and in case of such transfer or
payment, the Company shall not be required to issue any stock certificate or pay
any cash until such tax or charge has been paid or it has been established to
the Company's satisfaction that no such tax or other charge is due.
7.4. Surrender of Certificates. When this Warrant is surrendered for
-------------------------
exercise to the Company, it shall be promptly canceled by the Company
and shall not be reissued.
7.5. Mutilated, Destroyed, Lost or Stolen Warrant. If (a) this
--------------------------------------------
Warrant is mutilated and is surrendered to the Company or (b) the Company
receives evidence to its reasonable satisfaction of the destruction, loss or
theft of this Warrant, and there is delivered to the Company such security or
indemnity as may reasonably be required by it to save it harmless,
9
<PAGE>
then, in the absence of notice to the Company that this Warrant has been
acquired by a bona fide purchaser, the Company shall execute and deliver, in
exchange for any such mutilated Warrant or in lieu of any such destroyed, lost
or stolen Warrant, a new Warrant of like tenor and for a like aggregate number
of Underlying Shares.
Upon issuance of any new Warrant under this Section 7.5, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and other expenses
(including the reasonable fees and expenses of counsel to the Company) in
connection therewith.
Every new Warrant executed and delivered pursuant to this Section 7.5
in lieu of any destroyed, lost or stolen Warrant shall constitute an original
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Warrant shall be at any time enforceable by anyone.
The provisions of this Section 7.5 are exclusive and shall preclude
(to the extent lawful) all other rights or remedies with respect to the
replacement of a mutilated, destroyed, lost or stolen Warrant.
7.6. Notices. Any notice, demand or delivery authorized by this
-------
Warrant shall be sufficiently given or made when personally delivered or when
mailed if sent by firstclass mail, postage prepaid, addressed to any Holder at
such Holder's address shown on the register of the Company maintained by the
Company and to the Company as follows:
Tower Air, Inc.
Hangar No. 17
JFK International Airport
Jamaica, NY 11430
Attn: Chief Executive Officer
or such other address as shall have been furnished to the Holder.
7.7. Applicable Law. This Warrant and all rights arising hereunder
--------------
shall be governed by the laws of the State of New York with respect to
contracts made and to be performed entirely within such State.
7.8. Persons Benefitting. This Warrant shall be binding upon and
-------------------
inure to the benefit of the Company and its successors, and assigns, and the
Holders and its successors and assigns from time to time of this Warrant.
Nothing in this Warrant is intended or shall be construed to confer upon any
Person, other than the Company, and any Holder of this Warrant, any right,
remedy or claim under or by reason of this Warrant or any part hereof.
10
<PAGE>
7.9. Headings. The descriptive headings of the several Sections of
--------
this Warrant are inserted for convenience and shall not control or affect the
meaning or construction of any of the provisions hereof.
Dated As of February 6, 1998
TOWER AIR, INC.
By:___________________________________
Name:
Title:
11
<PAGE>
EXHIBIT A
Subscription Form
-----------------
(To be executed only upon exercise of the Warrant
in whole or in part)
To the Company:
The undersigned registered holder of the accompanying Warrant hereby
irrevocably exercises such Warrant or portion thereof for, and purchases
thereunder, _______________* Underlying Shares (as defined in such Warrant) and
herewith makes payment therefor of $____________. The undersigned requests that
the certificates for such Underlying Shares be issued in the name of, and
delivered to, ________________________, whose address is
_________________________________________.
Dated:
____________________________________
(Name must conform to name of holder
as specified on the face of the Warrant)
____________________________________
(Street Address)
____________________________________
(City) (State) (Zip Code)
___________________
* Insert the number of Underlying Shares as to which this Warrant is
being exercised. In the case of a partial exercise, a new Warrant or
Warrants will be issued and delivered, representing the unexercised
portion of this Warrant, to the Holder surrendering the same.
<PAGE>
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, the undersigned _______________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrants with respect to the number of shares of the Common Stock covered
thereby set forth below, unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
__________________________________
By:________________________________
Name:
Title:
Witness:____________________________
<PAGE>
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
TOWER AIR, INC.
WARRANT NO. 2
NO. OF SHARES OF
COMMON STOCK: 100,000
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. DEFINITIONS.................................................................... 1
2. EXERCISE OF WARRANT............................................................ 2
2.1. Exercise of Warrant.......................................... 2
-------------------
2.2. Method of Exercise; Payment of Exercise Price................ 2
---------------------------------------------
2.3. Compliance with Securities Act............................... 2
------------------------------
3. ADJUSTMENTS.................................................................... 3
3.1. Adjustments.................................................. 3
-----------
3.2. Notice of Adjustment......................................... 6
--------------------
3.3. Statement on Warrants........................................ 6
---------------------
3.4. Fractional Interest.......................................... 6
-------------------
3.5. Minimum Exercise Price....................................... 7
----------------------
4. WARRANT TRANSFER BOOKS......................................................... 7
5. NO VOTING RIGHTS; LIMITATION OF LIABILITY...................................... 8
6. RESERVATION OF COMMON STOCK FOR ISSUANCE ON EXERCISE OF WARRANTS; NO
IMPAIRMENT..................................................................... 8
7. MISCELLANEOUS.................................................................. 9
7.2. Payments to the Holder....................................... 9
----------------------
7.3. Payment of Taxes............................................. 9
----------------
7.4. Surrender of Certificates.................................... 9
-------------------------
7.5. Mutilated, Destroyed, Lost or Stolen Warrant................. 9
--------------------------------------------
7.6. Notices...................................................... 10
-------
7.7. Applicable Law............................................... 10
--------------
7.8. Persons Benefitting.......................................... 10
-------------------
7.9. Headings..................................................... 11
--------
</TABLE>
i
<PAGE>
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND NEITHER
THE WARRANTS NOR ANY INTEREST THEREIN MAY BE SOLD OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREUNDER.
WARRANT TO PURCHASE SHARES OF
COMMON STOCK OF TOWER AIR
No. of shares of
Common Stock: 100,000 Warrant No. 2
This certifies that VBG CAPITAL INC. or registered assigns, is
entitled to purchase from TOWER AIR, INC. a Delaware corporation (the "Company")
-------
ONE HUNDRED THOUSAND (100,000) shares of Common Stock, par value $.01, of the
Company, at the exercise price of $5.00 per share (the "Exercise Price"),
--------------
subject to adjustment as provided herein, all on the terms and conditions and
pursuant to the provisions hereinafter set forth.
1. DEFINITIONS.
Capitalized terms used herein have the following meanings (such
definitions to be equally applicable to both the singular and plural forms of
the terms defined):
Common Stock: voting Common Stock of the Company and any other capital
------------
stock of the Company into which such shares of common stock may be converted or
reclassified or that may be issued in respect of, in exchange for, or in
substitution of, such shares of common stock by reason of any stock splits,
stock dividends, distributions, mergers, consolidations or other like events.
Company: the meaning set forth in the preamble to this Warrant and its
-------
successors and assigns.
Exercise Price: the meaning set forth in the preamble hereto, as the
--------------
same may be adjusted pursuant to the terms hereof.
Expiration Date: means February 5, 2008.
---------------
Holders: from time to time, the holders of the Warrants.
-------
Underlying Shares: the shares of Common Stock issuable or issued upon
-----------------
the exercise of this Warrant.
<PAGE>
2. EXERCISE OF WARRANT.
2.1. Exercise of Warrant. Subject to the terms and conditions set
-------------------
forth herein, this Warrant shall be exercisable, in whole or in part, at any
time or from time to time on any Business Day and until 5:00 p.m., New York
time, on the Expiration Date.
2.2. Method of Exercise; Payment of Exercise Price. In order to
---------------------------------------------
exercise this Warrant in whole or in part, the Holder of this Warrant must
surrender this Warrant to the Company at its principal office at Hangar No. 17,
JFK International Airport, Jamaica, NY 11430 or at the office or agency
designated by the Company of which the Holder has been notified in accordance
with Section 7.6, with a duly executed subscription in the form attached to this
Warrant, together with payment in full of the Exercise Price for the shares of
Underlying Common Stock as to which this Warrant is submitted for exercise. Any
such payment of the Exercise Price shall be in cash or by check payable to the
order of the Company.
If this Warrant is exercised for less than all of the Underlying
Shares, this Warrant shall be surrendered and a new Warrant of the same tenor
and date and for the remaining number of Underlying Shares shall be executed by
the Company, which shall register such new Warrant in such name or names as may
be directed in writing by the Holder and deliver the new Warrant to the Person
or Persons entitled to receive the same.
Upon surrender of this Warrant in conformity with the foregoing
provisions, the Company shall transfer to the Holder of this Warrant appropriate
evidence of ownership of any Underlying Shares or other securities or property
(including any money) to which the Holder is entitled, registered or otherwise
placed in, or payable to the order of, such name or names as may be directed in
writing by the Holder, and shall deliver such evidence of ownership and any
other securities or property (including any money) to the Person or Persons
entitled to receive the same.
Notwithstanding anything to the contrary contained herein, upon exercise of
this Warrant by any Holder, in lieu of delivery to the Holder of the Underlying
Shares issuable on account thereof pursuant to the terms hereof, the Company
may, in its discretion, pay the Holder in cash in immediately available funds
the Fair Market Value (as defined in Section 3.1(f) hereof) of such Underlying
Shares.
2.3. Compliance with Securities Act.
------------------------------
(a) This Warrant may not be exercised and neither this Warrant nor
any Underlying Shares may be sold, transferred or otherwise disposed of (any
such sale, transfer or other disposition, a "sale"), except in compliance with
----
this Section 2.3.
(b) A Holder may exercise this Warrant if it is an "accredited
investor", as defined in Regulation D under the Securities Act, and, subject to
the provisions of Section 2.4
2
<PAGE>
hereof, a Holder may sell this Warrant or Underlying Shares to any entity which
is a member of Funding Enterprises LLC or any transferee that is an "accredited
investor", provided that:
(i) such transferee represents that it is acquiring the Underlying
Shares (in the case of an exercise) or this Warrant or Underlying Shares
(in the case of a sale) for its own account and that it is not acquiring
such Underlying Shares or this Warrant with a view to, or for offer or sale
in connection with, any distribution thereof (within the meaning of the
Securities Act) that would be in violation of the securities laws of the
United States or any state thereof, but subject, nevertheless, to the
disposition of its property being at all times within its control; and
(ii) such transferee agrees to be bound by the provisions of this
Section 2.3 with respect to any exercise of this Warrant and any sale of
this Warrant or Underlying Shares.
(c) In the event of a proposed exercise or sale that does not
qualify under Section 2.3(b), a Holder may exercise this Warrant or sell this
Warrant or Underlying Shares only if:
(i) such Holder gives written notice to the Company of its intention
to exercise or effect such sale, which notice (A) shall describe the manner
of circumstances of the proposed transaction in reasonable detail and (B)
shall designate the counsel for such Holder; and
(ii) counsel for the Holder and counsel for the Company shall render
an opinion to the effect that such proposed exercise or sale may be
effected without registration under the Securities Act or under applicable
blue sky laws.
3. ADJUSTMENTS.
3.1. Adjustments. The Exercise Price and the number of Underlying
-----------
Shares issuable upon exercise of this Warrant shall be subject to adjustment
from time to time as follows:
(a) Stock Dividends; Stock Splits; Reverse Stock Splits;
----------------------------------------------------
Reclassifications. In case the Company shall (i) pay a dividend or make any
other distribution with respect to any class of Common Stock in shares of its
capital stock, (ii) subdivide any class of the Common Stock, (iii) combine any
class of the Common Stock into a smaller number of shares, or (iv) issue any
shares of its capital stock in a reclassification of any class of Common Stock
(including any such reclassification in connection with a merger, consolidation
or other business combination in which the Company is the continuing
corporation) the number of Underlying Shares issuable upon exercise of this
Warrant immediately prior to the record date for such dividend or distribution
or the effective date of such subdivision or combination shall be adjusted so
that the
3
<PAGE>
holder of this Warrant shall thereafter be entitled to receive the kind and
number of shares of Common Stock or other securities of the Company that such
Holder would have owned or have been entitled to receive after the happening of
any of the events described above, had this Warrant been exercised immediately
prior to the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this Section 3.1(a) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) Rights; Options; Warrants. In case the Company shall issue
-------------------------
rights, options, warrants or convertible or exchangeable securities (other than
a convertible or exchangeable security subject to Section 3.1(a)) to all holders
of any class of the Common Stock then outstanding, entitling them to subscribe
for or purchase Common Stock at a price per share that is lower (at the record
date for such issuance) than the Fair Market Value per share of such Common
Stock, the number of shares of Common Stock thereafter issuable upon the
exercise of this Warrant shall be determined by adding the number of shares of
Common Stock theretofore issuable upon exercise of this Warrant to the product
of (x) the Cheap Stock Issued, multiplied by (y) the Ownership Ratio. Such
adjustment shall be made whenever such rights, options, warrants or convertible
or exchangeable securities are issued, and shall become effective retroactively
immediately after the record date for the determination of stockholders entitled
to receive such rights, options, warrants or convertible or exchangeable
securities.
For purposes of this Section 3.1(b), (i) the "Cheap Stock Issued"
------------------
shall be the number of additional shares of any Common Stock offered by the
Company for subscription or purchase as described above minus the number of
shares of Common Stock that the aggregate offering price of the total number of
shares of Common Stock so offered would purchase at the then Fair Market Value
per share of Common Stock and (ii) the "Ownership Ratio" shall be a fraction,
---------------
the numerator of which shall be the number of shares of Common Stock theretofore
issuable upon exercise of this Warrant and the denominator of which shall be the
number of shares of Common Stock then outstanding on the date of issuance of
(and entitled to receive) such rights, options, warrants or convertible or
exchangeable securities.
(c) Mergers; Consolidations; Asset Sales. In case of the
------------------------------------
consolidation of the Company with or the merger of the Company with or into any
other Person or any other business combination of the Company with any other
Person, other than those described in Section 3.1(a), or the sale of all or
substantially all of the properties and assets of the Company to any other
Person, this Warrant shall thereupon be exercisable, upon the terms and
conditions specified herein and upon payment of the Exercise Price, for the
number of shares of stock or other securities or property to which the
Underlying Shares issuable upon exercise of this Warrant at the time of such
event would have been entitled if such exercise had taken place, and, if
necessary, the provisions set forth in this Section 3.1 shall be deemed adjusted
so as to be applicable, as nearly as may reasonably be, to any shares of stock
or other securities or property thereafter deliverable on the exercise of this
Warrant
4
<PAGE>
(d) Distribution of Debt, Assets, Subscription Rights or Convertible
----------------------------------------------------------------
Securities. In case the Company shall fix a record date for the making of a
- ----------
distribution to all holders of shares of its Common Stock of evidence of
indebtedness of the Company, of assets (other than cash dividends payable out of
earnings and profits arising after the date hereof) or securities (excluding
those referred to in Sections 31.(a) and 3.1(b)) (any such evidence of
indebtedness, assets or securities, the "assets or securities"), then in each
--------------------
case the Holder upon the exercise of this Warrant, shall be entitled to receive
in addition to the Underlying Shares, (i) the assets or securities to which such
Holder would have been entitled as a holder of Common Stock if such Holder had
exercised this Warrant immediately prior to the record date for such
distribution and (ii) any income earned on the assets or securities distributed
from the distribution date to the date of exercise or repurchase, as the case
may be, less the Exercise Price then in effect. At the time of any such
distribution, the Company shall either (A) deposit the assets or securities
payable to the Holder pursuant hereto in trust for the Holder with an "eligible
institution" with instructions as to the investment of such property and any
proceeds therefrom so as to protect the value of such property for the Holder or
(B) distribute to the Holder the assets or securities to which it would be
entitled upon exercise and, upon any such distribution pursuant to this Clause
(B), the provisions of this Section 3.1(d) shall no longer apply to such event.
Such election shall be made by the Company giving written notice thereof to the
Holder.
For purposes of this Section 3.1(d), the term "eligible institution"
--------------------
shall mean a corporation organized and doing business under the laws of the
United States of America or of any state thereof, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $50,000,000, and subject to the supervision or examination by Federal or
state authority.
(e) Expiration of Rights, Options and Conversion Privileges. Upon
-------------------------------------------------------
the expiration of any rights, options, warrants or conversion or exchange
privileges that have previously resulted in an adjustment hereunder, if any
thereof shall not have been exercised, the Exercise Price and the number of
Underlying Shares issuable upon the exercise of this Warrant shall, upon such
expiration, be readjusted and shall thereafter, upon any future exercise, be
such as they would have been had they been originally adjusted (or had the
original adjustment not been required, as the case may be) as if (i) the only
shares of Common Stock so issued were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such rights, options, warrants or
conversion or exchange rights and (ii) such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company upon such
exercise plus the consideration, if any, actually received by the Company for
issuance, sale or grant of all such rights, options, warrants or conversion or
exchange rights whether or not exercised; provided further that no such
-------- -------
readjustment shall have the effect or increasing the Exercise Price by an
amount, or decreasing the number of Underlying Shares issuable upon exercise of
this Warrant by a number, in excess of the amount or number of the adjustment
initially made in respect to the issuance, sale or grant of such rights,
options, warrants or conversion or exchange rights.
5
<PAGE>
(f) Fair Market Value. For the purposes of any computation
-----------------
hereunder, the Fair Market Value per share of Common Stock or of any other
equity security (herein collectively referred to as a "security") at the date
--------
herein specified shall be the value of the security (i) determined in good faith
by the last reported closing sale price of the Common Stock in an arm"s length
transaction the closing of which shall have occurred within the six months
preceding such date, or (ii) if no such transaction shall have occurred within
such six-month period, determined as of such date by an independent investment
banking firm.
(g) Adjustment of Exercise Price. Whenever the number of shares of
----------------------------
Common Stock purchasable upon the exercise of this Warrant is adjusted, as
provided in Section 3.1(a) and (b), the Exercise Price for each Underlying Share
payable upon exercise of this Warrant shall be adjusted (calculated to the
nearest $.0001) so that it shall equal the price determined by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, the numerator
of which shall be the number of Underlying Shares issuable upon the exercise of
this Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Underlying Shares so issuable immediately thereafter.
(h) De Minimis Adjustments. No adjustment in the number of shares of
----------------------
Common Stock issuable hereunder shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the number of
Underlying Shares purchasable upon an exercise of this Warrant; provided,
--------
however, that any adjustments which by reason of this Section 3.1(h) are not
- -------
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest one-
thousandth of a share.
3.2. Notice of Adjustment. Whenever the number of Underlying Shares
--------------------
or other stock or property issuable upon the exercise of this Warrant or the
Exercise Price is adjusted, as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder notice of such adjustment or
adjustments and shall deliver to the Holder a certificate of a firm of
independent public accountants selected by the Board of Directors of the Company
(who may be the regular accountants employed by the Company) setting forth the
number of Underlying Shares or other stock or property issuable upon the
exercise of this Warrant and the Exercise Price after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made.
3.3. Statement on Warrants. Irrespective of any adjustment in the
---------------------
Exercise Price or the number or kind of shares issuable upon the exercise of
this Warrant, Warrants theretofore or thereafter issued in respect hereof may
continue to express the same price and number and kind of shares as are stated
herein.
3.4. Fractional Interest. The Company shall issue fractional shares
-------------------
of Common Stock on the exercise of this Warrant. If more than one Warrant shall
be presented for exercise
6
<PAGE>
in full at the same time by the same Holder, the number of full shares of Common
Stock which shall be issuable upon such exercise thereof shall be computed on
the basis of the aggregate number of shares of Common Stock acquirable on
exercise of the Warrants so presented.
3.5. Minimum Exercise Price. Notwithstanding the foregoing, the
----------------------
Exercise Price shall not be less than the par value of the Common Stock for
which this Warrant is exercisable.
4. WARRANT TRANSFER BOOKS.
This Warrant shall be issued in registered form only. The Company
shall keep at its principal office at Hangar No. 17, JFK International Airport,
Jamaica, NY 11430, or at the office or agency designated by the Company and
notified to the Holder in accordance with Section 7.6, a register in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Warrants and of transfers or exchanges of
Warrants as herein provided.
At the option of the Holder, this Warrant may be exchanged at such
office, and upon payment of the charges hereinafter provided. Whenever this
Warrant is so surrendered for exchange, the Company shall execute and deliver
the Warrant or Warrants that the Holder making the exchange is entitled to
receive.
All Warrants issued upon any registration of transfer or exchange of
this Warrant shall be the valid obligations of the Company, evidencing the same
obligations, and entitled to the same benefits as this Warrant.
This Warrant, if surrendered for registration of transfer or exchange,
shall (if so required by the Company) be duly endorsed, or be accompanied by a
written instrument of assignment in the form attached hereto or otherwise
satisfactory to the Company, duly executed by the Holder or his attorney duly
authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of this Warrant. The Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of this Warrant.
This Warrant, when duly endorsed in blank, shall be deemed negotiable
and when this Warrant shall have been so endorsed, the Holder thereof may be
treated by the Company and all other persons dealing therewith as the absolute
owner thereof for any purpose and as the Person entitled to exercise the rights
represented thereby, or to the transfer thereof on the register of the Company,
any notice to the contrary notwithstanding; but until such transfer on such
register, the Company may treat the registered Holder thereof as the owner for
all purposes.
7
<PAGE>
5. NO VOTING RIGHTS; LIMITATION OF LIABILITY.
Prior to the exercise of this Warrant, the Holder, as such, shall not
be entitled to any rights of a stockholder or the Company, including, without
limitation, the right to vote, to consent, to exercise any preemptive right, to
receive any notices of meetings of stockholders for the election of directors of
the Company or any other matter or to receive any notice of any proceedings of
the Company, except as may be specifically provided for herein or in any other
agreement between the Holder and the Company.
No provision hereof, in the absence of affirmative action by the
Holder to purchase shares of Common Stock, and no enumeration herein of the
rights or privileges of the Holder hereof, shall give rise to any liability of
the Holder for the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by the creditors
of the Company.
6. RESERVATION OF COMMON STOCK FOR ISSUANCE ON EXERCISE OF WARRANTS; NO
IMPAIRMENT.
The Company covenants that it will at all times reserve and keep
available, free from pre-emptive rights out of its authorized but unissued
Common Stock, solely for the purpose of issue upon exercise of this Warrant as
herein provided, such number of shares of Common Stock as shall then be issuable
upon the exercise of this Warrant. The Company covenants that all shares of
Common Stock which shall be so issuable shall, upon such issue, be duly and
validly issued and fully paid and non-assessable.
The Company shall not by any action including, without limitation,
amending 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 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 actions as may be necessary or appropriate to protect the rights of the
Holder against impairment. Without limiting the generality of the foregoing,
the Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and non-assessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Before taking any action which would cause an adjustment reducing the
Exercise Price below the then par value, if any, of the shares of Common Stock
issuable upon exercise of this Warrant, the Company shall take any corporate
action which may be necessary in order that
8
<PAGE>
the Company may validly and legally issue fully paid and non-assessable shares
of such Common Stock at such adjusted Exercise Price.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
7. MISCELLANEOUS.
7.1. Notice Upon Payment of Dividends or Distributions. Prior to the
-------------------------------------------------
record date for any dividend or other distribution payable in cash, property, or
capital stock of the Company, or any division of the net assets of the Company,
or any division of the net assets of the Company among the holders of Common
Stock in the event of the liquidation, dissolution or winding up of the Company,
the Company shall provide written notice thereof to each holder of Warrants and
each such holder shall have a reasonable opportunity to exercise such Warrants
prior to such record date and any shares of Common Stock issued upon the
exercise of such Warrants shall be considered to be issued and outstanding as of
such record date.
7.2. Payments to the Holder. Unless otherwise specifically provided
----------------------
herein, the Company shall distribute any money due and owing to the Holder by
mailing by first-class mail a check in such amount as is appropriate, to the
Holder at the address shown on the Warrant register of the Company, or as it may
be otherwise directed in writing by the Holder, upon surrender of the Holder"s
Warrant.
7.3. Payment of Taxes. The Company shall pay all taxes and other
----------------
governmental charges that may be imposed on the Company or on this Warrant or on
any securities deliverable upon exercise of this Warrant (other than taxes based
on net income). The Company shall not be required, however, to pay any tax or
other charge imposed in connection with any transfer involved in the issue of
any certificate for Underlying Shares or other securities underlying this
Warrant or payment of cash to any Person other than the Holder of this Warrant
when it is surrendered upon the exercise of this Warrant, and in case of such
transfer or payment, the Company shall not be required to issue any stock
certificate or pay any cash until such tax or charge has been paid or it has
been established to the Company"s satisfaction that no such tax or other charge
is due.
7.4. Surrender of Certificates. When this Warrant is surrendered
-------------------------
for exercise to the Company, it shall be promptly canceled by the Company and
shall not be reissued.
7.5. Mutilated, Destroyed, Lost or Stolen Warrant. If (a) this
--------------------------------------------
Warrant is mutilated and is surrendered to the Company or (b) the Company
receives evidence to its reasonable satisfaction of the destruction, loss or
theft of this Warrant, and there is delivered to the Company such security or
indemnity as may reasonably be required by it to save it harmless,
9
<PAGE>
then, in the absence of notice to the Company that this Warrant has been
acquired by a bona fide purchaser, the Company shall execute and deliver, in
exchange for any such mutilated Warrant or in lieu of any such destroyed, lost
or stolen Warrant, a new Warrant of like tenor and for a like aggregate number
of Underlying Shares.
Upon issuance of any new Warrant under this Section 7.5, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and other expenses
(including the reasonable fees and expenses of counsel to the Company) in
connection therewith.
Every new Warrant executed and delivered pursuant to this Section 7.5
in lieu of any destroyed, lost or stolen Warrant shall constitute an original
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Warrant shall be at any time enforceable by anyone.
The provisions of this Section 7.5 are exclusive and shall preclude
(to the extent lawful) all other rights or remedies with respect to the
replacement of a mutilated, destroyed, lost or stolen Warrant.
7.6. Notices. Any notice, demand or delivery authorized by this
-------
Warrant shall be sufficiently given or made when personally delivered or when
mailed if sent by first-class mail, postage prepaid, addressed to any Holder at
such Holder"s address shown on the register of the Company maintained by the
Company and to the Company as follows:
Tower Air, Inc.
Hangar No. 17
JFK International Airport
Jamaica, NY 11430
Attn: Chief Executive Officer
or such other address as shall have been furnished to the Holder.
7.7. Applicable Law. This Warrant and all rights arising hereunder
--------------
shall be governed by the laws of the State of New York with respect to contracts
made and to be performed entirely within such State.
7.8. Persons Benefitting. This Warrant shall be binding upon and
-------------------
inure to the benefit of the Company and its successors, and assigns, and the
Holders and its successors and assigns from time to time of this Warrant.
Nothing in this Warrant is intended or shall be construed to confer upon any
Person, other than the Company, and any Holder of this Warrant, any right,
remedy or claim under or by reason of this Warrant or any part hereof.
10
<PAGE>
7.9. Headings. The descriptive headings of the several Sections of
--------
this Warrant are inserted for convenience and shall not control or affect the
meaning or construction of any of the provisions hereof.
Dated As of February 6, 1998
TOWER AIR, INC.
By:___________________________________
Name:
Title:
11
<PAGE>
EXHIBIT A
Subscription Form
-----------------
(To be executed only upon exercise of the Warrant
in whole or in part)
To the Company:
The undersigned registered holder of the accompanying Warrant hereby
irrevocably exercises such Warrant or portion thereof for, and purchases
thereunder, _______________* Underlying Shares (as defined in such Warrant) and
herewith makes payment therefor of $____________. The undersigned requests that
the certificates for such Underlying Shares be issued in the name of, and
delivered to, ________________________, whose address is______________________
___________________.
Dated:
____________________________________
(Name must conform to name of holder
as specified on the face of the Warrant)
____________________________________
(Street Address)
____________________________________
(City) (State) (Zip Code)
_________________________
* Insert the number of Underlying Shares as to which this Warrant is
being exercised. In the case of a partial exercise, a new Warrant or
Warrants will be issued and delivered, representing the unexercised
portion of this Warrant, to the Holder surrendering the same.
<PAGE>
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, the undersigned _______________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrants with respect to the number of shares of the Common Stock covered
thereby set forth below, unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
__________________________________
By:________________________________
Name:
Title:
Witness:___________________________
<PAGE>
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
TOWER AIR, INC.
WARRANT NO. 3
NO. OF SHARES OF
COMMON STOCK: 300,000
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. DEFINITIONS.......................................................... 1
2. EXERCISE OF WARRANT.................................................. 2
2.1. Exercise of Warrant................................ 2
-------------------
2.2. Method of Exercise; Payment of Exercise Price...... 2
---------------------------------------------
2.3. Compliance with Securities Act..................... 2
------------------------------
3. ADJUSTMENTS.......................................................... 3
3.1. Adjustments.......................................... 3
-----------
3.2. Notice of Adjustment................................. 6
--------------------
3.3. Statement on Warrants................................ 6
---------------------
3.4. Fractional Interest.................................. 6
-------------------
3.5. Minimum Exercise Price............................... 7
----------------------
4. WARRANT TRANSFER BOOKS............................................... 7
5. NO VOTING RIGHTS; LIMITATION OF LIABILITY............................ 8
6. RESERVATION OF COMMON STOCK FOR ISSUANCE ON EXERCISE OF
WARRANTS; NO IMPAIRMENT.............................................. 8
7. MISCELLANEOUS........................................................ 9
7.2. Payments to the Holder............................... 9
----------------------
7.3. Payment of Taxes..................................... 9
----------------
7.4. Surrender of Certificates............................ 9
-------------------------
7.5. Mutilated, Destroyed, Lost or Stolen Warrant......... 9
--------------------------------------------
7.6. Notices.............................................. 10
-------
7.7. Applicable Law....................................... 10
--------------
7.8. Persons Benefitting.................................. 10
-------------------
7.9. Headings............................................. 11
--------
</TABLE>
i
<PAGE>
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND NEITHER
THE WARRANTS NOR ANY INTEREST THEREIN MAY BE SOLD OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREUNDER.
WARRANT TO PURCHASE SHARES OF
COMMON STOCK OF TOWER AIR
No. of shares of
Common Stock: 300,000 Warrant No. 3
This certifies that ALETHEA LIMITED PARTNERSHIP or registered assigns,
is entitled to purchase from TOWER AIR, INC. a Delaware corporation (the
"Company") THREE HUNDRED THOUSAND (300,000) shares of Common Stock, par value
-------
$.01, of the Company, at the exercise price of $5.00 per share (the "Exercise
--------
Price"), subject to adjustment as provided herein, all on the terms and
- -----
conditions and pursuant to the provisions hereinafter set forth.
1. DEFINITIONS.
Capitalized terms used herein have the following meanings (such
definitions to be equally applicable to both the singular and plural forms of
the terms defined):
Common Stock: voting Common Stock of the Company and any other capital
------------
stock of the Company into which such shares of common stock may be converted or
reclassified or that may be issued in respect of, in exchange for, or in
substitution of, such shares of common stock by reason of any stock splits,
stock dividends, distributions, mergers, consolidations or other like events.
Company: the meaning set forth in the preamble to this Warrant and its
-------
successors and assigns.
Exercise Price: the meaning set forth in the preamble hereto, as the
--------------
same may be adjusted pursuant to the terms hereof.
Expiration Date: means February 5, 2008.
---------------
Holders: from time to time, the holders of the Warrants.
-------
Underlying Shares: the shares of Common Stock issuable or issued upon
-----------------
the exercise of this Warrant.
<PAGE>
2. EXERCISE OF WARRANT.
2.1. Exercise of Warrant. Subject to the terms and conditions set
-------------------
forth herein, this Warrant shall be exercisable, in whole or in part, at any
time or from time to time on any Business Day and until 5:00 p.m., New York
time, on the Expiration Date.
2.2. Method of Exercise; Payment of Exercise Price. In order to
---------------------------------------------
to exercise this Warrant in whole or in part, the Holder of this Warrant must
surrender this Warrant to the Company at its principal office at Hangar No. 17,
JFK International Airport, Jamaica, NY 11430 or at the office or agency
designated by the Company of which the Holder has been notified in accordance
with Section 7.6, with a duly executed subscription in the form attached to this
Warrant, together with payment in full of the Exercise Price for the shares of
Underlying Common Stock as to which this Warrant is submitted for exercise. Any
such payment of the Exercise Price shall be in cash or by check payable to the
order of the Company.
If this Warrant is exercised for less than all of the Underlying
Shares, this Warrant shall be surrendered and a new Warrant of the same tenor
and date and for the remaining number of Underlying Shares shall be executed by
the Company, which shall register such new Warrant in such name or names as may
be directed in writing by the Holder and deliver the new Warrant to the Person
or Persons entitled to receive the same.
Upon surrender of this Warrant in conformity with the foregoing
provisions, the Company shall transfer to the Holder of this Warrant appropriate
evidence of ownership of any Underlying Shares or other securities or property
(including any money) to which the Holder is entitled, registered or otherwise
placed in, or payable to the order of, such name or names as may be directed in
writing by the Holder, and shall deliver such evidence of ownership and any
other securities or property (including any money) to the Person or Persons
entitled to receive the same.
Notwithstanding anything to the contrary contained herein, upon exercise of
this Warrant by any Holder, in lieu of delivery to the Holder of the Underlying
Shares issuable on account thereof pursuant to the terms hereof, the Company
may, in its discretion, pay the Holder in cash in immediately available funds
the Fair Market Value (as defined in Section 3.1(f) hereof) of such Underlying
Shares.
2.3. Compliance with Securities Act.
------------------------------
(a) This Warrant may not be exercised and neither this Warrant nor
any Underlying Shares may be sold, transferred or otherwise disposed of (any
such sale, transfer or other disposition, a "sale"), except in compliance with
----
this Section 2.3.
(b) A Holder may exercise this Warrant if it is an "accredited
investor", as defined in Regulation D under the Securities Act, and, subject to
the provisions of Section 2.4
2
<PAGE>
hereof, a Holder may sell this Warrant or Underlying Shares to any entity which
is a member of Funding Enterprises LLC or any transferee that is an "accredited
investor", provided that:
(i) such transferee represents that it is acquiring the Underlying
Shares (in the case of an exercise) or this Warrant or Underlying Shares
(in the case of a sale) for its own account and that it is not acquiring
such Underlying Shares or this Warrant with a view to, or for offer or sale
in connection with, any distribution thereof (within the meaning of the
Securities Act) that would be in violation of the securities laws of the
United States or any state thereof, but subject, nevertheless, to the
disposition of its property being at all times within its control; and
(ii) such transferee agrees to be bound by the provisions of this
Section 2.3 with respect to any exercise of this Warrant and any sale of
this Warrant or Underlying Shares.
(c) In the event of a proposed exercise or sale that does not
qualify under Section 2.3(b), a Holder may exercise this Warrant or sell this
Warrant or Underlying Shares only if:
(i) such Holder gives written notice to the Company of its
intention to exercise or effect such sale, which notice (A) shall describe
the manner of circumstances of the proposed transaction in reasonable
detail and (B) shall designate the counsel for such Holder; and
(ii) counsel for the Holder and counsel for the Company shall render
an opinion to the effect that such proposed exercise or sale may be
effected without registration under the Securities Act or under applicable
blue sky laws.
3. ADJUSTMENTS.
3.1. Adjustments. The Exercise Price and the number of Underlying
-----------
Shares issuable upon exercise of this Warrant shall be subject to adjustment
from time to time as follows:
(a) Stock Dividends; Stock Splits; Reverse Stock Splits;
----------------------------------------------------
Reclassifications. In case the Company shall (i) pay a dividend or make any
- -----------------
other distribution with respect to any class of Common Stock in shares of its
capital stock, (ii) subdivide any class of the Common Stock, (iii) combine any
class of the Common Stock into a smaller number of shares, or (iv) issue any
shares of its capital stock in a reclassification of any class of Common Stock
(including any such reclassification in connection with a merger, consolidation
or other business combination in which the Company is the continuing
corporation) the number of Underlying Shares issuable upon exercise of this
Warrant immediately prior to the record date for such dividend or distribution
or the effective date of such subdivision or combination shall be adjusted so
that the
3
<PAGE>
holder of this Warrant shall thereafter be entitled to receive the kind and
number of shares of Common Stock or other securities of the Company that such
Holder would have owned or have been entitled to receive after the happening of
any of the events described above, had this Warrant been exercised immediately
prior to the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this Section 3.1(a) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) Rights; Options; Warrants. In case the Company shall issue
-------------------------
rights, options, warrants or convertible or exchangeable securities (other than
a convertible or exchangeable security subject to Section 3.1(a)) to all holders
of any class of the Common Stock then outstanding, entitling them to subscribe
for or purchase Common Stock at a price per share that is lower (at the record
date for such issuance) than the Fair Market Value per share of such Common
Stock, the number of shares of Common Stock thereafter issuable upon the
exercise of this Warrant shall be determined by adding the number of shares of
Common Stock theretofore issuable upon exercise of this Warrant to the product
of (x) the Cheap Stock Issued, multiplied by (y) the Ownership Ratio. Such
adjustment shall be made whenever such rights, options, warrants or convertible
or exchangeable securities are issued, and shall become effective retroactively
immediately after the record date for the determination of stockholders entitled
to receive such rights, options, warrants or convertible or exchangeable
securities.
For purposes of this Section 3.1(b), (i) the "Cheap Stock Issued"
------------------
shall be the number of additional shares of any Common Stock offered by the
Company for subscription or purchase as described above minus the number of
shares of Common Stock that the aggregate offering price of the total number of
shares of Common Stock so offered would purchase at the then Fair Market Value
per share of Common Stock and (ii) the "Ownership Ratio" shall be a fraction,
---------------
the numerator of which shall be the number of shares of Common Stock theretofore
issuable upon exercise of this Warrant and the denominator of which shall be the
number of shares of Common Stock then outstanding on the date of issuance of
(and entitled to receive) such rights, options, warrants or convertible or
exchangeable securities.
(c) Mergers; Consolidations; Asset Sales. In case of the
------------------------------------
consolidation of the Company with or the merger of the Company with or into any
other Person or any other business combination of the Company with any other
Person, other than those described in Section 3.1(a), or the sale of all or
substantially all of the properties and assets of the Company to any other
Person, this Warrant shall thereupon be exercisable, upon the terms and
conditions specified herein and upon payment of the Exercise Price, for the
number of shares of stock or other securities or property to which the
Underlying Shares issuable upon exercise of this Warrant at the time of such
event would have been entitled if such exercise had taken place, and, if
necessary, the provisions set forth in this Section 3.1 shall be deemed adjusted
so as to be applicable, as nearly as may reasonably be, to any shares of stock
or other securities or property thereafter deliverable on the exercise of this
Warrant
4
<PAGE>
(d) Distribution of Debt, Assets, Subscription Rights or
----------------------------------------------------
Convertible Securities. In case the Company shall fix a record date for the
- ----------------------
making of a distribution to all holders of shares of its Common Stock of
evidence of indebtedness of the Company, of assets (other than cash dividends
payable out of earnings and profits arising after the date hereof) or securities
(excluding those referred to in Sections 31.(a) and 3.1(b)) (any such evidence
of indebtedness, assets or securities, the "assets or securities"), then in each
--------------------
case the Holder upon the exercise of this Warrant, shall be entitled to receive
in addition to the Underlying Shares, (i) the assets or securities to which such
Holder would have been entitled as a holder of Common Stock if such Holder had
exercised this Warrant immediately prior to the record date for such
distribution and (ii) any income earned on the assets or securities distributed
from the distribution date to the date of exercise or repurchase, as the case
may be, less the Exercise Price then in effect. At the time of any such
distribution, the Company shall either (A) deposit the assets or securities
payable to the Holder pursuant hereto in trust for the Holder with an "eligible
institution" with instructions as to the investment of such property and any
proceeds therefrom so as to protect the value of such property for the Holder or
(B) distribute to the Holder the assets or securities to which it would be
entitled upon exercise and, upon any such distribution pursuant to this Clause
(B), the provisions of this Section 3.1(d) shall no longer apply to such event.
Such election shall be made by the Company giving written notice thereof to the
Holder.
For purposes of this Section 3.1(d), the term "eligible institution"
--------------------
shall mean a corporation organized and doing business under the laws of the
United States of America or of any state thereof, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $50,000,000, and subject to the supervision or examination by Federal or
state authority.
(e) Expiration of Rights, Options and Conversion Privileges. Upon
-------------------------------------------------------
the expiration of any rights, options, warrants or conversion or exchange
privileges that have previously resulted in an adjustment hereunder, if any
thereof shall not have been exercised, the Exercise Price and the number of
Underlying Shares issuable upon the exercise of this Warrant shall, upon such
expiration, be readjusted and shall thereafter, upon any future exercise, be
such as they would have been had they been originally adjusted (or had the
original adjustment not been required, as the case may be) as if (i) the only
shares of Common Stock so issued were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such rights, options, warrants or
conversion or exchange rights and (ii) such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company upon such
exercise plus the consideration, if any, actually received by the Company for
issuance, sale or grant of all such rights, options, warrants or conversion or
exchange rights whether or not exercised; provided further that no such
-------- -------
readjustment shall have the effect or increasing the Exercise Price by an
amount, or decreasing the number of Underlying Shares issuable upon exercise of
this Warrant by a number, in excess of the amount or number of the adjustment
initially made in respect to the issuance, sale or grant of such rights,
options, warrants or conversion or exchange rights.
5
<PAGE>
(f) Fair Market Value. For the purposes of any computation
-----------------
hereunder, the Fair Market Value per share of Common Stock or of any other
equity security (herein collectively referred to as a "security") at the date
--------
herein specified shall be the value of the security (i) determined in good faith
by the last reported closing sale price of the Common Stock in an arm's length
transaction the closing of which shall have occurred within the six months
preceding such date, or (ii) if no such transaction shall have occurred within
such six-month period, determined as of such date by an independent investment
banking firm.
(g) Adjustment of Exercise Price. Whenever the number of shares of
----------------------------
Common Stock purchasable upon the exercise of this Warrant is adjusted, as
provided in Section 3.1(a) and (b), the Exercise Price for each Underlying Share
payable upon exercise of this Warrant shall be adjusted (calculated to the
nearest $.0001) so that it shall equal the price determined by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, the numerator
of which shall be the number of Underlying Shares issuable upon the exercise of
this Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Underlying Shares so issuable immediately thereafter.
(h) De Minimis Adjustments. No adjustment in the number of shares
----------------------
of Common Stock issuable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the number
of Underlying Shares purchasable upon an exercise of this Warrant; provided,
--------
however, that any adjustments which by reason of this Section 3.1(h) are not
- -------
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest one-
thousandth of a share.
3.2. Notice of Adjustment. Whenever the number of Underlying Shares
--------------------
or other stock or property issuable upon the exercise of this Warrant or the
Exercise Price is adjusted, as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder notice of such adjustment or
adjustments and shall deliver to the Holder a certificate of a firm of
independent public accountants selected by the Board of Directors of the Company
(who may be the regular accountants employed by the Company) setting forth the
number of Underlying Shares or other stock or property issuable upon the
exercise of this Warrant and the Exercise Price after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made.
3.3. Statement on Warrants. Irrespective of any adjustment in the
---------------------
Exercise Price or the number or kind of shares issuable upon the exercise of
this Warrant, Warrants theretofore or thereafter issued in respect hereof may
continue to express the same price and number and kind of shares as are stated
herein.
3.4. Fractional Interest. The Company shall issue fractional shares
-------------------
of Common Stock on the exercise of this Warrant. If more than one Warrant shall
be presented for exercise
6
<PAGE>
in full at the same time by the same Holder, the number of full shares of Common
Stock which shall be issuable upon such exercise thereof shall be computed on
the basis of the aggregate number of shares of Common Stock acquirable on
exercise of the Warrants so presented.
3.5. Minimum Exercise Price. Notwithstanding the foregoing, the
----------------------
Exercise Price shall not be less than the par value of the Common Stock for
which this Warrant is exercisable.
4. WARRANT TRANSFER BOOKS.
This Warrant shall be issued in registered form only. The Company
shall keep at its principal office at Hangar No. 17, JFK International Airport,
Jamaica, NY 11430, or at the office or agency designated by the Company and
notified to the Holder in accordance with Section 7.6, a register in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Warrants and of transfers or exchanges of
Warrants as herein provided.
At the option of the Holder, this Warrant may be exchanged at such
office, and upon payment of the charges hereinafter provided. Whenever this
Warrant is so surrendered for exchange, the Company shall execute and deliver
the Warrant or Warrants that the Holder making the exchange is entitled to
receive.
All Warrants issued upon any registration of transfer or exchange of
this Warrant shall be the valid obligations of the Company, evidencing the same
obligations, and entitled to the same benefits as this Warrant.
This Warrant, if surrendered for registration of transfer or exchange,
shall (if so required by the Company) be duly endorsed, or be accompanied by a
written instrument of assignment in the form attached hereto or otherwise
satisfactory to the Company, duly executed by the Holder or his attorney duly
authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of this Warrant. The Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of this Warrant.
This Warrant, when duly endorsed in blank, shall be deemed negotiable
and when this Warrant shall have been so endorsed, the Holder thereof may be
treated by the Company and all other persons dealing therewith as the absolute
owner thereof for any purpose and as the Person entitled to exercise the rights
represented thereby, or to the transfer thereof on the register of the Company,
any notice to the contrary notwithstanding; but until such transfer on such
register, the Company may treat the registered Holder thereof as the owner for
all purposes.
7
<PAGE>
5. NO VOTING RIGHTS; LIMITATION OF LIABILITY.
Prior to the exercise of this Warrant, the Holder, as such, shall not
be entitled to any rights of a stockholder or the Company, including, without
limitation, the right to vote, to consent, to exercise any preemptive right, to
receive any notices of meetings of stockholders for the election of directors of
the Company or any other matter or to receive any notice of any proceedings of
the Company, except as may be specifically provided for herein or in any other
agreement between the Holder and the Company.
No provision hereof, in the absence of affirmative action by the
Holder to purchase shares of Common Stock, and no enumeration herein of the
rights or privileges of the Holder hereof, shall give rise to any liability of
the Holder for the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by the creditors
of the Company.
6. RESERVATION OF COMMON STOCK FOR ISSUANCE ON EXERCISE OF WARRANTS; NO
IMPAIRMENT.
The Company covenants that it will at all times reserve and keep
available, free from pre-emptive rights out of its authorized but unissued
Common Stock, solely for the purpose of issue upon exercise of this Warrant as
herein provided, such number of shares of Common Stock as shall then be issuable
upon the exercise of this Warrant. The Company covenants that all shares of
Common Stock which shall be so issuable shall, upon such issue, be duly and
validly issued and fully paid and non-assessable.
The Company shall not by any action including, without limitation,
amending 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 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 actions as may be necessary or appropriate to protect the rights of the
Holder against impairment. Without limiting the generality of the foregoing,
the Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and non-assessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Before taking any action which would cause an adjustment reducing the
Exercise Price below the then par value, if any, of the shares of Common Stock
issuable upon exercise of this Warrant, the Company shall take any corporate
action which may be necessary in order that
8
<PAGE>
the Company may validly and legally issue fully paid and non-assessable shares
of such Common Stock at such adjusted Exercise Price.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
7. MISCELLANEOUS.
7.1. Notice Upon Payment of Dividends or Distributions. Prior to the
-------------------------------------------------
record date for any dividend or other distribution payable in cash, property, or
capital stock of the Company, or any division of the net assets of the Company,
or any division of the net assets of the Company among the holders of Common
Stock in the event of the liquidation, dissolution or winding up of the Company,
the Company shall provide written notice thereof to each holder of Warrants and
each such holder shall have a reasonable opportunity to exercise such Warrants
prior to such record date and any shares of Common Stock issued upon the
exercise of such Warrants shall be considered to be issued and outstanding as of
such record date.
7.2. Payments to the Holder. Unless otherwise specifically provided
----------------------
herein, the Company shall distribute any money due and owing to the Holder by
mailing by first-class mail a check in such amount as is appropriate, to the
Holder at the address shown on the Warrant register of the Company, or as it may
be otherwise directed in writing by the Holder, upon surrender of the Holder"s
Warrant.
7.3. Payment of Taxes. The Company shall pay all taxes and other
----------------
governmental charges that may be imposed on the Company or on this Warrant or on
any securities deliverable upon exercise of this Warrant (other than taxes based
on net income). The Company shall not be required, however, to pay any tax or
other charge imposed in connection with any transfer involved in the issue of
any certificate for Underlying Shares or other securities underlying this
Warrant or payment of cash to any Person other than the Holder of this Warrant
when it is surrendered upon the exercise of this Warrant, and in case of such
transfer or payment, the Company shall not be required to issue any stock
certificate or pay any cash until such tax or charge has been paid or it has
been established to the Company"s satisfaction that no such tax or other charge
is due.
7.4. Surrender of Certificates. When this Warrant is surrendered for
-------------------------
exercise to the Company, it shall be promptly canceled by the Company and shall
not be reissued.
7.5. Mutilated, Destroyed, Lost or Stolen Warrant. If (a) this
--------------------------------------------
Warrant is mutilated and is surrendered to the Company or (b) the Company
receives evidence to its reasonable satisfaction of the destruction, loss or
theft of this Warrant, and there is delivered to the Company such security or
indemnity as may reasonably be required by it to save it harmless,
9
<PAGE>
then, in the absence of notice to the Company that this Warrant has been
acquired by a bona fide purchaser, the Company shall execute and deliver, in
exchange for any such mutilated Warrant or in lieu of any such destroyed, lost
or stolen Warrant, a new Warrant of like tenor and for a like aggregate number
of Underlying Shares.
Upon issuance of any new Warrant under this Section 7.5, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and other expenses
(including the reasonable fees and expenses of counsel to the Company) in
connection therewith.
Every new Warrant executed and delivered pursuant to this Section 7.5
in lieu of any destroyed, lost or stolen Warrant shall constitute an original
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Warrant shall be at any time enforceable by anyone.
The provisions of this Section 7.5 are exclusive and shall preclude
(to the extent lawful) all other rights or remedies with respect to the
replacement of a mutilated, destroyed, lost or stolen Warrant.
7.6. Notices. Any notice, demand or delivery authorized by this
-------
Warrant shall be sufficiently given or made when personally delivered or when
mailed if sent by first-class mail, postage prepaid, addressed to any Holder at
such Holder"s address shown on the register of the Company maintained by the
Company and to the Company as follows:
Tower Air, Inc.
Hangar No. 17
JFK International Airport
Jamaica, NY 11430
Attn: Chief Executive Officer
or such other address as shall have been furnished to the Holder.
7.7. Applicable Law. This Warrant and all rights arising hereunder
--------------
shall be governed by the laws of the State of New York with respect to contracts
made and to be performed entirely within such State.
7.8. Persons Benefitting. This Warrant shall be binding upon and
-------------------
inure to the benefit of the Company and its successors, and assigns, and the
Holders and its successors and assigns from time to time of this Warrant.
Nothing in this Warrant is intended or shall be construed to confer upon any
Person, other than the Company, and any Holder of this Warrant, any right,
remedy or claim under or by reason of this Warrant or any part hereof.
10
<PAGE>
7.9. Headings. The descriptive headings of the several Sections of
--------
this Warrant are inserted for convenience and shall not control or affect the
meaning or construction of any of the provisions hereof.
Dated As of February 6, 1998
TOWER AIR, INC.
By:___________________________________
Name:
Title:
11
<PAGE>
EXHIBIT A
Subscription Form
-----------------
(To be executed only upon exercise of the Warrant
in whole or in part)
To the Company:
The undersigned registered holder of the accompanying Warrant hereby
irrevocably exercises such Warrant or portion thereof for, and purchases
thereunder, _______________* Underlying Shares (as defined in such Warrant) and
herewith makes payment therefor of $____________. The undersigned requests that
the certificates for such Underlying Shares be issued in the name of, and
delivered to, ________________________, whose address is
_________________________________________.
Dated:
____________________________________
(Name must conform to name of holder
as specified on the face of the Warrant)
____________________________________
(Street Address)
____________________________________
(City) (State) (Zip Code)
____________________
* Insert the number of Underlying Shares as to which this Warrant is
being exercised. In the case of a partial exercise, a new Warrant or
Warrants will be issued and delivered, representing the unexercised
portion of this Warrant, to the Holder surrendering the same.
<PAGE>
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, the undersigned _______________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrants with respect to the number of shares of the Common Stock covered
thereby set forth below, unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
___________________________________
By:________________________________
Name:
Title:
Witness:____________________________
<PAGE>
WARRANT
TO PURCHASE SHARES OF COMMON STOCK OF
TOWER AIR, INC.
WARRANT NO. 4
NO. OF SHARES OF
COMMON STOCK: 600,000
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. DEFINITIONS........................................................ 1
2. EXERCISE OF WARRANT................................................ 2
2.1. Exercise of Warrant............................... 2
---------------------------------------------
2.2. Method of Exercise; Payment of Exercise Price..... 2
---------------------------------------------
2.3. Compliance with Securities Act.................... 2
---------------------------------------------
3. ADJUSTMENTS........................................................ 3
3.1. Adjustments........................................ 3
------------------------
3.2. Notice of Adjustment............................... 6
------------------------
3.3. Statement on Warrants.............................. 6
------------------------
3.4. Fractional Interest................................ 6
------------------------
3.5. Minimum Exercise Price............................. 7
------------------------
4. WARRANT TRANSFER BOOKS............................................. 7
5. NO VOTING RIGHTS; LIMITATION OF LIABILITY.......................... 8
6. RESERVATION OF COMMON STOCK FOR ISSUANCE ON EXERCISE OF
WARRANTS; NO IMPAIRMENT............................................ 8
7. MISCELLANEOUS...................................................... 9
7.2. Payments to the Holder............................. 9
----------------------------------------------
7.3. Payment of Taxes................................... 9
----------------------------------------------
7.4. Surrender of Certificates.......................... 9
----------------------------------------------
7.5. Mutilated, Destroyed, Lost or Stolen Warrant....... 9
----------------------------------------------
7.6. Notices............................................ 10
----------------------------------------------
7.7. Applicable Law..................................... 10
----------------------------------------------
7.8. Persons Benefitting................................ 10
----------------------------------------------
7.9. Headings........................................... 11
----------------------------------------------
</TABLE>
<PAGE>
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND NEITHER
THE WARRANTS NOR ANY INTEREST THEREIN MAY BE SOLD OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREUNDER.
WARRANT TO PURCHASE SHARES OF
COMMON STOCK OF TOWER AIR
No. of shares of
Common Stock: 600,000 Warrant No. 4
This certifies that MORRIS K. NACHTOMI or registered assigns, is
entitled to purchase from TOWER AIR, INC. a Delaware corporation (the "Company")
-------
SIX HUNDRED THOUSAND (600,000) shares of Common Stock, par value $.01, of the
Company, at the exercise price of $5.00 per share (the "Exercise Price"),
--------------
subject to adjustment as provided herein, all on the terms and conditions and
pursuant to the provisions hereinafter set forth.
1. DEFINITIONS.
Capitalized terms used herein have the following meanings (such
definitions to be equally applicable to both the singular and plural forms of
the terms defined):
Common Stock: voting Common Stock of the Company and any other capital
------------
stock of the Company into which such shares of common stock may be converted or
reclassified or that may be issued in respect of, in exchange for, or in
substitution of, such shares of common stock by reason of any stock splits,
stock dividends, distributions, mergers, consolidations or other like events.
Company: the meaning set forth in the preamble to this Warrant and its
-------
successors and assigns.
Exercise Price: the meaning set forth in the preamble hereto, as the
--------------
same may be adjusted pursuant to the terms hereof.
Expiration Date: means February 5, 2008.
---------------
Holders: from time to time, the holders of the Warrants.
-------
Underlying Shares: the shares of Common Stock issuable or issued upon
-----------------
the exercise of this Warrant.
<PAGE>
2. EXERCISE OF WARRANT.
2.1. Exercise of Warrant. Subject to the terms and conditions set
-------------------
forth herein, this Warrant shall be exercisable, in whole or in part, at any
time or from time to time on any Business Day and until 5:00 p.m., New York
time, on the Expiration Date.
2.2. Method of Exercise; Payment of Exercise Price. In order to
---------------------------------------------
exercise this Warrant in whole or in part, the Holder of this Warrant must
surrender this Warrant to the Company at its principal office at Hangar No. 17,
JFK International Airport, Jamaica, NY 11430 or at the office or agency
designated by the Company of which the Holder has been notified in accordance
with Section 7.6, with a duly executed subscription in the form attached to this
Warrant, together with payment in full of the Exercise Price for the shares of
Underlying Common Stock as to which this Warrant is submitted for exercise. Any
such payment of the Exercise Price shall be in cash or by check payable to the
order of the Company.
If this Warrant is exercised for less than all of the Underlying
Shares, this Warrant shall be surrendered and a new Warrant of the same tenor
and date and for the remaining number of Underlying Shares shall be executed by
the Company, which shall register such new Warrant in such name or names as may
be directed in writing by the Holder and deliver the new Warrant to the Person
or Persons entitled to receive the same.
Upon surrender of this Warrant in conformity with the foregoing
provisions, the Company shall transfer to the Holder of this Warrant appropriate
evidence of ownership of any Underlying Shares or other securities or property
(including any money) to which the Holder is entitled, registered or otherwise
placed in, or payable to the order of, such name or names as may be directed in
writing by the Holder, and shall deliver such evidence of ownership and any
other securities or property (including any money) to the Person or Persons
entitled to receive the same.
Notwithstanding anything to the contrary contained herein, upon exercise of
this Warrant by any Holder, in lieu of delivery to the Holder of the Underlying
Shares issuable on account thereof pursuant to the terms hereof, the Company
may, in its discretion, pay the Holder in cash in immediately available funds
the Fair Market Value (as defined in Section 3.1(f) hereof) of such Underlying
Shares.
2.3. Compliance with Securities Act.
------------------------------
(a) This Warrant may not be exercised and neither this Warrant nor
any Underlying Shares may be sold, transferred or otherwise disposed of (any
such sale, transfer or other disposition, a "sale"), except in compliance with
----
this Section 2.3.
(b) A Holder may exercise this Warrant if it is an "accredited
investor", as defined in Regulation D under the Securities Act, and, subject to
the provisions of Section 2.4
2
<PAGE>
hereof, a Holder may sell this Warrant or Underlying Shares to any entity which
is a member of Funding Enterprises LLC or any transferee that is an "accredited
investor", provided that:
(i) such transferee represents that it is acquiring the Underlying
Shares (in the case of an exercise) or this Warrant or Underlying Shares
(in the case of a sale) for its own account and that it is not acquiring
such Underlying Shares or this Warrant with a view to, or for offer or sale
in connection with, any distribution thereof (within the meaning of the
Securities Act) that would be in violation of the securities laws of the
United States or any state thereof, but subject, nevertheless, to the
disposition of its property being at all times within its control; and
(ii) such transferee agrees to be bound by the provisions of this
Section 2.3 with respect to any exercise of this Warrant and any sale of
this Warrant or Underlying Shares.
(c) in the event of a proposed exercise or sale that does not
qualify under Section 2.3(b), a Holder may exercise this Warrant or sell this
Warrant or Underlying Shares only if:
(i) such Holder gives written notice to the Company of its
intention to exercise or effect such sale, which notice (A) shall describe
the manner of circumstances of the proposed transaction in reasonable
detail and (B) shall designate the counsel for such Holder; and
(ii) counsel for the Holder and counsel for the Company shall render
an opinion to the effect that such proposed exercise or sale may be
effected without registration under the Securities Act or under applicable
blue sky laws.
3. ADJUSTMENTS.
3.1. Adjustments. The Exercise Price and the number of Underlying
-----------
Shares issuable upon exercise of this Warrant shall be subject to adjustment
from time to time as follows:
(a) Stock Dividends; Stock Splits; Reverse Stock Splits;
----------------------------------------------------
Reclassifications. In case the Company shall (i) pay a dividend or make any
- -----------------
other distribution with respect to any class of Common Stock in shares of its
capital stock, (ii) subdivide any class of the Common Stock, (iii) combine any
class of the Common Stock into a smaller number of shares, or (iv) issue any
shares of its capital stock in a reclassification of any class of Common Stock
(including any such reclassification in connection with a merger, consolidation
or other business combination in which the Company is the continuing
corporation) the number of Underlying Shares issuable upon exercise of this
Warrant immediately prior to the record date for such dividend or distribution
or the effective date of such subdivision or combination shall be adjusted so
that the
3
<PAGE>
holder of this Warrant shall thereafter be entitled to receive the kind and
number of shares of Common Stock or other securities of the Company that such
Holder would have owned or have been entitled to receive after the happening of
any of the events described above, had this Warrant been exercised immediately
prior to the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this Section 3.1(a) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) Rights; Options; Warrants. In case the Company shall issue
-------------------------
rights, options, warrants or convertible or exchangeable securities (other than
a convertible or exchangeable security subject to Section 3.1(a)) to all holders
of any class of the Common Stock then outstanding, entitling them to subscribe
for or purchase Common Stock at a price per share that is lower (at the record
date for such issuance) than the Fair Market Value per share of such Common
Stock, the number of shares of Common Stock thereafter issuable upon the
exercise of this Warrant shall be determined by adding the number of shares of
Common Stock theretofore issuable upon exercise of this Warrant to the product
of (x) the Cheap Stock Issued, multiplied by (y) the Ownership Ratio. Such
adjustment shall be made whenever such rights, options, warrants or convertible
or exchangeable securities are issued, and shall become effective retroactively
immediately after the record date for the determination of stockholders entitled
to receive such rights, options, warrants or convertible or exchangeable
securities.
For purposes of this Section 3.1(b), (i) the "Cheap Stock Issued"
------------------
shall be the number of additional shares of any Common Stock offered by the
Company for subscription or purchase as described above minus the number of
shares of Common Stock that the aggregate offering price of the total number of
shares of Common Stock so offered would purchase at the then Fair Market Value
per share of Common Stock and (ii) the "Ownership Ratio" shall be a fraction,
---------------
the numerator of which shall be the number of shares of Common Stock theretofore
issuable upon exercise of this Warrant and the denominator of which shall be the
number of shares of Common Stock then outstanding on the date of issuance of
(and entitled to receive) such rights, options, warrants or convertible or
exchangeable securities.
(c) Mergers; Consolidations; Asset Sales. In case of the
------------------------------------
consolidation of the Company with or the merger of the Company with or into any
other Person or any other business combination of the Company with any other
Person, other than those described in Section 3.1(a), or the sale of all or
substantially all of the properties and assets of the Company to any other
Person, this Warrant shall thereupon be exercisable, upon the terms and
conditions specified herein and upon payment of the Exercise Price, for the
number of shares of stock or other securities or property to which the
Underlying Shares issuable upon exercise of this Warrant at the time of such
event would have been entitled if such exercise had taken place, and, if
necessary, the provisions set forth in this Section 3.1 shall be deemed adjusted
so as to be applicable, as nearly as may reasonably be, to any shares of stock
or other securities or property thereafter deliverable on the exercise of this
Warrant.
4
<PAGE>
(d) Distribution of Debt, Assets, Subscription Rights or
----------------------------------------------------
Convertible Securities. In case the Company shall fix a record date for the
- ----------------------
making of a distribution to all holders of shares of its Common Stock of
evidence of indebtedness of the Company, of assets (other than cash dividends
payable out of earnings and profits arising after the date hereof) or securities
(excluding those referred to in Sections 31.(a) and 3.1(b)) (any such evidence
of indebtedness, assets or securities, the "assets or securities"), then in each
--------------------
case the Holder upon the exercise of this Warrant, shall be entitled to receive
in addition to the Underlying Shares, (i) the assets or securities to which such
Holder would have been entitled as a holder of Common Stock if such Holder had
exercised this Warrant immediately prior to the record date for such
distribution and (ii) any income earned on the assets or securities distributed
from the distribution date to the date of exercise or repurchase, as the case
may be, less the Exercise Price then in effect. At the time of any such
distribution, the Company shall either (A) deposit the assets or securities
payable to the Holder pursuant hereto in trust for the Holder with an "eligible
institution" with instructions as to the investment of such property and any
proceeds therefrom so as to protect the value of such property for the Holder or
(B) distribute to the Holder the assets or securities to which it would be
entitled upon exercise and, upon any such distribution pursuant to this Clause
(B), the provisions of this Section 3.1(d) shall no longer apply to such event.
Such election shall be made by the Company giving written notice thereof to the
Holder.
For purposes of this Section 3.1(d), the term "eligible institution"
--------------------
shall mean a corporation organized and doing business under the laws of the
United States of America or of any state thereof, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $50,000,000, and subject to the supervision or examination by Federal or
state authority.
(e) Expiration of Rights, Options and Conversion Privileges. Upon
-------------------------------------------------------
the expiration of any rights, options, warrants or conversion or exchange
privileges that have previously resulted in an adjustment hereunder, if any
thereof shall not have been exercised, the Exercise Price and the number of
Underlying Shares issuable upon the exercise of this Warrant shall, upon such
expiration, be readjusted and shall thereafter, upon any future exercise, be
such as they would have been had they been originally adjusted (or had the
original adjustment not been required, as the case may be) as if (i) the only
shares of Common Stock so issued were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such rights, options, warrants or
conversion or exchange rights and (ii) such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company upon such
exercise plus the consideration, if any, actually received by the Company for
issuance, sale or grant of all such rights, options, warrants or conversion or
exchange rights whether or not exercised; provided further that no such
-------- -------
readjustment shall have the effect or increasing the Exercise Price by an
amount, or decreasing the number of Underlying Shares issuable upon exercise of
this Warrant by a number, in excess of the amount or number of the adjustment
initially made in respect to the issuance, sale or grant of such rights,
options, warrants or conversion or exchange rights.
5
<PAGE>
(f) Fair Market Value. For the purposes of any computation
-----------------
hereunder, the Fair Market Value per share of Common Stock or of any other
equity security (herein collectively referred to as a "security") at the date
--------
herein specified shall be the value of the security (i) determined in good faith
by the last reported closing sale price of the Common Stock in an arm"s length
transaction the closing of which shall have occurred within the six months
preceding such date, or (ii) if no such transaction shall have occurred within
such six-month period, determined as of such date by an independent investment
banking firm.
(g) Adjustment of Exercise Price. Whenever the number of shares of
----------------------------
Common Stock purchasable upon the exercise of this Warrant is adjusted, as
provided in Section 3.1(a) and (b), the Exercise Price for each Underlying Share
payable upon exercise of this Warrant shall be adjusted (calculated to the
nearest $.0001) so that it shall equal the price determined by multiplying such
Exercise Price immediately prior to such adjustment by a fraction, the numerator
of which shall be the number of Underlying Shares issuable upon the exercise of
this Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Underlying Shares so issuable immediately thereafter.
(h) De Minimis Adjustments. No adjustment in the number of shares
----------------------
of Common Stock issuable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the number
of Underlying Shares purchasable upon an exercise of this Warrant; provided,
--------
however, that any adjustments which by reason of this Section 3.1(h) are not
- -------
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations shall be made to the nearest one-
thousandth of a share.
3.2. Notice of Adjustment. Whenever the number of Underlying Shares
--------------------
or other stock or property issuable upon the exercise of this Warrant or the
Exercise Price is adjusted, as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder notice of such adjustment or
adjustments and shall deliver to the Holder a certificate of a firm of
independent public accountants selected by the Board of Directors of the Company
(who may be the regular accountants employed by the Company) setting forth the
number of Underlying Shares or other stock or property issuable upon the
exercise of this Warrant and the Exercise Price after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made.
3.3. Statement on Warrants. Irrespective of any adjustment in the
---------------------
Exercise Price or the number or kind of shares issuable upon the exercise of
this Warrant, Warrants theretofore or thereafter issued in respect hereof may
continue to express the same price and number and kind of shares as are stated
herein.
3.4. Fractional Interest. The Company shall issue fractional shares
-------------------
of Common Stock on the exercise of this Warrant. If more than one Warrant shall
be presented for exercise
6
<PAGE>
in full at the same time by the same Holder, the number of full shares of Common
Stock which shall be issuable upon such exercise thereof shall be computed on
the basis of the aggregate number of shares of Common Stock acquirable on
exercise of the Warrants so presented.
3.5. Minimum Exercise Price. Notwithstanding the foregoing, the
----------------------
Exercise Price shall not be less than the par value of the Common Stock for
which this Warrant is exercisable.
4. WARRANT TRANSFER BOOKS.
This Warrant shall be issued in registered form only. The Company
shall keep at its principal office at Hangar No. 17, JFK International Airport,
Jamaica, NY 11430, or at the office or agency designated by the Company and
notified to the Holder in accordance with Section 7.6, a register in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Warrants and of transfers or exchanges of
Warrants as herein provided.
At the option of the Holder, this Warrant may be exchanged at such
office, and upon payment of the charges hereinafter provided. Whenever this
Warrant is so surrendered for exchange, the Company shall execute and deliver
the Warrant or Warrants that the Holder making the exchange is entitled to
receive.
All Warrants issued upon any registration of transfer or exchange of
this Warrant shall be the valid obligations of the Company, evidencing the same
obligations, and entitled to the same benefits as this Warrant.
This Warrant, if surrendered for registration of transfer or exchange,
shall (if so required by the Company) be duly endorsed, or be accompanied by a
written instrument of assignment in the form attached hereto or otherwise
satisfactory to the Company, duly executed by the Holder or his attorney duly
authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of this Warrant. The Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of this Warrant.
This Warrant, when duly endorsed in blank, shall be deemed negotiable
and when this Warrant shall have been so endorsed, the Holder thereof may be
treated by the Company and all other persons dealing therewith as the absolute
owner thereof for any purpose and as the Person entitled to exercise the rights
represented thereby, or to the transfer thereof on the register of the Company,
any notice to the contrary notwithstanding; but until such transfer on such
register, the Company may treat the registered Holder thereof as the owner for
all purposes.
7
<PAGE>
5. NO VOTING RIGHTS; LIMITATION OF LIABILITY.
Prior to the exercise of this Warrant, the Holder, as such, shall not
be entitled to any rights of a stockholder or the Company, including, without
limitation, the right to vote, to consent, to exercise any preemptive right, to
receive any notices of meetings of stockholders for the election of directors of
the Company or any other matter or to receive any notice of any proceedings of
the Company, except as may be specifically provided for herein or in any other
agreement between the Holder and the Company.
No provision hereof, in the absence of affirmative action by the
Holder to purchase shares of Common Stock, and no enumeration herein of the
rights or privileges of the Holder hereof, shall give rise to any liability of
the Holder for the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by the creditors
of the Company.
6. RESERVATION OF COMMON STOCK FOR ISSUANCE ON EXERCISE OF WARRANTS;
NO IMPAIRMENT.
The Company covenants that it will at all times reserve and keep
available, free from pre-emptive rights out of its authorized but unissued
Common Stock, solely for the purpose of issue upon exercise of this Warrant as
herein provided, such number of shares of Common Stock as shall then be issuable
upon the exercise of this Warrant. The Company covenants that all shares of
Common Stock which shall be so issuable shall, upon such issue, be duly and
validly issued and fully paid and non-assessable.
The Company shall not by any action including, without limitation,
amending 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 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 actions as may be necessary or appropriate to protect the rights of the
Holder against impairment. Without limiting the generality of the foregoing,
the Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and non-assessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Before taking any action which would cause an adjustment reducing the
Exercise Price below the then par value, if any, of the shares of Common Stock
issuable upon exercise of this Warrant, the Company shall take any corporate
action which may be necessary in order that
8
<PAGE>
the Company may validly and legally issue fully paid and non-assessable shares
of such Common Stock at such adjusted Exercise Price.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
7. MISCELLANEOUS.
7.1. Notice Upon Payment of Dividends or Distributions. Prior to
-------------------------------------------------
the record date for any dividend or other distribution payable in cash,
property, or capital stock of the Company, or any division of the net assets of
the Company, or any division of the net assets of the Company among the holders
of Common Stock in the event of the liquidation, dissolution or winding up of
the Company, the Company shall provide written notice thereof to each holder of
Warrants and each such holder shall have a reasonable opportunity to exercise
such Warrants prior to such record date and any shares of Common Stock issued
upon the exercise of such Warrants shall be considered to be issued and
outstanding as of such record date.
7.2. Payments to the Holder. Unless otherwise specifically provided
----------------------
herein, the Company shall distribute any money due and owing to the Holder by
mailing by first-class mail a check in such amount as is appropriate, to the
Holder at the address shown on the Warrant register of the Company, or as it may
be otherwise directed in writing by the Holder, upon surrender of the Holder"s
Warrant.
7.3. Payment of Taxes. The Company shall pay all taxes and other
----------------
governmental charges that may be imposed on the Company or on this Warrant or on
any securities deliverable upon exercise of this Warrant (other than taxes based
on net income). The Company shall not be required, however, to pay any tax or
other charge imposed in connection with any transfer involved in the issue of
any certificate for Underlying Shares or other securities underlying this
Warrant or payment of cash to any Person other than the Holder of this Warrant
when it is surrendered upon the exercise of this Warrant, and in case of such
transfer or payment, the Company shall not be required to issue any stock
certificate or pay any cash until such tax or charge has been paid or it has
been established to the Company"s satisfaction that no such tax or other charge
is due.
7.4. Surrender of Certificates. When this Warrant is surrendered
-------------------------
for exercise to the Company, it shall be promptly canceled by the Company and
shall not be reissued.
7.5. Mutilated, Destroyed, Lost or Stolen Warrant. If (a) this
--------------------------------------------
Warrant is mutilated and is surrendered to the Company or (b) the Company
receives evidence to its reasonable satisfaction of the destruction, loss or
theft of this Warrant, and there is delivered to the Company such security or
indemnity as may reasonably be required by it to save it harmless,
9
<PAGE>
then, in the absence of notice to the Company that this Warrant has been
acquired by a bona fide purchaser, the Company shall execute and deliver, in
exchange for any such mutilated Warrant or in lieu of any such destroyed, lost
or stolen Warrant, a new Warrant of like tenor and for a like aggregate number
of Underlying Shares.
Upon issuance of any new Warrant under this Section 7.5, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and other expenses
(including the reasonable fees and expenses of counsel to the Company) in
connection therewith.
Every new Warrant executed and delivered pursuant to this Section 7.5
in lieu of any destroyed, lost or stolen Warrant shall constitute an original
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Warrant shall be at any time enforceable by anyone.
The provisions of this Section 7.5 are exclusive and shall preclude
(to the extent lawful) all other rights or remedies with respect to the
replacement of a mutilated, destroyed, lost or stolen Warrant.
7.6. Notices. Any notice, demand or delivery authorized by this
-------
Warrant shall be sufficiently given or made when personally delivered or when
mailed if sent by first-class mail, postage prepaid, addressed to any Holder at
such Holder"s address shown on the register of the Company maintained by the
Company and to the Company as follows:
Tower Air, Inc.
Hangar No. 17
JFK International Airport
Jamaica, NY 11430
Attn: Chief Executive Officer
or such other address as shall have been furnished to the Holder.
7.7. Applicable Law. This Warrant and all rights arising hereunder
--------------
shall be governed by the laws of the State of New York with respect to contracts
made and to be performed entirely within such State.
7.8. Persons Benefitting. This Warrant shall be binding upon and
-------------------
inure to the benefit of the Company and its successors, and assigns, and the
Holders and its successors and assigns from time to time of this Warrant.
Nothing in this Warrant is intended or shall be construed to confer upon any
Person, other than the Company, and any Holder of this Warrant, any right,
remedy or claim under or by reason of this Warrant or any part hereof.
10
<PAGE>
7.9. Headings. The descriptive headings of the several Sections of
--------
this Warrant are inserted for convenience and shall not control or affect the
meaning or construction of any of the provisions hereof.
Dated As of February 6, 1998
TOWER AIR, INC.
By:___________________________________
Name:
Title:
11
<PAGE>
EXHIBIT A
Subscription Form
-----------------
(To be executed only upon exercise of the Warrant
in whole or in part)
To the Company:
The undersigned registered holder of the accompanying Warrant hereby
irrevocably exercises such Warrant or portion thereof for, and purchases
thereunder, _______________* Underlying Shares (as defined in such Warrant) and
herewith makes payment therefor of $____________. The undersigned requests that
the certificates for such Underlying Shares be issued in the name of, and
delivered to, ________________________, whose address is
_________________________________________.
Dated:
____________________________________
(Name must conform to name of holder
as specified on the face of the Warrant)
____________________________________
(Street Address)
____________________________________
(City) (State) (Zip Code)
____________________________
* Insert the number of Underlying Shares as to which this Warrant is
being exercised. In the case of a partial exercise, a new Warrant or
Warrants will be issued and delivered, representing the unexercised
portion of this Warrant, to the Holder surrendering the same.
<PAGE>
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, the undersigned _______________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrants with respect to the number of shares of the Common Stock covered
thereby set forth below, unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
__________________________________
By:________________________________
Name:
Title:
Witness:____________________________
<PAGE>
OPERATING AGREEMENT
OF
FUNDING ENTERPRISES LLC
ARTICLE I
INITIAL DATE, PARTIES, AUTHORIZATION AND PURPOSE
OF THIS AGREEMENT
SECTION 1.01 INITIAL DATE; INITIAL PARTIES
This Agreement is made as of the 5th day of February 1998 and is initially
agreed to by Funding Enterprises LLC (the "Company") and all persons who on
that date were Members of the Company.
SECTION 1.02 SUBSEQUENT PARTIES; ASSENT AS A PRECONDITION TO BECOMING A
MEMBER OR TO OBTAINING RIGHTS TO BECOME A MEMBER
(a) No Person may become a Member of the Company without first
assenting to and signing this Agreement. Any act by the Company to offer or
provide Member status, or reflect that status in the Company's Required
Records, shall include the condition that the Person becoming a Member first
assent to and sign this Agreement.
(b) If: (i) the Company offers, makes, or signs a Subscription
Agreement or any other agreement that permits or requires a Person to make a
contribution and become a Member, and (ii) the other party to the Subscription
Agreement or other agreement is not already a Member and has not already
assented to and signed this Agreement, then the Company's action shall
automatically include the condition that the other party assent to and sign this
Agreement before that Person actually makes a contribution or becomes a Member.
(c) The Company is obligated not to accept a contribution from, or
accord Member status to, any person who has not first assented to and signed
this Agreement. The Company's acceptance of a contribution from a person who has
not signed this Agreement does not waive that person's obligation to sign this
Agreement.
SECTION 1.03 AUTHORIZATION OF THIS AGREEMENT
This Agreement is made pursuant to the Delaware Limited Liability Company Act,
1994 Del. Laws, Ch. 434, as amended, Del. Code Ann. tit. 6. (S) 18-101 et seq.
-- ---
(the "Delaware LLC Act").
<PAGE>
ARTICLE II
DEFINITIONS
SECTION 2.01 DEFINITIONS
For purposes of this Agreement, unless the language or context clearly indicates
that a different meaning is intended, the words, terms and phrases defined in
this section have the following meanings:
(a) "Act of the Members" has the meaning stated in Section 10.01.
(b) "Agreement" means this Operating Agreement, as amended from time to
time.
(c) "Capital Account" means the account of any Member or Dissociated
Member, maintained as provided in Section 7.02.
(d) "Capital Interest" means the right of any Member or dissociated Member
to be paid the amount in that Member's or Dissociated Member's Capital Account.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Default Rule" means any provision in the Delaware LLC Act (i) which
structures, defines, or regulates the finances, governance, operations, or other
aspects of a limited liability company organized under the Delaware LLC Act and
(ii) which applies except to the extent it is negated or modified through the
provisions of a limited liability company's articles of organization or
operating agreement.
(g) "Delaware LLC Act" has the meaning stated in Section 1.03.
(h) "Dissociation of a Member" or "Dissociation" occurs when the Company
has notice or knowledge of an event that has terminated a Member's continued
Membership in the Company.
(i) "Financial Rights" means a Member's rights to share in profits and
losses, a Member's rights to receive distributions from the Company and a
Member's Capital Interest in the Company.
(j) "Fiscal Year" means the annual period upon which the Company files its
federal income tax return.
(k) "Governance Rights" means all of a Member's rights as a Member in the
Company, other than Financial Rights and the right to assign Financial Rights.
2
<PAGE>
(l) "Majority-In-Interest Consent" means the consent described in Revenue
Procedure 94-46. 1994-28 IRB 129, as amended from time to time.
(m) "Member" means a person who owns at least one Membership Unit and
whose ownership of one or more Membership Units is reflected in the Required
Records.
(n) "Membership Unit" has the meaning stated in Section 5.01.
(o) "Person" includes a natural person, domestic or foreign limited
liability company, corporation, partnership, limited partnership, joint venture,
association, business trust, estate, trust, enterprise, and any other legal or
commercial entity.
(p) "Required Records" means those records specified in Section 11.01.
(q) "Subscription Agreement" means an agreement between a Person and the
Company pursuant to which the Person agrees to make a capital contribution to
the Company and become a member of the Company.
(r) "Successor LLC" means a limited liability company organized under
Section 15.02 to participate as the surviving organization in a merger with the
Company if the Company is dissolved.
(s) "Termination of the Company" means, as defined in the Delaware LLC
Act, the end of the Company's legal existence.
(t) "Transfer" includes an assignment, sale, conveyance, lease, mortgage,
security interest, deed, encumbrance, gift, or other disposition of any kind.
ARTICLE III
BACKGROUND OF THIS AGREEMENT
SECTION 3.01 HISTORY AND NATURE OF THE COMPANY
The Company was organized in Delaware and is, and will be, engaged solely in the
business of extending financing to Tower Air, Inc., a Delaware corporation
("Tower"), and any other business its Members unanimously choose to pursue.
SECTION 3.02 INTENT OF THIS AGREEMENT
The parties intend this Agreement to control, to the extent stated or fairly
implied, the business and affairs of the Company, including the Company's
governance structure and the Company's dissolution, winding up and termination,
as well as the relations among the Company's Members
3
<PAGE>
and persons who have signed Subscription Agreements.
SECTION 3.03 ADVICE OF COUNSEL
Each person signing this Agreement understands that this Agreement contains
legally binding provisions, and has had an adequate opportunity to consult with
an attorney of his, her or its own choosing.
ARTICLE IV
RELATIONSHIP OF THIS AGREEMENT
TO THE DEFAULT RULES PROVIDED BY THE DELAWARE LLC ACT
SECTION 4.01 RELATIONSHIP OF THIS AGREEMENT TO THE DEFAULT RULES PROVIDED BY THE
DELAWARE LLC ACT
Regardless of whether any provision of this Agreement specifically refers to a
particular Default Rule:
(a) if any provision of this Agreement conflicts with a Default Rule, the
provision of this Agreement controls and the Default Rule is modified or negated
accordingly, and
(b) if it is necessary to construe a Default Rule as modified or negated
in order to effectuate any provision of this Agreement, the Default Rule is
modified or negated accordingly, and
(c) with respect to any matter not covered hereunder, the Default Rules
shall apply.
ARTICLE V
CAPITAL STRUCTURE: MEMBERSHIP AND CONTRIBUTIONS
SECTION 5.01 MEMBERSHIP UNITS
(a) Ownership rights in the Company are reflected in Membership Units, as
recorded in the Required Records. Each Membership Unit
(i) has equal Governance Rights with every other Membership
Unit and, in all matters subject to a vote of the Members, has the vote and
(ii) except as otherwise provided herein, each Membership
Unit has equal rights with every other Membership Unit with respect to sharing
of profits and losses and with respect to distributions.
4
<PAGE>
(b) A Member may Transfer the Member's Financial Rights only as provided
in and subject to Section 12.01. A Member may not Transfer any Governance
Rights. Transfer of a Member's entire Membership Unit may be made only in
compliance with Section 12.02.
(c) The Company will not issue any certificates of Membership Units, but
will, at the written request of a Member, provide a statement of Membership
interests, stating the number of Membership Units owned, as well as any
effective Transfers of rights under those Units, as of the date the statement is
provided.
SECTION 5.02 ISSUANCE OF MEMBERSHIP UNITS BY THE COMPANY
(a) The Members will determine when and for what consideration the Company
will issue Membership Units. For each Member, the Required Records shall state
the value and nature of the contribution received by the Company and the number
of Membership Units received in return by the Member.
(b) No Member has the right to make additional contributions or obtain
additional Membership Units, and each Member specifically waives any preemptive
rights.
SECTION 5.03 NO RIGHT OF COMPANY TO REQUIRE ADDITIONAL CONTRIBUTIONS
The Company has no right to require any Member to make any additional
contributions.
SECTION 5.04 COMPANY'S RIGHT TO ACCEPT ADDITIONAL CONTRIBUTIONS LIMITED
The Company may not accept additional contributions, enter into Subscription
Agreements, or create or allocate additional Membership Units except as approved
by an Act of the Members. To be effective, the approval required by this section
must specify the number of Membership Units authorized. The approval may, but
need not, specify the amount, nature, and value of the consideration to be
received, the identity of the contributor or proposed contributor, a deadline
by which the authorized contribution must be received or any other applicable
conditions to the approval.
SECTION 5.05 NO RIGHTS OF REDEMPTION OR RETURN OF CONTRIBUTION
No Member has a right to have its Membership Units redeemed or its contribution
returned prior to the termination of the Company, even if the Member dissociates
prior to termination of the Company. At termination, a Member's right to return
of contribution or redemption is subject to Article XV hereof.
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ARTICLE VI
CAPITAL STRUCTURE: PROFITS. LOSSES, DISTRIBUTIONS,
AND TRANSACTIONS BETWEEN MEMBERS AND THE COMPANY
SECTION 6.01 ALLOCATION OF PROFITS AND LOSSES
(a) Profits and losses of the Company shall be allocated each fiscal year
according to the number of Membership Units owned as reflected in the Required
Records.
(b) For any Membership Unit not owned by the same Person for the entire
fiscal year, the allocation will be prorated.
SECTION 6.02 NO RIGHT TO INTERIM DISTRIBUTIONS; ALLOCATION OF INTERIM
DISTRIBUTION
(a) No Member has a right to any distribution prior to the termination of
the Company.
(b) Interim distributions, if made, will be allocated according to the
number of Membership Units owned, as reflected in the Required Records. For any
Membership Unit not owned by the same Person for the entire fiscal year, the
allocation will be prorated.
SECTION 6.03 NO RIGHT TO DISTRIBUTION UPON DISSOCIATION
A Member's dissociation does not entitle the Member to any distribution,
regardless of whether the dissociation causes the Company to dissolve.
SECTION 6.04 DISTRIBUTIONS UPON TERMINATION OF THE COMPANY
(a) At the Termination of the Company, subject to Article XV and after the
Company has satisfied or provided for the satisfaction of all the Company's
debts and other obligations, if any, the Company's assets will be distributed in
cash to the Members and any dissociated Members whose Membership Units have not
been previously redeemed as follows:
(i) first, in discharge of their respective Capital Interests; and
(ii) then, in proportion to their Membership Units.
(b) If the Company lacks sufficient assets to make the distributions
described in Section 6.04(a), the Company will make distributions in proportion
to the respective Capital Interests of the Members and dissociated Members whose
Membership Units have not been previously redeemed.
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SECTION 6.05 DISTRIBUTIONS IN KIND; WARRANTS
(a) Except as provided in Section 6.05(c), no Member has a right to any
distribution in any form other than cash.
(b) The Company may not make a distribution in kind unless:
(i) the Member receiving the in-kind distribution consents.
(ii) all Members receive undivided interests in the same property,
or
(iii) all Members receive, in proportion to their rights to
distribution, interests in substantially equivalent property.
(c) Notwithstanding anything to the contrary contained herein, it is
intended that all Warrants to purchase Tower common stock issued to the Company
will be distributed to Members, pro rata in accordance with their respective
Capital Interests, as promptly as possible.
SECTION 6.06 DISTRIBUTIONS SUBJECT TO SET-OFF BY THE COMPANY
All distributions are subject to set-off by the Company:
(a) in the case of a Member, for any past-due obligation of the Member to
make a contribution to the Company; and
(b) in the case of a Transferee of Financial Rights, for any past-due
obligation owed to the Company by the Member who originally owned the Financial
Rights.
ARTICLE VII
TAX MATTERS
SECTION 7.01 TAX CHARACTERIZATION AND RETURNS
(a) The Members acknowledge that the Company will be treated as a
"partnership" for federal and Delaware state income tax purposes. All provisions
of this Agreement and the Company's Articles of Organization shall be construed
so as to preserve that tax status.
(b) Within ninety (90) days after the end of each Fiscal Year, the Company
will cause to be delivered to each person who was a Member at any time during
such Fiscal Year a Form K-1 and such other information, if any, with respect to
the Company as may be necessary for the preparation of each Member's federal or
state income tax (or information) returns, including a statement showing each
Member's share of income, gain or loss, and credits for the
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Fiscal Year.
SECTION 7.02 CAPITAL ACCOUNTS
The Company will establish a Capital Account for each Member and will maintain
each Account according to the following rules:
(a) Maintenance. The Company will maintain the Capital Accounts in
-----------
accordance with Treasury Regulations (S) 1.704-1(b)(2)(iv).
(b) Liquidation Payments. If the Company liquidates, subject to Article
--------------------
XV, the Company will make liquidating distributions in accordance with Section
6.04.
(c) Negative Capital Account and Qualified Income Offset. A Member is not
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be liable to fund any deficit in the Member's Capital Account at any time.
Notwithstanding any other provision in this Agreement, if a Member unexpectedly
receives an adjustment, allocation, or distribution described in Treasury
Regulations (S) 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(ii)(2)(d)(5), or 1.704-1
(b)(2)(ii)(d)(6), and the unexpected adjustment, allocation, or distribution
results in a deficit balance in the Capital Account for the Member, the Member
will be allocated items of income and gain in an amount and manner sufficient to
eliminate the deficit balance or the increase in the deficit balance as quickly
as possible. It is intended that this subdivision will meet the requirements of
a "qualified income offset" as defined in Treasury Regulations (S) 1.704-1
(b)(2)(ii)(d), and this subdivision is to be interpreted and applied consistent
with that intention.
(d) Nonrecourse Deductions. If a Member's Capital Account has a deficit
----------------------
balance at any time and the deficit or increase in deficit was caused by the
allocation of nonrecourse deductions as defined in Treasury Regulations (S)
1.704-2(b), then beginning in the first taxable year of the Company in which
there are nonrecourse deductions or in which the Company makes a distribution of
proceeds of a nonrecourse liability that are allocable to an increase in minimum
gain as defined in Treasury Regulations (S) 1.704-2(d) and thereafter throughout
the full term of the Company, the following rules shall apply:
(i) Nonrecourse deductions shall be allocated to the Members in a
manner that is reasonably consistent with the allocations that have substantial
economic effect as defined in Treasury Regulations (S) 1.704-1 or some other
significant item attributable to the property securing the nonrecourse
liabilities, if applicable; and
(ii) If there is a net decrease in minimum gain for a taxable year,
each Member will be allocated items of Company income and gain for that year
equal to that Member's share of the net decrease in minimum gain as defined in
Treasury Regulations (S) 1.704-2(g)(2).
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SECTION 7.03 ACCOUNTING DECISIONS
The Members will make all decisions as to accounting matters. The Members may
cause the Company to make whatever elections the Company may make under the
Code, including the election referred to in Section 754 of the Code to adjust
the basis of Company assets.
SECTION 1.04 "TAX MATTERS PARTNER"
The Members shall, if necessary, designate a Member to act on behalf of the
Company as the "tax matters partner" within the meaning of Section 6231(a)(7) of
the Code.
ARTICLE VIII
GOVERNANCE: MANAGEMENT BY MEMBERS
SECTION 8.01 MANAGEMENT BY MEMBERS
The Company will be managed by its Members each of whom shall be a Manager of
the Company.
SECTION 8.02 OPERATIONAL AUTHORITY OF MEMBERS
(a) Subject to Article IX and except as provided in Section 8.02(b), the
Members, acting as a group, have sole authority to manage the Company and are
authorized to take any action, enter into or other any contract, transaction, or
make or obtain any commitments on behalf of the Company in order to conduct or
further the Company's business. Except for those actions requiring a unanimous
vote of the Members pursuant to Section 9.01 hereof, a vote of the majority of
the Membership Units shall be required to authorize any act of the Company.
(b) The Members may delegate to a subcommittee of Members, an individual
Member, or an employee of the Company any management responsibility or authority
except with respect to those matters described in Article IX which require the
unanimous consent of the Members.
SECTION 8.03 MANAGERIAL DUTIES OF MEMBERS
(a) Each Member must discharge his, her or its managerial duties in good
faith, with the care an ordinarily prudent person in a like position would
exercise under similar circumstances, and in a manner the Member reasonably
believes to be in the best interests of the Company.
(b) A Member may rely on information received from other persons if that
reliance is consistent with the Member's duties under Section 8.08(a)
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SECTION 8.04 NONLIABILITY OF MEMBERS FOR ACTS OR OMISSIONS IN THEIR MANAGERIAL
CAPACITY
To the fullest extent permitted by the Delaware LLC Act, all Members are
released from liability for damages and other monetary relief on account of any
act, omission, or conduct in the Member's managerial capacity. No amendment or
repeal of this Section shall affect any liability or alleged liability of any
Member for acts, omissions, or conduct that occurred prior to the amendment or
repeal.
SECTION 8.05 NO AUTHORITY OF INDIVIDUAL MEMBERS
Except as authorized under paragraph 8.02(b), no individual Member is an agent
of the Company or has the authority to enter into any contracts, or other
transactions or make any commitments on behalf of the Company.
ARTICLE IX
LIMITATIONS ON MANAGERIAL POWERS
SECTION 9.01 ACTIONS REQUIRING UNANIMOUS CONSENT OF MEMBERS
(a) The Company shall have no authority or power to take the following
actions unless first approved by an act of all of the Members:
(i) entering into any Subscription Agreements;
(ii) issuance of any additional Membership Units; or
(iii) amending the Company's Articles of Organization or this
Agreement.
SECTION 9.02 OTHER PROVISIONS LIMITING MANAGERIAL AUTHORITY
When some other provision of this Agreement states procedures for taking
particular actions or accomplishing specified results, that provision states the
sole method for taking that action or accomplishing that result.
ARTICLE X
ACTS OF MEMBERS AND MEMBER MEETINGS
SECTION 10.01 ACTS OF MEMBERS
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Except to the extent that the Delaware LLC Act, the Articles of Organization of
the Company, or this Agreement require otherwise, an Act of the Members consists
of either:
(a) a majority vote of the Membership Units present at a properly called
meeting of the Members, when a quorum is present, or
(b) written action by the Members without a meeting, as provided in Section
10.09.
SECTION 10.02 REQUIRED ANNUAL MEETING
The Members will meet at least annually telephonically or in person. The Company
will give notice of this annual meeting to all Members in accordance with
Section 10.04.
SECTION 10.03 SPECIAL MEETINGS
(a) A special meeting of the Members may be called for any purpose or
purposes at any time by one or more Members owning a least ten percent (10%) of
the Membership Units of the Company entitled to vote.
(b) For any special meeting called by any Member, those Members who are
demanding the special meeting must give written notice to the Company and all
other Members of the Company specifying the purposes of the meeting. Within ten
(10) days after the Company receives a demand under this Section, the Company
must hold a special meeting of the Members by telephone or in person.
SECTION 10.04 NOTICE OF MEETINGS
Written notice of each meeting of the Members, stating the date, time, and place
and, in the case of a special meeting, the purpose or purposes, must be given to
every Member at least ten (10) days and not more than sixty (60) days prior to
the meeting. The business transacted at a special meeting of Members is limited
to the purposes stated in the notice of the meeting.
SECTION 10.05 LOCATION AND CONDUCT OF THE MEETINGS; ADJOURNMENTS
(a) Each meeting of the Members will be held at the Company's principal
place of business or at some other suitable location as agreed by the Members.
(b) The Members will select one person to chair each meeting of the
Members.
(c) Any meeting of the Members may be adjourned from time to time to
another date and time and, subject to Section 10.05(a), to another place. If at
the time of adjournment the person chairing the meeting announces the date,
time, and place at which the meeting will be reconvened, it is not necessary to
give any further notice of the reconvening.
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SECTION 10.06 WAIVER OF NOTICE
(a) A Member may waive notice of the date, time, place, and purpose or
purposes of a meeting of Members. A waiver may be made before, at, or after the
meeting, in writing, orally, or by attendance.
(b) Attendance by a Member at a meeting is a waiver of notice of that
meeting unless the Member objects at the beginning of the meeting to the
transaction of business because the meeting is not properly called or convened,
or objects before a vote on an item of business because the item may not
properly be considered at that meeting and does not participate in the
consideration of the item at that meeting.
SECTION 10.07 PROXIES
(a) A Member may cast or authorize the casting of a vote by filing a
written appointment of a revocable proxy with the Company at or before the
meeting at which the appointment is to be effective. The Member may sign or
authorize the written appointment by facsimile, or other means of electronic
transmission stating, or submitted with information sufficient to determine,
that the Member authorized the transmission. Any copy, facsimile,
telecommunication, or other reproduction of the original of either the writing
or the transmission may be used in lieu of the original, if it is a complete and
legible reproduction of the entire original.
(b) A Member may not grant or appoint an irrevocable proxy.
SECTION 10.08 QUORUM
For any meeting of the Members, a quorum consists of a majority of the
outstanding Membership Units. If a quorum is present when a property called
meeting is convened, the Members present may continue to transact business until
adjournment, even though the departure of Members originally present leaves
less than the proportion otherwise required for a quorum.
SECTION 10.09 ACTION WITHOUT A MEETING
Any action required or permitted to be taken at a meeting of the Members may be
taken without a meeting by written action signed by the Members who own the
number of Membership Units equal to the number of Membership Units that,
proposed required to take the same action at a meeting of the Members at which
all Members were present. The written action is effective when signed by Members
owning the required number of Membership Units, unless a different effective
time is provided in the written action. When written action is taken by less
than all Members, the Company will immediately notify all Members of the
action's text and effective date. Failure to provide the notice does not
invalidate the written action.
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ARTICLE XII
REQUIRED RECORDS
SECTION 11.01 CONTENTS AND LOCATION OF REQUIRED RECORDS
The Company will maintain at its principal place of business, or at some other
location chosen by the Members, the following records (the "Required Records"):
1. a list of all members and the Membership Units owned by each Member:
2. the original copies of all promissory notes and warrants issued by
Tower to the Company; and
3. such other records as the Company shall decree necessary or
appropriate.
SECTION 11.02 ACCESS TO REQUIRED RECORDS
(a) After giving reasonable advance notice to the Company, any Member
may inspect and review the Required Records and may, at the Member's expense,
have the Company make copies of any portion or all of the Records.
(b) Unless the Company agrees otherwise, all Member access to the
Required Records must take place during the Company's regular business hours.
The Company may impose additional reasonable conditions and restrictions on
Members' access to the Required Records, including specifying the amount of
advance notice a Member must give and the charges imposed for copying.
ARTICLE XII
TRANSFER RESTRICTIONS
SECTION 12.01 FINANCIAL RIGHTS
(a) A Member may assign its Financial Rights in whole or in part. As to
the Company, a Transfer of Financial Rights is effective only when the Company
has received notice of the Transfer and has noted the Transfer in the Required
Records.
(b) Any transferee of a Member's Financial Rights derives its rights
exclusively through the Member transferor. Any transferee takes the Transfer
subject to any claims or offsets the Company has against the Member, regardless
of whether those claims or offsets exist at the time of the assignment or arise
afterwards. An amendment to this Agreement may change a Member's rights and
consequently affect the rights of an transferee, even if the amendment is made
after the Transfer.
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SECTION 12.02 TRANSFER OF MEMBERSHIP UNITS
Before transferring any Membership Unit to any person, a Member must first
obtain the written consent of Members holding a majority of all of the
outstanding Membership Units which consent shall not be unreasonably withheld.
ARTICLE XIII
MEMBER DISSOCIATION: EFFECT ON DISSOCIATED MEMBER
SECTION 13.01 IF DISSOLUTION RESULTS
If the dissociation of a Member results in the dissolution of the Company
pursuant to the Delaware LCC Act or hereunder, the Dissociated Member will have
the same rights as any Member who has not dissociated, subject to Section 13.03.
SECTION 13.02 IF DISSOLUTION IS AVOIDED
If the dissociation of a Member does not result in the dissolution of the
Company:
(a) The Dissociated Member shall lose, without compensation, all
Governance Rights but will retain the Financial Rights owned before the
dissociation;
(b) Subject to Section 13.04. the Dissociated Member will continue to
have, as if no dissociation had occurred,
(i) the same right to share in profits and losses under Section
6.01.
(ii) the same right to distributions under Article VI, and
(iii) the same Capital Interest;
as such Member had before the dissociation.
SECTION 13.03 DAMAGES AND SET-OFFS
(a) No Member has the right to disassociate before the end of the duration
of the Company as stated in the Articles of Organization If a Member
dissociates before that time and the dissociation results from volitional
conduct of the Member that could reasonably be characterized as resignation,
retirement, or withdrawal, then the Dissociated Member is liable to the
Company for any damages resulting from the wrongful dissociation.
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(b) The Company may set-off any amounts or obligations owed by a
Dissociated Member to the Company against any amounts due the dissociated
Member, regardless of the cause of a Member's dissociation and regardless of
whether the Member's dissociation results in dissolution of the Company.
ARTICLE XIV
MEMBER DISSOCIATION: EFFECT ON THE COMPANY
SECTION 14.01 DISSOLUTION AVOIDANCE
A Member's dissociation will not cause the Company to dissolve if:
(a) more than one Member remains, or, if only one Member remains, within
30 days after the dissociation the Company issues at least one Membership Unit
to a new Member, and
(b) within 60 days after the dissociation, a Majority - in Interest
Consent is obtained from the remaining Members to avoid dissolution and to
continue the existence and business of the Company.
SECTION 14.02 AGREEMENT TO GIVE DISSOLUTION AVOIDANCE CONSENT
(a) Subject to Section 14.02(b), within 10 days after the Dissociation of
a Member each remaining Member will consent to avoid dissolution and continue
the existence and business of the Company.
(b) No Member shall be required to give dissolution avoidance consent if
any indebtedness of Tower to the Company is then in default.
ARTICLE XV
BUSINESS CONTINUATION IN THE EVENT OF DISSOLUTION
SECTION 15.01 TRIGGERING EVENTS
(a) Subject only to Sections 14.02(b) and 15.01(b), if the Company
dissolves for any reason at any time, the affairs of the Company will be wound
up and its legal existence terminated by merging the Company into a Successor
LLC, as provided in Section 15.02.
(b) Section 15.02 will not apply and the Company will be liquidated in
accordance with the Delaware LLC Act if:
(i) within 30 days after the dissolution Members owning a majority
of all
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outstanding Membership Units notify the Company in writing that they object to
proceeding under Section 15.02,
(ii) only one Member remains, or
(iii) more than two years have passed since the initial date of this
Agreement.
SECTION 15.02 BUSINESS CONTINUITY
(a) Subject only to Sections 14.02(b) and 15.01(b), as soon as dissolution
occurs the Members will:
(i) organize a Successor LLC to continue the business and operations
of the Company as set forth herein,
(ii) develop a plan of merger that complies with Section 15.02(c) for
the Company and the Successor LLC.
(iii) submit the plan to the Company's Members for approval at a
properly called meeting of the Members,
(iv) cause the Managers of the Successor LLC to approve the plan of
merger and submit the plan to the Members of the Successor LLC for approval, and
(v) cause the Members of the Successor LLC to approve the plan of
merger.
(b) When the plan of merger is presented to the Members for approval, the
Members will, subject to Section 15-03,
(i) vote to approve the plan and
(ii) sign any documents that the plan requires them to sign or whose
execution is necessary to proper implementation of the plan.
(c) The plan of merger must provide that:
(i) the Successor LLC will be the surviving organization in the
merger.
(ii) all the assets and liabilities of the Company will be
transferred to the Successor LLC and the Successor LLC will continue the
business of the Company under the same name,
(iii) all Membership Units of the Members, including all Financial
Rights
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(whether or not assigned) and all Governance Rights, will be converted into
Membership Units in the Successor LLC having substantially identical terms,
(iv) the Successor LLC will have articles of organization and an
operating agreement that are substantially equivalent to the articles of
organization and operating agreement in effect for the Company immediately prior
to the merger, and
(v) the rights of any dissociated Members as described in Article
XIII will apply against the Successor LLC.
Section 15.03 DISSENTERS' RIGHTS
(a) Any person who is a Member at the time of dissolution can dissent
from the implementation of the business continuation agreement stated in this
section by giving written notice to the Company within five (5) days after the
Company presents the plan for a vote and by voting against the proposed merger.
(b) A Member who properly dissents under Section 15.03(a) will be
cashed out of the dissolved Company provided that if the Company properly
chooses to make installment payments of the cash out amount, the obligation to
make those payments will transfer to the Successor LLC as part of the merger
contemplated by this article.
ARTICLE XVI
INDEMNIFICATION
SECTION 16.01 DEFINITIONS
For purposes of this article, the terms defined in this section have the
meanings given them.
(a) "Company" includes any domestic or foreign company that was the
predecessor of this Company in a merger or other transaction in which the
predecessor's existence ceased upon consummation of the transaction.
(b) "Official Capacity" means (i) with respect to a manager, the
position of manager in the Company, (ii) with respect to a Person other than a
manager, the elective or appointive office or position held by an officer,
member of a committee of the Management Committee, if any, or the efforts
undertaken by a Member of the Company who acts on behalf of and at the request
of the Company, or the employment or agency relationship undertaken by an
employee or agent of the Company, and (iii) with respect to a manager, Member,
officer, employee, or agent of the Company who, while a manager, Member,
officer, employee, or agent of the Company, is or was serving at the request of
the Company or whose duties in that position involve or involved service as a
manager, Member, officer, partner, trustee, or agent of another organization or
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employee benefit plan, the position of that person as a manager, Member,
officer, partner, trustee, employee, or agent, as the case may be, of the other
organization or employee benefit plan.
(c) "Proceeding" means a threatened, pending, or completed civil,
criminal, administrative, arbitration, or investigative proceeding, including a
proceeding by or in the right of the Company.
(d) "Special Legal Counsel" means counsel who has not represented the
Company or a related company, or a manager, Member, officer, member of a
committee of the Management Committee, if any, employee, or agent whose
indemnification is in issue.
SECTION 16.02 MANDATORY INDEMNIFICATION; STANDARD
(a) The Company will indemnify a Person made or threatened to be made a
party to a proceeding by reason of the former or present Official Capacity of
the Person against judgments, penalties, fines, including, without limitation,
excise taxes assessed against the Person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorney fees and
disbursements, incurred by the Person in connection with the proceeding, if,
with respect to the acts or omissions of the Person complained of in the
proceeding, the Person:
(i) has not been indemnified by another organization or employee
benefit plan for the same judgments, penalties, fines, including, without
limitation, excise taxes assessed against the Person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorney fees and
disbursements, incurred by the Person in connection with the proceeding with
respect to the same act or omissions;
(ii) acted in good faith;
(iii) received no improper personal benefit; and
(iv) in the case of a criminal proceeding, had no reasonable
cause to believe the conduct was unlawful; and
(v) in the case of acts or omissions occurring in such Person's
Official Capacity, reasonably believed that the conduct was in the best
interests of the Company.
(b) The termination of a proceeding by judgment, order, settlement, or
conviction or upon a plea of nolo contendere or its equivalent does not, of
itself, establish that the Person did not meet the criteria set forth in this
Section 16.02.
SECTION 16.03 ADVANCES
If a Person is made or threatened to be made a party to a proceeding, the Person
is entitled, upon
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written request to the Company, to payment or reimbursement by the Company of
reasonable expenses, including attorney fees and disbursements, incurred by the
Person in advance of the final disposition of the proceeding,
(a) upon receipt by the Company of a written affirmation by the
Person of a good faith belief that the criteria for indemnification set forth in
Section 16.02 have been satisfied and a written undertaking by the Person to
repay all amounts so paid or reimbursed by the Company, if it is ultimately
determined that the criteria for indemnification have not been satisfied, and
(b) after a determination that the facts then known to those making the
determination would not preclude indemnification under this article.
The written undertaking required by paragraph (a) above is an unlimited general
obligation of the Person making it, but need not be secured and will be accepted
without reference to financial ability to make the repayment.
SECTION 16.04 DETERMINATION OF Eligibility
(a) All determinations as to whether indemnification of a Person is
required because the criteria stated in Section 16.02 have been satisfied and
as to whether a Person is entitled to payment or reimbursement of expenses in
advance of the final disposition of a proceeding as provided in Section 16.03
will be made:
(i) by an Act of the Members provided that Members who are at the
time parties to the proceeding shall not be counted for determining either a
majority or the presence of a quorum;
(ii) if a determination is not made under clause (i), then by
Special Legal Counsel, selected by the Members;
(iii) if an adverse determination is made under clauses (i) or (ii) or
under paragraph (b), or if no determination is made under clauses (i) through
(ii) or under paragraph (b) within sixty (60) days after the termination of a
proceeding or after a request for an advance of expenses, as the case may be, by
a court in Delaware, which may be the same court in which the proceeding
involving the Person's liability is taking or has taken place, upon
application of the Person and any notice the court requires.
(b) With respect to a Person who is not, and was not at the time of the
acts or omissions complained of in the proceedings, a manager, officer, or
Person possessing, directly or indirectly, the power to direct or cause the
direction of the management or policies of the Company, the determination
whether indemnification of this Person is required because the criteria set
forth in Section 16.02 have been notified and whether this Person is entitled to
payment or reimbursement of expenses in advance of the final disposition of a
proceeding as
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provided in Section 16.03 shall be made by an Act of the Members.
ARTICLE XVII
REMEDIES FOR BREACH
SECTION 17.01 SPECIFIC ENFORCEMENT
All breaches of this Agreement are subject to specific enforcement, without
prejudice to the right to seek damages or other remedies.
SECTION 17.02 ATTORNEY FEES AND OTHER LITIGATION EXPENSES
If the Company resorts to litigation to remedy a breach of this Agreement by a
Member or former Member and the Company prevails in the litigation, in
addition to any other remedies available to the Company under this Agreement or
by law the Company may collect its reasonable attorney fees and other costs and
expenses of litigation.
ARTICLE XVIII
MISCELLANEOUS
SECTION 18.01 GOVERNING LAW
This Agreement, and any question, dispute, or other matter related to or arising
from this Agreement, will be governed by the laws of the State of Delaware.
SECTION 18.02 BINDING EFFECT
This Agreement binds all Members and their respective distributees, heirs,
successors and assigns and any other Person claiming a right or benefit under or
covered by this Agreement.
SECTION 18.03 SEVERABILITY
If any provision of this Agreement is held to be illegal, invalid, or
unenforceable.
(a) that provision will be fully severable and this Agreement will be
construed and enforced as if the illegal, invalid, or unenforceable provision
had never been part of this Agreement
(b) the remaining provisions of this Agreement will remain in full force
and will not be affected by the illegal, invalid, or unenforceable provision
or by its severance from this Agreement; and
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(c) in the place of the illegal, invalid, or unenforceable provision,
there will be added automatically to this Agreement a legal, valid, and
enforceable provision that is as similar to the illegal, invalid, or
unenforceable provision as possible.
SECTION 18.04 MULTIPLE COUNTERPARTS
This Agreement may be executed in several counterparts, each of which will be
considered an original and all of which will constitute one and the same
document. Proving the execution and contents of this document against a party
may be done by producing any copy of this Agreement signed by that party.
SECTION 18.05 ADDITIONAL DOCUMENTS AND ACTS
Each Member agrees to execute and deliver whatever additional documents and to
perform such additional acts as may be necessary or appropriate to effectuate
and perform all of the terms, provisions, and conditions of this Agreement and
the transactions contemplated by this Agreement.
SECTION 18.06 NOTICES
Any notice to be given hereunder must be in writing and will be considered to
have been given when delivered to the address specified in the Company's
Required Records.
SECTION 18.07 AGREEMENT CONCERNING SUBORDINATION
The parties hereto agree that the Company shall enter into a partial
subordination agreement (the "Subordination Agreement") with ____________
("Heller") providing that $2 million of the indebtedness owed to the Company by
Tower shall be subordinated to certain loans made by Heller to Tower. A copy of
the Subordination Agreement has been provided to all parties hereto.
Notwithstanding anything to the contrary contained herein or in the Articles of
Organization of the Company or the Default Rules, the parties agree that while
the Subordination Agreement remains in effect, Morris K. Nachtomi and Terry V.
Hallcom, both of whom are Members of the Company, shall receive no distributions
of any kind from the Company, and all repayments of the indebtedness of Tower to
the Company, and all interest payments thereon, received by the Company shall be
allocated and distributed solely to the other Members of the Company, pro rata
in accordance with their respective Membership Units in the Company until such
time as such other Members have received an amount equal to their original
contribution to the Company and interest thereon at the rate of 12% per annum
(15% per annum from and after the date of any default by Tower on any
indebtedness to the Company) from the date such contribution was made. After all
Members other than Messrs. Nachtomi and Hallcom have received such amount, any
additional cash payments received by the Company from Tower on account of the
repayment of indebtedness of Tower to the Company, and interest thereon, shall
be allocated and distributed
21
<PAGE>
solely to Messrs. Nachtomi and Hallcom, pro rata in accordance with the
Membership Units held by Mr. Nachtomi and Mr. Hallcom.
ACCEPTED AND AGREED TO BY:
FUNDING ENTERPRISES LLC
By:_____________________________________
Title:
________________________________________
Morris K. Nachtomi, Member
________________________________________
Terry V. Hallcom, Member
VBG Capital Inc., Member
By:_____________________________________
Title:
Althea Limited Partnership, Member
By:________________________________
Title: General Partner
22
<PAGE>
EXHIBIT 10(22)
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of January 6, 1998, by and between Tower Air, Inc.,
a Delaware corporation (the "Company") and Terry V. Hallcom (the "Executive").
WHEREAS, the Company desires to employ the Executive as its President
and Executive Vice President - Operations; and
WHEREAS, the Executive is willing to accept such employment in
accordance with the terms set forth herein; and
WHEREAS, the parties desire to enter into this Agreement setting forth
the terms and conditions of the employment relationship of the Executive with
the Company.
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement is for the three-year period (the "Term")
----
commencing on January 12, 1998 (the "Effective Date") and terminating on the
third anniversary of such date, or upon the Executive's earlier death,
disability or other termination of employment pursuant to Section 13; provided,
however, that on the third anniversary of the date hereof the Term shall
automatically be extended for two additional years on the terms set forth herein
subject to such increase in compensation as the Board of Directors of the
Company (the "Board") may reasonably determine unless, not later than sixty (60)
days prior to such anniversary, either the Company or the Executive shall notify
the other party that such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as the
--------
President and Executive Vice President - Operations of the Company. At the
first annual meeting of shareholders after commencement of the Term, the
Executive
<PAGE>
Shall also be elected as a member of the Company's Board of Directors (the
"Board").
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall use his skills and render services to the best of his abilities in
supervising and conducting the operations of the Company subject at all times to
the direction and control of the Chairman and Chief Executive Office of the
Company. As part of the his duties as President and Executive Vice President -
Operations, the Executive shall be responsible for, and have general supervisory
control over, the day-to-day operations of the Company and shall report to, and
be subject to direct supervision by, the Chairman and Chief Executive Officer of
the Company. The Executive shall be generally responsible for overseeing all
facets of the Company's operation. Without limitation on the generality of the
forego ing, the Executive shall have the authority normally accorded to a chief
operating officer and to the vice president - operations of the Company. During
the Term, the Executive's position, including, without limitation, his status,
offices, titles, reporting relationships, authority, duties and responsibilities
shall be at least com mensurate with those held at the commencement of the Term.
During the Term it shall not be a violation of this Agreement for the
Executive to (A) serve on corporate, civic or charitable boards or committees,
(B) deliver lectures, fulfill speaking engagements or teach at educational
institu tions or (C) manage personal investments in the airline industry or
otherwise, so long as no such investment exceeds five per cent (5%) of any class
of outstanding securities of a company in the airline industry and provided that
such activities do not interfere with the performance of the Executive's
responsibilities as an em ployee of the Company in accordance with this
Agreement. It is further under stood and agreed that before the Executive may
engage in such activities, they shall have been agreed to and approved by the
Chairman and Chief Executive Officer of the Company. It is also expressly
understood and agreed that to the extent that such activities have been
conducted by the Executive prior to the Effective Date hereof the continued
conduct of such activities (or the conduct of activities similar in nature and
scope thereto) subsequent to the Effective Date shall not thereafter be deemed
to therefore with the performance of the Executive's responsibilities to the
Company. In connection with the foregoing, the Executive hereby represents that
the only board on which he presently serves is the Board of Directors of the
Special Olympics and that he does not presently hold investments in a company in
the airline industry in excess of the limitation set forth above.
2
<PAGE>
5. Place of Performance. The Executive shall perform his duties at
--------------------
the principal executive offices of the Company in Jamaica, New York, except for
required travel on the Company's business.
6. Salary and Annual Bonus. (a) Base Salary. The Executive's base
----------------------- -----------
salary hereunder shall be $350,000 a year during the first six months of the
Term which shall automatically increase on the commencement of the seventh month
to $425,000 a year, payable in accordance with the Company's customary payroll
practices, but in no event less frequently than semi-monthly. The Board shall
review such Base Salary at least annually and make such increase, if any, from
time to time as it may deem advisable. The Executive's base salary shall not at
any time (after the first six months of the Term) be less than $425,000 a year.
(b) Annual Bonus. In addition to his Base Salary, the Executive
------------
shall be awarded, for each year, or partial year, during the Term commencing
with the year ending December 31, 1998, an annual bonus as shall be determined
by the Board or its Compensation and Benefits Committee provided that, if he
achieves goals and targets to be mutually agreed by the Executive and the
Chairman and Chief Executive Officer of the Company, the minimum bonus to which
the Executive shall be entitled will equal 50% of his annual Base Salary, such
minimum to be increased to such level as the Board or its Compensation and
Benefits Committee deems appropriate if the performance targets set forth on
Exhibit A hereto are met or exceeded by the Company. The annual bonus under
this Section 6(b) shall hereinafter be referred to as the "Annual Bonus."
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior executive officers, which
policies shall provide the Executive with benefits no less favorable than those
provided to any other senior executive officers of the Company.
8. Relocation Payments. In order to assist the Executive in
-------------------
relocating to New York, the Company will (i) reimburse the Executive in an
amount not to exceed $3,000 per month for reasonable living expenses of the
Executive in New York for a period of up to six months following commence ment
of the Term, including rental expenses of a suitable apartment in New York City
or in another area in reasonable proximity to the Company's headquarters
selected by the Executive and (ii) pay the Executive an additional $150,000 to
assist the Executive in purchasing or otherwise acquiring permanent housing in
New York.
3
<PAGE>
9. Business Expenses. The Executive will be reimbursed for all
-----------------
ordinary and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
10. Pension and Welfare Benefits; Perquisites. During the Term, the
-----------------------------------------
Executive shall be eligible to participate fully in all health benefits,
insurance programs, bonus and stock option plans, pension and retirement plans
and other employee benefit and compensation arrangements (collectively, the
"Employee Benefits") available to officers of the Company generally, which
Employee Benefits shall provide the Executive with benefits no less favorable
than those provided to any other senior executive officer of the Company other
than the Chairman and Chief Executive Officer with any otherwise applicable
waiting period being waived. Notwithstanding anything to the contrary in the
foregoing sentence, nothing herein shall be deemed to make the Executive
eligible to participate in more than one bonus or stock option plan or program
at any one time. In addition, during the Term, the Executive and his family
shall be entitled to fringe benefits, including but not limited to pass
privileges for non-revenue transportation, in accordance with the most favorable
plans, practices, programs and policies of the Company applicable at any time on
or after the Effective Date to any other senior executive of the Company.
11. Stock Options. Contemporaneously with execution of this
-------------
Agreement, the Company and the Executive shall enter into a stock option
agreement (the "Option Agreement"), subject to shareholder approval, which
shall provide for the grant to the Executive of an option to purchase up to
800,000 shares of common stock of the Company at the current market price per
share which shall be deemed to be the lowest reported closing sales price of the
Company's common stock (the "Purchase Price") for the period from December 29,
1997 through January 12, 1998. The Option Agreement shall provide that the
Options shall vest as follows: (i) 200,000 shares immediately upon execution of
the Option Agreement, (ii) an additional 200,000 shares at such time as the last
reported closing sales price of such shares (the "Closing Price") shall be at
least $6.50 per share for any consecutive three-day period, (iii) an additional
200,000 shares at such time as the Closing Price shall be at least $8 per share
for any consecutive three-day period and (iv) the final 200,000 shares at such
time as the Closing Price shall be at least $10 per share for any consecutive
three-day period provided, however, that in any event all such options shall
vest no later than the last day of the Term. Notwithstanding the foregoing, (x)
the Option Agreement
4
<PAGE>
shall provide that in the event that the Company shall terminate the Executive
for any reason other than Cause, or the death or disability of the Executive, or
the Executive shall terminate this Agreement for Good Reason as defined in
Section 12(d)), all such options shall immediately be deemed vested and (y) in
the event the Executive shall voluntarily resign other than for Good Reason, any
options not vested as of the effective date of such resignation shall be deemed
canceled effec tive upon such resignation.
12. Termination of Employment. (a) General. The Executive's
------------------------- -------
employment hereunder may be terminated by the Company without any breach of this
Agreement only under the circumstances set forth in Sections 12(b) and (c)
hereof.
(b) Death or Disability. (i) The Executive's employment
-------------------
hereunder shall automatically terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his
duties with the Company for any six (6) consecutive months or for 120 days
within a twelve month period, the Board may terminate the Executive's
employment hereunder for "Disability."
(c) Cause. The Company may terminate the Executive's employment
-----
hereunder for Cause. For purposes of this Agreement, "Cause" shall mean (i) an
act or acts of personal dishonesty which shall be deemed by the Board to
constitute material dishonesty, (ii) repeated and material violations by the
Executive of the Executive's obligations hereunder which are not remedied in a
reasonable period of time after receipt of written notice from the Company,
(iii) the conviction of the Executive of a crime involving moral turpitude or
(iv) such other acts as the Board may reasonably deem to constitute material
misfeasance or malfeasance. Notwithstanding the foregoing, the Executive's
employment here under shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of the Board at a meeting of the
Board (after writ ten notice to the Executive and a reasonable opportunity for
the Executive, together with the Executive's counsel, to be heard before the
Board), finding that in the good faith opinion of the Board the Executive should
be terminated for Cause.
5
<PAGE>
(d) Termination by the Executive. The Executive shall be
----------------------------
entitled to terminate his employment hereunder for Good Reason. For purposes of
this Agreement, "Good Reason" shall mean, without the Executive's express
written consent and unless remedied within a reasonable time after receipt of
written notice from the Executive, (i) the assignment to the Executive of any
duties inconsistent with, or the diminution of, the Executive's positions,
titles, offices, authority, duties, responsibilities or status with the Company,
(ii) a reduction by the Company in the Executive's annual Base Salary provided
for herein or as the same may be increased from time to time; (iii) the
relocation of the Company's principal executive offices to a location more than
25 miles from the location of such offices on the date hereof or the Company's
requiring the Executive to be based anywhere other than the Company's principal
executive offices except for required travel on the Company's business; (iv) the
failure by the Company to pay to the Executive any portion of the Executive's
current compensation or to pay to the Executive any portion of an installment of
deferred compensation under any deferred compensation program of the Company,
within fourteen (14) days of the date such compensation is due; (v) the failure
by the Company to continue in effect any benefit or compensation plan to which
the Executive is entitled, or plans providing the Executive with substantially
similar benefits, the taking of any action by the Company which would adversely
affect Executive's participation in or materially reduce the Executive's
benefits under any such benefit or compensation plan or deprive the Executive of
any material fringe benefit enjoyed by the Executive hereunder, or the failure
by the Company to provide the Executive with the number of paid vacation days to
which the Executive is then entitled on the basis of years of service with the
Company in accordance with the Company's normal vacation policies and practices
in effect on the date hereof or in effect from time to time hereafter; (vi) any
purported termination of the Executive's employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Section
12(f), which such purported termination shall not be effective for purposes of
this Agreement; (vii) the failure of the Company to obtain the explicit
assumption in writing of its obligation to perform this Agreement by any
successor as contemplated in Section 15 hereof; (viii) any other material
violation by the Company of this Agreement or the Option Agreement (as
hereinafter defined) shall occur. In addition, if the Executive elects to
terminate his employment within thirty (30) days of a Change in Control, as such
term is defined below, such termination shall be deemed to be for Good Reason.
6
<PAGE>
(e) Voluntary Resignation. Should the Executive wish to resign
---------------------
from his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days written
notice to the Company, specifying the date as of which his resignation is to
become effective.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be commu nicated
by written Notice of Termination to the other party hereto in accordance with
Section 22. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a basis for
Termination of the Executive's employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i) if
-------------------
the Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the Executive's
employment is terminated pursuant to subsections (c), (d) or (e) hereof, the
date specified in the Notice of Termination.
13. Compensation During Disability, Death or Upon Termination. (a)
---------------------------------------------------------
During any period that the Executive fails to perform his duties hereunder as a
result of incapacity due to physical or mental illness ("disability period"),
the Executive shall continue to receive his Base Salary at the rate then in
effect for such period until his employment is terminated pursuant to Section
12(b)(ii) hereof, provided that payments so made to the Executive during the
disability period shall be reduced by the sum of the amounts, if any, payable to
the Execu tive with respect to such period under disability benefit plans of the
Company or under the Social Security disability insurance program, and which
amounts were not previously applied to reduce any such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay all amounts due to the Executive under
Sections 6, 7 and 8, prorated through the Date of Termination, plus all other
amounts to which he is entitled under any compensation or benefit plan or
program of the Company and the Company shall have no further obligation to the
Executive under this Agreement.
7
<PAGE>
(c) If the Executive's employment shall be terminated by the
Company for Cause or by the Executive for other than Good Reason, the Company
shall pay the Executive his Base Salary and minimum Annual Bonus, if any,
prorated through the Date of Termination, at the rate in effect at the time
Notice of Termination is given plus all other amounts to which he is entitled
under any compensation or benefit plan or program of the Company, and the
Company shall have no further obligations to the Executive under this Agreement.
(d) If, at any time, including prior or subsequent to a "Change
in Control" (as defined in subsection 12(f) (below), (A) the Company shall
terminate the Executive's employment for any reason other than for Cause or on
account of the death or disability of the Executive or (B) the Executive shall
terminate his employment for Good Reason, then
(i) the Company shall pay the Executive his Base Salary and an
Annual Bonus equal to the highest annual bonus previously award ed to the
Executive pursuant to Section 6(b) hereof, prorated through the Date of
Termination, at the rate in effect at the time Notice of Termination is
given and all other unpaid amounts, if any, to which the Executive is
entitled as of the Date of Termination under any compensation or benefit
plan or program of the Company, at the time such payments are due; and
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay as
liquidated damages to the Executive an amount equal to two times the sum of
(A) the Executive's annual Base Salary in effect as of the Date of
Termination and (B) an additional amount equal to twenty five per cent
(25%) of said Base Salary in lieu of any bonus to which the Executive might
otherwise claim an entitlement; and
(iii) for a period of five years after the Date of Termina tion,
the Executive may retain the same travel privileges for himself and his
family as he was entitled to during the Term.
(e) All amounts required to be paid to the Executive under this
Section 13, would be paid to the Executive (or his estate) in a lump sum within
fifteen (15) days of the Date of Termination.
8
<PAGE>
(f) For purposes of this Agreement, a "Change in Control" shall
be deemed to have occurred if (i) Morris Nachtomi ceases to be the Chief
Executive Officer of the Company and a person other than the Executive is named
to such position, or (ii) any "Person" (as such term is used in Section 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), other than (A) the Company or any of its subsidiaries, (B) a trustee or
other fiduciary holding securities under an employee benefit plan of the Company
or any of its subsidiaries , (C) an underwriter temporarily holding securities
pursuant to an offering of such securities, or (D) a corporation owned, directly
or indi rectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes the
"Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company (not including in the securities
beneficially owned by such Persons any securities acquired directly from the
Company or its affiliates) representing a sufficient percentage of the combined
voting power of the Company's then outstanding securities that the holdings of
the Nachtomi Family Partnership, or its successors or assigns affiliated with or
controlled by members of the Nachtomi family, constitutes less than fifty per
cent (50%) of the then out standing voting securities of the Company; or (iii)
the shareholders of the Compa ny approve a merger or consolidation of the
Company with any other corporation, other than (x) a merger or consolidation
which would result in the voting securi ties of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity), in combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, more than
fifty per cent (50%) of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation, or (y) a merger or consolidation effected to implement a
recapi talization of the Company (or similar transaction) in which no Person
acquires more than 50% of the combined voting power of the Company's then
outstanding securities; or (iv) the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets.
(g) The Executive shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment or
otherwise, and the amount of any payment or benefit provided for in this Agree
ment shall not be reduced by any compensation earned by the Executive as the
result of employment by another employer or by retirement benefits or otherwise.
9
<PAGE>
14. Representation.
---------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid and
binding agreement of the Company enforceable against it in accordance with its
terms.
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in any way under this Agreement.
15. Successors: Binding Agreement.
------------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, sale of assets or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement is a personal contract and the rights and interest
of the Executive hereunder may not be sold, transferred, assigned, pledged,
encumbered, or hypothecated by him, except as otherwise expressly permitted by
the provision of this Agreement. This Agreement shall inure to the benefits of
and be enforceable by the Executive and his personal or legal repre sentatives,
executors, administrators, successors, heirs, distributees, devises and
legatees. If the Executive should die while any amount would still be payable
to him hereunder had the Executive continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the term of this
Agreement to his devisee, legatee or other designee or, if there is no such
designee to his estate.
16. Confidentiality and Non-Competition Covenants.
----------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during and after the end of the Term, directly or indirectly, use for his own
account, or disclose to any person, firm or corporation, other than authorized
officers, directors, agents and employees of the Company or its subsidiaries,
10
<PAGE>
Confidential Information (as hereinafter defined) of the Company. As used
herein, "Confidential Information" of the Company means information of any kind,
nature or description which is disclosed to or otherwise known to the Executive
as a direct or indirect consequence of his association with the Compa ny, which
information is not generally known to the public or in the businesses in which
the Company is engaged.
(b) The Executive further covenants and agrees that in the event,
after the expiration of the first six (6) months of the Term, he shall (i)
voluntarily resign (for Good Reason or otherwise), (ii) be terminated for Cause
or Disability or (iii) be terminated not for Cause but upon a good faith
determination by the Board that the Executive's performance has been materially
deficient, then the Executive shall not engage in competition with the Company
for a period of one (1) year thereafter. For purposes of this Agreement,
"engaging in competition" shall mean becoming employed or retained by or
consulting with any airline or air carrier whose primary business is operating
long haul transcontinental or interna tional flights utilizing Boeing 747 or
similar large aircraft for the carriage of passengers, cargo or both on routes
now or hereafter served by the Company on a scheduled or non-scheduled basis,
charter or otherwise (including charters for the military or the carriage of
Hadj pilgrims.)
17. Entire Agreement. This Agreement contains all the under
-----------------
standings between the parties hereto pertaining to the matters referred to
herein, and supersedes all undertakings and agreements, whether oral or in
writing, previously entered into by them with respect thereto. The Executive
represents that, in executing this Agreement, he does not rely and has not
relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification Waiver. No provision of this Agreement
---------------------------------
may be amended or waived unless such amendment or waiver is agreed to in
writing, signed by the Executive and by a duly authorized officer of the
Company. No waiver by any party hereto of any breach by another party hereto of
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
New York, New York in accordance with the rules of the American Arbitration
11
<PAGE>
Association then in effect. The Company shall pay all costs arising out of or
relating to such proceeding. Judgment may be entered on the arbitrator's award
in any court having jurisdiction.
20. Indemnification: Legal Fees. The Company shall indemnify the
---------------------------
Executive and hold him harmless from any cost, expense or liability arising out
of or relating to any acts or decisions made by him, or in the course of
performing services hereunder, within the scope of his employment hereunder,
provided such acts or decisions are taken or made in good faith. The Company
shall bear, or reimburse the Executive for, all legal fees incurred by him in
connection with entering into this Agreement, and shall pay all legal fees and
other fees and expenses which the Executive may incur with respect to claims
arising under or in connection with this Agreement regardless of the outcome
thereof.
21. No Set Off. The Company's obligations to make the payments
----------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. The Company agrees to pay, to the full extent permitted by
law, all legal fees and expense incurred by the Executive, which the Executive
may reasonably incur as a result of any contest (regardless of the outcome
thereof) by the Compa ny or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of performance
thereof (including as a result of any contest by the Executive about the amount
of any payment pursuant to Section 14(h)-(k) of this Agreement), plus in each
case interest at the applicable federal rate provided for in Section 7872(f)(2)
of the Internal Revenue Code of 1986, as amended.
22. Notices. Any notice to be given hereunder shall be in writing
-------
and shall be deemed given when delivered personally, sent by courier or telecopy
or registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to each other
addressed as such party may subsequently give notice of hereunder in writing:
To Executive at:
Terry V. Hallcom
73 Exeter Road
Hampton, NH 03842
12
<PAGE>
Telecopy: (603) 926-0051
To the Company at:
Tower Air, Inc.
Hangar No. 17
John F. Kennedy International Airport
Jamaica, New York 11430
Telecopy: (718) 553-4387
Attention: Chief Executive Officer
Any notice delivered personally or by courier under this Section 23 shall
be deemed given on the date delivered and any notice sent by telecopy or regis
tered or certified mail, postage prepaid, return receipt requested, shall be
deemed given on the data telescoped or mailed.
23. Severability. If any provision of this Agreement or the
------------
application of any such provision to any party or circumstances shall be deter
mined by any court or competent jurisdiction to be invalid and unenforceable to
any extent, the remainder of this Agreement or the application of such provision
to such person or circumstances other than those to which it is so determined to
be invalid and unenforceable, shall not be affected thereby, and each other
provision hereof shall continue to be valid and shall be enforceable to the
fullest extent permitted by law.
24. Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
25. Governing Law. This agreement will be governed by and construed
-------------
in accordance with the laws of the State of New York, without regard to its
conflicts of laws principles.
26. Headings. All descriptive headings of sections and paragraphs in
--------
this Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
13
<PAGE>
27. Withholding. All payments to the Executive under this Agreement
-----------
shall be reduced by all applicable withholding required by federal, state or
local law.
28. Counterparts. This Agreement may be executed in counter parts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto may be executed this Agreement
as of the date first above written.
TOWER AIR, INC.
By: /s/ Morris K. Nachtomi
--------------------------
Name: Morris K.Nachtomi
Title: Chairman and Chief
Executive Officer
/s/ Terry V. Hallcom
--------------------------
Terry V. Hallcom
15
<PAGE>
EXHIBIT A
---------
PERFORMANCE TARGETS
[TO COME]
16
<PAGE>
[To be prepared on Tower Air, Inc. Letterhead]
PERSONAL & CONFIDENTIAL
-----------------------
January 6, 1998
Mr. Terry V. Hallcom
73 Exeter Street
Hampton, NH 03842
Dear Mr. Hallcom:
We have discussed the possibility of Tower Air, Inc. (the "Company")
considering acquiring an interest in, or forming a code sharing or other
alliance with, one of the domestic regional airlines that you have been in
negotia tions with, such as Kiwi, Vanguard, Mesa, Eastwind or Nations Air,
and/or pursuing an arrangement with the Government of the Dominican Republic
concerning the re-establishment of a new Dominican national flag carrier. In
the event the Company decides not to proceed with an arrangement with one of the
domestic carriers or to pursue the Dominican Republic opportunity, the Company
agrees that, subject to the provisions of your Employment Agreement, you may
make an investment in, and/or become a director of, one or more of these
entities.
Very truly yours,
TOWER AIR, INC.
By ______________________
Morris K. Nachtomi
Chairman and Chief
Executive Officer
17
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Tower Air, Inc.
We consent to the incorporation by reference in the Registration Statement (form
S-8 No. 333-41345) pertaining to the Tower Air 1993 Long-Term Incentive Plan of
our report dated February 16, 1998, except for the ninth paragraph of Note 2, as
to which the date is March 9, 1998, with respect to the financial statements and
schedule of Tower Air, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1997.
Ernst & Young LLP
Melville, New York
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,922,000
<SECURITIES> 2,407,000
<RECEIVABLES> 29,625,000
<ALLOWANCES> 1,474,000
<INVENTORY> 0
<CURRENT-ASSETS> 39,210,000
<PP&E> 453,340,000
<DEPRECIATION> 186,945,000
<TOTAL-ASSETS> 310,120,000
<CURRENT-LIABILITIES> 179,189,000
<BONDS> 106,594,000
0
0
<COMMON> 155,000
<OTHER-SE> 49,266,000
<TOTAL-LIABILITY-AND-EQUITY> 310,120,000
<SALES> 0
<TOTAL-REVENUES> 461,502,000
<CGS> 0
<TOTAL-COSTS> 454,050,000
<OTHER-EXPENSES> 69,000
<LOSS-PROVISION> 775,000
<INTEREST-EXPENSE> 12,273,000
<INCOME-PRETAX> (4,890,000)
<INCOME-TAX> (995,000)
<INCOME-CONTINUING> (3,895,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,895,000)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
