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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, 1998
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. 11430
(Address of principal executive offices) (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 No X
--- ---
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 26, 1999 was approximately $7,039,624. As of
February 26, 1999, there were 15,365,424 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 1999
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 between New York and Santo Domingo, Dominican Republic; and from New
York to and between Athens and Tel Aviv; and from New York to and between Paris
and Tel Aviv;. Scheduled domestic passenger routes include service between New
York and Ft. Lauderdale, Los Angeles, Miami, San Francisco, San Juan, Puerto
Rico, and between Miami and San Juan. 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 1998, Tower entered into
two Aircraft,
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Crew, Maintenance and Insurance (ACMI) agreements for the lease of two Tower Air
cargo aircraft. One of these lease agreements was suspended in December 1998 due
to fire damage sustained by the aircraft and both parties agreed to continue the
service on an ad hoc basis by utilizing the Company's third cargo aircraft. In
addition, Tower provides also ad hoc third party maintenance service at its JFK
facility.
As of December 31, 1998, Tower operated a fleet of fourteen passenger aircraft
(four B747-100s and ten B747-200s) and three cargo aircraft (one B747-100 and
two B747-200s). The Company maintains offices and ground personnel in New York
City, Miami, Ft. Lauderdale, 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; New
York and Athens; and Miami and San Juan, 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
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scheduled service Available Seat Mile (ASM) statistics in recent years: 1998-
$.0543; 1997-$.0527; 1996-$.0538; 1995-$.0477; 1994-$.0463.
. 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 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 low capital investment requirements and a highly flexible
cost structure. Tower's fixed overhead expenses in 1998 were approximately
$137.1 million, or 28.3% 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
16-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 sales and marketing strategy focuses on specific market profitability
targets. This orientation allows Tower to pursue market opportunities which may
not be attractive to, or manageable by, larger competitors, and permits Tower to
adjust rapidly to dynamic market conditions. Tower's services are marketed
through direct sales efforts and travel intermediaries, including travel agents,
tour operators, religious and other organizations, and interline agreements with
other airlines. In international markets, the Company believes that its travel
agent commissions are greater than many of its competitors and thereby provide
an incentive for these agents to promote the Company's services. In
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addition, the Company sells tickets through global distribution systems (e.g.,
Sabre, Amadeus, Shares, Galileo and Galileo International), which permits the
Company to expand its overall presence in price sensitive domestic markets. The
Company maintains a local sales presence to manage relationships with retail and
wholesale travel agencies in the United States, Puerto Rico, Israel, and
France.
The Company's annual advertising plan includes direct advertising through radio
and print media to promote its product. The campaign focuses on the Company's
experience, its fleet and affordable fares, and promotes the value of the
service that the Company provides. The Company believes that its sales and
marketing strategy allows it to reach a broad customer base while focusing its
resources in a cost effective manner.
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C>
Scheduled passenger service $ 323.2 $ 267.3 $ 247.2
Commercial charter service 59.5 103.4 84.4
Military charter service 64.0 67.9 64.4
Cargo service 24.8 13.8 14.1
Other 12.3 9.1 7.7
------------ ------------ ------------
Total operating revenues $ 483.8 $ 461.5 $ 417.8
============ ============ ============
</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 66.8% of the
Company's total revenues for the year ended December 31, 1998. 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.
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996
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(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NY/Tel Aviv $ 118.3 24.5% $ 112.8 24.4% $ 94.2 22.6%
NY/Paris 26.7 5.5 24.7 5.3 23.7 5.7
NY and/or Miami/Sao
Paulo/Rio de Janeiro (1) - - 4.2 0.9 17.7 4.2
NY/Amsterdam/Bombay (2) - - -- -- 6.0 1.4
NY/Athens 19.3 4.0 8.2 1.8 -- --
NY/San Juan 36.5 7.5 30.7 6.7 21.2 5.1
NY/Miami 35.2 7.3 27.4 5.9 21.5 5.1
NY/Los Angeles 42.6 8.8 32.4 7.0 39.5 9.5
NY/Las Vegas (3) 4.4 0.9 2.1 0.5 -- --
NY/San Francisco (4) 26.4 5.5 24.4 5.3 19.6 4.7
Miami/San Juan(5) 6.5 1.3 0.4 0.1 3.3 0.8
NY/Ft. Lauderdale(6) 7.3 1.5 -- -- -- --
Other (7) - - -- -- 0.5 0.1
--------------------------------------------------------------------------
$ 323.2 66.8% $ 267.3 57.9% $ 247.2 59.2%
==========================================================================
</TABLE>
1) Service was expanded in December 1995 with continuation to Rio de Janeiro.
Service to Rio de Janeiro was discontinued August 1996. In March 1997, Tower
discontinued its remaining scheduled passenger service to Brazil when its
route authority to Brazil expired in March 1997.
2) Service commenced in December 1994 and was discontinued in March 1996.
3) Service commenced in September 1997 and was discontinued in July 1998.
4) Service to San Francisco was discontinued April 1996 and was resumed in April
1997; also includes service to Oakland which commenced April 1996 and was
discontinued in March 1997.
5) Seasonal service commenced in June 1996 and was discontinued in February 1997
and was resumed again in June 1998.
6) Service commenced in June 1998.
7) Includes revenues generated by certain discontinued routes.
INTERNATIONAL MARKET - Tower generated 50.8% of its scheduled passenger service
revenues from service between New York and various international destinations,
as well as between Paris and Tel Aviv and Athens and Tel Aviv. International
scheduled passenger service revenues was 34.0% of total operating revenues.
In the market between the U.S. and Israel, Tower believes that it currently is
the largest United States carrier and second only to El Al, Israel's national
flag carrier, as measured in passengers carried. Tower has operated scheduled
passenger service between New York and Tel Aviv since the Company received its
operating certificate in 1983 and was the only non-Israeli carrier to provide
uninterrupted passenger service during the Gulf War in
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1991. As a result, the Company believes it benefits from significant customer
brand loyalty in the Israel market.
In addition to vacation and business travelers, the U.S.-Israel market also
includes a large percentage of individuals and groups who travel for religious
reasons. The Company competes in this market by focusing on accommodating the
cultural needs of its customers by, for example, providing Kosher meals,
staffing flights with Israel-based, Hebrew speaking flight attendants, providing
a separate terminal facility in Tel Aviv, offering early check-in services and
designating "quiet cabins" in its aircraft where in-flight entertainment is not
provided. 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.
Tower has operated scheduled passenger service between New York and Paris since
1991. From 1984 to 1991, Tower operated passenger charter service between New
York and Paris. Because the passengers on its Paris route are typically leisure
travelers, the Company schedules a greater number of flights during the summer
season and holiday periods than during the winter. During 1998, the Company was
awarded traffic rights to operate scheduled passenger service between Paris and
Tel Aviv and commenced such service in July 1998. The Company expects to
maintain more frequent service to Paris in the future. The Company believes
that the local traffic between Paris and Tel Aviv represents a large point-to-
point market. In addition, this traffic right permits Tower to offer customers
a European stop-over on their way to or from Israel.
In March 1997, Tower was awarded authority to operate scheduled service between
New York and Athens and between Athens and Tel Aviv. From 1984 to 1997, Tower
operated passenger charter service between New York and Athens. In 1997, Tower
operated both scheduled passenger service and charters between New York and
Athens; and in 1998, operated only scheduled passenger service. Because
passengers on its Athens route are typically leisure and ethnic travelers, there
is significant variability of demand on flights on this route.
In October 1998, Tower was awarded traffic rights to operate passenger service
between New York and Santo Domingo, Dominican Republic by the Department of
Transportation, a route permitted under the current U.S.-Dominican Republic
bilateral civil air transport agreement. In February 1999, a corresponding
approval
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was granted by the civil aviation authorities of the Dominican Republic and
regular scheduled service commenced March 5, 1999.
In July 1997, Tower was awarded traffic rights to operate passenger service
between New York and Cairo, Egypt, a route permitted under the current U.S.-
Egypt bilateral civil air transport agreement. In April 1998, Tower was awarded
traffic rights to operate passenger service between Paris and Cairo. Subject to
prevailing political and economic factors, Tower presently expects to implement
these services in the summer of 2000.
DOMESTIC MARKET - In 1998, Tower generated 49.2% of its scheduled passenger
service revenues from domestic markets. Domestic scheduled passenger service
was 32.8% of total operating revenues. From 1985 to 1993, Tower served the
domestic market on a limited basis. Thereafter, Tower expanded its scheduled
passenger service by adding new destinations and increasing frequencies. The
Company's scheduled domestic passenger routes include service between New York
and Los Angeles, Miami, San Francisco, and San Juan and since June 26, 1998,
between New York and Ft. Lauderdale and between Miami and San Juan. The Company
believes that it competes for its customers primarily on the basis of price, and
that its low cost structure, resulting in affordable fares with few or no
restrictions (e.g., minimum stay or advance purchase requirements), provides a
significant competitive advantage. The Company emphasizes its competitive fares
and widebody aircraft with service comparable to that offered by carriers with
higher fares. The Company believes that its domestic service passengers are
typically family and ethnic travelers. In addition, Tower believes that its
service also appeals to cost-conscious business travelers.
The Company believes that there are opportunities to leverage its brand identity
in its domestic scheduled operations by expanding to select point-to-point
markets and increasing frequencies on existing routes.
In May 1998, Tower re-implemented a simplified ticket pricing strategy. Tower
believes that marketing a single restricted fare, a single unrestricted fare and
a single business class fare in its domestic operations differentiates the
Company from its competition, which generally relies on a multi-tiered pricing
strategy. The Company believes that its new pricing strategy will principally
benefit its reputation with its customers, who the Company believes are
dissatisfied with the yield management practices of other airlines.
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COMMERCIAL CHARTER SERVICE
The Company provides charter service between the U.S. and a number of European
and South American destinations, as well as between certain Asian countries and
the Middle East for the Hajj. For 1998, the commercial charter market
represented approximately 12.3% of the Company's total operating revenues. The
Company's principal customers for commercial charter services are tour
operators, as well as sponsors of incentive travel packages, specialty charter
customers, and other carriers. Tower also supplies charter passenger service to
the IOM.
Charters provided to tour operators constitute a seasonal market, with the
majority of passengers traveling during each country's respective summer period.
The programs are generally contracted for repetitive, round-trip patterns,
operating over varying periods of time. In such arrangements, the tour operator
pays a fixed price for use of the aircraft (which includes the services of the
pilots, flight engineers and flight attendants, together with check-in, baggage
handling, maintenance services, catering and all necessary aircraft handling
services) and assumes responsibility and risk for the actual sale of the
available aircraft seats. In connection with its sales to tour operators, the
Company seeks to minimize its exposure to unexpected changes in operating costs,
including most of the risk of fuel price increases. Because the Company has a
contract with its customers for each flight or series of flights, it can,
subject to competitive constraints, structure the terms of each contract to
reflect the costs of providing the specific service, together with an acceptable
return. The Company's flexible operating structure also enables it to provide
short-notice charter service to other airlines who have equipment temporarily
out of service. Although the Company typically collects non-refundable deposits
in advance of operating commercial charter flights, there can be no assurance
that such flights will operate and the full revenues will be realized.
The Company believes that although price is the principal competitive criterion
for its tour operator program, product quality, reputation for reliability and
delivery of services which are customized to the specific needs of its customers
have become increasingly important to the buyer of this product. Although the
Company serves tour operators on a worldwide basis, its primary customers are
European-based, South American-based and Asian-based operators. Contracts with
all operators establish prices payable to the Company in U.S. dollars, thereby
significantly reducing the Company's foreign currency risk. Tower's charter
operations also enable the Company to evaluate market potential for future
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scheduled passenger service operations. For example, Tower's scheduled passenger
service to Tel Aviv, Paris and Athens each developed from strong charter
operations to those destinations.
The Company's charter agreements also provide for the transport of religious
pilgrims making the annual Hajj pilgrimage to the Middle East. During 1998, the
Company operated seven aircraft for this purpose for Saudi Arabian Airlines and
P.T. Garuda Indonesia Airlines, carriers which have been unable to satisfy this
peak utilization. The Company is responsible for the costs of providing the
aircraft, pilots, flight engineers and, in certain cases, flight attendants,
maintenance and insurance, while its customers bear the risk of all other
operating costs, as well as the revenue risk. During 1998, the Company's Hajj
charter operations occurred from approximately March 1 to May 15. Due to the
nature of the Islamic calendar, the Hajj occurs approximately 1 to 12 days
earlier each year. As a result, the Company expects its Hajj charter operations
to continue to occur during periods of generally weak demand in its scheduled
passenger service business for the next ten years. However, there is no
assurance that the Company will obtain renewal of Hajj charter operations in
future years. In addition, there is no assurance that the Company will be able
to commit its resources to future Hajj charter operations.
MILITARY CHARTER SERVICE
As an operator of charters for the United States military, the Company has
transported armed forces, reserve personnel and cargo domestically and
internationally since 1984. For 1998, military charters represented
approximately 13.2% of the Company's total operating revenues. The Company
provides charter air travel service to the Department of Defense (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.
AMC contract awards are of two types: (i) fixed award business for known
scheduled needs throughout a contract year; and (ii) short-term expansion
business, which is offered to the Civil Reserve Air Fleet (CRAF) participants on
an ad hoc basis as the need arises. The short-term expansion business is
offered to carriers in proportion to their level of fixed award business, and
then to any CRAF participant that has aircraft available.
Pursuant to the AMC's fixed-award system, each participating airline is given
certain mobilization value points based on the number and type of aircraft then
pledged by such airline. A participant may team up with one or more other
airlines to
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increase the total number of mobilization value points of the team; if a
participant in the team is unable to use its mobilization value points, then
another participant in such team may use them. Generally, a passenger airline
will seek to team up with one or more cargo airlines as well as with other
passenger carriers not interested in operating military charters and vice versa.
When the military determines its requirements for a particular period, it
determines how much of each particular type of service it will need (e.g.,
widebody, passenger service). It will then award each type of business to those
carriers or teams that have committed to make available that type of aircraft
and service, in proportion to each team's mobilization value points.
In 1998, the Company entered into a one-year teaming arrangement with Federal
Express Corporation, Polar Air Cargo Inc., Bax Global, Inc., American Trans Air,
Inc., and Air Transport International LLC for the bid and award of AMC business
for the 1999 U.S. government fiscal year beginning October 1, 1998 and ending
September 30, 1999. The Company believes that participating in such teaming
arrangements increases the likelihood that it will receive a greater amount of
the AMC's fixed award business than it would otherwise receive. The Company
believes that its participation in this teaming arrangement will also improve
its ability to generate additional short-term expansion business in the future.
In addition, because some of the AMC's short-term expansion business involves
the one-way deployment or repatriation of troops, the Company is sometimes able
to use the same aircraft in the other direction for its scheduled passenger
service and therefore maximize revenue opportunities. Historically, the
Company's short-term expansion business has exceeded its fixed award. As part
of its participation in this teaming arrangement, the Company may pay certain
utilization fees to other team members over the term of the agreement.
The MTMC purchases domestic air travel as needed on a lowest bid basis from a
broad group of charter and scheduled passenger 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 of
the number of passengers to be carried on many routes is too small to be served
efficiently by the Company's current fleet. Therefore, the Company's strategy is
to participate in the MTMC program on a selective basis depending on aircraft
availability and suitability, as well as price.
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On January 27, 1999, the Company reached an agreement with the Department of
Defense-Commercial Airlift Review Board (CARB) pursuant to which the Company
agreed to a temporary suspension of the use of Tower Air aircraft for military
charters pending the completion of an on-site survey by CARB. At the conclusion
of the survey, the CARB reinstated the Company to operate military charters on
February 12, 1999.
Military and other government flight activity has recently been, and is expected
to remain, a significant part of the Company's business. However, the market
for military charter services will be influenced by numerous factors, including
changes in the overall level of defense spending and teaming arrangements.
CARGO SERVICE
Since 1992, Tower has provided airport-to-airport cargo transportation services
to other international airlines, as well as to freight forwarders. For 1998,
cargo service represented approximately 5.1% of the Company's total operating
revenues. During 1998, Tower entered into an ACMI Contract for one cargo
aircraft for a period of one year, beginning March 1998, with a South American
cargo airline. This agreement was suspended in December 1998 due to fire damage
sustained by the aircraft and both parties agreed to continue the service on an
ad hoc basis by utilizing the Company's third cargo aircraft. In addition,
Tower also entered into another ACMI contract for a cargo aircraft with an
European carrier starting October 1998 for a period of one year. The Company's
ACMI Contracts typically provide for the Company's customers to guarantee
monthly minimum aircraft utilization levels at fixed hourly rates and are
typically in force for periods of one year, subject in certain cases to early
termination provisions. These contracts generally require that the Company
supply aircraft, crew, maintenance and insurance and that its customers bear all
other operating expenses, including fuel and fuel servicing; marketing costs
associated with obtaining cargo; airport cargo handling; landing fees; ground
handling; aircraft push-back and de-icing services; and specific cargo and mail
insurance. These contracts, therefore, mitigate for the Company the load
factor, yield and operating expense risks traditionally associated with the air
cargo business. Because the customer is responsible for a large percentage of
the operating costs, the revenues associated with ACMI Contracts are lower than
for full service contracts in which the Company bears more of such costs. For
the same reasons, however, ACMI Contracts have greater profit margins compared
to full service cargo arrangements.
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In addition to the three cargo aircraft operated by the Company, the Company has
a fourth cargo aircraft that has been grounded pursuant to certain Airworthiness
Directives (ADs) since February 1996.
OTHER
The Company sells available belly cargo space on its passenger aircraft 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 ad hoc third-party maintenance and ground
handling services to other airlines at its JFK facilities. For 1998, such other
services contributed 2.6% of the Company's total operating revenues.
COMPETITION
SCHEDULED SERVICES - The airline industry is highly competitive. In the
scheduled passenger business, carriers generally compete on the basis of price,
availability of equipment, quality of service and convenience. In the leisure
and business travel market, many of the airlines against which the Company
competes are larger, have longer operating histories and greater name
recognition than the Company. The Company may also face competition from
airlines which may begin serving any of the markets the Company serves or may
subsequently serve, from an expansion of existing low fare service offered by
current competitors and from new low cost airlines that may be formed to compete
in the low fare market. In addition, certain of the Company's competitors have
in recent years consolidated and/or established alliances with foreign or
domestic carriers, allowing those competitors to strengthen their overall
operations by, among other things, transporting passengers connecting with or
otherwise traveling on the consolidated or alliance carriers. Many airlines,
including other nations' flag carriers, also possess substantially greater
financial resources and more extensive facilities and equipment than those which
are now, or will in the foreseeable future become, available to the Company.
The Company also from time to time competes against carriers with certain
financial advantages due to their status under the bankruptcy laws. Vigorous
price competition exists, and airline competitors frequently offer sharply
reduced discount fares in many markets. In addition, many scheduled carriers
compete for customers in a variety of ways, including wholesaling to tour
operators, discounting seats on scheduled flights, promoting to travel agents
prepackaged tours for sale to retail customers, developing frequent flyer
programs and selling discounted, excursion airfare-only products to the public.
As a
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result, the Company competes for customers with the lowest revenue generating
seats of the scheduled airlines. The Company's ability to meet price competition
depends on its ability to operate at costs equal to or lower than its
competitors or potential competitors. In addition, competitors with greater
financial resources than the Company may price their fares below the Company's
fares or increase their service beyond current levels which could have a
material adverse effect on the Company's business. Although the domestic
airline industry has at present abandoned deeply discounted general pricing
structures and fare levels have continued to increase in recent years,
significant industry-wide discounts could be reimplemented at any time, and the
introduction of broadly available, deeply discounted fares by a major U.S.
airline would result in lower yields for the entire industry and could have a
material adverse effect on the Company's business.
COMMERCIAL CHARTERS - In the commercial charter market, the Company faces
competition from charter carriers, some of which are affiliates of major
scheduled airlines or tour operators and many of which are larger and have
substantially greater financial resources than the Company. As a result, in
addition to greater access to financial resources, these charter airlines may
have greater distribution capabilities, including exclusive or preferential
relationships with affiliated tour operators. In addition, many scheduled
carriers compete for charter customers in the same ways as they compete for
scheduled customers, as discussed above. During periods of dramatic fare cuts
by scheduled airlines, the Company is forced to respond with reduced charter
prices, which could have a material adverse effect on the Company's business.
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. In 1998, the Company entered into a one-year
teaming arrangement with Federal Express Corporation, Polar Air Cargo Inc., Bax
Global, Inc., American Trans Air, Inc., and Air Transport International LLC for
the bid and award of AMC business for the 1999 U.S. government fiscal year
beginning October 1, 1998 and ending September 30, 1999. 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.
14
<PAGE>
CARGO SERVICES - The market for air cargo services is highly competitive. The
Company's cargo business competes primarily with air freight carriers and, from
time to time with integrated carriers. The Company also competes on a limited
basis with scheduled freight operations of passenger airlines and overnight
delivery services. Numerous competitors of the Company provide or coordinate
door-to-door air freight charters on an expedited basis. The Company's cargo
business is also subject to competition from other modes of transportation,
including, but not limited to railroads and trucking. The Company believes that
the most important basis for competition in this area are the range, payload and
cubic capacities of the aircraft and the price, flexibility, quality and
reliability of the cargo transportation service. Additional demand for these
services over the last few years has resulted in numerous new entrants in this
business. The Company believes that there are limited barriers to entry in this
business and that increased demand may stimulate additional competition. The
ability of the Company to compete in this segment depends on its ability to
convince international airlines that outsourcing some portion of their air cargo
business remains more cost-effective than undertaking cargo operations with
their own capacity and resources.
The level of competition in international markets is normally governed by the
terms of bilateral agreements. Under bilateral air service between the United
States and some foreign countries, traffic rights to those countries are
available to only a limited number of, and in some cases only one or two, U.S.
carriers, and are subject to approval by the applicable foreign regulators.
Tower's ability to provide service in some foreign markets in the future may
depend in part on the willingness of the Department of Transportation (DOT) to
allocate limited traffic rights to Tower rather than to competing U.S. airlines,
including major scheduled carriers capable of carrying greater passenger
traffic, and the approval of the applicable foreign regulators. While the
Company generally has been able to obtain traffic rights where it has sought
them in the past, there can be no assurance that it will be able to do so in the
future. In some of the markets in which the Company operates or may in the
future operate, there is little or no restriction on the ability of other
carriers to enter such markets or currently existing restrictions may be reduced
or eliminated.
There are relatively few barriers to entry into the airline business, apart from
the need for certain government licenses and the need for and availability of
financing, particularly for those seeking to operate on a small scale with
limited infrastructure and other support systems. As a result, the Company may
face
15
<PAGE>
increased competition from start-up airlines in selected markets from time
to time.
Demand for air transportation has historically tended to mirror general economic
conditions. During the most recent economic recession in the United States, the
change in industry capacity failed to mirror the reduction in demand for
domestic air transportation due primarily to continued delivery of new aircraft.
While in the period following such recession, industry capacity leveled off,
such capacity has begun to expand. The Company expects that the airline
industry will remain extremely competitive for the foreseeable future.
REGULATORY ENVIRONMENT
REGULATION - The Company is an air carrier subject to the jurisdiction of, and
regulation by, the 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 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 con-siderably 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
16
<PAGE>
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 1998, a period during which
the Company transported in excess of 2.07 million total passengers, the DOT
recorded a total of 359 consumer complaints concerning the Company, resulting in
a complaint rate of 17.3 per 100,000 passengers transported. This rate compares
with an average consumer complaint rate of .92 per 100,000 passengers for all
major airlines.
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 ADs under its "Aging Aircraft" program
which are applicable to the Company's aircraft. These ADs call for extensive
aircraft 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
17
<PAGE>
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.
EMPLOYEES
As of December 31, 1998, the Company had 1,932 employees (including foreign
stations), 1,467 of which were full time and 465 of which were part time, and
763 of which were represented by labor unions. 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 entered into an
agreement to extend the contract with the AFA by up to two years until
September 14, 1998. The agreement provided for no change in the 1993 rates
of pay received by Tower flight attendants. In September 1998 negotiations
18
<PAGE>
commenced with AFA to replace the existing contract. Negotiations are expected
to continue well into 1999.
The Company's pilots and flight engineers were 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 continued throughout 1998. In June 1998, Tower Air's
cockpit crewmembers voted to replace TACCA with the Air Line Pilots Association
(ALPA). Negotiations are continuing and the Company expects mediation to
conclude sometime during 1999.
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 December 31, 1998, the Company operated a fleet of seventeen B747 aircraft
(fourteen passenger aircraft and three cargo aircraft). The widebody Boeing 747,
which provides operators with high levels of passenger comfort at low seat-mile
costs, is well suited for Tower's long-haul, high capacity routes. In addition,
the Boeing 747 offers higher maximum payload and cubic capacities and longer
range compared to most other cargo aircraft, which makes it particularly well
suited to the cargo markets the Company serves. In addition, because the
Company's fleet currently consists entirely of Boeing 747 aircraft, the Company
benefits from efficiencies with regard to maintenance costs, crew training costs
and spare parts inventory.
For the year ended December 31, 1998, the Company's average daily utilization
for its aircraft was 9.1 hours per operating day, with an average flight
duration of 8.1 hours.
19
<PAGE>
The following table summarizes relevant data regarding the ownership and average
age of the aircraft operated by the Company as of December 31, 1998.
<TABLE>
<CAPTION>
AVERAGE AGE IN
TYPE AND SERIES OWNED /(1)/ LEASED TOTAL /(2)/ YEARS
- --------------- ------------ -------- ----------- ------------------
<S> <C> <C> <C> <C>
Passenger Aircraft
Boeing 747-100...................................... 3 1/(3)/ 4 28.3
Boeing 747-200...................................... 5 5/(4)/ 10 22.0
Cargo Aircraft
Boeing 747-100...................................... 1 - 1 28.9
Boeing 747-200...................................... - 2/(5)/ 2 20.3
- ---- -- ----
Total............................................... 9 8 17 23.7
= ==== == ====
</TABLE>
(1) As of December 31, 1998, all of the Company's owned aircraft were pledged to
secure indebtedness.
(2) The table excludes a cargo aircraft which is out of service pursuant to
certain AD requirements and two passenger aircraft which are not in the
active fleet.
(3) Lease expires in September 2000.
(4) Leases expire as follows: two aircraft in September 2000; one aircraft in
January 2001; one aircraft in January 2003; and one aircraft in March 2008.
(5) One aircraft lease expires in October 1999 and one lease expires in March
2013.
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.
FUEL
The Company's worldwide aircraft fuel requirements are met by a variety of
suppliers. The Company has contracts with some of these suppliers, the terms of
which vary as to price, payment terms, quantities and duration. The cost of
fuel is a major operating expense for all airlines, including the Company.
Also, because of the relative age of the Company's Boeing 747 fleet, the
Company's aircraft tend to be less fuel efficient than newer aircraft, and fuel
costs tend to be a higher percentage of the Company's operating expenses than
for other airlines. Therefore,
20
<PAGE>
significant increases in fuel prices would materially and adversely affect the
Company's operating results. Both the cost and availability of fuel are subject
to many worldwide economic and political factors and events which are beyond the
control of the Company. As a result, the cost of fuel has fluctuated markedly.
The Company's price for fuel varies directly with market conditions, and the
Company has no guaranteed long-term sources of supply. Fuel costs are also
affected by increases in taxes imposed on sale of fuel. The Company intends
generally to follow industry trends in seeking to raise fares in response to
significant fuel price increases. However, the Company's ability to pass on
increased fuel costs through fare increases may be limited by economic and
competitive conditions, and the inability to pass through such increased costs
could have a material adverse effect on operating results or result in a
reduction in the Company's operations or both. Similarly, a reduction in the
availability of fuel, resulting from a disruption of oil imports or other
events, could have a material adverse effect on the Company.
Although the Company has in the past successfully hedged fuel prices, it does
not regularly enter into hedging arrangements. There can be no assurance that if
the Company elects to hedge fuel prices in the future, through the purchase of
fuel futures or options or otherwise, it will be able to do so successfully. In
addition, while the Company currently passes on most increases in the cost of
jet fuel pursuant to its commercial and military charter arrangements, there can
be no assurance that such arrangements will not change. The Company is also
exposed to the risk that a substantial rise in fuel costs could cause a
reduction in leisure travel and/or the cancellation or renegotiation of
previously-booked commitments from tour operators.
The following table details the Company's fuel consumption and costs for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Gallons consumed (in millions) 119.7 120.8 111.7 135.3
Total cost (1) (in millions) $ 71.3 $ 85.8 $ 82.6 $ 89.6
Average cost per gallon $ 0.60 $ 0.71 $ 0.74 $ 0.66
Percentage of operating expenses
15.2% 18.9% 18.7% 18.8%
</TABLE>
(1) Includes into-plane fees.
21
<PAGE>
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, Tel Aviv, Paris and Athens.
INSURANCE
The Company carries types and amounts of insurance customary in the airline
industry. Tower maintains insurance coverage with major insurance carriers with
protection of up to $75.0 million for damage per aircraft and $1.25 billion of
third party liability per occurrence. Tower's insurance protection includes
coverage for public liability, property damage, aircraft loss or damage, baggage
and cargo liability and workers' compensation. The "Hull War Risks" section of
these policies imposes a $400.0 million annual aggregate limit. In addition,
Tower carries deductible insurance which lowers its per aircraft deductible from
$1.0 million to $0.5 million for any claim, subject to an aggregate of $2.5
million in claims per year. The Company also obtains insurance from the U.S.
Government under Chapter 443 of the Aviation Statute ("Chapter 443"). Chapter
443 generally authorizes the U.S. Government to issue insurance with respect to
aircraft engaged in operations deemed by the U.S. Government to be necessary to
carry out the foreign policy of the U.S. when such insurance is either
unavailable or prohibitively expensive when sought from private insurers (as in
connection with the Gulf War). Payment of valid claims pursuant to insurance
issued under Chapter 443 is made out of and subject to congressional
appropriations.
ITEM 3. LEGAL PROCEEDINGS.
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.
22
<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 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. This case is being vigorously contested by the
Company. Trial has been concluded, but a decision has not been issued.
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 is 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 and is being vigorously defended and prosecuted by
the Company.
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 being claimed in compensatory and
punitive damages with respect to mental anguish and emotional distress. The
case is in the discovery phase and is being vigorously defended by the Company,
both as to class certification and on the merits.
The Company is the defendant in a New York State Court action filed on or about
April 3, 1998, Steven Leichtung on behalf of himself and all other similarly
-------------------------------------------------------------
situated v. Tower Air, Inc., in which plaintiff alleges that he and other
- -----------------------------
members of the purported
23
<PAGE>
class were harmed by the stopping enroute for fuel of flights allegedly
advertised as operating "non-stop" between New York and Tel Aviv over a four-
year period. Plaintiff seeks unspecified damages. The case is in the discovery
phase and is being vigorously defended by the Company. Application for class
certification has been granted.
The Company is the defendant in an arbitration proceeding filed on or about
August 19, 1998, Terry V. Hallcom v. Tower Air, Inc., in which plaintiff alleges
-------------------------------------
breach of contract, fraud, misrepresentation and defamation in connection with
the resignation of plaintiff from the Company, and seeking unspecified damages.
The Company has denied the allegations and has filed counterclaims alleging
breach of fiduciary duties, breach of employment contract, fraud, malfeasance,
misfeasance and nonfeasance. The Company plans to vigorously defend against
plaintiff's claims and to pursue its counterclaims. A hearing has not yet been
held.
The Company is the defendant in a U.S. Federal Court action filed in the Eastern
District of New York on or about May 20, 1998, Kay and Aristides Demetriou v.
------------------------------
Tower Air, Inc. Defendants seek damages of approximately $950,000 claiming loss
- ---------------
of hearing and loss of consortium due to an alleged engine explosion sustained
during a flight. The case is being handled by an attorney provided by the
Company's insurance carrier. The Company believes that all claims resulting
form this matter remain fully covered under the Company's insurance policies.
The Company is the defendant in a New York State Court action filed on or about
March 20, 1997. Hart to Hart Aircraft Detailing, Inc. v. Tower Air, Inc., in
---------------------------------------------------------
which plaintiff alleges that the Company improperly terminated a contract with
the plaintiff and failed to pay certain charges for aircraft cleaning allegedly
performed by the plaintiff. Plaintiff also alleges that agents of the Company
defamed the plaintiff and divulged certain confidential information regarding
the terms of the contract and that the termination of the contract resulted from
certain complaints by the plaintiff. Plaintiff seeks damages in excess of $2.3
million for the breach of contract and approximately $1.5 million on various
tort theories. The claim contending that termination resulted from certain
complaints of plaintiff was voluntarily withdrawn by plaintiff by stipulation.
On July 1, 1997, the Company filed its Answer and counterclaims in amounts
equal to or exceeding plaintiff's claims. The Company believes it has good
defenses to all claims and is vigorously contesting the claims and pursuing its
counterclaims. The case is still in the discovery stage.
24
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company plans to submit to its stockholders at its next meeting a proposal
to amend the Company's 1993 Long-Term Incentive Plan (the Plan) to allow the
amendment of certain options to purchase the Company's common stock issued under
the Plan to non-employee directors of the Company. If approved, the proposed
amendment to the Plan would allow the Board of Directors to adjust the exercise
price of options previously granted under the Plan to such non-employee
directors. Subject to the approval of the Company's stockholders, on February
17, 1999 the Board of Directors approved the amendment of each option currently
held by a non-employee director of the Company to provide that the per-share
exercise price of such option shall be $2.50, the closing price of the Company's
common stock on February 16, 1999. All other terms and conditions of these
options will continue in effect.
25
<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 26, 1999 was 109. The quarterly price range
of the Company's Common Stock is shown in the following schedule:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- --------------------------------------------
QUARTER ENDED High Low High Low
--------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C>
March 31 $ 6 5/8 $ 4 1/8 $ 4 3/16 $ 2 1/2
June 30 5 1/2 3 1/2 3 15/16 2 1/2
September 30 4 3/8 1 5/16 4 1/2 2 7/8
December 31 3 9/16 1 1/2 6 5/16 4
</TABLE>
The Company paid quarterly cash dividends in 1996 aggregating $.12 per share.
No dividends were declared or paid during 1997 and 1998 in order to conserve
cash. The Company intends to retain future earnings, for the development of its
business and, therefore, the Company does not anticipate that its Board of
Directors will declare or pay any dividends on its Common Stock any time in the
foreseeable future.
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, 1998 are derived from the financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors.
26
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Operating revenues $ 483,820 $ 461,502 $ 417,819 $ 490,472 $ 367,984
Operating expenses 466,699 454,050 441,345 476,956 363,192
---------- ---------- ---------- ---------- ----------
Operating income (loss) 17,121 7,452 (23,526) 13,516 4,792
Other (income) expenses 12,470 12,342 8,863 (5,903) 3,169
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 4,651 (4,890) (32,389) 19,419 1,623
Income tax provision (benefit) 3,159 (995) (11,506) 8,730 1,055
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 1,492 $ (3,895) $ (20,883) $ 10,689 $ 568
========== ========== ========== ========== ==========
Net income (loss) per share $ 0.10 $ (0.25) $ (1.37) $ 0.70 $ 0.04
At Period-end
Cash and cash equivalents $ 1,614 $ 3,922 $ 2,968 $ 3,521 $ 14,824
Working capital (deficiency) $ (140,388) $ (139,979) $ (84,196) $ (28,744) $ (30,585)
Property and equipment, net $ 298,929 $ 266,395 $ 218,058 $ 147,202 $ 133,741
Total assets $ 350,762 $ 310,120 $ 263,255 $ 210,547 $ 177,877
Long-term debt $ 91,932 $ 63,321 $ 67,716 $ 23,594 $ 21,065
Stockholders' equity $ 51,457 $ 49,421 $ 53,316 $ 76,034 $ 67,792
Cash dividends declared and
paid per Common Share $ - $ - $ 0.12 $ 0.16 $ 0.16
OPERATING DATA:
Total:
Block hours flown 44,429 43,092 41,336 47,186 34,221
Revenue per block hour (1) $ 10,612 $ 10,499 $ 9,922 $ 10,227 $ 10,601
Variable expense per block hour (2) $ 6,412 $ 6,643 $ 8,014 $ 7,964 $ 8,411
Scheduled Passenger Services:
Revenue passengers carried(000s) 1,589 1,308 1,194 1,194 925
Revenue passenger miles (RPMs)(000s) 4,073,056 3,578,714 3,332,477 3,601,323 2,758,753
Available seat miles(ASMs)(000s) 5,448,056 4,685,022 4,626,478 4,810,710 3,715,993
Passenger load factor 75% 76% 72% 75% 74%
Yield per RPM $ 0.0794 $ 0.0747 $ 0.0742 $ 0.0751 $ 0.0749
Block hours flown 25,960 21,949 21,991 22,094 17,172
Operating revenue per ASM $ 0.0593 $ 0.0571 $ 0.0534 $ 0.0562 $ 0.0556
Operating expense per ASM (3) $ 0.0543 $ 0.0527 $ 0.0538 $ 0.0477 $ 0.0463
Total expense per ASM (4) $ 0.0618 $ 0.0606 $ 0.0615 $ 0.0581 $ 0.0570
Employees (at period-end) 1,932 1,969 1,681 1,842 1,367
Number of aircraft in service (at period-end) 17* 16* 16* 17 16
</TABLE>
* "For the relevant periods, aircraft in service (at the end of each period)
excludes a cargo aircraft which has been out of service since February 1996
pursuant to certain AD requirements and two passenger aircraft which have not
been in the active fleet since June 1997 and January 1998, respectively.
- --------------------------------------------------------------------------------
(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.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
For the year ended December 31, 1998, the Company recorded net income of $1.5
million compared with a net loss of $3.9 million for the year ended December 31,
1997. The $5.4 million increase in net income was principally due to the
increase in revenue from the Tel Aviv and Athens markets, strong domestic
traffic and increased cargo revenues partially offset by decreased commercial
and military charters. In addition, 1998 net income was partially offset by
increased cost of flight equipment to support the Company's fleet in 1998.
Overall operating margins increased from 1.6% in 1997 to 3.5% in 1998.
OPERATING REVENUES. The Company's operating revenues for the year ended
December 31, 1998 increased $22.3 million, or 4.8%, to $483.8 million from
$461.5 for the year ended December 31, 1997.
Scheduled passenger service revenues for the year ended December 31, 1998
increased $55.9 million, or 20.9%, to $323.2 million from $267.3 million for the
year ended December 31, 1997. Scheduled passenger traffic (as measured in
revenue passenger miles) for 1998, increased by 13.8% while capacity (as
measured by ASMs) increased by 16.3%, resulting in a lower load factor of 75%
compared to 76% for the year ended December 31, 1997. Higher operating revenues
for 1998 were attributable to increased frequencies on existing routes as well
as inception of new routes between Paris and Tel Aviv, and New York and Ft.
Lauderdale and an increase in yields of 8.3% partially offset by the lower load
factor. The Athens market realized an $11.1 million or 135.4% increase in
revenue for 1998 over 1997. Revenue in domestic markets including Miami, San
Juan, Los Angeles and San Francisco also increased during 1998, which resulted
in an increase of $41.5 million or 35.4% in revenue over 1997.
Commercial charter service revenues for the year ended December 31, 1998
decreased $43.8 million, or 42.4%, to $59.6 million from $103.4 million in 1997.
Lower revenues for 1998 were attributable to a number of factors including:
(i) the cancellation of certain charter flights that were scheduled to commence
in March 1998 because of the late release of three aircraft from heavy
28
<PAGE>
maintenance facilities, and (ii) the Company's strategy to increase scheduled
passenger business, resulting in an allocation of more of its available aircraft
to this area of the business and consequently, a decrease in aircraft
availability for the commercial charter business.
Military charter service revenues for the year ended December 31, 1998 decreased
$3.9 million, or 5.8%, to $64.0 million from $67.9 million in 1997. 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.
Cargo service revenue for the year ended December 31, 1998 increased $10.9
million, or 79.1%, to $24.8 million from $13.8 million in 1997. The increase in
cargo service revenue was primarily due to the addition of two cargo aircraft;
one as a result of the conversion of a leased passenger aircraft in March 1998
and the other leased as of October 1998, which enabled the Company to enter into
two ACMI contracts. The increased revenue was partially offset by a change in
the type of contract, to ACMI in 1998, from a full service contract (where the
carrier incurs more costs associated with the operation of the aircraft) in
1997. In addition, this increased revenue was also partially offset by a ground
damage incident which occurred on one of the Company's two B747-200 cargo
aircraft on December 1, 1998. This damage was caused during the fueling of the
aircraft as a result of fire in the fuel truck which was owned and operated by a
third party. The repair to the aircraft is covered by insurance and the Company
is also seeking monetary damages to compensate for the loss of revenue as well
as other expenses incurred by the Company in connection with the loss of service
of this aircraft. One of the Company's cargo aircraft has been inoperable since
February 1996, when the FAA promulgated certain ADs which restricted the cargo
carrying capacity of one of the Company's Boeing 747-100 cargo aircraft, as well
as nine other similarly converted Boeing 747-100 cargo aircraft operated by
other carriers. At that time, the Company decided to ground the aircraft rather
than operate it with restricted payload as required by such ADs. In order to
return the cargo capacity of such aircraft to what the Company believes to be
economically attractive levels, an FAA-approved modification plan will be
required. Such modifications are being designed and tested by the GATX-Airlog
Co. The FAA has approved a modification plan and the Company is presently
assessing the cost of such modification program. There is no assurance that such
aircraft will be returned to service.
29
<PAGE>
OPERATING EXPENSES. The Company's operating expenses for the year ended
December 31, 1998 increased $12.6 million, or 2.8%, to $466.7 million from
$454.1 million for the year ended December 31, 1997. Operating expenses,
excluding fuel and depreciation, increased by 7.7% in 1998. This increase in
operating expenses reflected a number of factors, including: (i) higher costs
arising from delayed completion of work on, and late release of, three aircraft
from heavy maintenance and one aircraft from cargo conversion facilities, (ii)
higher rental expense as a result of the addition of three aircraft to the
Company's fleet and the conversion of one aircraft to cargo configuration, (iii)
increased crew costs resulting from certain of the Company's commercial charter
operations and (iv) a 3.1% increase in block hours flown.
Aircraft fuel expenses for the year ended December 31, 1998 decreased $14.9
million, or 17.4%, to $70.9 million from $85.8 million for the year ended
December 31, 1997. This decrease resulted from a 16.1% decrease in the average
cost per gallon in 1998 coupled with an increase in ACMI contract activities
where the lessee pays for the cost of fuel resulting in lower fuel consumption
by the Company.
Flight equipment rentals and insurance expenses for the year ended December 31,
1998 increased $9.3 million, or 37.5%, to $34.1 million from $24.8 million for
the year ended December 31, 1997. This increase was attributable to charges
associated with the rental of three additional aircraft to support the Company's
fleet requirements as well as increased aircraft rent resulting from the
conversion of one leased aircraft from passenger to cargo configuration. In
addition, rental expenses associated with certain flight equipment increased
during 1998 relative to 1997 in accordance with terms of the relevant sale and
leaseback transaction.
Maintenance costs for the year ended December 31, 1998 decreased $4.7 million,
or 9.7%, to $43.8 million from $48.5 million for the year ended December 31,
1997. The decrease was attributable to lower maintenance reserves associated
with the purchase of two previously leased aircraft resulting in one-time
refunds previously paid by the Company under the lease agreement totaling $5.5
million in the fourth quarter of 1998 along with the Company's May 1998
implementation of an FAA-approved program which allows the Company to reduce
expenses associated with
30
<PAGE>
bench-testing serviceable spare part components at third-party facilities.
Crew costs and other expenses for the year ended December 31, 1998 increased
$2.9 million, or 10.3%, to $31.6 million from $28.6 million for the year ended
December 31, 1997. The increase was primarily due to a 3.1% increase in block
hours flown along with increases in pay rates. In addition, the applicability of
certain foreign regulations to a portion of the Company's charter operations,
resulted in increased crew cost, including additional overtime, per diem and
hotel costs.
Aircraft and traffic servicing expenses for the year ended December 31, 1998
increased $9.4 million, or 12.2%, to $86.2 million from $76.8 million for the
year ended December 31, 1997. This increase resulted primarily from the change
in the Company's business mix in keeping with its strategy to increase scheduled
passenger service. Scheduled service block hours, where the Company is
responsible for all operating expenses, increased from 21,949 to 25,960. As a
percentage of total block hours, scheduled service block hours represented 58.4%
for the year ended December 31, 1998, compared to 50.9% for the year ended
December 31, 1997.
Passenger servicing expenses for the year ended December 31, 1998 increased $5.3
million, or 10.6%, to $55.7 million from $50.4 million for the year ended
December 31, 1997. This increase in passenger servicing expense resulted
primarily from the change in the Company's business mix described above.
Promotion, sales and commission expenses for the year ended December 31, 1998
remained unchanged for the year ended December 31, 1997 at $66.2.
General and administrative expenses for the year ended December 31, 1998
increased $1.9 million, or 9.1%, to $22.5 million from $20.7 million for the
year ended December 31, 1997. The increase resulted primarily due to the
Company's efforts of raising capital during the second half of 1998. As a
percentage of operating revenue, general and administrative expenses for 1998
were 4.7% compared with 4.5% for 1997.
Depreciation and amortization expense for the year ended December 31, 1998
increased $3.3 million, or 6.3%, to $55.7 million from $52.4 million for the
year ended December 31, 1997. This increase was primarily due to depreciation
expense associated with the
31
<PAGE>
purchase of two previously leased aircraft, one in July 1998 and the other in
November 1998, along with capitalized engine overhauls and heavy airframe
maintenance, which was partially offset by the May 1998 revision to the
Company's maintenance program that involves spreading certain work typically
performed during infrequent major overhauls over the course of more frequent,
smaller maintenance checks. This revision also schedules heavy service
maintenance overhauls as a function of both aircraft utilization and elapsed
time since the last heavy overhauls, while the prior program scheduled heavy
maintenance overhauls based solely on elapsed time. As a result of this revision
to its maintenance program, the Company is able to depreciate its heavy airframe
maintenance overhaul expenses over a longer time period.
OTHER EXPENSES AND INCOME. Interest expense for the year ended December 31,
1998 increased $2.3 million, or 18.5%, to $14.5 million from $12.3 million for
the year ended December 31, 1997. This increase primarily reflects a higher
average outstanding debt balance in 1998 and a one-time charge of $0.3 million
associated with warrants issued in connection with borrowings from Funding
Enterprises LLC, partially offset by a reduction of $0.3 million recognized due
to the restructuring of an outstanding loan with a debtor which resulted in a
lower interest rate. Other income for the year ended December 31, 1998 increased
$2.1 million from a minimal amount for the year ended December 31, 1997. The
increase in other income reflects a gain of $1.5 million recognized from the
outcome of a legal case with a vendor.
INCOME TAX BENEFIT. The income tax provision for the year ended December 31,
1998 was $3.2 million as compared to the income tax benefit of $1.0 million for
the year ended December 31, 1997. The increase in tax provision is principally
attributable to the Company realizing net income for the year ended December 31,
1998 compared to a net loss for the year ended December 31, 1997.
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
32
<PAGE>
resulting 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.
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, 1996. 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.
33
<PAGE>
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 year ended December 31, 1997. 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,
34
<PAGE>
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.
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.
35
<PAGE>
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%.
INCOME TAX BENEFIT. The income tax benefit for the year ended December 31, 1997
was $1.0 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.
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>
1998
Operating revenue $ 96,740 $119,556 $162,875 $104,649 $483,820
Operating (loss) income $ (9,355) $ 3,925 $ 24,185 $ (1,634) $ 17,121
Net (loss) income $ (7,325) $ 501 $ 12,060 $ (3,744) $ 1,492
Block hours 10,156 11,612 12,771 9,890 44,429
1997
Operating revenue $ 78,010 $112,576 $162,260 $108,656 $461,502
Operating (loss) income $( 7,074) $ 9,512 $ 17,627 $(12,613) $ 7,452
Net (loss) income $ (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 (loss) income $(13,139) $ 5,146 $ 3,479 $(19,012) $(23,526)
Net (loss) income $ (8,134) $ 2,923 $ (1,596) $(14,076) $(20,883)
Block hours 9,016 12,649 12,907 6,764 41,336
</TABLE>
YEAR 2000
The Year 2000 problem exists because many computer programs use only the last
two digits to refer to a year. This convention could affect date-sensitive
calculations that treat "00" as the
36
<PAGE>
year 1900, rather than 2000. An additional issue is that 1900 was not a leap
year, whereas the Year 2000 is. Therefore, some programs may not properly
provide for February 29, 2000. This anomaly could result in miscalculations when
processing critical date-sensitive information after December 31, 1999.
The Company recently strengthened its MIS Department with the hiring of
additional computer experts who are familiar with information system issues
confronting both the Company in particular and the airline industry in general.
The Company's comprehensive Year 2000 initiative will be managed by this new
internal MIS team. 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 has determined that due to its most recent and near term software
upgrades, its internal systems will function properly with respect to dates in
the Year 2000 and beyond. The Company has 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.
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 or
governmental agencies on which the Company's systems and operations rely will be
converted on a timely basis and, if not so converted, will not have a material
adverse effect on the Company's business.
The Company's new MIS team will be assessing the need to develop remediation
contingency plans and business resumption contingency plans specific to the Year
2000. Remediation contingency plans address the actions to be taken if the
current approach to remediating a system is falling behind schedule or otherwise
appears in jeopardy of failing to deliver a Year 2000 ready system when needed.
Business resumption contingency plans address the actions that would be taken if
critical business functions can not be carried out in the normal manner upon
entering the next century due to system or supplier failure.
The Company, as an International Air Transport Association (IATA) member
airline, is a participant in the "IATA Year 2000 Project". The IATA Year 2000
Project is an initiative to increase the
37
<PAGE>
awareness of third party suppliers and to assess/promote their Year 2000
preparedness. Working closely with The Airports Council International, the
International Civil Aviation Organization, (ICAO) and other industry
organizations, IATA has developed and piloted a standard methodology to assess
Year 2000 readiness. The project will provide training on how to use the
methodology, and will track the status of remedial programs so that problems can
be identified early. IATA estimates that the cost of the Project will be
approximately $20 million, of which the Company's pro rata share is
approximately $67,000. The Company does not expect the total cost of its Year
2000 initiatives to have a material adverse effect on the Company's business.
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,
1998, December 31, 1997 and December 31, 1996 were $3.8 million, $6.3 million
and $3.2 million, respectively. The Company generated cash from operations for
1998, 1997 and 1996 of $54.4 million, $67.2 million and $29.6 million,
respectively.
Net cash used in investing activities was $31.0 million for 1998, $76.3 million
for 1997 and $20.9 million for 1996. The Company's expenditures for flight
equipment were $37.6 million for 1998, $72.7 million for 1997 and $49.7 million
for 1996. Expenditures for flight equipment in 1998 included 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, 1998 and December 31, 1997, the Company had negative working
capital of $140.4 million and $140.0 million, respectively. Historically, the
Company has operated with a working capital deficit.
The Company is highly leveraged and has and will continue to have significant
debt service obligations. The Company currently expects that capital
expenditures for 1999 will total approximately $40.0 million, included will be
expenditures for scheduled heavy
38
<PAGE>
airframe maintenance and engine overhaul on the Company's aircraft.
Net cash (used in) provided by financing activities was $(26.1) million for
1998, $10.1 million for 1997 and $(9.2) million for 1996.
The Company has no unused lines of credit and must satisfy all of its working
capital, debt service and capital expenditure requirements from internally
generated funds, from external financing sources or from the sale of assets. In
addition, the Company has no significant unpledged assets and, to the extent
that pledged assets are sold, the applicable financing arrangements generally
require the sale proceeds to be applied to repay the corresponding indebtedness.
In September 1997, the Company entered into the Loan Agreement which extended
the term of a line of credit with Heller Financial, Inc. (Heller) until
September 1999. The line of credit which was increased from $15.0 million to
$20.0 million on April 14, 1999 is secured by accounts receivable, general
intangibles, inventory, intellectual property, cash held in the Company's lock-
box account, one spare airframe, aircraft spare parts and landing and gate
rights. The Loan Agreement provides that the Company shall not, directly or
indirectly, create or become liable in respect of any indebtedness, with certain
specified exceptions.
From time to time during 1998 and the first quarter of 1999, the Company has
been in default under certain provisions of the Loan Agreement. The Company has
entered into amendments with Heller waiving such defaults and is currently in
compliance with such provisions as they have been amended.
Since February 1998, the Company has entered into eight amendments to the Loan
Agreement providing, among other things, for (i) changes in the maximum amount
of the revolving loan during different periods; (ii) subordination of loans made
to the Company by officers and directors; (iii) increases to the spread between
the amount of collateral required and the amount of available borrowing under
the Loan Agreement; (iv) modification of the financial covenant relating to the
Company's Tangible Net Worth (as defined therein) to facilitate compliance by
the Company; and (v) increases in the interest rate from Prime (as defined
therein) plus 0.75% to Prime plus 1.50% (9.25% at December 31, 1998). Through a
combination of the fourth amendment on May 14, 1998 and the sixth amendment on
July 13,
39
<PAGE>
1998, the Company and Heller agreed to modify the Tangible Net Worth covenant in
the Loan Agreement by reducing the amount of Tangible Net Worth the Company is
required to maintain from $47.0 million prior to August 31, 1998 and $55.0
million thereafter to $35.0 million through May 1998, $38.0 million for June
1998, $47.5 million through August 1, 1998 and $55.0 million from August 31,
1998 and thereafter. On June 1, 1998, the fifth amendment permanently limited
the maximum amount of borrowings under the facility to $15.0 million beginning
on June 29, 1998, a decrease from the $25.0 million maximum amount originally
permitted. The sixth amendment to the Loan Agreement waived defaults resulting
from the repayment of the 12% Note (as defined herein), the issuance of the
Nachtomi Note (as defined herein) and the defaults referred to below. On August
27, 1998, the seventh amendment to the Loan Agreement between the Company and
Heller modified again the Tangible Net Worth covenant in the Loan Agreement by
reducing the amounts of Tangible Net Worth the Company is required to maintain
to $44.5 million in July 1998, $45.0 million from August 1998 through March 1999
and to $50.0 million in April and May 1999. On April 14, 1999, the eighth
amendment to this Loan Agreement increased the maximum amount of borrowings
under the facility to $20.0 million and waived a covenant default relating to
the late payment of excise taxes which, as of April 15, 1999, the Company has
paid in full. As of December 31, 1998, the Company had $12.8 million of
obligations outstanding under the Loan Agreement, with an additional $2.0
million consisting of letters of credit issued to various suppliers and
insurance companies.
In July 1998, the Company was in default under three separate engine lease
agreements because certain lease payments were due and not timely paid. The
Company negotiated waivers and revised payment schedules to remedy such
defaults. The defaults may have constituted defaults under certain of the
Company's other debt instruments and leases and the Company obtained waivers of
such cross-defaults from the respective parties. In addition, the Company also
obtained waivers of certain covenant requirements from some of its lessors and
lenders. In July 1998, the Company did not meet the minimum net worth
requirements of an operating lease agreement entered into in connection with a
sale and leaseback transaction, but has obtained a waiver of that provision
through July 31, 1999. The Company obtained agreements with other lessors for
deferred or revised payment terms for approximately $8.1 million of lease and
maintenance reserve payments. In addition, on April 14, 1999, the Company
obtained waivers under certain lease and debt agreements for a covenant default
relating to the late payment of excise taxes, which as of April 15, 1999, the
Company has paid in full. As of December 31, 1998, the outstanding amount is
approximately $3.9 million. In addition, the Company agreed with certain of its
vendors and suppliers to extend payment terms, and has, in some cases, obtained
payment extensions with respect to certain of the Company's current obligations.
On several occasions during 1998, the Company did not make contributions to the
401(k) Savings Plan of amounts withheld from
40
<PAGE>
participants salaries on a timely basis. Different factors contributed to these
delays in funding including administrative errors in the communication process
between the Company's payroll department, the Company's payroll vendor, and the
administrator of the Savings Plan, as well as Company cash flow issues. In
September 1998, the Company made an additional contribution of approximately
$10,500 to the Savings Plan to make participant's whole from the effects of the
delayed funding. For a variety of factors, the Company was similarly delayed on
several occasions during 1998 in the timely payment of its payroll and per diem
runs.
In January 1998, the Company entered into a $15.0 million loan agreement with a
commercial financial institution secured by twelve Pratt & Whitney engines, of
which $11.3 million was used to pay the balance remaining on two previous
agreements with the same commercial financial institution and $1.6 million was
to be paid toward engines under repair. As of December 31, 1998, this amount of
$1.6 million remains unpaid. The aggregate balance outstanding on the note at
December 31, 1998 was approximately $7.4 million.
In February and March 1998, the Company borrowed $6.0 million which bears
interest at a rate of 12% (the "12% Note") from Funding Enterprises, LLC, a
limited liability Company in which the Company's Chairman and former President
were members. On July 1, 1998, the Company discharged its obligations under the
12% Note by issuing a new note (the "Nachtomi Note"), due August 7, 1998, to the
Company's Chairman in the principal amount of $3.0 million and repaying the
balance of the 12% Note in cash. The Nachtomi Note originally provided for
interest at an annual rate of 12.0%, increasing to 15% after August 7, 1998.
The Nachtomi Note was amended so that it bears interest at an annual rate of
12.0% after August 7, 1998 and matures on April 30, 1999. In connection with the
12% Note, warrants for the purchase of 1.2 million shares of Common Stock of the
Company were issued with an exercise price of $5.00. The warrants expire in
February 2008.
On July 15, 1998, the Company purchased an existing leased aircraft from a
lessor for a purchase price of $13.5 million of which a credit of $6.0 million
was given by the lessor to the Company for the payment of maintenance reserves
paid during the lease period and a balance of $7.5 million was financed by the
same lessor. In addition, the lessor waived all previously outstanding rent and
maintenance reserves through June 30, 1998 amounting to $1.4 million. This loan
requires a monthly payment
41
<PAGE>
of approximately $50,000 of interest only starting October 1998 through May 1999
and then a total monthly payment of approximately $0.4 million including
principal and interest through March 2001.
From September 1997 through March 1998, the Company entered into a finance
agreement involving the conversion and refurbishment of Pratt & Whitney engines.
In connection with this transaction, seven engines were financed for $35.8
million with interest at prime plus 2%. In September 1998, the lender agreed to
increase the loan to include $4.2 million relating to certain engines previously
overhauled. The loan was restructured and now requires a total monthly payment
of $1.5 million through March 1999 and $2.0 million through July 1999 and $2.5
million through August 2000 which allows the Company to repair/overhaul
additional engines currently at the repair facility with interest at 6% going up
to a maximum of 9% per annum. Under this restructuring agreement, the Company
was unable to make required payments for January through March 1999 amounting to
$4.5 million. The Company has reached an understanding with the financial
institution whereby this amount will be paid by September 1999.
On August 13, 1998, the Company restructured three existing loans with a
financial institution under which the Company was required to pay a total
monthly principal payment of $1.5 million. Under the terms of these
restructured Aircraft Loan and Security Agreements, the Company is required to
pay an aggregate monthly principal payment of $0.5 million plus interest through
March 1999, which will pay off one of the three loans and the remaining two
loans will require a monthly principal and interest payment, commencing April
1999, of $1.2 million and $0.5 million through December 2002 and February 2003,
respectively.
On November 13, 1998, the Company purchased another existing leased aircraft
from a lessor for a purchase price of $21.0 million of which $20.0 million was
financed by the same lessor. The loan is comprised of two notes of $10.0
million each and requires a fixed total monthly payment of $105,000 each
consisting of principal and interest.
On December 31, 1998, the Company purchased three Pratt and Whitney engines from
a vendor for a total purchase price of $8.1 million of which $6.7 million was
financed by the same vendor. The loan, which bears interest at 9.0% per annum,
is for three
42
<PAGE>
years and requires a fixed monthly payment of $.2 million consisting of
principal and interest starting February 1, 1999.
The Company has entered into a letter of intent with International Lease Finance
Corp. to lease two new Boeing 777 aircraft for an initial term of ten years. If
a definitive agreement is executed, the Company will be required to pay $4.8
million in deposits for the two leased aircraft, of which $0.4 million is due
during the first half of 1999. The deposits are refundable, subject to certain
conditions, at the end of the lease term.
To the extent that the Company's access to capital is constrained, the Company
may not be able to make certain capital expenditures, meet certain other
requirements or continue to implement certain other aspects of its strategic
plan. The Company's ability to make scheduled principal and interest payments
and to refinance its indebtedness and to meet its other obligations and future
capital commitments will be dependent upon its financial and operating
performance, which is subject to general economic conditions and to financial,
business and other factors, including factors beyond its control. Management
believes that the Company's cash flow from its operations and financing
activities should be sufficient in the next twelve months to meet the Company's
debt service and other obligations, future capital commitments and liquidity
requirements. However, the airline industry in general, and the Company in
particular, are subject to significant risks and uncertainties, therefore, there
can be no assurance that the Company's operating results and financing
activities will be sufficient in the foreseeable future to meet such obligations
and commitments.
As of December 31, 1998, the Company had $56.7 million of required principal
payments on long-term debt due within one year.
In an effort to conserve cash, the Company suspended cash dividends on its
Common Stock after the third quarter of 1996.
INCOME TAXES
At December 31, 1998, for federal and state tax reporting purposes, the Company
had approximately $2,300,000 of alternative minimum tax credit carryforwards and
approximately $87,900,000 of net operating loss carryforwards available to
offset future federal tax liabilities.
43
<PAGE>
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.
44
<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, 1998, the directors, officers and key employees of the Company
were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Morris K. Nachtomi............ 62 President, Chief Executive
Officer and Chairman of the Board
Stephen L. Gelband............ 67 Director and Secretary
Stephen A. Osborn............. 48 Director
Henry P. Baer................. 63 Director
Leo-Arthur Kelmenson.......... 72 Director
Eli Segal..................... 55 Director
William J. Cain............... 42 Senior Vice President-Maintenance &
Engineering
Philip R. Brookmeyer.......... 44 Vice President-Legal & Deputy
General Counsel
Badar Mir..................... 40 Vice President-Financial Accounting
Nathan Nelson*................ 50 Chief Financial Officer & Treasurer
Vincent J. Vitale............. 60 Vice President-Customer Relations
</TABLE>
* As of March 1, 1999, Mr. Nelson and the Company reached a mutual
understanding regarding the winding down of his employment with the Company in
order to enable him to pursue other business opportunities. Mr. Nelson will
leave the Company effective May 31, 1999.
Mr. Morris Nachtomi co-founded the Company in 1982 of which he became a Director
and has been President 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; which position he reassumed in July, 1998.
45
<PAGE>
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 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 and Chief Executive Officer
of Bozell Worldwide, Inc. 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.
46
<PAGE>
Mr. Segal has been a Director of the Company since January 1998. He is
currently the President and CEO of The Welfare to Work Partnership. Prior to
joining The Partnership, Mr. Segal served as Chief Executive Officer of the
Corporation for National Service from October 1993 to February 1996, Assistant
to the President of the United States from January 1993 to February 1996, and as
Chief of Staff of the Clinton-Gore campaign in 1992. He has also held the
office of President at several companies including American Publishing
Corporation, Vogart Crafts Corporation, Bits & Pieces, Inc., and Publisher at
GAMES Magazine. Mr. Segal received his Bachelor's degree from Brandeis
University in 1964 and a Juris Doctorate from the University of Michigan Law
School in 1967.
Mr. Brookmeyer has been Vice President-Legal & Deputy General Counsel since July
1998. From 1983 to 1998 he held positions of increasing legal responsibility
with UST Inc. (a Fortune 500 company), including most recently as Assistant
General Counsel & Assistant Secretary. Mr. Brookmeyer simultaneously served as
Senior Vice President-Business Affairs for Cabin Fever Entertainment Inc., a UST
subsidiary. He holds a B.A. degree from the State University of New York at
Albany and a J.D. from St. John's University School of Law.
Mr. Cain rejoined the Company in November 1998 as Senior Vice President-
Maintenance & Engineering. From 1985 until May 1993, Mr. Cain held a number of
positions with the Company, including Maintenance Manager and Director of
Maintenance. From May 1993 to January 1996, Mr. Cain held the position of Vice
President-Maintenance & Engineering. From April 1996 to November 1998, Mr. Cain
was Vice President Technical for the Pacific Region of Atlas Air with
responsibility for all technical activity and the development of customer
relationships. Mr. Cain was honorably discharged from the U.S. Navy in 1979.
Mr. Mir has been Vice President-Financial Accounting since January 1999. Mr.
Mir joined Tower in February 1989 and has held various positions of increasing
responsibilities within the finance and accounting areas including, Manager of
Accounting and Corporate Controller, the position held just prior to his recent
appointment as Vice President-Financial Accounting. He holds a B.S. degree in
Accounting and a M.A. degree in Accounting/Economics from The City University of
New York schools system.
Mr. Nelson has been Chief Financial Officer & Treasurer since May 1998. From
1993 until he joined the Company, Mr. Nelson was Chief
47
<PAGE>
Financial Officer of Amana Tool Corporation. From 1992 to 1993, he was Chief
Financial Officer of American Dream Airlines and from 1989 to 1992, he was
Treasurer of Trump Shuttle, Inc. and USAir Shuttle, Inc. Mr. Nelson holds a B.A.
in Mathematics from Yeshiva University, an M.S. in Operations Research from New
York University and an M.B.A. in Finance from St. John's University.
Mr. Vincent J. Vitale has been Vice President-Customer Relations since January
1999. Prior to assuming this position, Mr. Vitale was Vice President-
Maintenance & Engineering from February 1997 to November 1998 and Vice
President-Special Projects from November 1998 to January 1999. 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.
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 1999 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 1999 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 1999 Proxy
Statement, pursuant to Regulation 14A, which is incorporated herein by
reference.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
Item 14(a)1 and 2. Financial Statement and Schedules. See "Index of 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
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
49
<PAGE>
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 1, 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
10(23)* Heller Financial - First Amendment to Amended &
Restated Loan & Security Agreement, Dated
February 27, 1998
10(24)* Heller Financial - Second Amendment to Amended &
Restated Loan & Security Agreement, dated
April 24, 1998
10(25)* Heller Financial - Third Amendment to Amended &
Restated Loan & Security Agreement, dated
May 1, 1998
10(26)* Heller Financial - Fourth Amendment to Amended &
Restated Loan & Security Agreement, dated
May 14, 1998
10(27)* Heller Financial, Inc. - Subordination Agreement, dated
April 12, 1998
10(28)* Heller Financial - Fifth Amendment to Amended &
Restated Loan & Security Agreement, dated
June 1, 1998
10(29)* Employment Agreement between the Company and
Nathan Nelson
10(30)* Heller Financial - Sixth Amendment to Amended &
Restated Loan & Security Agreement, dated
July 13, 1998
10(31)* The CIT Group/Equipment Financing, Inc. - Loan
Agreement, dated July 15, 1998
10(32)* C.I.T. Leasing Corporation - Purchase and Sale
Agreement, dated July 15, 1998
10(33)* Finova Capital Corporation - Amended & Restated
Promissory Note, dated August 13, 1998
50
<PAGE>
10(34)* Finova Capital Corporation - Amended & Restated
Promissory Note, dated August 13, 1998
10(35)* Finova Capital Corporation - Consolidated, Amended and
Restated Promissory Note, dated August 13, 1998
10(36)* Finova Capital Corporation - Second Amendment to
Aircraft Loan & Security Agreement, dated August 13,
1998
10(37)* Finova Capital Corporation - Sixth Amendment to
Aircraft Loan & Security Agreement, dated August 13,
1998
10(38)* Heller Financial, Inc. - Seventh Amendment to Loan &
Security Agreement, dated August 27, 1998
10(39)* GE Aircraft Engines Maintenance Services Agreement,
dated October 1, 1996
10(40)* GE Aircraft Engines/Tower Air Payment Plan, dated
September 28, 1998
10(41) Employment Agreement between the Company and William J.
Cain
10(42) ILFC - Purchase Agreement, dated November 13, 1998
10(43) US Tec - Engine Purchase & Sale Agreement, dated
December 13, 1998
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule for the year ended
December 31, 1998
________________
*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.
Item 14(d). Financial Statement Schedules. The response to this portion of
Item 14 is submitted as a separate section of this report.
51
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 14(a) (1) and (2)
Tower Air, Inc.
Index of Financial Statements and Financial Statement Schedule
The following Financial Statements of Tower Air, Inc. are included in Item 8:
Report of Independent Auditors.................................................................. F-2
Balance Sheets as of December 31, 1998 and 1997................................................. F-3
Statements of Operations for the years ended December 31, 1998, 1997
and 1996...................................................................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1998,
1997 and 1996................................................................................. F-5
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996...................................................................................... 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 Accounts................................................... F-19
</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, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 15, 1999, except for
the last paragraph of Note 2,
as to which date is April 15, 1999
F-2
<PAGE>
TOWER AIR, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS December 31,
- ------ -------------------------------------------
1998 1997
--------------- ----------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,614 $ 3,922
Certificates of deposit, at cost, which
approximates market 2,157 2,407
Receivables, net of allowance for doubtful
accounts of $1,556 and $1,474, respectively 38,626 28,151
Income tax receivable -- 3,850
Prepaid expenses and other current assets 3,414 880
------------------- -------------------
Total current assets 45,811 39,210
Property and Equipment, at cost:
Flight equipment 500,520 419,851
Ground property and equipment 34,067 33,489
------------------- -------------------
534,587 453,340
Less accumulated depreciation and amortization 235,658 186,945
------------------- -------------------
298,929 266,395
Other assets 6,022 4,515
=================== ===================
$ 350,762 $ 310,120
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Note payable $ 12,818 $ 21,038
Accounts payable 58,558 55,313
Accrued liabilities 44,329 40,698
Air traffic liability 13,793 18,867
Current maturities of long-term debt 56,701 43,273
------------------- -------------------
Total current liabilities 186,199 179,189
Long-Term debt 91,932 63,321
Deferred income taxes 19,558 16,399
Deferred rent 1,616 1,790
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;
15,575,424 issued in 1998 and 15,500,006 in 1997 156 155
Additional paid-in capital 44,428 43,885
Retained earnings 8,384 6,892
Less treasury stock, at cost (210,000 shares) (1,511) (1,511)
------------------- -------------------
Total stockholders' equity 51,457 49,421
------------------- -------------------
$ 350,762 $ 310,120
=================== ===================
</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,
-------------------------------------------------------------------
1998 1997 1996
------------------- ------------------ -------------------
OPERATING REVENUES:
<S> <C> <C> <C>
Scheduled passenger service $ 323,198 $ 267,326 $ 247,190
Commercial charter service 59,554 103,358 84,389
Military charter service 63,953 67,896 64,460
Cargo service 24,769 13,826 14,085
Other 12,346 9,096 7,695
------------------- ------------------ -------------------
Total operating revenues 483,820 461,502 417,819
OPERATING EXPENSES:
Fuel 70,902 85,803 82,561
Flight equipment rentals and
insurance 34,071 24,770 19,721
Maintenance 43,767 48,450 52,981
Crew costs and other 31,590 28,646 26,031
Aircraft and traffic servicing 86,173 76,772 83,704
Passenger servicing 55,711 50,370 55,645
Promotion, sales and commissions 66,240 66,167 60,669
General and administrative 22,542 20,658 21,178
Depreciation and amortization 55,703 52,414 38,855
------------------- ------------------ -------------------
Total operating expenses 466,699 454,050 441,345
------------------- ------------------ -------------------
OPERATING INCOME (LOSS) 17,121 7,452 (23,526)
INTEREST AND OTHER EXPENSES:
Interest expense 14,543 12,273 8,114
Other (income) expense (2,073) 69 749
------------------- ------------------ -------------------
Total interest and other expenses 12,470 12,342 8,863
------------------- ------------------ -------------------
INCOME (LOSS) BEFORE INCOME TAXES 4,651 (4,890) (32,389)
Income tax provision (benefit) 3,159 (995) (11,506)
------------------- ------------------ -------------------
NET INCOME (LOSS) $ 1,492 $ (3,895) $ (20,883)
=================== ================== ===================
NET INCOME (LOSS) PER COMMON SHARE -
BASIC AND DILUTED $ 0.10 $ (0.25) $ (1.37)
=================== ================== ===================
</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, 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
Warrants issued in connection
with debt issuance -- -- 342 -- -- -- 342
Exercised options 75 1 201 -- -- -- 202
Net income - 1998 -- -- -- 1,492 -- -- 1,492
-----------------------------------------------------------------------------------------
Balance at December 31, 1998 15,575 $ 156 $ 44,428 $ 8,384 (210) $ (1,511) $ 51,457
=========================================================================================
</TABLE>
See notes to financial statements.
F-5
<PAGE>
TOWER AIR, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,492 $ (3,895) $ (20,883)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 55,703 52,414 38,855
Provision for doubtful accounts 486 775 1,009
Warrants issued in connection with debt
issuance 342 -- --
Deferred income taxes 3,159 2,854 (5,109)
Deferred rent (174) (38) 320
(Gain) loss on disposal of property
and equipment (2,306) 153 403
Changes in certain assets and liabilities:
Receivables (10,961) (1,014) 3,135
Income tax receivable 3,850 2,547 (6,397)
Prepaid expenses and other assets (4,077) 2,235 (449)
Accounts payable and accrued liabilities 12,349 10,284 20,584
Air traffic liability (5,074) 857 (1,868)
----------- ---------- ----------
Net cash provided by operating activities 54,789 67,172 29,600
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of flight equipment (37,552) (72,696) (49,735)
Purchases of ground property and equipment (578) (1,572) (2,850)
Proceeds from sale of flight equipment 6,880 -- 6,191
Proceeds from sale of ground property and equipment -- 100 47
Proceeds from insurance company -- -- 25,000
Decrease (increase) in certificates of deposit 250 (2,132) 425
----------- ---------- ----------
Net cash used in investing activities (31,000) (76,300) (20,922)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 505,277 464,260 41,875
Principal payments on borrowings (530,627) (453,372) (47,884)
Proceeds from the exercise of stock options 202 -- --
Payment of cash dividends -- -- (1,835)
Other (949) (806) (1,387)
----------- ---------- ----------
Net cash (used in) provided by financing activities (26,097) 10,082 (9,231)
----------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (2,308) 954 (553)
Cash and cash equivalents at beginning of year 3,922 2,968 3,521
----------- ---------- ----------
Cash and cash equivalents at end of year $ 1,614 $ 3,922 $ 2,968
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 13,977 $ 11,221 $ 8,022
Cash paid during the period for income taxes $ -- $ 52 $ 442
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of flight equipment accrued but not paid $ 13,275 $ 14,238 $ 15,512
Purchase of flight equipment financed through debt $ 54,659 $ 27,189 $ 57,600
</TABLE>
See notes to financial statements.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, OPERATIONS 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.
OPERATIONS
The Company's ability to reduce its working capital deficiency during 1998 was
significantly affected, in part by the reduction in its line of credit and
expenditures for the purchase and repair of flight equipment. The Company's
ability to maintain a satisfactory level of working capital during 1999 depends
on its ability to increase revenue and reduce costs. The Company is currently
negotiating with a financial institution to further increase its line of credit.
The Company's management believes that its operating plans for the balance of
1999 will provide an appropriate level of working capital to meet the Company's
needs.
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, one Boeing 747 has a salvage
value of $6,000,000 and three 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.
During 1998, the Company changed their depreciation policy for overhauls of
airframe in accordance with their amended Federal Aviation Administration
maintenance plan. The result of the depreciation policy change resulted in a
decrease to depreciation expense for the year ended December 31, 1998 of
approximately $4.4 million.
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.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board ("FASB") Statement No. 109, Accounting for
Income Taxes.
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 expense".
F-7
<PAGE>
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations because the Company believes the alternative fair value
accounting provided for under FASB Statement No. 123, Accounting for Stock-Based
Compensation, requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of the grant, no compensation expense is
recognized.
EARNINGS PER SHARE
Basic and diluted earnings per share is calculated in accordance with FASB
Statement No. 128, Earnings per Share. All earnings per share amounts for all
periods have been presented, and where appropriate, restated to conform to the
requirements of Statement 128.
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, 1998, 1997 or 1996.
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, 1998 and 1997 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.
2. LONG-TERM DEBT AND NOTE PAYABLE
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1998 1997
------------------- --------------------
<S> <C> <C>
6.5% Notes, due in monthly installments through
December 2005 $ 19,899 $ --
8.5% - 9.45% Loans Payable, due in monthly
installments through September 2013 6,802 7,750
8.5% Note, due in monthly installments through
March 2001 7,520 --
9% Note, due in monthly installments through
January 2002 6,723 --
10.12% Note, due in monthly installments through
December 2002 41,351 42,851
10.27% Note, due in monthly installments
through February 2003 18,082 18,238
10.27% Note, due in monthly installments
through March 1999 2,034 4,032
12% Note, maturing in April 1999 3,000 --
</TABLE>
F-8
<PAGE>
<TABLE>
<S> <C> <C>
Prime plus 2.5% Note, due in monthly installments
through November 2000 6,593 9,520
Prime plus 2.75% Notes, due in monthly installments
through February 1999 -- 11,257
Prime plus 2.75% Note, due in monthly installments
through January 2000 7,358 --
Prime plus 2.0% Notes, due in monthly installments
through August 2000 29,168 12,946
Other 103 --
------------------- --------------------
148,633 106,594
Less current maturities 56,701 43,273
------------------- --------------------
$ 91,932 $ 63,321
=================== ====================
</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%. In August 1998, the lender agreed to defer the principal portion of the
monthly payment for a period of eight months, reducing the monthly payments
during the period by approximately $700,000. Accordingly, the maturity date of
the loan has been extended to December 2002. At December 31, 1998 and 1997,
there was approximately $41,351,000 and $42,851,000 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 of $5,500,000 of five-year financing at a fixed interest rate of 8.5%
for this project. As of December 31, 1998 and 1997, there was approximately
$6,802,000 and $7,750,000, respectively, outstanding.
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. During
1997, the Company borrowed an additional $5,365,000 at the same interest rate
from the same commercial finance institution with such debt being due in
September 1998. In August 1998, the loan agreement was amended and restated
whereas the financial institution reduced the monthly principal payments by
approximately $150,000. The amended note bears interest at a rate of 10.27% per
annum and is due in March 1999. Monthly principal and interest payments required
under the amended note approximate $500,000. At December 31, 1998 and 1997,
there was approximately $2,034,000 and $4,032,000 outstanding, respectively.
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. In August 1998, the lender agreed to
defer the principal portion of the monthly payment for a period of eight months,
reducing the monthly payments during the period by approximately $300,000.
Accordingly, the maturity date of the loan has been extended to February 2003.
At December 31, 1998 and 1997, there was approximately $18,082,000 and
$18,238,000 outstanding, respectively.
In January 1998, the Company entered into an agreement with a financial
institution to borrow up to $15,000,000. The proceeds of this borrowing
($13,584,000) were used to pay the balances
F-9
<PAGE>
remaining on two previous agreements with the same commercial financial
institution of $7,500,000 and $3,757,000 outstanding, respectively, as of
December 31, 1997 and the remaining proceeds were used primarily to pay for
engines under repair. The note bears interest at prime plus 2.75% and is due in
January 2000. The note is secured by twelve JT9D engines. The balance
outstanding on the note at December 31, 1998 was approximately $7,358,000.
In February and March 1998, the Company borrowed $6 million from Funding
Enterprises, LLC, a limited liability company in which the Company's Chairman
and former President were members, bearing interest at 12% per annum. On July 1,
1998, the Company discharged its obligations under the 12% Note by issuing a new
note (the "Nachtomi Note"), due August 7, 1998, to the Company's Chairman in the
principal amount of $3.0 million and repaying the balance of the 12% Note in
cash. The Nachtomi Note originally provided for interest at an annual rate of
12.0%, increasing to 15% after August 7, 1998. The Nachtomi Note was amended on
August 7, 1998 to reduce the interest rate to 12% after August 7, 1998 and to
extend the maturity date to April 30, 1999. In connection with the Funding
Enterprises LLC Note, warrants for the purchase of 1.2 million shares of common
stock of the Company were issued with an exercise price of $5.00. The Company
recorded approximately $340,000 in interest expense relating to the fair value
of the warrants as of August 7, 1998. The warrants expire in February 2008. At
December 31, 1998, $3,000,000 was 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 through November 2000. The balance outstanding as of December 31, 1998
and 1997 was approximately $6,593,000 and $9,520,000, respectively.
The Company entered into a finance agreement during September 1997 through March
1998 involving the conversion and refurbishment of seven Pratt & Whitney JT9
engines. In connection with this transaction, promissory notes were issued
between September 1997 and March 1998, totalling approximately $35,780,000.
Related interest accrues at prime plus 2% per annum on the outstanding principal
balance. In September 1998, the lender agreed to increase the loan to include
$4.2 million relating to certain engines previously overhauled. In addition, the
maturity date of the note was extended to August 2000. The balance outstanding
at December 31, 1998 and 1997 was approximately $29,168,000 and $12,946,000.
On July 15, 1998, the Company purchased a leased aircraft from a lessor for a
purchase price of $13.5 million of which a credit of $6 million was given by the
lessor to the Company for the payments of maintenance reserves paid during the
lease period and a balance of $7.5 million was financed by the same lessor. In
addition, the lessor waived all previously outstanding rent and maintenance
reserves through June 30, 1998, amounting to $1.4 million. This loan requires a
monthly payment of approximately $50,000 of interest only commencing October
1998 through May 1999 and then a total monthly payment of approximately $370,000
including principal and interest through March 2001. The note bears interest at
8.5% per annum. At December 31, 1998 there was approximately $7,520,000
outstanding.
In November 1998, the Company purchased an existing leased aircraft from the
lessor for a purchase price of $21,000,000. In connection with this purchase,
the Company paid $1,000,000 and issued two $10,000,000 promissory notes to the
seller, a financial institution. In addition, the lessor paid the Company for
all unused accumulated maintenance reserves which amounted to approximately $5
million. Such amounts were recorded as a reduction of aircraft maintenance
expense in the fourth quarter of 1998. The notes bear interest at 6.5% per
annum. The first note requires monthly principal and interest payments of
approximately $105,000 through October 2005 and a balloon payment of $4.9
million in November 2005. The second note requires monthly principal and
interest payments of approximately $105,000 through October 2004 and a balloon
payment of $5.7 million in November 2004. At December 31, 1998, the aggregate
balance outstanding on these notes was approximately $19,899,000.
F-10
<PAGE>
In December 1998, the Company purchased three engines for an aggregate purchase
price of $8,100,000. In connection with the purchase, the Company paid
$1,377,000 and issued a $6,723,000 promissory note to the seller. This loan
bears interest at 9% per annum and requires monthly payments of approximately
$214,000 through January 2002. At December 31, 1998, the balance outstanding was
$6,723,000.
At December 31, 1998, the aggregate annual maturities of long-term debt during
the next five years are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $56,701
2000 $33,033
2001 $21,616
2002 $20,226
2003 $ 3,651
</TABLE>
Certain debt is secured by aircraft having a net book value of approximately
$113,732,000 at December 31, 1998.
The Company has a $15,000,000 line of credit ("Loan Agreement") with a financial
institution which may be used for short-term borrowings or letters of credit.
The agreement, as amended in September 1997, expires in September 1999. Since
February 1998, the Company has entered into seven amendments to the Loan
Agreement providing, among other things, for (i) changes in the maximum amount
of the revolving loan during different periods; (ii) subordination of loans made
to the Company by officers and directors; (iii) increases to the spread between
the amount of collateral required and the amount of available borrowing under
the Loan Agreement; (iv) modification of the financial covenant relating to the
Company's tangible net worth to facilitate compliance by the Company; and (v)
increases in the interest rate from prime plus 0.75% to prime plus 1.50% (9.25%
at December 31, 1998). Through a combination of the fourth amendment on May 14,
1998 and the sixth amendment on July 13, 1998, the Company agreed to modify the
tangible net worth covenant in the Loan Agreement by reducing the amount of
tangible net worth the Company is required to maintain from $47.0 million prior
to August 31, 1998 and $55.0 million thereafter to $35.0 million through May
1998, $38.0 million for June 1998, $47.5 million through August 1, 1998 and
$55.0 million from August 31, 1998 and thereafter. On June 1, 1998, the fifth
amendment permanently limited the maximum amount of borrowings under the
facility to $15.0 million beginning on June 29, 1998, a decrease from the $25.0
million maximum amount originally permitted. The sixth amendment to the Loan
Agreement waived defaults resulting from the repayment of certain notes payable
and the defaults referred to below. On August 27, 1998, the seventh amendment
modified the tangible net worth covenant by reducing the amounts of tangible net
worth the Company is required to maintain to $44.5 million in July 1998, $45.0
million from August 1998 through March 1999 and to $50.0 million in April and
May 1999. As of December 31, 1998, the Company had $12,818,000 of obligations
outstanding under the Loan Agreement of which an additional $2.0 million
consisted of letters of credit issued to various suppliers and insurance
companies. The credit line is primarily secured by the Company's trade
receivables and certain property and equipment.
On April 14, 1999, the Company entered into the eighth amendment to waive a
default in the Loan Agreement and to increase the line of credit as follows: (i)
from and after April 14, 1999 to and including May 30, 1999, $20,000,000; (ii)
on and after May 31, 1999, to and including June 29, 1999, $19,000,000; (iii) on
and after June 30, 1999, to and including July 30, 1999, $18,000,000; (iv) on
and after July 31, 1999, to and including August 30, 1999, $16,000,000; and (v)
on and after August 31, 1999, $15,000,000. On April 15, 1999, the Company
entered into the ninth amendment to modify the tangible net worth covenant by
reducing the amounts of tangible net worth the Company is required to maintain
to $45 million in April 1999 through June 1999, and $50 million in July 1999
through September 1999.
F-11
<PAGE>
3. INCOME TAXES
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ (3,849) $ (6,397)
State and local -- -- --
------------------- ------------------- -------------------
-- (3,849) (6,397)
------------------- ------------------- -------------------
Deferred:
Federal 2,743 3,086 (3,541)
State and local 416 (232) (1,568)
------------------- ------------------- -------------------
3,159 2,854 (5,109)
------------------- ------------------- -------------------
Provision (benefit) for income taxes $ 3,159 $ (995) $ (11,506)
=================== =================== ===================
</TABLE>
Deferred tax expense (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Tax depreciation greater than
book depreciation $ 8,431 $ 12,218 $ 4,056
Tax benefit of net operating loss
carryforwards (5,674) (15,023) (13,792)
Tax utilization of alternative
minimum tax credit carryforwards -- 3,867 3,572
Other 402 1,792 1,055
------------------- ------------------- -------------------
$ 3,159 $ 2,854 $ (5,109)
=================== =================== ===================
</TABLE>
The income tax provisions were at rates different from the U.S. federal
statutory rates for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Statutory rate 34.0 % (34.0) % (35.0) %
State and local income tax
(benefit), net of federal tax benefit 5.9 (3.1) (3.0)
Nondeductible items 21.8 20.0 2.5
Other 6.2 (3.2) --
-------------------- -------------------- --------------------
Effective tax rate 67.9 % (20.3) % (35.5) %
==================== ==================== ====================
</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
1998 1997
-----------------------------------------
<S> <C> <C>
Deferred tax liabilities for taxable temporary differences:
Tax depreciation in excess of book depreciation $ 54,765 $ 46,334
Other 1,605 1,203
-----------------------------------------
Total deferred tax liabilities 56,370 47,537
Deferred tax assets:
Tax benefit of net operating loss carryforwards 34,471 28,797
Alternative minimum tax credit carryforwards 2,341 2,341
-----------------------------------------
Total deferred tax assets 36,812 31,138
-----------------------------------------
Net noncurrent liability $ 19,558 $ 16,399
=========================================
</TABLE>
F-12
<PAGE>
At December 31, 1998, for federal reporting purposes, the Company had
approximately $87,935,000 of net operating loss carryforwards available to
offset future federal tax liabilities.
4. COMMITMENTS
At December 31, 1998, the Company had eight Boeing 747 aircraft under operating
leases. Three aircraft are under the terms of the same lease agreement which
provides monthly rental payments at fixed rates. Under the terms of four of the
lease agreements, monthly rent is at a fixed rate. In addition, one aircraft is
being leased at a power by the hour rate, as defined.
In January 1998, the Company commenced rental payments on a leased aircraft,
amended in the prior year, providing for fixed monthly rental payments. This
lease was extended through January 2001.
In March 1998, the Company commenced rental payments on a leased aircraft that
was converted to a freighter. The amended lease term is fifteen years with
monthly rentals at a fixed rate through 2013.
In April 1998, the Company renewed lease agreements on two aircraft from the
same lessor. These leases, for five and ten years, respectively, provide for
rental payments at a fixed monthly rate.
In September 1998, the Company entered into a one-year lease for a freighter
which commenced on the delivery date in October 1998. Monthly rental payments
are determined on a power by the hour basis.
Five of the Company's 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, 1998, 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>
1999 22,636 5,107 27,743
2000 21,547 5,066 26,613
2001 17,160 5,066 22,226
2002 17,160 5,066 22,226
2003 12,159 1,800 13,959
Thereafter 32,144 454 32,598
------------------------------------
$122,806 $22,559 $145,365
====================================
</TABLE>
Rent expense amounted to approximately $38,000,000, $28,500,000 and $22,600,000
for the years ended December 31, 1998, 1997 and 1996, respectively. These
amounts include flight equipment rental expense of $32,100,000, $22,700,000 and
$17,100,000 and ground property and equipment rentals of $5,900,000, $5,800,000
and $5,500,000 for the years ended December 31, 1998, 1997 and 1996,
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. 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
October 1998, the contract was automatically extended
F-13
<PAGE>
through October 1999. 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, 1998, the Company had 1,932 employees, 1,467 of which were
full time and 465 of which were part time. Of the full time employees, 543
belong to the Association of Flight Attendants (AFA) and 220 are members of the
Air Line Pilots Association (ALPA).
The Company's September 1993 contract with its pilots and flight engineers
became amendable in September 1996 and direct negotiations continued until July
1997, at which time a federal mediator was appointed. On June 12, 1998, the
Company's pilots and flight engineers elected to change representation from an
in-house union to ALPA. The Company expects mediation to conclude sometime
during 1999.
The Company's contract with its flight attendants became amendable in September
1998. Negotiations with the AFA commenced in September 1998 to replace the
existing contract and are expected to continue well into 1999.
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, 1998 and 1997, cash collateral
amounted to $2,157,000 and $2,407,000. 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, 1998, 1997 and 1996, the Company's contributions, which are principally
based on a percentage of an employee's annual compensation, amounted to
approximately $758,000, $719,000 and $698,000, respectively.
6. CONCENTRATION OF CREDIT RISK
Sales with foreign destinations and/or arrivals accounted for 63%, 69% and 70%
of total revenues for the years ended December 31, 1998, 1997 and 1996,
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, 1998 and 1997 accounts receivable from the U.S.
government and its agencies were approximately $3,100,000 and $2,500,000,
respectively.
7. STOCK OPTION PLAN
The Company has authorized 2,400,000 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-14
<PAGE>
The following table summarizes the activity under these plans (shares in
millions):
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Beginning of year 1,106,136 $3.75 733,850 $7.89
Granted 180,000 $2.68 998,157 $2.83
Cancelled (671,092) $3.57 (625,871) $7.72
Exercised (75,418) $2.69 -- --
----------------- -----------------
End of Year 539,626 1,106,136 $3.75
Options exercisable at
end of year 215,647 $4.89 104,834 $8.99
<CAPTION>
1996
-------------------------------------
Weighted-
Average
Exercise
Shares Price
----------------- ----------------
<S> <C> <C>
Beginning of year 424,398 $10.13
Granted 448,067 $ 6.45
Cancelled (138,615) $10.09
Exercised --
-----------------
End of Year 733,850 $ 7.89
Options exercisable at
end of year 169,302 $11.37
</TABLE>
The following table summarizes information about these plans at December 31,
1998:
<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>
$2.06-$2.50 130,000 3.8 years $ 2.07 30,000 $ 2.10
$2.51-$5.00 334,626 1.6 years $ 3.01 125,647 $ 2.72
$5.01-$7.50 30,000 2.0 years $ 6.81 15,000 $ 7.04
$7.51-$10.00 15,000 -- $ 8.50 15,000 $ 8.50
$10.01-$12.50 -- -- -- -- --
$12.51-$15.00 30,000 -- $13.88 30,000 $13.88
----------------- -----------------
539,626 215,647
</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 1998,
1997 and 1996 were $1.99, $1.28 and $2.36, 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, 1998,
1997 and 1996, respectively: risk-free interest rate of 5%, 6% and 6%,
volatility factor of .608, .434 and .371, 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.
F-15
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss) $1,337,805 $(4,451,467) $(21,309,960)
Pro forma net income (loss) per share $ 0.09 $ (0.29) $ (1.39)
</TABLE>
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,
1998 1997
-----------------------
<S> <C> <C>
Accrued maintenance $20,521 $16,652
Other accrued operating expenses 10,484 7,154
Accrued salaries 3,843 5,056
Accrued interest 1,707 1,161
Accrued rent 1,502 1,675
Other 6,272 9,000
-----------------------
$44,329 $40,698
=======================
</TABLE>
9. CONTINGENCIES
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.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly financial data for 1998 and 1997 is as follows (in thousands
except per share amounts):
F-16
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-----------------------------------------------
<S> <C> <C> <C> <C>
1998
- -----
Operating revenues $96,740 $119,556 $162,875 $104,649
==============================================
Operating income (loss) $(9,355) $ 3,925 $ 24,185 $ (1,634)
==============================================
Net income (loss) $(7,325) $ 501 $ 12,060 $ (3,744)
==============================================
Net income (loss) per
common share $ (.48) $ .03 $ .79 $ (.24)
==============================================
Net income (loss) per
common share assuming
dilution $ (.48) $ .03 $ .79 $ (.24)
==============================================
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)
==============================================
</TABLE>
11. RECEIVABLES
The components of receivables were as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------------
<S> <C> <C>
Trade receivables $ 39,682 $ 28,985
Maintenance receivables 500 640
------------------------------
40,182 29,625
Less: Allowance for doubtful accounts (1,556) (1,474)
------------------------------
$ 38,626 $ 28,151
==============================
</TABLE>
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
F-17
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------- ------------
<S> <C> <C> <C>
Numerator for basic earnings per share - income (loss)
available to common stockholders $ 1,492 $(3,895) $(20,883)
Numerator for diluted earnings per share - income (loss)
available to common stockholders after assumed
conversions $ 1,492 $(3,895) $(20,883)
Denominator:
Denominator for basic earnings per share-weighted
average shares 15,354 15,290 15,290
Effect of dilutive securities:
Employee stock options 129 -- --
---------------------------------------------------------
Dilutive potential common shares 129 -- --
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 15,483 15,290 15,290
=========================================================
Basic earnings per common share $ 0.10 ($0.25) ($1.37)
=========================================================
Diluted earnings per common share $ 0.10 ($0.25) ($1.37)
=========================================================
</TABLE>
The computation of diluted EPS did not assume the conversion of 1,200,000
warrants and 125,000 options in 1998 because their inclusion would have been
antidilutive.
13. SEGMENT REPORTING
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.
In 1998, Tower Air adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise," and requires that a public company report annual and
interim financial and descriptive information about its reportable operating
segments pursuant to criteria that differ from current accounting practice.
Operating segments, as defined, are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
Tower Air's operating revenue by geographic markets are summarized below (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Domestic $177,723 $142,090 $131,425
Europe 241,148 243,195 207,443
Pacific 35,960 60,062 37,444
Latin America 28,989 16,155 41,507
------------------------------------
Total operating revenues $483,820 $461,502 $417,819
====================================
</TABLE>
The Company attributes operating revenues by geographic region based upon the
origin and destination of each flight segment.
The Company's tangible assets consist primarily of flight equipment which are
mobile across geographic markets and, therefore, have not been allocated by
geographic region.
F-18
<PAGE>
SCHEDULE II
TOWER AIR, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(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, 1996 $1,488 $1,009 $1,296 $1,201
Year ended December 31, 1997 $1,201 $ 775 $ 502 $1,474
Year ended December 31, 1998 $1,474 $ 486 $ 404 $1,556
</TABLE>
(a) Uncollectible accounts written off, net of recoveries.
F-19
<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: TOWER AIR, INC.
By:/s/ MORRIS K. NACHTOMI
----------------------------
Morris K. Nachtomi
Chief Executive Officer,
President 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 April 15, 1999 on behalf of the
Registrant and in the capacities indicated.
/s/ MORRIS K. NACHTOMI Chief Executive Officer,
- -----------------------------------
Morris K. Nachtomi President and Chairman of the
Board of Directors (Principal
Executive Officer)
/s/ BADAR MIR Vice President-Financial Accounting
- -----------------------------------
Badar Mir (Principal Financial Officer)
/s/ HENRY P. BAER Director
- -----------------------------------
Henry P. Baer
/s/ STEPHEN L. GELBAND Director
- -----------------------------------
Stephen L. Gelband
/s/ LEO-ARTHUR KELMENSON Director
- ------------------------------------
Leo-Arthur Kelmenson
/s/ STEPHEN A. OSBORN Director
- -----------------------------------
Stephen A. Osborn
/s/ ELI SEAGAL Director
- -----------------------------------
Eli Segal
<PAGE>
EXHIBIT 10(41)
[LETTERHEAD OF TOWER AIR APPEARS HERE]
Hangar 17 JFK International Airport Jamaica, New York 11430
October 19, 1998
Mr. William Cain
105 Louisiana Street
Long Beach, NY 11561
Dear Bill:
This letter will confirm our recent discussions and constitute Tower Air's
formal offer of employment to you of the position "Senior Vice President-
Engineering & Maintenance", with an expected hire date of no later than
November 9, 1998. The following parameters will be applicable to your
employment:
1. Annual Salary: $275,000
2. Minimum term of employment: 4 years
3. Annual Bonus: Minimum of 25% of salary subject to potential
increase based upon satisfactory achievement of performance
objectives to be mutually agreed upon between the Chairman & CEO
and the Senior Vice President-Engineering & Maintenance.
4. Signing Bonus: An award of 50,000 shares of Tower Air Common Stock
plus 25,000 stock options with the exercise price based on the
closing price of Tower Air Common Stock on October 19, 1998.
5. Additional Stock Option Grant: The Senior Vice President-
Engineering & Maintenance will also be granted 100,000 additional
stock options with the exercise price based on the closing price
of Tower Air Common Stock on October 19, 1998. These options will
vest at a rate of 25,000 per year during the course of the 4 years
of the employment term.
6. Eligibility to participate immediately in Company medical plans.
7. Annual Performance Review: The Senior Vice President-Engineering &
Maintenance's performance will be reviewed annually by the
Chairman & CEO and salary will be adjusted consistent with
<PAGE>
performance as determined solely by the Chairman & CEO and in
compliance with the salary policy of the Company then currently in
effect.
8. During his employment, the Senior Vice President-Engineering &
Maintenance may be terminated by the Company at any time for
cause. If his employment is terminated by the Company for reasons
other than cause, the Company will pay the Senior Vice President-
Engineering & Maintenance the balance of annual salary payments
outstanding to the end of the four-year employment term.
The Senior Vice President-Engineering & Maintenance will be
entitled to no other payments or benefits as a consequence of the
termination of his employment, except as specified in this
paragraph or otherwise required by law. For the purposes of this
Agreement, "cause" shall be defined as willful failure to follow
instructions of a significant nature or conduct that is criminal,
fraudulent or grossly negligent.
9. In discharging his duties to Tower Air, the Senior Vice President-
Engineering & Maintenance shall, at all times, devote his complete
and utter adherence to the philosophy of conservative flight
safety principles.
10. Vacation: An amount consistent with the Company's vacation
policy.
11. Parking privilege in Company executive parking lot.
I look forward to officially welcoming you to the Tower Air family no later
than November 9, 1998.
If you are in agreement with the foregoing, please sign in the space
provided below.
Sincerely,
/s/ Morris K. Nachtomi
Morris K. Nachtomi
Agreed and Accepted this 19 day of
October, 1998.
/s/ William Cain
- ---------------------------------
William Cain
<PAGE>
EXHIBIT 10(42)
================================================================================
MORTGAGE AND SECURITY AGREEMENT
Dated as of November 13, 1998
Between
TOWER AIR, INC.,
Mortgagor
and
INTERNATIONAL LEASE FINANCE CORPORATION,
Mortgagee
================================================================================
Covering one Boeing 747-212B Aircraft, U.S. Registration Mark N618FF and
manufacturer's serial no. 21937, four Pratt & Whitney JT9D-7Q engines,
manufacturer's serial nos. 702097, 702163, 702195 and 702348, respectively.
MORTGAGE AND SECURITY AGREEMENT
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. SECURITY INTEREST......................................................................................... 4
1.1 Granting of Security Interest....................................................................... 4
-----------------------------
2. EVENTS OF DEFAULT; DISPOSITION OF SECURITY AND APPLICATION OF PROCEEDS.................................... 6
2.1 Judicial Proceedings, etc., Following Event of Default.............................................. 6
------------------------------------------------------
2.2 Delivery of Security, Power of Sale, etc............................................................ 7
----------------------------------------
2.3 Right to Possession, etc............................................................................ 8
------------------------
2.4 Application of Proceeds............................................................................. 9
-----------------------
2.5 Matters Involving Manner of Sale.................................................................... 9
--------------------------------
3. REPRESENTATIONS, WARRANTIES AND COVENANTS................................................................. 11
3.1 Representations and Warranties...................................................................... 11
------------------------------
3.2 Covenants........................................................................................... 11
---------
4. CONDEMNATION.............................................................................................. 11
4.1 Notice of Condemnation.............................................................................. 11
----------------------
4.2 Condemnation of Engine.............................................................................. 12
----------------------
4.3 Condemnation of Aircraft or Airframe................................................................ 12
------------------------------------
5. MISCELLANEOUS............................................................................................. 12
5.1 Indemnification by Mortgagor........................................................................ 12
----------------------------
5.2 Performance by Mortgagee............................................................................ 12
------------------------
5.3 Power of Attorney................................................................................... 13
-----------------
5.4 Waiver, etc., by Mortgagor.......................................................................... 13
--------------------------
5.5 Amendment, etc...................................................................................... 14
--------------
5.6 Mortgagor's Obligations Absolute.................................................................... 14
--------------------------------
5.7 Successors and Assigns.............................................................................. 15
----------------------
5.8 Severability........................................................................................ 15
------------
5.9 Governing Law....................................................................................... 15
-------------
5.10 Consent to Jurisdiction, etc........................................................................ 15
----------------------------
5.11 Further Assurances.................................................................................. 16
------------------
5.12 Notices............................................................................................. 16
-------
5.13 Liability of Mortgagee.............................................................................. 17
----------------------
5.14 Absence of Certain Duties........................................................................... 17
-------------------------
</TABLE>
2
<PAGE>
THIS MORTGAGE AND SECURITY AGREEMENT HAS BEEN EXECUTED IN SEVERAL COUNTERPARTS.
ONLY THE ORIGINAL COUNTERPART CONTAINS THE RECEIPT THEREFOR. TO THE EXTENT, IF
ANY, THAT THIS MORTGAGE AND SECURITY AGREEMENT CONSTITUTES CHATTEL PAPER (AS
SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY
APPLICABLE JURISDICTION), NO SECURITY INTEREST IN THIS MORTGAGE AND SECURITY
AGREEMENT MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART
OTHER THAN THE ORIGINAL COUNTERPART THAT CONTAINS THE RECEIPT THEREFOR EXECUTED
BY INTERNATIONAL LEASE FINANCE CORPORATION.
THIS COUNTERPART IS THE ORIGINAL COUNTERPART.
MORTGAGE AND SECURITY AGREEMENT
MORTGAGE AND SECURITY AGREEMENT (the "Agreement") dated as of November 13,
1998 between TOWER AIR, INC., a Delaware corporation (the "Mortgagor"), and
---------
INTERNATIONAL LEASE FINANCE CORPORATION, a California corporation (the
"Mortgagee"). Capitalized terms used and not defined herein are used as defined
---------
in the Loan Agreement (as defined below).
W I T N E S S E T H :
-------------------
WHEREAS, pursuant to an Aircraft Sale Agreement dated as of November 13,
1998 (the "Sale Agreement"), between Mortgagee (in its capacity as seller of the
--------------
Aircraft, the "Seller") and Mortgagor, the Mortgagor has agreed to purchase one
------
used Boeing 747-212B aircraft bearing manufacturer's serial number 21937 (such
aircraft, including the four Engines (as hereinafter defined) constituting a
part thereof, whether or not from time to time installed on the Airframe (as
hereinafter defined) constituting a part thereof, being herein called the
"Aircraft"); and
- ---------
WHEREAS, the Mortgagee and the Mortgagor have entered into a Term Loan
Agreement (the "Loan Agreement"), dated as of the date hereof, pursuant to which
--------------
the Mortgagee has agreed, on the terms and conditions therein set forth, to make
a loan (the "Loan") to the Mortgagor in order to finance a portion of the
----
purchase price of the Aircraft; and
WHEREAS, the Mortgagor has agreed to secure its obligations under the Loan
Agreement by granting to the Mortgagee a mortgage Lien on its Interest in the
Aircraft; and
WHEREAS, the Mortgagor is executing and delivering this Agreement in order
to create in favor of the Mortgagee a valid and perfected security interest in
the property described herein, which security interest shall secure (i) the
prompt indefeasible payment of any indebtedness or obligation of the Mortgagor
evidenced by or arising under the Loan Agreement, this Agreement and
3
<PAGE>
the Notes described in the Loan Agreement and (ii) the timely and faithful
performance and observance by the Mortgagor of all the agreements, promises and
covenants undertaken in the Loan Agreement, this Agreement and the Notes; and
WHEREAS, this Agreement relates to the Airframe and Engines more
specifically described below and is being filed for recordation on the date
hereof with the Federal Aviation Administration;
NOW, THEREFORE, in order to (a) induce the Mortgagee to enter into the Loan
Agreement and (b) secure the prompt payment of all indebtedness of the Mortgagor
under the Loan Agreement and this Agreement and the performance and observance
of the agreements and covenants of the Mortgagor under the Loan Agreement, this
Agreement and the Promissory Note, the Mortgagor and the Mortgagee hereby agree
as follows:
1. SECURITY INTEREST
1.1 Granting of Security Interest. The Mortgagor does hereby transfer,
-----------------------------
convey, mortgage, hypothecate, assign and grant a security interest to the
Mortgagee, subject to no prior interests of any Person whatsoever, in the
following collateral (collectively the "Security") attaching on the date of
--------
delivery of this Agreement:
(a) one Boeing 747-212B airframe, bearing U.S. registration mark
N618FF, and manufacturer's serial no. 21937, and the four Pratt & Whitney
JT9D-7Q Engines installed thereon bearing, respectively, manufacturer's
serial numbers 702097, 702163, 702195 and 702348 (each of which engines has
750 or more rated takeoff horsepower or the equivalent of such horsepower)
(such airframe being referred to herein as the "Airframe" and each such
--------
Engine, including any replacement JT9D-7A engine substituted therefor, as
an "Engine", and the Airframe and the four Engines, including any such
------
replacement engine, constituting the "Aircraft"), whether or not any such
--------
original or replacement engines may from time to time no longer be
installed on the Airframe or may be installed on any other airframe or any
other aircraft;
(b) all equipment, attachments, accessories, replacement and added
parts and components now or hereafter placed thereon, installed therein or
attached thereto (other than an engine that is not an Engine), whether or
not any of such equipment, attachments, accessories. replacements or added
parts or components may from time to time no longer be installed on the
Airframe or may be installed in any other airframe or any other aircraft;
(c) all proceeds from the sale or other disposition of, all proceeds
of insurance due to the Mortgagor on, and all proceeds of any Condemnation
(as hereinafter defined) due to the Mortgagor with respect to, any of the
properties described in clauses (a) and (b) above;
4
<PAGE>
Tower Air, Inc
Mortgage and Security Agreement
November, 1998
(d) all technical documents, manuals, log books and records that
relate to the Aircraft and all the Mortgagor's right, title and interest,
present and future, therein and thereto;
(e) all rents, issues, profits, revenues and other income of the
property intended, subjected or required to be subjected to the Lien of
this Agreement hereby or by any supplement to this Agreement in form and
substance satisfactory to the Mortgagee (a "Mortgage Supplement"), and all
-------------------
of the estate, right, title and interest of every nature whatsoever of the
Mortgagor in and to the same and every part thereof; and
(f) all proceeds, howsoever arising, of the foregoing;
TO HAVE AND TO HOLD the Security unto the Mortgagee, and its successors and
assigns, as security for
(i) the due and punctual indefeasible payment in full of (A) all
sums, together with interest thereon, owing or outstanding or
that may be or become due and payable to the Mortgagee, and its
successors and assigns, by the Mortgagor, under the Loan
Agreement, the Notes or this Agreement, (B) the reasonable
costs and expenses of collection and foreclosure with respect
to the indebtedness and obligations secured hereby, whether now
existing or hereafter arising, including without limitation
reasonable attorneys' fees and other costs and expenses
expended or incurred by the Mortgagee under or pursuant to this
Agreement or otherwise in connection with discovering,
locating, satisfying Liens and charges on, protecting and
taking possession of the Security or any part thereof, the
returning of the Security or any part thereof to any place
designated by the Mortgagee (including, without limitation,
costs of repairing, rehabilitating and storing the Security or
any part thereof), and the enforcement of, or collection of
amounts owing or outstanding or due and payable under, the Loan
Agreement and the other agreements and instruments referred to
in this clause (i) and (C) interest (to the extent permitted by
Applicable Law) on all costs and expenses described in this
clause (i), at a rate of interest per annum equal to the
Overdue Rate, computed on the basis of a 360-day year and the
actual number of days elapsed; and
(ii) the timely and faithful performance and observance by the
Mortgagor of all agreements, promises and covenants undertaken
by it hereunder, in the Loan Agreement and the other agreements
and obligations referred to in clause (i) above; provided,
however, that, and these presents are subject to the condition
that, if the Mortgagor shall have paid or caused to be paid in
full all sums, together with interest thereon, owing or
outstanding or
5
<PAGE>
that may be due and payable by the Mortgagor to the Mortgagee
under the Loan Agreement and any other indebtedness, obligation
or account whatsoever (whether presently existing or
subsequently arising) secured hereby, and the Mortgagor shall
have well and faithfully performed and observed all the
agreements and covenants therein and herein at the time and in
the manner specified therefor, and any other indebtedness,
obligation or account whatsoever (whether presently existing or
subsequently arising) secured hereby, then, upon the request of
the Mortgagor, delivered to the Mortgagee, the Mortgagee shall
execute and deliver to the Mortgagor, at the expense of the
Mortgagor, such instruments of satisfaction and discharge as
may be appropriate (without, however, being under any duty to
cause such instruments to be filed or recorded in the public
records wherein this Agreement shall have been filed and/or
recorded), and otherwise the same shall be and remain in full
force and effect.
2. EVENTS OF DEFAULT; DISPOSITION OF SECURITY AND APPLICATION OF PROCEEDS
2.1 Judicial Proceedings, etc., Following Event of Default. If any
------------------------------------------------------
Event of Default under the Loan Agreement shall occur and be continuing, then,
and in any such event, the Mortgagee may, forthwith upon notice to the Mortgagor
(it being understood and agreed that such provision of notice to the Mortgagor
shall not be deemed to limit or otherwise restrict the Mortgagee's rights and
remedies hereunder or under any other agreement): (i) apply to a court of
competent jurisdiction to obtain specific performance or observance by the
Mortgagor of any covenant, agreement or undertaking on the part of the Mortgagor
hereunder that the Mortgagor shall have failed to observe or perform or to
obtain to aid in the execution of any power granted herein; and/or (ii) proceed
to foreclose against the Security or any part thereof pursuant to this
Agreement, and according to the Applicable Law of the jurisdiction or
jurisdictions in which such Security or part thereof shall at the time be
located, by doing any one or more or all of the acts described in Section 2.2
and/or the following acts, as the Mortgagee, in its sole and complete discretion
(acting in good faith), may then elect:
(a) exercise all the rights and remedies, in foreclosure and
otherwise, available to it as a mortgagee and secured party under the
provisions of Applicable Law;
(b) institute legal proceeding to obtain a judgment conferring on
the Mortgagee the right to immediate possession or requiring the Mortgagor
to deliver immediate possession of all or part of such Security to the
Mortgagee, to the entry of which judgment the Mortgagor hereby specifically
consent;
6
<PAGE>
(c) institute legal proceedings to foreclose upon and against the
security interest granted in and by this Agreement, to recover judgment for
all amounts then due and owing as indebtedness secured hereby, and to
collect the same out of any of the Security or the proceeds of any sale
thereof;
(d) institute legal proceedings for the sale, under the judgment or
decree of any court of competent jurisdiction, of any or all of the
Security;
(e) without regard to the adequacy of the security for the Loan
Agreement or any other agreement between the Mortgagee and the Mortgagor by
virtue of this Agreement or otherwise, or any other collateral or other
security or to the solvency of the Mortgagor, institute legal proceedings
for the appointment of a receiver or receivers pending foreclosure
hereunder or for the sale to any of the Security under the order of a court
of competent jurisdiction or under other legal process; or
(f) personally, or by agents or attorneys, enter upon any premises
where the Security or any part thereof may then be located, and take
possession of and remove all or any part thereof or render it unusable; and
without being responsible for loss or damage to such Security, hold, store
and keep idle, or lease, operate or otherwise use or permit the use of, the
same or any part thereof, for such time and upon such terms as the
Mortgagee may in its sole and complete discretion deem to be in its own
best interests, and demand, collect and retain all hire, earnings and other
sums due and to become due in respect of the same from any party
whomsoever, accounting for net earnings, if any, arising from such use and
charging against all receipts from the use of the same or from the sale
thereof, by court proceedings or pursuant to Section 2.2, all other costs,
expenses, charges, damages and other losses resulting from such use in good
faith.
All expenses of obtaining any such judgment, bringing any such legal proceeding
or of pursuing, searching for and taking such property shall, until paid, be
secured by the Lien of this Agreement.
2.2 Delivery of Security, Power of Sale, etc.. If the Mortgagee should
-----------------------------------------
elect to foreclose upon and against the security interest created in and by this
Agreement, the Mortgagor shall, upon demand of the Mortgagee, deliver to the
Mortgagee all or any part of the Security at such time or times and place or
places as the Mortgagee may specify. The Mortgagee is hereby authorized and
empowered, in accordance with Applicable Law and without being responsible for
loss or damage to such security incurred other than solely by reason of the
Mortgagee's gross negligence or wilful misconduct, to enter upon any premises
where the security or any part thereof may be located and take possession of and
remove the same. The Mortgagee may thereafter sell and dispose of, or cause to
be sold and disposed of, all or any part of the Security at one or more public
or private sales, at such places and times and on such terms and conditions as
the Mortgagee may deem fit in good faith, with or without any previous demand to
the Mortgagor or any other person, or advertisement of any such sale or other
disposal upon notice to the Mortgagor (it being understood
7
<PAGE>
and agreed that such provision of notice to the Mortgagor shall not be deemed to
limit or otherwise restrict the Mortgagee's rights and remedies hereunder or
under any other agreement); and for the aforesaid purpose, any other notice of
sale, any advertisement and other notice or demand, any right of equity of
redemption and any obligation of a prospective purchaser to inquire as to the
power and authority of the Mortgagee to sell or the application by the Mortgage
of the proceeds of sale or otherwise that would otherwise be required by, or
available to the Mortgagor under, Applicable Law are hereby expressly waived by
the Mortgagor to the fullest extent permitted by such Law. In the event that any
mandatory requirement of Applicable Law shall obligate the Mortgagee to give
different, additional or prior notice to the Mortgagor of any of the foregoing
acts, the Mortgagor hereby agrees that, to the extent permitted by Applicable
Law, a written notice sent to it by mail or by telecopy, so as reasonably to be
expected to be delivered to the Mortgagor at least five (5) Business Days before
the date of any such act shall be deemed to be reasonable notice of such act
and, specifically, reasonable notification of the time after which any private
sale or other disposition intended to be made hereunder is to be made.
2.3 Right to Possession, etc..
-------------------------
(a) To the fullest extent the Mortgagor may lawfully agree, the
right of the Mortgagee to take possession of and sell any of the Security
in compliance with the provisions of this Section 2 shall not be affected
by the provisions of any applicable reorganization or other similar law of
any jurisdiction. The Mortgagor shall not take advantage of any such law or
agree to allow any agent, assignee or other party to take advantage of such
law in its place, to which end the Mortgagor, for itself and all who may
claim through it, as far as it or they now or hereafter lawfully may do so,
hereby waives, to the fullest extent permitted under Applicable Law, any
rights or defenses arising under any such law, and all rights to have the
Security marshaled upon any foreclosure hereof, and hereby agrees that any
court having jurisdiction to foreclose upon and against the security
interest created in this Agreement may order the sale of the Security
subject to its jurisdiction as an entirety or severally.
(b) The Mortgagee shall not have any duty or obligation to use,
operate, store, lease, control, manage, sell, dispose of or otherwise deal
with the Aircraft or any other part of the Security, or otherwise to take
or refrain from taking any action under, or in connection with, this
Agreement. If an Event of Default under the Loan Agreement shall occur and
be continuing and the Mortgagee shall have obtained possession of or title
to the Aircraft or any Engines, the Mortgagee shall not be obligated to use
or operate such Aircraft or Engines or cause such Aircraft or Engines to be
used or operated directly or indirectly by itself or through agents or
other representatives or to lease, license or otherwise permit or provide
for the use or operation of such Aircraft or Engines by any other person,
provided, however, that if the Mortgagee in its sole discretion elects to
so use or operate the Aircraft or Engines, the Mortgagee may obtain
insurance in kinds, at rates and in amounts satisfactory to it in its
reasonable opinion to protect the Security and the Mortgagee against any
and all liability for
8
<PAGE>
loss or damage to such Aircraft or Engines and for public liability and
property damage resulting from use or operation of such Aircraft or Engines
by application of any funds available in the Security to pay for all such
insurance or, in lieu of such insurance, the Mortgagee is furnished with
indemnification from any other person upon terms and in amounts
satisfactory to the Mortgagee in its sole discretion to protect the
Security and the Mortgagee, both as Mortgagee and individually, against any
and all such liabilities.
2.4 Application of Proceeds. All proceeds received by the Mortgagee
-----------------------
under or pursuant to this Agreement, and all amounts received by the Mortgagee
pursuant to the Loan Agreement, shall be applied in the first place to pay all
such payments, disbursements, expenses and losses whatsoever (together with
interest thereon as hereinbefore provided for) as may have been incurred by the
Mortgagee in or about or incidental to the exercise by the Mortgagee of the
rights and powers specified in this Agreement or the Loan Agreement and the
balance shall be applied or in the absolute discretion of the Mortgagee retained
for application in the manner following:
(a) first, to any tax prior to the lien of this Mortgage, expense or
other loss including, without limitation, reasonable attorneys' fees and
expenses incurred or expenditures or advances made, or reasonable
remarketing fees paid, by the Mortgagee in the exercise or enforcement of
any right, power or remedy and any damages sustained by the Mortgagee upon
any Event of Default under the Loan Agreement;
(b) second, towards any amount owing under the Loan Agreement or the
Notes, including any accrued and unpaid interest and the outstanding
principal balance thereunder; and
(c) third, the surplus (if any) shall be paid to the Mortgagor or at
its order or to whomsoever may be entitled thereto under any Applicable
Law.
If the proceeds received by the Mortgagee under this Agreement, the Loan
Agreement or the Notes shall be insufficient to pay indefeasibly in full the
amounts then due and payable to the Mortgagee and as set forth above in this
Section 2.4, the Mortgagor shall forthwith pay any balance of such amounts
remaining unpaid to the Mortgagee or as the Mortgagee directs, and any
deficiencies remaining thereafter may be entered as a judgment against the
Mortgagor in any court of competent jurisdiction.
2.5 Matters Involving Manner of Sale.
--------------------------------
(a) At any sale pursuant to this Section 2, whether by virtue of
judicial proceedings contemplated in Section 2.1 or under the power of sale
granted in Section 2.2, it shall not be necessary for the Mortgagee or a
public officer under order of a court to have present physical or
constructive possession of the Security to be sold. The recitals contained
in any conveyances and receipts made and given by the Mortgagee in good
faith or such
9
<PAGE>
public officer to any purchaser at any sale made pursuant to this Agreement
shall, to the extent permitted by Applicable Law, conclusively establish
the truth and accuracy of the matters therein stated (including, without
limiting the generality of the foregoing, the amounts due and payable under
the Loan Agreement and any other indebtedness secured hereby, the accrual
and nonpayment thereof and advertisement and conduct of such sale in the
manner provided herein and by Applicable Law); and all prerequisites to
such sale shall be presumed to have been satisfied and performed.
(b) At any sale or sales made pursuant to this Section 2, the
Mortgagee or its agents may bid for or purchase, free from any right or
equity of redemption in favor of the Mortgagor and any person claiming by,
through or under the Mortgagor (all such rights being in this Section 2
waived and released), any part of or all the Security offered for sale. and
may make payment on account thereof by using any claim for moneys then due
and payable to the Mortgagee by the Mortgagor as a credit against the
purchase price; and the Mortgagee, upon compliance with the terms of sale,
may hold, retain and dispose of such Security without further
accountability therefor to the Mortgagor or any third party, except as
expressly required by Applicable Law. In any such sale the Mortgagee shall
not be obligated to make any representations or warranties with respect to
the Security or any part thereof, and the Mortgagee shall not be chargeable
with any of the obligations or liabilities of the Mortgagor with respect
thereto. The Mortgagor hereby agrees (i) that it will indemnify and hold
the Mortgagee harmless from and against any and all claims with respect to
the Security asserted before the taking of actual possession or control
thereof by the Mortgagee or its agents pursuant to this Section 2, or
arising out of any act of, or omission to act on the part of, any party
other than the Mortgagee or any of its agents prior to such taking of
actual possession or control by the Mortgagee, or arising out of any act
of, or omission to act on the part of, the Mortgagor or any person claiming
by, through or under the Mortgagor or any of its affiliates or agents
before or after the commencement of such actual possession or control by
the Mortgagee or any of its agents; and (ii) that the Mortgagee shall have
no liability or obligation arising out of any such claim.
(c) Nothing herein contained shall be deemed to impair in any manner
the absolute right of the Mortgagee to sell and convey title to the
Security to the purchaser(s) at such public or private sale(s) or to grant
options with respect to or otherwise to realize upon all or such portion of
the Security, at such time, and in such order as it may elect in its sole
and complete discretion in good faith, or to enforce any one or more
remedies relative hereto either successively or concurrently; and the
Mortgagor hereby agrees that the security interest, options and other
rights hereby given to the Mortgagee shall remain unimpaired and
unprejudiced until all the Security shall have been sold or this Agreement
shall otherwise have ceased to be of any force or effect according to its
terms, and that the enforcement of any right or remedy shall not operate to
bar or stop the Mortgagee from exercising any other right or remedy
available hereunder or under any other agreement between the Mortgagee and
any of its affiliates, on the one hand, and the Mortgagor, any person
claiming by, through
10
<PAGE>
or under the Mortgagor and their affiliates on the other hand, or
otherwise, available at law, in equity or otherwise.
(d) Upon the completion of any sale under this Section 2, the
Mortgagor shall deliver, in accordance with the instructions of the
Mortgagee (including flying the Aircraft or any Engine or causing the same
to be flown to such airports in the United States as the Mortgagee may
specify) such Security so sold. The Mortgagee may execute and deliver to
the accepted purchaser or purchasers a good and sufficient instrument or
instruments of conveyance, sale and transfer of all of the property sold;
and the Mortgagee is hereby irrevocably appointed the true and lawful
attorney of the Mortgagor, with full power of substitution, in its name and
stead, to make all necessary conveyances of the property thus sold.
Nevertheless, if so requested by the Mortgagee or by any purchaser, the
Mortgagor shall confirm any such sale or transfer by executing and
delivering to the Mortgagee or to such purchaser all proper instruments of
conveyance and transfer and releases as may be designated in any such
request.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS
3.1 Representations and Warranties.
------------------------------
(a) The Mortgagor represents and warrants to the Mortgagee that (i)
all things have been done to make this Agreement and the Loan Agreement,
when executed by the Mortgagor, the legal, valid and binding obligation of
the Mortgagor and (ii) all things necessary to make this Agreement the
legal, valid and binding obligation of the Mortgagor, for the uses and
purposes herein set forth, in accordance with its terms, have been done and
performed and have happened.
(b) The Mortgagor does hereby warrant and represent that it has not
assigned or pledged, and hereby covenants that it will not assign or
pledge, so long as the assignment hereunder shall remain in effect, any of
its right, title or interest hereby or thereby assigned, to anyone other
than the Mortgagee.
3.2 Covenants. So long as this Agreement remains in effect the
---------
Mortgagor shall duly observe and perform its obligations under the Loan
Agreement and pay to the Mortgagee all amounts due and owing hereunder and
under the provisions of the Loan Agreement. All such covenants are specifically
incorporated herein and made a part hereof.
4. CONDEMNATION
4.1 Notice of Condemnation. The Mortgagor shall promptly give the
----------------------
Mortgagee notice of any condemnation, confiscation or seizure of, or requisition
of title to or use of, the
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Airframe or any Engine by any government or instrumentality or agency thereof (a
"Condemnation").
------------
4.2 Condemnation of Engine. If there shall have been a Condemnation of
----------------------
an Engine, but no related Condemnation with respect to the Airframe, the
Mortgagor shall promptly replace, or cause to be replaced, such Engine. All
amounts receivable with respect to any such Condemnation of an Engine shall be
paid to the Mortgagee and applied by the Mortgagee in the same manner as is
specified in Section 2.4.
4.3 Condemnation of Aircraft or Airframe. If there shall have been a
------------------------------------
Condemnation of the Aircraft or the Airframe, all amounts receivable with
respect thereto shall be paid to the Mortgagee and applied by the Mortgagee in
accordance with the provisions of Section 2.4.
5. MISCELLANEOUS
5.1 Indemnification by Mortgagor. The Mortgagor shall indemnify,
----------------------------
defend, reimburse and hold the Mortgagee, its affiliates and its and their
successors, assigns and transferees harmless from and against any and all
claims, demands, causes of action, suits or judgments, and any and all expenses
in connection with any thereof (including, without limitation, reasonable fees
and expenses of legal counsel, including allocated fees and expenses of in-house
counsel of the Mortgagee), for or on account of injury to or death of persons
(including employees and agents of the Mortgagor), loss of or damage to property
(including the Security) and any other liability (including liability for patent
infringement), that may result from or arise in any manner out of (a) the
ownership, control, management, use or operation of Security, except where any
such liability arises solely out of or solely as the result of the actual
possession or control of the relevant Security by the Mortgagee or its assigns,
(b) any failure on the part of the Mortgagor to perform or comply with any of
the terms hereof (including, without limitation, any failure by the Mortgagor to
effect or maintain any insurance required to be effected or maintained under the
Loan Agreement, and (c) any necessity to defend any of the right, title or
security interest conveyed or created by this Mortgage. Any amounts payable by
the Mortgagor under this Section which are not paid within 10 days after written
demand therefor shall bear interest at the Overdue Rate from the date of such
demand, and such amounts, together with such interest, shall be secured by this
Mortgage. The indemnity contained in this Section 5.1 shall continue in full
force and effect notwithstanding the full payment of all amounts due hereunder
and under the Loan Agreement and any other indebtedness or agreement secured
hereby, and all amounts due in respect of such indemnification shall be
additional indebtedness secured by this Agreement.
5.2 Performance by Mortgagee. If the Mortgagor shall fail to maintain,
------------------------
or cause to be maintained, any insurance required to be carried pursuant to the
Loan Agreement, the Mortgagee may obtain the same for the account of the
Mortgagor and the Mortgagor shall pay to the Mortgagee interest (to the extent
permitted by Applicable Law) at the Overdue Rate, computed on the basis of a
360-day year and the actual number of days elapsed, on the amount of any such
payment from the date made until the date reimbursed by the Mortgagor pursuant
hereto. If the Mortgagor shall fail
12
<PAGE>
in a timely and effective manner to take and complete any other action that it
has herein undertaken to perform, strictly in accordance with the provisions
hereof, the Mortgagee may do or cause the same to be done. In such case, there
shall be added to the indebtedness secured hereby any loss, cost or expense
incurred by or on behalf of the Mortgagee in curing such default or failure, or
caused to be suffered by Mortgagee through the incorrectness or breach of any of
the covenants, agreements, representations or warranties of the Mortgagor herein
or by any other default of the Mortgagor hereunder. All sums so lost or expended
shall be payable on demand and shall bear interest as provided in the first
sentence of this Section 5.2, and the Mortgagee shall be subrogated to all the
rights against the Mortgagor of any person to whom it shall have made any
payment or payments under the foregoing authority.
5.3 Power of Attorney. The Mortgagor hereby irrevocably appoints the
-----------------
Mortgagee, and its successors and assigns, the true and lawful attorney of the
Mortgagor (with the full power of substitution), in the name and place and at
the expense of the Mortgagor, (i) to give any necessary receipts or acquittance
for amounts collected or received pursuant to Section 2 hereof, (ii) at any time
after the occurrence of an Event of Default under the Loan Agreement and so long
as the same shall be continuing, to make all necessary transfers of all or any
part of the Security in connection with any sale or other disposition thereof
made pursuant to such Section 2, (iii) at any time after the occurrence of any
such Event of Default and so long as the same shall be continuing, to execute
and deliver for value all necessary instruments of negotiation, assignment and
transfer, (iv) at any time after the occurrence of any such Event of Default and
so long as the same shall be continuing, to employ legal counsel and to appear
in its name in any court in any jurisdiction to commit and compromise and
discharge any alleged Lien, charge or other encumbrance asserted against any of
the Security, in any manner and by any means that shall to it or them, in its or
their sole and complete discretion, seem proper; provided, however, that any
such undertaking on the part of the Mortgagee shall not qualify in any manner or
to any extent or degree the obligation of the Mortgagor so to defend its title
to, and the security interest of the Mortgagee in, the Security and every part
thereof and (v) to file and record such copies or memoranda hereof and financing
statements, continuation statements and other instruments or documents with
respect to the security interest created hereby as the Mortgagee may deem
desirable fully to protect its interest hereunder, and for such purpose the
Mortgagor hereby authorizes the Mortgagee to effect any such filings or
recordings without the signature of the Mortgagor to the extent permitted by
Applicable Law, the Mortgagor hereby ratifying and confirming all that its said
attorney shall lawfully do hereunder and pursuant hereto and acknowledging that
its said attorney shall have no duty, by virtue of this Section 5.3 or at the
risk of otherwise waiving or qualifying the obligation of the Mortgagor to do
so, to do any of the above acts.
5.4 Waiver, etc., by Mortgagor. To the fullest extent that it may now
--------------------------
and hereafter lawfully so agree, the Mortgagor hereby agrees that it shall not
at any time plead, claim or take the benefit of any appraisement, valuation,
extension, moratorium, redemption or other law now or hereafter in effect in any
jurisdiction in order to prevent or delay the enforcement of any provision of
this Agreement or the indebtedness or agreements secured hereby, or the absolute
sale of any
13
<PAGE>
portion of or all the Security to any purchaser at any sale under Section 2
hereof; and the Mortgagor, for itself and all who may claim through it, to the
fullest extent that it or they now and hereafter may lawfully so agree, hereby
waives the benefit of all such laws. Any sale of, grant of options to purchase
or other realization against all or any part of the Security shall operate to
divest all right, title and interest, at law, in equity and otherwise, of the
Mortgagor in and to the security so sold, optioned or realized upon, and shall
be a perpetual bar, at law, in equity and otherwise, against the Mortgagor and
against any and all persons claiming or attempting to claim the security so
sold, optioned or realized upon, or any part thereof, from, through or under the
Mortgagor. THE MORTGAGOR HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT TO PRIOR NOTICE OR JUDICIAL HEARING IN CONNECTION WITH
THE MORTGAGEE TAKING POSSESSION OR DISPOSING OF THE AIRCRAFT AND OTHER SECURITY,
INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY
PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH THE MORTGAGOR WOULD
OTHERWISE HAVE UNDER ANY APPLICABLE LAW. No delay on the part of the Mortgagee
in exercising any power of sale, Lien or option, or any other right or remedy
hereunder, or otherwise, and no notice or demand that may be given to or made
upon the Mortgagor with respect to any such power, right or remedy, shall
constitute a waiver thereof or limit or impair the right of the Mortgagee to
take any other or similar action or to exercise any power of sale, Lien or
option, or any other right or remedy granted in this Agreement or in any other
agreement secured hereby or otherwise available to the Mortgagee; nor shall any
single or partial exercise of any such power, right or remedy preclude any other
or further exercise thereof, or the exercise of any power, right or remedy
granted in this Agreement or otherwise available to the Mortgagee, or prejudice
its rights against the Mortgagor in any respect. Each and every remedy of the
Mortgagee shall, to the extent permitted by Applicable Law, be cumulative and in
addition to any other remedy granted hereunder or now or hereafter available to
it at law, in equity or otherwise.
5.5 Amendment, etc.. Neither this Agreement nor any provision hereof
---------------
may be amended, modified, waived or discharged orally, but only by an instrument
in writing signed by the parties hereto. No waiver by the Mortgagee of any
breach or default of or by the Mortgagor under this Agreement, any other
agreement or indebtedness secured hereby, or otherwise, shall be deemed a waiver
of any other or similar, previous or subsequent breach or default.
5.6 Mortgagor's Obligations Absolute. The obligations of the Mortgagor
--------------------------------
under this Agreement shall be absolute and unconditional and shall remain in
full force and effect without regard to, and shall not be released, discharged
or in any way affected by: (i) any amendment to, modification of, supplement to
or extension or renewal of the Loan Agreement or any other agreement or
indebtedness secured hereby, or any resort to or release of any part of the
Security or any other collateral now or hereafter held as security for the
payment thereof; (ii) any exercise or nonexercise of any power, right or remedy
granted under this Agreement or the Loan Agreement, or any other agreement or
indebtedness secured hereby, or available under any Applicable Law, or any
waiver, consent, extension, indulgence or other action or inaction in respect of
any thereof; (iii)
14
<PAGE>
any insolvency, bankruptcy, reorganization, arrangement, liquidation, winding-up
or similar proceeding of or affecting the Mortgagor or (iv) any other act or
omission or delay to do any other act that may vary the risk of the Mortgagor or
otherwise operate as a discharge of the obligations of the Mortgagor hereunder.
This Agreement shall continue to be effective or shall be reinstated, as the
case may be, if at any time payment (or any part thereof) of the indebtedness
secured hereby is rescinded or must otherwise be restored or returned by the
Mortgagee upon the insolvency, bankruptcy or reorganization of the Mortgagor, as
though such payment had not been made.
5.7 Successors and Assigns. All the terms, provisions, conditions and
----------------------
covenants herein contained shall be binding upon and shall inure to the benefit
of the Mortgagor and the Mortgagee and their respective successors, assigns and
transferees, provided, that the Mortgagor may not assign or transfer its
interest hereunder without the prior written consent of the Mortgagee.
5.8 Severability. This Agreement is intended to comply with the laws of
------------
the jurisdiction or jurisdictions wherein it is to be enforced, and any
provisions hereof not so complying shall be deemed to be modified accordingly in
the manner and to the extent that shall best effect the intentions and purposes
reflected in and contemplated by this Agreement. Any provision of this
Agreement prohibited by the laws of any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition, or modified to
conform with such laws, without invalidating the remaining provisions hereof;
and any such prohibition in any jurisdiction shall not invalidate such
provisions in any other jurisdiction. Any impairment or invalidity, under the
laws of any jurisdiction, of this Agreement, in its aspect as security for any
portion of the indebtedness of the Mortgagor to the Mortgagee, hereunder or
under the Loan Agreement, for any portion of any other indebtedness or
obligation secured hereby, shall not impair or invalidate this Agreement as
security for any other portion thereof.
5.9 Governing Law. This Agreement shall be governed and controlled as
-------------
to validity, enforcement, interpretation, construction, effect and in all other
respects by the Federal Aviation Act, as applicable, and by the laws of the
State of California without regard to conflict of laws rules.
5.10 Consent to Jurisdiction, etc.. The Mortgagor hereby irrevocably
-----------------------------
submits to the jurisdiction of any Federal or California State court sitting in
Los Angeles County in any action or proceeding arising out of or relating to
this Agreement or any other Transaction Document, and the Mortgagor hereby
irrevocably agrees that all claims in respect of such action or proceeding may
be heard and determined in such California State court or, to the extent
permitted by law, in such Federal court. The Mortgagor hereby irrevocably
waives to the fullest extent it may effectively do so, the defense of an
inconvenient forum to the maintenance of such action or proceeding.
(a) Nothing in this Section 5.10 shall affect the right of any other
party to serve legal process in any other manner permitted by law or affect
the right of any other party to bring any action or proceeding against the
Mortgagor or its properties in the courts of other jurisdictions.
15
<PAGE>
(b) To the extent that the Mortgagor has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal process
(whether through service or notice, attachment prior to judgment,
attachment in aid of execution or otherwise) with respect to itself or its
property, the Mortgagor hereby irrevocably waives such immunity in respect
of its obligations under this Agreement.
5.11 Further Assurances. At any time and from time to time, upon the
------------------
request of the Mortgagee, the Mortgagor shall promptly and duly execute and
deliver any and all such further instruments and documents as the Mortgagee may
reasonably deem desirable in obtaining the full benefits of security interests
and assignments created or intended to be created hereby and of the rights and
powers granted herein and in the Loan Agreement. Upon the instructions at any
time and from time to time of the Mortgagee, the Mortgagor will execute and file
any supplement to this Agreement, any financing statement (and any continuation
statement with respect to any financing statement) or any other similar document
relating to the security interests and assignments created by this Agreement and
the Loan Agreement as may be specified in such instructions.
5.12 Notices. All notices, requests, demands or other communications
-------
required hereunder or given pursuant hereto shall be in writing unless otherwise
expressly provided. Any notice permitted hereunder shall become effective ten
(10) Business Days after deposit in the United States mail, with proper postage
for registered or certified mail, when delivered personally, or, if promptly
confirmed by mail as provided above, when dispatched by fax written
telecommunication to the following specified address or to such other address as
either party may from time to time hereafter designate to the other party in
writing:
If to the Mortgagor:
Tower Air, Inc.
Hangar 17
JFK International Airport
Jamaica, New York 11430
Telecopier: (718) 553-4312
Telephone: (718) 553-4300
Attention: Morris Nachtomi, Chairman & CEO
With copy to:
Stephen Gelband, Esq.
Hewes, Gelband, Lambert & Dunn
1000 Potomac Street, NW, Suite 300
Washington, DC 20007-3533
Telecopier: (202) 333-0871
Telephone: (202) 337-6200
16
<PAGE>
If to the Mortgagee:
International Lease Finance Corporation
1999 Avenue of the Stars
39th Floor
Los Angeles, California 90067
Telecopy: (310) 788-1990
Telephone: (310) 788-1999
Attention: Legal Department
5.13 Liability of Mortgagee. Mortgagee shall not be answerable or
----------------------
accountable under any circumstances, except for its own wilful misconduct or
gross negligence and except for liabilities that may result from the inaccuracy
of any representation or warranty in this Agreement.
5.14 Absence of Certain Duties. The Mortgagee shall have no duty (i) to
-------------------------
see to any registration of the Aircraft or any recording or filing of this
Agreement or any other document, or to see to the maintenance of any such
registration, recording or filing, (ii) to see to any insurance on the Aircraft
or to effect or maintain any such insurance, whether or not Mortgagor shall be
in default with respect thereto, (iii) to see to the payment or discharge of any
tax, assessment or other governmental charge or any Lien or encumbrance of any
kind owing with respect to, assessed or levied against, any part of the Security
or (iv) to inspect the Aircraft at any time.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have, by their indicated officers,
thereunto duly authorized, caused this Mortgage and Security Agreement to be
executed as of the day and year first above written and to be delivered in the
State of California.
MORTGAGOR,
TOWER AIR, INC.
By: /s/ MORRIS NACHTOMI
----------------------------------
Name: MORRIS NACHTOMI
Title: Chairman & CEO
MORTGAGEE,
INTERNATIONAL LEASE FINANCE CORPORATION
By: /s/ Julie I. Sackman
----------------------------------
Name: Julie I. Sackman
Title: Senior Vice President
and General Counsel
18
<PAGE>
TERM LOAN AGREEMENT
-------------------
THIS TERM LOAN AGREEMENT, dated as of November 13, 1998, is entered into
between TOWER AIR, INC., a Delaware corporation ("Borrower"), and INTERNATIONAL
LEASE FINANCE CORPORATION, a California corporation ("Lender"), in light of the
following facts:
WHEREAS, Borrower and Lender have entered into that certain Aircraft Sale
Agreement dated as of November 13, 1998 (the "Sale Agreement") relating to one
Boeing 747-212B aircraft bearing manufacturer's serial number 21937 and
Registration Mark N618FF together with four Pratt & Whitney JT9D-7Q engines
bearing manufacturer's serial numbers 702097, 702163, 702195 and 702348;
WHEREAS, Borrower has requested that Lender provide Borrower with a loan of
Twenty Million U.S. Dollars (US$ 20,000,000) for the purpose of purchasing the
Aircraft; and
WHEREAS, on the terms and conditions contained herein, Lender has agreed to
provide Borrower with a loan of Twenty Million U.S. Dollars (US$ 20,000,000).
NOW THEREFORE, in consideration of the foregoing, mutual covenants and
conditions contained herein and other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:
1. DEFINITIONS; CONSTRUCTION
1.1 Definitions. For purposes of this Agreement, the following
-----------
capitalized terms shall have the following meanings:
"Agreement" shall mean this Term Loan Agreement between Borrower and
---------
Lender, together with all of the exhibits and schedules hereto.
"Asset" shall mean any interest of a Person in any kind of property or
-----
asset, whether real, personal, or mixed real and personal, or whether tangible
or intangible.
"Borrower" shall have the meaning set forth in the introduction to
--------
this Agreement.
1
<PAGE>
"Borrowing" shall mean a borrowing under the Loan made by Lender to
---------
Borrower.
"Business Day" shall mean a day (other than a Saturday or Sunday) upon
------------
which banks are open for the transaction of lending business.
"Contractual Obligation" shall mean, as applied to any Person, any
----------------------
provision of any security agreement entered into by that Person or of any
material indenture, mortgage, deed of trust, contract, undertaking, agreement,
or other material instrument to which that Person is a party or by which it or
any of its owned Assets is bound or to which it or any of its owned Assets is
subject.
"Debt" shall mean, with respect to any Person, the aggregate amount
----
of, without duplication: (a) all obligations of such Person for borrowed money;
(b) all obligations of such Person evidenced by bonds, debentures, letters of
credit, notes, or other similar instruments and all reimbursement or other
obligations of such Person in respect of letters of credit, bankers acceptances,
interest rate swaps, or other financial products; (c) all capitalized lease
obligations of such Person; (d) all obligations or liabilities of others secured
by a Lien on any Asset owned by such Person whether or not such obligation or
liability is assumed; (e) all obligations guaranteed by such Person or in
respect of which such Person acts as surety; and (f) all obligations of such
Person to pay the deferred purchase price of Assets or services, exclusive of
trade payables which are incurred in the ordinary course of such Person's
business consistent with past practices.
"Event of Default" shall have the meaning ascribed to such term in
----------------
Section 101 hereof.
"Extension Maturity Date" shall mean December 1, 2005.
-----------------------
"FAA" shall mean the Federal Aviation Administration of the
---
Department of Transportation or any successor thereto under the Laws of the U.S.
"First Monthly Payment Date" shall have the meaning ascribed to such
--------------------------
term in Section 4.1 hereof.
"Highest Lawful Rate" shall mean, the maximum non-usurious interest
-------------------
rate, as in effect from time to time, which may be charged, contracted for,
reserved, received, or collected by Lender in connection with this Agreement,
the Notes, or any other document executed in connection herewith or therewith.
2
<PAGE>
"Indemnified Liabilities" shall have the meaning ascribed to such
-----------------------
term in Section 11.2 hereof.
"Indemnitee" shall have the meaning ascribed to such term in Section
----------
11.2 hereof.
"Interest Rate" shall have the meaning ascribed to such term in
-------------
Section 3.1 hereof.
"Investment" shall mean, as applied to any Person, any direct or
----------
indirect purchase or other acquisition by that Person of, or beneficial interest
in, stock, instruments, bonds, debentures or other securities of any other
Person, or any direct or indirect loan, advance (other than advances to
employees, agents and contractors for expenditures in the ordinary course of
such Person's business), or capital contribution by such Person to any other
Person, including all indebtedness and accounts receivable from that other
Person which did not arise from sales or the rendition of services to that other
Person in the ordinary and usual course of such Person's business, and deposit
accounts (including certificates of deposit).
"Loan" shall have the meaning ascribed to such term in Section 21
----
hereof.
"Loan Amount" means (a) on the Loan Date, the amount set forth in
-----------
Section 21 hereof, and (b) thereafter, the outstanding principal balance and any
and all accrued and unpaid interest on the Loan from time to time.
"Lien" shall mean any lien, mortgage, assignment (including any
----
assignment of rights to receive payments of money), pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest).
"Loan Date" shall mean the date on which the Loan is advanced by
---------
Lender to Borrower.
"Material Adverse Effect" shall mean a material and adverse effect on
-----------------------
the business, operations, Assets, or condition (financial or otherwise) of a
Person.
"Maturity Date" shall mean December 1, 2004.
-------------
"Monthly Payment Date" shall have the meaning ascribed to such term
--------------------
in Section 41 hereof.
3
<PAGE>
"Mortgage and Security Agreement" means the Mortgage and Security
-------------------------------
Agreement between Borrower and Lender dates as of November 13, 1998.
"Notes" shall have the meaning ascribed to such term in Section 2.2
-----
hereof.
"Overdue Rate" shall have the meaning ascribed to such term in
------------
Section 3.3 hereof.
"Person" shall mean natural persons, corporations, limited
------
partnerships, general partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts, vehicle
trusts, business trusts or other organizations irrespective of whether they are
legal entities, and governments and agencies and political subdivisions thereof.
"Subsidiary" shall mean any corporation a majority of whose securities
----------
having ordinary voting power for the election of directors (other than
securities having such power only by reason of the happening of a contingency)
is, as of the date any determination thereof is to be made, owned by a Person or
one or more of such Person's Subsidiaries.
"Taxes" shall mean any taxes, charges, fees, levies or other
-----
assessments based upon or measured by net or gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, withholding, payroll, employment,
excise, occupation, premium, property or conduct of business, together with any
interest and penalties, additions to tax and additional amounts imposed by any
federal, state, local or foreign taxing authority.
"Transaction Documents" shall mean this Agreement, the Notes, the
---------------------
Related Documents, and all other agreements or instruments executed and
delivered or to be executed and delivered pursuant hereto or thereto or in
connection herewith or therewith, or in connection with any of the transactions
contemplated hereby or thereby.
"Unmatured Event of Default" shall mean an event, act, or occurrence
--------------------------
which, with the giving of notice or the lapse of time (or both), would become an
Event of Default.
1.2 Construction. Unless the context of this Agreement clearly
------------
requires otherwise, references to the plural include the singular and to the
singular include the plural, the part includes the whole, the terms "include"
and "including" are not limiting, and the term "or" has, except where otherwise
indicated, the inclusive meaning represented by the phrase "and/or". The words
"hereof," "herein," "hereby," "hereunder" and similar terms in this Agreement
refer to this Agreement as a whole and not to any particular provision of this
Agreement. Article, section, subsection, clause, exhibit and schedule
references are to this Agreement unless otherwise specified. Any reference
herein to this Agreement, the Notes, or
4
<PAGE>
any of the Related Documents includes any and all alterations, amendments,
changes, extensions, modifications, renewals, or supplements thereto or thereof,
as applicable.
1.3 Exhibits. All of the exhibits or schedules attached hereto
--------
shall be deemed incorporated herein by reference.
2. AMOUNT OF LOAN
2.1 Loan. Subject to the terms and conditions contained herein,
----
Lender agrees to make a loan to Borrower in one Borrowing and in the principal
amount equal to Twenty Million U.S. Dollars (US$ 20,000,000) (the "Loan"). The
Loan Amount will be advanced to Borrower at such time as all conditions
precedent thereto have been met or waived. Any amount repaid on the Loan may not
be reborrowed by Borrower.
2.2 Notes. The Loan will be evidenced by the promissory notes
-----
(the "Notes"). The form of such Notes is attached hereto as Exhibit A. One
--------
such note will be designated as Note "A" and one will designated as Note "B".
The Notes shall evidence the aggregate outstanding principal balance of the Loan
together with any and all accrued and unpaid interest thereon. Lender may, on
notice to Borrower, assign the note designated as Note "B" to a subsidiary of
American International Group.
2.3 Down payment. Borrower will pay Lender One Million U.S.
------------
Dollars (US$1,000,000) of the down payment for the Aircraft no later than
November 16, 1998.
3. INTEREST AND FEES
3.1 Interest Rate. The Loan shall accrue interest at a rate
-------------
equal to six and fifty hundredths percent (6.50%) per annum (the "Interest
Rate") from the Loan Date until the outstanding balance of the Loan and all of
the accrued and unpaid interest thereon is repaid in full (whether on the
Maturity Date or on an earlier date by a voluntary prepayment or a mandatory
prepayment or an acceleration of the entire outstanding principal and interest
of the Loan as the result of an occurrence of an Event of Default) and with
interest on any overdue portion of the balance due hereunder according to the
provisions for late payment hereunder.
3.2 Extension of Loan. Borrower may elect to extend the portion
-----------------
of the Loan reflected in Note "A" for an additional period of one year. During
such extension period, the Loan shall accrue interest at a rate equal to nine
and twenty five hundredths percent (9.25%) per annum from the original Maturity
Date until the outstanding balance of the Loan and all of the accrued and unpaid
interest thereon is repaid in full (whether on the Extension Maturity Date or on
an earlier date by a voluntary prepayment or a mandatory prepayment or an
5
<PAGE>
acceleration of the entire outstanding principal and interest of the Loan as the
result of an occurrence of an Event of Default).
3.3 Overdue Rate. Any payments of principal, interest (to the
------------
extent permitted by law both before and after judgment) with respect to the
Loan, fees, expenses, or other amounts payable to Borrower which are not paid
when due hereunder or declared due, whether at maturity, by acceleration, by
lapse of time or otherwise, shall bear interest thereafter, at a per annum
interest rate (the "Overdue Rate") which is equal to the Interest Rate plus four
----
percent (4.0%).
3.4 Computation of Interest. All computations of interest with
-----------------------
respect to the Loan and all computations of interest due under Section 3.3
----------
hereof for any period shall be calculated on the basis of a year of three
hundred sixty (360) days for the actual number of days elapsed in such period.
Interest shall accrue from the Loan Date (or the date on which interest or other
payments are due, if applicable), to but not including the date of repayment of
the Loan (or the date of the payment of interest or fees or other payments, if
applicable) in accordance with the provisions hereof.
3.5 Maximum Interest Rate. Notwithstanding anything to the
---------------------
contrary contained in this Agreement, Borrower shall not be obligated to pay,
and Lender shall not be entitled to charge, collect, or receive, interest (it
being understood that interest shall be calculated as the aggregate of all
charges which constitute interest under applicable law that are contracted for,
charged, reserved, received, or paid) in excess of the Highest Lawful Rate.
During any period of time in which the interest rate specified herein exceeds
the Highest Lawful Rate, interest shall accrue and be payable at such maximum
rate; provided, however, that, if the interest rate subsequently declines below
-------- -------
the Highest Lawful Rate, then interest shall continue to accrue and be payable
at the Highest Lawful Rate (so long as there remains any unpaid principal
balance with respect to the Loan) until the interest that has been paid
hereunder and under the Notes equals the amount of interest that would have been
paid if interest had at all times accrued and been payable at the applicable
interest rate specified in this Agreement.
For purposes of this Section 3.5, the term "applicable law" shall mean
-----------
that law in effect from time to time and applicable to this loan transaction
between Borrower and Lender which lawfully permits the charging and collection
of the highest permissible, lawful, non-usurious rate of interest on such loan
transaction and this Agreement, including the laws of the States of California,
New York and Delaware and, to the extent controlling, the laws of the United
States of America.
4. TERMS OF LOANS
6
<PAGE>
4.1 Payment of Interest on the Loan. Interest due with respect
-------------------------------
to the Loan shall be due and payable monthly in arrears, commencing on January
1, 1999 (the "First Monthly Payment Date") and continuing on the last day of
each month thereafter (each a "Monthly Payment Date") until and including the
Monthly Payment Date immediately preceding the Maturity Date, and on the
Maturity Date, or, if Borrower elects to extend the Loan, until and including
the Monthly Payment Date immediately preceding the Extension Maturity Date, and
on the Extension Maturity Date.
4.2 Repayment of the Outstanding Principal Balance of the Loan.
----------------------------------------------------------
The obligation of Borrower to repay the Loan shall be evidenced by the Notes.
The Loan shall be due and payable in full on the Maturity Date or, if Borrower
elects to extend the Loan on the Extension Maturity Date. Borrower shall repay
the outstanding principal balance of the Loan in monthly payments in accordance
with the amortization schedule titled the "Loan" set forth in Exhibit B attached
--------
hereto and incorporated herein by this reference; provided, however, that if
-------- -------
such date of payment of a principal installment of the Loan is not a Business
Day, then such payment shall be made on the immediately preceding Business Day.
The outstanding principal balance of the Loan shall be repaid on the last day of
each month commencing on January 1, 1999 and continuing monthly thereafter until
repaid in full on the Maturity Date, or if Borrower elects to extend the Loan on
the Extension Maturity Date.
4.3 Exhibit B. Exhibit B contains the amortization schedules
--------- ---------
which set forth the aggregate monthly payments of principal and interest due
hereunder for each of the Notes that constitute the Loan. Exhibit B shall be
---------
signed by the authorized officers of both Borrower and Lender. In case of any
dispute regarding the repayment of principal or interest on the Loan, the
payment schedule set forth in Exhibit B shall control the repayment. At any
---------
time that Borrower and Lender determine in their reasonable judgment that they
should revise the amortization schedule contained in Exhibit B, Lender will
--------
prepare a revised Exhibit B which will include a revised amortization schedule
--------
for the Loan. The revised Exhibit B will become effective and replace the old
---------
Exhibit B when it is signed by an authorized officer of both Borrower and
Lender.
4.4 Voluntary Prepayments. At any time, Borrower may, upon at
---------------------
least one (1) Business Day prior written notice, prepay the Loan in whole or in
part without penalty or premium.
5. PLACE AND MANNER OF BORROWING AND PAYMENT
5.1 Manner and Time of Payment. All payments of principal and
--------------------------
interest in respect of the Loan payable to Lender shall be made without
condition or reservation
7
<PAGE>
of right in United States Dollars and in immediately available funds to the
following bank account or to such other bank account as Lender may designate:
International Lease Finance Corporation
Account No. 74-45164
Bank of America Illinois
231 South LaSalle Street
Chicago, Illinois 60697
ABA# 071000039
5.2 Payments on Non-Business Days. Whenever any payment to be
-----------------------------
made by Borrower hereunder shall be stated to be due on a day which is not a
Business Day, then such payment shall be due and payable on the immediately
preceding Business Day.
6. CONDITIONS TO THE LOAN
6.1 Conditions Precedent to the Loan. The obligation of Lender
--------------------------------
to make the Loan specified in Section.21 hereof is subject to the fulfillment
----------
and satisfaction of the each of the following conditions precedent on or before
the Loan Date:
(a) The Loan Date shall occur on or before January 9, 1999;
(b) Lender shall have received the Notes duly executed by
Borrower to the order of Lender;
(c) The Notes shall be in full force and effect;
(d) Lender shall have received a certificate from the Secretary
of Borrower attesting to the resolutions of the Borrower's board of
directors authorizing the execution, delivery, and performance of this
Agreement, the Related Documents, and the other documents contemplated
herein or therein, and the issuance of the Notes, and authorizing specific
officers of the Borrower to execute same;
(e) Lender shall have received a signature and incumbency
certificate for the officers of Borrower which will execute this Agreement,
the Notes, the Related Documents, and the other documents contemplated
herein or therein to which Borrower is a party, which certificate has been
certified by the Secretary of the Borrower;
(f) Lender shall have received the written opinion of the Legal
Counsel for Borrower, in form and substance satisfactory to Lender and its
counsel,
<PAGE>
covering the matters set forth in the form of opinion contained in
Exhibit C attached hereto;
---------
(g) No Event of Default or Unmatured Event of Default shall have
occurred and be continuing on the date of the Borrowing of the Loan nor
shall either result from the making of the Borrowing of the Loan;
(h) Except as set forth in Exhibit D attached hereto and
---------
incorporated herein by this reference, there is no litigation or proceeding
pending or threatened against or affecting Borrower, the result of which
might materially adversely affect the financial condition, business or
operations of Borrower, and there has been no materially adverse change in
the financial condition of Borrower since the date of execution of this
Agreement;
(i) The representations and warranties contained in Section 7 of
this Agreement are true and correct as of the date of the Borrowing of the
Loan; provided, however, that the representations and warranties contained
-------- -------
herein with respect to the accuracy of financial statements shall be deemed
to be made with respect to the financial statements most recently delivered
to the Lender;
(j) An officer of the Borrower shall have delivered to Lender an
officers' certificate setting forth that the Borrower has complied with the
statements set forth in clauses (g), (h), and (i) of this Section 6; and
---------
(k) Borrower shall have executed, delivered and caused to be
recorded the Mortgage and Security Agreement
7. REPRESENTATIONS AND WARRANTIES OF BORROWER
In order to induce Lender to enter into this Agreement, Borrower makes
the following representations and warranties which shall be true and correct in
all material respects as of the Loan Date, as though made on and as of the date
of the making of such Borrowing of the Loan and such representations and
warranties shall survive the execution and delivery of this Agreement and the
Notes and the making of the Loan:
7.1 Organization. Borrower (a) is a corporation duly organized,
------------
validly existing and in good standing under the laws of the State of Delaware
and (b) has all requisite corporate power and authority to own, operate, and
encumber its Assets and to conduct its business as presently conducted and as
proposed to be conducted in connection with the consummation of the transactions
contemplated by this Agreement and the Related Documents.
9
<PAGE>
7.2 Authority.
---------
(a) Borrower has the requisite power and authority to execute,
deliver, and perform each of the Transaction Documents executed by it, or
to be executed by it.
(b) The execution, delivery, and performance of each of the
Transaction Documents to which Borrower is a party and the consummation of
the transactions contemplated thereby, have been duly approved by the board
of directors of Borrower, and no other proceedings on the part of Borrower
are necessary to consummate such transactions.
(c) Each of the Transaction Documents to which Borrower is a
party has been duly executed and delivered by Borrower, constitutes its
legal, valid and binding obligation, enforceable against it in accordance
with its terms, and is in full force and effect except as the
enforceability hereof or thereof may be affected by: (a) bankruptcy,
insolvency, moratorium, or other similar laws affecting the enforcement of
creditors' rights generally; (b) the limitation of certain remedies by
certain equitable principles of general applicability; and (c) the fact
that the rights to indemnification thereunder or hereunder may be limited
by securities laws.
7.3 No Conflict. The execution, delivery, and performance of
-----------
each of the Transaction Documents to which Borrower is a party and each of the
transactions contemplated thereby do not and will not (a) conflict with or
violate Borrower's Articles of Incorporation, or (b) conflict with, result in a
breach of, constitute (with or without notice or lapse of time) a default under,
or require termination of, any of the Transaction Documents, any material
indenture, mortgage or other agreement or instrument to which Borrower is a
party or by which any of their properties may be bound, or (c) result in or
require the creation or imposition of any lien upon any of the Assets of
Borrower (other than liens in favor of Lender created by the Transaction
Documents), or (d) require any approval of stockholders, or any approval or
consent of any Person under any other Contractual Obligations to which Borrower
is a party which approval or consent, as the case may be has not already been
obtained prior to the date hereof, except where such conflict, breach or default
individually or in the aggregate would not affect Borrower's ability to perform
its obligations under this Agreement and could not reasonably be expected to
have a Material Adverse Effect.
7.4 Government Consent. The execution, delivery, and
------------------
performance of each Transaction Document to which Borrower is a party and the
transactions contemplated thereby do not and will not require any registration
with, consent or approval of, or notice to, or other action to, with or by any
regulatory body or authority in the United States of America.
10
<PAGE>
7.5 Preservation of Existence. Borrower will maintain its
-------------------------
existence and all of its material rights, privileges, and franchises in every
jurisdiction in which the character of the property owned or the nature of the
business transacted by it or its obligations and duties arising under or
pursuant to any of the Transaction Documents requires such qualification.
7.6 Payment of Taxes. All tax returns and reports of Borrower
----------------
required to be filed, have been timely filed (inclusive of any permitted
extensions), and all taxes, assessments, fees, and other governmental charges
thereupon and upon its assets, income, and franchises which are shown on such
returns or reports as being due and payable, have been paid when due and
payable, except such taxes, if any, that are reserved against in accordance with
generally accepted accounting principals in the United States of America and are
being contested in good faith by appropriate proceedings promptly instituted and
diligently conducted. Borrower has no knowledge of any proposed tax assessment
against it which is not either going to be paid prior to it becoming delinquent
or being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted by such Person with appropriate reserves made for such
assessment in accordance with generally accepted accounting principals.
7.7 Litigation; Adverse Facts. Except as disclosed to Lender in
-------------------------
Exhibit D: (a) there is no action, suit, proceeding, or arbitration at law or
- ---------
in equity or before or by any federal, state, municipal, or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, pending or, to the knowledge of Borrower, threatened against or
directly affecting Borrower which is reasonably likely to result in a Material
Adverse Effect on Borrower or may reasonably be expected to materially adversely
affect Borrower's ability to perform its obligations hereunder or under the
Notes; or (b) Borrower is not subject to or in default with respect to any final
judgment, writ, injunction, decree, rule, or regulation of any court or federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, in a manner which would have a
Material Adverse Effect on Borrower; and (c)(i) as of the date hereof or on the
Loan Date, there is no action, suit, proceeding or, to the best of Borrower's
knowledge or belief, investigation pending or, to the best of Borrower's
knowledge or belief, threatened against or directly affecting Borrower, which
questions the validity or the enforceability of this Agreement, the Related
Documents, or the Notes; and (ii) after the Loan Date, there is no action, suit
or proceeding pending against or affecting Borrower, pursuant to which, on the
date of the making of any Loan hereunder, there is in effect a binding
injunction materially and adversely affecting the validity or the enforceability
of this Agreement, the Related Documents, or the Notes.
7.8 Consents. Other than such as may have previously been
--------
obtained, no consent, license, permit, approval or authorization of, exemption
by, notice to, report to, or registration, filing or declaration with, any
governmental authority or agency is required in
11
<PAGE>
connection with the execution, delivery, and performance by Borrower of this
Agreement, the Related Documents, or the Notes.
7.9 Existing Defaults. Except as previously disclosed in
-----------------
writing, Borrower is not in default under any Contractual Obligation, which
would have a Material Adverse Effect on Borrower. Except as previously
disclosed in writing, Borrower is not in violation of any law, ordinance, rule
or regulation to which it or any of its Assets is subject, the failure to comply
with which would have a Material Adverse Effect on Borrower.
8. AFFIRMATIVE COVENANTS
Borrower and Lender covenant and agree, so long as the Loan hereunder
shall be outstanding and until the full and final payment of the Loan and the
performance of all obligations of Borrower, as follows:
8.1 Payment of Principal and Interest. Borrower will duly and
---------------------------------
punctually pay all principal and interest due hereunder at the time and place
and in the manner specified herein.
8.2 Accounting Records and Inspection. Borrower shall maintain
---------------------------------
adequate financial and accounting books and records in accordance with sound
business practices and generally accepted accounting principles consistently
applied, and permit any representative of Lender at Lender's expense, upon
reasonable written notice to Borrower, at any time during usual business hours,
to inspect, audit, and examine such books and records and to make copies and
take extracts therefrom, and discuss its affairs, financing, and accounts with
its officers and independent public accountants. Borrower shall furnish Lender
with any information reasonably requested regarding Borrower's business or
finances promptly upon such entity's request. Borrower shall permit those
Persons designated by Lender to visit and inspect, during Borrower's normal
business hours, any of the Assets of Borrower upon reasonable notice and as
often as may be reasonably requested.
8.3 Financial Statements. Borrower shall furnish Lender:
--------------------
(a) as soon as practicable after the end of each fiscal year,
but in no event later than one hundred and twenty (120) days after the end
of such fiscal year, balance sheets of Borrower as of the end of such year,
profit and loss statements and statements of cash flow (which cash flow
statement need not be certified) of Borrower for such year, setting forth
in each case in comparative form, figures for the previous fiscal year, all
in reasonable detail and certified by independent certified public
accountants of recognized standing selected by Borrower;
12
<PAGE>
(b) as soon as possible and, in any event, within five (5)
Business Days after Borrower has knowledge, written notice of: (1) the
occurrence of any Event of Default or event which with the giving of notice
or lapse of time, or both, would result in an Event of Default; or (2) any
default or event of default as defined in any evidence of Debt of Borrower
which have an outstanding balance in excess of Seven Million Five Hundred
Thousand U.S. Dollars (US$ 7,500,000) or under any agreement, indenture, or
other instrument under which such Debt has been issued, irrespective of
whether such Debt is accelerated or such default is waived;
(c) with prompt written notice of: (1) a material adverse effect
on Borrower's consolidated condition (financial or otherwise) or
operations; (2) a material breach of or noncompliance with any term,
condition or covenant contained in this Agreement, the Notes, or the other
Transaction Documents; or (3) a material breach of or noncompliance with
any material term, condition, or covenant of any material contract to which
Borrower is a party or by which any of its Assets may be bound;
(d) with prompt written notice of any claims, proceedings, or
disputes against, or to the knowledge or belief of Borrower, threatened or
directly affecting Borrower, which involve monetary amounts of Ten Million
U.S. Dollars (US$ 10,000,000) or more or which are reasonably likely to
have a Material Adverse Effect on Borrower, any material labor controversy
resulting in or threatening to result in a strike against Borrower which
could have a Material Adverse Effect on Borrower or any proposal by any
public authority of which Borrower has knowledge to acquire any of the
material Assets or businesses of Borrower;
(e) promptly upon becoming aware of any Person's overtly seeking
to obtain or overtly threatening to seek to obtain an order for relief with
respect to Borrower in an involuntary case under any applicable bankruptcy,
insolvency, or other similar law now or hereafter in effect, a written
notice thereof specifying what action Borrower is taking or proposes to
take with respect thereto;
(f) prompt notice of: (1) all legal or arbitral proceedings, and
all proceedings by or before any governmental regulatory authority or
agency, directly affecting Borrower which involve monetary amounts of Ten
Million U.S. Dollars (US$ 10,000,000) or more, or which are reasonably
likely to have a Material Adverse Effect on Borrower, or on the timely
payment of the principal of or interest on the Loan, or the enforceability
of this Agreement, the Related Documents, or the Notes, or the rights and
remedies of Lender hereunder or thereunder, as applicable; (2) any
information coming to the attention of Borrower relating to any action
taken or proposed to be taken by any Person which is reasonably likely to
have a material adverse effect on the ability
13
<PAGE>
of Borrower to perform its obligations under this Agreement, the Related
Documents, or the Notes, as applicable; and
(g) upon demand, furnish Lender with such information as it may
reasonably request with respect to the financial condition and affairs of
Borrower.
8.4 Conduct of Business. Borrower will maintain and preserve
-------------------
its existence, conduct its business in an orderly, efficient manner, without
voluntary interruption; keep its properties useful or necessary in its business
in good working order and condition, and from time to time make all needed
repairs, renewals and replacements thereto, so that the efficiency of its
properties shall be fully preserved. Borrower will comply in all material
respects with all applicable laws and regulations of governmental agencies.
Borrower will duly qualify to do business and maintain such qualification in
each jurisdiction where its ownership of property or conduct of business
requires such qualification except where the failure to qualify could not have a
Material Adverse Effect and would not affect Borrower's ability to perform its
obligations under this Agreement.
8.5 Insurance. Borrower shall, at no cost to Lender, maintain
---------
or cause to be maintained with insurers and through recognized brokers, in full
force and effect during the term of the Loan until two (2) years after the date
of full repayment, full liability insurance with a combined single limit of not
less than US$750,000,000 any one accident/occurrence, with Lender named as an
additional insured. If the Aircraft is sold, transferred, leased or operated by
a third party during such two (2) year period, Borrower and/or the lessee of the
Aircraft (the "Insured") will cause such subsequent owner, lessee or operator to
-------
obtain the insurance referred to below so that Lender is fully protected by such
insurance for the entire two (2) year period. Borrower shall also, at no cost to
Lender, maintain or cause to be maintained in full force and effect during the
term of the Loan aircraft hull insurance (all risks and hull war and allied
perils risks) with limits of at least US$20,000,000, naming Lender as loss payee
as its interests appear and as an additional insured. Such insurance policies
shall include the following provisions:
(a) The Insurers agree that Lender shall not be liable for, nor
have any obligation to pay, any premium due hereunder, and the Insurers
further agree that they shall not offset or counter-claim any unpaid
premium against the interest of Lender.
(b) The Insurers agree to waive all of their rights of
subrogation against Lender.
(c) The policy shall contain a cross liability clause to the
effect that this insurance, except for the limits of liability, shall
operate to give Lender and Insureds the same protection as if there was a
separate policy issued to each of them.
14
<PAGE>
(d) The Insurers agree that this insurance shall be primary
insurance without any right of contribution from any other insurance which
is carried by Lender or by the Insured and the Insurer's liability shall
not be affected by any other insurance of which any of Lender or Insured
have the benefit so as to reduce the amount payable to Lender under the
policy.
(e) The Insurers agree that as respects the interest of Lender
this insurance shall not be invalidated by any action or inaction of the
Insured or any other person and shall insure Lender and its directors,
officers, agents, and employees regardless of any breach or violation of
any warranty, declaration or condition contained in the policy by the
Insured or by the omission or neglect, or by the performance of any act in
violation or any terms or conditions of the policy or because of the
subjection of the property to any conditions, uses or operations not
permitted by the policy or because of a use or operation of the property
which is, by the terms of the policy, specifically excluded from coverage
or because of any false statement concerning this policy or the subject
thereof, by the Insured or the Insured's employees, agents or
representatives, whether occurring before or after attachment of this
Agreement, or whether before or after the loss.
(f) The Insurers shall promptly notify Lender in the event of
cancellation or of any change whatsoever of a restrictive nature affecting
the insurance certified hereunder or in the event that any premium or
installment of premium shall not be paid when due. The Insurance shall
continue unaltered for the benefit of Lender and its officers, agents, and
employees for at least thirty (30) days after written notice by registered
mail of such cancellation change or non-payment of premium or installment
thereof shall have been received by Lender except in the case of war risk
for which seven (7) days notice will be given.
(g) Irrespective of any war, Hi-Jacking, Confiscation and other
related perils exclusion clause(s) (e.g. London endorsement form AVN 48B or
wording of similar intent) the Insurers agree that coverage afforded shall
apply for the benefit of Lender to the same extent as would have applied
had such exclusion clause(s) not been made a part of any such policy.
(h) In respect of any claim that becomes payable on the basis of
a total loss, settlement (net of any relevant policy deductible) will be
made to, or to the order of, the Lender. In respect of any other claim,
settlement (net of any relevant policy deductible) will be made with such
parties as may be necessary to repair the equipment unless otherwise agreed
after consultation between the Insurers and the Insured and, where
necessary under the terms of this Agreement, with Lender. For purposes of
any
15
<PAGE>
such policy, the term "total loss" means any of the following in relation
to the Aircraft or an Engine: destruction, damage beyond repair or being
rendered permanently unfit for normal use for any reason whatsoever;
actual, constructive, compromised, arranged or agreed total loss;
requisition of title, confiscation, forfeiture or any compulsory
acquisition or other similar event; sequestration, detention, seizure or
any similar event for more than thirty (30) consecutive days; requisition
for use for more than one hundred and eighty (180) consecutive days; (with
respect to an Engine) if Borrower's title to an Engine is impaired under
any creditor agreement that purports to preserve title to such engine
although installed on another Person's airframe; any sale of the Aircraft
in connection with Borrower's bankruptcy; or any other occurrence that
deprives Borrower of use or possession for a period of sixty (60) days or
longer.
(i) In the event any of Borrower's insurances (either the
primary insurance or the reinsurance) contain any date recognition
exclusion clause (such as AVN2000) or similar clause excluding from such
insurance coverage damage to any property (including the Aircraft) or death
or injury to any person on account of accidents, incidents or occurrences
caused by date recognition or other Year 2000-related problems, Borrower at
its cost will obtain for the benefit of itself and Lender the broadest
write-back available in the London insurance market with respect to such
exclusion.
(j) Borrower will cause its insurers to issue a broker's letter
of undertaking to Lender in a form acceptable to Lender.
8.6 Compliance with Laws. Borrower shall exercise all due
--------------------
diligence in order to comply with the requirements of all applicable laws,
rules, regulations and orders of any governmental authority, noncompliance with
which would have a Material Adverse Effect on Borrower.
8.7 Subsequent Leases. Borrower will obtain Lender's prior
-----------------
written approval, not to be unreasonably withheld, with respect to the lease of
the Aircraft to any new lessee. Borrower will provide a copy of the proposed
lease agreement with such new lessee. Lender will have the right to approve the
form and substance thereof with respect to those terms and provisions relevant
to Lender's interest such as insurance, registration, maintenance and return
condition. With respect to other terms and provisions of the lease, Borrower
will use its best efforts to negotiate with the new lessee such terms and
conditions as Lender reasonably may request. In order to secure, among other
things, its obligations hereunder, Borrower will assign all of its rights under
such lease to Lender pursuant to a written assignment agreement acceptable to
Lender.
16
<PAGE>
8.8 Further Assurances. At any time or from time to time upon
------------------
the reasonable request of Lender, Borrower shall and shall cause the appropriate
person to execute, acknowledge and deliver all such additional instruments, and
documents and further assurances or cause to be done all such further acts and
things as may reasonably be necessary to effectuate fully the intent and
purposes of this Agreement, the Notes, the Related Documents, and any other
agreement entered into in connection with Lender's extension of the Loan to
Borrower and to provide for payment of the Loan made hereunder with interest
thereon in accordance with the terms of this Agreement and the Notes.
9. NEGATIVE COVENANTS
Borrower covenants and agrees that from the date hereof, and so
long as the Loan hereunder shall be outstanding and until the full and final
payment of the Loan and the performance of all obligations of Borrower
hereunder, without the prior written consent of Lender first having been
obtained (which will not be unreasonably withheld), to perform each and all of
the covenants applicable to it:
9.1 Restriction on Fundamental Changes. Borrower shall not
----------------------------------
change its name, cease to be a certified air carrier, enter into any merger,
consolidation, reorganization or recapitalization or reclassify its interests or
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of,
in one transaction or a series of transactions, all or substantially all of its
businesses or Assets, whether now owned or hereafter acquired, or acquire by
purchase or otherwise all or substantially all the businesses or Assets of, or
stock or other evidence of beneficial ownership of, any Person, except:
(a) Borrower may sell, assign, transfer, convey, or otherwise
dispose of businesses or Assets in accordance with the provisions of
Section 92 hereof; and
----------
(b) Upon thirty (30) calendar days prior written notice to
Lender, Borrower may change its name.
9.2 Sale of Assets. Borrower shall not sell, assign, transfer,
--------------
convey, or otherwise dispose of, in one or a series of transactions, all or
substantially all of its Assets, whether now owned or hereafter acquired, except
for:
(a) the sale or other disposition by Borrower of Assets in the
ordinary and usual course of business, for a reasonably equivalent value;
and
17
<PAGE>
(b) the involuntary sales or other dispositions of any of the
Assets of Borrower.
10. EVENTS OF DEFAULT
10.1 Events of Default. The occurrence of any one or more of the
-----------------
following described events (each, an "Event of Default") shall constitute a
default hereunder:
(a) Failure to Make Payments When Due. Borrower shall fail to
---------------------------------
pay when due, any amount owing hereunder (including the portion of the down
payment described in Article 2.3) or under the Notes with respect to the
principal and interest on the Loan when such amount is due, whether at
stated maturity, as a result of a mandatory repayment requirement, by
acceleration, by notice of prepayment, or otherwise and such failure is not
cured within five (5) Business Days after written notice from Lender of the
occurrence thereof;
(b) Default in Other Agreements. (i) Borrower shall default (as
---------------------------
principal or guarantor or other surety) in the payment when due (subject to
any applicable notice or grace period), whether at stated maturity or
otherwise, of any monetary obligation with respect to (howsoever
designated) any Debt that is for an amount in excess of $7,500,000, whether
such Debt now exists or shall hereafter be created; or (ii) an event of
default, as defined in a mortgage, indenture, interest rate swap agreement,
or instrument under which there may be issued, or by which there may be
secured or evidenced, any Debt that is for an amount in excess of
$7,500,000, or Debt guaranteed by, Borrower whether such Debt now exists or
shall hereafter be created, shall occur and Borrower shall permit such Debt
to become due and payable prior to its stated maturity or due date;
(c) Breach of Certain Covenants. (i) Borrower shall fail to
---------------------------
perform or comply in any respect with any covenant, term, or condition
contained in Article 9 hereof; or (ii) Borrower shall default in the
---------
performance of or compliance with any term contained in this Agreement
other than those referred to in Sections 10.1(a), 10.1(c)(i), and 10.1(d)
---------------- ---------- -------
and such default shall not have been remedied or waived within fifteen (15)
calendar days after receipt of notice from Lender of such default (if
Borrower is using diligent and best efforts to cure such default, then
Borrower will have the reasonable number of days necessary to cure such
default (not to exceed sixty (60) days));
(d) Breach of Representation or Warranty. Any financial
------------------------------------
statement, representation, warranty, or certification made or furnished by
Borrower under this
18
<PAGE>
Agreement shall, at any time, prove to have been materially false,
incorrect, or incomplete when made, effective, or reaffirmed, as the case
may be;
(e) Bankruptcy; Assignment for the benefit of Creditors.
---------------------------------------------------
Borrower makes an assignment for the benefit of creditors, or admits in
writing its inability to pay its debts as they become due, or files a
voluntary petition in bankruptcy, or is adjudicated a bankrupt or
insolvent, or files any petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, or files any answer admitting or not contesting the material
allegations of a petition filed against Borrower in any such proceeding, or
seeks or consents to or acquiesces in the appointment of any trustee,
receiver or liquidator of Borrower or of all or any substantial part of the
Assets of Borrower or if Borrower takes any action looking to the
dissolution or liquidation of Borrower;
(f) Material Adverse Effect. A Material Adverse Effect occurs
-----------------------
in the financial condition of Borrower such that in Lender's reasonable
opinion a bankruptcy filing (whether voluntary or involuntary) is imminent;
(g) Appointment of Receiver. Within sixty (60) days after the
-----------------------
commencement of an action against Borrower seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, such action
is not dismissed or all orders or proceedings thereunder affecting the
operations or the business of Borrower stayed, or if stayed such stay order
is thereafter set aside, or if, within sixty (60) days after the
appointment without the consent of Borrower as applicable, the receiver, or
the liquidator of Borrower or all or any substantial part of the Assets of
Borrower or, such appointment is not vacated;
(h) Judgments and Attachments.
-------------------------
(i) A final judgment for money, the uninsured portion of
which is in excess of Ten Million U.S. Dollars (US $10,000,000) is
rendered against Borrower and within thirty (30) days after the entry
thereof, such judgment is not discharged or execution thereof stayed
pending appeal, or within thirty (30) days after the expiration of any
such stay, such judgment is not discharged; or
19
<PAGE>
(ii) a judgment creditor shall obtain possession of any
material portion of the Assets of Borrower in excess of $5,000,000 by
any means, including without limitation, levy, distraint, replevin, or
self-help; or
(i) Cross Default. Borrower is in default under any lease or
-------------
other agreement between Borrower and Lender and the same is not cured
within its specified cure period.
10.2 Remedies. Upon the occurrence of an Event of Default:
--------
(a) If such Event of Default arises under Sections 10.1(e) or
---------------
10.1(g), then the unpaid principal amount of and any accrued interest on
the Loan and any other amounts owing hereunder, under the Notes or under
the other Transaction Documents shall automatically become immediately due
and payable, without presentment, demand, protest, notice, or other
requirements of any kind, all of which are hereby expressly waived by
Borrower; and
(b) In the case of any other Event of Default, Lender, by
written notice to Borrower, may declare all of the Loan to be, and the same
shall forthwith become, due and payable, together with any and all accrued
interest thereon, and any other amounts owing hereunder, under the Notes or
under the other Transaction Documents.
Upon acceleration, Lender, without notice to or demand upon
Borrower, which are expressly waived by Borrower, to the fullest extent
permitted by law, may proceed to protect, exercise, and enforce its rights and
remedies hereunder and under the Notes and the Related Documents, and any other
rights and remedies as are provided by law or equity. Lender may determine, in
its sole discretion, the order and manner in which Lender's rights and remedies
are to be exercised, and all payments received by Lender, or any one or more of
them, shall be applied as follows (regardless of how Lender may treat the
payments for the purpose of its own accounting): first, to all out-of-pocket
-----
expenses (including reasonable attorneys' fees) incurred by Lender in enforcing
any Debt of Borrower hereunder, or in collecting any payments due hereunder or
under the Notes; second, to accrued and unpaid interest on the Loans; third, to
------ -----
the outstanding principal balance of the Loans, fourth, to any other Debt of
------
Borrower owing to Lender; and fifth, any remainder to Borrower.
-----
11. EXPENSES AND INDEMNITIES
11.1 Expenses. Borrower hereby agrees to pay on demand: (a) the
--------
reasonable out-of-pocket costs and expenses (including reasonable attorneys'
fees and expenses)
20
<PAGE>
incurred by Lender to correct any default or to enforce any provision of this
Agreement, the Notes, any of the Related Documents, or any other document or
instrument contemplated hereby or thereby against Borrower; and (b) the
reasonable out-of-pocket costs and expenses (including reasonable attorneys'
fees and expenses) incurred by Lender in connection with any bankruptcy or other
insolvency proceeding, reorganization, workout, composition, or other credit
arrangement of Borrower.
11.2 Indemnity. In addition to the payment of expenses pursuant
---------
to Section 11.1 hereof, and irrespective of whether the transactions
------------
contemplated hereby shall be consummated, Borrower hereby agrees to indemnify,
exonerate, pay, defend and hold harmless Lender, and the officers, directors,
employees, and agents of and counsel to Lender (collectively, the "Indemnitees"
and individually, an "Indemnitee") from and against any and all liabilities,
obligations, losses, damages, penalties, actions, causes of action, judgments,
suits, claims, costs, expenses, of any kind or nature whatsoever, including the
reasonable fees and expenses of counsel to Indemnitees, in connection with any
investigative, administrative, or judicial proceeding, irrespective of whether
such Indemnitee shall be designated a party thereto, which may be imposed on,
incurred by, or asserted against such Indemnitee, in any manner relating to or
arising out of this Agreement, any Loan hereunder, the use or intended use of
the proceeds of the Loans, or the consummation of the transactions contemplated
by this Agreement (the "Indemnified Liabilities"); provided, however, that
-------- -------
Borrower's obligations to indemnify shall not extend to any losses, damages,
liabilities, actions, or claims against any Indemnitee arising as a result of
the gross negligence or willful misconduct of such Indemnitee. Each Indemnitee
shall promptly notify Borrower of each event of which it has knowledge which may
give rise to a claim under the indemnification provisions of this Section 11.2.
------------
If any investigative, judicial, or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, Borrower, to the extent
directed by such Indemnitee, will resist and defend such action, suit, or
proceeding or cause the same to be resisted and defended by counsel designated
by Borrower (which counsel shall be reasonably satisfactory to such Indemnitee);
provided, however, that Borrower's obligation to so resist or defend any such
- -------- -------
action, suit, or proceeding shall exist if and only if Borrower is directed to
do so by the Indemnitee. Such Indemnitee will use its best efforts to cooperate
in the defense of any such action, suit, or proceeding. In the event that the
Indemnitee does not direct Borrower to resist or defend any action, suit,
proceeding or cause and Borrower desires to resist or defend such action, suit,
proceeding or cause, then Borrower and such Indemnitee will discuss and
establish the terms and conditions on which Borrower may defend such action,
suit, proceeding or cause. To the extent that the undertaking to indemnify,
exonerate, pay, and hold harmless set forth in this Section 11.2 may be
------------
unenforceable because it is violative of any law or public policy as determined
by a final judgment of a court of competent jurisdiction, Borrower shall make
the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law. The
obligations of
21
<PAGE>
Borrower under this Section 11.2 shall survive the termination of this Agreement
------------
and the discharge of Borrower's other obligations hereunder.
12. MISCELLANEOUS
12.1 Setoffs. Nothing in this Agreement shall be deemed to
-------
constitute a waiver or prohibition of the Lender's right of setoff and Borrower
hereby expressly acknowledges that the Lender has such rights.
12.2 Entire Agreement. This Agreement and the documents and
----------------
agreements referred to and incorporated herein embody the entire agreement and
understanding between the parties hereto and supersede all prior agreements and
understandings relating to the subject matter hereof and the transactions
contemplated hereby.
12.3 Successors and Assigns. This Agreement shall be binding
----------------------
upon, and inure to the benefit of, the parties hereto and their respective
successors and assigns; provided, however, that Borrower and Lender may not
-------- -------
assign or transfer any interest or rights hereunder without the prior written
consent of the other party (which consent will not be unreasonably withheld) and
any such prohibited assignment shall be absolutely void.
12.4 No Waiver. No failure to exercise, and no delay in
---------
exercising any right, power or remedy hereunder or under any document delivered
pursuant hereto shall impair any right, power or remedy which Lender may have,
nor shall any such delay be construed to be a waiver of any such rights, powers
or remedies, or an acquiescence in any breach or default under this Agreement or
any document delivered pursuant hereto nor shall any waiver of any breach or
default of Borrower hereunder be deemed a waiver of any subsequent default or
breach. The rights and remedies of Lender specified herein are cumulative and
not exclusive of any rights or remedies which Lender would otherwise have either
at law or in equity.
12.5 Survival. All representations, warranties and agreements
--------
contained herein on the part of Borrower shall survive the making of the Loan
hereunder and all such representations, warranties and agreements shall be
effective so long as any portion of the principal of the Loan or any interest
thereon is unpaid.
12.6 Notices. Any notice required or permissible under this
-------
Agreement will be in writing and in English. Notices will be delivered in
person or sent by telex, fax, letter (mailed airmail, certified and return
receipt requested), or by expedited delivery addressed to the parties as set
forth below. In the case of a telex or fax, notice will be deemed received upon
actual receipt (in the case of a fax notice, the date of actual receipt will be
deemed to be the date set forth on the confirmation of receipt produced by the
sender's fax machine immediately after
22
<PAGE>
the fax is sent). In the case of a mailed letter, notice will be deemed received
on the tenth (10th) day after mailing. In the case of a notice sent by expedited
delivery, notice will be deemed received on the date of delivery set forth in
the records of the Person which accomplished the delivery. If any notice is sent
by more than one of the above listed methods, notice will be deemed received on
the earliest possible date in accordance with the above provisions. Notice will
be addressed as follows:
Lender:
INTERNATIONAL LEASE FINANCE CORPORATION
1999 Avenue of the Stars, 39th Floor
Los Angeles, California 90067
United States of America
Telex: INTERLEASE BVHL
Telecopier: 310-788-1990
Telephone: 310-788-1999
ATTENTION: Legal Department
Borrower:
TOWER AIR, INC.
Hangar 17
JFK International Airport
Jamaica, New York 11430
Telecopier: 718-553-4300
Telephone: 718-553-4312
ATTENTION: Morris Nachtomi, Chairman & CEO
With copy to:
Stephen Gelband, Esq.
Hewes, Gelband, Lambert & Dann
1000 Potomac Street, NW, Suite 300
Washington, DC 20007-3533
Telecopier: (202) 333-0871
23
<PAGE>
Telephone: (202) 337-6200
12.7 Termination. This Agreement shall terminate when all
-----------
obligations of Borrower incurred hereunder, under the Note, any Transaction
Document, or under any other agreement executed and delivered in connection
herewith have been discharged in full.
12.8 Waivers and Amendments. No amendment, modification,
----------------------
restatement, supplement, termination, or waiver of or to, or consent to any
departure from, any provision of this Agreement, the Notes, or the Related
Documents, shall be effective unless the same shall be in writing and signed by
Lender and Borrower.
12.9 Execution in Counterparts. This Agreement may be executed
-------------------------
in any number of counterparts and by different parties on separate counterparts,
each of which counterparts, when so executed and delivered, shall be deemed to
be an original and all of which counterparts, taken together, shall constitute
but one and the same Agreement. This Agreement shall become effective upon the
execution of a counterpart hereof by each of the parties hereto.
12.10 Severability of Provisions. Any provision of this Agreement,
--------------------------
the Notes, or the Related Documents which is illegal, invalid, prohibited, or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such illegality, invalidity, prohibition, or unenforceability
without invalidating or impairing the remaining provisions hereof or affecting
the validity or enforceability of such provision in any other jurisdiction.
12.11 California Law. This Agreement is being delivered in the
--------------
State of California and will in all respects be governed by and construed in
accordance with the Laws of the State of California (notwithstanding the
conflict Laws of the State of California).
12.12 Non-Exclusive Jurisdiction in California. The parties
----------------------------------------
hereby consent to the non-exclusive jurisdiction of the Federal District Court
for the Central District of California or the State of California Superior or
Municipal Court in Los Angeles, California. Nothing herein will prevent either
party from bringing suit in any other appropriate jurisdiction.
12.13 Service of Process. The parties hereby agree that service
-------------------
of process may be made upon Borrower and Lender in accordance with Section
415.40 of the California Code of Civil Procedure by mailing copies of the
summons and complaint to the person to be served by air mail, certified or
registered mail to the address set forth in Article 12.6, postage prepaid,
return receipt requested, or in accordance with the Hague Convention, if
applicable.
12.14 Prevailing Party in Dispute. If any legal action or other
---------------------------
proceeding is brought in connection with any provisions in this Agreement, the
prevailing party will be
24
<PAGE>
entitled to recover reasonable attorneys' fees and other costs incurred in such
action or proceedings. The prevailing party will also, to the extent permissible
by law, be entitled to receive pre- and post-judgment Default Interest.
12.15 Headings. Article and Section headings used in this
--------
Agreement and the table of contents preceding this Agreement are for convenience
of reference only and shall not constitute a part of this Agreement for any
other purpose or affect the construction of this Agreement.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed the day and year first above written.
INTERNATIONAL LEASE FINANCE TOWER AIR, INC.,
CORPORATION, a Delaware corporation
a California corporation
By: /s/ JULIE SACKMAN By: /s/ Morris Nachtomi
--------------------------- -----------------------------------
ITS: SENIOR PRESIDENT ITS: CHAIRMAN & CEO
AND GENERAL COUNSEL
26
<PAGE>
PROMISSORY NOTE "A"
ORIGINAL PRINCIPAL AMOUNT: US$ 10,000,000
MAKER: TOWER AIR, INC., a Delaware corporation
DATED AS OF: November 13, 1998
A. PROMISE TO REPAY. FOR VALUE RECEIVED, TOWER AIR, INC., a
----------------
Delaware corporation ("Borrower"), promises to pay to INTERNATIONAL LEASE
FINANCE CORPORATION, a California corporation ("Lender"), or order, the
principal sum of Ten Million U.S. Dollars (US$ 10,000,000) or such lesser amount
as shall equal the outstanding amount of the Loan made by Lender to Borrower
pursuant to Section 2.1 of that certain Term Loan Agreement, dated as of
-----------
November 13, 1998 (the "Loan Agreement"), entered into between Borrower and
Lender.
B. DEFINED TERMS. Any and all initially capitalized terms used
-------------
herein shall have the meanings ascribed thereto in the Loan Agreement, unless
specifically defined herein. The term "or" as used in this Aircraft Secured
Promissory Note has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or". This Aircraft Secured Promissory Note (this
"Note") is the promissory note defined in the Loan Agreement as the "Note" and
is subject to, and entitled to the benefits of, the terms and provisions of the
Loan Agreement.
C. PAYMENTS OF PRINCIPAL AND INTEREST.
----------------------------------
i. Borrower hereby promises to make payments of principal and
interest, with respect to the Loan, evidenced hereby at the rates and times, and
in the amounts, and in all other respects in the manner as provided in the Loan
Agreement.
ii. As more fully set forth in the Loan Agreement, Borrower
shall not be obligated to pay, and the holder of this Note shall not be
obligated to charge, collect, receive, reserve, or take interest (it being
understood that interest shall be calculated as the aggregate of all charges
which constitute interest under applicable law that are contracted for, charged,
reserved, received, or paid) in excess of the maximum non-usurious interest
rate, as in effect from time to time, which may be charged, contracted for,
reserved, received, or collected by Lender in connection with the Loan
Agreement, this Note, the other Transaction Documents, or any other documents
executed in connection herewith or therewith.
D. PREPAYMENTS. Borrower may prepay the principal balance due under
-----------
this Note, in whole or in part, only in accordance with the provisions of the
Loan Agreement.
<PAGE>
E. APPLICATION OF PAYMENTS. All payments (including prepayments)
-----------------------
made hereunder shall be applied as set forth in the Loan Agreement.
F. TIME AND PLACE OF PAYMENTS. All principal and interest due
--------------------------
hereunder is payable in immediately available United States Dollars at Lender's
bank account number 74-45164 at Bank of America Illinois, 231 South LaSalle
Street, Chicago, Illinois 60697, ABA #071000039 (or at such other office as may
be designated from time to time by Lender), not later than 1:00 p.m., Chicago
time, on the day of payment.
G. WAIVERS. Borrower, for itself and its legal representatives,
-------
successors, and assigns, expressly waives presentment, demand, protest, notice
(except as required by the Loan Agreement), and all other requirements of any
kind, in connection with the enforcement or collection of this Note.
H. ACCELERATION AND WAIVER. IT IS EXPRESSLY AGREED THAT, UPON THE
-----------------------
OCCURRENCE OF AN EVENT OF DEFAULT, THE UNPAID PRINCIPAL BALANCE OF AND ANY
ACCRUED AND UNPAID INTEREST UNDER THIS NOTE MAY BE DECLARED TO BE, OR SHALL
IMMEDIATELY BECOME, DUE AND PAYABLE PURSUANT TO THE TERMS OF THE LOAN AGREEMENT,
WITHOUT PRESENTMENT, DEMAND, PROTEST, NOTICE (EXCEPT AS REQUIRED BY THE LOAN
AGREEMENT) OR OTHER REQUIREMENTS OF ANY KIND, ALL OF WHICH ARE HEREBY EXPRESSLY
WAIVED BY BORROWER.
I. ATTORNEYS' FEES. In the event it should become necessary to
---------------
employ counsel to collect or enforce this Note, Borrower agrees to pay the
reasonable attorneys' fees and costs of the holder hereof, irrespective of
whether suit is brought, to the extent and as provided in the Loan Agreement.
J. AMENDMENTS. This Note may not be changed, modified, amended, or
----------
terminated except by a writing duly executed by Borrower and the holder hereof.
K. HEADINGS. Section headings used in this Note are solely for
--------
convenience of reference, shall not constitute a part of this Note for any other
purpose, and shall not affect the construction of this Note.
L. CALIFORNIA LAW. This Note is being delivered in the State of
--------------
California and will in all respects be governed by and construed in accordance
with the Laws of the State of California (notwithstanding the conflict Laws of
the State of California).
<PAGE>
M. NON-EXCLUSIVE JURISDICTION IN CALIFORNIA. Borrower hereby
----------------------------------------
consents to the non-exclusive jurisdiction of the Federal District Court for the
Central District of California or the State of California Superior or Municipal
Court in Los Angeles, California. Nothing herein will prevent either party from
bringing suit in any other appropriate jurisdiction.
N. SERVICE OF PROCESS. Borrower hereby agrees that service of
------------------
process may be made upon Borrower in accordance with Section 415.40 of the
California Code of Civil Procedure by mailing copies of the summons and
complaint to the person to be served by air mail, certified or registered mail
to the address set forth in Section 12.6 of the Loan Agreement, postage prepaid,
return receipt requested, or in accordance with the Hague Convention, if
applicable.
O. PREVAILING PARTY IN DISPUTE. If any legal action or other
---------------------------
proceeding is brought in connection with any provisions in this Note, the
prevailing party will be entitled to recover reasonable attorneys' fees and
other costs incurred in such action or proceedings. The prevailing party will
also, to the extent permissible by law, be entitled to receive pre- and post-
judgment Default Interest.
TOWER AIR, INC. A DELAWARE CORPORATION
BY: /s/ Morris Nachtomi
----------------------------------------
ITS: CHAIRMAN & CEO
---------------------------------------
<PAGE>
PROMISSORY NOTE "B"
ORIGINAL PRINCIPAL AMOUNT: US$ 10,000,000
MAKER: TOWER AIR, INC., a Delaware corporation
DATED AS OF: November 13, 1998
A. PROMISE TO REPAY. FOR VALUE RECEIVED, TOWER AIR, INC., a
----------------
Delaware corporation ("Borrower"), promises to pay to INTERNATIONAL LEASE
FINANCE CORPORATION, a California corporation ("Lender"), or order, the
principal sum of Ten Million U.S. Dollars (US$ 10,000,000) or such lesser amount
as shall equal the outstanding amount of the Loan made by Lender to Borrower
pursuant to Section 21 of that certain Term Loan Agreement, dated as of November
----------
13, 1998 (the "Loan Agreement"), entered into between Borrower and Lender.
B. DEFINED TERMS. Any and all initially capitalized terms used
-------------
herein shall have the meanings ascribed thereto in the Loan Agreement, unless
specifically defined herein. The term "or" as used in this Aircraft Secured
Promissory Note has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or". This Aircraft Secured Promissory Note (this
"Note") is the promissory note defined in the Loan Agreement as the "Note" and
is subject to, and entitled to the benefits of, the terms and provisions of the
Loan Agreement.
C. PAYMENTS OF PRINCIPAL AND INTEREST.
----------------------------------
i. Borrower hereby promises to make payments of principal and
interest, with respect to the Loan, evidenced hereby at the rates and times, and
in the amounts, and in all other respects in the manner as provided in the Loan
Agreement.
ii. As more fully set forth in the Loan Agreement, Borrower
shall not be obligated to pay, and the holder of this Note shall not be
obligated to charge, collect, receive, reserve, or take interest (it being
understood that interest shall be calculated as the aggregate of all charges
which constitute interest under applicable law that are contracted for, charged,
reserved, received, or paid) in excess of the maximum non-usurious interest
rate, as in effect from time to time, which may be charged, contracted for,
reserved, received, or collected by Lender in connection with the Loan
Agreement, this Note, the other Transaction Documents, or any other documents
executed in connection herewith or therewith.
D. PREPAYMENTS. Borrower may prepay the principal balance due under
-----------
this Note, in whole or in part, only in accordance with the provisions of the
Loan Agreement.
<PAGE>
E. APPLICATION OF PAYMENTS. All payments (including prepayments)
-----------------------
made hereunder shall be applied as set forth in the Loan Agreement.
F. TIME AND PLACE OF PAYMENTS. All principal and interest due
--------------------------
hereunder is payable in immediately available United States Dollars at Lender's
bank account number 74-45164 at Bank of America Illinois, 231 South LaSalle
Street, Chicago, Illinois 60697, ABA #071000039 (or at such other office as may
be designated from time to time by Lender), not later than 1:00 p.m., Chicago
time, on the day of payment.
G. WAIVERS. Borrower, for itself and its legal representatives,
-------
successors, and assigns, expressly waives presentment, demand, protest, notice
(except as required by the Loan Agreement), and all other requirements of any
kind, in connection with the enforcement or collection of this Note.
H. ACCELERATION AND WAIVER. IT IS EXPRESSLY AGREED THAT, UPON THE
-----------------------
OCCURRENCE OF AN EVENT OF DEFAULT, THE UNPAID PRINCIPAL BALANCE OF AND ANY
ACCRUED AND UNPAID INTEREST UNDER THIS NOTE MAY BE DECLARED TO BE, OR SHALL
IMMEDIATELY BECOME, DUE AND PAYABLE PURSUANT TO THE TERMS OF THE LOAN AGREEMENT,
WITHOUT PRESENTMENT, DEMAND, PROTEST, NOTICE (EXCEPT AS REQUIRED BY THE LOAN
AGREEMENT) OR OTHER REQUIREMENTS OF ANY KIND, ALL OF WHICH ARE HEREBY EXPRESSLY
WAIVED BY BORROWER.
I. ATTORNEYS' FEES. In the event it should become necessary to
---------------
employ counsel to collect or enforce this Note, Borrower agrees to pay the
reasonable attorneys' fees and costs of the holder hereof, irrespective of
whether suit is brought, to the extent and as provided in the Loan Agreement.
J. AMENDMENTS. This Note may not be changed, modified, amended, or
----------
terminated except by a writing duly executed by Borrower and the holder hereof.
K. HEADINGS. Section headings used in this Note are solely for
--------
convenience of reference, shall not constitute a part of this Note for any other
purpose, and shall not affect the construction of this Note.
L. CALIFORNIA LAW. This Note is being delivered in the State of
--------------
California and will in all respects be governed by and construed in accordance
with the Laws of the State of California (notwithstanding the conflict Laws of
the State of California).
<PAGE>
M. NON-EXCLUSIVE JURISDICTION IN CALIFORNIA. Borrower hereby
----------------------------------------
consents to the non-exclusive jurisdiction of the Federal District Court for the
Central District of California or the State of California Superior or Municipal
Court in Los Angeles, California. Nothing herein will prevent either party from
bringing suit in any other appropriate jurisdiction.
N. SERVICE OF PROCESS. Borrower hereby agrees that service of
------------------
process may be made upon Borrower in accordance with Section 415.40 of the
California Code of Civil Procedure by mailing copies of the summons and
complaint to the person to be served by air mail, certified or registered mail
to the address set forth in Section 12.6 of the Loan Agreement, postage prepaid,
return receipt requested, or in accordance with the Hague Convention, if
applicable.
O. PREVAILING PARTY IN DISPUTE. If any legal action or other
---------------------------
proceeding is brought in connection with any provisions in this Note, the
prevailing party will be entitled to recover reasonable attorneys' fees and
other costs incurred in such action or proceedings. The prevailing party will
also, to the extent permissible by law, be entitled to receive pre- and post-
judgment Default Interest.
TOWER AIR, INC. A DELAWARE CORPORATION
BY: /s/ Morris Nachtomi
--------------------------------------
ITS: CHAIRMAN & CEO
-------------------------------------
<PAGE>
N618FF LEASE TERMINATION AGREEMENT
The undersigned, International Lease Finance Corporation ("Lessor") and
Tower Air, Inc. ("Lessee"), hereby (a) terminate the Aircraft Lease Agreement
dated as of December 6, 1994 between Lessor and Lessee the ("Lease"), recorded
with the Federal Aviation Administration on April 1, 1996 and assigned
conveyance number D07846; and (b) release the following the equipment from the
terms and conditions of the Lease:
One (1) Boeing 747-212B aircraft bearing manufacturer's serial
number 21937 and U.S. registration number N618FF, together with
four Pratt & Whitney JT9D-7Q engines, bearing manufacturer's
serial numbers 702097, 702163, 702195 and 702348.
This instrument may be executed in counterparts, each of which when
executed and delivered will be deemed an original and all together will
constitute one and the same instrument.
Dated as of November 13, 1998.
INTERNATIONAL LEASE FINANCE TOWER AIR, INC.
CORPORATION
By: /s/ Julie I. Sackman By: /s/ [SIGNATURE ILLEGIBLE]^^
---------------------------- --------------------------------
JULIE I. SACKMAN
SENIOR VICE PRESIDENT
Its: AND GENERAL COUNSEL Its: Vice President - Legal
---------------------------- --------------------------------
<PAGE>
WARRANTY BILL OF SALE
International Lease Finance Corporation ("SELLER"), a corporation organized
under the laws of the State of California, is the owner of the full legal and
beneficial title to the following equipment, all as described in Aircraft Sale
Agreement between Seller and Tower Air, Inc. ("BUYER") dated as of November 13,
1998 (collectively, the "AIRCRAFT"):
1. One 747-212B aircraft bearing manufacturer's serial number 21937.
2. Four (4) JT9D-7Q engines bearing manufacturer's serial number 702097,
702163, 702195 and 702348.
3. All appliances, parts, instruments, appurtenances, accessories,
furnishings or other equipment or property installed in or attached to
such aircraft and engines.
4. All records and manuals applicable to such aircraft and engines.
For and in consideration of the sum of One United States Dollar (US$1) and
other valuable consideration, receipt of which is herby acknowledged, Seller
does hereby sell, grant, transfer, deliver and set over to Buyer and its
successors and assignees forever all of Seller's right, title and interest in
and to the Aircraft, to have and to hold the Aircraft for its and their use
forever.
Seller hereby warrants to Buyer and its successors and assigns that there
is hereby conveyed to Buyer on the date hereof title to the Aircraft free and
clear of all liens, claims, charges and encumbrances whatsoever created by or
arising through Seller and that Seller will warrant and defend such title
forever against all claims and demands. SELLER represents that when it purchased
the Aircraft, the prior owner warranted to SELLER that the prior owner had at
the time it delivered the Aircraft full, clear and marketable title to the
Aircraft, free from any liens, mortgages, charges, pledges, trusts, claims,
leases, licenses, rights of set-off, possession or detention or other
incumbrances or defects whatsoever.
IN TESTIMONY WHEREOF we have set our hand this 13 day of November, 1998.
INTERNATIONAL LEASE FINANCE
CORPORATION
By: /s/ Julie I. Sackman
---------------------------
JULIE I. SACKMAN
SENIOR VICE PRESIDENT
Title: AND GENERAL COUNSEL
---------------------------
<PAGE>
ACCEPTANCE CERTIFICATE
TOWER AIR, INC. ("BUYER"), a corporation organized under the laws of
-----
Delaware and INTERNATIONAL LEASE FINANCE CORPORATION ("SELLER") do herby
------
represent, acknowledge, warrant and agree as follows:
1. BUYER and SELLER have entered into an Aircraft Sale Agreement dated as of
November 13, 1998 (hereinafter referred to as the "SALE AGREEMENT")
--------------
pursuant to which BUYER has purchased the Aircraft (as defined therein).
Words used herein with capital letters and not otherwise defined will have
the meanings set forth in the Sale Agreement.
2. BUYER has this ____ day of November, 1998 (Time:________________)
at ____________ accepted for purchase from SELLER:
a. One (1) 747-212B Aircraft bearing Manufacturer's serial number 21937
and Registration Mark N618FF, together with four (4) JT9D-7Q Engines
bearing manufacturer's serial numbers 702097, 702163, 702195 and
702348 (each of which has 750 or more rated take-off horse power), an
APU bearing manufacturer's serial number ___________ and all Parts
attached thereto, all in airworthy condition.
b. All Aircraft Documentation, including the usual and customary manuals,
logbooks, flight records and historical information regarding the
Aircraft Engines and Parts.
3. The Aircraft, Engines, Parts and Aircraft Documentation as described in the
Sale Agreement have been fully examined by BUYER and have been received in
a condition fully satisfactory to BUYER and in full conformity with the
Sale Agreement in every respect.
4. BUYER agrees that it is purchasing the Aircraft "AS IS, WHERE IS AND WITH
ALL FAULTS" and pursuant to the terms and conditions of the Sale Agreement.
Dated on the date set forth above
TOWER AIR, INC.
By: /s/ PHILIP R. BROOKMEYER
--------------------------------
Its: Vice President - Legal
--------------------------------
<PAGE>
N618FF LEASE TERMINATION AGREEMENT
The undersigned, International Lease Finance Corporation ("Lessor") and
Tower Air, Inc. ("Lessee"), hereby (a) terminate the Aircraft Lease Agreement
dated as of December 6, 1994 between Lessor and Lessee the ("Lease"), recorded
with the Federal Aviation Administration on April 1, 1996 and assigned
conveyance number D07846; and (b) release the following the equipment from the
terms and conditions of the Lease:
One (1) Boeing 747-212B aircraft bearing manufacturer's serial
number 21937 and U.S. registration number N618FF, together with
four Pratt & Whitney JT9D-7Q engines, bearing manufacturer's
serial numbers 702097, 702163, 702195 and 702348.
This instrument may be executed in counterparts, each of which when
executed and delivered will be deemed an original and all together will
constitute one and the same instrument.
Dated as of November 13, 1998
INTERNATIONAL LEASE FINANCE TOWER AIR, INC.
CORPORATION
By: /s/ Julie I. Sackman By:__________________________________
-------------------------------------
JULIE I. SACKMAN
SENIOR VICE PRESIDENT
Its: AND GENERAL COUNSEL Its:_________________________________
-------------------------------------
<PAGE>
N618FF LEASE TERMINATION AGREEMENT
The undersigned, International Lease Finance Corporation ("Lessor") and
Tower Air, Inc. ("Lessee"), hereby (a) terminate the Aircraft Lease Agreement
dated as of December 6, 1994 between Lessor and Lessee the ("Lease"), recorded
with the Federal Aviation Administration on April 1, 1996 and assigned
conveyance number D07846; and (b) release the following the equipment from the
terms and conditions of the Lease;
One (1) Boeing 747-212B aircraft bearing manufacturer's serial
number 21937 and U.S. registration number N618FF, together with
four Pratt & Whitney JT9D-7Q engines, bearing manufacturer's
serial numbers 702097, 702163, 702195 and 702348.
This instrument may be executed in counterparts, each of which when
executed and delivered will be deemed original and all together will constitute
one and the same instrument.
Dated as of November 13, 1998
INTERNATIONAL LEASE FINANCE CORPORATION TOWER AIR, INC.
By: __________________________________ By: /s/ PHILIP R. BROOKMEYER
-------------------------------
Its: _________________________________ Its: Vice President - Legal
------------------------------
<PAGE>
EXHIBIT 10(43)
AIRCRAFT ENGINE PURCHASE AGREEMENT
This AIRCRAFT ENGINE PURCHASE AGREEMENT (the "Agreement") is made and
entered into as of December 31, 1998, between TOWER AIR, INC., a Delaware
corporation ("Seller"), and UNITED STATES TURBINE ENGINE CORPORATION, a Delaware
corporation ("Purchaser").
1. SUBJECT MATTER OF PURCHASE
Subject to the terms and provisions of this Agreement, Seller hereby agrees
to sell to Purchaser, and Purchaser hereby agrees to purchase from Seller, the
following aircraft equipment (collectively, the "Equipment"):
(1) one (1) Pratt & Whitney JT9D-7A engine bearing manufacturer's serial
number 662993, in its as removed condition, with all equipment installed thereon
as of the date of inspection of such engine by Purchaser at Seller's facilities
at J.F.K. International Airport (including, without limitation, a full 747 QEC),
and with all pertinent engine logs, records and historical information,
including back to birth records on life limited parts.
(2) one (1) Pratt & Whitney JT9D-7A engine bearing manufacturer's serial
number 662420, in its as removed condition, with all equipment installed thereon
as of the date of inspection of such engine by Purchaser at Seller's facilities
at J.F.K. International Airport (including, without limitation, a full 747 QEC),
and with all pertinent engine logs, records and historical information,
including back to birth records on life limited parts.
(3) one (1) Pratt & Whitney JT9D-7A engine bearing manufacturer's serial
number 662838, in its as removed condition, with all equipment installed thereon
as of the date of inspection of such engine by Purchaser at Seller's facilities
at J.F.K. International Airport (including, without limitation, a full 747 QEC),
and with all pertinent engine logs, records and historical information,
including back to birth records on life limited parts.
2. PURCHASE PRICE AND PAYMENT
A. The purchase price for the Equipment (the "Purchase Price") shall be
Three Million Three Hundred Thousand Dollars (US$3,300,000).
B. On the Delivery Date, Purchaser shall pay Seller an amount equal to the
Purchase Price by wire transfer of immediately available funds to the following
account:
The Chase Manhattan Bank
ABA No. 021-000-021
For Credit To: Tower Air
Account No.: 080-022-162
3. DELIVERY OF THE EQUIPMENT AND TRANSFER OF TITLE
A. Delivery of all of the Equipment will be made to Purchaser on a
mutually agreed date, on or before December 31, 1998. For purposes of this
Agreement, the term "Delivery Date" shall mean the date on which Seller delivers
to Purchaser Bills of Sale conveying title to the Equipment in accordance with
the terms of this Agreement.
<PAGE>
B. On the Delivery Date, Seller shall execute and deliver to Purchaser a
Bill of Sale for each item of the Equipment in the form of EXHIBIT A.
---------
Concurrently with Seller's delivery of the Bills of Sale to Purchaser, title to
the Equipment, and all risk of loss or damage to the Equipment, shall pass from
Seller to Purchaser.
C. On the Delivery Date, Seller shall deliver the Equipment to Purchaser
F.O.B. J.F.K. International Airport.
D. On the Delivery Date, concurrently with the payment of the Purchase
Price, Purchaser will execute and deliver to Seller an Equipment Delivery
Receipt for each item of the Equipment in the form of EXHIBIT B.
---------
E. All of the available records relating to the Equipment will be provided
to Purchaser on or immediately following the Delivery Date.
4. EQUIPMENT RECORDS
Seller shall, at Seller's sole cost and expense, deliver to Purchaser, on
the Delivery Date, all documents and technical records relating to the Equipment
(the "Engine Records"). The Engine Records shall be in English, shall have been
maintained in accordance with Federal Aviation Administration ("FAA")
requirements and shall be delivered in up-to-date status, including appropriate
FAA approvals, with substantiation data, for modifications and/or repairs,
compliance with airworthiness directives issued by the FAA ("AD's") and
supporting documentation, serviceable tags and last shop visit reports for all
rotable components and traceability records for life-limited parts so as to
establish back-to-birth traceability for such parts. Seller acknowledges that
this Agreement and the purchase of Equipment hereunder is contingent upon
Purchaser's receipt and acceptance of all Engine Records in accordance with the
requirements of this Article 4.
5. CONDITION OF THE EQUIPMENT; PURCHASER'S INSPECTION; DISCLAIMER
A. On the Delivery Date, the Equipment will be delivered by Seller to
Purchaser in its then "AS IS WHERE IS" condition, with all faults accepted
(except as to title).
B. Purchaser acknowledges that it has had access to the Equipment and all
records pertaining thereto by Purchaser's duly authorized technical
representative to determine that the Equipment is acceptable to Purchaser and in
the condition for delivery required by this Agreement. Purchaser acknowledges
that it is relying on its own inspection and knowledge of the Equipment and not
on any inspection or representation of Seller.
C. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, PURCHASER
UNCONDITIONALLY AGREES THAT, AS BETWEEN PURCHASER AND SELLER, THE EQUIPMENT AND
EACH PART THEREOF IS TO BE SOLD AND PURCHASED IN AN "AS IS, WHERE IS" CONDITION
ON THE DELIVERY DATE, WITHOUT ANY REPRESENTATION, WARRANTY, COVENANT OR
GUARANTEE OF ANY KIND BEING MADE OR GIVEN BY SELLER, ITS SERVANTS OR AGENTS,
EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, OTHER THAN AS EXPRESSLY SET
FORTH IN THIS AGREEMENT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
SELLER SPECIFICALLY DISCLAIMS AND PURCHASER WAIVES AND AGREES THAT SELLER HAS
NOT MADE NOR SHALL BE DEEMED TO HAVE MADE, AND EXCLUDES HEREFROM ANY
REPRESENTATION,
-2-
<PAGE>
WARRANTY, COVENANT OR GUARANTEE, EXPRESS OR IMPLIED, WITH
RESPECT TO THE EQUIPMENT, INCLUDING BUT NOT LIMITED TO (1) ANY IMPLIED WARRANTY
OF MERCHANTABILITY OF FITNESS, (2) ANY IMPLIED WARRANTY ARISING FROM COURSE OF
PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, (3) ANY OBLIGATION, LIABILITY,
RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM SELLER'S NEGLIGENCE,
ACTUAL OR IMPUTED, AND (4) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR
LOSS OF OR DAMAGE TO THE EQUIPMENT, FOR LOSS OF USE, REVENUE OR PROFIT WITH
RESPECT TO THE EQUIPMENT, FOR ANY LIABILITY OF PURCHASER TO ANY THIRD PARTY, OR
FOR ANY OTHER DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
D. SELLER MAKES NO REPRESENTATIONS AS TO WHAT USE OR APPLICATION MAY BE
MADE OF THE EQUIPMENT OR ANY PART THEREOF IN THE CONDITION IN WHICH IT WILL BE
DELIVERED, AND PURCHASER ASSUMES ALL RESPONSIBILITY FOR SUCH REPAIR, OVERHAUL,
ALTERATION OR MODIFICATION AS MAY BE NECESSARY FOR THE USES TO WHICH THE
EQUIPMENT MAY BE PUT BY PURCHASER OR ANY CUSTOMER OF PURCHASER.
E. Purchaser agrees that, from and after the Delivery Date, Seller shall
not be liable for, and Purchaser hereby releases Seller from, any liability,
claim, loss, damage or expense of any kind or nature caused directly or
indirectly by the Equipment or any part thereof, by any inadequacy of the
Equipment or any part thereof for any purpose or any deficiency or defect
therein, by the use or performance of the Equipment, by any maintenance,
service, repairs, overhauls or modifications to the Equipment, by any
interruption or loss of service or use of the Equipment or by any loss of
business or other consequential damage or any other damage whatsoever, howsoever
caused; provided, that the release by Purchaser of Seller pursuant to this
Article 5E shall not apply to any such liability, claim, loss, damage or expense
which arises as a result of Seller's breach of any express warranty,
representation or obligation of Seller hereunder.
6. REPRESENTATIONS AND WARRANTIES
A. Seller hereby represents and warrants to Purchaser that:
(1) Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has the power
and authority to enter into this Agreement and perform its obligations
hereunder.
(2) No authorization, approval, consent, license or order of, or
registration with, or the giving of notice to any government entity or
third party is required for the valid authorization, execution,
delivery and performance by Seller of this Agreement.
(3) This Agreement has been duly authorized, executed and delivered by
Seller and is a valid, enforceable and binding obligation of Seller,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium or similar laws affecting the rights of
creditors generally, and except as enforceability may be subject to
the application of equitable principles in any proceeding, legal or
equitable.
-3-
<PAGE>
(4) The execution and delivery of this Agreement, the consummation by
Seller of the transactions contemplated herein and compliance by
Seller with the terms and provisions hereof do not and will not
contravene any law applicable to Seller, or result in any breach of or
constitute any default under any indenture, mortgage, chattel
mortgage, deed of trust, conditional sales contract, bank loan or
credit agreement, or other agreement or instrument to which Seller is
a party or by which Seller or its properties or assets may be bound or
affected.
(5) On the Delivery Date, Seller shall have and convey to Purchaser good
and marketable title to the Equipment, free and clear of any and all
mortgages, pledges, liens, charges, security interests, leases, claims
or other encumbrances of any kind or nature whatsoever.
(6) To the best of Seller's knowledge, none of the Equipment has been
subjected to extreme heat or stress (including, without limitation,
such as would result from an accident or fire) and none of the
Equipment has had an uncontained failure.
B. Purchaser hereby represents and warrants to Seller that:
(1) Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has the
power and authority to enter into this Agreement and perform its
obligations hereunder.
(2) No authorization, approval, consent, license or order of, or
registration with, or the giving of notice to any government entity or
third party is required for the valid authorization, execution,
delivery and performance by Purchaser of this Agreement.
(3) This Agreement has been duly authorized, executed and delivered by
Purchaser and is a valid, enforceable and binding obligation of
Purchaser, except as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium or similar laws affecting the
rights of creditors generally, and except as enforceability may be
subject to the application of equitable principles in any proceeding,
legal or equitable.
(4) The execution and delivery of this Agreement, the consummation by
Purchaser of the transactions contemplated herein and compliance by
Purchaser with the terms and provisions hereof do not and will not
contravene any law applicable to Purchaser, or result in any breach of
or constitute any default under any indenture, mortgage, chattel
mortgage, deed of trust, conditional sales contract, bank loan or
credit agreement, or other agreement or instrument to which Purchaser
is a party or by which Purchaser or its properties or assets may be
bound or affected.
7. TAXES AND INDEMNIFICATION
A. Purchaser and Seller shall cooperate and use reasonable efforts to
minimize or avoid the imposition of any sales or other taxes on the sale,
delivery and transfer of title to the Equipment. Notwithstanding the foregoing,
Seller agrees to pay promptly when due, and will indemnify and hold Purchaser
harmless from any and all fees (including, without limitation, license,
registration and recording fees and assessments), taxes (including, without
limitation, gross receipts, income, sales, rental, use, turnover, value added,
property (tangible or intangible), excise and stamp taxes), levies,
-4-
<PAGE>
imposts, duties, charges, assessments or withholdings of any nature whatsoever,
together with any and all penalties, fines, additions to tax and interest
thereon or computed by reference thereto (except taxes levied or assessed
against Purchaser based upon gross receipts or net income or taxes imposed upon
Purchaser for the privilege of doing business or exercising a franchise) arising
out of the sale, purchase and delivery of the Equipment, in any manner levied,
assessed or imposed by any government or subdivision or agency thereof having
jurisdiction.
B. Purchaser hereby agrees to indemnify, protect, save and keep harmless
Seller and Seller's officers, directors, employees, agents, affiliates,
successors and assigns (each, an "Indemnitee") from and against, and on written
demand to pay, or to reimburse each Indemnitee for the payment of, any and all
liabilities, obligations, losses, damages, penalties, claims (including, without
limitation, claims arising out of negligence or involving strict liability in
tort), suits, actions, costs, expenses and disbursements (including, without
limitation, reasonable legal fees, costs and related expenses), of whatsoever
kind and nature ("Expenses") imposed on, incurred by or asserted against any
Indemnitee after the Delivery Date relating to or arising directly or indirectly
out of or in any way connected with the ownership, possession, control, use,
operation, sale, leasing or other application or disposition of the Equipment or
any part thereof or interest therein after the Delivery Date, whether by
Purchaser, Purchaser's customer or any other person; provided, however, that
such Expenses are not judicially determined to have been attributable to such
Indemnitee's gross negligence or willful misconduct or the breach by Seller of
any express warranty, representation or obligation of Seller hereunder. The
obligations contained in this Article 7B. shall survive the sale and delivery of
the Equipment hereunder and are expressly made for the benefit of, and shall be
enforceable by, Seller and each other Indemnitee entitled thereto.
8. NOTICES
All notices required or permitted hereunder shall be in writing and shall
be delivered in person or sent by telecopier, courier service or facsimile
(confirmed by telephone in the case of notice by facsimile) or any other
customary means of communication, and any such notice shall be effective when
delivered. Notices shall be addressed to the parties as follows (or to such
other places and numbers as either party directs in writing to the other party):
<TABLE>
<CAPTION>
Seller Purchaser
----- ---------
<S> <C>
Tower Air, Inc. United States Turbine Engine Corporation
Hangar 17 79 Glover Avenue
J.F.K. International Airport Norwalk, CT 06850
Jamaica, NY 11430 Attn: Mr. Randy Fiorenza
Attn: William Cain Fax: (203) 847-9612
Fax: (718) 553-4387 Telephone: (203) 847-1401
Telephone: (718) 553-4300
with a copy to: with a copy to:
Stephen L. Gelband, Esq. Kenneth C. Hoffman, Esq.
Hewes Gelband Lambert & Dann Greenberg Traurig, P.A.
1000 Potomac St. NW 1221 Brickell Avenue
Suite 300 Miami, Florida 33131
Washington, D.C. 20007 Fax: (305) 579-0717
Fax: (202) 333-0871 Telephone: (305) 579-0809
Telephone: (202) 337-6200
</TABLE>
-5-
<PAGE>
9. NO BROKERS
Both parties acknowledge that there are no brokerage commissions to be paid
with respect to the purchase and sale of the Equipment, and each party agrees to
indemnify and hold the other harmless from and against any and all claims,
suits, damages, costs, expenses, including attorneys' fees, asserted by agents
or other third parties for any commission or compensation based on the sale of
the Equipment, if such claim, suit, damage, costs or expense arises out of any
action or alleged actions by the indemnifying party, its employees, officers or
agents.
10. ASSIGNMENT OF WARRANTY
To the extent any warranties relating to the Equipment are assignable,
Seller hereby assigns to Purchaser, effective on the Delivery Date as of the
delivery to and acceptance of the Equipment by Purchaser, all of Seller's rights
under such warranties and Seller's rights with respect to warranties or other
obligations of entities which have performed maintenance, service, repair,
overhaul or testing thereon. Seller agrees to execute such documents as may be
reasonably necessary to evidence the assignment hereby made or contemplated.
11. LOSS OR DAMAGE PRIOR TO DELIVERY
A. In the event of damage to any of the Equipment following the execution
hereof and prior to the Delivery Date, Purchaser shall have the right to delay
the Delivery Date for a reasonable period of time (but not beyond December 31,
1998, or such later date as is mutually agreed) to ensure to Purchaser's
satisfaction that the Equipment will be repaired and restored to the condition
required by this Agreement; and if such damage delays delivery of any of the
Equipment beyond December 31, 1998 (or such later date as is mutually agreed),
Purchaser or Seller shall have the right to terminate this Agreement by giving
written notice to the other, and upon such termination all rights and
obligations of both parties hereunder shall be discharged automatically without
further act or deed.
B. In the event of total loss or destruction of any of the Equipment
following the execution hereof and prior to the Delivery Date, either Purchaser
or Seller shall have the right to terminate the Agreement by giving written
notice to the other, and upon such termination all rights and obligations of
both parties hereunder shall be discharged automatically without further act or
deed.
12. APPLICABLE LAW AND JURISDICTION
This Agreement shall, in all respects, be governed by and construed in
accordance with the laws of the State of New York, United States of America,
without giving effect to the conflict of laws principles thereof.
13. MISCELLANEOUS
A. All warranties and representations made by either party shall survive
the closing of the transaction contemplated herein and the delivery of the
Equipment.
B. Whether or not the transactions contemplated hereby shall be
consummated, each of Purchaser and Seller agrees to pay its own out-of-pocket
expenses, including attorney's fees,
-6-
<PAGE>
incurred in connection with the preparation, negotiation and execution of this
Agreement and any other documents required in connection herewith and the
transactions contemplated hereby.
C. This Agreement is a confidential document between Purchaser and Seller
and, except as provided by applicable law or with the prior written consent of
the other party, which consent shall not be unreasonably withheld, neither
Purchaser nor Seller will disclose the terms of this Agreement to third parties,
other than to its auditors, legal and technical advisors or lenders.
D. This Agreement constitutes the entire agreement between Seller and
Purchaser in relation to the purchase and sale of the Equipment and supersedes
all previous proposals, agreements and other written and oral communications in
relation thereto. Purchaser and Buyer acknowledge and agree that there have been
no representations, warranties, promises, guarantees or agreements, express or
implied, made by either party in connection with the transactions contemplated
hereby, except as set forth herein. This Agreement may only be amended or
modified by a writing executed by Buyer and Seller.
E. This Agreement shall be binding on, and inure to the benefit of, the
parties hereto and their successors and assigns. Except as set forth
immediately below, neither this Agreement, nor any of Purchaser's or Seller's
rights and interests hereunder, may be assigned without the express prior
written consent of the other party hereto.
F. The rights of the parties hereunder are cumulative, not exclusive, may
be exercised as often as each party considers appropriate and are in addition to
its rights under general law. The rights of one party against the other party
shall not be deemed waived or amended except by an express waiver or amendment
in writing. Any failure to exercise or any delay in exercising any of such
rights will not operate as a waiver or amendment of that or any other such
right; any defective or partial exercise of any such rights will not preclude
any other or further exercise of that or any other such right; and no act or
course of conduct or negotiation on a party's part or on its behalf will in any
way preclude such party from exercising any such right or constitute a
suspension or any amendment of any such right.
G. Any provision herein which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof or rendering unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, Seller and Purchaser
hereby waive any provision of law which renders any provision hereof prohibited
or unenforceable in any respect.
H. This Agreement may be executed in any number of identical counterparts,
all of which together will be deemed to be one and the same instrument.
Delivery of an executed counterpart of this Agreement by facsimile will be
deemed effective as delivery of an originally executed counterpart. Any party
delivering an executed counterpart of this Agreement by facsimile will also
deliver an originally executed counterpart; provided the failure of any party to
deliver an originally executed counterpart of this Agreement will not affect the
validity or effectiveness of this Agreement.
(continued on signature page)
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first shown above.
TOWER AIR, INC. UNITED STATES TURBINE ENGINE
CORPORATION
BY: /s/ WILLIAM CAIN BY: /s/ RANDALL P. FIORENZA
--------------------------- -----------------------------
TITLE: S.R VP MAINTENANCE & TITLE: PRESIDENT
------------------------- --------------------------
ENGINEERING
-------------------------
<PAGE>
EXECUTION COPY
AIRCRAFT ENGINE PURCHASE AGREEMENT
This AIRCRAFT ENGINE PURCHASE AGREEMENT (the "Agreement") is made and
entered into as of December 31, 1998, between UNITED STATES TURBINE ENGINE
CORPORATION, a Delaware corporation ("Seller"), and TOWER AIR, INC., a Delaware
corporation ("Purchaser").
1. SUBJECT MATTER OF PURCHASE
Subject to the terms and provisions of this Agreement, Seller hereby agrees
to sell to Purchaser, and Purchaser hereby agrees to purchase from Seller, the
following aircraft equipment (collectively, the "Equipment," and each
individually, an "Engine"):
(1) one (1) Pratt & Whitney JT9D-7A engine bearing manufacturer's serial
number 662973, in serviceable condition with a current FAA Part 145 tag
attached, with all equipment installed thereon as of the date of inspection of
such engine by Purchaser at Seller's facilities in Norwalk, Connecticut
(including, without limitation, a full 747 QEC kit tagged serviceable), and with
all pertinent engine logs, records and historical information, including back to
birth records on life limited parts.
(2) one (1) Pratt & Whitney JT9D-7A engine bearing manufacturer's serial
number 662649, in serviceable condition with a current FAA Part 145 tag
attached, with all equipment installed thereon as of the date of inspection of
such engine by Purchaser at Seller's facilities in Norwalk, Connecticut
(including, without limitation, a full 747 QEC kit tagged serviceable), and with
all pertinent engine logs, records and historical information, including back to
birth records on life limited parts.
(3) one (1) Pratt & Whitney JT9D-7A engine bearing manufacturer's serial
number 662330, in serviceable condition with a current FAA Part 145 tag
attached, with all equipment installed thereon as of the date of inspection of
such engine by Purchaser at Seller's facilities in Norwalk, Connecticut
(including, without limitation, a full 747 QEC kit tagged serviceable), and with
all pertinent engine logs, records and historical information, including back to
birth records on life limited parts.
2. PURCHASE PRICE AND PAYMENT
A. The purchase price for the Equipment (the "Purchase Price") shall be
Eight Million One Hundred Thousand Dollars (US$8,100,000).
B. On the Delivery Date, Purchaser shall:
(1) Make an initial payment to Seller in an amount equal to One Million
Three Hundred Seventy Seven Thousand Dollars (US$1,377,000) (the "Initial
Payment") by wire transfer of immediately available funds to the following
account:
Nationsbank, N.A.
ABA No. 111000012
Account No.: 3751075750
For Final Credit To: United States Turbine Engine Corp.
<PAGE>
(2) Deliver to Seller, as a condition precedent to Seller's obligations
hereunder, an executed Promissory Note (the "Note") in the form of EXHIBIT A in
---------
an amount equal to the Purchase price less the Initial Payment and an executed
Engine Security Agreement (the "Security Agreement") in the form of EXHIBIT B.
---------
3. SECURITY DEPOSIT
A. Within thirty (30) days following the last day of each calendar
quarter during such period as any amounts, whether of principal, interest or
otherwise shall be due and payable to Seller pursuant to the Note, commencing
with the quarter ending March 31, 1999, the Purchaser hereby agrees to pay to
the Seller, in arrears, an amount ("Security Deposits") equal to the sum of (i)
US$450,000 per quarter plus (ii) to the extent that the Engines, in the
aggregate, are flown over 2,250 hours during the applicable quarter (the
"Maximum Quarterly Hours"), an amount equal to the product of the number of
hours flown during the quarter in excess of the Maximum Quarterly Hours
multiplied by US$210; provided, that, to the extent that the Engines, in the
aggregate, are flown less than the Maximum Quarterly Hours during any quarter,
such excess of the Maximum Quarterly Hours over the number of hours actually
flown may be deducted from the number of hours flown in future quarters for the
purposes of computing any amounts owed pursuant this clause (ii).
B. The Purchaser shall be entitled to reimbursement from the Security
Deposits for Purchaser's actual costs (without mark-up) incurred with respect to
scheduled off-wing heavy maintenance of any Engine, including any costs
associated with replacement of life limited parts, but excluding the cost of any
repairs or maintenance required due to accidents, abuse, misuse, mishandling,
faulty maintenance, foreign object damage, elective part replacement or any
insured event (collectively, "Non-Reimbursable Repairs"); provided, that, the
Purchaser shall be entitled to reimbursement from the Security Deposits for any
maintenance for ordinary wear and tear performed contemporaneously with such
Non-Reimbursable Repairs. Such reimbursement shall be made within fifteen (15)
Business Days after presentation to Seller of appropriate written evidence of
such expenses (which shall include a copy of an invoice from an FAA-approved
maintenance facility indicating that the maintenance has been completed and
identifying those engine maintenance tasks accomplished and the labor and
material breakdown thereof, and a receipt from the maintenance facility for
payment of the invoice, or at least such amount thereof as shall exceed the
portion of the Security Deposits available to Purchaser hereunder); provided,
--------
that (i) the amount reimbursed to Purchaser shall not exceed the amount of the
Security Deposits paid by Purchaser (and not previously disbursed), and (ii) in
no event shall Purchaser be entitled to reimbursement for any expenses related
to removal or installation of an Engine for maintenance or any other shipping or
transportation expenses. To the extent that any amount reimbursable hereunder
has not been paid by Purchaser, such amount shall be paid directly to the
maintenance facility which performed the services for which reimbursement is
sought.
C. Upon such time as the Security Deposits paid by Purchaser and not
previously disbursed equal the total amount, whether of principal, interest or
otherwise, due and payable to Seller pursuant to the Note, the Purchaser shall
have the right to request that the Security Deposits be applied to the
outstanding balance of the Note and that the Note be cancelled by giving written
notice to the Seller of such request (the "Prepayment Notice"). The Prepayment
Notice shall state the amount of Security Deposits paid by the Purchaser and not
disbursed and the current outstanding balance of the Note and shall include a
representation by the Purchaser that no requests for disbursements pursuant to
this Article 3 have been made within the past fifteen (15) Business Days and
that no future request for disbursements will be made. Upon receipt of the
Prepayment Notice by the Seller, all obligations of the Seller to make
disbursements to Purchaser from the Security
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<PAGE>
Deposits shall terminate and the Seller shall deliver the cancelled Note and any
amount of Security Deposits in excess of Purchaser's outstanding obligations
under the Note on the date of the Prepayment Notice to Purchaser within fifteen
(15) Business Days after the receipt thereof.
4. DELIVERY OF THE EQUIPMENT AND TRANSFER OF TITLE
A. Delivery of all of the Equipment will be made to Purchaser on a
mutually agreed date, on or before December 31, 1998. For purposes of this
Agreement, the term "Delivery Date" shall mean the date on which Seller delivers
to Purchaser Bills of Sale conveying title to the Equipment in accordance with
the terms of this Agreement.
B. On the Delivery Date, Seller shall execute and deliver to Purchaser a
Bill of Sale for each item of the Equipment in the form of EXHIBIT C.
---------
Concurrently with Seller's delivery of the Bills of Sale to Purchaser, title to
the Equipment, and all risk of loss or damage to the Equipment, shall pass from
Seller to Purchaser.
C. On the Delivery Date, Seller shall deliver the Equipment to Purchaser
F.O.B. Seller's facilities in Norwalk, Connecticut.
D. On the Delivery Date, concurrently with the payment of the Purchase
Price, Purchaser will execute and deliver to Seller an Equipment Delivery
Receipt for each item of the Equipment in the form of EXHIBIT D.
---------
E. All of the available records relating to the Equipment will be provided
to Purchaser on or immediately following the Delivery Date.
F. Seller's obligations pursuant to this Agreement are subject to the
following conditions:
(1) Purchaser shall have delivered to Seller on or prior to the Delivery
Date a certificate of insurance and Broker's Letter of Undertaking evidencing
compliance with the provisions of Section 2 of the Security Agreement concerning
insurance of the Engines; and
(2) Purchaser shall have delivered to Seller on or prior to the Delivery
Date a certificate executed by an officer of Purchaser attaching reasonable
evidence that all action and authorizations, corporate and otherwise, of
Purchaser necessary to enter into and perform its obligations under this
Purchase Agreement, the Note and the Security Agreement have been obtained and
are in full force and effect and including a certificate of incumbency showing
and certifying the signatures of those officers of Purchaser authorized to
execute, on behalf of Purchaser, this Agreement, the Note and the Security
Agreement and all other documents or instruments to be executed and delivered by
Purchaser hereunder or in connection with the transactions contemplated hereby.
(3) On or prior to the Delivery Date, the Security Agreement shall have
been filed with the Federal Aviation Administration ("FAA").
5. EQUIPMENT RECORDS
Seller shall, at Seller's sole cost and expense, deliver to Purchaser, on
the Delivery Date, all documents and technical records relating to the Equipment
(the "Engine Records"). The Engine Records shall be in English, shall have been
maintained in accordance with FAA requirements and
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<PAGE>
shall be delivered in up-to-date status, including appropriate FAA approvals,
with substantiation data, for modifications and/or repairs, compliance with
airworthiness directives issued by the FAA ("AD's") and supporting
documentation, serviceable tags and last shop visit reports for all rotable
components and traceability records for life-limited parts so as to establish
back-to-birth traceability for such parts. Seller acknowledges that this
Agreement and the purchase of Equipment hereunder is contingent upon Purchaser's
receipt and acceptance of all Engine Records in accordance with the requirements
of this Article 4.
6. CONDITION OF THE EQUIPMENT; PURCHASER'S INSPECTION; DISCLAIMER
A. On the Delivery Date, the Equipment will be delivered by Seller to
Purchaser in its then "AS IS WHERE IS" condition, with all faults accepted
(except as to title).
B. Purchaser acknowledges that it has had access to the Equipment and all
records pertaining thereto by Purchaser's duly authorized technical
representative to determine that the Equipment is acceptable to Purchaser and in
the condition for delivery required by this Agreement. Purchaser acknowledges
that it is relying on its own inspection and knowledge of the Equipment and not
on any inspection or representation of Seller.
C. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, PURCHASER
UNCONDITIONALLY AGREES THAT, AS BETWEEN PURCHASER AND SELLER, THE EQUIPMENT AND
EACH PART THEREOF IS TO BE SOLD AND PURCHASED IN AN "AS IS, WHERE IS" CONDITION
ON THE DELIVERY DATE, WITHOUT ANY REPRESENTATION, WARRANTY, COVENANT OR
GUARANTEE OF ANY KIND BEING MADE OR GIVEN BY SELLER, ITS SERVANTS OR AGENTS,
EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, OTHER THAN AS EXPRESSLY SET
FORTH IN THIS AGREEMENT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
SELLER SPECIFICALLY DISCLAIMS AND PURCHASER WAIVES AND AGREES THAT SELLER HAS
NOT MADE NOR SHALL BE DEEMED TO HAVE MADE, AND EXCLUDES HEREFROM ANY
REPRESENTATION, WARRANTY, COVENANT OR GUARANTEE, EXPRESS OR IMPLIED, WITH
RESPECT TO THE EQUIPMENT, INCLUDING BUT NOT LIMITED TO (1) ANY IMPLIED WARRANTY
OF MERCHANTABILITY OF FITNESS, (2) ANY IMPLIED WARRANTY ARISING FROM COURSE OF
PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, (3) ANY OBLIGATION, LIABILITY,
RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM SELLER'S NEGLIGENCE,
ACTUAL OR IMPUTED, AND (4) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR
LOSS OF OR DAMAGE TO THE EQUIPMENT, FOR LOSS OF USE, REVENUE OR PROFIT WITH
RESPECT TO THE EQUIPMENT, FOR ANY LIABILITY OF PURCHASER TO ANY THIRD PARTY, OR
FOR ANY OTHER DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
D. SELLER MAKES NO REPRESENTATIONS AS TO WHAT USE OR APPLICATION MAY BE
MADE OF THE EQUIPMENT OR ANY PART THEREOF IN THE CONDITION IN WHICH IT WILL BE
DELIVERED, AND PURCHASER ASSUMES ALL RESPONSIBILITY FOR SUCH REPAIR, OVERHAUL,
ALTERATION OR MODIFICATION AS MAY BE NECESSARY FOR THE USES TO WHICH THE
EQUIPMENT MAY BE PUT BY PURCHASER OR ANY CUSTOMER OF PURCHASER.
-4-
<PAGE>
E. Purchaser agrees that, from and after the Delivery Date, Seller shall
not be liable for, and Purchaser hereby releases Seller from, any liability,
claim, loss, damage or expense of any kind or nature caused directly or
indirectly by the Equipment or any part thereof, by any inadequacy of the
Equipment or any part thereof for any purpose or any deficiency or defect
therein, by the use or performance of the Equipment, by any maintenance,
service, repairs, overhauls or modifications to the Equipment, by any
interruption or loss of service or use of the Equipment or by any loss of
business or other consequential damage or any other damage whatsoever, howsoever
caused; provided, that the release by Purchaser of Seller pursuant to this
Article 6E shall not apply to any such liability, claim, loss, damage or expense
which arises as a result of Seller's breach of any express warranty,
representation or obligation of Seller hereunder.
7. REPRESENTATIONS AND WARRANTIES
A. Seller hereby represents and warrants to Purchaser that:
(1) Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has the power
and authority to enter into this Agreement and perform its obligations
hereunder.
(2) No authorization, approval, consent, license or order of, or
registration with, or the giving of notice to any government entity or
third party is required for the valid authorization, execution,
delivery and performance by Seller of this Agreement.
(3) This Agreement has been duly authorized, executed and delivered by
Seller and is a valid, enforceable and binding obligation of Seller,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium or similar laws affecting the rights of
creditors generally, and except as enforceability may be subject to
the application of equitable principles in any proceeding, legal or
equitable.
(4) The execution and delivery of this Agreement, the consummation by
Seller of the transactions contemplated herein and compliance by
Seller with the terms and provisions hereof do not and will not
contravene any law applicable to Seller, or result in any breach of or
constitute any default under any indenture, mortgage, chattel
mortgage, deed of trust, conditional sales contract, bank loan or
credit agreement, or other agreement or instrument to which Seller is
a party or by which Seller or its properties or assets may be bound or
affected.
(5) On the Delivery Date, Seller shall have and convey to Purchaser good
and marketable title to the Equipment, free and clear of any and all
mortgages, pledges, liens, charges, security interests, leases, claims
or other encumbrances of any kind or nature whatsoever.
(6) To the best of Seller's knowledge, none of the Equipment has been
subjected to extreme heat or stress (including, without limitation,
such as would result from an accident or fire) and none of the
Equipment has had an uncontained failure.
B. Purchaser hereby represents and warrants to Seller that:
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<PAGE>
(1) Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has the
power and authority to enter into this Agreement and perform its
obligations hereunder.
(2) No authorization, approval, consent, license or order of, or
registration with, or the giving of notice to any government entity or
third party is required for the valid authorization, execution,
delivery and performance by Purchaser of this Agreement.
(3) This Agreement has been duly authorized, executed and delivered by
Purchaser and is a valid, enforceable and binding obligation of
Purchaser, except as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium or similar laws affecting the
rights of creditors generally, and except as enforceability may be
subject to the application of equitable principles in any proceeding,
legal or equitable.
(4) The execution and delivery of this Agreement, the consummation by
Purchaser of the transactions contemplated herein and compliance by
Purchaser with the terms and provisions hereof do not and will not
contravene any law applicable to Purchaser, or result in any breach of
or constitute any default under any indenture, mortgage, chattel
mortgage, deed of trust, conditional sales contract, bank loan or
credit agreement, or other agreement or instrument to which Purchaser
is a party or by which Purchaser or its properties or assets may be
bound or affected.
8. TAXES AND INDEMNIFICATION
A. Purchaser and Seller shall cooperate and use reasonable efforts to
minimize or avoid the imposition of any sales or other taxes on the sale,
delivery and transfer of title to the Equipment. Notwithstanding the foregoing,
Seller agrees to pay promptly when due, and will indemnify and hold Purchaser
harmless from any and all fees (including, without limitation, license,
registration and recording fees and assessments), taxes (including, without
limitation, gross receipts, income, sales, rental, use, turnover, value added,
property (tangible or intangible), excise and stamp taxes), levies, imposts,
duties, charges, assessments or withholdings of any nature whatsoever, together
with any and all penalties, fines, additions to tax and interest thereon or
computed by reference thereto (except taxes levied or assessed against Purchaser
based upon gross receipts or net income or taxes imposed upon Purchaser for the
privilege of doing business or exercising a franchise) arising out of the sale,
purchase and delivery of the Equipment, in any manner levied, assessed or
imposed by any government or subdivision or agency thereof having jurisdiction.
B. Purchaser hereby agrees to indemnify, protect, save and keep harmless
Seller and Seller's officers, directors, employees, agents, affiliates,
successors and assigns (each, an "Indemnitee") from and against, and on written
demand to pay, or to reimburse each Indemnitee for the payment of, any and all
liabilities, obligations, losses, damages, penalties, claims (including, without
limitation, claims arising out of negligence or involving strict liability in
tort), suits, actions, costs, expenses and disbursements (including, without
limitation, reasonable legal fees, costs and related expenses), of whatsoever
kind and nature ("Expenses") imposed on, incurred by or asserted against any
Indemnitee after the Delivery Date relating to or arising directly or indirectly
out of or in any way connected with the ownership, possession, control, use,
operation, sale, leasing or other application or disposition of the Equipment or
any part thereof or interest therein after the Delivery Date, whether by
Purchaser, Purchaser's customer or any other person; provided, however, that
such
-6-
<PAGE>
Expenses are not judicially determined to have been attributable to such
Indemnitee's gross negligence or willful misconduct or the breach by Seller of
any express warranty, representation or obligation of Seller hereunder. The
obligations contained in this Article 8B. shall survive the sale and delivery of
the Equipment hereunder and are expressly made for the benefit of, and shall be
enforceable by, Seller and each other Indemnitee entitled thereto.
9. NOTICES
All notices required or permitted hereunder shall be in writing and shall
be delivered in person or sent by telecopier, courier service or facsimile
(confirmed by telephone in the case of notice by facsimile) or any other
customary means of communication, and any such notice shall be effective when
delivered. Notices shall be addressed to the parties as follows (or to such
other places and numbers as either party directs in writing to the other party):
<TABLE>
<CAPTION>
Seller Purchaser
- ----------------------------------------------------- ---------------------------------------------
<S> <C>
Tower Air, Inc.
United States Turbine Engine Corporation Hangar 17
79 Glover Avenue J.F.K. International Airport
Norwalk, CT 06850 Jamaica, NY 11430
Attn: Mr. Randy Fiorenza Attn: William Cain
Fax: (203) 847-9612 Fax: (718) 553-4387
Telephone: (203) 847-1401 Telephone: (718) 553-4300
with a copy to:
with a copy to: Stephen L. Gelband, Esq.
Kenneth C. Hoffman, Esq. Hewes Gelband Lambert & Dann
Greenberg Traurig, P.A. 1000 Potomac St. NW
1221 Brickell Avenue Suite 300
Miami, Florida 33131 Washington, D.C. 20007
Fax: (305) 579-0717 Fax: (202) 333-0871
Telephone: (305) 579-0809 Telephone: (202) 337-6200
</TABLE>
10. NO BROKERS
Both parties acknowledge that there are no brokerage commissions to be paid
with respect to the purchase and sale of the Equipment, and each party agrees to
indemnify and hold the other harmless from and against any and all claims,
suits, damages, costs, expenses, including attorneys' fees, asserted by agents
or other third parties for any commission or compensation based on the sale of
the Equipment, if such claim, suit, damage, costs or expense arises out of any
action or alleged actions by the indemnifying party, its employees, officers or
agents.
11. ASSIGNMENT OF WARRANTY
To the extent any warranties relating to the Equipment are assignable,
Seller hereby assigns to Purchaser, effective on the Delivery Date as of the
delivery to and acceptance of the Equipment by Purchaser, all of Seller's rights
under such warranties and Seller's rights with respect to warranties or other
obligations of entities which have performed maintenance, service, repair,
overhaul or testing thereon. Seller agrees to execute such documents as may be
reasonably necessary to evidence the assignment hereby made or contemplated.
-7-
<PAGE>
12. LOSS OR DAMAGE PRIOR TO DELIVERY
A. In the event of damage to any of the Equipment following the execution
hereof and prior to the Delivery Date, Purchaser shall have the right to delay
the Delivery Date for a reasonable period of time (but not beyond December 31,
1998, or such later date as is mutually agreed) to ensure to Purchaser's
satisfaction that the Equipment will be repaired and restored to the condition
required by this Agreement; and if such damage delays delivery of any of the
Equipment beyond December 31, 1998 (or such later date as is mutually agreed),
Purchaser or Seller shall have the right to terminate this Agreement by giving
written notice to the other, and upon such termination all rights and
obligations of both parties hereunder shall be discharged automatically without
further act or deed.
B. In the event of total loss or destruction of any of the Equipment
following the execution hereof and prior to the Delivery Date, either Purchaser
or Seller shall have the right to terminate the Agreement by giving written
notice to the other, and upon such termination all rights and obligations of
both parties hereunder shall be discharged automatically without further act or
deed.
13. APPLICABLE LAW AND JURISDICTION
This Agreement shall, in all respects, be governed by and construed in
accordance with the laws of the State of New York, United States of America,
without giving effect to the conflict of laws principles thereof.
14. MISCELLANEOUS
A. All warranties and representations made by either party shall survive
the closing of the transaction contemplated herein and the delivery of the
Equipment.
B. Whether or not the transactions contemplated hereby shall be
consummated, each of Purchaser and Seller agrees to pay its own out-of-pocket
expenses, including attorney's fees, incurred in connection with the
preparation, negotiation and execution of this Agreement and any other documents
required in connection herewith and the transactions contemplated hereby.
C. This Agreement is a confidential document between Purchaser and Seller
and, except as provided by applicable law or with the prior written consent of
the other party, which consent shall not be unreasonably withheld, neither
Purchaser nor Seller will disclose the terms of this Agreement to third parties,
other than to its auditors, legal and technical advisors or lenders.
D. This Agreement constitutes the entire agreement between Seller and
Purchaser in relation to the purchase and sale of the Equipment and supersedes
all previous proposals, agreements and other written and oral communications in
relation thereto. Purchaser and Buyer acknowledge and agree that there have been
no representations, warranties, promises, guarantees or agreements, express or
implied, made by either party in connection with the transactions contemplated
hereby, except as set forth herein. This Agreement may only be amended or
modified by a writing executed by Buyer and Seller.
E. This Agreement shall be binding on, and inure to the benefit of, the
parties hereto and their successors and assigns. Except as set forth
immediately below, neither this Agreement, nor
-8-
<PAGE>
any of Purchaser's or Seller's rights and interests hereunder, may be assigned
without the express prior written consent of the other party hereto.
F. The rights of the parties hereunder are cumulative, not exclusive, may
be exercised as often as each party considers appropriate and are in addition to
its rights under general law. The rights of one party against the other party
shall not be deemed waived or amended except by an express waiver or amendment
in writing. Any failure to exercise or any delay in exercising any of such
rights will not operate as a waiver or amendment of that or any other such
right; any defective or partial exercise of any such rights will not preclude
any other or further exercise of that or any other such right; and no act or
course of conduct or negotiation on a party's part or on its behalf will in any
way preclude such party from exercising any such right or constitute a
suspension or any amendment of any such right.
G. Any provision herein which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof or rendering unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, Seller and Purchaser
hereby waive any provision of law which renders any provision hereof prohibited
or unenforceable in any respect.
H. This Agreement may be executed in any number of identical counterparts,
all of which together will be deemed to be one and the same instrument.
Delivery of an executed counterpart of this Agreement by facsimile will be
deemed effective as delivery of an originally executed counterpart. Any party
delivering an executed counterpart of this Agreement by facsimile will also
deliver an originally executed counterpart; provided the failure of any party to
deliver an originally executed counterpart of this Agreement will not affect the
validity or effectiveness of this Agreement.
(continued on signature page)
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first shown above.
UNITED STATES TURBINE ENGINE TOWER AIR, INC.
CORPORATION
BY: /s/ RANDALL P. FIORENZA BY: /s/ WILLIAM CAIN
------------------------------- ---------------------------------
TITLE: PRESIDENT TITLE: SR VP MAINTENANCE ENGINEERING
---------------------------- -----------------------------
<PAGE>
EQUIPMENT DELIVERY RECEIPT
In accordance with the terms of that certain Aircraft Engine Purchase
Agreement dated as of December 31, 1998 (the "Agreement") between TOWER AIR,
INC., a Delaware corporation ("Seller"), and UNITED STATES TURBINE ENGINE
CORPORATION, a Delaware corporation ("Purchaser"), the undersigned, on behalf
of, and as the duly authorized agent of Purchaser hereby acknowledges the
receipt from Seller on the date set forth below of the delivery to Purchaser at
________________________________________________, of the following items of the
Equipment:
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662993, in its as removed
condition, with all equipment installed thereon as of the
date of inspection of such engine by Purchaser at Seller's
facilities at J.F.K. International Airport (including,
without limitation, full 747 QEC), and with all pertinent
engine logs, records and historical information, including
back to birth records on life limited parts.
IN WITNESS WHEREOF, we have set our hand hereto this 31st day of December,
1998.
UNITED STATES TURBINE ENGINE
CORPORATION
BY: /S/ RANDALL P. FIORENZA
-------------------------------
NAME: RANDALL P. FIORENZA
-----------------------------
TITLE: PRESIDENT
----------------------------
<PAGE>
EQUIPMENT DELIVERY RECEIPT
In accordance with the terms of that certain Aircraft Engine Purchase
Agreement dated as of December 31, 1998 (the "Agreement") between TOWER AIR,
INC., a Delaware corporation ("Seller"), and UNITED STATES TURBINE ENGINE
CORPORATION, a Delaware corporation ("Purchaser"), the undersigned, on behalf
of, and as the duly authorized agent of Purchaser hereby acknowledges the
receipt from Seller on the date set forth below of the delivery to Purchaser at
________________________________________________, of the following items of the
Equipment:
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662420, in its as removed
condition, with all equipment installed thereon as of the
date of inspection of such engine by Purchaser at Seller's
facilities at J.F.K. International Airport (including,
without limitation, full 747 QEC), and with all pertinent
engine logs, records and historical information, including
back to birth records on life limited parts.
IN WITNESS WHEREOF, we have set our hand hereto this 31st day of December,
1998.
UNITED STATES TURBINE ENGINE
CORPORATION
BY: /S/ RANDALL P. FIORENZA
-------------------------------
NAME: RANDALL P. FIORENZA
-----------------------------
TITLE: PRESIDENT
----------------------------
<PAGE>
EQUIPMENT DELIVERY RECEIPT
In accordance with the terms of that certain Aircraft Engine Purchase
Agreement dated as of December 31, 1998 (the "Agreement") between TOWER AIR,
INC., a Delaware corporation ("Seller"), and UNITED STATES TURBINE ENGINE
CORPORATION, a Delaware corporation ("Purchaser"), the undersigned, on behalf
of, and as the duly authorized agent of Purchaser hereby acknowledges the
receipt from Seller on the date set forth below of the delivery to Purchaser at
________________________________________________, of the following items of the
Equipment:
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662838, in its as removed
condition, with all equipment installed thereon as of the
date of inspection of such engine by Purchaser at Seller's
facilities at J.F.K. International Airport (including,
without limitation, full 747 QEC), and with all pertinent
engine logs, records and historical information, including
back to birth records on life limited parts.
IN WITNESS WHEREOF, we have set our hand hereto this 31st day of December,
1998.
UNITED STATES TURBINE ENGINE
CORPORATION
BY: /S/ RANDALL P. FIORENZA
-------------------------------
NAME: RANDALL P. FIORENZA
-----------------------------
TITLE: PRESIDENT
----------------------------
<PAGE>
BILL OF SALE
TOWER AIR INC., a Delaware corporation ("Seller"), is the legal and
beneficial owner of the following equipment (collectively, the "Equipment"):
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662420, in its as removed
condition, with all equipment installed thereon as of the
date of inspection of such engine by Purchaser at Seller's
facilities at J.F.K. International Airport (including,
without limitation, a full 747 QEC), and with all pertinent
engine logs, records and historical information, including
back to birth records on life limited parts.
For and in consideration of the sum of One Dollar (US$ 1) and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Seller does hereby transfer, deliver and set over to UNITED STATES
TURBINE ENGINE CORPORATION, a Delaware corporation ("Purchaser"), and its
successors and assingnees forever all of Seller's right, title and interest in
and to the Equipment, to have and to hold for its and their use forever.
Seller hereby warrants to Purchaser and its sucessors and assigns that
there is hereby conveyed to Purchaser on the date hereof good and marketable
title to the Equipment free and clear of any and all mortgages, pledges, liens,
charges, security interests, leases, claims or other encumbrances of any kind or
nature whatsoever, and that Seller will warrant and defend such title forever
against all claims and demands. Except for the aforesaid warranty of title,
Seller is selling the Equipment on an "AS IS, WHERE IS" BASIS, WITHOUT ANY
WARRANTY OR REPRESENTATION OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED.
This Bill of Sale is made and delivered pursuant to the provisions of the
Aircraft Engine Purchase Agreement dated as of December 31st, 1999 between
Seller and Purchaser.
IN WITNESS WHEREOF, we have set our hand hereto this 31st day of December,
1998.
TOWER AIR, INC.
BY: /S/ WILLIAM CAIN
-----------------------------------
NAME: WILLIAM CAIN
----------------------------------
TITLE: SR VP MAINT & ENG.
---------------------------------
<PAGE>
BILL OF SALE
TOWER AIR INC., a Delaware corporation ("Seller"), is the legal and
beneficial owner of the following equipment (collectively, the "Equipment"):
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662993, in its as removed
condition, with all equipment installed thereon as of the
date of inspection of such engine by Purchaser at Seller's
facilities at J.F.K. International Airport (including,
without limitation, a full 747 QEC), and with all pertinent
engine logs, records and historical information, including
back to birth records on life limited parts.
For and in consideration of the sum of One Dollar (US$ 1) and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Seller does hereby transfer, deliver and set over to UNITED STATES
TURBINE ENGINE CORPORATION, a Delaware corporation ("Purchaser"), and its
successors and assingnees forever all of Seller's right, title and interest in
and to the Equipment, to have and to hold for its and their use forever.
Seller hereby warrants to Purchaser and its sucessors and assigns that
there is hereby conveyed to Purchaser on the date hereof good and marketable
title to the Equipment free and clear of any and all mortgages, pledges, liens,
charges, security interests, leases, claims or other encumbrances of any kind or
nature whatsoever, and that Seller will warrant and defend such title forever
against all claims and demands. Except for the aforesaid warranty of title,
Seller is selling the Equipment on an "AS IS, WHERE IS" BASIS, WITHOUT ANY
WARRANTY OR REPRESENTATION OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED.
This Bill of Sale is made and delivered pursuant to the provisions of the
Aircraft Engine Purchase Agreement dated as of December 31st, 1999 between
Seller and Purchaser.
IN WITNESS WHEREOF, we have set our hand hereto this 31st day of December,
1998.
TOWER AIR, INC.
BY: /S/ WILLIAM CAIN
-----------------------------------
NAME: WILLIAM CAIN
----------------------------------
TITLE: SR VP MAINT & ENG.
---------------------------------
<PAGE>
BILL OF SALE
TOWER AIR INC., a Delaware corporation ("Seller"), is the legal and
beneficial owner of the following equipment (collectively, the "Equipment"):
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662838, in its as removed
condition, with all equipment installed thereon as of the
date of inspection of such engine by Purchaser at Seller's
facilities at J.F.K. International Airport (including,
without limitation, a full 747 QEC), and with all pertinent
engine logs, records and historical information, including
back to birth records on life limited parts.
For and in consideration of the sum of One Dollar (US$ 1) and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Seller does hereby transfer, deliver and set over to UNITED STATES
TURBINE ENGINE CORPORATION, a Delaware corporation ("Purchaser"), and its
successors and assingnees forever all of Seller's right, title and interest in
and to the Equipment, to have and to hold for its and their use forever.
Seller hereby warrants to Purchaser and its sucessors and assigns that
there is hereby conveyed to Purchaser on the date hereof good and marketable
title to the Equipment free and clear of any and all mortgages, pledges, liens,
charges, security interests, leases, claims or other encumbrances of any kind or
nature whatsoever, and that Seller will warrant and defend such title forever
against all claims and demands. Except for the aforesaid warranty of title,
Seller is selling the Equipment on an "AS IS, WHERE IS" BASIS, WITHOUT ANY
WARRANTY OR REPRESENTATION OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED.
This Bill of Sale is made and delivered pursuant to the provisions of the
Aircraft Engine Purchase Agreement dated as of December 31st, 1999 between
Seller and Purchaser.
IN WITNESS WHEREOF, we have set our hand hereto this 31st day of December,
1998.
TOWER AIR, INC.
BY: /S/ WILLIAM CAIN
-----------------------------------
NAME: WILLIAM CAIN
----------------------------------
TITLE: SR VP MAINT & ENG.
---------------------------------
<PAGE>
BILL OF SALE
UNITED STATES TURBINE ENGINE CORPORATION, a Delaware corporation
("Seller"), is the legal and beneficial owner of the following equipment
(collectively, the "Equipment"):
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662973, in serviceable
condition with a current FAA Part 145 tag attached, with
all equipment installed thereon as of the date of
inspection of such engine by Purchaser at Seller's
facilities in Norwalk, Connecticut (including, without
limitation, a full 747 QEC kit tagged serviceable), and
with all pertinent engine logs, records and historical
information, including back to birth records on life
limited parts.
For and in consideration of the sum of One Dollar (US$ 1) and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Seller does hereby transfer, deliver and set over to UNITED STATES
TURBINE ENGINE CORPORATION, a Delaware corporation ("Purchaser"), and its
successors and assingnees forever all of Seller's right, title and interest in
and to the Equipment, to have and to hold for its and their use forever.
Seller hereby warrants to Purchaser and its sucessors and assigns that
there is hereby conveyed to Purchaser on the date hereof good and marketable
title to the Equipment free and clear of any and all mortgages, pledges, liens,
charges, security interests, leases, claims or other encumbrances of any kind or
nature whatsoever, and that Seller will warrant and defend such title forever
against all claims and demands. Except for the aforesaid warranty of title,
Seller is selling the Equipment on an "AS IS, WHERE IS" BASIS, WITHOUT ANY
WARRANTY OR REPRESENTATION OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED.
This Bill of Sale is made and delivered pursuant to the provisions of the
Aircraft Engine Purchase Agreement dated as of December 31st, 1999 between
Seller and Purchaser.
IN WITNESS WHEREOF, we have set our hand hereto this 31st day of December,
1998.
UNITED STATES TURBINE ENGINE
CORPORATION
BY: /S/ RANDALL P. FIORENZA
-----------------------------------
NAME: RANDALL P. FIORENZA
----------------------------------
TITLE: PRESIDENT
---------------------------------
<PAGE>
BILL OF SALE
UNITED STATES TURBINE ENGINE CORPORATION, a Delaware corporation
("Seller"), is the legal and beneficial owner of the following equipment
(collectively, the "Equipment"):
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662649, in serviceable
condition with a current FAA Part 145 tag attached,
with all equipment installed thereon as of the date of
inspection of such engine by Purchaser at Seller's
facilities in Norwalk, Connecticut (including, without
limitation, a full 747 QEC kit tagged serviceable), and
with all pertinent engine logs, records and historical
information, including back to birth records on life
limited parts.
For and in consideration of the sum of One Dollar (US$ 1) and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Seller does hereby transfer, deliver and set over to UNITED STATES
TURBINE ENGINE CORPORATION, a Delaware corporation ("Purchaser"), and its
successors and assingnees forever all of Seller's right, title and interest in
and to the Equipment, to have and to hold for its and their use forever.
Seller hereby warrants to Purchaser and its sucessors and assigns that
there is hereby conveyed to Purchaser on the date hereof good and marketable
title to the Equipment free and clear of any and all mortgages, pledges, liens,
charges, security interests, leases, claims or other encumbrances of any kind or
nature whatsoever, and that Seller will warrant and defend such title forever
against all claims and demands. Except for the aforesaid warranty of title,
Seller is selling the Equipment on an "AS IS, WHERE IS" BASIS, WITHOUT ANY
WARRANTY OR REPRESENTATION OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED.
This Bill of Sale is made and delivered pursuant to the provisions of the
Aircraft Engine Purchase Agreement dated as of December 31st, 1999 between
Seller and Purchaser.
IN WITNESS WHEREOF, we have set our hand hereto this 31st day of December,
1998.
UNITED STATES TURBINE ENGINE
CORPORATION
BY: /S/ RANDALL P. FIORENZA
-----------------------------------
NAME: RANDALL P. FIORENZA
----------------------------------
TITLE: PRESIDENT
---------------------------------
<PAGE>
BILL OF SALE
UNITED STATES TURBINE ENGINE CORPORATION, a Delaware corporation
("Seller"), is the legal and beneficial owner of the following equipment
(collectively, the "Equipment"):
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662330, in serviceable
condition with a current FAA Part 145 tag attached,
with all equipment installed thereon as of the date of
inspection of such engine by Purchaser at Seller's
facilities in Norwalk, Connecticut (including, without
limitation, a full 747 QEC kit tagged serviceable), and
with all pertinent engine logs, records and historical
information, including back to birth records on life
limited parts.
For and in consideration of the sum of One Dollar (US$ 1) and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Seller does hereby transfer, deliver and set over to UNITED STATES
TURBINE ENGINE CORPORATION, a Delaware corporation ("Purchaser"), and its
successors and assingnees forever all of Seller's right, title and interest in
and to the Equipment, to have and to hold for its and their use forever.
Seller hereby warrants to Purchaser and its sucessors and assigns that
there is hereby conveyed to Purchaser on the date hereof good and marketable
title to the Equipment free and clear of any and all mortgages, pledges, liens,
charges, security interests, leases, claims or other encumbrances of any kind or
nature whatsoever, and that Seller will warrant and defend such title forever
against all claims and demands. Except for the aforesaid warranty of title,
Seller is selling the Equipment on an "AS IS, WHERE IS" BASIS, WITHOUT ANY
WARRANTY OR REPRESENTATION OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED.
This Bill of Sale is made and delivered pursuant to the provisions of the
Aircraft Engine Purchase Agreement dated as of December 31st, 1999 between
Seller and Purchaser.
IN WITNESS WHEREOF, we have set our hand hereto this 31st day of December,
1998.
UNITED STATES TURBINE ENGINE
CORPORATION
BY: /S/ RANDALL P. FIORENZA
-----------------------------------
NAME: RANDALL P. FIORENZA
----------------------------------
TITLE: PRESIDENT
---------------------------------
<PAGE>
EQUIPMENT DELIVERY RECEIPT
In accordance with the terms of that certain Aircraft Engine Purchase
Agreement dated as of December 31, 1998 (the "Agreement") between TOWER AIR,
INC., a Delaware corporation ("Seller"), and UNITED STATES TURBINE ENGINE
CORPORATION, a Delaware corporation ("Purchaser"), the undersigned, on behalf
of, and as the duly authorized agent of Purchaser hereby acknowledges the
receipt from Seller on the date set forth below of the delivery to Purchaser at
________________________________________________, of the following items of the
Equipment:
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662973, in serviceable
condition with a curent FAA Part 145 tag attached,
with all equipment installed thereon as of the date of
inspection of such engine by Purchaser at Seller's
facilities in Norwalk, Connecticut (including, without
limitation, full 747 QEC kit tagged serviceable), and
with all pertinent engine logs, records and historical
information, including back to birth records on life
limited parts.
IN WITNESS WHEREOF, we have set our hand hereto this 31st day of December,
1998.
TOWER AIR, INC.
BY: /s/ WILLIAM CAIN
-------------------------------
NAME: WILLIAM CAIN
-----------------------------
TITLE: SR VP MAINT & ENG.
----------------------------
<PAGE>
EQUIPMENT DELIVERY RECEIPT
In accordance with the terms of that certain Aircraft Engine Purchase
Agreement dated as of December 31, 1998 (the "Agreement") between UNITED STATES
TURBINE ENGINE CORPORATION, a Delaware corporation ("Seller"), and TOWER AIR,
INC., a Delaware corporation ("Purchaser"), the undersigned, on behalf of, and
as the duly authorized agent of Purchaser hereby acknowledges the receipt from
Seller on the date set forth below of the delivery to Purchaser at
__________________________________, of the following items of the Equipment:
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662649, in serviceable
condition with a current FAA Part 145 tag attached, with all
equipment installed thereon as of the date of inspection of
such engine by Purchaser at Seller's facilities in Norwalk,
Connecticut (including, without limitation, a full 747 QEC
kit tagged serviceable), and with all pertinent engine logs,
records and historical information, including back to birth
records on life limited parts.
IN WITNESS WHEREOF, we have set our hand hereto this 31/st/ day of
December, 1998.
TOWER AIR, INC.
BY: /s/ William Cain
------------------------------
NAME: WILLIAM CAIN
----------------------------
TITLE: SR. VP. MAINT. & ENG.
---------------------------
<PAGE>
EQUIPMENT DELIVERY RECEIPT
In accordance with the terms of that certain Aircraft Engine Purchase
Agreement dated as of December 31, 1998 (the "Agreement") between UNITED STATES
TURBINE ENGINE CORPORATION, a Delaware corporation ("Seller"), and TOWER AIR,
INC., a Delaware corporation ("Purchaser"), the undersigned, on behalf of, and
as the duly authorized agent of Purchaser hereby acknowledges the receipt from
Seller on the date set forth below of the delivery to Purchaser at
___________________________________, of the following items of the Equipment:
One (1) Pratt & Whitney JT9D-7A engine bearing
manufacturer's serial number 662816, in serviceable
condition with a current FAA Part 145 tag attached, with all
equipment installed thereon as of the date of inspection of
such engine by Purchaser at Seller's facilities in Norwalk,
Connecticut (including, without limitation, a full 747 QEC
kit tagged serviceable), and with all pertinent engine logs,
records and historical information, including back to birth
records on life limited parts.
IN WITNESS WHEREOF, we have set our hand hereto this 31/st/ day of
December, 1998.
TOWER AIR, INC.
BY: /s/ William Cain
------------------------------
NAME: WILLIAM CAIN
----------------------------
TITLE: SR. VP. MAINT. & ENG.
---------------------------
<PAGE>
PROMISSORY NOTE
U.S.$6,723,000 December 31, 1998
FOR VALUE RECEIVED, TOWER AIR, INC., a Delaware corporation (the
"Borrower"), by this promissory note (the "Note") irrevocably and
unconditionally promises to pay to the order of UNITED STATES TURBINE ENGINE
CORPORATION, a Delaware corporation, or any assignee of this Note or any
successor or assignee thereof (the "Holder"), the principal sum of SIX MILLION
SEVEN HUNDRED TWENTY THREE THOUSAND DOLLARS (US$6,723,000) payable in thirty-six
(36) consecutive equal monthly installments of principal and interest due on the
same day of each month of each year until maturity beginning on February 1,
1999; provided, however, that the final installment of principal and interest
payable hereunder shall be in the amount of all of the remaining and then
outstanding principal balance of this Note, together with interest accrued
thereon.
The unpaid principal amount from time to time outstanding shall bear
interest from the date of this Note at the fixed rate of interest of nine
percent (9%) per annum. Any principal, interest or any other amount hereunder
which is not paid when due (whether as stated, by acceleration or otherwise)
shall, to the full extent permitted by law, thereafter bear interest at the rate
of twelve percent (12%) per annum from the date such amount shall have become
due and payable up to the date the same shall be paid. Interest shall be
computed on the basis of a 360 day year consisting of 12 months of 30 days each.
Anything in this Note to the contrary notwithstanding, the Holder shall not be
permitted to charge or receive, and the Borrower shall not be obligated to pay,
interest in excess of the maximum rate from time to time permitted by applicable
law.
All payments to be made hereunder by the Borrower shall be made without
set-off, deduction, counterclaim or withholding whatsoever, in United States
dollars in same day funds not later than 3:00 p.m., New York time, on the due
date, by wire transfer of immediately available funds to NationsBank, N.A., ABA
No. 111000012, Account No. 3751075750, For Final Credit To: United States
Turbine Engine Corp., or to such other account as the Holder may from time to
time designate, in writing, to the Borrower. Whenever any payment hereunder
shall be stated to be due on a day that is not a Working Day, such payment shall
be made on, and interest shall be payable to, the succeeding Working Day unless
the succeeding Working Day shall fall in the succeeding calendar month, in which
event such payment shall be made on the preceding Working Day. "Working Day"
shall mean a day on which dealings in currencies and exchange between banks may
be carried on in New York, New York.
The Borrower agrees to indemnify the Holder for, and hold the Holder
harmless from, any present or future claim or liability for any registration
charge or any stamp, excise or other similar taxes and any penalties or interest
with respect thereto, which may be imposed by any jurisdiction in connection
with this Note or enforcement hereof.
<PAGE>
The Borrower hereby represents and warrants that: (a) the Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of Delaware and has full power, authority and legal right to execute, deliver
and perform this Note, and has taken all necessary corporate and other action to
authorize the execution, delivery and performance of this Note on the terms and
conditions hereof; (b) this Note constitutes the legal, valid and binding
obligation of the Borrower enforceable in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium or similar laws affecting the rights of creditors generally, and
except as enforceability may be subject to the application of equitable
principles in any proceeding, legal or equitable; (c) the execution, delivery
and performance by the Borrower of this Note will not violate the charter,
bylaws or other corporate rules of the Borrower or any provision of law or
regulation or of any judgment, order or decree of any court, arbitrator or
governmental authority or of any agreement of any nature whatsoever, binding
upon the Borrower or its assets; (d) no consent or exemption is required in
connection with the execution, delivery, performance (including payment as
specified in the fourth paragraph of this Note), validity or enforceability of
this Note; (e) no Event of Default (as defined herein) has occurred and is
continuing; (f) the obligations of the Borrower under this Note rank at least
pari passu (in priority of payment, security and otherwise) with all other
unsecured pecuniary obligations of whatsoever nature (including contingent
obligations) of the Borrower outstanding as of the date hereof; (g) except as
set forth on the schedule provided to the Holder on December 28, 1998, no
litigation, arbitration or administrative proceeding of or before any court,
arbitrator or governmental authority is pending or, to the knowledge of the
Borrower, threatened (i) with respect to any aspect of this Note or (ii)
affecting the Borrower or any of its assets, which, if adversely determined,
would have a material adverse effect on the business, prospects or financial
condition of the Borrower; (h) all tax returns required to be filed by the
Borrower have been filed and all taxes payable by the Borrower have been paid,
except those being contested in good faith by appropriate proceedings for which
adequate reserves have been provided on its books; and (i) this Note is issued
to evidence the financing of 83% of the Purchase Price (as defined in that
certain Engine Purchase Agreement dated as of December 31, 1998, between the
Borrower and the Lender).
If any of the following events (each, an "Event of Default") occurs: (a)
the Borrower fails to pay when due any principal of or interest on this Note or
any other amount payable hereunder and such failure is not remedied within 3
Working Days; or (b) the Borrower fails to make any payment when due on any
pecuniary obligation(s) (other than this Note) of any nature whatsoever
(including, without limitation, contingent obligations), which pecuniary
obligation(s) exceed US$5.000,000 (or the equivalent in one or more other
currencies) individually or in the aggregate, or defaults in performance of any
agreement under which any such obligation is created, or any other event shall
occur or condition exist, if the effect of such default or other event or
condition is to cause such obligation to become, or to permit holders of such
obligation, or a trustee on their behalf, to declare such obligation, due prior
to its normal maturity, provided, however, that if the Borrower is contesting in
good faith the amount of any such obligation and has set aside adequate
reserves, such failure to pay shall not be deemed to constitute an Event of
Default hereunder during the pendency of such contest; or (c) the Borrower
becomes insolvent or unable to pay its debts as they mature, or consents to the
appointment of a custodian, trustee,
-2-
<PAGE>
intervenor or receiver for it or a substantial part of its property, or any such
custodian, trustee, intervenor or receiver is appointed, or bankruptcy,
dissolution, reorganization, intervention, arrangement or liquidation
proceedings (or proceedings similar in purpose or effect) are instituted (i) by
the Borrower or (ii) against the Borrower and are not dismissed within sixty
(60) days; or (d) any governmental consent or exemption necessary to enable the
Borrower to comply with or perform its obligations under this Note is revoked,
withdrawn or withheld, or otherwise fails to be issued or remain in full force
and effect; or (e) a warrant of attachment or execution or similar process
against any substantial part of the assets of the Borrower is issued; or (f) any
representation or warranty made by the Borrower in this Note proves to have been
incorrect when made; or (g) there occurs a material adverse change in the
business, prospects or financial condition of the Borrower; or (h) the Borrower
fails to perform or observe any covenant or other term contained in this Note
and such failure, if capable of remedy, is not remedied within 15 days after its
receipt of written notice of such failure to perform or observe from the Holder;
then, and in any such event, the Holder may, by notice of default given to the
Borrower, declare unpaid principal, accrued interest and all other amounts
payable under this Note to be immediately due and payable without presentment,
demand, protest or other notice of any kind, each of which is hereby expressly
waived by the Borrower. The Borrower hereby agrees that, so long as any
principal, interest or any other amount remains outstanding and unpaid under
this Note, the Borrower shall notify the Holder promptly by telephone, confirmed
in writing, or in writing, upon the occurrence of any Event of Default.
The Borrower agrees to pay all the Holder's costs and out-of-pocket
expenses (including, without limitation, reasonable fees and disbursements of
counsel including, without limitation, the allocated cost of in-house counsel)
arising in connection with the enforcement of, and preservation of rights under,
this Note.
The Borrower agrees to indemnify the Holder for, and to hold the Holder
harmless from, any loss or expense which the Holder may sustain or incur as a
consequence of (i) default by the Borrower in payment when due of any principal
of or interest on this Note or (ii) the making of any payment or prepayment
hereunder on a day or in an amount other than the dates and amounts specified in
this Note.
No action or omission by the Holder shall constitute a waiver of any rights
or remedies of the Holder hereunder. Such rights and remedies are cumulative and
not exclusive of any rights or remedies provided by law. Payment of principal of
and interest on this Note shall not discharge the Borrower's obligation with
respect to any other amount payable hereunder. In connection with any assignment
by the Holder of this Note and the loan evidenced hereby, the Borrower hereby
agrees promptly to execute and deliver such documents and instruments, and to
take such further action as may be reasonably requested by the Holder or such
assignee to further evidence, or in connection with, such assignment, including,
without limitation, the giving by the Borrower of any notice to any regulatory
authority or others deemed necessary or advisable by the Holder or such assignee
in its sole discretion. The Holder shall have all the rights and benefits of
this Note as if it were the original Holder hereof.
-3-
<PAGE>
Unless otherwise specified, all notices and other communications under
the Note shall be in writing and shall be deemed made (i) if by hand or courier
service, when delivered or (ii) if by mail or facsimile, when sent, addressed as
follows or at such other address as may be designated by written notice:
Tower Air, Inc.17
Hanger 17
J.F.K. International Airport
Jamaica, NY 11430
Attn: William Cain
Fax: (718) 553-4387
with a copy to:
Stephen L. Gelband, Esq.
Hewes Gelband Lambert & Dann
1000 Potomac St. NW
Suite 300
Washington, D.C. 20007
Fax: (202) 333-0871
United States Turbine Engine Corporation
79 Glover Avenue
Norwalk, CT 06850
Attn: Mr. Randy Fiorenza
Fax: (203) 847-9612
The Borrower hereby irrevocably: (a) submits in any legal proceeding
relating to this Note to the non-exclusive jurisdiction of any state or United
States court of competent jurisdiction sitting in the State of New York and
agrees to suit being brought in any such court, as the Holder may elect; (b)
waives and agrees not to claim (i) any objection that it may now or hereafter
have to the venue of any such proceeding in any such court or that such
proceeding was brought in an inconvenient court and (ii) immunity (whether
characterized as sovereign immunity or otherwise) from suit, from the
jurisdiction of any court, from attachment prior to or in aid of execution of, a
judgment, or from execution of a judgment; (c) agrees to service of process in
any such legal proceeding by mailing of copies thereof (by registered or
certified mail, if practicable) postage prepaid, or by fax, to the Borrower at
its address set forth above or such other address of which the Holder shall have
been notified in writing; (d) agrees that nothing herein shall affect the
Holder's right to effect service of process in any other manner permitted by
law, and that the Holder shall have the right to bring any legal proceedings
(including a proceeding for enforcement of a judgment entered by any of the
aforementioned courts) against the Borrower in any other court or jurisdiction
in accordance with applicable law; and (g) WAIVES TRIAL BY JURY IN ANY SUCH
LEGAL PROCEEDING.
-4-
<PAGE>
THIS NOTE SHALL BE A CONTRACT UNDER, AND BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK
TOWER AIR, INC.
By: /s/ WILLIAM CAIN
-----------------------------
Title: SR. VP. MAINTENANCE AND
ENGINEERING
-5-
<PAGE>
EXECUTION COPY
ENGINE SECURITY AGREEMENT
-------------------------
TOWER AIR, INC., a Delaware corporation (the "Debtor"), for valuable
consideration, the receipt of which hereby is acknowledged, hereby transfers,
assigns and pledges to UNITED STATES TURBINE ENGINE CORPORATION, a Delaware
corporation (the "Secured Party"), and grants to the Secured Party a security
interest in the following collateral, wherever located, now existing and
hereafter arising or coming into existence (the "Collateral"):
(a) Pratt & Whitney JT9D-7A engine bearing manufacturer's serial
number 662973, which has 750 or more rated takeoff horsepower, together with all
attachments, additions and accessions thereto, and added and substituted parts,
equipment and repairs now or hereafter placed upon such property, whether
because of necessary repairs or otherwise;
(b) Pratt & Whitney JT9D-7A engine bearing manufacturer's serial
number 662649, which has 750 or more rated takeoff horsepower, together with all
attachments, additions and accessions thereto, and added and substituted parts,
equipment and repairs now or hereafter placed upon such property, whether
because of necessary repairs or otherwise;
(c) Pratt & Whitney JT9D-7A engine bearing manufacturer's serial
number 662330, which has 750 or more rated takeoff horsepower, together with all
attachments, additions and accessions thereto, and added and substituted parts,
equipment and repairs now or hereafter placed upon such property, whether
because of necessary repairs or otherwise; and
(d) The proceeds and products of the foregoing in whatever form the
same may be,
for the purpose of securing the payment to the Secured Party and the performance
by the Debtor of the following ("Obligations"): the obligations, covenants and
duties owing to the Secured Party from the Debtor under the Aircraft Engine
Purchase Agreement of even date herewith, between the Debtor and the Secured
Party, including the Secured Party's obligations under the Promissory Note (the
"Note") attached as Exhibit A thereto, as whether now existing\\ or hereafter
arising.
The Debtor further warrants to and agrees with the Secured Party as
follows:
1. PRESERVATION OF COLLATERAL. The Debtor will keep the Collateral in good
--------------------------
order and repair at all times, will use same with reasonable care and caution,
will not part with ownership thereof and will give representatives of the
Secured Party access thereto at all reasonable times upon reasonable notice to
the Debtor. The Debtor will not part with possession of the Collateral nor
lease or hire out same without the written consent of the Secured Party which
shall not unreasonably be withheld (provided, that so long as no Event of
Default is continuing, the Debtor, without the written consent of the Secured
Party, may, subject and subordinate in all respects to this Agreement and the
Secured Party's rights hereunder, (i) sublease the Collateral to any affiliate
of the Debtor; (ii) subject the Collateral to normal interchange or pooling
agreements with responsible air carriers entered into by the Debtor in the
<PAGE>
ordinary course of business; and (iii) deliver possession of the Collateral to a
Federal Aviation Administration-approved maintenance facility for testing,
service, repair, maintenance or overhaul work). The Debtor will not knowingly
use, or permit the Collateral to be used, in violation of any federal, state,
county or municipal law or regulation or for any unlawful purpose whatsoever.
2. INSURANCE.
---------
2.1 The Debtor will keep the Collateral insured in respect of both
ground and flight risk under its fleet policy on terms and conditions
substantially similar to those in effect on the date hereof. All such insurance
policies will name the Secured Party as an additional insured and, where
applicable, as loss payee under a loss payable endorsement satisfactory to the
Secured Party. The Debtor will deliver to the Secured Party certificates
representing such insurance policies upon the execution hereof. All amounts
payable in settlement of insurance losses not constituting a total loss shall be
used to repair, replace or restore the Collateral. If any Event of Default
shall then be continuing, all amounts payable in settlement of a total loss may
be applied, at the Secured Party's option, to the Obligations in the order
determined by the Secured Party.
2.2 The Debtor will at its expense carry or cause to be carried
public liability (including, without limitation, contractual liability and
passenger legal liability), payable in U.S. dollars, with respect to the any
airframe upon which any item of Collateral is installed (i) in amounts, of the
type and covering the risks reasonably acceptable to the Secured Party, but in
no event shall the amount of such insurance be less than that which at the time
is customarily carried with respect to similar aircraft by corporations engaged
in the same or similar business and similarly situated with the Debtor, and (ii)
with insurers of recognized international responsibility reasonably satisfactory
to the Secured Party.
2.3 Any policies of insurance required pursuant to either paragraph
2.2 or 2.3 above shall: (i) name the Secured Party as an additional named
insured, but without the Secured Party being thereby liable for payment of
premiums; (ii) provide that in respect of the interest of the Secured Party in
such policies the insurance shall not be invalidated by any action or inaction
of the Debtor and shall insure the interest of the Secured Party regardless of
any breach or violation by the Debtor of any warranty, declaration or condition
contained in such policies; and (iii) provide that if such insurance is
canceled, such cancellation shall not be effective as to the Secured Party for
thirty (30) days after receipt by the Secured Party of written notice from the
insurers of such cancellation.
2.4 On or prior to the date hereof and annually thereafter on or
prior to the anniversary of the date hereof, the Debtor will furnish to the
Secured Party a report signed by a firm of independent aircraft insurance
brokers, appointed by the Debtor and acceptable to the Secured Party, describing
in reasonable detail the insurance then carried and maintained on or with
respect to the Collateral and stating that in the opinion of such firm such
insurance complies with the terms of this Section 2 and is adequate to protect
the interests of the Debtor and the Secured Party. The Debtor will cause such
firm to advise the Secured Party in writing (i) promptly of any default in the
payment of any premium and of any other act or omission on the part of the
Debtor of which such firm has knowledge and which might invalidate or render
unenforceable, in whole or in part, any
2
<PAGE>
insurance on the Collateral and (ii) at least 30 days prior to the expiration or
termination date of any insurance carried and maintained on the Collateral
hereunder if such insurance has not been renewed by such date in accordance with
the terms hereof
3. PAYMENT OF EXPENSES BY THE SECURED PARTY. At its option, if the Debtor
----------------------------------------
fails to do so, the Secured Party may discharge taxes, liens, security interests
or such other encumbrances as may attach to the Collateral, may pay for the
insurance on the Collateral specified in Section 2 hereof and may pay for the
maintenance, appraisal or reappraisal, and preservation of the Collateral, as
determined by the Secured Party to be reasonably necessary. The Debtor will
reimburse the Secured Party on demand for any payment so made or any expense
incurred by the Secured Party pursuant to the foregoing authorization, and the
Collateral also will secure any advances or payments so made or expenses so
incurred by the Secured Party.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Debtor represents,
-----------------------------------------
warrants and covenants to the Secured Party that: (a) the Debtor is the sole and
lawful owner of the Collateral and has not made any prior sale, pledge,
encumbrance, assignment or other disposition of any of the Collateral, and the
same is free from all encumbrances and rights of setoff of any kind (except for
liens for taxes not yet due and payable and statutory and common law liens of
mechanics, workmen and materialmen incurred in the ordinary course of business
for sums not yet due and payable ("Permitted Encumbrances")); (b) except as
herein provided, the Debtor will not hereafter without the prior written consent
of the Secured Party sell, pledge, encumber, assign or otherwise dispose of any
of the Collateral or permit any right of setoff, lien or security interest to
exist thereon except for Permitted Encumbrances and except to the Secured Party;
(c) the Debtor will defend the Collateral against all claims and demands of all
persons at any time claiming the same or any interest therein.
5. FINANCING STATEMENTS; DOCUMENTS. At the request of the Secured Party,
-------------------------------
the Debtor will join with the Secured Party in executing financing statements
pursuant to the Uniform Commercial Code and/or any documents required or
permitted by the United States Department of Transportation, Federal Aviation
Administration, in form satisfactory to the Secured Party and will pay the cost
of filing such documents in all public offices where filing is deemed necessary
or desirable by the Secured Party. The Debtor will execute and deliver to the
Secured Party from time to time such supplemental assignments or other
instruments as the Secured Party may require for the purpose of confirming the
Secured Party's interest in the Collateral. The Debtor hereby authorizes the
Secured Party to execute and file on behalf of the Debtor all financing
statements and documents deemed necessary or appropriate to perfect the Secured
Party's interest in the Collateral.
6. DEFAULT.
-------
6.1 Upon the occurrence of any Event of Default (as defined in the
Note) and the lapse of any notice or cure period provided in such Note with
respect to such default, the Secured Party is authorized in its discretion to
declare the Note immediately due and payable without demand or notice to the
Debtor and may exercise any one or more of the rights and remedies granted
pursuant to this Agreement or given to a secured party under the Uniform
3
<PAGE>
Commercial Code as in effect in the State of New York (irrespective of whether
the Uniform Commercial Code applies to the Collateral), including but not
limited to the right to take possession and sell, lease or otherwise dispose of
the Collateral and, at its option, operate, use or exercise any rights of
ownership pertaining to the Collateral as the Secured Party deems necessary to
preserve the value and receive the benefits of the Collateral. Upon the
occurrence of an Event of Default, and so long as the same shall be continuing,
the Secured Party may, so far as the Debtor can give authority therefor, enter
upon any premises on which the Collateral or any part thereof may be situated
and take possession of and remove the same therefrom. The Secured Party may
require the Debtor to make the Collateral available to the Secured Party at a
place to be designated by the Secured Party that is reasonably convenient to
both parties. The Debtor waives all claims for damages by reason of any
seizure, repossession, retention, use or sale of the Collateral under the terms
of this Agreement, except to the extent caused by the Secured Party's willful
misconduct or gross negligence.
6.2 The net proceeds arising from the disposition of the Collateral
after deducting reasonable expenses incurred by the Secured Party in connection
therewith will be applied to the Obligations in the order determined by the
Secured Party. If any excess remains after the discharge of all of the
Obligations, the same will be paid to the Debtor. If after exhausting all of
the Collateral, there should be a deficiency, the Debtor will be liable therefor
to the Secured Party, provided, however, that nothing contained herein will
obligate the Secured Party to proceed against the Collateral prior to making a
claim against the Debtor or any other party obligated under the Obligations or
prior to proceeding against any other collateral for the Obligations.
6.3 Whenever notice is required by law to be sent by the Secured
Party to the Debtor of any sale, lease or other disposition of the Collateral,
ten days written notice sent to the Debtor's address set forth below will be
reasonable.
6.4 If any demand is made at any time upon the Secured Party for the
repayment or recovery of any amount received by it in payment or on account of
any of the Obligations and if the Secured Party repays all or any part of such
amount, the Debtor will be and remain liable for the amounts so repaid or
recovered to the same extent as if never originally received by the Secured
Party.
7. EVENT OF LOSS. If an Event of Loss (as defined below) shall occur, the
-------------
Debtor will forthwith notify the Secured Party thereof in writing and will, not
later than 60 days after the occurrence of such Event of Loss, prepay to the
Secured Party the aggregate unpaid principal amount of Note, together with
interest on such aggregate principal amount accrued to the date of prepayment
and any other amounts owing by the Debtor under the Obligations. For purposes
hereof, the term "Event of Loss" shall mean any of the following events with
respect to any item of Collateral: (i) loss of such item of Collateral or of the
use thereof due to theft, disappearance, destruction, damage beyond repair or
rendition of such property permanently unfit for normal use for any reason; (ii)
any damage to such item of Collateral which results in an insurance settlement
with respect to such item of Collateral on the basis of a total loss,
constructive loss or agreed loss; (iii) the condemnation, confiscation or
seizure of, or requisition of title to or use of,
4
<PAGE>
such item of Collateral by private persons or governmental or purported
governmental authority (de facto or de jure); (iv) as a result of any rule,
regulation, order or other action by the Federal Aviation Administration (of the
United States of America or any other country at any time having jurisdiction)
or other governmental body having jurisdiction, the use of such item of
Collateral in the normal course of interstate air transportation shall have been
prohibited for a period of two (2) consecutive months; or (v) the inability, for
any reason whatsoever, of the Secured Party to obtain possession of any item of
Collateral within thirty (30) days of delivery of notice to the Secured Party of
the occurrence of an Event of Default under the Note.
8. RIGHTS OF SECURED PARTY; POWER OF ATTORNEY. The Debtor hereby
------------------------------------------
irrevocably constitutes and appoints the Secured Party and any officer thereof,
with full power of substitution, as its true and lawful attorney-in-fact with
full irrevocable power and authority in the place and stead of the Debtor or in
its name, from time to time in the Secured Party's discretion for the purpose of
carrying out the terms of this Agreement, to take any and all appropriate action
and to execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Agreement and, without limiting the
generality of the foregoing, the Debtor hereby gives the Secured Party the power
and right, on behalf of the Debtor, after an Event of Default shall have
occurred and so long as the same shall be continuing, and without notice to or
assent by the Debtor, to do the following:
8.1 to receive payment of, endorse, and receipt for, any and all
monies, claims and other amounts due and to become due at any time in respect of
or arising out of the Collateral;
8.2 to commence and prosecute any suits, actions or proceeding at law
or in equity in any court of competent jurisdiction to collect any of the
Collateral and to enforce any other right in respect of the Collateral;
8.3 to settle, compromise or adjust any suit, action or proceeding
described above, and, in connection therewith, to give such discharges or
releases as the Secured Party may deem appropriate; and
8.4 generally to sell, transfer, pledge, make any agreement with
respect to or otherwise deal with any of the Collateral as fully and completely
as though the Secured Party were the absolute owner thereof for all purposes,
and to do, at the Secured Party's option, at any time, or from time to time, all
acts and things which the Secured Party deems necessary to protect or preserve
the Collateral and the Secured Party's security interest and rights therein in
order to effect the intent of this Agreement, all as fully and effectively as
the Debtor might do.
The Debtor hereby ratifies all that such attorneys shall lawfully do or cause to
be done by virtue hereof. This power of attorney is a power coupled with an
interest will be irrevocable and shall terminate only upon payment in full of
the Obligations and the termination of this Agreement. The powers conferred
upon the Secured Party hereunder are solely to protect the Secured Party's
interests in the Collateral and will not impose any duty upon it to exercise any
such powers. The Secured Party will have no obligation to preserve any rights
of any third parties in the Collateral. The Secured Party will be accountable
only for amounts that it actually receives as a result of the
5
<PAGE>
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents will be responsible to the Debtor for any action taken or
omitted to be taken in good faith or in reliance on the advice of counsel except
for its own gross negligence or willful misconduct.
9. MISCELLANEOUS.
-------------
9.1 FEES AND EXPENSES. The Debtor will promptly (and in any event
-----------------
within 30 days after its receipt of an invoice or statement therefor) pay all
costs and expenses (including, without limitation, reasonable fees and
disbursements of counsel) suffered or incurred by the Secured Party in
connection with its enforcement of the payment and performance of the
Obligations or any other sum due to it under this Agreement, or any of its other
rights hereunder or thereunder. The provisions of this Section shall survive
the payment of the Obligations and the termination of this Agreement.
9.2 RIGHT OF SET-OFF. In addition to any rights now or hereafter
----------------
granted under applicable law or otherwise and not by way of limitation of any
such rights, upon the occurrence of any Event of Default and so long as the same
shall be continuing, the Secured Party is hereby authorized at any time or from
time to time, without presentment, demand, protest or other notice of any kind
to the Debtor or to any other person, and such notice herein hereby expressly
waived, to set off and to apply any and all deposits (general or special) and
any other indebtedness at any time held or owing by the Secured Party to or for
the credit or the account of the Debtor, including the Maintenance Reserves (as
defined in the Obligations) against and on account of the obligations and
liabilities of the Debtor to the Secured Party under this Agreement or the
Obligations, including, without limitation, all other claims of any nature or
description arising out of or connected with this Agreement, the Obligations or
any other Security Document, whether or not the Secured Party shall have made
any demand therefor and although said obligations, liabilities or claims, or any
of them, shall be contingent or unmatured.
9.3 NOTICES. All notices, requests, reports and other communications
-------
pursuant to this Agreement shall be in writing, delivered by hand or commercial
messenger service or sent by facsimile confirmed on the same business day by
telephone and certified mail, return receipt requested, addressed as follows:
(a) If to Debtor: Tower Air, Inc.
Hangar 17
J.F.K. International Airport
Jamaica, NY 11430
Attn: William Cain
Fax: (718) 553-4387
Telephone: (718) 553-4300
with a copy to: Hewes Gelband Lambert & Dann
1000 Potomac St. NW
Suite 300
Washington, D.C. 20007
Fax: (202) 333-0871
Telephone: (202) 337-6200
6
<PAGE>
(b) If to Secured Party: United States Turbine Engine Corporation
79 Glover Avenue
Norwalk, CT 06850
Attn: Mr. Randy Fiorenza
Fax: (203) 847-9612
Telephone: (203) 847-1401
with a copy to: Greenberg, Traurig, P.A.
1221 Brickell Avenue
Miami, Florida 33131
Attention: Kenneth C. Hoffman, Esq.
Facsimile: 305-579-0717
Telephone: 305-579-0809
Any notice, request, report or communication hereunder shall be deemed to have
been given on the day on which it is delivered by hand or such commercial
messenger service to such party at its address specified above, or, if sent by
facsimile confirmed on the same business day by telephone and certified mail,
return receipt requested, on the third business day after such confirmation is
deposited in the mail, postage prepaid. Any party may change the person or
address to whom or which notices, requests, reports and communications are to be
given hereunder, by notice duly given hereunder; provided, however that any such
-------- --------
notice shall be deemed to have been given hereunder only when actually received
by the party to which it is addressed.
9.4 BINDING EFFECT. This Agreement shall be binding upon and shall
--------------
inure to the benefit of the Secured Party and the Debtor and their respective
successors and assigns, except that the Debtor may not assign its rights and
obligations hereunder without the prior written consent of the Secured Party,
and any purported assignment or delegation without such consent shall be void.
9.5 NO WAIVER: REMEDIES CUMULATIVE. No failure or delay on the part
------------------------------
of the Secured Party in exercising any right, power or privilege hereunder or
under any other Security Document and no course of dealing between the Debtor
and the Secured Party shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege hereunder or under any other
Security Document preclude any other or further exercise thereof or the exercise
of any other right, power or privilege hereunder or thereunder. The rights and
remedies herein expressly provided are cumulative and not exclusive of any
rights or remedies which the Secured Party would otherwise have. No notice to
or demand on the Debtor in any case shall entitle the Debtor to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Secured Party to any other or further action in any
circumstances without notice or demand.
9.6 CONSTRUCTION; GOVERNING LAW; CONSENT TO JURISDICTION.
----------------------------------------------------
(a) The headings used in this Agreement are for convenience only
and shall not be deemed to constitute a part hereof. All uses herein of the
masculine gender or of
7
<PAGE>
singular or plural terms shall be deemed to include uses of the feminine or
neuter gender or plural or singular terms, as the context may require. This
Agreement, the Security Documents and all other documents and instruments
executed and delivered in connection herewith and therewith, shall be governed
by, and construed and interpreted in accordance with, the laws of the State of
New York.
(b) The Debtor irrevocably consents that any legal action or
proceeding against it under, arising out of or in any manner relating to this
Agreement, the Obligations or any other Security Document may be brought in any
court of the State of New York or in the United States District Court for the
Southern District of New York. The Debtor, by the execution and delivery of this
Agreement, expressly and irrevocably assents and submits to the personal
jurisdiction of any of such courts in any such action or proceeding. The Debtor
further irrevocably consents to the service of any complaint, summons, notice or
other process relating to any such action or proceeding by delivery thereof to
it by hand or by mail in the manner provided for in Section 9.3 hereof. The
Debtor hereby expressly and irrevocably waives any claim or defense in any such
action or proceeding based on any alleged lack of personal jurisdiction,
improper venue or forum non conveniens or any similar basis. The Debtor shall
----- --- ----------
not be entitled in any such action or proceeding to assert any defense given or
allowed under the laws of any state other than the State of New York. Nothing in
this Section 9.6 shall affect or impair in any manner or to any extent the right
otherwise proceed against the Debtor in any jurisdiction or to serve process in
any manner permitted by law. The Debtor and the Secured Party waive their right
to trial by jury in any litigation in any court with respect to, in connection
with, or arising out of, this Agreement, the Obligations, the Security
Documents, or any instrument or document delivered pursuant to this Agreement,
or the validity, protection, interpretation, collection or enforcement thereof.
9.7 AMENDMENT OR WAIVER. This Agreement may not be amended, changed,
-------------------
waived, discharged or terminated without the written consent of the Secured
Party and the Debtor.
9.8 SURVIVAL OF AGREEMENT AND REPRESENTATIONS. All agreements,
-----------------------------------------
representations and warranties made herein shall survive the delivery of this
Agreement.
9.9 SEVERABILITY. The provisions of this Agreement are severable,
------------
and if any clause or provision hereof shall be held invalid or unenforceable in
whole or in part in any jurisdiction, then such invalidity or unenforceability
shall affect only such clause or provision, or part thereof, in such
jurisdiction and shall not in any manner affect such clause or provision in any
other jurisdiction, or any other clause or provision in this Agreement in any
jurisdiction. Each of the covenants, agreements and conditions contained in
this Agreement is independent and compliance by the Debtor with any of them
shall not excuse non-compliance by the Debtor with any other. The Debtor shall
not take any action the effect of which shall constitute a breach or violation
of any provision of this Agreement.
9.10 TERMINATION; RELEASE. Upon payment in full of the Obligations,
--------------------
this Agreement, all liabilities and obligations of the Debtor hereunder, and all
rights and interests of
8
<PAGE>
the Secured Party herein shall terminate, and the Secured Party, at the request
of the Debtor, shall promptly execute and deliver to the Debtor a release and
any other proper instruments (including UCC-3 termination statements, if
applicable) acknowledging termination of this Agreement.
9.11 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Debtor and the Secured Party.
9.12 LIABILITY OF THE SECURED PARTY. The Debtor hereby agrees that
------------------------------
the Secured Party will not be chargeable for any negligence, mistake, act or
omission of any employee, accountant, examiner, agent or attorney employed by
the Secured Party (except for the willful misconduct of any person, corporation,
partnership or other entity employed by the Secured Party) in making
examinations, investigations or collections, or otherwise in perfecting,
maintaining, protecting or realizing upon any lien or security interest or any
other interest in the Collateral or other security for the Obligations.
(continued on signature page)
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Agreement as of December 31, 1998.
TOWER AIR, INC.
By: /s/ William Cain
-------------------------------------
Name:WILLIAM CAIN
Title: SR.V MAINTENANCE ENGINEERING
UNITED STATES TURBINE ENGINE CORPORATION
By: /s/ Randall P. Fiorenza
-------------------------------------
Name: RANDALL P. FIORENZA
Title:PRESIDENT
<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 15, 1999, 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, 1998.
Ernst & Young LLP
Melville, New York
April 15, 1999
<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, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,614
<SECURITIES> 2,157
<RECEIVABLES> 40,182
<ALLOWANCES> 1,556
<INVENTORY> 0
<CURRENT-ASSETS> 45,811
<PP&E> 534,587
<DEPRECIATION> 235,658
<TOTAL-ASSETS> 350,762
<CURRENT-LIABILITIES> 186,199
<BONDS> 148,633
0
0
<COMMON> 156
<OTHER-SE> 51,301
<TOTAL-LIABILITY-AND-EQUITY> 350,762
<SALES> 0
<TOTAL-REVENUES> 483,820
<CGS> 0
<TOTAL-COSTS> 466,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 486
<INTEREST-EXPENSE> 14,543
<INCOME-PRETAX> 4,651
<INCOME-TAX> 3,159
<INCOME-CONTINUING> 1,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,492
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
