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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________________ to___________________
Commission file number: 000-23447
MIDWAY AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 36-3915637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 WEST MORGAN STREET, SUITE 1200
DURHAM, NORTH CAROLINA 27701
(Address of principal executive offices)
(Zip Code)
919-956-4800
(Registrant's telephone number, including area code)
Securities registered pursuant
to Section 12(b) of the Act:
None None
(Title of Class) (Names of exchange on
which registered)
Securities registered pursuant to
Section 12(g) of the Act: Common stock, par value $0.01
(Title of class)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ____X___ No ________
Indicate by checkmark 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 amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates as of March 20,
1998: $90.7 million
As of March 20, 1998 there were 8,558,695 shares of Common Stock, $.01 par
value, of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for registrant's Annual Meeting of
Shareholders to be held on May 19, 1998 are incorporated by reference in Part
III.
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MIDWAY AIRLINES CORPORATION
FORM 10-K
For the year ended December 31, 1997
TABLE OF CONTENTS
PART I Page No.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the
Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related
Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
SIGNATURES
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
EXHIBIT INDEX
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PART I
Item 1. Business
Background
Midway Airlines Corporation ("Midway" or the "Company") was incorporated
under the laws of the State of Delaware in 1983 as Jet Express Inc. and renamed
Midway Airlines Corporation in November 1993 in connection with its
commencement of jet operations. The Company is an all-jet aircraft operator
serving 14 destinations in eight eastern states and Mexico from its hub at
Raleigh-Durham International Airport ("RDU") in North Carolina, where it
currently carries more passengers and operates more flights than any other
airline. The Company focuses its operations to attract and retain business
travelers by providing frequent non-stop service from RDU to major business
destinations, maintaining a high level of service and offering American
Airlines, Inc. ("American") AAdvantage(R) frequent flyer miles. The Company
currently operates the youngest all-jet fleet in the United States with 12
98-seat Fokker F-100s, one 148-seat Airbus A320, and three Canadair Regional
Jets ("CRJs"). The first two CRJs were added to the fleet in December 1997 and
scheduled operations began in January 1998. The third CRJ was delivered and
started operations in March 1998. The fourth CRJ was delivered in March 1998
and will be put into service in April 1998. To further serve its market niche,
the Company has firm orders for six additional CRJs to be delivered during
1998, with options to acquire up to 20 additional CRJs over a two-year period
with delivery dates beginning in 1999. The Company anticipates that the CRJs
will expand the Company's capacity as measured by departing seats by about 40%,
and will be utilized to serve existing Midway destinations with greater
frequency and to enter new routes, providing Midway's customers more non-stop
jet destinations.
In March 1995, the Company moved its base of operations from Chicago to
RDU following American's reduction in service in the Raleigh-Durham market. RDU
offers modern facilities with room for the Company to grow. The Company
subleases or has options to sublease 18 of the 26 gates at the newer of RDU's
two terminals, Terminal C. The remaining eight gates in Terminal C are used by
American and Corporate Airlines, Midway's code sharing commuter partner.
Substantially all of the gates at RDU's other terminal are occupied.
The Company maintains a significant relationship with American. Part of
this relationship includes contractual arrangements with American that allow
Midway to offer AAdvantage(R) miles to, and accept AAirpass(R) tickets and
American first class upgrades from, its passengers. Midway also contracts with
American for important services, including reservations, maintenance, ground
handling, fueling and yield management. Midway believes the relationship
benefits American as well, by building customer loyalty through the use of
AAdvantage(R) miles by Midway customers, by providing sublease revenues to help
offset American's lease payments at RDU and by providing revenue through
Midway's use of various American services.
In February 1997, the Company completed a recapitalization (the
"Recapitalization"), resulting in a change in ownership and management. The
Recapitalization resulted in an approximate $12 million reduction in annual
expenses, including a decrease in aircraft rent expense, a decrease in facility
rentals, a decrease in the cost of certain services and a reduction in net
interest expense. In addition to the Recapitalization, the Company discontinued
flying certain unprofitable long-haul routes. Since the Recapitalization, the
Company has experienced a significant improvement in operating performance and
financial condition. The Company believes that its improved results are
attributable to the benefits realized from the Recapitalization, route
restructuring, improved yield management, increased passenger demand and a
generally strong economic environment.
In December 1997, the Company completed an initial public offering by
registering and selling 4,830,000 shares of common stock at $15.50 per share.
Of the shares sold, 2,130,680 were sold by selling shareholders. The remaining
2,699,320 shares were sold by the Company. Proceeds to the Company, net of
underwriters discount and offering expenses, were $37.7 million.
Operating Strategy
The principal elements of the Company's operating strategy are:
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o Attract High-Yielding Local Business Travelers. Based on available 1997
data, the Company's yields are higher than the yields of many other jet
operators. To attract high-yielding passengers, the Company has designed
its operations to serve the needs of business travelers flying to and from
Raleigh-Durham. The Company has developed strong relationships with major
corporations located in the Raleigh-Durham area, and offers these business
travelers frequent non-stop jet service, as well as an attractive, high
quality in-flight product and AAdvantage(R) frequent flyer miles. The
Company believes this focus on the needs of business travelers has produced
a loyal customer base and a higher percentage of business travelers than
other carriers.
o Maintain High Quality Operations. Because the Company's business customers
require consistent, dependable performance, Midway is committed to meeting
the highest operational standards. The Company's full year 1997 completion
factor (percent of scheduled flights actually operated) and on-time
performance rate (flights arriving within 15 minutes of schedule) of 99.0%
and 83.4%, respectively, are higher than those of the major carriers. The
Company achieved these performance measures by operating the youngest all
jet fleet in the United States, with an average age of 3.1 years as of
December 31, 1997, by maintaining a spare aircraft during much of 1997 to
ensure a high completion factor and through its commitment to high quality
maintenance, including the use of vendors such as American, affiliates of
Rolls-Royce plc ("Rolls-Royce") and a subsidiary of Canadian Airlines
Corporation.
o Provide Quality Customer Service. The Company seeks to generate a high
degree of loyalty and customer preference by providing high quality
in-flight amenities and customer service. The Company emphasizes customer
service from reservation to destination and offers tangible amenities such
as greater leg room, leather seating (on all aircraft except the Company's
single A320), gourmet coffee, quality snacks and a quiet, modern all-jet
fleet.
o Continue to Reduce Operating Costs. Because of its focus on business
travelers and premium service, its small aircraft and its relatively short
average stage length, the Company operates with yields and a cost per
available seat mile that are higher than industry averages. The Company is
committed to maintaining a competitive cost structure and has identified a
number of cost reduction opportunities. In addition to the cost savings
resulting from the Recapitalization, the Company has entered into new
maintenance contracts, reduced dependence on third-party vendors for flight
reservation call handling, reduced the cost of credit card processing and
reduced certain insurance costs. The Company is also implementing an
automated voice-response flight information system. Although the
introduction of regional jet aircraft will shorten average stage length,
the Company believes it should result in additional cost benefits,
including greater economies of scale and more efficient utilization of
facilities and personnel.
Growth Strategy
The Company believes that RDU is relatively under-served with respect to
non-stop flights. To address this need and to better serve its core business
customers, the Company ordered ten 50-seat CRJs. The first two CRJs were added
to the fleet in December 1997 and began scheduled operations in January 1998.
The third CRJ was delivered and started scheduled operations in March 1998. The
fourth CRJ was delivered in March 1998 and will be put into service in April
1998. The six additional CRJs are to be delivered during the remainder of 1998.
The Company has options to acquire up to 20 additional CRJs over a two-year
period with delivery dates beginning in 1999.
The principal elements of the Company's growth strategy are:
o Increase Frequencies to Current Markets. The Company's market share and
route profitability are greatest on routes where it offers the same or
better frequency and timing of flights compared to its competitors. The
Company's core customers are business travelers who generally pay higher
fares and select an airline primarily based on convenience of schedule.
Introduction of the new CRJs should enable the Company to increase
frequency and offer more convenient scheduling to current markets, without
necessarily increasing overall capacity in these markets. With the delivery
of the new CRJs, the Company has increased frequency to Philadelphia,
Boston, and Orlando.
o Increase Number of Markets Served. The Company has identified up to 20 new
market opportunities that it believes can support service primarily on an
"origination and destination" (i.e., local passenger) basis. The Company
intends to begin service from RDU to the five to ten most attractive of
these markets with the future
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delivery of the CRJs. In addition, the Company believes that existing
demand on a number of routes currently served with 19-seat turboprop
aircraft by Midway's code sharing commuter partner, Corporate Airlines, can
support 50-seat CRJ service. The Company believes that most customers have
a strong preference for jet service, and will often pay a premium or choose
a connecting flight to avoid flying on turboprop aircraft. The Company
anticipates attracting these customers with the introduction of the CRJs.
One of the new CRJs was utilized to initiate service to Jacksonville,
Florida, formerly served by Corporate Airlines.
Raleigh-Durham Market
The Company believes that it is well positioned to benefit from the rapidly
expanding Raleigh-Durham area. Raleigh-Durham's metropolitan population is
approximately 1.1 million, and is home to three major universities, the state
capital and Research Triangle Park, a 6,850-acre business center with more than
130 high technology and other research-oriented companies, employing over
37,000 people. In 1996, the median household effective buying income in the
Raleigh-Durham metropolitan area was 8.4% higher than the national average. In
the first six months of 1997, the unemployment rate was 2.3%, compared with
5.2% nationwide, the fourth lowest among standard metropolitan statistical
areas in the nation.
The Company currently carries more passengers and operates more flights at
RDU than any other airline. Air travel at RDU has grown by an average of 9% per
year from 1991 to 1997, compared to 5% for the United States as a whole. In
fact, the RDU market is 32% larger than when American had its hub at RDU.
Although 11 other jet aircraft operators currently serve RDU, these carriers
(other than US Airways, Inc. to New York's LaGuardia Airport and Washington,
D.C.'s National Airport) provide non-stop flights only between RDU and their
respective hubs. The Company believes that the area's growing business
community offers opportunities for expansion at RDU with regional jets. RDU
offers modern facilities with room for the Company to grow. The Company
subleases or has options to sublease 18 of the 26 gates at the newer of RDU's
two terminals, Terminal C. Substantially all of the gates at RDU's other
terminal are currently occupied.
Services
Routes and Schedule
The Company currently provides non-stop service from RDU to the following
14 cities: Atlanta, Georgia; Boston, Massachusetts; Cancun, Mexico; Ft.
Lauderdale, Florida; Hartford, Connecticut; Jacksonville, Florida; Newark, New
Jersey; New York, New York; Orlando, Florida; Philadelphia, Pennsylvania;
Stewart/Newburgh, New York; Tampa, Florida; Washington, D.C.; and West Palm
Beach, Florida. The Company believes that business travelers select an airline
primarily based on convenience of schedule, with a strong preference for
frequent, non-stop service. Midway believes that three flights per day is the
minimum service pattern necessary to successfully serve its core business
customers, and therefore currently offers between three and five flights per
day in all but two of its markets. The introduction of the CRJs will allow the
Company to increase frequency in several markets without necessarily increasing
overall capacity in these markets.
High Quality Customer Service
The Company has consistently promoted, and been recognized by its customers for
quality customer service that distinguishes Midway from other airlines. Midway
believes it has attained its superior level of customer service through the
efforts of its professional and personable employees and the provision of
amenities such as greater leg room, leather seating (on all aircraft except the
Company's single A320), gourmet coffee, quality snacks and a quiet, modern
all-jet fleet. Although the Company is not required to report on-time
statistics and baggage delivery performance, it consistently ranks high
relative to the nation's ten largest airlines that do report these statistics
to the DOT. For example, for the 12 months ended December 31, 1997, using DOT
statistics and statistics compiled from its own reports, Midway's on-time
performance and baggage delivery performance exceeded that of all major
carriers.
Maintenance and Support
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The Company is dedicated to providing the highest level of maintenance
quality and reliability. The Company's emphasis on high quality maintenance is
evidenced by its experienced maintenance management (an average of more than 20
years' experience), extensive and recurrent mechanic training and selection of
high quality maintenance providers. The Company performs all low level checks
(below "C" Check) and non-routine maintenance at RDU or at its maintenance
facility in Orlando, Florida. Major inspections and overhauls of the airframes
and engines are conducted by contract vendors whose work and procedures are
closely monitored by Midway maintenance management personnel. The contract
vendors currently engaged by the Company to perform major inspections of the
airframe and to perform engine overhauls include American, Rolls-Royce and a
subsidiary of Canadian Airlines Corporation.
Sales and Marketing
Pricing and Yield Management
The Company's strategy is designed to result in premium yields. The
Company believes its efforts to identify favorable markets and provide premium
non-stop service enables it to generate a high degree of loyalty among its
passengers and to attract a large percentage of business travelers on its
flights. Pursuant to an agreement with American, the Company began implementing
a version of American's yield management system in 1996, and it became fully
operational in February 1997. The system is one of the most advanced yield
management systems worldwide, and has enabled Midway to significantly enhance
its ability to maximize revenues. Midway's license to use the system and to
obtain system related services from American personnel currently extends
through August 2001, and may be extended thereafter at market terms or may be
perpetually licensed by Midway for a fixed price.
Distribution
Midway sells approximately 70% of its tickets through travel agents, a
level that the Company believes is comparable to the percentage of travel
agency sales made by many other airlines. Travel agents receive commissions
from airlines based on the price of the tickets they sell. In 1995, many
airlines began limiting or capping the amount of commissions they would pay to
agents for certain higher priced tickets and in September 1997, several major
carriers lowered their base commission rate from 10% to 8%. At the time Midway
elected not to lower its base commission rate to 8%, but to further study its
base commission rate and its impact on sales growth. In March 1998, following
analysis, the Company elected to lower its base commission rate to 8% with no
cap.
Midway also pays additional commissions, referred to as "overrides", to
selected travel agencies in connection with special revenue programs. The
Company believes these override programs result in incremental revenue to the
Company. Midway also offers these travel agencies significant opportunities to
participate in the development of specific corporate strategies and procedures,
through their attendance at quarterly forums with the Company's senior
executives. Special services developed through these and other programs include
Midway's full-time staffing of the "Carolina Desk" within its sales department
to answer questions or otherwise attend to the needs of these important
customers. The Company believes that the combination of higher available
commissions, the development of relationships between these travel agents and
senior management and the devotion of resources to meet the needs of these
agencies has resulted in strong support of Midway by travel agencies.
Corporate Relationships
The Company believes that it receives a substantial share of travel from
the local Raleigh-Durham business community on the routes that it serves. The
Company believes that this success is in part a result of its significant
efforts to meet the demands of its core business customers, its established
relationships with many local, national and international corporations in the
Raleigh-Durham area and the support it receives as the "hometown" airline.
Discounts are offered to a limited number of corporations in exchange for a
premium share of their travel. Employees of some of these corporations may also
be offered discounts for leisure weekend travel on flights that would otherwise
operate with empty seats. This program, called "Midway Weekend Madness", has
helped build loyalty in the Raleigh-Durham market and is an important incentive
for corporations to do more business with Midway. Midway sales agents visit
customers on a regular basis to solicit their input and to answer questions.
Each sales manager is supported by a help desk staffed full time by employees
trained to meet these customers' needs.
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American Relationship
The Company maintains a significant relationship with American. Part of this
relationship includes contractual arrangements with American that allow Midway
to offer AAdvantage(R) miles to, and accept AAirpass(R) tickets and American
first class upgrades from, its passengers. Midway also contracts with American
for important services, including reservations, maintenance, ground handling,
fueling and yield management. Midway believes the relationship benefits
American as well, by building customer loyalty through the use of AAdvantage(R)
miles by Midway customers, by providing sublease revenues to help offset
American's lease payments at RDU and by providing revenue through Midway's use
of various American services.
Frequent Flyer Program
Midway has been a partner in American's AAdvantage(R) frequent flyer
program since March 1995. Upon its arrival at RDU, Midway's participation in
this program quickly facilitated its access to a large and loyal group of
AAdvantage(R) members in the Raleigh-Durham area and along the East Coast. For
payment of a per-mile fee, the Company is able to offer its passengers the
ability to obtain award mileage on every current flight, and AAdvantage(R)
award certificates can be redeemed for travel on Midway, American, or other
AAdvantage(R) partners. Midway's contract with American, which extends through
April 30, 2001, gives the Company the ability to offer AAdvantage(R) miles on
several additional routes, though the Company may add new routes in the near
future without having the ability to offer AAdvantage(R) miles. The ability to
offer AAdvantage(R) miles on additional routes and the extension of the term of
the agreement are the subject of ongoing discussions between the Company and
American. The Company believes its participation in the AAdvantage(R) program
gives it access to a flexible and extremely powerful marketing tool. However,
due to the potential limitations of the agreement (including the number of
additional markets and the term of the agreement), the Company may in the
future choose to develop its own frequent flyer program.
Marketing
The Company markets its services through listings in computer reservations
systems and the Official Airline Guide; through advertising and promotions in
newspapers, magazines, billboards, radio and television; and through direct
contact with travel agencies, corporate travel departments, wholesalers and
consolidators. The Company maintains a nationwide toll-free telephone number
for use by passengers to make reservations and purchase tickets and has sales
representatives assigned to all regions where Midway operates. The service mark
"Feel Like Flying Again" was adopted in 1995 when the Company began RDU
operations to communicate a level of service that is reminiscent of flying when
airlines generally provided higher quality service than is perceived today.
Employees and Labor Relations
As of December 31, 1997, the Company had the number of full time
equivalent employees in the categories listed below:
Flight Operations 183
Inflight 137
Passenger Services 226
Maintenance 59
Reservations & Marketing 111
Accounting & Finance 18
Administrative 45
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Total 779
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The Railway Labor Act ("RLA") governs the labor relations of employers and
employees engaged in the airline industry. Comprehensive provisions are set
forth in the RLA establishing the right of airline employees to organize and
bargain collectively along craft or class lines and imposing a duty upon air
carriers and their employees to exert every
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reasonable effort to make and maintain collective bargaining agreements. The
RLA contains detailed procedures which must be exhausted before a lawful work
stoppage can occur.
Of the Company's employees, only the pilots are represented by a labor
union. In a February 1998 representation election the Association of Flight
Attendants, AFL-CIO ("AFA") failed to obtain the votes necessary to represent
Midway's Flight Attendants. AFA has filed a motion with the National Mediation
Board ("NMB") alleging carrier interference with the election. The Company
filed its response on March 30, 1998. In March 1998, the Company was notified
that the NMB had received an application filed on behalf of the International
Association of Machinists and Aerospace Workers, AFL-CIO to use the services of
the Board for purposes of holding a representation election among the Company's
fleet service (ramp) employees. The NMB has not yet determined whether or not
to authorize an election.
The Company believes its management and employees have a good relationship.
Management, including the Company's President and Chief Executive Officer, meet
with pilots, flight attendants, customer service agents and other employees on
a routine basis to discuss Company objectives as well as more specific labor
related issues such as scheduling, compensation and work rules. Management
believes it has addressed pilot and other employee concerns in a timely and
responsive manner.
Government Regulation
General
The Company is subject to the jurisdiction of and regulation by the
Department of Transportation ("DOT"), the Federal Aviation Administration
("FAA") and certain other governmental agencies. The DOT principally regulates
economic issues affecting air service such as air carrier certification and
fitness, insurance, authorization of proposed scheduled and charter operations,
consumer protection and competitive practices. In 1993, the Company was granted
a Certificate of Public Convenience and Necessity pursuant to Section 401 of
the Federal Aviation Act authorizing it to engage in air transportation. The
DOT has authority to investigate and institute proceedings to enforce its
economic regulations and may in certain circumstances assess civil penalties,
revoke operating authority and seek criminal sanctions.
The FAA primarily regulates flight operations, in particular matters
affecting air safety, such as airworthiness requirements for aircraft, and
pilot and flight attendant certification. The FAA requires each carrier to
obtain an operating certificate and operations specifications authorizing the
carrier to operate to specific airports using specified equipment. All of the
Company's aircraft must have and maintain certificates of airworthiness issued
by the FAA. The Company holds an FAA air carrier operating certificate under
Part 121 of the Federal Aviation Regulations. The FAA has the authority to
modify, suspend temporarily or revoke permanently the authority of the Company
or its licensed personnel, after notice and a hearing, for failure to comply
with regulations promulgated by the FAA and to assess civil penalties for such
failures. In September 1997, the Civil Aviation Security Division of the FAA
conducted an investigation of the Company's compliance with certain regulations
requiring the Company to verify the accuracy of background information provided
by its employees who have access to secure airport areas. This investigation
will likely result in the finding of violations of these regulations. The
Company revised its background check procedures during the course of the FAA's
investigation and then obtained and verified the necessary background
information of those employees who had been identified by the FAA as having
insufficient background check documentation. While the Company is unable to
determine whether the FAA will pursue an assessment as a result of the findings
of this investigation, the Company believes that such an assessment would not
have a material effect on the Company.
The FAA also has authority to issue maintenance directives and other
mandatory orders relating to, among other things, inspection of aircraft and
engines, fire retardant and smoke detection devices, increased security
precautions, collision and windshear avoidance systems, noise abatement and the
mandatory removal and replacement of aircraft parts that have failed or may
fail in the future.
The Company is regulated by the Environmental Protection Agency and state
and local agencies with respect to the protection of the environment and to the
discharge of materials into the environment. At its aircraft line maintenance
facilities, the Company uses materials that are regulated as hazardous under
federal and state law. The Company maintains programs to protect the safety of
its employees who use these materials and to manage and dispose
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of any waste generated by the use of these materials, and believes that it is
in substantial compliance with all applicable laws and regulations.
In addition, the Immigration and Naturalization Service, the U.S. Customs
Service, and the Animal and Plant Health Inspection Service of the Department
of Agriculture have jurisdiction over inspection of the Company's aircraft,
passengers and cargo to ensure the Company's compliance with U.S. immigration,
customs and import laws.
The Company is also subject to other federal and state laws and
regulations relating to protection of the environment, radio communications,
labor relations, equal employment opportunity and other matters.
Safety
The Company has never had an accident, and is dedicated to ensuring its
customers' safety. The FAA monitors the Company's compliance with maintenance,
flight operations and safety regulations, maintains representatives on-site and
performs frequent spot inspections, and the Company believes it has a strong
and open relationship with its regional FAA office. 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. A modification, suspension or revocation of any
of the Company's DOT or FAA authorizations or certificates could have a
material adverse effect upon the Company.
Slots
The FAA's regulations currently limit the availability of, and permit the
buying, selling, trading and leasing of, certain airline slots at Chicago's
O'Hare, New York's LaGuardia and Kennedy International and Washington, D.C.'s
National airports. A slot is an authorization to take off or land at the
designated airport within a specified time window. Midway uses ten slots at New
York's LaGuardia Airport, three of which are owned and seven of which are
leased from a third party airline. Midway uses eight slots at Washington,
D.C.'s National Airport, two of which are owned and six of which are leased
from a different third party airline. Although the Company's slot lease at
National Airport in Washington D.C. is currently scheduled to expire in October
1998 and its slot lease at LaGuardia Airport in New York is currently scheduled
to expire in April 2000, the Company believes it will be able to renew these
leases on terms that will be acceptable to the Company.
The FAA's slot regulations require the use of each slot at least 80% of
the time, measured on a bimonthly basis. Failure to meet this utilization
threshold without a waiver from the FAA, which is granted only under
exceptional circumstances, subjects the slot to recall by the FAA. In addition,
the slot regulations provide that slots may be withdrawn by the FAA at any time
without compensation to the carrier holding or operating the slot to meet the
DOT's operational needs, such as providing slots for international carriers or
essential air transportation.
Foreign Ownership
Pursuant to law and the regulation of the DOT, the Company must be
effectively controlled by United States citizens. In this regard, the Company's
President and at least two-thirds of the Company's Board of Directors must be
United States citizens and not more than 25% of the Company's voting stock may
be owned by foreign nationals (although subject to DOT approval the percent of
foreign economic ownership may be as high as 49%).
Fuel
The cost of fuel is a significant operating expense, constituting 13.4% of
operating costs in 1996 and 12.6% in 1997. Jet fuel costs have been subject to
wide fluctuations as a result of sudden disruptions in supply. Because of the
effect of such events on price and availability of oil, the cost and future
availability of jet fuel cannot be predicted with any degree of certainty.
The Company's fuel requirements are met by approximately 11 different
suppliers. The Company contracts with these suppliers as fuel is needed, and
the terms vary as to price and quantity. The Company has not entered into any
agreement that fixes the price of fuel over any period of time.
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Competition
The Company competes with other air carriers on many of its routes. Many
of the Company's competitors have elaborate route structures that transport
passengers to hub airports for transfer to many destinations, including those
served by Midway. Although 11 other jet aircraft operators currently serve RDU,
these carriers (other than US Airways, Inc. to New York's LaGuardia Airport and
Washington, D.C.'s National Airport) provide non-stop flights only between RDU
and their respective hubs. In some markets, Midway also competes against ground
transportation providers.
Insurance
In the opinion of management, the Company maintains insurance policies of
types customary in the industry and in amounts management believes are adequate
to meet DOT requirements and to protect the Company and its property against
material loss. The policies principally provide coverage for public liability,
passenger liability, baggage and cargo liability, property damage, including
coverage for loss or damage to its flight equipment, and worker's compensation
insurance. There can be no assurance, however, that the amount of insurance
carried by the Company will be sufficient to protect it from material loss.
Item 2. Properties
Flight Equipment
Midway operates a fleet of 12 Fokker F-100s, one Airbus A320, and four
Canadair CRJs, with an average age of 3.0 years. The F-100s are configured with
eight first class seats and 90 coach seats, the A320 is configured with ten
first class seats and 138 coach seats, and the CRJs are configured with 50
coach seats. All of the aircraft meet Stage 3 noise requirements imposed by
federal law. With the delivery of the ten new CRJs, the average age of Midway's
fleet is expected to decrease to 2.8 years at December 31, 1998. The Company
believes that its young all-jet fleet gives it a significant advantage in
attracting and retaining business travelers and improves its reliability
statistics.
Owned Leased Total
----- ------ -----
A320s - 1 1
CRJs 4 - 4
F100s - 12 12
The Company has firm orders for seven additional newly manufactured
CRJ-200ER Canadair Regional Jet aircraft to be delivered during 1998. The
purchase agreement also provides Midway with options to acquire up to 20
additional CRJ-200ER aircraft over a two-year period with delivery dates
beginning in 1999. Pursuant to an agreement with GE Aircraft Engines, a
division of General Electric International, Inc., the Company has agreed to
purchase two CF34-3B1 spare engines to support the operation of the ten
CRJ-200ER aircraft. This agreement also provides for the purchase of an
additional spare engine for each five additional CRJ-200ER aircraft that Midway
acquires.
Following the delivery of the CRJs, the mix of Midway's fleet between
98-seat F-100s and 50-seat CRJs should allow the Company to meet expected
passenger volumes while maintaining a competitive cost structure, and should
enhance the Company's ability to more efficiently match its aircraft to its
route network requirements. The relative uniformity of the fleet should also
minimize training and maintenance costs. The terms of the Company's F-100
leases also provide the Company with significant fleet flexibility.
The Company's 12 F-100 leases expire in groups of four during the
following date ranges: October 1998-May 1999, October 2003-January 2004, and
January 2013. The Company is currently in extension negotiations with the
lessor regarding the four leases expiring during the October 1998-May 1999
timeframe. Each F-100 lessor has the right to terminate its lease on six
months' prior notice beginning September 15, 1998, provided that no lease can
be terminated if it would result in a fourth termination of any F-100 lease in
any 12-month period, including scheduled terminations. This staggered schedule
of lease expirations combined with the Company's options to acquire up to 20
additional CRJs will give the Company the ability to continually evaluate and
change the size and composition of its fleet over time as necessary to take
advantage of changing market conditions. To support its operation of F-100
aircraft the Company recently agreed to purchase a refurbished Rolls Royce Tay
650-15 Engine for delivery prior to
-11-
<PAGE>
August 1, 1998 and is expecting to take delivery of a new lease financed, spare
Rolls Royce Tay 650-15 Engine in early April 1998.
The Company's lease of its one Airbus A320 is scheduled to terminate in
June 1999. The Company does not plan to renew the lease.
Pursuant to a March 1995 purchase agreement, Midway is obligated to
purchase four Airbus A320 aircraft with deliveries in 2005 and 2006. The Airbus
purchase agreement also gives Midway an option to purchase up to four additional
Airbus A320 or A319 aircraft with delivery dates in 2007. To support the
operation of the four A320 aircraft, the Company also agreed to purchase one IAE
V2527-A5 spare engine scheduled for delivery in November 2005 from International
Aero Engines AG ("IAE"). The IAE engine purchase agreement gives Midway an
option to purchase one additional spare engine for delivery in November 2006.
The purchase of the A320s and the associated spare engine may not fit with the
Company's current strategy. The Company is looking at several alternatives with
respect to the A320s, including restructuring its agreement with Airbus or
selling its positions.
Facilities
Of the 26 gates at the newer of RDU's two terminals, Terminal C, the
Company currently subleases 12 gates through February 2013 and has options
expiring in August 1999 to sublease through February 2013 six additional gates.
The Company also subleases certain hangar facilities in Orlando, Florida where
light maintenance and aircraft cleaning are performed. This sublease expires at
the end of April 1998, but an extension is now being negotiated with the
lessor. The Company's corporate headquarters and reservations facility are
located in Durham, where it subleases approximately 30,000 square feet of
space. The Durham facility sublease expires on July 31, 1998. The Company has
two, one-year extension options available on this space. The Company believes
it can find suitable replacement headquarters and reservation center space if
needed.
In two of the cities Midway serves, the Company leases a gate at the
airport directly from the airport. For the remaining cities, Midway obtains the
use of gates as part of third party ground handling contracts.
Item 3. Legal Proceedings
The Company is a party to routine litigation incidental to its business.
Management believes that none of this litigation is likely to have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the fiscal quarter ended December 31, 1997, certain actions were
taken by written consent of the security holders of the Corporation prior to and
in connection with the Company's initial public offering, including the adoption
of amended and restated articles of incorporation and by-laws, the subdivision
of shares and an authorization allowing the Corporation's President or its Board
of Directors to adopt certain profit sharing and stock option plans.
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 Stock Market sm under
the symbol "MDWY". Trading began in December 1997 upon the completion of
Midway's initial public offering of common stock, and the stock has ranged in
price as follows:
High Low
---- ---
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<PAGE>
4th Quarter 1997 $17.50 $14.00
1st Quarter 1998* $22.125 $15.25
*through March 20, 1998
As of March 20, 1998, there were 8,558,695 shares outstanding and approximately
4,520 shareholders of record.
The Company has not paid cash dividends since its formation and does not
anticipate that cash dividends will be paid in the foreseeable future, since the
Company intends to retain any future earnings to finance the expansion and
continuing development of its business. In addition, certain of the Company's
debt instruments prohibit the payment of dividends to insiders until such debt
has been repaid. The declaration and payment in the future of any cash dividends
will be at the election of the Company's Board of Directors and will depend upon
the earnings, capital requirements and financial position of the Company, future
loan covenants, general economic conditions and other pertinent factors.
Sales of Securities Other Than Sales of Equity Securities Pursuant to
Regulation S
On February 11, 1997 the Company was recapitalized via the issuance of:
2,509,697 shares(1) of senior convertible preferred stock to James H.
Goodnight, Ph.D. and 1,218,995 shares to John P. Sall in exchange for a $15
million cash investment. These shares were converted to common stock on a
one-for-one basis prior to the initial public offering.
1,740,056 shares(1) of common stock to the Zell/Chilmark Fund L.P. in
exchange for a $7 million cash investment.
390,625 shares(1) of common stock, in the aggregate, to debis
AirFinance B.V. and Wings Aircraft Finance, Inc. in exchange for certain
concessions.
A warrant for the purchase of 390,625 shares(1) of common stock to AMR
Corporation, in exchange for certain concessions. This warrant is exercisable at
any time at a price of $0.01 per share.
Options to acquire 1,005,245 shares(1) of common stock to certain
members of management. These options are exercisable at a price of $4.02 per
share, and vest over periods ranging from February 1997 to February 2002.
$15.3 million in notes to AMR Corporation, debis AirFinance B.V. and
Damlier-Benz Aerospace, A.G. See footnote 3 to the 1997 audited financial
statements for long-term debt outstanding.
(1) Note: All share amounts have been adjusted to reflect the November 1997
share subdivision.
The above securities were exempt from registration under Section 4(2) of the
Securities Act of 1933 because they were issued in a transaction not involving a
public offering of securities.
At the December 1997 Initial Public Offering:
2,699,320 shares of common stock were sold by the company at an initial
price of $15.50 per share
Options to acquire 335,345 shares(1) of common stock were issued to all
active non-executive employees. These options are exercisable at a
price of $15.50 per share, and vest in increments of 20% annually over
five years.
The Initial Public Offering of Common Stock and Use of Proceeds
The Company completed its initial public offering of common stock in
December 1997. The effective date of the registration statement was December 4,
1997, and the Securities and Exchange Commission file number was 333-37375. The
offering was underwritten by Morgan Stanley Dean Witter and The
Robinson-Humphrey Company.
4,830,000 shares were registered and sold at $15.50 per share. Of the
shares sold, 2,130,680 shares were sold by selling shareholders. The remaining
2,699,320 shares were sold by the Company for gross proceeds of $41.8 million.
Expenses incurred by the Company in connection with the offering, including
underwriting commissions, legal and accounting fees and other expenses amounted
to $4.1 million, resulting in net proceeds to the company of $37.7 million. Of
the fees paid, approximately $275,000 was paid to the law firm of Fulbright &
Jaworski as counsel to the Company. Howard Wolf, a senior partner of Fulbright &
Jaworski, is a member of the Company's Board of directors. The Company believes
all fees paid to Fulbright & Jaworski were customary and reasonable.
-13-
<PAGE>
Through December 31, 1997, the net proceeds from the offering were used as
follows:
1. $2.8 million as security for the Treasury Lock commitment (see note 2 to
the financial statements) and
2. $34.9 million was invested in marketable securities pending use in 1998.
Future uses of the proceeds include down payments or lease deposits
related to the acquisition and financing of the CRJs, the acquisition of related
CRJ spare parts and engines, and $7 million to secure the Company's performance
of its obligations under a credit card processing agreement, among other uses.
Item 6. Selected Financial Data
The following selected financial data are derived from the financial
statements of the Company. The operating data for the five months ended December
31, 1994 and the years ended December 31, 1995, 1996, and 1997 have been derived
from audited financial statements. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto included elsewhere in
this document.
<TABLE>
Five months
ended Year ended
December 31, December 31,
1994 1995 1996 1997
---------- ---------- ---------- ----------
(dollars in thousands except per share amounts)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Operating revenues:
Passenger $ 14,662 $ 118,568 $ 173,541 $ 179,000
Other $ 1,213 $ 4,034 $ 6,493 $ 7,275
---------- ---------- ---------- ----------
Total operating revenues $ 15,875 $ 122,602 $ 180,034 $ 186,275
Operating expenses:
Wages, salaries and related costs 3,659 19,874 24,619 25,757
Aircraft fuel 3,514 16,782 27,300 21,499
Aircraft and engine rentals 5,328 30,889 34,113 30,495
Commissions 1,205 9,382 13,728 13,978
Maintenance, materials and repairs 1,383 13,551 17,930 15,760
Depreciation and amortization 334 2,056 1,346 1,999
Other operating expenses 9,308 55,693 67,314 60,920
Restructuring (1) 4,900 6,004 - -
Impairment of long-lived assets (2) - - 16,941 -
Recapitalization (3) - - - 750
---------- ---------- ---------- ----------
Total operating expenses 29,631 154,231 203,291 171,158
---------- ---------- ---------- ----------
Operating income (loss) (13,756) (31,629) (23,257) 15,117
Interest income (expense) (29) (413) (1,841) 114
Other income (expense) (29) (222) 834 -
Income (loss) before income taxes and
extraordinary gain (13,814) (32,264) (24,264) 15,231
Income tax expense - - - 6,306
Income (loss) before extraordinary gain (13,814) (32,264) (24,264) 8,925
Extraordinary gain (4) - - - 15,969
---------- ---------- ---------- ----------
Net income (loss) (13,814) (32,264) (24,264) 24,894
Preferred dividends (600) (1,440) - -
---------- ---------- ---------- ----------
Net income (loss) available for
common stockholders (14,414) (33,704) (24,264) 24,894
========== ========== ========== ==========
Per Share Amounts (5):
Basic earnings per share:
Income before extraordinary gain $ 1.47
Extraordinary gain 2.64
Net income $ 4.11
Weighted average shares used in computing basic
earnings per share 6,059,051
Diluted earnings per share:
Income before extraordinary gain $ 1.24
Extraordinary gain 2.22
Net income $ 3.46
Weighted average shares used in computing diluted
earnings per share 7,193,794
Other Financial Data:
EBITDA (6) $ (8,450) $ (23,485) $ (3,525) $ 18,533
EBITDAR (6) (3,122) 7,404 30,588 49,028
Cash flows provided by (used in ):
Operating activities (14,323) (805) 5,784 8,765
Investing activities (354) (6,876) (2,614) (25,219)
Financing activities 12,427 3,571 4,836 60,158
Year ended
December 31,
1995 1996 1997
Selected Operating Statistics (7):
Available seat miles (000s) 1,387,921 1,758,560 1,387,864
Revenue passenger miles (000s) 692,681 998,959 875,752
Load factor 49.9% 56.8% 63.1%
Break-even load factor (8) 60.8% 59.1% 57.6%
Yield (cents) 17.1 17.4 20.4
Cost per available seat mile (9) (cents) 10.7 10.6 12.3
Aircraft (average during period) 11.0 13.7 13.0
As of December 31,
1994 1995 1996 1,997
-------- ---------- ---------- ----------
Balance Sheet Data:
Cash, cash equivalents, restricted cash and
short-term investments $ 6,909 $ 2,799 $ 12,805 $ 58,071
Working capital (2,745) (39,790) (40,871) 22,153
Equipment and property, net 1,861 9,258 6,669 46,574
Total assets 35,982 58,312 40,686 142,112
Long-term debt and capital lease obligations (net of current
maturities) 2,018 7,307 11,704 39,187
Stockholders' equity 16,586 (17,058) (39,242) 49,813
</TABLE>
(1) The Company recorded restructuring charges for the five months ended
December 31, 1994 of $4.9 million, related to the Company's decision to move
from Chicago to RDU and in 1995 of $6.0 million related to the return of
four A320 aircraft and other related one-time charges.
(2) The Company recorded an impairment loss of $16.9 million from certain
long-lived assets, primarily intangible assets, that were determined by
Company management to be impaired in accordance with SFAS 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
(3) The Company recorded a one-time charge of $0.75 million in 1997 related to
the Recapitalization.
(4) Extraordinary gain includes one-time gains recognized in connection with the
Recapitalization. See Note 13 to Audited Financial Statements for the year
ended December 31, 1997.
(5) Since the Company was recapitalized in February 1997 and all prior capital
stock was cancelled at that time, per share amounts prior to 1997 are not
meaningful and thus are not presented.
(6) EBITDA represents income before income taxes, dividends and extraordinary
item plus interest expense (net of capitalized interest), depreciation,
amortization, restructuring expense, impairment of long-lived assets and
recapitalization expense. EBITDAR represents income before income taxes,
dividends and extraordinary item plus interest expense (net of capitalized
interest), depreciation, amortization, restructuring expense, impairment of
long-lived assets, recapitalization expense and aircraft and engine rentals.
EBITDA and EBITDAR are presented because each is a widely accepted financial
indicator of a company's ability to incur and service debt. However, EBITDA
and EBITDAR should not be considered in isolation, as a substitute for net
income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity.
(7) For definitions of the airline operating terms used in this table, see
"Glossary" below.
(8) "Break-even load factor" represents total operating expenses minus other
operating revenues plus non-operating income/(expenses), excluding
restructuring, impairment of long-lived assets and recapitalization expenses
divided by the product of available seat miles and yield. Had restructuring,
impairment of long-lived assets and recapitalization expenses been included
for the years ended December 31, 1995, 1996, and 1997, the break-even load
factor would have been 63.3%, 64.6% and 57.8%, respectively.
(9) "Cost per available seat mile" represents total operating expenses plus
non-operating expenses/(income), excluding restructuring, impairment of
long-lived assets and recapitalization expenses, divided by available seat
miles. Had restructuring, impairment of long-lived assets and
recapitalization expenses been included for the years ended December 31,
1995, 1996, and 1997, cost per available seat mile would have been 11.1
cents, 11.6 cents, and 12.3 cents, respectively.
Glossary
Certain of the terms included in this document have the meanings indicated
below:
Aircraft (average during period) The average number of aircraft owned or leased
during the period.
Aircraft utilization The average number of block hours operated
in scheduled service per day per aircraft for
the total fleet of aircraft.
Available seat miles (ASMs) The number of seats available for scheduled
passengers multiplied
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<PAGE>
by the number of miles those seats were flown.
Average fare The average fare paid by a revenue passenger.
Average seats per departure The average number of available seats per
departing aircraft.
Average stage length The average number of miles flown per flight.
Block hour The total time an aircraft is in motion from
brake release to brake application at the
destination
Break-even load factor The load factor at which scheduled passenger
revenues would have been equal to operating
plus non-operating expenses/(income)
(holding yield constant).
Cost per available seat mile Operating expenses plus non-operating
(CASM) expenses/(income) divided by ASMs.
Departure A scheduled aircraft flight
Fuel price per gallon The average price per gallon of jet fuel for
the fleet (including fueling charges).
Load factor RPMs divided by ASMs.
Onboard passengers The number of revenue passengers carried.
Revenue passenger miles (RPMs) The number of miles flown by revenue
passengers.
Revenue per available seat mile
(RASM) Total operating revenues divided by ASMs.
Yield The average passenger fare paid for each
mile a scheduled revenue passenger is
carried.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company began commercial operations in November 1993, operating from
its base at Chicago's Midway Airport. Operations there were unprofitable, and
following American's announcement of its intention to reduce service from its
hub at Raleigh-Durham International Airport ("RDU"), Midway relocated its entire
operations from Midway Airport to RDU in March 1995. Midway entered into
agreements with American to sublease certain of American's gates and to
participate in the AAdvantage(R) program. At the time of the move, management
committed to expanding Midway's fleet through the addition of five Airbus A320s
and four Fokker F100s, to a total of five A320s and 12 F100s. A combination of
factors, including inadequate capital resources, the increased fleet capacity,
the lack of marketing presence and unusually bad weather, resulted in
significant losses during 1995 and 1996. Following unsuccessful efforts to
renegotiate lease terms, one of the Company's lessors required the return of
four A320s during the first four months of 1996. This reduced the Company's
fleet to a level of 12 F100s and one A320 which level was maintained until late
1997 when the first two CRJs of the ten ordered for delivery by December 1998
were received. Initial operations with the CRJs began in January 1998. The third
CRJ was delivered and began revenue service in March 1998. Seven additional CRJs
are to be delivered during 1998.
In February 1997, the Company completed the Recapitalization, resulting in
a change in ownership and management. The Recapitalization resulted in
reductions of approximately $12 million in annual expenses, including a decrease
in aircraft rental expense, a decrease in facility rentals, a decrease in the
cost of certain services and a reduction in net interest expense. In addition to
the Recapitalization, but at approximately the same time, the Company
discontinued certain unprofitable flight operations. Since the Recapitalization,
the Company has experienced a significant improvement in operating performance
and financial condition. The Company believes that its improved results are
attributable to the benefits realized from the Recapitalization, route
restructuring, improved yield management, increased passenger demand and a
generally strong economic environment.
The Company's business plan is designed to result in premium yields by
providing local business travelers with frequent flight schedules, superior
operational performance and high quality customer service. The Company's growth
strategy involves increasing the frequency of flights to markets the Company
currently serves and increasing the number of markets served. To implement the
strategy, the Company agreed to acquire ten new CRJs, with deliveries that began
in December 1997. The Company believes its efforts to identify favorable markets
and provide premium non-stop service will enable it to generate a high degree of
loyalty among its passengers and to attract a larger
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<PAGE>
percentage of business travelers on its flights than other carriers. Midway
generally offers the same range of fares that its competitors offer, with
exceptions in particular markets where Midway discounts certain categories of
fares more than its competition to stimulate the market or charges a premium
where passengers are willing to pay slightly higher fares because of the
convenience of the Company's non-stop jet flights and its superior service. The
vast majority of the Company's revenues are a function of the average fare paid
by the Company's passengers and the number of such passengers.
Because of its premium service, focus on business travelers, small
aircraft and shorter average stage lengths, the Company's yields and cost per
available seat mile are higher than the industry average. The Company recognizes
the importance of a competitive cost structure and expects to lower unit costs
through growth and the restructuring of various functions. In addition to the
cost savings resulting from the Recapitalization, the Company has recently
entered into new maintenance contracts, reduced dependence on third-party
vendors for flight reservation call handling, reduced credit card processing
fees and reduced certain insurance costs. The Company is also implementing an
automated voice-response flight information system.
Based on the current interest rate environment, the Company estimates that
its fixed charges will increase by approximately $14 million to $17 million per
year as a result of its debt-financed purchase or leveraged lease financing of
the ten CRJs. Although the introduction of regional jet aircraft will shorten
average stage length, the Company believes it should result in additional cost
benefits, including greater economies of scale and more efficient utilization of
facilities and personnel.
<TABLE>
Selected Operating Data
For the year ended December 31,
-------------------------------
1996 (1) 1997
-------- ----
<S> <C> <C>
Available seat miles (000s) 1,758,560 1,387,864
Revenue passenger miles (000s) 998,959 875,752
Load factor 56.8% 63.1%
Break-even load factor (2) 59.2% 57.5%
Departures 29,192 26,898
Block Hours 48,682 42,867
Total revenue per available
seat mile (cents) 10.2 13.4
Yield (cents) 17.4 20.4
Average fare $99 $108
Cost per available seat mile (2) (cents) 10.6 12.3
Onboard passengers 1,742,957 1,660,140
Average seats per departure 104 101
Average stage length (miles) 571 524
Aircraft (average during period) 13.7 13.0
Aircraft utilization (hours per day) 9.8 9.0
Fuel price per gallon (cents) 80.6 72.1
(1) Certain 1996 amounts were reclassified to reflect reclassifications in 1997
audited financial statements
(2) excludes impairment of long-lived assets and recapitalization expenses
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Capacity. In 1997, the company produced 1.388 billion ASMs, a reduction of
371 million or 21.1% from 1996. The reduction in ASM production was attributable
to 7.9% fewer departures (to 26,898), an 8.2% shorter average stage length (to
524 miles) and 2.9% fewer seats per departure (to 101 seats). These changes
resulted from the Company's cancellation of service on certain longer haul
routes and the decision to return four (relatively larger) Airbus A320 aircraft
to their lessors, and were made to better position the Company by concentrating
on profitable operations and operations deemed to have a higher future return.
This change in capacity resulted in higher costs per ASM for the majority of the
Company's operating costs, as more particularly described below.
Operating Revenues. The Company's operating revenues increased 3.5% to
$186.3 million for the year ended December 31, 1997 from $180.0 million for the
year ended December 31, 1996. The increase is attributable to a 9.1% increase in
average fare paid to $108 from $99 offset by a 4.8% decline in the number of
passengers boarded to 1.66 million from 1.743 million. Revenue per ASM increased
31.4% to 13.4 cents per ASM due to a 17.2% increase in yield (revenue per RPM)
to 20.4 cents combined with a 6.3 percentage point increase in load factor to
63.1%.
Operating Expenses. The Company's operating expenses decreased 15.8% to
$171.2 million for the year ended December 31, 1997 from $203.3 million for the
year ended December 31, 1996. Total expenses declined primarily due to the
reduction in the scope of the Company's operations and the benefits realized
through the Recapitalization, partially offset by increases in wage expense.
Total operating expense per ASM increased 6.7% to 12.34 cents from 11.56 cents.
Excluding the one-time charges for the Recapitalization in 1997 and for
recognition of the impairment of long-lived assets in 1996 in accordance with
SFAS No. 121, operating expense per ASM increased 15.9% to 12.29 cents from 10.6
cents. This increase is attributable to the spreading of the company's fixed
costs over the smaller, less cost-efficient ASM base discussed above in
"Capacity", as well as the cost impact of the 31.1% increase in unit revenues.
The increase in revenue per ASM drives related increases in passenger and
revenue-related costs, the impact of which was to raise operating expense per
ASM by approximately 0.5 cents.
<TABLE>
Twelve Months Ended December 31,
------------------------------------------------------------------------
1996 1997
-------------------------------------------------------------------------
Percent Percent
of Cost of Cost
Operating per ASM Operating per ASM
Expenses (cents) Expenses (cents)
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Wages, salaries and related costs 12.1% 1.40 15.0% 1.86
Aircraft fuel 13.4% 1.55 12.6% 1.55
Aircraft and engine rentals 16.8% 1.94 17.8% 2.20
Commissions 6.8% 0.78 8.2% 1.01
Maintenance, materials and repairs 8.8% 1.02 9.2% 1.14
Depreciation and amortization 0.7% 0.08 1.2% 0.14
Other operating expenses 33.1% 3.83 35.6% 4.39
Sub-Total operating expenses before
impairment of long-lived assets
and recapitalization charge 91.7% 10.60 99.6% 12.29
Impairment of long-lived assets 8.3% 0.96 0.0% 0.00
Recapitalization Charges 0.0% 0.00 0.4% 0.05
Total operating expenses 100.0% 11.56 100.0% 12.34
</TABLE>
Wages, salaries and related costs increased $1.2 million or 4.6% to $25.8
million for the year ended December 31, 1997 from $24.6 million for the year
ended December 31, 1996. The increase is attributable to increased staffing
associated with the addition of new aircraft at yearend, annual increases for
all personnel and general hiring to fill specific needs within the Company
throughout 1997. Included in the 1997 amounts are discretionary bonuses
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<PAGE>
amounting to $1.2 million or an average of 5.4% of each employee's annual
compensation. Wages, salaries and related cost per ASM increased 0.46 cents or
32.8% to 1.86 cents. The increase in unit costs is attributable to the items
noted above as well as the changes noted in "Capacity".
Aircraft fuel expense decreased 21.2% to $21.5 million for the year ended
December 31, 1997 from $27.3 million for the year ended December 31, 1996. The
decrease was due to a 10.5% decrease in the average fuel price per gallon to
72.1 cents from 80.6 cents and the 11.9% reduction in block hours. Aircraft fuel
expense per ASM remained stable at 1.55 cents because the fuel price reduction
was offset by the smaller number of relatively more fuel efficient A320s in the
fleet along with shorter stage lengths which increases fuel consumption on a
unit cost basis.
Aircraft and engine rental expense decreased 10.6% to $30.5 million for the
year ended December 31, 1997 from $34.1 million for the year ended December 31,
1996. The decrease in expense is attributable to the 5.1% decrease in the
average number of aircraft to 13.0 from 13.7 and the 1ower lease rates for the
F100s after the Recapitalization in February 1997. Aircraft and engine rentals
expense per ASM increased 13.4% to 2.20 cents from 1.94 cents. The increase in
cost per ASM resulted from the 21.1% decrease in ASMs discussed above in
"Capacity", partially offset by the overall decrease in lease rates.
Commission expense increased 1.8% to $14.0 million for the year ended
December 31, 1997 from $13.7 million for the year ended December 31, 1996. This
was due to the 3.5% increase in operating revenues offset by a decrease of
travel agency revenues as a percent of passenger revenue to 69.2% from 71.4%.
Commissions expense per ASM increased 29.5% to 1.01 cents from .78 cents,
primarily driven by the 31.1% increase in revenue per available seat mile to
13.4 cents from 10.2 cents.
Maintenance, materials and repairs expense decreased 12.1% to $15.8
million for the year ended December 31, 1997 from $17.9 million in the year
ended December 31, 1996. The expense decrease is largely attributable to the
11.9% reduction in block hours of aircraft operations. Maintenance, materials
and repairs expense per ASM increased 11.8% to 1.14 cents from 1.02 cents due to
the return of the four relatively more maintenance efficient A320s to their
lessors in 1996.
Depreciation and amortization expense increased 48.5% to $2.0 million for
the year ended December 31, 1997 from $1.3 million for the year ended December
31, 1996. Depreciation and amortization expense per ASM increased 75% to 0.14
cents from 0.08 cents in the year ended December 31, 1996. During 1997, the
Company increased its investment in fixed assets by $41.8 million, including the
two CRJs delivered in December (which had a minimal impact on depreciation
expense for the year) and the acquisition of an inventory of F100 parts.
Other operating expense decreased 9.5% to $60.9 million for the year ended
December 31, 1997 from $67.3 million for the year ended December 31, 1996. Other
operating expenses consist primarily of landing fees and facility rentals,
reservations, ground handling, advertising, general and administrative expense
and insurance. The decrease in expense is attributable to the 7.9% decrease in
departures and 4.8% decrease in passengers, as well as expenses related to
unusually bad weather in the winter of 1996 and Hurricane Fran in September
1996. Other operating expense per ASM increased 14.6% to 4.39 cents from 3.83
cents. The increase in cost per ASM is the result of the items noted above and
the decrease in ASMs discussed in "Capacity" above.
In the last quarter of 1997, the Company elected to fully reserve a
receivable due from a business partner. The total amount reserved was $1.6
million. The Company made certain other adjustments in the last quarter of 1997
related to book to physical inventory adjustments, changes in estimates related
to the special recapitalization charges and the extrordinary gain. The net
effect of the adjustments are as follows:
<TABLE>
<CAPTION>
Net Income Before Net Income (1)
Extraordinary Gain
(dollars in thousands)
<S> <C> <C>
Book to physical inventory $ 706 $ 424
Accounts receivable reserve (1,551) (931)
Special recapitalization charges 475 285
Extraordinary gain 676
-------- -----
Total ($370) $ 454
======== =====
</TABLE>
(1) Marginal tax rate estimated at 40%.
Selected Operating Data
For the year ended December 31,
-------------------------------
1995 1996 (2)
---- --------
Available seat miles (000s) 1,387,921 1,758,560
Revenue passenger miles (000s) 692,681 998,959
Load factor 49.9% 56.8%
Break-even load factor (1) 60.8% 59.2%
Departures 24,403 29,192
Block Hours 38,933 48,682
Total revenue per available
seat mile (cents) 8.8 10.2
Yield (cents) 17.1 17.4
Average fare $ 89 $ 99
Cost per available seat mile (1) (cents) 10.7 10.6
Onboard passengers 1,338,438 1,742,957
Average seats per departure 108 104
Average stage length (miles) 532 571
Aircraft (average during period) 11 13.7
Aircraft utilization (hours per day) 9.9 9.8
Fuel price per gallon (cents) 69.0 80.6
(1) excludes impairment of long-lived assets and restructuring expenses
(2) Certain 1996 amounts were reclassified to reflect reclassifications in
1997 audited financial statements
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
-17-
<PAGE>
Capacity. In 1996, the company produced 1.759 billion ASMs, an increase of
371 million or 26.7% from 1995. The increased ASM production was attributable to
19.6% more departures (to 29,192), a 7.3% longer average stage length (to 571
miles) offset by 3.7% fewer seats per departure (to 104 seats). These changes
resulted from a 24.5% increase in average aircraft in service, the introduction
of service on certain longer haul routes and the decision to return four
(relatively larger) Airbus A320 aircraft to their lessors in early 1996.
Operating Revenues. The Company's operating revenues increased 46.8% to
$180.0 million for the year ended December 31, 1996 from $122.6 million for the
year ended December 31, 1995. The increase is attributable to a 30.2% increase
in passengers to 1.743 million from 1.338 million and an 11.2% increase in
average fare paid to $99 from $89. Revenue per ASM increased 15.9% to 10.2 cents
per ASM due to a 1.8% increase in yield (revenue per RPM) to 17.4 cents combined
with a 6.9 percentage point increase in load factor to 56.8%.
Operating Expenses. The Company's operating expenses increased 31.8% to
$203.3 million for the year ended December 31, 1996 from $154.2 million for the
year ended December 31, 1995. Total expenses increased primarily due to the
increase in the scope of the Company's operations combined with the costs
related to higher passenger traffic and revenues. Total operating expense per
ASM increased 3.6% to 11.6 cents from 11.1 cents. Excluding the charges for the
recognition of the impairment of long-lived assets in 1996 in accordance with
SFAS No. 121 and the 1995 restructuring charges, operating expense per
ASM decreased .9% to 10.6 cents from 10.7 cents. This decrease is attributable
to the spreading of the company's fixed costs over the larger ASM base discussed
above in "Capacity", offset by the cost impact of the 15.9% increase in unit
revenues. The increase in revenue per ASM drives related increases in passenger
and revenue-related costs, the impact of which was to raise operating expense
per ASM by approximately 0.3 cents.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
-------------------------------------------------------------------------
1995 1996
------------------------------ -----------------------------
Percent Percent
of Cost of Cost
Operating per ASM Operating per ASM
Expenses (cents) Expenses (cents)
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Wages, salaries and related costs 12.9% 1.4 12.1% 1.4
Aircraft fuel 10.9% 1.2 13.4% 1.6
Aircraft and engine rentals 20.0% 2.2 16.8% 1.9
Commissions 6.1% 0.7 6.8% 0.8
Maintenance, materials and repairs 8.8% 1.0 8.8% 1.0
Depreciation and amortization 1.3% 0.2 0.7% 0.1
Other operating expenses 36.1% 4.0 33.1% 3.8
Sub-Total operating expenses before
impairment of long-lived assets
and restructuring expense 96.1% 10.7 91.7% 10.6
Impairment of long-lived assets 0.0% 0.0 8.3% 1.0
Restructuring 3.9% 0.4 0.0% 0.0
Total operating expenses 100.0% 11.1 100.0% 11.6
</TABLE>
Wages, salaries and related costs increased 23.9% to $24.6 million for the
year ended December 31, 1996 from $19.9 million for the year ended December 31,
1995. The expense increase is attributable to increased staffing associated
with the addition of new routes, annual increases for line personnel and
general hiring to fill specific needs within the Company throughout 1996.
Wages, salaries and related costs expense per ASM remained unchanged at 1.4
cents.
Aircraft fuel expense increased 62.7% to $27.3 million for the year ended
December 31, 1996 from $16.8 million for the year ended December 31, 1995. The
increase was due to a 16.8% increase in the average fuel price per gallon to
80.6 cents from 69.0 cents and the 25.0% increase in block hours. Aircraft fuel
expense per ASM increased 28.1% to 1.6 cents from 1.2 cents because of a the
increase in the average fuel price per gallon and the smaller number of
relatively more fuel efficient A320s in the fleet during the year ended
December 31, 1995.
Aircraft and engine rentals expense increased 10.4% to $34.1 million for
the year ended December 31, 1996 from $30.9 million for the year ended December
31, 1995. The increase in expense is attributable to the increase of average
number of aircraft for the year ended December 31, 1996 to 13.7 from 11.0.
Aircraft and engine rentals expense per ASM decreased 13.0% to 1.9 cents from
2.2 cents due largely to the increase in ASMs discussed above in "Capacity".
Commissions expense increased 46.3% to $13.7 million for the year ended
December 31, 1996 from $9.4 million for the year ended December 31, 1995. This
was due to the 46.8% increase in operating revenues. Commissions expense per
ASM increased 14.7% to 0.8 cents from 0.7 cents, primarily driven by the 15.9%
increase in revenue per available seat mile to 10.2 cents from 8.8 cents.
Maintenance, materials and repairs expense increased 32.3% to $17.9
million for the year ended December 31, 1996 from $13.6 million in the year
ended December 31, 1995. The expense increase is largely attributable to the
25.0% increase in block hours of aircraft operations plus certain maintenance
contract rate increases. Maintenance, materials and repairs expense per ASM
remained unchanged at 1.0 cents.
Depreciation and amortization expense decreased 34.5% to $1.3 million for
the year ended December 31, 1996 from $2.1 million for the year ended December
31, 1995. Depreciation and amortization expense per ASM decreased
-18-
<PAGE>
46.7% to 0.1 cents from 0.2 cents in the year ended December 31, 1995. The
Company was amortizing goodwill, slot costs and deferred debt costs in 1995 at
a rate of $0.7 million per year, all of which were written off during 1996 as
impaired assets under SFAS 121. Without the SFAS 121 adjustment, depreciation
and amortization expense in 1996 would have remained substantially unchanged at
$2.0 million, including $0.7 million of such amortization charges.
Other operating expense increased 20.9% to $67.3 million for the year
ended December 31, 1996 from $55.7 million for the year ended December 31,
1995. Other operating expenses consist primarily of landing fees and rentals,
reservations, ground handling, advertising, general and administrative expenses
and insurance. The increase in expense is attributable to the increase in
departures and passengers, as well as expenses related to unusually bad weather
in the winter of 1996 and Hurricane Fran in September 1996. Other operating
expense per ASM decreased 4.5% to 3.8 cents from 4.0 cents. The decrease in
cost per ASM is the result of the increase in ASMs discussed in "Capacity"
offset somewhat by the items noted above.
In accordance with SFAS No. 121, the Company recorded an impairment loss
of $16.9 million increased cost per ASM by 1.0 cents during 1996.
For the year ended December 31, 1995, the Company incurred a restructuring
expense of $6.0 million related to the return of the four A320 aircraft and
other one-time costs that increased cost per ASM by 0.4 cents for the year
ended December 31, 1995.
Seasonality and Quarterly Results of Operations
As is common in its industry, the Company experiences seasonal factors
during certain periods of the year that have combined in the past to reduce the
Company's traffic, profitability and cash generation as compared to the
remainder of the year. The highest levels of traffic and revenue are generally
realized in the second quarter and the lowest levels of traffic and revenue are
generally realized in the third quarter. Given the Company's high proportion of
fixed costs, such seasonality affects the Company's profitability from quarter
to quarter. Specifically, the Company experiences the lowest demand for its
services in September. In addition, many of the Company's areas of operations
experience adverse weather during the winter, causing a greater percentage of
the Company's flights to be canceled and/or delayed than in other quarters.
<TABLE>
<CAPTION>
1996 (1) 1997
-------------------------------------- --------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $49,441 $45,933 $39,899 $44,761 $47,853 $47,238 $43,122 $48,062
Operating income (loss) (1) (2) ($6,876) $1,865 ($2,853) $1,548 $3,880 $6,443 $2,807 $2,737
Income (loss) before extraordinary gain ($7,226) ($15,608) ($2,492) $1,062 $1,341 $3,916 $1,723 $1,945
Net income (loss) ($7,226) ($15,608) ($2,492) $1,062 $16,614 $3,916 $1,723 $2,641
ASMs (000s) (cents) 566,384 405,335 392,951 393,890 366,944 343,933 331,190 345,797
RPMs (000s) (cents) 316,841 230,950 213,445 237,723 221,157 219,355 212,443 222,797
Load factor 55.9% 57.0% 54.3% 60.4% 60.3% 63.8% 64.1% 64.4%
Break-even load factor (2) 64.4% 55.3% 57.8% 58.9% 55.2% 54.8% 59.9% 60.6%
Yield (cents) 15.0 19.3 18.0 18.1 20.8 20.8 19.4 20.7
RASM (cents) 8.7 11.3 10.2 11.4 13.0 13.7 13.0 13.9
CASM (2) (cents) 10.0 11.0 10.8 11.1 12.0 11.9 12.2 13.1
Aircraft (average during period) 16.0 13.3 13.0 13.0 13.0 13.0 13.0 13.0
</TABLE>
(1) Certain 1996 amounts were reclassified to reflect reclassifications in 1997
audited financial statements
(2) excludes impairment of long-lived assets and recapitalization expenses.
Liquidity and Capital Resources
Liquidity
As a result of the Recapitalization and the Initial Public Offering, the
Company's financial position improved significantly from December 31, 1996 to
December 31, 1997. As of December 31, 1997, the Company had cash, cash
equivalents, restricted cash and short term investments of $58.1 million and
working capital of $22.2 million, compared to cash, cash equivalents,
restricted cash and short term investments of $12.8 million and a working
capital deficit of $40.9 million as of December 31, 1996. During the year ended
December 31, 1997, cash, cash equivalents, restricted cash and short-term
investments increased $45.3 million, reflecting net cash provided by operating
activities of $9.6 million (excluding the change in restricted cash), net cash
used in investing activities of $24.5 million (excluding purchases and sales
of short-term investments) and net cash provided by financing activities of
$60.2 million. During 1996, cash, cash equivalents, restricted cash and
short-term investments increased $8.0 million, reflecting net cash provided
by operations of $5.8 million, net cash used by investing activities of
$2.6 million and net cash provided by financing activities of $4.8 million.
Cash Flows from Operations. Net cash provided by operating activities
increased $3.0 million to $8.8 million for the year ended December 31, 1997
from $5.8 million for the year ended December 31, 1996. This increase is due
primarily to net income in 1997 as compared to a net loss in 1996. The 1997 net
income of $24.9 million was offset by a $16.0 million non-cash extraordinary
gain and net use of cash of $2.9 million from a $5.0 million increase in
operating assets and an $2.1 million increase in operating liabilities. The
1996 net loss of $24.3 million was primarily offset by a noncash impairment
charge of $16.9 million and deferral of expense payments of $8.8 million,
combined
-19-
<PAGE>
with a $5.6 million decrease in operating assets and $2.6 million decrease in
operating liabilities, which provided a net cash source of $3.0 million.
Net cash provided by operating activities increased $6.6 million to $5.8
million for the year ended 1996 from negative $.8 million in 1995. This
increase was due to a smaller net loss in 1996, offset by non-cash items
including a $16.9 million impairment charge and deferral of expense payments of
$8.8 million, combined with a $5.6 million decrease in operating assets and
$2.6 million decrease in operating liabilities, which provided a net cash
source of $3.0 million. The 1995 net loss of $32.3 million was offset by
non-cash deferred income of $5.8 million, combined with an $18.8 million
increase in operating assets and $42.4 million increase in operating
liabilities, which provided a net cash source of $23.6 million.
Cash Flows from Investing. Net cash used in investing activities increased
$22.6 million to $25.2 million for the year ended December 31, 1997 from $2.6
million for the year ended December 31, 1996. In 1997, net purchases and sales
of investments accounted for a $0.8 million use of cash compared to no
investment activity during the same period in 1996. Cash outflows for capital
expenditures were $7.3 million in 1997, as compared to $1.7 million in 1996. In
1997, the Company began purchasing its own rotable parts in conjunction with
the negotiation of new Fokker maintenance contracts. Aircraft purchase deposits
were $17.1 million in 1997, compared to $0.9 million in 1996.
Net cash used in investing activities decreased $4.3 million to $2.6
million in 1996 from $6.9 million in 1995. Capital expenditures were $1.7
million in 1996, compared to $6.9 million in 1995. The balance of cash used in
investing activities in 1996 was for aircraft purchase deposits.
Cash Flows from Financing. Net cash provided by financing activities
increased $55.3 million to $60.2 million for the year ended December 31, 1997
from $4.8 million for the year ended December 31, 1996. In 1997, $22.0 million
of cash was received for stock issued in the Recapitalization and $38.9 million
from the Initial Public Offering, compared to no new stock issuances in the
same period in 1996. Non-cash long-term debt of $34.5 million was issued in
1997, compared to cash received from issuing debt in 1996 of $8.8 million,
comprised of $4.0 million in subordinated debt from the stockholders and $4.8
million from a vendor.
Net cash provided by financing activities increased $1.2 million in 1996
to $4.8 million from $3.6 million in 1995. The Company received $4.0 million in
cash from the issuance of subordinated debt in 1996, as well as receiving $4.8
from vendors. In 1995, $6.0 million of debt was issued to certain stockholders.
Repayment of debt in 1996 was $4.0 million compared to $2.4 million in 1995.
The Company has an agreement to purchase four newly manufactured Airbus
A320-200 aircraft currently scheduled to begin delivery in December 2005 and
ending in December 2006. The Company is required to make progress payments in
amounts to be determined beginning in 2003. If Midway's future strategy does
not require the use of this type of aircraft, Midway would be compelled to
either restructure or sell its rights under this purchase agreement or accept
delivery of the four A320 aircraft. There can be no assurance that Midway would
be able to restructure or sell its rights under this purchase agreement.
Capital Resources
Since the February 1997 Recapitalization, the Company has been able to
generate sufficient funds from operations to meet its working capital
requirements and does not currently have any lines of credit. The Company
believes that, taking into account the proceeds of the Initial Public Offering,
the working capital available to the Company is sufficient for its present
requirements and will be sufficient to meet its anticipated requirements for
capital expenditures, other than issuing debt or leveraged leases for the CRJ
purchases, and other cash requirements for the foreseeable future.
Capital Expenditures
The Company's net cash outflows for capital expenditures in 1995, 1996 and
1997 were $6.9 million, $1.7 million and $7.3 million, respectively.
-20-
<PAGE>
In September 1997 the Company agreed to acquire 10 Canadair CRJ aircraft
between December 1997 and December 1998, and took options on 20 more aircraft
which would be delivered 10 each in 1999 and 2000. Several financing
alternatives have been arranged for the firm orders, including standby or
long-term lease financing, short-term bridge financing, and a firm commitment
for the purchase financing of the first five CRJs of which financing for the
first two has been completed. The Company expects to arrange a combination of
third party debt and leveraged lease financing for the five remaining CRJs, but
will use the standby lease financing in the event that it cannot arrange more
attractive financing from third party sources. For each aircraft that is
purchased (as opposed to leased), the Company anticipates an initial cash
outlay of approximately $4 million.
The two CRJs delivered in December 1997 were initially financed with
interim short-term financing. In February 1998, the Company arranged permanent
financing of 80% of the purchase price for 16.5 years at 6.9% with an effective
interest rate of 7.2% due to the Treasury Lock agreement entered into with
Bombardier, Inc., in December 1997. The Treasury Lock transactions
substantially eliminated the Company's exposure to interest rate fluctuations
on long-term financing for the first five CRJ aircraft. (See Note 2 of the
audited financial statements.)
Midway expects to arrange financing for two spare CRJ engines the Company
has agreed to acquire. The Company anticipates spending approximately $1
million on CRJ rotable parts during 1998. To support its operation of F-100
aircraft the Company recently agreed to purchase a refurbished Rolls Royce Tay
650-15 Engine for delivery prior to August 1, 1998 and is expecting to take
delivery on or about March 30, 1998 of a new spare Rolls Royce Tay 650-15
engine which will be purchase-financed over seven years.
The Company's fixed costs will increase significantly with the induction
of the CRJs. Based on the current interest rate environment, the Company
estimates that its fixed charges will increase by approximately $14 million to
$17 million per year as a result of its debt-financed purchase or leveraged
lease financing of the ten CRJs. However, depending upon the financing method
ultimately chosen, the Company's balance sheet liabilities may or may not
increase.
Other Financing
The Company has significant lease obligations for aircraft that are
classified as operating leases and therefore not reflected as liabilities on
the Company's balance sheet. The remaining terms of such leases range from
approximately one year to fifteen years. The Company's total rent expense in
1997 and 1996 under all non-cancelable aircraft operating leases was
approximately $29.1 million and $33.5 million, respectively.
The Company's sublease of gate and operations facilities at RDU extends
through 2013 with annual lease and maintenance expense of approximately $2.0
million.
Year 2000
The Company uses a significant number of computer software programs and
embedded operating systems that are essential to its operations. As a result,
the Company has implemented a Year 2000 project to ensure that the Company's
computer systems will function properly in the year 2000 and thereafter. The
Company anticipates completing its Year 2000 project prior to there being any
material impact on the operations of the Company, and believes that, with
modifications to its existing software and systems and/or conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems.
The Company has also initiated communications with its significant
suppliers and vendors with which its systems interface and exchange data or upon
which its business depends. The Company is coordinating efforts with these
parties to minimize the extent to which its business will be vulnerable to their
failure to remediate their own Year 2000 issues. The Company's business is also
dependent upon certain governmental organizations or entities such as the
Federal Aviation Administration ( "FAA") that provide essential aviation
industry infrastructure. There can be no assurance that the systems of such
third parties on which the Company's business relies (including those of the
FAA) will be modified on a timely basis. The Company's business, financial
condition or results of operations could be materially adversely affected by the
failure of its systems or those operated by other parties to operate properly
beyond.
-21-
<PAGE>
1999. To the extent possible, the Company will be developing and executing
contingency plans designed to allow continued operation in the event of failure
of the Company's or third parties' systems.
The total costs of the Company's Year 2000 project are expected to be
immaterial and will be funded through cash from operations. The cost of the
Company's Year 2000 project is limited by the substantial outsourcing of its
systems and the relative youth of the Company and its operating systems. The
costs of the Company's Year 2000 project and the date on which the Company
believes it will be completed are based on management's best estimates and
include assumptions regarding third-party modification plans. However, in
particular due to the potential impact of third-party modification plans, there
can be no assurance that these estimates will be achieved and actual results
could differ materially from those anticipated.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides
a safe harbor for forward-looking statements made by or on behalf of the
Company. The Company and its representatives may from time to time make written
or verbal forward-looking statements, including statements contained in the
Company's filings with the Securities and Exchange Commission and in reports to
share owners. All statements which address operational performance, events or
developments which are anticipated to occur in the future, including statements
relating to revenue growth, cost reductions and earnings growth or statements
expressing general optimism about future operating results, are forward-looking
statements within the meaning of the Act. The forward-looking statements are and
will be based on management's then current views and assumptions regarding
future events and operating performance.
The following are some of the factors that could cause actual results to
differ materially from estimates contained in the Company's forward-looking
statements:
The ability to generate sufficient cash flows to support capital expansion plans
and general operating activities. Competitive product and pricing pressures and
the ability to gain or maintain market share as a result of actions by
competitors. While we believe our opportunities for sustained, profitable
growth are considerable, unanticipated actions of competitors could impact
our earnings.
Change in laws and regulations, including changes in accounting standards,
taxation requirements (including tax rate changes, new tax laws and revised
tax law interpretations) and environmental laws.
Fluctuations in the cost and availability of materials, fuel and labor,
including the continued availability of landing slots at New York/LaGuardia
and Washington National airports.
The ability to achieve earnings forecasts, which are based on projected traffic
and fares in the different markets we serve, some of which are more
profitable than others. There can be no assurance that we will achieve the
projected level of revenue.
Interest rate fluctuations and other capital market conditions. The ability to
enter and develop new markets. The effectiveness of advertising, marketing and
promotional programs.
The uncertainties of litigation, as well as other risks and uncertainties
detailed from time to time in the Company's Securities and Exchange
Commission filings.
Adverse weather conditions, which could effect the Company's ability to operate.
Item 8. Financial Statements and Supplementary Data
-22-
<PAGE>
Audited Financial Statements
Midway Airlines Corporation
YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Midway Airlines Corporation
Audited Financial Statements
Years ended December 31, 1997 and 1996
<TABLE>
<S> <C>
Report of Independent Auditors.................................................................................1
Audited Financial Statements
Balance Sheets.................................................................................................2
Statements of Operations.......................................................................................4
Statements of Stockholders' Equity (Deficit)...................................................................6
Statements of Cash Flows.......................................................................................7
Notes to Financial Statements..................................................................................8
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Midway Airlines Corporation
We have audited the accompanying balance sheets of Midway Airlines Corporation
as of December 31, 1997 and 1996 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. Our
audits also included the related financial statement schedules listed in the
Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules 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 Midway Airlines Corporation as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole
present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the financial statements, in fiscal year 1996 the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "ACCOUNTING FOR IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF."
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
February 10, 1998
<PAGE>
Midway Airlines Corporation
Balance Sheets
(DOLLARS IN THOUSANDS)
December 31
1997 1996
------------------------
Assets
Current assets:
Cash and cash equivalents $ 54,509 $ 10,805
Restricted cash 2,811 2,000
Short-term investments 751 -
Accounts receivable:
Credit cards 1,937 1,920
Travel agencies 5,443 3,535
Other 674 780
Inventories 2,109 395
Prepaids and other 6,723 6,230
--------- ---------
Total current assets 74,957 25,665
Equipment and property:
Flight 45,214 4,223
Other 5,968 5,150
Less accumulated depreciation and amortization (4,608) (2,704)
--------- ---------
Total equipment and property, net 46,574 6,669
Other noncurrent assets:
Equipment and aircraft purchase deposits 17,133 1,846
Aircraft lease deposits and other 3,448 6,506
--------- ---------
Total other noncurrent assets 20,581 8,352
--------- ---------
Total assets $ 142,112 $ 40,686
========= =========
2
<PAGE>
<TABLE>
<CAPTION>
December 31
1997 1996
----------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities:
Accounts payable $ 6,777 $ 6,501
Accrued expenses 4,324 6,267
Accrued excise taxes 1,421 6,624
Accrued income taxes 3,698 -
Advance ticket sales 21,859 19,151
Other current liabilities 5,709 9,005
Current maturities of long-term debt and capital lease obligations 9,016 18,988
-------- --------
Total current liabilities 52,804 66,536
Noncurrent liabilities:
Long-term debt and capital lease obligations 39,187 11,704
Other 308 1,688
-------- --------
Total noncurrent liabilities 39,495 13,392
-------- --------
Total liabilities 92,299 79,928
Stockholders' equity (deficit):
Preferred stock - 11
Common stock 85 100
Additional paid-in-capital 45,364 30,989
Retained earnings (accumulated deficit) ($49.8 million of
accumulated deficit eliminated in the quasi-reorganization as of
June 30, 1997) 4,364 (70,342)
-------- --------
Total stockholders' equity (deficit) 49,813 (39,242)
-------- --------
Total liabilities and stockholders' equity (deficit) $142,112 $ 40,686
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Midway Airlines Corporation
Statements of Operations
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
---------------------------------------
<S> <C> <C>
Operating revenues:
Passenger $ 179,000 $ 173,541
Cargo 1,936 2,214
Contract and other 5,339 4,279
---------------------------------------
Total revenues 186,275 180,034
Operating expenses:
Wages, salaries and related costs 25,757 24,619
Aircraft fuel 21,499 27,300
Aircraft and engine rentals 30,495 34,113
Commissions 13,978 13,728
Maintenance, materials and repairs 15,760 17,930
Other rentals and landing fees 9,812 12,711
Depreciation and amortization 1,999 1,346
Other 51,108 54,603
Impairment of long-lived assets - 16,941
Special recapitalization charges 750 -
---------------------------------------
Total operating expenses 171,158 203,291
---------------------------------------
Operating income (loss) 15,117 (23,257)
Other income (expense):
Interest income 1,783 630
Interest expense (1,669) (2,471)
Miscellaneous - 834
---------------------------------------
Total other income (expense) 114 (1,007)
---------------------------------------
Income (loss) before income taxes and extraordinary gain 15,231 (24,264)
Income tax expense 6,306 --
-------------------------------------------
Income (loss) before extraordinary gain 8,925 (24,264)
Extraordinary gain 15,969 --
-------------------------------------------
Net income (loss) $ 24,894 $ (24,264)
===========================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Midway Airlines Corporation
Statements of Operations (continued)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1997
------------
<S> <C>
Basic earnings per share:
Income before extraordinary gain $ 1.47
Extraordinary gain 2.64
------------
Net income $ 4.11
Weighted average shares used in computing basic earnings per share 6,059,051
============
Diluted earnings per share:
Income before extraordinary gain $ 1.24
Extraordinary gain 2.22
------------
Net income $ 3.46
============
Weighted average shares used in computing diluted earnings per share 7,193,794
============
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Midway Airlines Corporation
Statements of Stockholders' Equity (Deficit)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK Common Stock Retained
-------------------------------------------- Additional Earnings
Paid In (Accumulated
SHARES Amount Shares Amount Capital Deficit) Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,080,000 $ 11 10,000,000 $ 100 $ 30,949 $ (48,118) $(17,058)
Issuance of common stock warrants - - - - 40 - 40
Reversal of preferred stock dividends - - - - - 2,040 2,040
Net loss - - - - - (24,264) (24,264)
----------------------------------------------------------------------------------
Balance at December 31, 1996 1,080,000 11 10,000,000 100 30,989 (70,342) (39,242)
Cancellation of prior stock in connection
with recapitalization (1,080,000) (11) (10,000,000) (100) 111 - -
Issuance of preferred stock 3,728,693 37 - - 14,963 - 15,000
Issuance of common stock - - 2,130,682 21 8,551 - 8,572
Issuance of common stock warrants in
connection with debt restructuring - - - - 1,571 - 1,571
Contributed capital - - - - 1,314 - 1,314
Reclassification of accumulated deficit
pursuant to quasi-reorganization - - - - (49,812) 49,812 -
Conversion of preferred stock (3,728,693) (37) 3,728,693 37 - - -
Issuance of common stock in connection
with initial public offering - - 2,699,320 27 37,677 - 37,704
Net income - - - - - 24,894 24,894
----------------------------------------------------------------------------------
Balance at December 31, 1997 - $ - 8,558,695 $ 85 $45,364 $ 4,364 $49,813
==================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
Midway Airlines Corporation
Statements of Cash Flows
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
--------------------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $24,894 $ (24,264)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Impairment of long-lived assets - 16,941
Depreciation and amortization 1,999 1,346
Deferral of expense payments - 8,762
Special recapitalization charges 750 -
Extraordinary gain (15,969) -
Changes in operating assets and liabilities:
Restricted cash (811) -
Accounts receivable (1,760) 9,172
Inventories (1,714) (99)
Prepaids and other (226) (2,331)
Aircraft lease deposits and other (462) (1,126)
Accounts payable and accrued expenses 897 (1,089)
Accrued excise and income taxes (1,505) 2,437
Advance ticket sales 2,708 1,131
Other current liabilities 243 (6,795)
Other noncurrent liabilities (279) 1,699
----------------------------------------
Net cash provided by operating activities 8,765 5,784
INVESTING ACTIVITIES
Purchase of short-term investments (78,278) -
Sale of short-term investments 77,527 -
Purchase of equipment and property (7,335) (1,692)
Aircraft and equipment purchase deposits (17,133) (922)
----------------------------------------
Net cash used in investing activities (25,219) (2,614)
FINANCING ACTIVITIES
Issuance of common and preferred stock 60,257 -
Proceeds from issuance of long-term debt - 8,795
Repayment of long-term debt and capital lease obligations (1,617) (3,959)
Accreted interest on long-term debt 1,518 -
----------------------------------------
Net cash provided by financing activities 60,158 4,836
----------------------------------------
Increase in cash and cash equivalents 43,704 8,006
Cash and cash equivalents at beginning of year 10,805 2,799
----------------------------------------
Cash and cash equivalents at end of year $ 54,509 $ 10,805
========================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 125 $ 210
========================================
Income taxes paid 2,600 -
========================================
SCHEDULE OF NON-CASH ACTIVITIES
Issuance of debt in settlement of expenses - 14,934
========================================
</TABLE>
7
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements
December 31, 1997
1. BUSINESS AND BASIS OF PRESENTATION
Midway Airlines Corporation ("Midway" or the "Company"), a Delaware corporation,
is an air carrier providing primarily passenger service and to a lesser extent,
cargo and mail services. The Company began operations in November 1993 and flies
primarily to East Coast locations from its hub at the Raleigh-Durham
International Airport ("Raleigh-Durham"), with additional service to Cancun,
Mexico, currently utilizing twelve Fokker F-100 aircraft, one Airbus A320
aircraft, and two Canadair Regional Jets ("CRJs"). The CRJs were added to the
fleet in December 1997 with initial operations scheduled to begin in January
1998. The Company has firm orders for eight additional CRJs to be delivered
during 1998, with options to acquire up to twenty additional CRJs over a
two-year period with delivery dates beginning in 1999.
On February 11, 1997, the Company was recapitalized. Through the
recapitalization, debt was either extinguished or restructured, all of the
existing stock was canceled and new stock was issued, new terms for aircraft
leases and rent reductions for facilities were negotiated, and agreements
reflecting revised maintenance arrangements were implemented (NOTE 13).
On December 4, 1997, the Company completed an initial public offering of its
common stock at a price of $15.50 per common share. Proceeds to the Company, net
of underwriters discount and offering expenses, were $38.9 million (NOTE 5).
QUASI-REORGANIZATION
As a result of the February 11, 1997 recapitalization, debt restructurings and
retention of a new chief executive officer, the Company's Board of Directors
approved a corporate readjustment of the Company's accounts in the form of a
quasi-reorganization which was effected on June 30, 1997.
A quasi-reorganization is an accounting procedure which results in eliminating
the accumulated deficit in retained earnings. This accounting procedure is
limited to a reclassification of accumulated deficit as a reduction of paid-in
capital. The Company believes the quasi- reorganization was appropriate because
on completion of the recapitalization, the debt restructurings, and the
installation of a new chief executive officer, the Company had substantially
reduced its outstanding indebtedness, had formulated revised operating plans and
as a result thereof would be able to devote its resources to its continuing
operations. Because assets had been stated at approximate fair values, the
quasi-reorganization had no effect on recorded assets.
8
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during that reporting period.
Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, as a result of ongoing operating losses, the Company evaluated the
carrying value of its long-lived assets in accordance with SFAS No. 121. SFAS
No. 121 requires the evaluation of recoverability based on the relationship of
undiscounted cash flows to the carrying value of the long-lived assets. As a
result of this analysis, the Company determined that certain long-lived assets
were impaired. During 1996, the Company recorded an impairment loss of $11.1
million to write down the goodwill from a 1994 acquisition and $5.8 million
related to rotable aircraft parts and certain purchase deposits. The impairment
loss was determined by comparing the carrying value of the Company's long-lived
assets to the Company's estimates of fair values of the assets.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents include investments with an original maturity of three
months or less or which may be redeemed without penalty at any time. These
investments are stated at cost, which approximates market value. As of December
31, 1997 and 1996, approximately $2.8 million and $2 million, respectively, of
cash and cash equivalents were restricted as to withdrawal; these funds serve as
collateral to support letters of credit; and are classified as restricted cash
in the balance sheets.
SHORT-TERM INVESTMENTS
Short-term investments consist of government securities which mature between
three months and one year of the original investment date. These investments are
carried at cost, which approximates market value.
9
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
CONCENTRATIONS
Midway's accounts receivable are primarily receivables from major credit card
companies, travel agencies, and other air carriers related to ticket sales for
passenger transportation. The Company does not believe it is subject to any
significant concentration of credit risk. The Company establishes an allowance
for doubtful accounts based upon factors surrounding credit risk. At December
31, 1997 and 1996, the allowance for doubtful accounts was approximately
$1,673,000 and $58,000, respectively.
Amounts charged by a related party vendor accounted for approximately 15.6% and
15% of operating expenses for the years ended December 31, 1997 and 1996,
respectively. This vendor provided services related primarily to maintenance,
provision of passenger services and subleasing of airport facilities. The
Company does not believe, however, that there is a significant risk associated
with this vendor for the services provided, as alternative sources are generally
available at commercially reasonable prices. Facilities are subleased from this
vendor pursuant to lease agreements covering various time periods (NOTE 4).
The Company maintains certain cash balances and investments with banks which are
in excess of insured limits. The Company does not believe that the risk of loss
is significant.
INVENTORIES
The Company's inventories are carried at the lower of cost or market using the
first-in, first-out method. Inventories, which consist primarily of fuel,
consumable spare parts, materials and supplies relating to flight equipment, are
expensed as used.
EQUIPMENT AND PROPERTY
Equipment and property consist primarily of CRJ aircraft, rotable spare parts
for aircraft, leasehold improvements, and miscellaneous equipment used in
aircraft operations. Equipment and property are depreciated to estimated
residual values using the straight-line method over estimated useful lives of
16.5 years for CRJ aircraft, 5 to 25 years for flight equipment and 3 to 5 years
for other equipment. Depreciation expense charged to operations was
approximately $1.8 million and $1.1 million for the years ended December 31,
1997 and 1996, respectively. Equipment and property also includes office
equipment under capital leases (NOTE 4).
10
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximate fair values at December 31,1997. At December 31,
1996, debt, other liabilities and warrants were reflected at historical value.
In connection with the February 11, 1997 recapitalization (NOTE 13), debt, other
liabilities and warrants with an aggregate carrying value of $16.5 million were
settled for approximately $1.5 million.
HEDGED LOAN OBLIGATIONS
During December 1997, the Company entered into four Treasury Lock transactions
("Treasury Locks") with Bombardier, Inc., based on a 10 year US Treasury
Benchmark (the "Treasury rate"), to substantially eliminate the Company's
exposure to interest rate fluctuations on long-term financing for the purchase
of five CRJ aircraft to be financed during the first six months of 1998. The
Treasury Lock arrangements contemplate that the Company will receive or pay upon
dates certain (the intended financing date for each CRJ aircraft) an amount
which is equal to the present value of the difference between the interest cost
of a financing entered into at the time of entry into the Treasury Lock
arrangements and the interest cost of the same financing entered into at a later
date. The effect of such arrangements is that the Company essentially agreed to
borrow at fixed rates over periods extending to 16.5 years. If the Treasury rate
should decline, the Company will be obligated to make a payment to the
counterparty at the expiring of the Treasury Lock arrangement and vice versa if
rates should rise. The Company is not a party to leveraged derivatives and does
not hold or issue financial instruments for speculative purposes. The Company
does not anticipate nonperformance by the other party to the Treasury Lock, and
no material loss would be expected should nonperformance occur.
The net cash amounts paid or received on the agreements are recorded and
recognized as an adjustment of interest expense over the life of the related
loans.
AIRCRAFT AND ENGINE MAINTENANCE AND REPAIRS
Routine maintenance and repair costs for aircraft are charged to expense when
incurred, except for major airframe and engine maintenance. Depending on the
particular maintenance contract, these latter costs are either (i) expensed on
the basis of the number of hours flown or cycles incurred at contractual rates
or (ii) capitalized when incurred and amortized on a straight-line basis over
the period of time between overhauls.
11
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
MEDICAL SELF-INSURANCE
The Company provides certain health and medical benefits to eligible employees,
their spouses and dependents pursuant to a benefit plan funded by the Company.
Each participating employee contributes to the Company's costs associated with
such benefit plan. The Company's obligation to fund this benefit plan and pay
for these benefits is capped through the Company's purchase of an insurance
policy from a third party insurer. The amount established as a reserve is
intended to recognize the Company's estimated obligations with respect to its
payment of claims and claims incurred but not yet reported under the benefit
plan. Management believes that the recorded liability for medical self-insurance
at December 31, 1997 is adequate to cover the losses and claims incurred, but
these reserves are necessarily based on estimates and the amount ultimately paid
may be more or less than such estimates. These estimates are based upon
historical information along with certain assumptions about future events,
including increases in projected medical costs.
REVENUE RECOGNITION AND ADVANCE TICKET SALES
Passenger revenues are recognized when transportation services are provided,
rather than when a ticket is sold. The amount of ticket sales not yet recognized
as revenue is reflected as a liability in the accompanying balance sheets as
"advance ticket sales". Travel agency commissions are recognized as expense when
transportation is provided and the related revenue is recognized. The amount of
commissions related to advance ticket sales is included in "Prepaids and other"
in the accompanying balance sheets.
FREQUENT FLYER PROGRAM
The Company participates in the American Airlines AAdvantage(R) frequent flyer
program, which allows members to earn mileage credits and redeem awards at
participating AAdvantage companies. Midway is billed monthly for AAdvantage
miles earned by its passengers participating in the program who fly on Midway.
The Company does not accrue any liability for award travel it may be required to
provide because the incremental cost of redemptions have not been, and are not
expected to be, material.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. The Company recognized
advertising expense of $5.1 million and $5.7 million for the years ended
December 31, 1997 and 1996, respectively.
12
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
INCOME TAXES
The Company accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
In accordance with SFAS 128, basic earnings per share is computed using the
weighted average number of shares of common stock outstanding and diluted
earnings per share is computed using the weighted average number of shares of
common stock and the dilutive effect of options and warrants outstanding, using
the "treasury stock" method. Since the Company was recapitalized in February
1997 and all prior capital stock was canceled at that time, per share amounts
prior to 1997 are not meaningful and thus are not presented.
STOCK-BASED COMPENSATION
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Under the provisions of APB 25, no compensation expense is recognized for stock
or stock options issued at fair value.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No . 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), which provides an alternative to APB 25 in
accounting for stock-based compensation issued to employees. SFAS 123 provides
for a fair value based method of accounting for employee stock options and
similar equity instruments. However, for companies that continue to account for
stock-based compensation arrangements using APB 25, SFAS 123 requires disclosure
of the proforma effect on net income (loss) and earnings (loss) per share as if
the fair value based method provided by SFAS 123 had been applied. The Company
accounts for stock-based compensation arrangements using APB 25 and has adopted
the proforma disclosure requirements of SFAS 123 (NOTE 6).
13
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the FASB issued Statements No. 130, "Reporting Comprehensive Income"
("SFAS 130") and No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), which are both effective for fiscal years
beginning after December 15, 1997. SFAS 130 addresses reporting amounts of other
comprehensive income and SFAS 131 addresses reporting segment information. The
Company does not believe that the adoption of these new standards will have a
material impact on its financial statements.
RECLASSIFICATIONS
Certain 1996 amounts in the accompanying financial statements have been
reclassified to conform to the 1997 presentation. These reclassifications had no
effect on previously reported net loss or stockholders' deficit.
OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
December 31
1997 1996
-----------------------------------------
Maintenance $ 1,992 $ 289
Restructuring -- 3,855
Landing fees 561 321
Other 3,156 4,540
-----------------------------------------
$ 5,709 $ 9,005
=========================================
14
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
3. LONG-TERM DEBT
The Company's long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------------------
<S> <C> <C>
Variable rate notes payable, interest only at 30 day LIBOR plus 3%, due June
1998; 80% refinanced in February 1998 as 6.932% secured notes payable,
principal payments
commencing August 1998, due August 2014 (a) $ 34,531 $ -
8% secured notes payable, principal payments
commencing February 1998, due January 2004 (net of
debt discount of $1,483) (b) 8,796 -
8% unsecured note payable, principal payments commencing
February 1998, due January 2004 (net of debt discount of
$1,483) (c) 4,499 -
Miscellaneous notes payable due by December 2001 with
interest rates varying from 5 to 15% 6 1,120
7.5% secured note payable, principal payments
commencing November 1995, due October 2003 (d) - 1,173
12% unsecured subordinated notes payable, due April
2002 (net of debt discount of $100) (e) - 9,900
Unsecured note payable, noninterest bearing, due upon
conversion or redemption of Junior preferred stock, as
defined (f) - 245
10% secured note payable, due December 31, 1996 (g) - 9,000
Other notes payable at various interest rates, due
December 31, 1996 (h) - 8,746
----------------------------------------
47,832 30,184
Less - amounts due within one year 8,883 18,860
----------------------------------------
$ 38,949 $ 11,324
========================================
</TABLE>
15
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
a) In conjunction with the purchase of the first two CRJ aircraft in December
1997, the Company entered into interim short-term financing arrangements
for $34.5 million ("interim notes"). On February 5, 1998, these interim
notes were 80% refinanced with permanent financing (the "new notes") for
16.5 years. Therefore, the noncurrent portion of the new notes is included
in long-term debt on the balance sheet. The remaining 20% was paid on
February 5, 1998 and is reflected in current maturities along with the
current maturities of the new notes. The new notes carry a stated interest
rate of 6.932%, with an effective interest rate of 7.188% due to the
Treasury Lock agreement, and are collateralized by the Company's owned
aircraft. (NOTE 2).
b) As a part of the recapitalization on February 11, 1997, the note payable of
$9 million, plus accrued interest of $450,000 was converted into a note
payable, collateralized by first and second security interests in most of
the Company's assets. The note accrues interest until February 1998, when
principal plus interest payments begin.
c) As a part of the recapitalization on February 11, 1997, the notes payable
were restructured into long-term notes payable, accruing interest until
February 1998 when principal and interest payments begin. Certain lease
deposits were applied against the prior balances to reduce the principal
amount from that shown at December 31, 1996.
AS A RESULT OF THE FEBRUARY 11, 1997 RECAPITALIZATION (NOTE 13), THE FOLLOWING
DEBT WAS EITHER EXTINGUISHED OR RESTRUCTURED:
d) Pursuant to Midway's agreement to lease certain aircraft, the aircraft
manufacturer agreed to provide financing for certain support equipment. The
note payable was settled in connection with the recapitalization.
e) In May 1995, in return for $6 million cash, the Company issued subordinated
notes with a face value of $6 million due in April 2002. In January and
February 1996, in return for $4 million cash, the Company issued additional
subordinated notes with a face value of $4 million due in March 2003. The
subordinated debt was forgiven in connection with the recapitalization.
f) The Company issued a noninterest-bearing note payable to a vendor with a
face amount of $500,000, which had been discounted using a rate of 11%. The
note payable was settled in connection with the recapitalization.
16
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
g) Throughout 1996, a vendor advanced working capital to the Company and
accepted delayed payments on certain trade payables. Those obligations were
converted into short-term debt which was due on December 31, 1996. The
outstanding debt was restructured in connection with the recapitalization.
h) Throughout 1996, certain aircraft lessors allowed the Company to delay
payment on certain aircraft leases. These obligations were converted into
short-term debt which was due on December 31, 1996. As part of the
recapitalization, aircraft lease deposits of $3.4 million were offset
against the outstanding debt and the remaining debt was restructured.
Certain of the Company's debt instruments prohibit the payment of dividends
until such debt has been repaid.
The aggregate principal maturities at December 31, 1997, less interest to be
accreted through February 1998, are as follows (in thousands):
Year ended:
1998 $ 8,883
1999 2,875
2000 3,139
2001 3,424
2002 3,731
Thereafter 25,886
--------
47,938
Less: interest to be accreted through February 28, 1998 106
--------
Principal balance $ 47,832
========
Interest charged to expense was $1.7 million and $2.5 million for the years
ended December 31, 1997 and 1996, respectively. Of these amounts, $1.1 million
in 1997 and $19,000 in 1996 were accreted to the principal balance of the
related long-term debt.
17
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
4. LEASES
As of December 31, 1997 and 1996, the Company leased twelve Fokker F-100
aircraft and one Airbus Industries ("Airbus") A320 aircraft under operating
leases with original terms ranging from 4 to 18 years.
The Company's leases or subleases of gates at various airports, including
subleases for 12 gates at Raleigh-Durham Airport ("RDU"), expire at various
dates throughout 2013. The Company also leases 70% of its slots at New York's
LaGuardia Airport and 75% of its slots at Washington, D.C.'s National Airport
from certain airlines with terms ranging from six months to two years.
The Company leases certain furniture, machinery and equipment under capital
lease agreements that expire through 2000. Amortization expense of $149,000 and
$109,000 is included in depreciation and amortization expense in the statements
of operations for the years ended December 31, 1997 and 1996, respectively.
Equipment and property includes the following amounts for capital leases (in
thousands):
DECEMBER 31
1997 1996
-------------------
Office equipment $ 669 $ 669
Less accumulated amortization (310) (161)
-------------------
$ 359 $ 508
===================
18
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
4. LEASES (CONTINUED)
At December 31, 1997, the future minimum lease payments required under capital
leases and operating leases that have initial or remaining noncancelable lease
terms in excess of one year are as follows (in thousands):
<TABLE>
<CAPTION>
Operating
----------------------
Capital Aircraft Other Total
----------------------------------------------
<S> <C> <C> <C> <C>
Year ended:
1998 $165 $ 28,315 $ 3,587 $ 32,067
1999 165 19,675 3,163 23,003
2000 105 16,800 2,154 19,059
2001 - 16,800 1,818 18,618
2002 - 16,625 1,818 18,443
Thereafter - 97,826 18,481 116,307
----------------------------------------------
Total minimum lease payments 435 $196,041 $31,021 $ 227,497
====================================
Amounts representing interest (64)
----------
$371
==========
</TABLE>
Rent expense is recorded on a straight-line basis over the term of the leases.
Lease and rent expense charged to operations was approximately $36.7 million and
$41.1 million for the years ended December 31, 1997 and 1996, respectively.
Under the terms of the aircraft leases, the Company made a security deposit on
each aircraft, which totaled approximately $3.1 million and $6.3 million at
December 31, 1997 and 1996, respectively. At February 11, 1997, as a result of
the restructuring of debt, certain of the aircraft lease deposits were applied
against principal amounts due to aircraft lessors. The aircraft leases also
require the Company to make payments for maintenance based on block hours and/or
cycles. The Company incurred expenses of $4.2 million and $4.3 million related
to these payments for the years ended December 31, 1997 and 1996, respectively.
The Company currently leases 12 Fokker F-100 aircraft. Pursuant to the terms of
the leases, the lessor has the right to terminate its lease on six months prior
notice beginning September 15, 1998, provided that no lease can be terminated if
it would result in a fourth lease termination in any 12 month period, including
scheduled terminations.
19
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (DEFICIT)
STOCK SPLIT
Prior to the Offering, the Company's Board of Directors authorized a division of
common shares at the rate of 682.9108392 to one. All earnings per share, option
prices, share values, and other share information have been restated to reflect
the stock split.
INITIAL PUBLIC OFFERING
On December 4, 1997, the Company completed an initial public offering of
4,830,000 shares of common stock (the "Offering"). Of the 4,830,000 shares,
2,699,320 shares were sold by the Company and 2,130,680 shares were sold by
certain selling shareholders. The Offering price was $15.50 per common share
resulting in gross offering proceeds of $74.9 million. Proceeds to the Company,
net of underwriting discounts, offering expenses and amounts to selling
shareholders, were $38.9 million. Two shareholders holding all the Company's
outstanding preferred stock exercised their right to convert those shares into
an equivalent number of common shares.
RECAPITALIZATION
Effective with the recapitalization on February 11, 1997, the following equity
structure was established:
Up to 12 million shares of $.01 par value senior convertible preferred stock
with a $4.02 stated liquidation value per share were authorized, of which
3,728,693 shares were issued. Senior convertible preferred stockholders
("preferred stockholders") are entitled to dividends if any dividends are
declared or paid upon the common stock. Preferred stockholders are entitled to
70% of all votes in the aggregate. Senior convertible preferred stock may be
converted at any time at the election of the stockholder, on a basis of one
share of senior convertible preferred stock for one share of common stock. All
issued preferred shares were converted into an equal number of common shares
during 1997.
Up to 25 million shares of $.01 par value common stock were authorized, of which
8,558,695 shares are issued and outstanding. Common stockholders are entitled to
one vote per share of stock held. Common stockholders' rights are subordinate to
those of preferred stockholders.
20
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Warrants were issued for the purchase of 390,625 shares of $.01 par value common
stock for $0.0015 per share. The warrants were valued at $4.02 per share, or
$1.57 million, and expire on February 11, 2002. The warrants may be exercised in
whole or in part at any time prior to expiration.
IN CONNECTION WITH THE FEBRUARY 11, 1997 RECAPITALIZATION, ALL OF THE FOLLOWING
SERIES OF STOCKHOLDERS' EQUITY INSTRUMENTS WERE CANCELED AND REPLACED WITH THE
NEW EQUITY STRUCTURE (NOTE 13):
In connection with the 1994 acquisition by Zell/Chilmark, the previous
shareholders were granted junior preferred stock and approximately 10% of the
Company's outstanding common stock in return for their prior ownership
interests. Zell/Chilmark received 480,000 shares of $.01 par value prior
preferred stock, with $50 stated liquidation value and 1 million shares
authorized, and approximately 90% of the Company's outstanding common stock for
an investment of $25 million. At December 31, 1996, there were 1 million shares
of prior preferred stock, $.01 par value, authorized and 480,000 shares issued
and outstanding. The Company's common stock consisted of Class A, Class B, and
Class C series, $.01 par value, common stock with 9 million, 2 million, and 25
million shares authorized, respectively. At December 31, 1996, there were
8,872,200, 0, and 1,127,800 shares of Class A, Class B, and Class C issued and
outstanding, respectively.
Prior preferred stockholders were entitled to cumulative dividends, which
accrued at $3 per share per year. At December 31, 1995, the Company had accrued
$2,040,000 of cumulative dividends. At December 31, 1996, the Company reduced
this accrual to $0 because the dividends were forgiven in connection with the
recapitalization.
Junior preferred stockholders were entitled to cumulative dividends, only after
the redemption of significantly all of the prior preferred stock, at a rate of
$.60 per share per year. At December 31, 1996, 600,000 shares of junior
preferred stock were authorized, issued and outstanding with $.01 par value and
$10 stated liquidation value. The junior preferred stock was canceled in
connection with the recapitalization.
Common stockholders rights were subordinate to those of preferred stockholders.
The Class A, Class B and Class C common stock was canceled in connection with
the recapitalization.
21
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
In conjunction with the subordinated debt offerings (NOTE 3), the Company issued
warrants to purchase 7.5 million shares of the Company's Class C common stock at
an initial exercise price of $.01 per share. These warrants were canceled in
connection with the recapitalization.
The following table presents each class of the Company's issued and outstanding
capital stock for the period prior to the February 1997 recapitalization:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
SHARES Amount
------------------------
<S> <C> <C>
Prior preferred stock, $.01 par value, $50 stated liquidation
value, 1,000,000 shares authorized 480,000 $ 4,800
Junior preferred stock, $.01 par value, $10 stated liquidation
value, 600,000 shares authorized 600,000 6,000
Class A common stock, $.01 par value, 9,000,000 shares
authorized 8,872,200 88,722
Class C common stock, $.01 par value, 25,000,000 shares
authorized 1,127,800 11,278
</TABLE>
The following table presents each class of the Company's issued and outstanding
capital stock as of December 31, 1997 which reflects the 1997 recapitalization
and Initial Public Offering:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
SHARES Amount
-------------------------
<S> <C> <C>
Common stock, $.01 par value, 25,000,000 shares authorized,
8,558,695 shares issued and outstanding. 8,558,695 $85,587
Warrants, $.01 par value, 390,625 shares authorized, issued
and outstanding 390,625 3,906
</TABLE>
6. STOCK OPTIONS
During 1997, the Company granted stock options to acquire 1,340,590 shares of
common stock to employees of the Company at prices not less than the fair value
at the date of grant. The options granted have seven to ten year terms with some
options vesting fifty percent immediately and twenty-five percent per year over
the two years subsequent to the grant date and others vesting twenty percent per
year over five years.
22
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
6. STOCK OPTIONS (CONTINUED)
The following table summarizes common stock options granted at $4.02 and $15.50
per share in connection with the Company's 1997 option plan:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise
Available Options Price
for Grant Outstanding Exercisable Per Share
----------------------------------------------------
<S> <C> <C> <C> <C>
Shares reserved for grant 1,562,500 - - $ -
Granted during 1997 (1,340,590) 1,340,590 - 6.89
Became exercisable - - 390,625 4.02
Exercised - - - -
----------------------------------------------------
Balance at December 31, 1997 221,910 1,340,590 390,625 $6.89
====================================================
</TABLE>
The following summarizes information about the exercise prices of the Company's
stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING
Number
Exercise Outstanding at
Price December 31, 1997
- -------------------------------------
$ 4.02 1,005,245
$15.50 335,345
-------------------
1,340,590
===================
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options using the fair value method provided by that Statement.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997: risk-free interest rate of 6%; dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
55.1%; and expected lives of the options ranging from two to six years. The
weighted average grant date fair value of options outstanding at December 31,
1997 is $5.0 million and the weighted average contractual lives of the options
is 7.75 years. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period.
23
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
6. STOCK OPTIONS (CONTINUED)
The Company's pro forma information follows:
FOR THE YEAR ENDED
DECEMBER 31, 1997
---------------------
Net income as reported $24,894,000
Pro forma net income 23,701,000
Basic earnings per share:
As reported $ 4.11
Pro forma 3.91
Diluted earnings per share:
As reported $ 3.46
Pro forma 3.29
7. EARNINGS PER SHARE OF COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
-------------------
<S> <C>
Numerator:
Net income $ 24,894,000
Numerator for basic and diluted earnings per share 24,894,000
Denominator:
Denominator for basic earnings per share - weighted average shares 6,059,051
Effect of dilutive securities:
Employee stock options 744,155
Warrants 390,588
-------------------
Dilutive potential common shares 1,134,743
Denominator for diluted earnings per share - adjusted weighted
average shares and assumed conversions. 7,193,794
===================
Basic earnings per share $4.11
Diluted earnings per share 3.46
</TABLE>
24
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
8. INCOME TAXES
Differences between reported tax expense computed by applying the statutory
federal income tax rate to income (loss) before income taxes and reported tax
expense are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------------------------
$ % $ %
-----------------------------------------
<S> <C> <C> <C> <C>
Computed tax expense $5,331 35.0 $(7,899) (34.0)
State taxes, net of federal benefit 184 1.2 - -
Goodwill 64 .4
Valuation allowance for deferred tax assets 727 4.8 7,899 34.0
-----------------------------------------
Reported tax expense $6,306 41.4 $ - -
=========================================
</TABLE>
Income taxes are calculated in accordance with SFAS No. 109, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Deferred income taxes arise from temporary
differences between the income tax basis and financial reporting basis of assets
and liabilities. The components of the Company's deferred tax assets at December
31, are as follows (in thousands):
1997 1996
----------------------
Deferred tax assets - noncurrent
Operating loss carryforwards $17,281 $ 17,449
Restructuring reserve 2,016 5,701
Other miscellaneous 1,939 903
Valuation allowance (21,236) (24,053)
----------------------
Net deferred tax asset $ - $ -
======================
As of December 31, 1997 and 1996, the Company had approximately $51.0 million
and $65.8 million, respectively, of available net operating loss carryforwards
(NOLs) to offset future taxable income of the Company. The NOLs expire by 2012
if not used. Under Section 382 of the Internal Revenue Code, as amended, the
Company's ability to utilize such loss carryforwards in any one year, which were
generated prior to a change in ownership may be limited or eliminated as a
result of the February 11, 1997 recapitalization.
25
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The valuation allowance of $21.2 million and $24.1 million at December 31, 1997
and 1996, respectively, was provided because, in the Company's assessment, it is
uncertain whether the net deferred tax assets will be realized due to the
history of operating losses of the Company and the recent ownership changes.
9. COMMITMENTS AND CONTINGENCIES
In 1997, the Company executed an aircraft purchase agreement with Bombardier,
Inc. for the acquisition of ten newly manufactured CRJ-200ER Canadair Regional
Jet ("CRJs") aircraft. Two new aircraft were delivered in December 1997 and an
additional eight aircraft are scheduled to be delivered through December 1998.
The purchase agreement provides Midway with options to acquire up to 20
additional CRJ aircraft over a two year period with delivery dates beginning in
1999. Pursuant to an agreement with GE Aircraft Engines, a division of General
Electric International, Inc., the Company has agreed to purchase two CF34-3B1
spare engines to support the operation of the ten CRJ aircraft. This agreement
also provides for the purchase of an additional spare engine for each five CRJ
aircraft Midway acquires. The Company expects to arrange a combination of third
party debt and leveraged lease financing for the ten CRJs. For each aircraft
that is purchased (as opposed to leased), the Company anticipates an initial
cash outlay of approximately $4 million. The Company also expects to arrange
financing for the two spare CRJ engines the Company has agreed to acquire.
Standby lease financing on terms reasonably acceptable to management have also
been arranged for the CRJs to be delivered in 1998. The first two CRJs were
purchased in December 1997, with permanent financing completed in February 1998
(NOTE 3).
The Company has agreed to acquire a $3.0 million spare engine for its F-100
fleet, which will be purchase-financed over seven years. The engine is scheduled
to be delivered in early 1998.
In September 1997, the Civil Aviation Security Division of the Federal Aviation
Administration ("FAA") conducted an investigation of the Company's compliance
with certain regulations requiring the Company to verify the accuracy of
background information provided by its employees who have access to secure
airport areas. The Company revised its background check procedures during the
course of the FAA's investigation and then obtained and verified the necessary
background information of those employees who had been identified by the FAA as
having insufficient background check documentation. This investigation will
likely result in the finding of violations of these regulations. While the
Company is unable to determine whether the FAA will pursue an assessment as a
result of the findings of this investigation, or what the amount of any such
assessment might be, an assessment could have a material adverse effect on the
Company's results of operations.
26
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has been named as a defendant in certain pending litigation. The
outcome of these matters cannot be predicted, but it is management's belief that
whatever the outcome, the results will not, either individually or in the
aggregate have a material adverse effect on the Company's financial position,
results of operations or cash flows.
As a part of the recapitalization on February 11, 1997, management elected to
effectuate the early termination of an unfavorable contract. A liability of
$500,000 was recorded to cover costs associated with exiting the contract. The
contract was settled for $250,000 and accordingly, the special recapitalization
charges were reduced in December 1997.
In March 1995, Midway reached an agreement with Airbus for the acquisition of
four firm Airbus A320 and four option A319 or A320 aircraft with deliveries
beginning in 1998. Pursuant to the recapitalization, the delivery dates of these
aircraft have been moved to 2005 and later. The Company is required to make
deposits on the four firm aircraft in amounts to be determined beginning in
2003. The Company is considering several alternatives with respect to the A320s,
including restructuring its agreement with Airbus or selling its position.
10. BENEFIT PLANS
Effective August 1995, the Company established a savings plan (the "Plan")
pursuant to Section 401(k) of the Internal Revenue Code. All employees are
eligible for enrollment in the Plan after six months of employment. The Company,
at its discretion, may match up to 50% of employee contributions up to a maximum
of $1,000 in any given calendar year. The Company made no contributions to the
Plan for the years ended December 31, 1997 and 1996.
Effective January 1, 1998, the Company established a profit sharing plan (the
"Plan"). All employees are eligible for enrollment in the Plan after six months
of employment. The Company, at its discretion, may distribute up to 12.5% of
profits above 10.1% of gross revenues in any given quarter or calendar year.
27
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
11. RESTRUCTURING CHARGES
In December 1994, the Company reached a decision to relocate its main base of
operations from Chicago to Raleigh-Durham. The Company began operations at
Raleigh-Durham in March 1995. In conjunction with the decision to move, the
Company recorded a restructuring charge of $4.9 million for estimated exit costs
related to its Chicago Midway Airport headquarters. The remaining liability of
$0 and $3.9 million is included in other current liabilities in the accompanying
balance sheets at December 31, 1997 and 1996, respectively. This liability was
settled for $1.2 million in the February 11, 1997 recapitalization, which
resulted in an extraordinary gain of $2.7 million.
12. TRANSACTIONS WITH RELATED PARTIES
In August of 1996, the then majority shareholder, Zell/Chilmark executed a
guaranty and pledge agreement in favor of a credit card intermediary (the
"Intermediary"). The execution of this guaranty and pledge agreement, and
Zell/Chilmark's deposit of $7 million with the Intermediary, allowed the
Intermediary to release $7 million of cash to Midway out of the credit card
holdback account maintained by the Intermediary in connection with its
processing of Midway's credit card sales. Midway executed a Subordinated Demand
Note to Zell/Chilmark in the event the Intermediary exercised its rights under
the guaranty and pledge agreement with respect to Zell/Chilmark's $7.0 million
cash collateral. Zell/Chilmark's guaranty and pledge agreement was terminated,
and Midway's note to Zell/Chilmark was canceled in connection with the
recapitalization on February 11, 1997 (NOTE 13). The Zell/Chilmark guaranty was
replaced by a letter of credit from the new majority owner.
Until the contact was canceled effective May 15, 1997, the Company purchased
certain reservation services from a related party. The expenses incurred were
approximately $850,000 and $2.1 million for the years ended December 31, 1997
and 1996, respectively.
13. RECAPITALIZATION
On February 11, 1997, the Company was recapitalized. Through the
recapitalization, debt was either extinguished or restructured; all of the
existing stock was canceled and new stock was issued; new terms for aircraft
leases and rent reductions for facilities were negotiated; and agreements
reflecting revised maintenance arrangements were implemented. As a result of the
foregoing items and other related transactions, the Company recorded an
extraordinary gain of $16.0 million and recapitalization charges of $750,000
during 1997.
28
<PAGE>
Midway Airlines Corporation
Notes to Financial Statements (continued)
13. RECAPITALIZATION (CONTINUED)
The following transactions were recorded as a result of the recapitalization:
1 All existing shares of capital stock were canceled. New shares of
capital stock were issued (a) to James H. Goodnight, Ph.D, for
consideration of $10.1 million in cash, (b) to John P. Sall for
consideration of $4.9 million in cash and (c) to Zell/Chilmark for
consideration of $7.0 million in cash. Additional shares of common
stock and a warrant to purchase common stock with an aggregate value of
$3.1 million were issued to certain key vendors. Additionally, current
assets were reduced to settle various liabilities for amounts
substantially less than the carrying value at February 11, 1997.
(b) Agreements were negotiated to allow for approximately $3.4 million in
aircraft lease deposits to be offset against amounts owed to the
holders of those deposits. Equipment purchase deposits of $1.8 million
were offset against related current liabilities.
(c) Current debt, accrued lease expense, accrued prior restructuring costs
(NOTE 11) and related accrued interest totaling approximately $6.7
million were settled for amounts substantially less than the carrying
value at December 31, 1996. Additionally, $750,000 of expenses were
incurred in connection with the recapitalization.
(d) Long-term debt and related interest of approximately $10.9 million were
forgiven and current maturities of approximately $14.9 million were
restructured to long-term debt.
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Midway Airlines Corporation:
We have audited the accompanying balance sheets of Midway Airlines
Corporation (a Delaware corporation) as of December 31, 1995 and 1994, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the year ended December 31, 1995 and for the period from August 1, 1994 to
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based upon 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 Midway Airlines
Corporation as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for the year ended December 31, 1995, and for the period from
August 1, 1994 to December 31, 1994 in conformity with generally accepted
accounting principles.
The accompanying financial statements as of December 31, 1995 and for
the year then ended have been prepared assuming the Company will continue as a
going concern. As discussed in Note 1 to the financial statements, the Company
has suffered recurring losses from operations and has a net working capital and
total stockholders' equity deficit. In addition, the Company has significant
obligations which mature primarily in September and October 1996. These factors
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Raleigh, North Carolina
June 16, 1996
<PAGE>
MIDWAY AIRLINES CORPORATION
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................................................................. $2,799 $6,909
Accounts receivable, net............................................................................... 14,878 4,689
Other receivables...................................................................................... 529 1,148
Prepayments and other.................................................................................. 3,897 1,484
------ ------
Total current assets........................................................................ 22,103 14,230
------ ------
Equipment and property:
Flight................................................................................................. 7,140 1,830
Other.................................................................................................. 3,518 95
------ ------
Less - Accumulated depreciation.......................................................................... 1,400 64
------ ------
9,258 1,861
Aircraft deposits...................................................................................... 7,749 1,721
------ ------
Intangible and other assets, net....................................................................... 19,202 18,170
------ ------
$58,312 $ 35,982
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term debt................................................................... $1,062 $949
Accounts payable....................................................................................... 10,956 778
Accrued liabilities (Note 4)........................................................................... 31,855 10,025
Advance ticket sales................................................................................... 18,020 5,223
------ ------
Total current liabilities................................................................... 61,893 16,975
------ ------
Long-term debt......................................................................................... 7,307 2,018
------ ------
Other noncurrent liabilities (Note 7).................................................................. 387 403
------ ------
Deferred income (Note 8)............................................................................... 5,783 0
------ ------
Commitments and contingencies (Notes 1, 6, 9, 11 and 15)
Stockholders' equity (deficit):
Prior preferred stock, $.01 par value, $50 stated liquidation value, 1,000,000 shares authorized, 5 5
480,000 shares issued and outstanding...............................................................
Junior preferred stock, $.01 par value, $10 stated liquidation value, 600,000 shares authorized, issued 6 6
and outstanding.....................................................................................
Class A common stock, $.01 par value, 9,000,000 shares authorized, 8,872,200 shares issued and 89 89
outstanding.........................................................................................
Class C common stock, $.01 par value, 25,000,000 shares authorized, 1,127,800 shares issued and 11 11
outstanding.........................................................................................
Additional paid-in capital............................................................................. 30,949 30,889
Accumulated deficit.................................................................................... (48,118) (14,414)
------ ------
Total stockholders' equity (deficit)........................................................ (17,058) 16,586
------ ------
$58,312 $35,982
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
<PAGE>
MIDWAY AIRLINES CORPORATION
STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended Five months
December 31, ended
1995 December 31,
1994
<S> <C> <C>
Operating revenues:
Passenger.................................................... $118,568 $14,662
Cargo........................................................ 1,168 33
Contract and other........................................... 2,866 1,180
-------- -------
Total revenues............................................ 122,602 15,875
-------- -------
Operating expenses:
Wages, salaries and related costs............................ 19,874 3,659
Aircraft fuel................................................ 16,782 3,514
Aircraft and engine rentals.................................. 30,889 5,328
Commissions.................................................. 9,382 1,205
Maintenance, materials and repairs........................... 13,551 1,383
Other rentals and landing fees............................... 11,924 1,760
Depreciation and amortization................................ 2,056 334
Other........................................................ 43,769 7,548
Restructuring................................................ 6,004 4,900
Total operating expenses.................................. 154,231 29,631
-------- -------
Operating loss.................................................. (31,629) (13,756)
-------- -------
Interest income................................................. 348 101
Interest expense................................................ (761) (130)
Other........................................................... (222) (29)
Net loss........................................................ (32,264) (13,814)
Preferred stock dividends....................................... (1,440) (600)
-------- -------
Net loss available for common stockholders...................... $(33,704) $(14,414)
-------- -------
$(3.37) $(1.44)
Net loss per share..............................................
10 million 10 million
Shares used in computing net loss per share.....................
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<PAGE>
MIDWAY AIRLINES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
<TABLE>
<CAPTION>
Prior Preferred Junior Preferred Class A Common Class C Common
Stock Stock Stock Stock Additional
--------------- ----------------- ----------------- ------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------ ------ ------ ------ ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, 480,000 $5 600,000 $6 8,872,200 $89 1,127,800 $11 $30,889 $ _ $31,000
August 1, 1994..........
Net loss available for _ _ _ _ _ _ _ _ _ (14,414) (14,414)
common stockholders
Balance, 480,000 $5 600,000 $6 8,872,200 $89 1,127,800 $11 $30,889 $(14,414) $16,586
December 31, 1994.......
Common stock warrants _ _ _ _ _ _ _ _ 60 _ 60
Net loss available for _ _ _ _ _ _ _ _ _ (33,704) (33,704)
common stockholders
Balance, 480,000 $5 600,000 $6 8,872,200 $89 1,127,800 $11 $30,949 $(48,118) $(17,058)
December 31, 1995.......
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<PAGE>
MIDWAY AIRLINES CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31, Five months ended
1995 December 31, 1994
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................................... $(32,264) $(13,814)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization............................................ 2,056 334
Restructuring charge..................................................... _ 4,900
Deferred income.......................................................... 6,000 _
Amortization of deferred income.......................................... (217) _
Deferred rent expense.................................................... _ 349
Accretion of debt discount............................................... 42 _
Change in other operating assets and liabilities:
Increase in receivables................................................ (9,569) (974)
Increase in prepayments and other...................................... (2,413) (543)
Increase in aircraft deposits.......................................... (5,105) (1,321)
Increase in other assets............................................... (1,752) (700)
Increase (decrease) in accounts payable................................ 10,178 (1,362)
Increase (decrease) in accrued liabilities............................. 19,658 (1,476)
Increase in advance ticket sales....................................... 12,796 660
Other, net............................................................. (215) (376)
------- --------
Net cash used in operating activities............................... (805) (14,323)
------- --------
Cash flows from investing activities_Purchase of equipment and property........ (6,876) (354)
------- --------
Cash flows from financing activities:
Collection of subscription receivable....................................... _ 12,500
Proceeds from issuance of debt.............................................. 6,012 _
Repayment of debt........................................................... (2,441) (73)
------- --------
Net cash provided by financing activities........................... 3,571 12,427
------- --------
Decrease in cash and cash equivalents.......................................... (4,110) (2,250)
Cash and cash equivalents, beginning of period................................. 6,909 9,159
------- --------
Cash and cash equivalents, end of period....................................... $2,799 $6,909
======= ========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organization and Basis of Presentation:
Midway Airlines Corporation (Midway or the Company), a Delaware
corporation, is an air carrier providing passenger, cargo and mail services. The
Company began jet operations in November 1993. The Company services primarily
East Coast locations from its hub at Raleigh-Durham International Airport
(Raleigh-Durham), with additional service to Cancun, Mexico, and Las Vegas,
Nevada, utilizing Fokker F-100 and Airbus A320 aircraft.
On July 22, 1994 Zell/Chilmark Fund LP (Zell/Chilmark) acquired prior
preferred stock and approximately 90% of the common stock of the Company for
approximately $25 million (the Acquisition). The Acquisition was accounted for
using the purchase method of accounting. This method requires that all of the
assets acquired and liabilities assumed be adjusted from their historical cost
basis to their fair market value as of the effective date of the acquisition,
August 1, 1994. The historical cost basis of the assets acquired and liabilities
assumed approximated their fair value at August 1, 1994. In connection with the
acquisition, Fokker Aircraft, B.V. (Fokker) agreed to restructure the Company's
outstanding debt balances in return for a cash payment of approximately $800,000
and the issuance of new debt (see Note 5). The excess of the purchase price over
the fair values of the net assets acquired was approximately $11,740,000.
The accompanying financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and
satisfaction of liabilities and commitments in the normal course of business. As
reflected in the accompanying financial statements, the Company incurred a net
loss before preferred stock dividends for the year ended December 31, 1995 and
for the five months ended December 31, 1994, of $32,264,000 and $13,814,000,
respectively, and as of December 31, 1995 and 1994, had an accumulated deficit
of $48,118,000 and $14,414,000, respectively. In addition, the Company has
deferred certain vendor payables from 1995 and incurred additional short-term
financing in 1996, totaling approximately $8 million. The Company's cash and
cash equivalents at December 31, 1995, and its projected 1996 operating cash
flows will not be sufficient to allow the Company to satisfy these obligations
which mature primarily in September and October 1996.
Management recognizes that the Company must obtain additional funds to
enable it to meet its obligations. Management's plans include the sale of
additional equity securities under appropriate market conditions or other
business transactions or vendor concessions which would generate sufficient
funds to enable the Company to repay its obligations.
The Company has retained investment banking counsel to advise it on the
possible sale of equity securities. Management expects that this effort will
result in obtaining additional capital. However, no assurance can be given that
the Company will be successful in these efforts.
<PAGE>
2. Significant Accounting Policies and Other Matters:
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during that
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement establishes accounting standards for the impairment of long-lived
assets and intangible assets to be held and used and for long-lived assets and
intangible assets to be disposed of. The Company will adopt the provisions of
this statement in fiscal 1996. Management has not yet determined the impact of
SFAS No. 121.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with an
original maturity of three months or less. At December 31, 1995 and 1994,
approximately $2 million and $700,000, respectively, of cash and cash
equivalents is restricted as to withdrawal for operating purposes to support
letters of credit and claims remaining from the Jet Express, Inc. bankruptcy
(Note 7) and is included in intangibles and other assets in the accompanying
balance sheets.
Accounts Receivable and Credit Risk
Midway's accounts receivable are primarily receivables from major
credit card companies and other airline carriers generated primarily from ticket
sales for passenger transportation. The Company does not believe it is subject
to any significant concentration of credit risk. The Company establishes an
allowance for doubtful accounts based upon factors surrounding credit risk. At
December 31, 1995 and 1994, the allowance for doubtful accounts was
approximately $75,000.
One vendor accounted for approximately 12% and 10% of operating
expenses for the year ended December 31, 1995 and five months ended December 31,
1994, respectively, primarily related to maintenance, passenger services and
airport facilities rentals. However, the Company does not believe there is a
significant risk associated with this vendor or these services, as alternative
sources are available.
Inventories
Consumable spare parts, materials and supplies relating to flight
equipment are carried at the lower of cost or market and are expensed as used.
Inventories are included in prepayments and other in the accompanying balance
sheets.
<PAGE>
Equipment and Property
Equipment and property consist primarily of rotable spare parts for
aircraft, leasehold improvements and miscellaneous equipment used in aircraft
operations. Equipment and property are depreciated to estimated residual values
using the straight-line method over estimated useful lives ranging from 5 to 25
years for flight equipment and 3 to 5 years for other equipment. Depreciation
expense charged to operations was approximately $1.3 million and $64,000 for the
year ended December 31, 1995 and five months ended December 31, 1994,
respectively.
Aircraft and Engine Maintenance and Repairs
The cost of routine maintenance of aircraft and engines is charged to
operating expense on a per hour or per landing basis as incurred.
Intangible and Other Assets
Intangible and other assets consist primarily of cost in excess of net
assets acquired related to the Zell/Chilmark acquisition (Note 1), landing slot
rights and restricted cash. The cost in excess of net assets acquired and the
landing slot rights are amortized over 25 years. Amortization expense recognized
for the year ended December 31, 1995 and the five months ended December 31,
1994, was approximately $709,000 and $270,000, respectively. The Company
periodically reviews the values assigned to its intangible assets to determine
whether current events and circumstances warrant adjustment to the carrying
values or amortization periods.
Intangible and other assets consist of the following at December 31 (in
thousands):
1995 1994
Cost in excess of net assets acquired, net............ $11,101 $11,570
Landing slot rights, net.............................. 5,660 5,900
Restricted cash....................................... 2,000 700
Other................................................. 441 0
------- -------
$19,202 $18,170
======= =======
Insurance
The Company is self-insured for losses arising from medical claims
arising from certain of its group medical plans. Such losses, however, are
limited to a maximum amount through insurance coverage in excess of the
self-insured retention. Reserves are established to recognize the estimated
liability for reported claims and claims incurred but not yet reported.
Management believes that the reserve for losses at December 31, 1995 and 1994,
is adequate to cover the ultimate cost of losses and claims to date, but the
reserve is necessarily based on estimates and the amount ultimately paid may be
more or less than such estimates. These estimates are based upon historical
information along with certain assumptions about future events, including
increases in projected medical costs.
<PAGE>
Revenue Recognition and Advance Ticket Sales
Passenger revenues are recognized when transportation services are
provided, rather than when a ticket is sold. The amount of passenger sales not
yet recognized as revenue is reflected in the accompanying balance sheets as
advance ticket sales. Commissions are recognized as expense when transportation
is provided and the related revenue is recognized. The amount of commissions
paid but not yet recognized as expense is reflected in prepayments and other in
the accompanying balance sheets.
Frequent Flyer Program
Effective March 1995, the Company began participation in the American
Airlines (American) AAdvantage frequent flyer program. Under this program,
members can earn mileage credits and redeem awards at participating AAdvantage
companies. Midway is billed monthly for AAdvantage miles earned by its
passengers participating in the program that fly on Midway and bills American
for award travel flown on Midway.
In connection with the decision to participate in the AAdvantage
program, the Company decided to discontinue awarding mileage credits under its
company-sponsored program. All travel under the company-sponsored program must
be completed by September 1996. The Company's liability related to its program,
which is included in accrued liabilities in the accompanying balance sheets, was
not significant at December 31, 1995 and 1994.
Restructuring Charges
Restructuring charges are established based upon management's estimate
of the incremental costs required to exit activities which will provide no
future economic benefit to the Company. These estimates are based upon current
information available to management and the amount ultimately paid may be more
or less than such estimates. See Note 13.
Cash Flow Information
Cash paid for interest for the year ended December 31, 1995, was
approximately $550,000 and $129,000 for the five months ended December 31, 1994.
In 1995, the Company acquired equipment and property of approximately $1,858,000
in exchange for notes payable.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents_The carrying amount reported
approximates fair value.
Debt_The fair value of the Company's fixed rate debt was
estimated using discounted cash flow analyses based on current rates
for similar types of borrowing arrangements. The fair value of the
Company's variable rate debt approximates its carrying value.
Warrants_The fair value of the warrants was estimated by the
value assigned to similar warrants issued in January 1996 (Note 15).
<PAGE>
The carrying amounts and fair values of the Company's financial
instruments at December 31, were as follows (in thousands):
1995 1994
------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
Cash and cash equivalents..... $2,799 $2,799 $6,909 $6,909
Debt.......................... 8,369 8,263 2,967 2,967
Warrants...................... 60 60 0 0
====== ====== ====== ======
Earnings (Loss) per Share of Common Stock
Earnings (loss) per share of common stock are computed based on the
weighted average number of shares of common stock outstanding of 10,000,000 for
the year ended December 31, 1995 and for the five months ended December 31,
1994. Common stock equivalents were antidilutive for each period.
3. Other Receivables:
At December 31, 1995, other receivables consist primarily of amounts
due for cargo and mail services, expenses incurred by the Company to be
reimbursed by Midway Connection and other miscellaneous receivables.
In July 1995, the Company entered into a code-sharing agreement with an
unrelated commuter airline operating under the name Midway Connection. Under the
provisions of this agreement, Midway provides certain services, including
reservation, scheduling and revenue accounting services to Midway Connection.
Passenger fares are settled in accordance with the operating agreement.
At December 31, 1994, the Company had recorded a receivable of
approximately $702,000 due from an airport authority related to a service
agreement for scheduled air transportation provided in 1994 and federal excise
taxes refunded in 1995 of approximately $391,000. These amounts were collected
in 1995. Revenues of $820,000 related to the airport authority service agreement
have been included in contract and other revenues in the accompanying statement
of operations for the five months ended December 31, 1994.
At August 1, 1994, the Company had recorded a subscription receivable
from Zell/Chilmark of $12,500,000 related to the purchase of prior preferred
stock and Class A common stock. This amount was collected in October and
November 1994.
4. Accrued Liabilities:
Accrued liabilities at December 31, consist of the following (in
thousands):
1995 1994
------ ------
Compensation and benefits................ $1,734 $1,000
Taxes.................................... 6,494 793
Airport and passenger services........... 3,397 333
Maintenance.............................. 3,748 268
Prior preferred dividends................ 2,040 600
Aircraft and facilities rentals.......... 1,621 435
Restructuring (Note 13).................. 7,412 4,900
Other.................................... 5,409 1,696
------- -------
$31,855 $10,025
======= =======
<PAGE>
5. Long-term Debt:
The Company's long-term debt as of December 31, consists of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
7.5% secured note payable, principal payments commencing $1,264 $1,284
November 1995, due October 2003(a)...............................................................
12% unsecured subordinated notes payable to stockholders, 5,940 0
due April 2002(b)................................................................................
Secured note payable to aircraft parts vendor, noninterest bearing, payable in monthly 510 0
installments of approximately $47,000, due December 1996......................................
10% secured note payable to aircraft parts vendor, due February 1996............................. 417 0
Unsecured note payable, noninterest bearing, due upon conversion or redemption of junior preferred 226 184
stock, as defined, or 2003(c).................................................................
Variable rate secured notes payable to bank repaid in 1995(d).................................... 0 1,499
Other............................................................................................ 12 0
----- -----
8,369 2,967
Less_Amounts due within one year................................................................. 1,062 949
----- -----
Amount due after one year........................................................................ $7,307 $2,018
====== ======
</TABLE>
- -----
(a) Pursuant to Midway's agreement to acquire Fokker aircraft, Fokker agreed to
provide financing for certain new support equipment for the aircraft. Such
equipment serves as collateral for this financing. Principal and interest
payments began in November 1995 and are scheduled to continue in equal monthly
installments of approximately $17,800 through October 2003.
(b) In May 1995, the Company issued subordinated debt to certain of its
stockholders with a face value of $6 million due in April 2002. The debt may be
prepaid at any time without penalty. Each holder of $1,000 of subordinated debt
received warrants for the purchase of 750 shares of Class C common stock at a
defined exercise price (Note 9). In connection with the issuance of these
warrants, the Company recorded a debt discount of $60,000 and a corresponding
increase to additional paid-in capital.
(c) The Company issued a noninterest-bearing note payable to Fokker with a face
amount of $500,000, which has been discounted using a rate of 11%. Interest
accrued related to this discounting was approximately $42,000 and $8,000 for the
year ended December 31, 1995 and the five months ended December 31, 1994,
respectively. This note is redeemable upon the conversion of the junior
preferred stock to Class C common stock, the redemption of the junior preferred
stock or 2003, whichever is earliest. Interest is payable semiannually at 6% per
year on the face amount of the note payable commencing on the date on which the
Company accrues dividends with respect to the junior preferred stock. As of
December 31, 1995 and 1994, no dividends were paid or accrued related to the
junior preferred stock.
<PAGE>
(d) In June 1995, the notes payable to bank were repaid from proceeds
of a long-term license agreement (Note 8).
The aggregate principal maturities of debt at December 31, 1995, are as
follows (in thousands):
Year ending December 31_
1996................................. $1,062
1997................................. 133
1998................................. 143
1999................................. 154
2000................................. 166
Thereafter........................... 6,711
------
$8,369
======
6. Leases:
As of December 31, 1995, the Company operated 12 Fokker F-100 aircraft
and 5 Airbus A320 aircraft under operating leases with original terms ranging
from 4 to 18 years. As of December 31, 1995, management determined that it would
return 4 of the Airbus A320 aircraft in early 1996 and evaluate the future
utilization of A320 aircraft in its operations (Note 13).
At December 31, 1995, the future minimum lease payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year at December 31, 1995, are (in thousands):
Year ending December 31_
1996................................ $30,900
1997................................ 35,100
1998................................ 33,800
1999................................ 24,100
2000................................ 20,500
Thereafter.......................... 164,200
-------
$308,600
=======
The amounts above include aircraft, airport, office and other rentals,
but exclude amounts due for the Company's previous headquarters facilities at
Midway Airport which have been included in the restructuring liability (Note
13), lease payments related to the Airbus A320 aircraft to be returned (Note 13)
and landing fees. Rent expense is recorded on a straight-line basis over the
term of the lease. Lease and rent expense charged to operations for the year
ended December 31, 1995 and five months ended December 31, 1994, was
approximately $38,488,000 and $6,402,000, respectively.
The Company is also required to make a lease deposit on each aircraft,
generally equal to approximately three months' rent. Deposits related to leased
aircraft totaled approximately $5,058,000 and $1,721,000 at December 31, 1995
and 1994, respectively.
<PAGE>
In December 1995, the Company entered into negotiations with the
lessors of its Fokker F-100 aircraft and received deferrals on certain aircraft
lease payments over a four-month period. These deferrals will be repaid over the
shorter of 48 months or the remaining lease term beginning in April and May
1996.
7. Other Noncurrent Liabilities:
Other noncurrent liabilities consist of bankruptcy obligations of Jet
Express, Inc. (Jet Express) which operated as a commuter airline under Chapter
11 of the Federal Bankruptcy Code.
Upon emergence from bankruptcy in November 1993, Jet Express merged
with Midway Air Transportation Company to form Midway. As a result, Midway
assumed certain liabilities and acquired certain operating assets of Jet
Express. The bankruptcy obligations are being repaid over five years as defined
by the reorganization plan. In July 1995, the bankruptcy court issued a final
decree and closed the case.
8. Deferred Income:
Deferred income consists of income from a long-term license of certain
intangible assets. The licensing agreement, for which the Company received a
one-time payment of $6 million in 1995, is for a fifteen-year period. Revenue is
recognized ratably over the term of the license on a straight- line basis. For
the year ended December 31, 1995, the Company recognized approximately $217,000
of income. A portion of the proceeds were used to repay notes payable to a bank
(Note 5).
9. Stockholders' Equity:
In connection with the acquisition by Zell/Chilmark, the previous
ownership was granted junior preferred stock and approximately 10% of the
Company's outstanding common stock in return for their previous ownership
interests. Zell/Chilmark received prior preferred stock and approximately 90% of
the Company's outstanding common stock for approximately $25 million.
Prior preferred stockholders are entitled to cumulative dividends,
which accrue at $3 per share per year. At December 31, 1995 and 1994, the
Company had accrued $2,040,000 and $600,000, respectively, of cumulative
dividends. No dividends may be paid on any class of stock if any dividends are
in arrears on the prior preferred stock. These shares of stock do not have any
voting rights and are redeemable at any time by the Company. The liquidation
rights of the prior preferred stockholders are senior to any other stockholder.
The liquidation value of the prior preferred stock is approximately $24 million
plus any unpaid cumulative dividends.
<PAGE>
Junior preferred stockholders are entitled to cumulative dividends,
only after the redemption of significantly all of the prior preferred stock, at
a rate of $.60 per share per year. No dividends may be paid on shares of common
stock if any dividends are in arrears, as defined. At December 31, 1995 and
1994, no dividends were required to be accrued. These shares of stock do not
have any voting rights. The junior preferred shares may only be redeemed if the
prior preferred shares have been redeemed. The junior preferred stock is
mandatorily redeemable three years after the first date upon which dividends
begin to accumulate. The liquidation rights of the junior preferred stockholders
are second to the prior preferred stockholders. The liquidation value of the
junior preferred stock is approximately $6 million plus accrued and unpaid
dividends. The Company has the option to convert the junior preferred shares to
Class C common shares based upon certain factors, as defined.
Class A common stockholders are entitled to 10 votes per share of stock
held. Each share of Class A common stock may be converted, at the option of the
holder, to a share of Class C common stock. Holders of the Class C common stock
are entitled to one vote per share of stock held. Common stockholders rights are
subordinate to those of preferred stockholders.
One million shares of $.01 par value preference stock other than the
prior preferred and junior preferred have been authorized. No shares have been
issued. The Company may establish voting rights, participation rights and other
rights, as defined, to these shares. Additionally, 2,000,000 shares of $.01 par
value Class B common stock have been authorized. No shares have been issued.
In conjunction with the subordinated debt offering (Note 5), the
Company issued warrants to purchase 4.5 million shares of the Company's Class C
common stock at an initial exercise price of $.01 per share. These warrants
expire April 2002. As of December 31, 1995, no warrants had been exercised.
10. Income Taxes:
Income taxes are calculated in accordance with SFAS No. 109, which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Deferred income taxes arise from temporary
differences between the income tax basis and financial reporting basis of assets
and liabilities.
<PAGE>
The components of the Company's deferred tax assets at December 31, are
as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets_
Current:
Operating loss carryforwards.................................. $12,020 $6,871
Restructuring reserve......................................... 3,192 1,698
Liabilities not currently deductible for tax purposes......... 1,542 296
Noncurrent:
Deferred income............................................... 1,966 0
Other......................................................... 243 0
Valuation allowance.............................................. (18,963) (8,865)
------- ------
Net deferred tax asset........................................... $0 $0
======= =======
</TABLE>
The valuation allowance of $18,963,000 and $8,865,000 at December 31,
1995 and 1994, respectively, was provided because, in the Company's assessment,
it is uncertain whether the net deferred tax assets will be realized due to the
limited operating history of the Company.
As of December 31, 1995, the Company had approximately $35.4 million of
available net operating loss carryforwards (NOLs) to offset future taxable
income of the Company. The NOLs expire by 2011 if not used. Under Section 382 of
the Internal Revenue Code, as amended, the Company's ability to utilize certain
loss carryforwards in any one year, which were generated prior to a change in
ownership, is limited. To the extent that the Company is unable to utilize any
of the net operating loss, that year's annual limitation may be carried forward
to increase the subsequent year's limitation. As discussed in Note 1, the
Company had an ownership change during 1994. The available NOLs have been
adjusted to reflect restrictions resulting from the change in ownership.
11. Commitments:
At December 31, 1994, Midway had commitments for the delivery of two
Fokker F100s during 1995. These aircraft were delivered in April and June 1995.
In February 1995, Midway reached an agreement with Airbus Industries
(Airbus), for the acquisition of four firm and four option Airbus A320 aircraft
with deliveries beginning in late 1998. The total cost of the firm aircraft
order is approximately $200 million. Financing will be through either a lease,
bank financing or internally generated funds. The final financing decision will
be made closer to the delivery date of the aircraft, based upon the Company's
financial position. The option aircraft may be converted to firm orders no later
than 24 months prior to delivery and may be converted to Airbus 319 aircraft at
the time of conversion to firm orders.
<PAGE>
As of December 31, 1995, the Company had made deposits of $2,691,000
and is required to make additional deposits on the firm aircraft as follows (in
thousands):
Year ending December 31_
1996......................... $737
1997......................... 19,196
1998......................... 17,265
1999......................... 1,117
-------
$38,315
=======
In March 1996, the Company converted a past due deposit from December
1995 of approximately $848,000 to a short-term note payable due October 1996.
The Company is involved in legal proceedings arising in the normal
course of business. It is the opinion of management that these matters will have
no significant impact on the financial position or results of operations of the
Company.
12. Retirement Plan:
Effective August 1995, the Company established a retirement plan (the
Plan) organized under Section 401(k) of the Internal Revenue Code. All employees
are eligible for enrollment in the Plan after six months of employment. The
Company, at its discretion, may match up to 50% of employee contributions up to
a maximum of $1,000. The Company made no contributions to the Plan for the year
ended December 31, 1995.
13. Restructuring Charges:
In December 1995, the Company recorded a restructuring charge of $5.6
million, primarily related to the Company's decision to exit certain leisure
markets, resulting in the termination of four of its Airbus A320 aircraft
operating leases. In connection with this decision, management is evaluating
whether to continue its Airbus A320 program. This $5.6 million charge is
comprised of $2 million related to lease commitment fees, $1.7 million related
to additional major overhaul costs due to the early return of aircraft and $1.9
million related to the write-off of certain related fixed asset and capitalized
preoperating costs. The remaining liability of $3,537,000 is included in accrued
liabilities in the accompanying balance sheet at December 31, 1995 (Note 4).
In December 1994, the Company reached a decision to relocate its main
base of operations from Chicago's Midway Airport to Raleigh-Durham. The Company
began operations at Raleigh-Durham in March 1995. In conjunction with the
decision, the Company recorded a restructuring charge of $4.9 million for
estimated exit costs related to its Chicago Midway Airport headquarters. As of
December 31, 1995, the Company has charged approximately $1,025,000 against the
restructuring accrual. The remaining liability of $3,875,000 is included in
accrued liabilities in the accompanying balance sheet at December 31, 1995 (Note
4).
<PAGE>
14. Transactions with Related Parties:
The Company purchases certain reservation services at market rates from
a related party. Expense charged for the year ended December 31, 1995, was
approximately $1.2 million and is included in other operating expenses in the
accompanying statement of operations. Subsequent to year-end, the Company was
granted extended terms on certain amounts due at December 31, 1995.
15. Subsequent Events:
In January and February 1996, the majority stockholder made a $4
million loan to the Company in the form of subordinated debt due March 2003,
with interest payable semi-annually at 12%. Interest payments are subordinate to
the deferrals on the Fokker aircraft lease payments (Note 6). Warrants to
purchase 3 million shares of the Company's Class C common stock were issued in
connection with this subordinated debt issuance. These warrants have similar
features as described in Note 9.
In March 1996, Fokker Aircraft B.V. (Fokker) entered into the
Netherlands equivalent of bankruptcy proceedings. Midway has received a proposal
from Fokker Services Inc., an entity that ultimately may or may not be related
to Fokker, to provide parts and engineering for a fee for Fokker aircraft
operated by Midway. The Company's operating leases are not with any of the
bankrupt entities as lessor. Management does not believe that Fokker's
bankruptcy proceedings will adversely affect its operations or that any
impairment has occurred related to its aircraft deposits related to its Fokker
operating leases (Note 6).
In April 1996, the Company converted approximately $3 million of
outstanding payables due for certain maintenance and other services as of
December 31, 1995, to a short-term note payable due September 1996 and received
an additional line of credit for up to $3 million, maturing in September 1996.
These notes are collateralized by substantially all of the Company's assets.
Interest accrues at 10% on the note payable and the line of credit.
In April 1996, the Company entered into short-term sublease agreements
with another air carrier to provide certain flight personnel and flight
management for two aircraft. The Company will receive payment based upon block
hours flown.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
The information required in this PART III (Items 10, 11, 12 and 13) is
hereby incorporated by reference from the Company's definitive proxy statement
which is expected to be filed pursuant to Regulation 14A of the Securities and
Exchange Act of 1934 not later than 120 days after the end of the fiscal year
covered by this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements:
See Item 8 for audited financial statements.
(a)(2) Financial Statement Schedules
Schedule I - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Schedule 1: Valuation and Qualifying Accounts
Additions
Balance at Charged to Deductions Balance at
Beginning of Costs and from End of
Period Expenses Reserves Period
- -------------------------------------------------------------------------------------------------
(dollars in thousands)
- -------------------------------------------------------------------------------------------------
Year ended December 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 58 2,254 639 $1,673
- -------------------------------------------------------------------------------------------------
Year ended December 31, 1996
- -------------------------------------------------------------------------------------------------
Allowance for doubtful accounts $ 75 177 194 $ 58
- -------------------------------------------------------------------------------------------------
</TABLE>
Other schedules have been omitted because they are inapplicable, immaterial,
or not required, or the information is included in the audited financial
statements or notes thereto.
(b) Reports on Form 8-K:
The Company filed a form 8-K on December 16, 1997, reporting that the
Airline Pilots Association had been authorized and designated to represent the
Company's pilots.
(c) Exhibits:
The Exhibits filed or incorporated by reference herewith are as
specified in the Exhibit Index.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Midway Airlines Corporation
Registrant
March 31, 1998 By /s/ STEVEN WESTBERG
Steven Westberg
Sr. Vice President and CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 31, 1997.
Signature Capacity
/s/ ROBERT R. FERGUSON, III Chairman of the Board of Directors,
Robert R. Ferguson, III President and Chief Executive Officer
(Principal Executive Officer)
/s/ STEVEN WESTBERG Senior Vice President and
Steven Westberg Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
/s/ W. GREYSON QUARLES Director
W. Greyson Quarles
/s/ GREGORY J. ROBITAILLE Director
Gregory J. Robitaille
/s/ HOWARD WOLF Director
Howard Wolf
EXHIBIT INDEX
MIDWAY AIRLINES CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Exhibit Index
<TABLE>
<CAPTION>
No. Description
<S> <C>
3.1+ Amended and Restated Certificate of Incorporation.
3.2+ Amended and Restated By-laws.
4.1+ Form of Common Stock Certificate.
4.2+ See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Certificate of Incorporation and Amended and Restated
By-laws of Midway defining the rights of the holders of Common
Stock.
4.3++ Form of Trust Indenture and Security Agreement between Midway and The First National Bank of Maryland as Indenture
Trustee
4.4++ Form of Promissory Note from Midway to Canadian Regional Aircraft
Finance Transaction No. 1 Limited
4.5+ Stockholders Agreement dated February 11, 1997
5.1+ Opinion of Fulbright & Jaworski L.L.P.
10.1++ See Exhibit 4.3 and 4.4 for Form of Promissory Note and Form of
Trust Indenture and Security Agreement
10.2 Midway Airlines Corporation 1997 Stock Option Plan and Form of
Stock Option Agreement related thereto
10.3*+ Aircraft Operating Lease Agreement No. AOLAF-111 dated as of
November 11, 1993 between First Security Bank of Utah, N.A.
("FSBU") and Midway, with amendments attached thereto.
10.4*+ Aircraft Operating Lease Agreement No. AOLAF-112 dated as of
November 11, 1993 between FSBU and Midway, with amendments
attached thereto.
10.5*+ Aircraft Operating Lease Agreement No. AOLAF-113 dated as of
November 11, 1993 between FSBU and Midway, with amendments
attached thereto.
10.6*+ Aircraft Operating Lease Agreement No. AOLAF-114 dated as of
November 11, 1993 between FSBU and Midway, with amendments
attached thereto.
10.7*+ Aircraft Operating Lease Agreement No. AOLAF-115-A dated as of
July 10, 1995 between Wings Aircraft Finance, Inc. ("Wings") and
Midway, with amendments attached thereto.
10.8*+ Aircraft Operating Lease Agreement No. AOLAF-116-A dated as of
July 10, 1995 between Wings and Midway, with amendments attached
thereto.
<PAGE>
10.9*+ Aircraft Operating Lease Agreement No. AOLAF-117-A dated as of
July 10, 1995 between Wings and Midway, with amendments attached
thereto.
10.10*+ Aircraft Operating Lease Agreement No. AOLAF-118-A dated as of
July 10, 1995 between Wings and Midway, with amendments attached
thereto.
10.11*+ Aircraft Operating Lease Agreement No. AOLAF-135 dated as of July
20, 1995 between FSBU and Midway, with amendments attached
thereto.
10.12*+ Aircraft Operating Lease Agreement No. AOLAF-524 dated as
of August 1, 1995 between FSBU and Midway, with amendments
attached thereto.
10.13*+ Aircraft Operating Lease Agreement No. AOLAF-525 dated as of
October 15, 1995 between FSBU and Midway, with amendments
attached thereto.
10.14*+ Aircraft Operating Lease Agreement No. AOLAF-136 dated as of
December 15, 1995 between FSBU and Midway, with amendments
attached thereto.
10.15*+ Aircraft Lease Agreement dated as of May 24, 1995 between Wilmington Trust Company and Midway.
10.16*+ Airbus A-320-200 Purchase Agreement dated as of March 17, 1995 between AVSA. S.A.R.L. ("AVSA") and Midway with
Amendment Nos. 1 through 6 thereto.
Letter Agreement No. 2 Re: Purchase Incentives and Miscellaneous Matters, as amended
Letter Agreement No. 3 Re: Option Aircraft, as amended
Letter Agreement Re: Financial Matters with Amendment No. 4 thereto.
10.17*+ Agreement of Sublease dated as of January 18, 1995 between
American Airlines, Inc. ("AA") and Midway, with amendments
attached thereto.
10.18*+ AAdvantage(R) Participating Carrier Agreement dated as of January
18, 1995 between AA and Midway, with amendments attached thereto.
10.19*+ Secured Promissory Note dated February 7, 1997 from Midway to AA.
10.20*+ February 10, 1997 Letter Agreement between American Airlines,
Inc. and Midway with Exhibits A and C through I thereto.
10.21*+ Agreement Relating to Repair and Overhaul of Rolls Royce Engines
dated as of May 10, 1996 between Rolls Royce Aero Engine Services
Limited and Midway.
10.22*+ Purchase Agreement between Bombardier Inc. and Midway dated September 17, 1997 with Letter Agreements 001 through
011.
10.23*+ Services and Licenses Agreement between Midway and Airline Management Services, Inc. dated as of December 7, 1995
with Annex A thereto.
10.24*+ Letter Agreement dated as of July 1, 1996 between Fokker
Services, Inc. and Midway.
10.25*+ Aircraft Maintenance Services Agreement dated August 27, 1997
between Time Air Inc. doing business as Canadian Regional
Airlines and Midway.
10.26+ Warrant to Purchase Shares of Common Stock of Midway Airlines
Corporation dated February 11, 1997 issued by Midway in favor of
AMR Corporation.
10.27+ Stockholders Agreement dated as of February 11, 1997.
10.28*+ General Terms of Sale between IAE International Aero Engines AG
and Midway dated May 17, 1995 with Side Letter Number 1 and Side
Letter Number 2 thereto.
10.29*+ Promissory Note dated February 11, 1997 made by Midway to debis
AirFinance B.V.
10.30*+ Promissory Note dated February 11, 1997 made by Midway to Daimler
Benz Aerospace A.G.
10.31+ Severance Agreement and Other Matters made as of February 11,
1997 between Robert R. Ferguson III and Midway.
10.32+ Employment Agreement dated as of July 15, 1996 between Steven
Westberg and Midway, with amendments attached thereto.
10.33+ Employment Agreement dated as of July 15, 1996 between Jonathan
S. Waller and Midway, with amendments attached thereto.
10.34 [Intentionally Omitted.]
10.35 [Intentionally Omitted.]
10.36+ Option to Purchase Shares of Common Stock of Midway Airlines
Corporation dated as of February 11, 1997 issued by Midway in
favor of Robert R. Ferguson III.
10.37+ Agreement and Plan of Merger dated as of January 17, 1997 by and
among Midway, GoodAero, Inc., James H. Goodnight, Ph.D, John P.
Sall and the Zell/Chilmark Fund L.P., with amendments attached
thereto.
10.38*+ Letter Agreement dated September 12, 1997 between GE Aircraft
Engines and Midway.
10.39*+ Sublease dated June 30, 1995 between Peoples
Security Life Insurance Company and Midway.
10.40*+ Sublease Agreement dated May 1, 1995 between Page Avjet
Corporation and Midway.
<PAGE>
10.41*+ AAirpass Agreement dated as of March 2,
1995 between American Airlines Inc. and Midway.
10.42*+ Engine Lease Agreement dated September 11, 1997 between RRPF
Engine Leasing Limited and Midway.
10.43+ Option to Purchase Shares of Common Stock of Midway Airlines
Corporation dated as of February 11, 1997 issued by Midway in
favor of Steven Westberg.
10.44+ Option to Purchase Shares of Common Stock of Midway Airlines
Corporation dated as of February 11, 1997 issued by Midway in
favor of Jonathan S. Waller.
10.45+ Option to Purchase Shares of Common Stock of Midway Airlines
Corporation dated as of February 11, 1997 issued by Midway in
favor of Joanne Smith.
10.46+ Option to Purchase Shares of Common Stock of Midway Airlines
Corporation dated as of February 11, 1997 issued by Midway in
favor of Thomas Duffy, Jr.
10.47+ Option to Purchase Shares of Common Stock of Midway Airlines
Corporation dated as of February 11, 1997 issued by Midway in
favor of David Vance.
10.48*+ Agreement, executed September and November 1997, between Rolls-Royce Canada Limited and Midway.
16.1+ Letter from Arthur Andersen LLP regarding change in independent
public accountants.
24.1 Powers of Attorney from certain members of the Board of Directors of the Company.
</TABLE>
- -----
* Portions have been omitted pursuant to a request for confidential treatment.
The confidential portions have been separately filed with the Securities and
Exchange Commission.
+ Filed as Exhibit to Form S-1, Registration No. 333-37375, effective December
4, 1997, incorporated herein by reference.
++ Form of document used or to be used in connection with the permanent
financing of the first five CRJs.
<PAGE>
Annex A
[FORM OF NOTE]
PROMISSORY NOTE
DUE AUGUST 5, 2014
Issued in Connection with One Canadair Regional Jet Model CL-600-2B19 Series
200ER Aircraft, Registration Number N570ML
No. _ New York, New York
$ , 1998
MIDWAY AIRLINES CORPORATION (the "Company"), hereby promises to pay to
________________________________________________________________, or registered
assigns, the principal sum of Dollars ($ ), in thirty three (33) installments,
each installment to be due and payable on a Payment Date and in an amount equal
to the amount set forth in Annex A hereto opposite such Payment Date, together
with interest on the unpaid principal amount hereof from time to time
outstanding from and including the date hereof until such principal amount is
paid in full at 6.932% per annum computed on the basis of a 360-day year
comprising twelve 30-day months, payable in arrears on each Payment Date and on
the date this Note is paid in full, and under certain circumstances, Breakage
Costs, all as more fully provided in the Trust Indenture and Security Agreement
[N570ML], dated as of _____________ (herein called the "Indenture", the defined
terms therein not otherwise defined herein being used herein with the same
meanings) between the Company and The First National Bank of Maryland, as
Indenture Trustee.
Payments with respect to the principal amount hereof and
interest and Breakage Costs, if any, thereon shall be payable in U.S. dollars in
immediately available funds at the principal corporate trust administration
office of the Indenture Trustee, or as otherwise provided in the Indenture. Each
such payment shall be made on the date such payment is due and without any
presentment or surrender of this Note, except that in the case of any final
payment with respect to this Note, this Note shall be surrendered to the
Indenture Trustee for delivery to the Company for cancellation upon payment in
full of such final payment. Whenever the date scheduled for any payment to be
made hereunder or under the Indenture shall not be a Business Day, then such
payment need not be made on such scheduled date but shall be made on the next
succeeding Business Day with the same force and effect as if made on such
scheduled date and no interest shall accrue on the amount of such payment from
and after such scheduled date if such payment is made on such next succeeding
Business Day.
Each holder hereof, by its acceptance of this Note, agrees
that each payment of principal, interest and Breakage Costs due in respect of
each Note shall, except as otherwise provided in the Indenture, be applied,
first, to the payment of Breakage Costs, if any, and interest on such Note (as
well as any interest on overdue principal and, to the extent permitted by law,
interest and other amounts payable thereunder) due thereunder, second, to the
payment of the principal of such Note then due and third, the balance, if any,
remaining thereafter, to the payment of the principal of such Note remaining
unpaid (provided that such Note shall not be subject to prepayment without the
consent of the affected Noteholder except as permitted by Sections 2.03(b) and
(c) of the Indenture). The amounts paid pursuant to clause third above shall be
applied to the installments of principal of such Note in inverse order of
maturity. Any payment of amounts other than principal, interest and Breakage
Costs in respect of each Note shall be paid by the Indenture Trustee directly to
the Noteholder entitled thereto.
This Note shall bear interest at the Overdue Rate on any part
of the principal amount hereof, interest or Breakage Costs, if any, or any other
amounts due under the Note Purchase Documents not paid when due for any period
during which the same shall be overdue, payable on demand.
<PAGE>
This Note is one of the Notes referred to in the Indenture
which have been or are to be issued by the Company pursuant to the terms of the
Indenture. The Collateral is held by the Indenture Trustee as security for the
Notes. Reference is hereby made to the Indenture for a statement of the rights
of the holder of, and the nature and extent of the security for, this Note, as
well as for a statement of the terms and conditions of the trusts created by the
Indenture, all of which terms and conditions in the Indenture each holder hereof
agrees to by its acceptance of this Note.
This Note is a registered Note and is transferable, as
provided in the Indenture, only upon surrender of this Note for registration of
transfer duly endorsed by, or accompanied by a written statement of transfer
duly executed by, the registered holder hereof or his attorney duly authorized
in writing. Prior to the due presentation for registration of transfer of this
Note, the Company and the Indenture Trustee may deem and treat the registered
holder of this Note as the absolute owner and holder hereof for the purpose of
receiving payment of all amounts payable with respect hereto and for all other
purposes and shall not be affected by any notice to the contrary.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION, AND MAY BE
OFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION
IS AVAILABLE.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
Unless the certificate of authentication hereon has been
executed by or on behalf of the Indenture Trustee by manual signature, this Note
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
-2-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be
executed by one of its authorized officers as of the date hereof.
MIDWAY AIRLINES CORPORATION
By
Title:
-3-
<PAGE>
This is one of the Notes referred to in the within mentioned Indenture.
THE FIRST NATIONAL BANK
OF MARYLAND
as Indenture Trustee
By
Authorized Officer
<PAGE>
MIDWAY AIRLINES CORPORATION
1997 STOCK OPTION PLAN
<PAGE>
MIDWAY AIRLINES CORPORATION
1997 STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. Establishment and Effective Date.........................................................................1
2. Purpose..................................................................................................1
3. Form of Awards. ........................................................................................1
4. Maximum Shares Available.................................................................................1
5. Administration...........................................................................................2
6. Eligibility..............................................................................................2
7. Terms and Conditions of Options..........................................................................3
8. Special Rules Applicable to ISOs.........................................................................4
9. Nontransferability of Options............................................................................4
10. Effect of Termination of Employment on Options...........................................................4
11. Adjustment upon Changes in Capitalization................................................................5
12. Amendment and Termination of Plan........................................................................6
13. Miscellaneous Provisions.................................................................................6
</TABLE>
<PAGE>
MIDWAY AIRLINES CORPORATION
1997 STOCK OPTION PLAN
1. Establishment and Effective Date. Midway Airlines Corporation, a
Delaware corporation (the "Corporation"), hereby establishes a stock option plan
to be known as the Midway Airlines Corporation 1997 Stock Option Plan" (the
"Plan"). The Plan shall become effective on the effective date of the initial
public offering of the Corporation's common stock, par value $.01 ("Common
Stock"), subject to the consummation of such initial public offering. Upon
approval by the Board of Directors of the Corporation (the "Board"), awards may
be made as provided herein, subject to such consummation. In the event that such
initial public offering is not consummated, any such awards shall be cancelled
and all rights of individuals with respect to such awards shall thereupon cease.
2. Purpose. The Corporation desires to attract and retain the best
available employees, officers, directors and consultants for itself and its
Subsidiaries and to encourage the highest level of performance by such
individuals in order to serve the best interests of the Corporation and its
shareholders. The Plan is expected to contribute to the attainment of these
objectives by offering eligible individuals the opportunity to acquire stock
ownership interests in the Corporation, and to thereby provide them with
incentives to put forth maximum efforts for the success of the Corporation and
its Subsidiaries. The term "Subsidiary" as used herein means each corporation
which meets the definition of "subsidiary corporation" contained in Section
424(f) of the Internal Revenue Code of 1986, as amended (the "Code").
3. Form of Awards. Stock options awarded under the Plan may be either
incentive stock options meeting the requirements of Section 422 of the Code
("ISOs") or options that do not meet the requirements of Section 422 of the Code
("NSOs"). Unless otherwise indicated, references in the Plan to "Options" shall
include both ISOs and NSOs. An Option (or a portion thereof) that is not
designated as an ISO, or that does not satisfy all of the requirements of
Section 422 of the Code, and any Option granted to an individual who is not an
employee or officer of the Corporation or a Subsidiary, shall not constitute an
ISO.
4. Maximum Shares Available. The maximum aggregate number of shares of
Common Stock available for award under the Plan is 557,255, subject to
adjustment pursuant to Section 11. Shares of Common Stock issued pursuant to the
Plan may be either authorized but unissued shares or issued shares reacquired by
the Corporation. In the event that any Option under the Plan expires unexercised
or is terminated, surrendered or cancelled without being exercised in whole or
in part for any reason, then the shares of Common Stock covered by such Option
may, at the discretion of the Committee (as defined below), be made available
for subsequent awards under the Plan, upon such terms as the Committee may
determine.
<PAGE>
5. Administration.
(a) Committee. The Plan shall be administered by a committee (the
"Committee") consisting of two or more members of the Board; provided, however,
that with respect to any Option grant to an Optionee (as defined in Section 6)
who is subject to Section 16 of the Securities Exchange Act of 1934, as amended
(the "Act"), (A) the members of the Committee shall each be a "Non-Employee
Director" as defined in Rule 16b-3(b)(3) under the Act, or (B) the full Board
shall act in lieu of the Committee hereunder.
(b) Powers of Committee. Subject to the express provisions of the Plan,
the Committee shall have the power and authority (i) to grant Options and to
determine the exercise price of such Options, the term of each such Option, the
number of shares of Common Stock to be covered by each such Option and any
vesting standards applicable to each such Option; (ii) to designate Options as
ISOs or NSOs; and (iii) to determine the employees, officers, directors and
consultants to whom, and the time or times at which, Options shall be granted.
(c) Delegation. The Committee may delegate to one or more of its
members or to any other person or persons such ministerial duties as it may deem
advisable; provided, however, that the Committee may not delegate any of its
responsibilities hereunder if such delegation will cause the Plan to fail to
comply with Rule 16b-3(d) under the Act. The Committee may also employ
attorneys, consultants, accountants or other professional advisors and shall be
entitled to rely upon the advice, opinions or valuations of any such advisors.
(d) Interpretations. The Committee shall have sole discretionary
authority to interpret the terms of the Plan, to adopt and revise rules,
regulations and policies to administer the Plan and to make any other factual
determinations which it believes to be necessary or advisable for the
administration of the Plan. All actions taken and interpretations and
determinations made by the Committee in good faith shall be final and binding
upon the Corporation, all Optionees who have received awards under the Plan and
all other interested persons.
(e) Liability; Indemnification. No member of the Committee, nor any
individual to whom ministerial duties have been delegated, shall be personally
liable for any action, interpretation or determination made with respect to the
Plan or awards made thereunder, and each member of the Committee shall be fully
indemnified and protected by the Corporation with respect to any liability he or
she may incur with respect to any such action, interpretation or determination,
to the extent permitted by applicable law and to the extent provided in the
Corporation's Certificate of Incorporation and Bylaws, as amended from time to
time.
6. Eligibility. Options may be granted to employees, officers,
directors and consultants of the Corporation and its Subsidiaries; provided,
however, that ISOs may not be granted to any individual who is not an employee
or officer of the Corporation or its
2
<PAGE>
Subsidiaries. In determining the individuals to whom Options shall be granted
and the number of shares to be covered by each Option, the Committee shall take
into account the nature of the services rendered by such individuals, their
present and potential contribution to the success of the Corporation and its
Subsidiaries and such other factors as the Committee in its sole discretion
shall deem relevant. Any individual who is granted an Option under the Plan is
referred to as an "Optionee."
7. Terms and Conditions of Options.
(a) Grant of Options. Options may be granted under this Plan for the
purchase of shares of Common Stock. Options shall be granted in such form and
upon such terms and conditions as the Committee shall from time to time
determine.
(b) Written Agreement. Each award of Options shall be evidenced by a
written agreement, executed by the Optionee and the Corporation, and containing
such restrictions, terms and conditions, if any, as the Committee may require
(the "Option Agreement"). In the event of any conflict between an Option
Agreement and the Plan, the terms of the Plan shall govern.
(c) Option Price. The price at which a share of Common Stock may be
purchased pursuant to the exercise of an Option shall be determined by the
Committee at the Date of Grant; provided, however, that with respect to ISOs,
the option price shall not be less than one hundred (100) percent of the Fair
Market Value (as defined in Section 14(b) of the Common Stock subject to such
Option on the Date of Grant (as defined in Section 14(a). Options granted
concurrently with the Corporation's initial public offering shall have an
exercise price equal to the initial public offering price.
(d) Term of Options. The term of each Option granted under the Plan
shall be established by the Committee. Except as otherwise provided in Section
8(a) with respect to ten (10) percent stockholders of the Corporation, the term
of each ISO shall not exceed ten (10) years from the Date of Grant.
(e) Exercise of Options; Vesting. No Option shall be exercisable until
it has vested. Unless otherwise provided in an Option Agreement, each Option
shall vest and become exercisable to the extent of twenty (20) percent of the
number of shares originally covered thereby on the first anniversary of the Date
of Grant of such Option and to the extent of an additional twenty (20) percent
on the second, third, fourth and fifth anniversaries of the Date of Grant. The
Committee may, in its discretion, accelerate the exercisability of any Option at
any time.
(f) Exercise of Options. Options may be exercised by an Optionee by
giving written notice to the Committee stating the number of shares of Common
Stock with respect to which the Option is being exercised and tendering payment
therefor. Payment for the
3
<PAGE>
Common Stock issuable upon exercise of the Option shall be made in full in cash
or, if the Committee, in its sole discretion, permits in shares of Common Stock
(valued at Fair Market Value on the date of exercise). As soon as reasonably
practicable following such exercise, a certificate representing the shares of
Common Stock purchased, registered in the name of the Optionee, shall be
delivered to the Optionee
8. Special Rules Applicable to ISOs.
(a) Ten Percent Stockholder. Notwithstanding any other provisions of
this Plan to the contrary, an individual may not receive an ISO under the Plan
if such individual, on the Date of Grant, owns (after application of the rules
contained in Section 424(d) of the Code) stock possessing more than ten (10)
percent of the total combined voting power of all classes of stock of the
Corporation or its Subsidiaries, unless (i) the option price for such ISO is at
least one hundred and ten (110) percent of the Fair Market Value of the Common
Stock subject to such ISO on the Date of Grant and (ii) such ISO is not
exercisable after the date five (5) years from its Date of Grant.
(b) Limitation on Grants. The aggregate Fair Market Value (determined
with respect to each ISO at the time such ISO is granted) of the shares of
Common Stock with respect to which ISOs are exercisable for the first time by an
Optionee during any calendar year (under this Plan or any other plan of the
Corporation or a Subsidiary) shall not exceed one hundred thousand dollars
($100,000). Any portion of an Option which exceeds this annual limit shall be a
NSO.
(c) Limitations on Time of Grant. No grant of an ISO shall be made
under this Plan more than ten (10) years after the earlier of the date of
adoption of the Plan by the Board or the date the Plan is approved by the
Corporation's stockholders.
9. Nontransferability of Options.
No Option may be transferred, assigned, pledged or hypothecated
(whether by operation of law or otherwise), except as provided by will, the
applicable laws of descent and distribution or pursuant to a qualified domestic
relations order (as defined in Section 414(p) of the Code), and no Option shall
be subject to execution, attachment or similar process. Any attempted
assignment, transfer, pledge, hypothecation or other disposition of an not
specifically permitted herein shall be null and void and without effect. An
Option may be exercised only by the Optionee during his or her lifetime and,
following the Optionee's death, may be exercised only as provided in Section
10(c).
10. Effect of Termination of Employment on Options.
(a) Termination of Employment. In the event that an Optionee's
employment or service as a non-employee director or consultant with the
Corporation or a Subsidiary shall be
4
<PAGE>
terminated (for reasons other than death, disability or "Cause") or in the event
such Optionee shall resign from employment or service as a non-employee director
or consultant, vested Options held by such Optionee may be exercised (to the
extent that the Optionee was entitled to do so at the time such employment or
services ended) at any time within thirty (30) days after such employment or
services ended, unless, in the case of an NSO, the exercise period is extended
by the Committee; provided, however, if the Corporation severs the employment
relationship or the performance of services by Optionee for "Cause" (as
hereinafter defined), the Optionee's right to exercise vested options shall
terminate simultaneously with such severance of employment or services. In no
event, however, may the Option be exercised after the expiration date of the
Option as designated by the Committee pursuant to Section 7(d).
(b) Disability. In the event that an Optionee's employment or service
as a non-employee director or consultant with the Corporation or one of its
Subsidiaries shall be terminated as a result of the disability of the Optionee
(within the meaning of Section 22(e)(3) of the Code), vested Options may be
exercised (to the extent that the Optionee was entitled to do so on the date he
or she terminated employment or ceased serving as a non-employee director or
consultant) at any time during the first twelve (12) months after such Optionee
terminated employment or ceased serving as a non-employee director or
consultant, unless, in the case an NSO, the exercise period is extended by the
Committee. In no event, however, may the Option be exercised after the
expiration date of the Option as designated by the Committee pursuant to Section
7(d).
(c) Death. If an Optionee shall die while employed by or serving as a
non-employee director or consultant of the Corporation or one of its
Subsidiaries or within three (3) months after the termination of such employment
or cessation of such director's term or service as a consultant, vested Options
may be exercised to the extent that the Optionee was entitled to do so at the
time of his or her death by the Optionee's estate or by the person who acquires
the right to exercise such Option on his or her death by bequest or inheritance.
Such exercise may occur at any time within one (1) year after the date of the
Optionee's death, unless, in the case of an NSO, the exercise period is extended
by the Committee. In no event, however, may the Option be exercised after the
expiration date of the Option as designated by the Committee pursuant to Section
7(d).
(d) Nonvested Options. Unless accelerated in accordance with Section
7(d), unvested Options shall terminate immediately upon the Optionee's
termination of employment or cessation of service as a non-employee director or
consultant with the Corporation and its Subsidiaries for any reason whatsoever,
including death or disability.
(e) Cause. For purposes of the Plan, "Cause" shall mean (i) the
commission by Optionee of a felony involving moral turpitude, (ii) the gross
negligence, misconduct or the breach by Optionee of any statutory or common law
duty of Optionee to the Company or (iii) any other act, omission to act,
statement or event which the Committee determines sufficient to constitute
"Cause" hereunder or as it may announce from time to time.
5
<PAGE>
11. Adjustment upon Changes in Capitalization. Notwithstanding any
other provision of the Plan, the Committee may at any time make or provide for
such adjustments to the Plan, to the number and class of shares available
thereunder or to any outstanding Options as it shall deem appropriate to prevent
dilution or enlargement of rights, including adjustments in the event of changes
in the number of shares of outstanding Common Stock by reason of stock
dividends, split-ups, recapitalizations, mergers, consolidations, combinations
or exchanges of shares, separations, reorganizations, liquidations and the like.
12. Amendment and Termination of Plan. Subject to any approval of the
shareholders of the Corporation that may be required (or, in the opinion of the
Committee, appropriate) under law or the rules of any securities exchange on
which the shares of Common Stock are listed or similar entity, the Committee may
at any time amend, suspend or terminate the Plan. No amendment, suspension or
termination of the Plan shall materially and adversely alter or impair any
Option previously granted under the Plan without the consent of the holder
thereof. No amendment requiring shareholder approval under Treasury Regulation
Section 1.162-27 or Section 422 of the Code shall be valid unless such
shareholder approval is secured as provided therein.
13. Miscellaneous Provisions.
(a) Date of Grant. "Date of Grant" shall refer to the date on which any
Option is granted to an Optionee as set forth in the Option Agreement.
(b) Fair Market Value. "Fair Market Value" of a share of Common Stock
as of any date shall mean the average of the high "bid" and low "asked" prices
of the shares during the three (3) most recent days on which the shares were
traded, as reported on the principal exchange on which the shares are listed.
(c) Tax Withholding. The Corporation shall have the right to require
Optionees or their beneficiaries or legal representatives to remit to the
Corporation an amount sufficient to satisfy Federal, state and local withholding
tax requirements, or to deduct from all payments under this Plan amounts
sufficient to satisfy all withholding tax requirements. Whenever payments under
the Plan are to be made to an Optionee in cash, such payments shall be net of
any amounts sufficient to satisfy all Federal, state and local withholding tax
requirements. The Committee may, in its discretion, permit an Optionee to
satisfy his or her tax withholding obligation either by (i) surrendering shares
owned by the Optionee or (ii) having the Corporation withhold from shares
otherwise deliverable to the Optionee. Shares surrendered or withheld shall be
valued at their Fair Market Value as of the date on which income is required to
be recognized for income tax purposes. In the case of an award of ISOs, the
foregoing right shall be deemed to be provided to the Optionee at the time of
such award.
(d) Compliance With Section 16(b). In the case of an Optionee who is or
may be subject to Section 16 of the Act, it is the intent of the Corporation
that the Plan and any award
6
<PAGE>
granted hereunder satisfy and be interpreted in a manner that satisfies the
applicable requirements of Rule 16b-3, so that such person will be entitled to
the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Act
and will not be subjected to liability thereunder. If any provision of the Plan
or any award would otherwise conflict with the intent expressed herein, that
provision, to the extent possible, shall be interpreted and deemed amended so as
to avoid such conflict. To the extent of any remaining irreconcilable conflict
with such intent, such provision shall be deemed void as applicable to an
Optionee who is or may be subject to Section 16 of the Act.
(e) Successors. The obligations of the Corporation under the Plan shall
be binding upon any successor corporation or organization resulting from the
merger, consolidation or other reorganization of the Corporation, or upon any
successor corporation or organization succeeding to substantially all of the
assets and business of the Corporation. The Corporation shall make appropriate
provision for the preservation of Optionees' rights under the Plan in any
agreement or plan which it may enter into or adopt to effect any such merger,
consolidation, reorganization or transfer of assets.
(f) No Right to Employment. Nothing in the Plan or in any Option
Agreement entered into pursuant to Section 7(b), nor the grant of any Option,
shall confer upon any individual any right to continue in the employ of the
Corporation or a Subsidiary or to be entitled to any remuneration or benefits
not set forth in the Plan or such Option Agreement or interfere with or limit
the right of the Corporation or a Subsidiary to modify the terms of or terminate
such individual's employment at any time.
(g) Notices. Notices required or permitted to be made under the Plan
shall be sufficiently made if sent by registered or certified mail addressed (a)
to the Optionee at the Optionee's address as set forth in the books and records
of the Corporation or its Subsidiaries, or (b) to the Corporation or the
Committee at the principal office of the Corporation.
(h) Severability. In the event that any provision of the Plan shall be
held illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
(i) Governing Law. To the extent not preempted by Federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of Delaware.
7
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Plan to be executed
by its duly authorized officers this ____________ day of __________, 1997.
MIDWAY AIRLINES CORPORATION
By:
President and Chief Executive Officer
<PAGE>
MIDWAY AIRLINES CORPORATION
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is entered into this 4th day of December,
1997 (the "Date of Grant") by and between MIDWAY AIRLINES CORPORATION (the
"Company") and (the "Optionee"), in order to set forth the terms and conditions
of Options granted to the Optionee under The Midway Airlines Corporation 1997
Stock Option Plan (the "Plan").
1. Terms of Grant. Subject to the terms and conditions of this
Agreement and the terms of the Plan, which are incorporated by reference herein,
the Company hereby grants to the Optionee incentive stock options ("ISOs")
and/or nonqualified stock options ("NSOs") (collectively, "Options") to purchase
shares of the Company's common stock, par value $.01 ("Common Stock") as
follows:
Nonqualifed
Stock Options
Number of Shares:
Option Price:
Expiration Date:
2. Vesting The Options shall become exercisable to the extent of 20% of
the shares originally subject to the Option on the first anniversary of the Date
of Grant and to the extent of an additional 20% on the second, third, fourth an
fifth anniversaries of the Date of Grant.
3. Exercise of Options. The Optionee may exercise the Options by giving
written notice to the Committee on a form provided by the Committee specifying
the portion of the Options being exercised and the exercise date, and by
tendering payment for the shares of Common Stock being purchased under the
Options. Written notice received by the Committee after the specified exercise
date will be accepted at the discretion of the Committee and, in such event, the
exercise date shall be deemed to be the date on which the written notice was
received by the Committee.
4. Payment for Shares. Payment for the shares of Common Stock issuable
under exercise of an Option shall be made in full in cash or if the Committee
permits, in its sole discretion, in shares of Common Stock, valued at fair
market value on the exercise date. Any payment for shares must include such
amount as may be required by the Company to satisfy Federal, state and local
withholding tax requirements.
5. Issuance of Certificates. As soon as reasonable practicable
following the exercise of an Option, and the receipt by the Company of payment
for the shares, a certificate representing the shares of Common Stock purchased,
registered in the name of the Optionee, shall be delivered to the Optionee.
6. Termination of Employment. In the event that the employment of the
Optionee is terminated (or, in the case of a non-employee director or
consultant, his or her status as a director or consultant ceases) for reasons
other than death, total disability or "Cause", or in the even such Optionee
shall resign from employment or service as a non-employee, director or
consultant, the Optionee may exercise his or her vested Options awarded
hereunder at any time before the earlier of (i) 30 days after such termination
or cessation or (ii) the expiration dates of the Options.
7. Total Disability. In the event the Optionee shall become totally
disabled (as defined in the Plan), the Optionee may exercise his or here vested
Options at any time before the earlier of (i) the date which is twelve (12)
months after the Optionee terminates employment (or status as a non-employee
director or consultant) as a result of disability or (ii) the expiration date of
the Options.
8. Death. In the event that the Optionee dies while employed by the
Company or within three (3) months after termination of such employment (or, if
the Optionee is a non-employment director or consultant), the Opionee's vested
Options may be exercised by the Optionee's estate or by he person who acquires
the right to
<PAGE>
exercise such Option upon the Optionee's death by bequest or inheritance. Such
exercise may occur at any time before the earlier of (i) one (1) year after the
date of the Optionee's death or (ii) the expiration date of the Options.
9. Cause. In the event that the Optionee's employment or other
relationship with the Company is terminated for Cause, then the Optionee's right
to exercise his or her vested Options and this Stock Option Agreement shall
terminate simultaneously with such termination. For purposes hereof, "Cause"
shall mean (i) the commission by Optionee of a felony involving moral turpitude,
(ii) the gross negligence, misconduct or the breach by Optionee of any statutory
or common law duty of Optionee to the Company, or (iii) any other act, omission
to act, statement or event which the Committee determines sufficient to
constitute "Cause" hereunder or as it may announce from time to time.
10. Nonvested Options. All nonvested Options will terminate immediately
upon the Options's termination of employment or cessation of service as a
non-employee director or consultant to the Company for any reason whatsoever,
including death or disability.
11. Nontransferability. The Options granted hereunder may not be
transferred, assigned, pledged or hypothecated (whether by operation of law or
otherwise), except as provided by will or the applicable laws of descent and
distribution or pursuant to a qualified domestic relations order, and such
Options shall not be subject, in whole or in part, to execution, attachment or
process.
12. Professional Advice. The acceptance and exercise of the Options and
the sale of Common Stock issued pursuant to the exercise of Options may have
consequences under federal and state tax and securities law which may vary
depending on the individual circumstances of the Optionee. Accordingly, Optionee
acknowledges that he or she has been advised to consult his or her personal
legal and tax advisors in connection with this Agreement and his or her dealings
with respect to the Options and/or the Common Stock. Without intending to limit
the matters to be considered, the Optionee should consider whether upon the
exercise of NSOs the Optionee should file an election with the Internal Revenue
Service pursuant to Section 83(b) of the Internal Revenue Code.
13. Miscellaneous.
(a) Definitions. Terms used in this Agreement which are defined in the
Plan shall have the respective meanings set forth in the Plan.
(b) No Right to Employment. This Agreement shall not confer upon the
Optionee any right to continue in the employ or service of the Company or a
subsidiary or to be entitled to any remuneration or benefits not set forth in
this Agreement or the Plan nor interfere with or limit the right of the Company
or a subsidiary to modify the term of or terminate the Optionee employee at any
time.
(c) Notice. Any notice or other communication required or permitted to
be given under this Agreement must be given by personal delivery or by certified
mail, return receipt requested, and addressed, if to the Committee or the
Company, at the principal office of the Company, and, if to the Optionee, at the
Optionee's last known address as set forth in the books and records of the
Company.
(d) Plan to Govern. This Agreement and the rights of the Optionee
hereunder are subject to all of the terms and conditions of the Plan, as the
same may be amended from time to time, as well as to such rules and regulations
as the Committee may adopt for administration of the Plan.
(e) Amendment. Subject to restrictions set forth in the Plan, the
Company may from time to time suspend, modify or amend this Agreement. No
suspension, modification or amendment of this Agreement may, without the consent
of the Optionee, adversely affect the rights of the Optionee with respect to the
Options granted pursuant to this Agreement.
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<PAGE>
(f) Severability. In the event that any provision of this Agreement
shall be held illegal or invalid for any reason, such illegality or invalidity
shall not affect the remaining provisions of this Agreement, and this Agreement
shall be construed and enforced as if the illegal or invalid provision had not
been included.
(g) Entire Agreement. This Agreement and the Plan contain all of the
understandings between the Company and the Optionee concerning the Options
granted under the Plan and supersede all prior agreements and understandings.
(h) Governing Law. To the extent not preempted by Federal law, this
Agreement shall be construed in accordance with and governed by the laws of the
State of Delaware.
The Company and the Optionee have executed this Agreement as of the
Date of Grant set forth above.
MIDWAY AIRLINES CORPORATION OPTIONEE:
By:
Robert R. Ferguson III
President and Chief Executive Officer
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<PAGE>
TRUST INDENTURE AND SECURITY AGREEMENT [N570ML]
Dated as of ______________
between
MIDWAY AIRLINES CORPORATION
and
THE FIRST NATIONAL BANK OF MARYLAND
as Indenture Trustee
Covering One Canadair Regional Jet Model CL-600-2B19 Aircraft
Registration Number N570ML
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 - INTERPRETATION...................................................................................... 1
Section 1.01. Definitions.......................................................................... 1
Section 1.02. References........................................................................... 2
Section 1.03. Headings............................................................................. 2
Section 1.04. Appendices, Schedule and Exhibits.................................................... 2
ARTICLE 2 - THE NOTES........................................................................................... 2
Section 2.01. Form of Notes........................................................................ 2
Section 2.02. Issuance of Notes.................................................................... 2
Section 2.03. Terms of the Notes................................................................... 2
Section 2.04. Authentication by the Indenture Trustee.............................................. 4
Section 2.05. No Liability of Indenture Trustee.................................................... 4
Section 2.06. Method of Payment.................................................................... 4
Section 2.07. Application of Payments.............................................................. 5
Section 2.08. Equally and Ratably Secured.......................................................... 5
Section 2.09. Termination of Interest in Collateral................................................ 5
Section 2.10. Transfer of Notes.................................................................... 5
Section 2.11. Mutilated, Destroyed, Lost or Stolen Notes........................................... 6
Section 2.12. Payment of Transfer Taxes............................................................ 7
Section 2.13. Notes in Respect of Replacement Aircraft............................................. 7
[Section 2.14. Withholding Taxes.................................................................... 7
Section 2.15. Increased Costs...................................................................... 7
ARTICLE 3 - SECURITY............................................................................................ 10
Section 3.01. Grant of Security Interest........................................................... 10
ARTICLE 4 - COVENANTS OF THE COMPANY............................................................................ 13
Section 4.01. Liens................................................................................ 13
Section 4.02. Possession, Operation and Use, Maintenance,
Registration and Insignia................................................... 14
(a) Generally........................................................... 14
(b) Possession.......................................................... 14
(c) Operation........................................................... 19
(d) Maintenance......................................................... 20
(e) Registration........................................................ 21
(f) Insignia............................................................ 23
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Section 4.03. Inspection; Financial Information.................................................... 23
(a) Inspection.......................................................... 23
(b) Financial Information............................................... 24
Section 4.04. Replacement and Pooling of Parts; Alterations,
Modifications and Additions; Substitution of Engines........................ 26
(a) Replacement of Parts................................................ 26
(b) Parts............................................................... 26
(c) Pooling or Parts Leasing............................................ 26
(d) Alterations, Modifications and Additions............................ 27
(e) Substitution of Engines............................................. 28
Section 4.05. Loss, Destruction or Requisition..................................................... 30
(a) Event of Loss with Respect to the Airframe.......................... 30
(b) Effect of Replacement............................................... 30
(c) Conditions to Airframe Replacement.................................. 31
(d) Non-Insurance Payments Received on Account
of an Event of Loss................................................. 33
(e) Requisition of Use.................................................. 33
(f) Application of Payments During Existence of
Material Potential Event of Acceleration or
Event of Acceleration............................................... 34
(g) Notice of Damage.................................................... 34
Section 4.06. Insurance............................................................................ 34
(a) Public Liability and Property
Damage Insurance.................................................... 34
(b) Insurance Against Loss or Damage to the
Aircraft and Engines................................................ 35
(c) Additional Insureds; Loss Payment................................... 35
[(d) Deductibles and Self-Insurance...................................... 36
(e) Application of Hull Insurance Proceeds.............................. 37
(f) Insurance for Own Account........................................... 37
(g) Reports, etc........................................................ 38
(h) Tail Insurance...................................................... 38
Section 4.07. Filings.............................................................................. 39
Section 4.08. Corporate Existence.................................................................. 39
Section 4.09. Merger, Consolidation................................................................ 39
Section 4.10. Notice of Change of the Company's Chief Executive
Office...................................................................... 40
ARTICLE 5 - RECEIPT, DISTRIBUTION AND APPLICATION
OF INCOME FROM THE COLLATERAL................................................................. 40
Section 5.01. Distribution of Principal, Breakage
Costs and Interest.......................................................... 40
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Section 5.02. Payments in Case of Prepayment....................................................... 41
Section 5.03. Payments during Continuance of
Event of Acceleration....................................................... 41
Section 5.04. Funds Held by Indenture Trustee; Investments......................................... 43
ARTICLE 6 - REMEDIES OF THE INDENTURE TRUSTEE UPON
AN EVENT OF ACCELERATION...................................................................... 44
Section 6.01. Event of Acceleration................................................................ 44
Section 6.02. Remedies with Respect to Collateral.................................................. 47
(a) Remedies Available.................................................. 47
(b) Notice of Sale...................................................... 49
(c) Rescission of Default............................................... 49
(d) Waiver of Defaults.................................................. 49
Section 6.03. Remedies Cumulative.................................................................. 50
Section 6.04. Discontinuance of Proceedings........................................................ 50
ARTICLE 7 - DUTIES OF THE INDENTURE TRUSTEE..................................................................... 50
Section 7.01. Notice of Event of Acceleration;
Action Upon Event of Acceleration........................................... 50
Section 7.02. Action Upon Instructions............................................................. 51
Section 7.03. Indemnification...................................................................... 51
Section 7.04. No Duties Except as Specified in
Indenture or Instructions................................................... 52
Section 7.05. No Action Except Under Indenture
or Instructions............................................................. 52
ARTICLE 8 - THE INDENTURE TRUSTEE............................................................................... 52
Section 8.01. Acceptance of Trusts and Duties...................................................... 52
Section 8.02. [Intentionally Omitted].............................................................. 53
Section 8.03. Absence of Duties.................................................................... 53
Section 8.04. No Representations or Warranties as to
the Aircraft or Documents................................................... 53
Section 8.05. No Segregation of Moneys; No Interest................................................ 53
Section 8.06. Reliance; Agents; Advice of Counsel.................................................. 54
Section 8.07. Compensation and Expenses of Indenture Trustee....................................... 54
ARTICLE 9 - [RESERVED].......................................................................................... 55
ARTICLE 10 - SUCCESSOR INDENTURE TRUSTEE........................................................................ 55
Section 10.01. Resignation of Indenture Trustee;
Appointment of Successor.................................................... 55
Section 10.02. Appointment of Separate Trustees..................................................... 56
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ARTICLE 11 - SUPPLEMENTS AND AMENDMENTS TO THIS
INDENTURE AND OTHER DOCUMENTS................................................................. 58
Section 11.01. Supplemental Indentures Without
Consent of Noteholders...................................................... 58
Section 11.02. Indenture Trustee Protected.......................................................... 59
Section 11.03. Requirement of Substance, Not Form................................................... 59
Section 11.04. Documents Mailed to Noteholders...................................................... 60
ARTICLE 12 - MISCELLANEOUS...................................................................................... 60
Section 12.01. Termination of Indenture............................................................. 60
Section 12.02. No Legal Title to Collateral in Noteholder........................................... 60
Section 12.03. Sale of Aircraft by Indenture Trustee is Binding..................................... 60
Section 12.04. Further Assurances................................................................... 60
Section 12.05. No Representations or Warranties as
to Aircraft or Note Purchase Documents...................................... 61
Section 12.06. Indenture and Notes for Benefit of
Indenture Trustee and Noteholders Only...................................... 61
Section 12.07. Section 1110 of the Bankruptcy Code.................................................. 62
Section 12.08. Notices.............................................................................. 62
Section 12.09. Separate Counterparts................................................................ 62
Section 12.10. Successors and Assigns............................................................... 63
Section 12.11. Governing Law........................................................................ 63
Section 12.12. Normal Commercial Relations.......................................................... 63
Section 12.13 Severability......................................................................... 63
Section 12.14. No Oral Modifications or Continuing Waivers.......................................... 63
Section 12.15. Headings............................................................................. 64
Section 12.16. Cross-Collateralization...............................................................64
Appendix A Definitional Appendix
Annex A Form of Note
Annex B Form of Indenture Supplement
Annex C Amortization Schedule
Annex D Country List for Re-registration; Leasing
Annex E Country List for Pooling
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<PAGE>
TRUST INDENTURE AND SECURITY AGREEMENT [N570ML]
This TRUST INDENTURE AND SECURITY AGREEMENT [N570ML], dated as
of __________________ (this "Indenture"), between MIDWAY AIRLINES CORPORATION, a
Delaware corporation (the "Company"), and THE FIRST NATIONAL BANK OF MARYLAND, a
national banking association (the "Indenture Trustee"), as Indenture Trustee
hereunder and any successor appointed in accordance with the terms hereof.
W I T N E S S E T H:
WHEREAS, the Company, the Indenture Trustee and the Initial
Lender have entered into the Note Purchase Agreement, pursuant to which the
Initial Lender has agreed to purchase the Initial Lender's Note from the Company
in an aggregate amount equal to the Loan by paying the Purchase Price therefor,
and the Company has agreed to issue and deliver pursuant to this Indenture such
Note to the Initial Lender, and the Company shall use the proceeds from the
purchase of such Note to refinance the interim indebtedness incurred in
connection with the acquisition of the Aircraft; and
WHEREAS, the Company desires by this Indenture, among other
things, (i) to issue and deliver to the Initial Lender such Note and (ii) to
grant to the Indenture Trustee a Lien on the Collateral in accordance with the
terms hereof, in trust, as security for the Secured Obligations, for the equal
and ratable benefit and security of the Noteholders; and
WHEREAS, all things necessary to make this Indenture the
legal, valid and binding obligation of the Company and the Indenture Trustee,
for the uses and purposes herein set forth, in accordance with its terms, have
been done and performed and have happened;
NOW, THEREFORE, to secure the Secured Obligations, it is
hereby covenanted and agreed by and between the parties hereto as follows:
ARTICLE 1 - INTERPRETATION
Section 1.01. Definitions
Capitalized terms used herein and defined in Appendix A shall,
except as such definitions may be specifically modified in the body of this
Indenture for the purposes of a particular section, paragraph or clause, have
the meanings given such terms in Appendix A.
<PAGE>
Section 1.02. References
References in this Indenture to sections, paragraphs, clauses,
appendices, schedules and exhibits are to sections, paragraphs, clauses,
appendices, schedules and exhibits in and to this Indenture unless otherwise
specified.
Section 1.03. Headings
The headings of the various sections, paragraphs and clauses
of this Indenture and the table of contents are for convenience of reference
only and shall not modify, define, expand or limit any of the terms of
provisions hereof.
Section 1.04. Appendices, Schedule and Exhibits
The appendices, schedules and exhibits hereto are part of this
Indenture.
ARTICLE 2 - THE NOTES
Section 2.01. Form of Notes
(a) The Notes shall be substantially in the form set forth as
Annex A.
Section 2.02. Issuance of Notes
(a) Subject to the satisfaction or waiver by the Initial
Lender of the conditions precedent contained in Article 3 of the Note Purchase
Agreement, on the Closing Date the Initial Lender shall purchase and the Company
shall execute and deliver the Initial Lender's Note in accordance with Article 2
of the Note Purchase Agreement. The Initial Lender's Note shall be duly
authenticated by the Indenture Trustee, dated the Closing Date, and designated
as having been issued in connection with the Aircraft. The Initial Lender's Note
shall be payable to the Initial Lender. The Company shall furnish to the
Indenture Trustee a copy of each Note issued pursuant to the provisions of this
Indenture.
(b) The aggregate principal amount of the Notes issued
hereunder shall be paid in accordance with the amortization schedule attached
hereto as Annex C. The Notes shall mature on August 5, 2014.
Section 2.03. Terms of the Notes
(a) The Notes shall bear interest on the principal amount
thereof from time to time outstanding at a rate of 6.932% per annum computed on
the basis of a 360-day year comprising
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<PAGE>
twelve 30-day months. Such interest shall be payable on each Payment Date.
Interest shall accrue from and including the Closing Date to but excluding the
first Payment Date, and thereafter from and including each Payment Date to but
excluding the following Payment Date. Each Note shall bear interest at the
Overdue Rate on any part of the principal amount thereof, interest or Breakage
Costs, if any, and any other amounts due to any Noteholder which is not paid
when due (whether at stated maturity, by acceleration or otherwise) for any
period during which the same shall be overdue.
(b) Unless a Replacement Airframe and Replacement Engines are
substituted for the Airframe and Engines suffering an Event of Loss in
accordance with Section 4.05, the Notes shall be prepaid in whole but not in
part by the Company in connection with an Event of Loss with respect to the
Aircraft as and when provided in Section 4.05(a) at a price, in addition to any
other amounts payable to the Noteholders or any other Indemnified Person under
the Note Purchase Documents, equal to the aggregate unpaid principal amount
thereof, together with accrued but unpaid interest thereon to but not including
the date of payment, but without Breakage Costs.
(c) The Notes may be prepaid in whole but not in part (except
in the case of a prepayment which occurs after a Noteholder has requested the
payment of (x) any Increased Costs pursuant to Section 2.14(a) or (y) any
amounts pursuant to Article 6 of the Note Purchase Agreement in respect of
withholding Taxes, in which case such prepayment, if elected to be made by the
Company, shall be in respect of only the Notes held by the Noteholder making
such request) by the Company on any Prepayment Date on or after the fifth
anniversary of the Closing Date (except in the case of any prepayment which
occurs after a Noteholder has requested the payment of (x) any Increased Costs
pursuant to Section 2.14(a) or (y) any amounts pursuant to Article 6 of the Note
Purchase Agreement in respect of withholding Taxes, in which case such
prepayment may be at any time with respect to the Notes held by the Noteholder
making such request) upon at least thirty (30) days' prior irrevocable notice
from the Company to the Indenture Trustee, at a price in addition to any other
amounts payable to the Noteholders or any other Indemnified Person under the
Note Purchase Documents, equal to the aggregate unpaid principal amount thereof,
together with accrued but unpaid interest thereon to but not including the date
of payment, plus in the case of each Note, Breakage Costs, if any.
(d) The Indenture Trustee shall give prompt notice of any
prepayment of the Notes to all Noteholders as soon as the Indenture Trustee
shall have received written notice from the Company of its intention to prepay
the Notes, which notice shall specify the date fixed for prepayment, which date
shall be not less than five (5) Business Days after the date of such notice from
the Indenture Trustee.
(e) The Company shall have no right to prepay the principal
amount of the Notes, in whole or in part, or purchase the Notes except as
permitted by Sections 2.03(b) and (c).
The Notes shall be executed on behalf of the Company by one of
its authorized officers. Notes bearing the signatures of individuals who were at
any time the proper officers of the
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<PAGE>
Company shall bind the Company, notwithstanding that such individuals or any of
them have ceased to hold such offices prior to the authentication and delivery
of such Notes or did not hold such offices at the respective dates of such
Notes. Each Note issued hereunder shall be dated the Closing Date.
Section 2.04. Authentication by the Indenture Trustee
No Note shall be entitled to any benefit under this Indenture
or be valid or obligatory for any purpose, unless it shall have been
authenticated by or on behalf of the Indenture Trustee by manual signature of
one of its authorized officers and such certificate upon any Note shall be
conclusive evidence, and the only evidence, that such Note has been duly
authenticated and delivered hereunder.
Section 2.05. No Liability of Indenture Trustee
Each Noteholder, by its acceptance of a Note, agrees that the
Indenture Trustee is not and shall not be personally liable to such Noteholder
for any amount payable under such Note or this Indenture or, except as expressly
provided in the Note Purchase Agreement or this Indenture, for any liability
under the Note Purchase Agreement or this Indenture.
Section 2.06. Method of Payment
The principal, interest and Breakage Costs, if any, in respect
of each Note and all other Obligations will be payable by the Company no later
than 1:00 p.m. (New York City time) on the date due in Dollars by wire transfer
in immediately available funds to the account of the Indenture Trustee set forth
on Schedule I to the Note Purchase Agreement (or such other office or such other
account of Indenture Trustee in the continental United States as the Indenture
Trustee shall direct in a written notice to the Company at least ten (10)
Business Days prior to the date such payment is due). The Indenture Trustee will
pay, or cause to be paid (if payment is received from the Company by 2:00 p.m.
(New York City time)), on the same day as so received and otherwise by 11:00
a.m. on the next Business Day) (x) to the Initial Lender at the account
specified in Schedule I to the Note Purchase Agreement and (y) to any other
Noteholder at such account or accounts at such financial institution or
institutions as such Noteholder shall have designated to the Indenture Trustee
in writing, all amounts payable by the Company hereunder to such holder or a
nominee thereof by transferring by wire transfer in immediately available funds
to such account or accounts the amount to be distributed to such Noteholder,
without any presentment or surrender of any Note, except that a Noteholder shall
surrender such Note to the Indenture Trustee for delivery to the Company for
cancellation upon payment in full of the principal amount of and interest on
such Note, Breakage Costs, if any, and such other amounts payable to such
Noteholder under the Note Purchase Documents.
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<PAGE>
Whenever the date scheduled for any payment to be made
hereunder or under any Note shall not be a Business Day, then such payment need
not be made on such scheduled date but may be made on the next succeeding
Business Day with the same force and effect as if made on such scheduled date
and no interest shall accrue on the amount of such payment from and after such
scheduled date if such payment is made on such next succeeding Business Day.
Section 2.07. Application of Payments
Each payment of principal, interest and Breakage Costs due in
respect of each Note shall, except as otherwise expressly provided herein, be
applied, first, to the payment of Breakage Costs, if any, and interest on such
Note (as well as any interest on overdue principal and, to the extent permitted
by law, interest and other amounts payable thereunder) due thereunder, second,
to the payment of the principal of such Note then due and third, the balance, if
any, remaining thereafter, to the payment of the principal of such Note
remaining unpaid (provided that such Note shall not be subject to prepayment
without the consent of the affected Noteholder except as permitted by Sections
2.03(b) and (c)). The amounts paid pursuant to clause third above shall be
applied to the installments of principal of such Note in inverse order of
maturity. Any payment of amounts other than principal, interest and Breakage
Costs in respect of each Note shall be paid by the Indenture Trustee directly to
the Noteholder entitled thereto.
Section 2.08. Equally and Ratably Secured
All Notes at any time outstanding under this Indenture shall
be equally and ratably secured hereby without preference, priority or
distinction on account of the date or dates or the actual time or times of the
issue or maturity of such Notes so that all Notes at any time issued and
outstanding hereunder shall have the same rights, Liens and preferences under
and by virtue of this Indenture.
Section 2.09. Termination of Interest in Collateral
A Noteholder shall have no further interest in, or other right
with respect to, the Collateral when and if the principal amount of and interest
on all Notes held by such Noteholder and all other Obligations of the Company to
such Noteholder and any Indemnified Person related to such Noteholder shall have
been paid in full.
Section 2.10. Transfer of Notes.
The Indenture Trustee shall maintain at its corporate trust
administration office a register for the purpose of registering transfers and
exchanges of Notes (the "Register"). A Noteholder intending to transfer such
Note to a new payee, or to exchange any Note or Notes held by it for a Note or
Notes of a different denomination or denominations, may surrender such Note or
Notes to the Indenture Trustee at such principal corporate trust administration
office of the Indenture
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Trustee, together with a written request from such Noteholder for the issuance
of a new Note or Notes, specifying the denomination or denominations of the
same, and, in the case of a surrender for registration of transfer, the name and
address of the transferee or transferees. Within five (5) Business Days after
receipt of such documents, the Company will issue, and the Indenture Trustee
will authenticate, a new Note or Notes, in the same aggregate principal amount
then outstanding, bearing the same interest rate and with the same payment
schedule and the same maturity as the Note or Notes surrendered, in such
denomination or denominations and payable to such payee or payees as shall be
specified in the written request from such Noteholder. All Notes issued upon any
registration of transfer or exchange of Notes shall be the valid obligations of
the Company evidencing the same respective obligations, and entitled to the same
security and benefits under this Indenture, as the Notes surrendered upon such
registration of transfer or exchange. The Indenture Trustee shall make a
notation on each new Note or Notes of the amount of all payments or prepayments
of principal and interest previously made on the old Note or Notes with respect
to which such new Note or Notes is or are issued.
Prior to the due presentment for registration of transfer of a
Note, the Company and the Indenture Trustee may deem and treat the registered
Noteholder of such Note as the absolute owner and holder of such Note for the
purpose of receiving payment of all amounts payable with respect to such Note
and for all other purposes and shall not be affected by any notice to the
contrary.
The Indenture Trustee will promptly notify the Company of each
request for a registration of transfer of any Note.
From time to time, the Indenture Trustee will provide the
Company with such information as it may request as to the name and address of
the registered Noteholders.
Section 2.11. Mutilated, Destroyed, Lost or Stolen Notes
If any Note shall become mutilated, destroyed, lost or stolen,
the Company shall, upon the written request of the Noteholder of such Note,
issue, and the Indenture Trustee shall authenticate and deliver in replacement
thereof, a new Note, payable to the same Noteholder in the same principal
amount, with the same final maturity date, bearing the same interest rate and
dated the same date as the Note so mutilated, destroyed, lost or stolen. If the
Note being replaced has become mutilated, such Note shall be surrendered to the
Indenture Trustee and forwarded to the Company by the Indenture Trustee. If the
Note being replaced has been destroyed, lost or stolen, the Noteholder of such
Note shall furnish to the Company and the Indenture Trustee such security and/or
indemnity as may be reasonably required by them to save the Company and the
Indenture Trustee harmless from any cost, expense, damage, loss and liability
resulting therefrom, and evidence satisfactory to the Company and the Indenture
Trustee of the destruction, loss or theft of such Note and of the ownership
thereof.
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The Indenture Trustee will promptly cancel and destroy all
Notes surrendered for transfer, exchange or replacement pursuant to Section 2.10
or this Section 2.11.
Section 2.12. Payment of Transfer Taxes
Prior to the transfer of any Note or Notes pursuant to Section
2.10, the Company or the Indenture Trustee may require from the party requesting
such new Note or Notes payment of a sum to reimburse the Company or the
Indenture Trustee for, or to provide funds for the payment of, any tax or other
governmental charge in connection with such transfer.
Section 2.13. Notes in Respect of Replacement Aircraft
Upon the execution and delivery of an Indenture Supplement
covering a Replacement Aircraft, each Note issued in connection with the
Aircraft being replaced shall be deemed to have been issued in connection with
such Replacement Aircraft and each Note issued thereafter upon a transfer or
exchange of, or as a replacement for, a Note, shall be designated as having been
issued in connection with such Replacement Aircraft.
Section 2.14. Withholding Taxes
The Indenture Trustee agrees, to the extent required by
Applicable Law, to withhold from each payment due under any Note, applicable
withholding taxes at the appropriate rate, and, on a timely basis, to deposit
such amounts with an authorized depository and make such reports, filings and
other reports in connection therewith, and in the manner, required under
Applicable Law. The Indenture Trustee shall promptly furnish to the affected
Noteholder (but in no event later than the date thirty (30) days after the due
date thereof) a U.S. Treasury Form 1042S and such other form reasonably required
by the affected Noteholder (or similar forms as at any relevant time in effect),
indicating payment in full of any Taxes withheld from any payments by the
Indenture Trustee to such Noteholder together with all such other information
and documents reasonably requested by such Noteholder and necessary or
appropriate to enable such Noteholder to substantiate a claim for credit or
deduction with respect thereto for income tax purposes of the country where such
Noteholder is located. Each Noteholder shall be responsible for delivering to
the Indenture Trustee from time to time such certificates, statements or other
documents which may be required by law to evidence such Noteholder's entitlement
to exemption from or reduction in rate of United States Federal income tax with
respect to payments under any Note pursuant to any Applicable Law on a payment
to a Noteholder.
Section 2.15. Increased Costs. (a) If the enactment, adoption
or promulgation, after the Closing Date, of any applicable law or regulation or
any change, after the Closing Date, in any applicable law, rule, regulation,
guidance or ruling or any exceptions thereto (or any applicable published
change, after the Closing Date, in the interpretation thereof (whether or not
having force or law) or any compliance by a Noteholder with any request from
such authority
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(provided that the observance thereof is in accordance with the reasonable
practice of lenders in the country concerned)) of general applicability by any
governmental, fiscal, monetary or other authority charged with the
administration or application thereof (in each of the foregoing cases which is
binding upon such Noteholder, in any applicable jurisdiction for purposes of
funding or maintaining any Note or the participation by such Noteholder in the
transactions contemplated hereby and by the Note Purchase Documents), shall:
(i) impose, modify, or deem applicable any reserve,
special deposit or similar requirement (including, without limitation,
any such requirement imposed by the Board of Governors of the Federal
Reserve System, but excluding any such requirement with respect to
which such Noteholder is entitled to compensation during the relevant
interest period and excluding any regulatory change the effect of which
is the implementation of the Basle Accord as in effect on the date
hereof) against deposits with, or credit extended by, such Noteholder
by reason of the funding or maintaining of its Note;
(ii) impose, modify or deem applicable a capital
adequacy requirement which such Noteholder can establish has the effect
of increasing the amount of capital required to be maintained by such
Noteholder, but only to the extent that such increase is directly
attributable and allocable to such Noteholder's obligations to fund and
maintain its Note; or
(iii) impose, modify or deem applicable any tax (not
excluded from indemnification under Article 6 of the Note Purchase
Agreement), or other governmental, monetary or other charge or other
condition which in each case is in the nature of such reserve, special
deposit or similar requirement;
and the result of any of the foregoing shall be to increase in the aggregate and
by a material amount the costs to such Noteholder, but only to the extent that
such increase is directly attributable and allocable to funding and maintaining
the Notes (any such reserve, special deposit, similar requirement, tax or other
governmental, monetary or other charge or condition or capital adequacy cost
hereinafter collectively referred to as an "Increased Cost") and provided, that
in assessing the effect of such enactment, adoption or change or condition and
determining such Increased Cost, such Noteholder shall evaluate and apply the
requirements in respect of its Notes hereunder in a manner which is no less
favorable to the Company than, and shall not discriminate in such evaluation and
application in relation to, and with respect to clauses (i) or (iii) above, the
other deposits with or credit extended by the Noteholder involving any other
Persons, and with respect to clause (ii) above, comparable funding obligations
held by the Noteholder of the same type and category involving other Persons,
then the Noteholder shall promptly provide the Company with written notice of
such event giving rise to such Increased Cost. Such notice shall be accompanied
by an officer's certificate describing in reasonable detail (a) the events
giving rise to such Increased Cost, (b) the basis for determining and allocating
such Increased Cost with respect to the Notes held by such Noteholder and a
statement to the effect that the determination for such Increased Costs in
connection with its
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obligations under this transaction has been made in a manner that does not
discriminate against the Company, and (c) a good faith estimate of the amount
expected to be incurred by the Noteholder (such estimate to set out in
reasonable detail the basis on which it has been prepared).
Within thirty (30) days of the receipt of an invoice for Increased Cost
incurred following (or accompanying such notice), the Company shall remit the
amount due to such Noteholder.
Notwithstanding any of the provisions hereof, such Noteholder shall not
be entitled to serve notice to cause a payment of Increased Cost if (i) the
Noteholder (or any office, branch or affiliate thereof) incurred the relevant
Increased Cost as a result of the Noteholder's (or any office, branch or
affiliate thereof) having acted in a manner contrary to, or failed to act in a
manner required by, the Applicable Laws or (ii) the relevant Increased Cost was
imposed with respect to the period prior to receipt by the Company of the notice
with respect thereto pursuant to the first paragraph of this Section.
(b) Upon the receipt of any notice of Increased Cost, the
Noteholder and the Company shall consult in good faith and each shall use its
reasonable best efforts to avoid or mitigate the amount of any Increased Cost,
including without limitation, by assigning the rights and obligations of the
Noteholder hereunder (if other than the Initial Lender) to another office,
branch, subsidiary or affiliate of the Noteholder or by selling or transferring
the rights, interests and obligations of the Noteholder hereunder or under any
other Note Purchase Document to another bank, financial or lending institution,
subject to the terms hereof, that would not be subject to any such Increased
Cost, provided that the Noteholder shall not be required to take such action to
avoid or mitigate such Increased Cost hereunder if such action would result in
any economic, legal or regulatory disadvantage, or any adverse tax consequence
to the Noteholder (other than (i) economic disadvantage for which the Company
agrees to indemnify the Noteholder on an After-Tax Basis and in a manner
reasonably acceptable to the Noteholder, or (ii) adverse tax consequences for
which the Company agrees to indemnify the Noteholder on an After-Tax Basis and
in a manner reasonably acceptable to the Noteholder).
(c) The Company shall not be required to make payments under
this Section to any Noteholder if (i) a claim hereunder arises through
circumstances peculiar to such Noteholder and which do not affect commercial
lenders in the same jurisdiction generally, (ii) the claim arises out of a
voluntary relocation by such Noteholder of its lending office, (iii) such
Noteholder is not also seeking indemnification against similar increased costs,
to the extent it is entitled to do so, in transactions with substantial
borrowers (it being agreed that an officer's certificate to the contrary from
any such Noteholder shall constitute conclusive evidence of such fact), (iv) a
claim is directly attributable to any corresponding claim for Increased Cost
which is made on such Noteholder by any Person which has funded such
Noteholder's purchase of its Notes or (v) such Noteholder is the Initial Lender.
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ARTICLE 3 - SECURITY
Section 3.01. Grant of Security Interest
The Company, in order to secure the equal and ratable payment
when due of the principal of, and interest and Breakage Costs, if any (including
interest on all past due amounts of principal, interest and Breakage Costs, if
any), upon, all Notes from time to time outstanding hereunder, and to secure the
payment of all other Obligations and all Other Obligations and the performance
and observance by the Company of all the agreements, covenants and provisions
contained in the Note Purchase Documents and the Other Note Purchase Documents
on its part to be performed or observed for the benefit of the Noteholders and
the Other Noteholders (the "Secured Obligations"), and in consideration of the
premises and of the covenants herein contained, and of the acceptance of the
Notes by the holders thereof, and of the sum of $___ paid to the Company by the
Indenture Trustee at or before the Closing Date, the receipt of which is hereby
acknowledged, does hereby mortgage, bargain, sell, transfer, convey, confirm,
assign, pledge, hypothecate and grant unto the Indenture Trustee, as Indenture
Trustee under this Indenture and under the Other Indentures, its successors in
trust and assigns, for the security and benefit of the Noteholders and the Other
Noteholders as aforesaid forever, a continuing first priority security interest
in, and first priority mortgage lien on, all and singular the following
described properties, rights, interests and privileges whether now or hereafter
acquired (hereinafter sometimes referred to as the "Collateral"):
(a) All right, title and interest of the Company in and to the
Airframe and Engines (as more specifically described in Annex A to the Indenture
Supplement), each of which Engines is of 750 or more rated takeoff horsepower or
the equivalent of such horsepower, and in the case of such Engines, whether or
not any such Engine shall be installed in or attached to the Airframe or any
other aircraft, together with all accessories, equipment, parts and
appurtenances appertaining or attached to the Airframe and Engines, whether now
owned or hereafter acquired, and all substitutions, renewals and replacements of
and additions, improvements, accessions and accumulations to the Airframe and
Engines and all records, logs, manuals and other documents at any time
maintained with respect to the foregoing;
(b) All right, interest, claims and demands of the Company in,
to and under the Purchase Agreement and the Engine Warranty to the extent the
same relate to continuing rights of the Company in respect of any warranty,
express or implied, as to title, materials, workmanship, design or patent
infringement with respect to the Airframe or the Engines and to any service life
policy, aircraft or engine performance guarantee and indemnity provisions with
respect to the Airframe or the Engines together with all rights, powers,
privileges, options and other benefits of the Company thereunder with respect to
the Airframe or the Engines, including, without limitation, the right to make
all waivers and agreements, to give and receive all notices and other
instruments or communications, to take such action upon the occurrence of a
default thereunder, including the commencement, conduct and consummation of
legal, administrative or other proceedings, as shall be permitted thereby or by
law, and to do any and all other things which the Company is or may be
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entitled to do thereunder reserving to the Company, however, (i) all of the
Company's rights and interests in and to the Purchase Agreement and the Engine
Warranty as and to the extent that the same relate to aircraft other than the
Aircraft or engines other than the Engines, and (ii) with respect to the
Aircraft and the Engines so long, and only so long, as Manufacturer or the
Engine Manufacturer, as the case may be, shall not have received notice from the
Indenture Trustee that an Event of Acceleration has occurred and is continuing
and the Indenture Trustee has declared the Indenture to be in default (except
such declaration shall not be required if an Event of Acceleration described in
Section 6.01(e), (f) or (g) has occurred and is continuing) and until
Manufacturer or the Engine Manufacturer, as the case may be, has received notice
from the Indenture Trustee that such Event of Acceleration has been cured or
waived, the right to demand, accept and retain all rights in and to all
property, data and services which Manufacturer or the Engine Manufacturer, as
the case may be, is obligated to provide or does provide pursuant to the
Purchase Agreement or the Engine Warranty, as the case may be;
(c) all estate, right, title and interest of the Company in,
to and under the Bill of Sale, the FAA Bill of Sale and any Permitted Lease
(including, without limitation, upon the occurrence and during the continuance
of an Event of Acceleration and after the Indenture Trustee has declared the
Indenture to be in default (except such declaration shall not be required if an
Event of Acceleration described in Section 6.01(e), (f) or (g) has occurred and
is continuing), all rights to amounts paid or payable to the Company thereunder
and all rights to enforce such payments) and including all rights of the Company
to execute any election or option or to give any notice, consent, waiver or
approval under or in respect thereof and to do any and all other things which
the Company is or may be entitled to do thereunder;
(d) all tolls, rents, issues, profits, revenues and other
income of the property subjected or required to be subjected to the Lien of this
Indenture (it being understood that revenues earned for the carriage of persons,
property or mail are not such proceeds) including all payments or proceeds
payable to the Company with respect to the Aircraft as the result of the sale or
other disposition thereof, and all estate, right, title and interest of every
nature whatsoever of the Company in and to the same and every part thereof;
(e) All right, title and interest of the Company in and to all
proceeds with respect to the requisition of title to the Aircraft or any part
thereof, and all insurance proceeds with respect to the Aircraft or any part
thereof, but excluding any insurance maintained by the Company and not required
under Section 4.06;
(f) All moneys and securities now or hereafter paid or
deposited or required to be paid or deposited to or with the Indenture Trustee
by or for the account of the Company pursuant to any term of any Note Purchase
Document and held or required to be held by the Indenture Trustee hereunder; and
(g) all proceeds of the foregoing;
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PROVIDED, HOWEVER, that notwithstanding any of the foregoing provisions of this
Section 3.01, so long as no Event of Acceleration shall have occurred and be
continuing, the Company shall have the right, to the exclusion of the Indenture
Trustee, (a) to quiet enjoyment of the Airframe and Engines, and to possess,
use, retain and control the Airframe and Engines and all revenues, income and
profits derived therefrom, and (b) with respect to the Purchase Agreement, to
exercise in the Company's name all rights and powers of the buyer under the
Purchase Agreement and to retain any recovery or benefit resulting from the
enforcement of any warranty or indemnity under the Purchase Agreement; and
provided further that, notwithstanding the occurrence and continuation of an
Event of Acceleration, the Indenture Trustee shall not enter into any amendment
of the Purchase Agreement which would increase the obligations of the Company
thereunder;
TO HAVE AND TO HOLD the Collateral unto the Indenture Trustee, its
successors and assigns, forever, IN TRUST, upon the terms and trust herein set
forth, for the benefit, security and protection of the Noteholders; provided
always, however, that these presents are upon the express condition that if the
Company shall pay or cause to be paid all the Obligations and shall observe,
keep and perform all the terms and conditions, covenants and agreements herein
and in the other Note Purchase Documents, then these presents and the estate
hereby granted and conveyed shall cease and this Indenture shall become null and
void except as otherwise provided in Section 7.2 of the Note Purchase Agreement
and except to the extent monies are distributable under clauses sixth and
seventh of Section 5.03; otherwise this Indenture shall remain in full force and
effect.
It is expressly agreed that anything herein to the contrary
notwithstanding, the Company shall remain liable under the Purchase Agreement to
perform all of its obligations thereunder, and neither the Indenture Trustee nor
any Noteholder shall have any obligation or liability under any thereof by
reason of or arising out of the assignment hereunder, nor shall the Indenture
Trustee or any Noteholder be required or obligated in any manner to perform or
fulfill any obligations of the Company under or pursuant to the Purchase
Agreement, to make any payment, or to make any inquiry as to the nature or
sufficiency of any payment received by it, or present or file any claim or take
any action to collect or enforce the payment of any amount which may have been
assigned to it or to which it may be entitled at any time or times. The Company
agrees that it will not enter into any agreement that would amend, modify,
supplement, rescind, cancel or terminate the Purchase Agreement in respect of
the Aircraft without the prior written consent of the Indenture Trustee, to the
extent any such amendment, modification, supplement, recision, cancellation or
termination would have an adverse effect on the Indenture Trustee or the
Noteholders.
The Company does hereby irrevocably constitute and appoint the
Indenture Trustee the true and lawful attorney of the Company (which appointment
is coupled with an interest) with full power of substitution (in the name of the
Company or otherwise) to ask, require, demand, receive, compound and give
acquittance for any and all moneys and claims for money (in each case including
insurance and requisition proceeds) due and to become due under or arising out
of the
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Purchase Agreement and all other property which now or hereafter constitutes
part of the Collateral, to endorse any checks or other instruments or orders in
connection therewith and to file any claims or to take any action or to
institute any proceeding which the Indenture Trustee may deem to be necessary or
advisable in the premises and to grant sub-powers of attorney; provided that,
the Indenture Trustee shall not exercise any such rights except upon the
occurrence and during the continuance of an Event of Acceleration.
The Company hereby agrees that promptly on receipt thereof,
except as otherwise expressly provided in the Note Purchase Documents, the
Company will transfer to the Indenture Trustee any and all moneys from time to
time received by the Company constituting part of the Collateral (and prior to
such transfer, shall be held by the Company in trust for the benefit of the
Indenture Trustee), for distribution by the Indenture Trustee pursuant to this
Indenture.
ARTICLE 4 - COVENANTS OF THE COMPANY
Section 4.01. Liens.
The Company shall not directly or indirectly create, incur,
assume or suffer to exist any Lien on or with respect to any of the Collateral
or title thereto or any interest therein except:
(a) the Lien of this Indenture and the rights of the
parties under the other Note Purchase Documents;
(b) the rights of others under agreements or
arrangements to the extent expressly permitted by Sections
4.02(b) and 4.04(c);
(c) Liens for taxes of the Company either not yet due
or being contested in good faith by appropriate proceedings
(and for which adequate reserves have been provided in
accordance with generally accepted accounting principles), so
long as such proceedings do not involve a material danger of
the sale, forfeiture or loss of any of the Collateral;
(d) suppliers', mechanics', workmen's, repairmen's,
employees', airport operators', air traffic control
authorities' or other like Liens arising in the ordinary
course of the Company's business for amounts the payment of
which is either not yet delinquent or is being contested in
good faith by appropriate proceedings (and for which adequate
reserves have been provided in accordance with generally
accepted accounting principles), so long as such proceedings
do not involve a material danger of the sale, forfeiture or
loss of any of the Collateral;
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(e) Liens arising from judgments or awards against
the Company with respect to which an appeal or proceeding for
review is being prosecuted in good faith and with respect to
which at the time there shall have been secured a stay of
execution so long as such proceedings do not involve a
material danger of the sale, forfeiture or loss of any of the
Collateral;
(f) Lender Liens;
(g) salvage and similar rights of insurers under
policies of insurance maintained with respect to the Aircraft;
and
(h) any other Lien with respect to which the Company
shall have provided a bond or other security in an amount and
under terms reasonably satisfactory to the Indenture Trustee.
Liens described in clauses (a) through (h) above are referred to herein as
"Permitted Liens." The Company shall promptly, at its own cost and expense, take
such action as may be necessary to duly discharge any Lien other than a
Permitted Lien arising at any time.
Section 4.02. Possession, Operation and Use, Maintenance,
Registration and Insignia
(a) Generally. Except as otherwise expressly provided herein,
the Company shall be entitled to operate, use, locate, employ or otherwise
utilize or not utilize the Airframe, Engines and Parts in any lawful manner or
place in accordance with the Company's business judgment.
(b) The Company shall not lease, or otherwise in any manner
deliver, relinquish or transfer possession of the Airframe or an Engine to any
Person or install an Engine, or permit an Engine to be installed, on any
airframe other than the Airframe, without the prior written consent of the
Indenture Trustee, provided, however, that so long as (w) only in the case of
clause (ix) below, no Material Potential Event of Acceleration shall have
occurred and be continuing, (x) no Event of Acceleration shall have occurred and
be continuing, (y) the action to be taken shall not deprive the Indenture
Trustee of the first priority Lien of the Indenture on the Airframe or any
Engine and (z) the Company shall continue to comply with all of the requirements
of this Indenture, the Company may, without the prior consent of the Indenture
Trustee:
(i) enter into a charter or wet lease or other
similar arrangement under which the Company has operational
control of the Airframe and any Engines installed thereon in
the ordinary course of the Company's business (which shall not
be considered a transfer of possession hereunder), provided
that (x) the Company will remain primarily liable for the
performance of all terms of this Indenture and the other Note
Purchase Documents and the Company's obligations under this
Indenture
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and the other Note Purchase Documents shall continue in full
force and effect and notwithstanding any such charter or wet
lease or other similar arrangement and (y) the transferee's
rights shall be expressly subject and subordinate to the
rights of the Indenture Trustee under the Note Purchase
Documents to the same extent as if such transferee had been a
Permitted Lessee;
(ii) deliver possession of the Airframe or any Engine
to the manufacturer thereof or to any organization for
testing, service, repair, maintenance, overhaul work or other
similar purposes on the Airframe or such Engine or for
alterations or modifications of or additions to the Airframe
or such Engine, to the extent required or permitted by the
terms of this Indenture;
(iii) subject the Airframe and any Engines installed
thereon to interchange agreements or an Engine to interchange
or pooling agreements or arrangements, in each case that are
applicable to other similar property owned by or leased to the
Company and are customary in the airline industry and entered
into by the Company in the ordinary course of its airline
business with any Permitted Air Carrier, provided, that (A) no
such agreement or arrangement shall under any circumstance
result in, contemplate or require the transfer of title to the
Aircraft or Airframe or any Engine or terminates or impairs
the first priority Lien of the Indenture on the Airframe or
any Engine; (B) if the Company's title to the Airframe or any
Engine shall be divested or the first priority Lien of the
Indenture therein shall be terminated or impaired under or by
reason of any such agreement or arrangement (no such
termination or impairment being deemed to arise as a result of
the existence of any Permitted Lien), such divestiture shall
be deemed to be an Event of Loss with respect to the Airframe
or such Engine, as the case may be, and the Company shall
comply with Section 4.04(e) or 4.05, as the case may be, in
respect thereof; and (C) with respect to any interchange
agreement involving the Airframe, the Airframe shall not be
out of the Company's possession for more than one week (unless
such longer time period is consented to by the Indenture
Trustee, which consent shall not be unreasonably withheld or
delayed)
(iv) install an Engine on an airframe owned by the
Company, leased to the Company or owned or purchased by the
Company subject to a conditional sale or other security
agreement free and clear of all Liens, except (A) Permitted
Liens, (B) those which apply only to the engines (other than
Engines), appliances, parts, instruments, appurtenances,
accessories, furnishings and other equipment (other than
Parts) installed on such airframe (but not to the aircraft as
an entirety), and (C) those created by the rights of other air
carriers under normal interchange or pooling agreements or
arrangements customary in the airline industry which do not
contemplate, permit or require the transfer of title to such
airframe or engines installed thereon, provided that the first
priority Lien of the Indenture on such Engine
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shall not be terminated or impaired as a result thereof (no
such termination or impairment being deemed to arise as a
result of the existence of any Permitted Lien);
(v) install an Engine on an airframe owned by the
Company, leased by the Company or purchased by the Company
subject to a conditional sale or other security agreement
under circumstances where clause (iv) above is not applicable,
provided that such installation shall be deemed an Event of
Loss with respect to such Engine and the Company shall comply
with Section 4.04(e);
(vi) transfer possession of the Airframe or Engine to
the United States of America or any instrumentality thereof
pursuant to the Civil Reserve Air Fleet Program (as
established and administered pursuant to Executive Order 11490
as amended, as superseded by United States Executive Order No.
12656) or any similar or substitute program so long as the
Company shall promptly notify the Indenture Trustee upon
transferring possession of the Airframe or any Engine to the
United States of America or any agency or instrumentality
thereof pursuant to such program and provide the Indenture
Trustee with the name and address of the Contracting Office
Representative for the Military Aircraft Command of the United
States Air Force to whom notice must be given in the event the
Indenture Trustee desires to give notice as provided in
Section 6.02;
(vii) transfer possession of the Airframe or any
Engine or to a foreign government when required by Applicable
Law in the circumstances referred to in clause (e) of the
definition of an Event of Loss (it being understood that
nothing in this clause (vii) shall relieve the Company from
its obligations under Section 4.05 if such transfer becomes an
Event of Loss);
(viii) transfer possession of the Airframe or any
Engine to the United States of America or any instrumentality
or agency thereof if backed by the full faith and credit of
the government of the United States of America pursuant to a
lease, contract or other instrument; and
(ix) subject to the provisions of the immediately
following paragraph, enter into a lease with respect to any
Engine or the Airframe and Engines or engines then installed
on the Airframe to any Permitted Lessee which is not at the
time such lease is entered into subject to bankruptcy,
reorganization or insolvency proceedings; provided that (A) in
the case only of a lease to a foreign air carrier, the
Indenture Trustee receives at the time of such lease an
opinion of counsel to the Company (which counsel shall be
reasonably satisfactory to the Indenture Trustee), in form and
substance reasonably satisfactory to the Indenture Trustee, to
the effect that (i) all necessary filings (if any) have been
made and necessary actions (if any) have been taken in order
to protect the first priority security interest (subject to
Permitted Liens)
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of the Indenture Trustee in and to the Aircraft while in such
jurisdiction and (ii) there shall exist no possessory rights
in favor of the Company (or such Permitted Lessee) or any
third party, including any government or instrumentality
thereof, more restrictive than existing in the United States
(other than immaterial differences in procedures of
enforcement), which would, upon bankruptcy or other default by
the Company (or such Permitted Lessee) prevent or delay beyond
the probable recovery time under the then existing laws of the
United States the return of the Aircraft to the Indenture
Trustee in accordance with and when permitted by the terms of
this Indenture upon the exercise by the Indenture Trustee of
its remedies hereunder and there is no adverse effect under
the laws of such country to the enforceability (other than
immaterial differences in procedures of enforcement) of the
material rights and remedies of the Indenture Trustee provided
for herein and under the other Note Purchase Documents (it
being understood that, in the absence of restrictions similar
to those imposed under Sections 362 and 363 of the Bankruptcy
Code, rights and remedies similar to those available under
Section 1110 of the Bankruptcy Code are not required); (B) the
Indenture Trustee receives evidence that: (1) all necessary
governmental approvals required for the Airframe or any Engine
or engine, as the case may be, to be imported and, to the
extent reasonably obtainable and reasonably requested,
exported from the applicable country of domicile upon
repossession of such leased equipment by the Indenture Trustee
shall have been obtained prior to commencement of any such
lease and any exchange permits necessary to allow all rent and
other payments provided for under such lease to be paid to the
Indenture Trustee after the occurrence of an Event of
Acceleration and after the Indenture Trustee has declared the
Indenture to be in default (except such declaration shall not
be required if an Event of Acceleration described in Section
6.01(e), (f) or (g) has occurred and is continuing) shall be
in full force and effect prior to the commencement of any such
lease; and (2) the insurance requirements of Section 4.06 are
satisfied and that war risk and governmental confiscation and
expropriation and hijacking insurance shall be carried and
maintained of such scope and coverage and subject to such
exclusions and exceptions as is standard for air carriers
flying similar equipment on routes comparable to those flown
by the Aircraft and (C) the currency of payments of such lease
shall be freely convertible into Dollars,
provided, that (1) the rights of any transferee who receives possession by
reason of a transfer permitted by this Section 4.02(b) (other than by a transfer
of an Engine which is deemed an Event of Loss) shall be subject and subordinate
to all the terms of this Indenture, (2) the Company shall remain primarily
liable for the performance of all of the terms of this Indenture and all the
terms and conditions of this Indenture and the other Operative Documents shall
remain in effect and (3) no lease or transfer of possession otherwise in
compliance with this Section 4.02(b) shall (x) result in any registration or
re-registration of the Aircraft except to the extent permitted by Section
4.02(e) or the maintenance, operation or use thereof except in compliance with
Sections 4.02(c) and 4.02 (d) or (y) permit any action not permitted to the
Company hereunder.
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In the case of any lease permitted under this Section 4.02(b),
the Company will include in such lease appropriate provisions which (s) make
such lease expressly subject and subordinate to all of the terms of this
Indenture, including the rights of the Indenture Trustee to avoid such lease in
the exercise of its rights to repossession of the Airframe and Engines
hereunder; (t) expressly prohibit any subleasing of the Airframe and Engines;
(u) require that the Airframe and Engines be maintained in accordance with a
Maintenance Program approved by the Aeronautical Authority applicable thereto
and contain provisions regarding the maintenance of the Aircraft substantially
similar and at least as restrictive as the maintenance provisions of this
Indenture; (v) require the lessee to comply with the terms of Section 4.06; (w)
require that the Airframe and Engines be used in accordance with the limitations
applicable to the Company's possession and use provided in this Indenture; (x)
provide that the Aircraft will not be operated in any country with which the
United States is then conducting ongoing hostilities, (y) provide that any
payments due under such Permitted Lease shall be paid by the Permitted Lessee
directly to the Indenture Trustee during the continuance of an Event of
Acceleration upon receipt of written notice specifying such Event of
Acceleration (which shall have been copied to the Company), and (z) not contain
any purchase option in favor of the Permitted Lessee or any other provisions
which would not permit the Company to perform its obligations hereunder or
permit the Indenture Trustee to exercise its rights and remedies hereunder.
Except as otherwise provided herein and without in any way relieving the Company
from its primary obligation for the performance of its obligations under this
Indenture, the Company may in its sole discretion permit a Permitted Lessee to
exercise any or all rights which the Company would be entitled to exercise under
Sections 4.02 and 4.04, and may cause a Permitted Lessee to perform any or all
of the Company's obligations under Article 4 hereof, and the Indenture Trustee
agrees that full performance by a Permitted Lessee of the obligations of the
Company hereunder shall constitute performance by the Company.
Subject to the Company's obligations in paragraph (ix) above,
the Company shall (i) notify the Indenture Trustee at least 15 days prior to
entering into any Permitted Lease stating the name of the proposed Permitted
Lessee and a copy of the proposed Permitted Lease, (ii) deliver a copy of the
executed Permitted Lease promptly (but no later than 10 days) after execution
thereof, (iii) obtain the consent of the Permitted Lessee to the assignment of
its Permitted Lease pursuant to Section 3.01 and (iv) cause an Indenture
Supplement and financing statements or similar documents under the Applicable
Laws of the country of the Permitted Lessee confirming the first priority
security interest of the Indenture Trustee in such Permitted Lease to be duly
executed and delivered and duly filed or recorded in all appropriate places.
In connection with any Permitted Lease, all necessary action
shall be taken by the Company at its expense which is required to continue the
perfection of the right, title and interest of the Indenture Trustee's first
priority security interest in the Collateral.
The Company shall pay all reasonable out-of-pocket costs and
expenses (including, without limitation, reasonable counsel fees and
disbursements) of the Indenture Trustee and each of the Noteholders in
connection with any leasing pursuant to this Section 4.02(b).
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The Indenture Trustee hereby agrees for the benefit of each
lessor or secured party of any airframe or engine leased to the Company or owned
or purchased by the Company subject to a conditional sale or other security
agreement that the Indenture Trustee will not acquire or claim, as against such
lessor or secured party, any right, title or interest in any such engine or
engines owned by the lessor under such lease or subject to a security interest
in favor of the secured party under such conditional sale or other security
agreement as the result of such engine or engines being installed on the
Airframe at any time while such engine or engines are owned by such lessor or
are subject to such lease or conditional sale or other security agreement or
security interest in favor of such secured party; provided, however, that such
agreement of the Indenture Trustee shall not be for the benefit of any lessor or
secured party of any airframe leased to the Company or owned or purchased by the
Company subject to a conditional sale or other security agreement or for the
benefit of any mortgagee of or any other holder of a security interest in an
airframe owned by the Company, unless such lessor, conditional vendor, other
secured party or mortgagee has agreed (which agreement may be contained in such
lease, conditional sale or other security agreement or mortgage and may consist
of a paragraph similar to this paragraph) that neither it nor its successors or
assigns will acquire, as against the Indenture Trustee, any right, title or
interest in an Engine as a result of such Engine being installed on such
airframe.
(c) Operation. The Company shall not (and will not permit any
Permitted Lessee to) operate, use or locate the Airframe or any Engine, or
suffer the Airframe or any Engine to be operated, used or located (i) in any
area excluded from coverage by any insurance required by the terms of Section
4.06, except in the case of a requisition by the United States of America where
the Company obtains indemnity from the United States of America against
substantially the same risks and for at least the amounts of the insurance
required by Section 4.06 covering such area, or (ii) in any recognized, or in
the Company's reasonable judgment, threatened area of hostilities unless covered
by war risk insurance, or in either case unless the Airframe or such Engine is
operated or used under contract with the government of the United States or any
agency or instrumentality thereof if backed by the full faith and credit of the
government of the United States of America under which contract said government
assumes liability for substantially the same risks in at least the same amounts
as would be covered by such insurance. The Company shall not permit the Airframe
or any Engine to be maintained, serviced, repaired, overhauled, used or operated
in violation of any Applicable Law or in violation of any airworthiness
certificate, rule, regulation, order, license or registration relating to the
Aircraft or such Engines issued by any governmental authority having
jurisdiction, unless (i) the validity thereof is being contested in good faith
and by appropriate proceedings which do not involve a material danger of the
sale, forfeiture or loss of the Airframe or such Engine or (except with respect
to Permitted Liens) the first priority Lien of the Indenture thereon or any
imposition of civil or criminal penalties against the Indenture Trustee or the
Noteholders or (ii) it is not possible for the Company to comply with the laws
of a jurisdiction other than the United States (or other than any jurisdiction
in which the Aircraft is then registered) because of a conflict with the
applicable laws of the United States (or such jurisdiction in which the Aircraft
is then registered), provided, however, that actions taken under (i) and (ii)
above will not result in the violation of any requirements of insurance pursuant
to Section 4.06. The Company shall obtain
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and maintain in good standing all certificates, licenses, permits and
authorizations required for use and operation of the Aircraft.
The Company shall not intentionally do or permit to be done
anything which will expose the Aircraft to penalty, forfeiture, impounding or
detention, appropriation, damage or destruction (other than any damage or
destruction arising in the ordinary course of operation of the Aircraft) or
(insofar as the same relates to the operation or use of the Aircraft) the
Indenture Trustee or any Noteholder to criminal liability (and in the event of
any forfeiture, impounding, detention or appropriation of the Aircraft the
Company shall take all such steps reasonably open to it with a view to obtaining
the immediate release of the Aircraft). The Company shall not represent or hold
out the Indenture Trustee or any Noteholder as carrying goods or passengers on
the Aircraft or as being connected or associated with any operation of carriage
which may be undertaken by the Company or pledge the credit of the Indenture
Trustee or any Noteholder. The Company shall not on any occasion on which the
ownership of the Aircraft is relevant represent to third parties that title to
the Aircraft is held by the Company free of the Lien of this Indenture.
(d) Maintenance. The Company, at its own cost and expense,
shall service, repair, maintain, overhaul and test the Airframe and each Engine
(and each engine that is not an Engine but is installed on the Aircraft) or
cause the same to be done in accordance with the Maintenance Program so as to
keep the Airframe and each Engine (or engine) in as good condition as when
originally delivered to the Company by the Manufacturer, ordinary wear and tear
excepted, in accordance with all applicable FAA regulations for the Aircraft
(including all FAA airworthiness directives applicable to the Aircraft), in
accordance with all mandatory service bulletins and as required to keep all
Manufacturer's and Engine Manufacturer's warranties in effect, in compliance
with any requirements under the policies of insurance required by Section 4.06
and in such operating condition as may be necessary to enable all certificates,
licenses, permits and authorizations required for the use and operation of the
Aircraft and each Engine in the appropriate category for the nature of the
operations of the Aircraft including the airworthiness certification of the
Aircraft to be maintained in good standing at all times under the Applicable
Laws of the Aeronautical Authority, except when all Canadair Regional Jet
CL-600-2B19 aircraft (powered by engines of the same type as those with which
the Airframe shall be equipped at the time of grounding) registered in the same
country have been grounded by the Aeronautical Authority and in substantially
the same manner and with the same care as the Company maintains, services,
repairs or overhauls similar aircraft operated by the Company in similar
circumstances and without in any way discriminating against the Aircraft. The
Company shall maintain or cause to be maintained all records, logs and other
materials required by the Aeronautical Authority to be maintained in respect of
the Aircraft in English in the manner as such Aeronautical Authority requires.
Nothing herein shall be deemed to prevent the Company from taking the Aircraft
out of service for maintenance or modifications permitted hereunder or storage
in accordance with the Applicable Laws of the Aeronautical Authority and the
manufacturer's recommended procedures for such storage.
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(e) Registration. From and after the Closing Date, the Company
shall cause the Aircraft to be duly registered, and at all times to remain duly
registered, in the United States in the name of the Company under the
Transportation Code, provided, however, that the Company may, in connection with
any Permitted Lease, request, upon at least 30 days' prior written notice to the
Indenture Trustee, that the Aircraft be appropriately re-registered under the
laws of a country listed on Annex D with which, at the time of such
registration, the United States maintains normal diplomatic relations and in
which there is no ongoing warfare; provided that prior to any change in the
country of registry of the Aircraft the following conditions are met:
(i) at the time of re-registration, no Event of Acceleration
or Material Potential Event of Acceleration exists or would occur as a
result of such re-registration;
(ii) the Company shall pay all fees, expenses, recording and
registration taxes (including the reasonable fees and expenses of local
counsel in such country and the fees and expenses of counsel to the
Indenture Trustee and the Noteholders) relating to such re-registration
or proposed re-registration;
(iii) the Company shall, at its own cost and expense, cause
the interest of the Indenture Trustee, as mortgagee, to be duly
registered or recorded under the laws of such country and at all times
thereafter to remain so duly registered or recorded unless and until
the registration of the Aircraft is changed as provided herein, and
shall cause to be done at all times all other acts including the
filing, recording and delivery of any document or instrument and the
payment of any sum necessary or, by reference to prudent industry
practice in such country, advisable in order to create, preserve and
protect the Lien of the Indenture Trustee under the Indenture in such
jurisdiction as a valid and duly perfected first priority security
interest in the Collateral as against the Company or any third parties;
(iv) the obligations of the Company and each other party under
the Note Purchase Documents (and of the Permitted Lessee under a
Permitted Lease) and the rights and remedies of the Indenture Trustee
and the Noteholders under the Note Purchase Documents shall remain or
be, as the case may be, legal, valid, binding and enforceable under the
laws of such country;
(v) the Company shall ensure that all insurance required by
Section 4.06 shall be in full force and effect prior to, at the time
of, and after such change in registration and the Indenture Trustee
shall receive a certificate of the Company's insurance broker to such
effect;
(vi) the country of such re-registration imposes aircraft
maintenance standards approved by, or at least as stringent as those
approved by, the FAA or the central civil aviation authority of the
United Kingdom, France, Germany, Japan, the Netherlands or Canada;
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(vii) it shall not be necessary by reason of such
re-registration or for purposes of exercising rights or enforcing
remedies contained in the Note Purchase Documents for the Indenture
Trustee or the Noteholders to register or qualify to do business in
such country;
(viii) no Liens (except Permitted Liens) shall arise by reason
of such re-registration, and the Indenture shall continue as a valid
and duly perfected first priority Lien on the Collateral (subject only
to Permitted Liens);
(ix) any export licenses and certificate of deregistration
required in connection with any repossession or return of the Aircraft
will be readily obtainable in the normal course without material delay
or material burden on the Indenture Trustee, it being agreed that the
Company shall be responsible for the cost thereof and (if not contrary
to the Applicable Laws of such country) the Indenture Trustee will be
granted a deregistration power of attorney by the Company and the
Permitted Lessee;
(x) (unless the Company shall have agreed to provide insurance
covering the risk of requisition of use or title of the Aircraft by the
government of such jurisdiction so long as the Aircraft is registered
under the laws of such jurisdiction) the laws of such jurisdiction
require fair compensation by the government of such jurisdiction
payable in currency freely convertible into Dollars for the loss of use
or title of the Aircraft in the event of the requisition by such
government of such use or title;
(xi) there shall exist no possessory rights in favor of the
Company (or any Permitted Lessee) or any third party, including any
government or instrumentality thereof, which would, upon bankruptcy or
other default by the Company (or any Permitted Lessee) prevent or delay
beyond the probable recovery time under the then existing laws of the
United States the return of the Aircraft to the Indenture Trustee in
accordance with and when permitted by the terms of the Indenture upon
the exercise by the Indenture Trustee of its remedies thereunder and
there is no adverse effect under the laws of such country of
re-registration to the enforceability (other than immaterial
differences in procedures of enforcement) of the material rights and
remedies of the Indenture Trustee provided for herein and under the
other Note Purchase Documents (it being understood that, in the absence
of restrictions similar to those imposed under Sections 362 and 363 of
the Bankruptcy Code, rights and remedies similar to those available
under Section 1110 of the Bankruptcy Code are not required);
(xii) none of the Indenture Trustee or the Noteholders shall
be subjected to any adverse tax consequence for which the Company is
not required to or does not then indemnify such Person as a result of
such re-registration; and
(xiii) the Indenture Trustee shall have received opinions in
scope, form and substance reasonably satisfactory to the Indenture
Trustee, of counsel, expert in the laws of
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such country and reasonably satisfactory to the Indenture Trustee, to
the effect set forth in clauses (iii), (iv), (vii), (viii), (ix), (x),
(xi) and (xii).
(f) Insignia. On or prior to the Closing Date, or as soon
thereafter as practicable, the Company shall affix and maintain (or cause to be
affixed and maintained) in the cockpit of the Airframe and on each Engine a
nameplate bearing the inscription:
Mortgaged To:
The First National Bank of Maryland, as Indenture Trustee
(such nameplate to be replaced, if necessary, with a nameplate reflecting the
name of any successor Indenture Trustee as permitted under this Indenture).
Except as above provided, neither the Company nor any Permitted Lessee will
permit the name of any person to be placed on the Airframe or any Engine in a
manner that may be interpreted as a claim of ownership of, or Lien on, the
Airframe or any Engine; provided, however, that nothing herein contained shall
prohibit the Company (or any Permitted Lessee) from placing its customary colors
and insignia on the Airframe or any Engine or from otherwise operating the
Aircraft in its livery.
Section 4.03. Inspection; Financial Information
(a) Inspection
Upon at least fifteen (15) days' prior notice to the Company
and at a time and place reasonably acceptable to the Company (but on no more
than one occasion during any twelve (12) month period, unless an Event of
Acceleration has occurred and is continuing), the Indenture Trustee or its
authorized representatives may at their own expense and risk conduct a visual
walk-around inspection of the Aircraft (including on board inspection) and any
Engine and may include inspection of areas exposed by any open panels, bays or
the like, but shall not include opening any panels, bays or the like without the
express written consent of an authorized employee of the Company (including a
visual walk-around inspection of the Aircraft during any "C" check or other
heavy maintenance) and may inspect the books and records of the Company relating
to the operation and maintenance thereof; provided that (a) any such inspection
shall be subject to the safety, security and workplace rules applicable at the
location where such inspection is conducted and any applicable governmental
rules or regulations and (b) in the case of an inspection during a maintenance
visit, such inspection shall not interfere with the normal conduct of such
maintenance visit or extend the time required for such maintenance visit or, in
any event, at any time interfere with the use or operation of the Airframe or
any Engine or with the normal conduct of the Company's or a Permitted Lessee's
business. All information obtained in connection with any such inspection shall
be held confidential by the Indenture Trustee and the Noteholders and shall not
be furnished or disclosed by
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them to anyone except (i) to prospective and permitted transferees of such
person's interest who agree to hold such information confidential, (ii) to such
person's counsel, independent certified public accountants, independent
insurance advisors or other agents who agree to hold such information
confidential, (iii) as may be required by any statute, court or administrative
order or decree or governmental ruling or regulation (or, in the case of any
Noteholder, to any bank examiner or other regulatory personnel), (iv) as may be
necessary for the purpose of the enforcement of this Indenture and (v) to the
Indenture Trustee and rating agencies, if applicable, (to the extent necessary
to obtain or maintain ratings and indicating whether such inspection shows
compliance or non-compliance by the Company with its obligations under the Note
Purchase Documents). The Indenture Trustee shall have no duty to make any such
inspection and shall not incur any liability or obligation by reason of not
making any such inspection. Upon the written request of the Indenture Trustee or
any Noteholder, the Company will give, and will use reasonable efforts to cause
any Permitted Lessee to give, the Indenture Trustee or such Noteholder notice of
the next scheduled "C" check or other heavy maintenance visit with respect to
the Aircraft or any Engine and afford such Person an opportunity to be present
at the same, without interfering with the maintenance, operations or business of
the Company or such Permitted Lessee. The Company shall furnish to the Indenture
Trustee such additional information concerning the location, condition, use and
operation of the Aircraft as the Indenture Trustee may from time to time
reasonably request.
(b) Financial Information. The Company agrees to furnish to
the Indenture Trustee:
(i) as soon as available, but not later than sixty
(60) days after the end of each of the first three fiscal
quarters in each fiscal year of the Company, unaudited balance
sheets (on a consolidated basis if applicable) of the Company
as of the end of such quarter and related statements of
income, shareholders' equity and cash flows of the Company for
the period commencing at the end of the previous fiscal year
and ending with the end of such quarter, each of which shall
be prepared in accordance with generally accepted accounting
principles in the United States; provided that so long as the
Company is subject to the reporting provisions of the
Securities Exchange Act of 1934, a copy of the Company's
quarterly report on Form 10-Q will satisfy this requirement
(to the extent such report contains the information required
to be provided by this clause (i));
(ii) as soon as available, but not later than one
hundred twenty (120) days after the end of each fiscal year of
the Company, a copy of the annual report for such year for the
Company or the affiliated group of which the Company is a
member (on a consolidated basis, if applicable) and a balance
sheet (consolidated if applicable) of the Company as of the
end of such fiscal year and related statements of income,
shareholders' equity and cash flows of the Company for such
fiscal year, in comparative form with the preceding fiscal
year, in each case certified by independent certified public
accountants of national standing as having been prepared
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in accordance with generally accepted accounting principles in
the United States; provided that so long as the Company is
subject to the reporting provisions of the Securities Exchange
Act of 1934, a copy of the Company's annual report on Form
10-K will satisfy this requirement (to the extent such report
contains the information required to be provided by this
clause (ii));
(iii) simultaneously with sending or no later than
thirty (30) days after filing thereof, copies of all such
proxy statements, financial statements, or reports, if any,
which the Company sends to its stockholders and copies of all
regular, periodic and current reports, which the Company files
with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor or
with any national securities exchange;
(iv) within one hundred twenty (120) days after the
end of each fiscal year of the Company, an Officer's
Certificate of the Company, to the effect that the signer is
familiar with or has reviewed the relevant terms of this
Indenture and has made, or caused to be made under his
supervision, a review of the transactions and conditions of
the Company during the preceding fiscal year and that such
review has not disclosed the existence during such period, nor
does the signer have knowledge of the existence as of the date
of such certificate, of any condition or event which
constituted or constitutes a Potential Event of Acceleration
or Event of Acceleration, or, if any such condition or event
existed or exists, specifying the nature and period of
existence thereof and what action the Company has taken or is
taking or proposes to take with respect thereto;
(v) from time to time, such other non-proprietary and
public information as the Indenture Trustee or any Noteholder
may reasonably request; and
(vi) promptly (but no later than five (5) Business
Days) after the occurrence thereof and actual knowledge
thereof by a responsible officer of the Company, notice of any
Potential Event of Acceleration or Event of Acceleration and
the action that the Company proposes to take with respect
thereto.
Section 4.04. Replacement and Pooling of Parts; Alterations,
Modifications and Additions; Substitution of En.ines
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(a) Replacement of Parts. Except as otherwise provided in the
proviso to the third sentence of Section 4.04(d) or if the Airframe or an Engine
to which a Part relates has suffered an Event of Loss, the Company, at its sole
cost and expense, will promptly replace all Parts that may from time to time
become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond
repair or permanently rendered unfit for use for any reason whatsoever. In
addition, in the course of maintenance, service, repair, overhaul or testing,
the Company, at its own cost and expense, may remove any Parts, whether or not
worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or
permanently rendered unfit for use, provided that the Company, at its own cost
and expense, shall, except as otherwise provided in the proviso to the third
sentence of Section 4.04(d), replace such Parts as promptly as practicable with
replacement Parts or temporary replacement parts as provided in Section 4.04(c).
All replacement Parts shall be free and clear of all Liens except Permitted
Liens and shall be in as good operating condition as, and have a value and
utility at least equal to, the Parts replaced assuming such replaced Parts were
in the condition required to be maintained by the terms hereof.
(b) Parts. Except as otherwise provided in the proviso to the
third sentence of Section 4.04(d), all Parts at any time removed from the
Airframe or any Engine shall remain subject to the Lien of this Indenture, no
matter where located, until such time as such Parts shall be replaced by Parts
that have been incorporated or installed in or attached to such Airframe or
Engine and that meet the requirements for replacement Parts specified in Section
4.04(a). Immediately upon any replacement Part becoming incorporated or
installed in or attached to an Airframe or Engine as provided in Section
4.04(a), without further act, (i) the replaced Part shall thereupon be free and
clear of all rights of the Indenture Trustee and shall no longer be deemed a
Part hereunder; and (ii) such replacement Part shall become subject to the Lien
of this Indenture and be deemed part of the Airframe or such Engine, as the case
may be, for all purposes hereof to the same extent as the Parts originally
incorporated or installed in or attached to the Airframe or such Engine.
(c) Pooling or Parts Leasing. Any Part removed from the
Airframe or from any Engine as provided in Section 4.04(a) may be subjected by
the Company to a pooling or parts leasing agreement or arrangement entered into
in the ordinary course of the Company's business with any Permitted Air Carrier;
provided that, the part replacing such removed Part shall be incorporated or
installed in or attached to such Airframe or Engine in accordance with Sections
4.04(a) and 4.04(b) as promptly as practicable after the removal of such removed
Part. In addition, any temporary replacement part when incorporated or installed
in or attached to the Airframe or any Engine in accordance with Section 4.04(a)
may be owned by another airline or vendor as customary in the United States
airline industry, subject to a pooling or parts leasing arrangement, provided
that the Company, at its own cost and expense, either (i) causes such temporary
replacement part to become subject to the Lien of this Indenture, free and clear
of all Liens except Permitted Liens, at which time such temporary replacement
part shall become a Part or (ii) replaces such temporary replacement part by
incorporating or installing in or attaching to such Airframe or Engine a further
replacement Part owned by the Company free and clear of all Liens except
Permitted Liens and which meets the
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requirements of Section 4.04(a) and which shall become subject to the Lien of
this Indenture in accordance with Section 4.04(b).
(d) Alterations, Modifications and Additions. The Company, at
its own cost and expense, shall make alterations and modifications in and
additions to the Airframe and any Engine as may be required to be made from time
to time by Applicable Law regardless of upon whom such requirements are, by
their terms, nominally imposed; provided, that the Company may, in good faith,
contest the validity or application of any such standard by appropriate
proceedings which do not involve a material danger of (x) the sale, forfeiture
or loss of the Airframe or any Engine or (y) the first priority Lien of the
Indenture thereon or any imposition of civil or criminal penalties against the
Indenture Trustee or the Noteholders. In addition, the Company, at its own cost
and expense, may from time to time make or cause to be made such alterations and
modifications in and additions to the Airframe and any Engine as the Company may
deem desirable in the proper conduct of its business (including, without
limitation, removal of Parts), provided further that no such alteration,
modification, removal or addition diminishes the value, utility, condition or
airworthiness of such Airframe or Engine below the value, utility, condition or
airworthiness thereof immediately prior to such alteration, modification or
addition, assuming such Airframe or Engine was then in the condition required to
be maintained by the terms of this Indenture, except that the value (but not the
utility, condition or airworthiness) of the Aircraft may be reduced by the value
of Parts which the Company deems to be obsolete or no longer suitable or
appropriate for use on the Airframe or such Engine ("Obsolete Parts") so long as
such removal without replacement complies with the Maintenance Program, if the
aggregate value of all such Obsolete Parts removed from the Aircraft and not
replaced shall not exceed $_______. All Parts incorporated or installed in or
attached or added to the Airframe or any Engine as the result of any alteration,
modification or addition effected by the Company shall be free and clear of any
Liens except Permitted Liens and without further act, become subject to the Lien
of this Indenture; provided that the Company may, at any time (but if an Event
of Acceleration has occurred and is continuing, after notice of such removal
describing the Part or Parts to be removed has been delivered to the Indenture
Trustee), remove any such Part from the Airframe or an Engine if (i) such Part
is in addition to, and not in replacement of or in substitution for, any Part
originally incorporated or installed in or attached to such Airframe or Engine
at the time of delivery thereof hereunder or any Part in replacement of, or in
substitution for, any such original Part, (ii) such Part is not required to be
incorporated or installed in or attached or added to such Airframe or Engine
pursuant to the terms of Section 4.02(d) or the first sentence of this Section
4.04(d) and (iii) such Part can be removed from such Airframe or Engine without
diminishing or impairing the value, condition, utility or airworthiness which
such Airframe or Engine would have had at the time of removal had such
alteration, modification or addition not been effected assuming the Aircraft was
otherwise maintained in the condition required by this Indenture. Upon the
removal by the Company of any such Part as above provided, title thereto shall,
without further act, be free and clear of all rights of the Indenture Trustee
and such Part shall no longer be deemed a Part hereunder.
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(e) Substitution of Engines. The Company shall have the right
at its option at any time, on at least thirty (30) days' prior written notice to
the Indenture Trustee, to substitute, and if an Event of Loss shall have
occurred with respect to an Engine under circumstances in which there has not
occurred an Event of Loss with respect to the Airframe, shall within sixty (60)
days of the occurrence of such Event of Loss and on at least five (5) Business
Days prior written notice to the Indenture Trustee substitute, a Replacement
Engine for an Engine. In such event, upon fulfillment, at the Company's sole
cost and expense, of the conditions precedent described in the third sentence of
this subparagraph (e) on the date set forth in such notice and without further
act, (i) the replaced Engine shall thereupon be released from the Lien of this
Indenture and shall no longer be deemed an Engine hereunder, and (ii) such
Replacement Engine shall become subject to the Lien of this Indenture and be
deemed part of the Aircraft for all purposes to the same extent as the Engine
originally installed on or attached to the Airframe. As conditions precedent to
such substitution, such Replacement Engine shall be free and clear of all Liens
(except Permitted Liens) and the Company shall (i) execute and deliver an
Indenture Supplement covering the Replacement Engine and all manufacturer's and
vendor's warranties generally available with respect to such Replacement Engine
and cause such Indenture Supplement to be duly recorded pursuant to the
Transportation Code (or such other Applicable Law of the country in which the
Aircraft may be registered in accordance with Section 4.02(e)), and there shall
have been duly executed and delivered to the Company and the Indenture Trustee a
full warranty (as to title) bill of sale covering the Replacement Engine
executed by the owner thereof in favor of the Company or in the event the
Replacement Engine is owned by the Company a copy of the original full warranty
bill of sale executed at the time of purchase of the Replacement Engine by the
Company, (ii) deliver to the Indenture Trustee a copy of such Indenture
Supplement and such other documents and instruments as the Indenture Trustee
shall reasonably request to evidence (on the public record or otherwise) the
Indenture Trustee's first priority security interest in the Replacement Engine,
(iii) cause to be delivered to the Indenture Trustee an Officer's Certificate
which certificate shall state that such Replacement Engine has a value and
utility at least equal to, and is in as good operating condition as, the engine
it replaced (assuming such engine was in the condition required by the terms
hereof), that the Company has good title to the Replacement Engine free and
clear of Liens except Permitted Liens and that the Company has complied with the
insurance provisions of Section 4.06 with respect to the Replacement Engine and
that the Replacement Engine meets the definition thereof and confirming the
manufacturer, model, and the manufacturer's serial number of the Replacement
Engine, (iv) cause such Uniform Commercial Code financing statements (or any
comparable document required to be filed or delivered pursuant to the Applicable
Law of the jurisdiction in which the Replacement Engine may be registered in
accordance with Section 4.02(e)) covering the interest created by this Indenture
as are deemed necessary or desirable by counsel to the Indenture Trustee to
protect the first priority security interest of the Indenture Trustee in the
Replacement Engine to be duly filed or recorded in the appropriate place or
places, (v) cause to be delivered to the Indenture Trustee, an opinion of
counsel in form and substance reasonably satisfactory to the Indenture Trustee
from counsel reasonably satisfactory to the Indenture Trustee to the effect that
the instruments referred to in clause (i) above have been duly authorized,
executed and delivered and are enforceable and that the warranty bill of sale
referred to in clause (i) above constitutes an
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effective instrument for the conveyance of title to the Replacement Engine to
the Company; the Replacement Engine is free and clear of all recorded Liens
other than Permitted Liens and the Indenture Trustee is entitled to the benefits
and protections of 11 USC ss.1110 with respect to the Replacement Engine to the
same extent as with respect to the replaced Engines immediately preceding such
replacement; the Replacement Engine has been duly subjected to the Lien of the
Indenture; the instruments subjecting such replacement property to the Indenture
have been duly filed for recordation pursuant to the Transportation Code or any
other law then applicable to the registration of the Aircraft, and no further
action or filing or recording of any document is necessary or advisable in order
to establish and perfect the Lien of the Indenture Trustee on such replacement
property, (vi) deliver to the Indenture Trustee evidence of compliance with
Section 4.06 with respect to such Replacement Engine and (vii) deliver to the
Indenture Trustee an Officer's Certificate stating that in the opinion of such
signer, all conditions precedent provided for in this Indenture relating to such
replacement have been complied with. Upon such substitution in accordance with
this Section 4.04(e), the Indenture Trustee shall, at the Company's cost and
expense (i) execute and deliver to the Company such documents and instruments,
as the Company shall reasonably request to evidence (on the public record or
otherwise) the release of the Indenture Trustee's security interest in and to
the replaced Engine and (ii) assign (without recourse) to the Company all claims
it may have against any other Person from an Event of Loss giving rise to such
substitution to the extent that the same relate to damage to or loss of the
Engine or Engines which were subject to such Event of Loss, other than with
respect to insurance policies maintained by the Indenture Trustee or the
Noteholders. Should the Company replace any Engine as provided herein, all the
provisions of this Indenture relating to the Engine being replaced shall be
applicable to the Replacement Engine with the same force and effect. The Company
shall bear all costs and expenses of the Indenture Trustee and the Noteholders
in connection with such substitution.
Section 4.05. Loss, Destruction or Requisition
(a) Event of Loss with Respect to the Airframe. Upon the
occurrence of an Event of Loss with respect to an Airframe or the Airframe and
the Engines and/or engines then installed thereon, the Company shall forthwith
(and in any event within fifteen (15) days after such occurrence) give the
Indenture Trustee written notice of such Event of Loss. Following such an Event
of Loss, the Company shall, by notice given to the Indenture Trustee within
sixty (60) days following the occurrence of such Event of Loss, elect to perform
one of the following options (it being understood that the failure to give such
notice shall be deemed to be an election of the option set forth in clause
(ii)): (i) provided that no Material Potential Event of Acceleration or Event of
Acceleration is continuing, on a date (the "Replacement Closing Date") specified
by the Company in such notice, which date may be postponed at the election of
the Company by further notice to the Indenture Trustee but shall not in any
event be later than one hundred fifty (150) days after the occurrence of such
Event of Loss, and subject to satisfaction of the closing conditions specified
in Section 4.05(c), to cause a Replacement Airframe, together with a number of
Replacement Engines equal to the number of Engines, if any, which were subject
to such Event of Loss, to be subjected to the Lien of this Indenture, free and
clear of all other Liens except Permitted Liens, or (ii) on a date
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specified by the Company in such notice, which date shall be a date not later
than the earlier of (x) one hundred fifty (150) days after the occurrence of
such Event of Loss and (y) three (3) Business Days following the payment of
insurance proceeds (unless option (i) has been elected) with respect to such
Event of Loss, to prepay the Notes in whole as provided in Section 2.03(b),
provided that if the Company shall elect to perform the option referred to in
clause (i) of this sentence and shall fail for any reason to make the
replacement in accordance with such clause on or prior to the Replacement
Closing Date, the Company shall, on the next succeeding Business Day following
the Replacement Closing Date, prepay the Notes in whole as provided in Section
2.03(b).
(b) Effect of Replacement. Should the Company have provided a
Replacement Airframe together with Replacement Engines, if any, as provided for
in Section 4.05(a) above, the Lien of this Indenture shall cease with respect to
the replaced Airframe and Engines, and the Indenture Trustee shall at the
Company's cost and expense (i) execute and deliver to the Company such documents
and instruments as the Company shall reasonably request to evidence (on the
public record or otherwise) the release of the Indenture Trustee's security
interest in and to the replaced Airframe and the Engine or Engines and (ii)
assign to the Company (without recourse) all claims it may have against any
other Person arising from the Event of Loss, to the extent the same relate to
damage to or loss of the Airframe or any Engines which were subject to such
Event of Loss other than with respect to insurance policies maintained by the
Indenture Trustee or the Noteholders. Should the Company have provided a
Replacement Airframe, together with Replacement Engines, if any, all provisions
of this Indenture relating to the Airframe and Engine or Engines, if any, being
replaced shall be applicable to the Replacement Airframe and Replacement Engine
or Replacement Engines with the same force and effect.
(c) Conditions to Airframe Replacement. The Company's right to
make a replacement under Section 4.05(a) above shall be subject to the
fulfillment of the following conditions precedent at the Company's sole cost and
expense:
(i) On the Replacement Closing Date, no Material
Potential Event of Acceleration or Event of Acceleration shall
have occurred and be continuing and the Indenture Trustee
shall have received an Officer's Certificate so certifying;
(ii) On or before the Replacement Closing Date, there
shall have been duly executed and delivered to the Company and
the Indenture Trustee an FAA Bill of Sale (or a comparable
document of another Aeronautical Authority, if applicable)
covering the Replacement Airframe and any Replacement Engines
and an additional full warranty bill of sale (as to title)
covering the Replacement Airframe and any Replacement Engines,
in each case executed by the owner thereof in favor of the
Company or in the event the Replacement Airframe or
Replacement Engines are owned by the Company a copy of the
original full warranty bill of sale executed at the time of
the purchase of the Replacement Airframe or Replacement
Engines by the Company;
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(iii) On the Replacement Closing Date, the Company
shall execute and deliver an Indenture Supplement covering the
Replacement Airframe and Replacement Engines, if any, and all
manufacturer's and vendor's warranties generally available
with respect to the Replacement Airframe and any Replacement
Engine and cause such Indenture Supplement to be duly recorded
pursuant to the Transportation Code (or such other Applicable
Law as may be in effect in the jurisdiction in which the
Replacement Aircraft may be registered in accordance with
Section 4.02(e));
(iv) On the Replacement Closing Date, the Company
shall cause such Uniform Commercial Code financing statements
(or any comparable document required to be filed or delivered
pursuant to the Applicable Law of the jurisdiction in which
the Replacement Aircraft may be registered in accordance with
Section 4.02(e)) as are deemed necessary or desirable by
counsel for the Indenture Trustee or the Noteholders to
perfect a first priority security interest in favor of the
Indenture Trustee in the Replacement Airframe and Replacement
Engines, if any, to be duly filed or recorded in the
appropriate place or places;
(v) On the Replacement Closing Date, (A) the Company
shall have good title to the Replacement Airframe and any
Replacement Engines, free and clear of Liens except Permitted
Liens; (B) the Replacement Airframe and any Replacement
Engines, shall have a value and utility at least equal to, and
to be in as good operating condition and repair as the
Airframe and any Engines replaced (assuming such Airframe and
Engines were in the condition required by the terms hereof) as
evidenced by the Independent Appraisal referred to in Section
4.05(c)(vii); (C) the Replacement Aircraft shall have been
duly certified by the FAA as to type and airworthiness and the
Replacement Aircraft shall be duly registered in the Company's
name under the Transportation Code or under the Applicable
Laws of such jurisdiction other than the United States in
which the Replacement Aircraft has been registered in
accordance with Section 4.02(e), and the Company shall have
authority to operate the Replacement Aircraft and an
airworthiness certificate shall have been duly issued under
the Transportation Code (or under the Applicable Laws of such
jurisdiction) and such registration and certificate shall be
in full force and effect; (D) the Company shall have complied
with the insurance provisions of Section 4.06 with respect to
the Replacement Airframe and any Replacement Engines and the
Indenture Trustee shall receive a certificate of the Company's
insurance broker to such effect and the Company shall have
paid all premiums then due on such insurance; and (E) the
Company shall have furnished the Indenture Trustee with an
Officer's Certificate confirming the statements made in
Section 4.05(c)(i) and clauses (A)-(D) above and that the
Replacement Airframe and any Replacement Engines meet the
definition thereof and confirming the manufacturer, model, and
the manufacturer's serial number of the Replacement Airframe
and any Replacement Engines and, in the case
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of the Replacement Airframe, the U.S. registration number (or
other applicable registration information);
(vi) On the Replacement Closing Date, the Indenture
Trustee shall, at the cost and expense of the Company, have
received (acting directly or by authorization to its special
counsel) an opinion of counsel in form and substance
reasonably satisfactory to the Indenture Trustee from counsel
reasonably satisfactory to the Indenture Trustee to the effect
that the instruments referred to in clauses (ii) and (iii)
above have been duly authorized, executed and delivered and
are enforceable and that the warranty bills of sale referred
to in clause (ii) above constitute effective instruments for
the conveyance of title to the Replacement Airframe and the
Replacement Engines, if any, to the Company; the Replacement
Airframe and the Replacement Engines, if any, are free and
clear of all recorded Liens other than Permitted Liens and the
Indenture Trustee is entitled to the benefits and protections
of 11 USC ss.1110 with respect to the Replacement Airframe and
Replacement Engines, if any, to the same extent as with
respect to the replaced Airframe or Engines immediately
preceding such Event of Loss; the Replacement Airframe and
Replacement Engines, if any, have been duly subjected to the
Lien of the Indenture; the instruments subjecting such
replacement property to the Indenture have been duly filed for
recordation pursuant to the Transportation Code or any other
law then applicable to the registration of the Aircraft, and
no further action or filing or recording of any document is
necessary or advisable in order to establish and perfect the
Lien of the Indenture Trustee on such replacement property;
and
(vii) The Indenture Trustee shall have received an
Independent Appraisal with respect to the Replacement
Aircraft.
(d) Non-Insurance Payments Received on Account of an Event of
Loss. As between the Indenture Trustee and the Company, any payments on account
of an Event of Loss (other than insurance proceeds or other payments the
application of which is provided for in Section 4.06 or payments in respect of
damage to the business or property (other than the Aircraft) of the Company)
with respect to the Aircraft, an Engine or any Part received at any time by the
Indenture Trustee or by the Company or any other Person from any governmental
authority or other Person will be applied as follows:
(i) if such payments are received with respect to an
Event of Loss as to the Aircraft, and the Airframe or the
Airframe and the Engines or engines installed thereon are
being replaced by the Company pursuant to clause (i) of
Section 4.05(a), such payments shall be paid over to, or
retained by, the Company, provided that if the Company has not
completed such replacement, such payments shall be paid over
to, or retained by, the Indenture Trustee as security, and
upon completion of such replacement, be paid over to or
retained by the Company;
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(ii) if such payments are received with respect to an
Event of Loss as to an Engine that has been or is being
replaced by the Company pursuant to Section 4.04, such
payments shall be paid over to, or retained by, the Company,
provided that if the Company has not completed such
replacement, such payments shall be paid over to, or retained
by, the Indenture Trustee as security, and upon completion of
such replacement, be paid over to or retained by the Company;
and
(iii) if such payments are received with respect to
an Event of Loss as to the Aircraft, and if the Airframe or
the Airframe and the Engines or engines installed thereon have
not been and will not be replaced as contemplated by Section
4.05(a), so much of such payments as shall not exceed the
amount required to be paid by the Company pursuant to Section
2.03(b) shall be paid to the Indenture Trustee to be applied
in reduction of the Company's obligation to pay such amount,
to the extent not already paid by the Company, and, after such
amount shall be paid in full, shall be paid over to the
Company.
(e) Requisition of Use. In the event of a requisition for use
of the Airframe and the Engines or engines installed on the Airframe by any
government that does not constitute an Event of Loss, the Company shall promptly
notify the Indenture Trustee of such requisition and all of the Company's
obligations under this Indenture shall continue to the same extent as if such
requisition had not occurred except to the extent that the performance or
observance of any obligation by the Company shall have been prevented or delayed
by such requisition, provided that the Company's obligations for the payment of
money and under Section 4.06 (except while an assumption of liability by the
government of the United States of the scope referred to in Section 4.02(b) is
in effect) shall not be affected, reduced or delayed by such requisition. Any
payments received by the Indenture Trustee or the Company from such government
with respect to such requisition of use shall be paid over to, or retained by,
the Company.
(f) Application of Payments During Existence of Material
Potential Event of Acceleration or Event of Accele. Any amount referred to in
this Section 4.05 or Section 4.06 which is payable to the Company shall not be
paid to the Company, or, if it has been previously paid directly to the Company,
shall not be retained by the Company (and pending delivery to the Indenture
Trustee, shall be held in trust by the Company for the benefit of the Indenture
Trustee), if at the time of such payment an Event of Acceleration or a Material
Potential Event of Acceleration shall have occurred and be continuing, but shall
be paid to and held by the Indenture Trustee as security for the obligations of
the Company under this Indenture, and at such time as there shall not be
continuing any such Event of Acceleration or Material Potential Event of
Acceleration such amount and any gain realized as a result of Permitted
Investments made pursuant to Section 5.04 shall be paid over to the Company.
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(g) Notice of Damage. The Company shall notify the Indenture
Trustee as soon as practicable after the Company becomes aware of any loss,
theft, damage or destruction of the Aircraft or any part thereof not
constituting an Event of Loss if the estimated cost of repair or replacement
exceeds $____________.
Section 4.06. Insurance
(a) Public Liability and Property Damage Insurance. Subject to
the rights of the Company under Section 4.06(d), the Company will, at its own
cost and expense (or at the cost and expense of a Permitted Lessee), maintain or
cause to be maintained in effect, at all times, with insurers of recognized
reputation and responsibility which normally participate in airline insurance
programs, comprehensive airline liability insurance (including, without
limitation, passenger legal liability, cargo liability, property damage
liability, contractual liability, baggage and mail and aviation general third
party liability and product liability coverage but excluding manufacturer's
product liability coverage) with respect to the Aircraft in an amount not less
than the Company may carry from time to time on other similar aircraft in its
fleet and of the same type and covering the same risks as usually carried from
time to time by similarly situated air carriers operating the same or similar
equipment on routes in the same jurisdictions as the Company, but in no event
less than $__________, provided that an agreement of the United States
Government to insure against or indemnify for substantially the same risks to at
least the same amount shall satisfy the requirements of this Section 4.06(a).
Such insurance shall be of the same type and covering the same risks usually
carried by the Company with respect to similar aircraft and engines. During any
period that the Aircraft is grounded and not in operation for any reason, the
Company may modify the insurance required by this Section 4.06(a) to (i) reduce
the amounts of public liability and property damages insurance and (ii) modify
the scope of the risks covered and the type of insurance, in both circumstances
to conform to such insurance customary for airlines similarly situated with the
Company in respect of similar aircraft which are grounded and not in operation
but which in no event are less favorable to the Indenture Trustee and the
Noteholders than the insurance applicable to aircraft owned or leased by the
Company of the same or similar type on the ground and not in operation.
(b) Insurance Against Loss or Damage to the Aircraft and
Engines. Subject to the rights of the Company under Section 4.06(d), the Company
will, at its own cost and expense (or at the cost and expense of a Permitted
Lessee), maintain or cause to be maintained in effect, at all times, with
insurers of recognized responsibility which normally participate in airline
insurance programs, all risk, agreed value, ground, taxiing and flight hull
insurance, which may exclude, except to the extent required by the penultimate
sentence of this Section 4.06(b), war risks and allied perils, covering the
Aircraft for an amount not less than 110% of the outstanding principal amount of
the Notes. Such hull insurance or other personal property insurance shall cover
Engines or engines and Parts removed from the Airframe. Such insurance shall be
on a replacement cost basis in respect of damage not constituting an Event of
Loss and on an agreed value basis in respect of an Event of Loss and of the same
type and covering the same risks usually carried by the Company with respect
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to similar aircraft and engines, and covering risks of the kind customarily
insured against by similarly situated airlines operating similar aircraft. If
and to the extent that the Company or a Permitted Lessee operates the Aircraft
(A) on routes where the Company or such Permitted Lessee maintains war risk
insurance in effect with respect to other owned or leased aircraft in its fleet,
or (B) on routes where the custom in the industry is to carry such insurance,
the Company or such Permitted Lessee shall maintain or cause to be maintained
such insurance in effect with respect to the Aircraft in an amount equal to at
least 110% of the outstanding principal amount of the Notes. An agreement by the
United States Government to insure against or indemnify for substantially the
same risks to at least the same amount will satisfy the requirements of this
Section 4.06(b). Notwithstanding the foregoing, the Company shall not be
required to maintain war risk insurance so long as the Aircraft is operated only
within the United States and Canada.
(c) Additional insureds; Loss Payment. The Company shall cause
all policies of insurance carried in accordance with this Section 4.06 to name
the Additional Insureds as additional insureds as their interests may appear.
Such policies shall provide with respect to the Additional Insureds that (i) no
cancellation or lapse of coverage for nonpayment of premium or otherwise, and no
substantial change of coverage which adversely affects the interests of any
Additional Insured, shall be effective as to such Additional Insured until
thirty (30) days (or such lesser period as may be applicable in the case of any
war risk coverage) after receipt by such Additional Insured of written notice
from the insurers of such cancellation, lapse or change; (ii) they shall have no
liability for premiums, commissions, calls, assessments or advances with respect
to such policies; (iii) shall provide that in respect of each Additional
Insured's interest in such policies the insurance shall not be invalidated by
any action or inaction of the Company (or if a Permitted Lease is in effect, the
Permitted Lessee) or any other Person (other than such Additional Insured) and
shall insure the respective interests of the Additional Insureds regardless of
any breach or violation of any warranty, declaration or condition contained in
such policies by the Company (or any Permitted Lessee), (iv) shall waive any
right of the insurers of subrogation or to set-off (including for unpaid
premiums) or counterclaim or any other deduction, whether by attachment or
otherwise, in respect of any liability of any Additional Insured, (v) shall
provide that losses shall be adjusted with the Company (or, if a Material
Potential Event of Acceleration or an Event of Acceleration shall have occurred
and be continuing, with the loss payee referred to in the last sentence of this
Section 4.06(c)), provided, that, in the case of an Event of Loss, no adjustment
shall reduce the amount payable under such policy to less than the agreed value
required by Section 4.06(b), (vi) shall be effective with respect to both
domestic and international operations, (vii) if hull war risk coverage is
maintained and if the hull all-risks insurance and the hull war risks insurance
are effected under separate policies, the insurers shall agree that if a
disagreement arises as to whether a claim is covered by the hull all-risks
insurance or the hull war risks insurance, the insurers will settle the claim on
the basis of a 50/50 claim funding arrangement; and (viii) such policies will be
primary without any right of contribution from any other insurance carried by
any Additional Insured. Each liability policy shall provide that all the
provisions thereof, except the limits of liability, shall operate in the same
manner as if there were a separate policy covering each insured and provide that
the exercise by the insurer of rights of subrogation derived from rights
retained by the Company will not delay payment of any claim that
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would otherwise be payable but for such rights of subrogation. Each hull policy
shall provide that, so long as the insurers shall not have received written
notice that an Event of Acceleration or a Material Potential Event of
Acceleration has occurred and is continuing, any proceeds of less than
$__________ shall be payable to the Company; and any amounts up to 110% of the
outstanding principal amount of the Notes of (i) any proceeds in excess of
$__________ (ii) any proceeds in respect of an Event of Loss with respect to the
Aircraft or (iii) if the insurers shall have received written notice that an
Event of Acceleration or a Material Potential Event of Acceleration has occurred
and is continuing, any proceeds with respect to any single loss, shall be
payable to the Indenture Trustee as long as this Indenture is in effect.
(d) Deductibles and Self-Insurance. The Company may from time
to time self-insure, by way of deductible or premium adjustment provisions in
insurance policies or otherwise, the risks required to be insured against
pursuant to this Section 4.06 under a program applicable to all aircraft in the
Company's fleet but in no case shall such self-insurance in the aggregate
exceed, in addition to the Company's normal deductible per occurrence relating
to damage (but not total loss) to aircraft for each aircraft in the Company's
fleet (which amount shall not to exceed $___________ in respect of the
Aircraft), an amount equal to three (3)% of the Company's tangible net worth,
calculated as at the end of the Company's immediately preceding fiscal year.
(e) Application of Hull Insurance Proceeds. As between the
Indenture Trustee and the Company, any payments received under policies of hull
or other property insurance required to be maintained by the Company pursuant to
Section 4.06(b), shall be applied as follows:
(i) if such payments are received with respect to
loss or damage (including an Event of Loss with respect to an
Engine) not constituting an Event of Loss with respect to the
Airframe, payments of less than $____________ shall be paid
over to, or retained by, the Company and, subject to Section
4.06(c), any payments in excess of $__________ shall be paid
over to or retained by the Indenture Trustee as security, and
paid over to, or retained by, the Company upon performance of
its repair or replacement obligation;
(ii) if such payments are received with respect to an
Event of Loss with respect to the Airframe and the Airframe is
not being replaced by the Company pursuant to Section 4.05, so
much of such payments as shall not exceed the amount payable
by the Company under Section 2.03(b) shall be paid to the
Indenture Trustee and applied in reduction of the Company's
obligation to pay such amount if not already paid by the
Company, and to reimburse the Company if such amount shall
have been paid, and the balance, if any, of such payments
shall be promptly paid over to, or retained by, the Company;
and
(iii) if such payments are received with respect to
an Event of Loss with respect to the Airframe and Engines or
engines installed thereon and the Airframe is being replaced
by the Company pursuant to clause (i) of Section 4.05(a), such
payments shall be paid over to, or retained by the Company,
provided that if the Company has not completed such
replacement, such
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payments shall be paid over to, or retained by, the Indenture
Trustee as security, and upon completion of such replacement,
be paid over to or retained by the Company.
(f) Insurance for Own Account. Nothing in this Section 4.06
shall prohibit the Company, the Indenture Trustee or the Noteholders from
obtaining insurance with respect to the Aircraft for its own account (including,
without limitation, in the case of the Company, hull insurance under the same
policies maintained pursuant to this Section 4.06 in amounts in excess of those
required to be maintained pursuant to this Section 4.06) and any proceeds
payable thereunder shall be payable as provided in the insurance policy relating
thereto, provided that no such insurance may be obtained which would limit or
otherwise adversely affect the availability of coverage or payment of any
insurance required to be obtained or maintained pursuant to this Section 4.06,
it being understood that all salvage rights to the Airframe or the Engines shall
remain with the Company's insurers at all times. In the event that the Company
shall fail to maintain or cause to be maintained insurance as herein provided,
the Indenture Trustee may at its sole option (but shall not be obligated to)
provide such insurance and, in such event, the Company shall, upon demand,
reimburse the Indenture Trustee for the cost thereof; provided, however, that no
exercise by the Indenture Trustee or any Noteholder of said option shall affect
the provisions of this Indenture, including the provisions that failure by the
Company to maintain the prescribed insurance shall constitute an Event of
Acceleration to the extent provided in Section 6.01(b).
(g) Reports, etc. The Company will furnish, or cause to be
furnished, to the Indenture Trustee on or before the Closing Date and annually
or on or before the renewal dates of the Company's (or the Permitted Lessee's)
relevant insurance policies, evidence of renewal of the insurance policies
required pursuant to this Section 4.06 prior to the cancellation, lapse or
expiration of such insurance policies and a report signed by a recognized
independent firm of insurance brokers of good reputation, which brokers may be
regularly retained by the Company or Permitted Lessee, describing in reasonable
detail the hull and liability insurance (and property insurance for detached
Engines which have not been replaced) then carried and maintained with respect
to the Aircraft and stating the opinion of such firm that (i) the insurance then
carried and maintained on the Aircraft complies with Section 4.06 and that such
renewal insurance will on and after the effective date thereof so comply with
the Section 4.06, (ii) to the best of such firm's knowledge, such insurance
provides coverage that is in substantially similar form, of such types and
having limits within the range of limits as are customarily carried by similarly
situated United States carriers operating similar aircraft on similar routes,
and (iii) premiums then due have been paid, provided that all information
contained in such report shall be held confidential by the Indenture Trustee,
and shall not be furnished or disclosed by them to any Person except (A) to any
Noteholder or to prospective and permitted transferees of a Noteholder's or the
Indenture Trustee's respective interest in the Aircraft, (B) to any Noteholder's
or the Indenture Trustee's counsel or independent certified public accountants,
independent insurance advisors or other agents who agree to hold such
information confidential, (C) as may be necessary for purposes of enforcement of
this Indenture, (D) to the
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Security Trustee or rating agencies or (E) as may be required by Applicable Law
or by any court or administrative order or decree or governmental ruling or
regulation (or, in the case of any Noteholder, to any bank examiner or other
regulatory personnel). The Company will cause such firm to give prompt written
advice to the Indenture Trustee of any default in the payment of any premium and
of any other act or omission on the part of the Company (or any Permitted
Lessee) of which it has knowledge and which would in such firm's opinion
invalidate or render unenforceable, in whole or in any part, any insurance on
the Aircraft. The Company will also cause such firm to advise the Indenture
Trustee in writing at least thirty (30) days (seven (7) days in the case of war
risk or allied perils coverage) prior to the termination or cancellation (but
not scheduled expiration) of, or material adverse change in, such insurance
carried and maintained on the Aircraft pursuant to this Section 4.06, provided,
that in respect of war risk or allied perils coverage, if the notice period
specified above is not obtainable, the insurance broker shall provide for as
long a period of prior notice as shall then be obtainable.
(h) Tail Insurance. The Company shall use reasonable efforts
to ensure that any Person that purchases the Aircraft from the Company will
include (to the same extent as is provided to the Company) the Indenture
Trustee, the Noteholders and the Security Trustee as named additional insureds
on any liability policy for two years following the repayment in full of the
Notes or until the next major overhaul ("D-check" or equivalent), whichever is
earlier.
Section 4.07. Filings.
The Company (i) will promptly take, or cause to be taken, at
the Company's cost and expense, such action with respect to the recording,
filing, re-recording and refiling of this Indenture, each Indenture Supplement
and all amendments or supplements thereto and any financing statements or
continuation statements or other instruments and (ii) will promptly take, or
cause to be taken, all such other actions as are reasonably requested by the
Indenture Trustee, in each case to maintain, so long as this Indenture is in
effect, the perfection of the first priority security interest created by this
Indenture or will furnish to the Indenture Trustee timely notice of the
necessity of such action, together with such instruments, in execution form, and
such other information as may be required to enable it to take such action.
Section 4.08. Corporate Existence
The Company shall at all times maintain its corporate
existence except as permitted by Section 4.09; and it shall do or cause to be
done all things necessary to preserve and keep in full force and effect its
corporate rights, powers, privileges and franchises, except for any corporate
right, power, privilege or franchise that it determines, in its reasonable, good
faith business judgment, is no longer necessary or desirable in the conduct of
its business.
Section 4.09. Merger, Consolidation
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The Company shall not consolidate with or merge into any other
corporation or convey, transfer or lease all or substantially all its assets as
an entirety to any Person, whether in a single transaction or a series of
related transactions, unless:
(i) The corporation formed by such consolidation or
into which it is merged or the Person which acquires by
conveyance, transfer or lease all or substantially all its
assets as an entirety (the "Successor") shall after such
merger or consolidation or acquisition of assets be a
Certificated Air Carrier and shall have executed and delivered
to the Indenture Trustee an agreement in form and substance
reasonably satisfactory to it containing an assumption by such
Successor of the due and punctual performance and observance
of each Note Purchase Document to which the Company is a
party;
(ii) No Event of Acceleration or Potential Event of
Acceleration shall arise as a result of such conveyance,
transfer, merger, consolidation or acquisition of assets;
(iii) The Company shall have delivered to the
Indenture Trustee an Officer's Certificate of the Company and
an opinion of the Company's General Counsel or other counsel
reasonably satisfactory to the Indenture Trustee, each stating
that such conveyance, transfer, consolidation, merger or
acquisition of assets and the assumption agreement mentioned
in clause (i) above comply with this Section 4.09 (which
opinion may rely, as to factual matters, on an Officer's
Certificate of the Company) and such opinion shall also state
that the assumption agreement executed and delivered pursuant
to clause (i) above has been duly authorized, executed and
delivered by the Successor and is enforceable against the
Successor (subject to customary exceptions);
(iv) the Company shall have made all filings
necessary in order to preserve and protect the rights of the
Indenture Trustee and the Noteholders under the Indenture; and
(v) the benefits of Section 1110 of the Bankruptcy
Code available to the Indenture Trustee immediately prior to
such transaction shall not be adversely affected as a result
of such transaction.
Upon any consolidation or merger, or any conveyance, transfer or lease of all or
substantially all the assets of the Company as an entirety in accordance with
this Section 4.09, the Successor shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under this Indenture and the
other Note Purchase Documents to which the Company is a party with the same
effect as if such Successor had been named as the Company herein and therein.
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Section 4.10. Notice of Change of the Company's Chief
Executive Office. The Company shall notify the Indenture Trustee 30 days prior
to any change in the location of the chief executive office (as such term is
used in Article 9 of the Uniform Commercial Code) of the Company or any change
in the location of the place where its records concerning the Aircraft and the
Note Purchase Documents are located.
ARTICLE 5 - RECEIPT, DISTRIBUTION AND APPLICATION
OF INCOME FROM THE COLLATERAL
Section 5.01. Distribution of Principal, Breakage Costs and
Interest.
Except as otherwise provided in Section 5.03, each installment
of principal, Breakage Costs, if any, and interest (as well as any installment
of interest on overdue principal, interest and Breakage Costs, if any), shall be
distributed by the Indenture Trustee as promptly as possible as follows and in
all events in accordance with Section 2.06: so much of such installment as shall
be required for the purpose shall be distributed and paid to the Noteholders to
pay the aggregate amount of the payments of principal, Breakage Costs, if any,
and interest (as well as any interest on overdue principal, interest and
Breakage Costs, if any) then due under the Notes, such distribution to be made
ratably, without priority of one over the other, in the proportion that the
amount of such payments then due under each such Note bears to the aggregate
amount of payments then due under all such Notes.
Section 5.02. Payments in Case of Prepayment
Except as otherwise provided in Section 5.03, in the event any
of the Notes are to be prepaid in accordance with the provisions of Section
2.03, the Indenture Trustee shall apply any payments received by it in
connection with such prepayment in the following order of priority:
first, so much of such payments as shall be required
for the purpose shall be distributed and paid to the
Noteholders to pay the aggregate amount of the payments of
principal, Breakage Costs, if any, and interest (as well as
any interest on overdue principal, interest and Breakage
Costs, if any) to be prepaid under the Notes pursuant to
Section 2.03, such prepayment to be made ratably, without
priority of one over the other, in the proportion that the
amount to be prepaid under each such Note bears to the
aggregate amount to be prepaid under all such Notes;
second, so much of such payments or amounts remaining
thereafter as shall be required to pay any other Obligations
then due and payable shall be applied to the payment of such
Obligations; and in case such payments or amounts shall be
insufficient to pay in full the whole amount so due and
payable, then to the payment
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of such Obligations without any preference or priority of one
Noteholder over another, ratably according to the aggregate
amount of Obligations so due;
third, to the Indenture Trustee, any amount due the
Indenture Trustee pursuant to Sections 8.07 hereof and 5.3 of
the Note Purchase Agreement; and
fourth, the balance, if any, of such amount to the
Company.
Section 5.03. Payments during Continuance of Event of
Acceleration
Notwithstanding Section 2.06, all payments received and
amounts held or realized by the Indenture Trustee after an Event of Acceleration
shall have occurred and be continuing (including any amounts realized by the
Indenture Trustee from the exercise of any remedies pursuant to Article 6), as
well as all payments or amounts then held or thereafter received by the
Indenture Trustee as part of the Collateral while such Event of Acceleration
shall be continuing, and, in each case, after the Indenture Trustee shall
commence remedies in respect thereof or after the Notes shall have become due
and payable as provided herein, shall be distributed by the Indenture Trustee in
the following order of priority:
first, so much of such payments or amounts as shall
be required to pay the Indenture Trustee all amounts then due
it pursuant to Sections 8.07 hereof and 5.3 of the Note
Purchase Agreement shall be applied to pay the Indenture
Trustee such amounts;
second, so much of such payments or amounts remaining
as shall be required to pay the expenses incurred, or in the
judgment of the Indenture Trustee expected to be incurred, in
using, operating, storing, leasing, controlling or managing
the Collateral, and in all maintenance, repairs, replacements,
alterations, additions and improvements and in making all
payments which the Indenture Trustee may be required or may
elect to make, if any, for taxes, assessments, insurance or
other proper charges upon the Collateral or any part thereof,
or for the satisfaction of Liens, if any, prior to or pari
passu with the Lien of this Indenture (including, without
limitation, the expenses of any sale, taking or other
proceeding, reasonable attorney's fees and expenses, court
costs, and any other expenditures incurred or expenditures or
advances made by the Indenture Trustee in the protection,
exercise or enforcement of any right, power or remedy or any
damages sustained by the Indenture Trustee, liquidated or
otherwise, upon such Event of Acceleration);
third, so much of such aggregate amount remaining as
shall be required to reimburse the Noteholders for payment
made by them to the Indenture Trustee pursuant to Section 7.03
(to the extent not previously reimbursed), to be distributed
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to the Noteholders ratably, without priority of one over any
other, in the proportion of the amounts of such unreimbursed
payment made pursuant to Section 7.03;
fourth, subject to Section 2.08, so much of such
payments or amounts remaining as shall be required to pay the
principal of and interest and Breakage Costs, if any, and
accrued interest on the outstanding Notes then due and
payable, whether by declaration of acceleration or otherwise,
shall be applied ratably to the payment of such principal,
Breakage Costs if any, and interest (as well as any interest
on overdue principal, interest and Breakage Costs, if any);
and in case such payments or amounts shall be insufficient to
pay in full the whole amount so due and payable, then to the
payment of such principal, Breakage Costs, if any, and
interest, without any preference or priority of one Note over
another, ratably according to the aggregate amount so due for
principal, Breakage Costs, if any, and interest;
fifth, so much of such payments or amounts remaining
thereafter as shall be required to pay any other Obligations
then due and payable shall be applied to the payment of such
Obligations; and in case such payments or amounts shall be
insufficient to pay in full the whole amount so due and
payable, then to the payment of such Obligations without any
preference or priority of one Noteholder over another, ratably
according to the aggregate amount of Obligations so due;
sixth, so much of such payments or amounts remaining
thereafter as shall be required to pay any Other Obligations
then due and payable shall be applied to the payment of such
Other Obligations; and in case such payments or amounts shall
be insufficient to pay in full the whole amount so due and
payable, then to the payment of such Other Obligations without
any preference or priority of one Other Noteholder over
another, ratably according to the aggregate amount of Other
Obligations so due; and
seventh, the balance, if any, of such payments or
amounts remaining thereafter shall be held by the Indenture
Trustee as collateral security for the Obligations and Other
Obligations on a pro rata basis until such time as no Event of
Acceleration shall be continuing hereunder and no "Event of
Acceleration" as defined in the Other Indentures shall be
continuing thereunder or the Notes have been accelerated and
all amounts due thereon and in respect of the Obligations and
the Other Obligations have been paid, at which time such
payments or amounts shall be distributed to the Company.
Section 5.04. Funds Held by Indenture Trustee; Investments.
At any time and from time to time, so long as no Material
Potential Event of Acceleration or Event of Acceleration shall have occurred and
be continuing, the Indenture Trustee
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shall, upon the written instructions of the Company, invest and reinvest in
Permitted Investments as specified in the written instructions of the Company,
any monies on deposit with the Indenture Trustee as part of the Collateral, and
sell any Permitted Investments, in either case, at such prices, including
accrued interest, as are set forth in the written instructions of the Company,
and such Permitted Investments shall be held by the Indenture Trustee until so
sold in trust as part of the Collateral; provided, that the Company shall upon
demand pay to the Indenture Trustee the amount of any loss realized upon
maturity, sale or other disposition of any Permitted Investments and, so long as
no Event of Acceleration or Material Potential Event of Acceleration shall have
occurred and be continuing, be entitled to receive from the Indenture Trustee,
and the Indenture Trustee shall promptly pay to the Company, any profit, income
interest, dividend or gain realized upon maturity, sale or other disposition of
any Permitted Investment. The Indenture Trustee shall not be responsible for any
losses on any investments or sales of Permitted Investments made pursuant to the
procedure specified in this Section 5.04.
ARTICLE 6 - REMEDIES OF THE INDENTURE TRUSTEE UPON
AN EVENT OF ACCELERATION
Section 6.01. Event of Acceleration
The following events shall constitute "Events of Acceleration"
(whether any such event shall be voluntary or involuntary or come about or be
effected by operation of law or pursuant to or in compliance with any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) and each such Event of Acceleration shall
be deemed to exist and continue so long as, but only so long as, it shall not
have been remedied:
(a) The Company shall fail to make any payment when
due of (i) principal, interest or Breakage Costs on any Note,
and such failure shall continue unremedied for ten (10) days
after the same shall have become due and payable or (ii) any
other amounts due under the Note Purchase Documents, and such
failure shall continue unremedied for fifteen (15) Business
Days after the Indenture Trustee or a Majority in Interest of
Noteholders has notified the Company of such failure; or
(b) The Company shall fail to procure and maintain
insurance pursuant to Section 4.06 or such insurance shall be
cancelled or lapse; provided that such lapse or cancellation
shall not constitute an Event of Acceleration until the
earlier of (i) thirty (30) days (or if thirty (30) days is
unavailable pursuant to Section 4.06(c), such shorter period
as is available pursuant to such Section) after receipt by the
Company or the Indenture Trustee of written notice of such
lapse or cancellation (or seven (7) days or such shorter time
as may be standard in the industry with respect to war-risk
coverage) or (ii) the date that such lapse or cancellation is
effective as to the Indenture Trustee or any Noteholder; or
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(c) The Company shall fail to observe or perform any
of its covenants or obligations in this Indenture or any other
Note Purchase Documents (other than those covered by Sections
6.01(a) and 6.01(b)), and such failure shall continue for a
period of 30 days after delivery of written notice of such
failure from the Indenture Trustee or a Majority in Interest
of Noteholders, unless such failure is curable and the Company
shall then be diligently proceeding to correct such failure
and shall in fact correct such failure within a reasonable
time thereafter, but in no event more than one hundred fifty
(150) days after delivery of such notice; or
(d) Any representation or warranty made by the
Company herein or in any other Note Purchase Documents
Document or in any document or certificate furnished to the
Indenture Trustee or any Noteholder in connection herewith or
therewith or pursuant hereto or thereto, shall prove to have
been incorrect in any material respect as of the date made and
shall remain material at the time in question and shall not be
remedied within thirty (30) days after written notice thereof
has been given to the Company by the Indenture Trustee or any
Noteholder, unless such incorrectness is curable and Company
shall, after delivery of such notice, be diligently proceeding
to correct such failure and shall in fact correct such failure
within one hundred fifty (150) days after the delivery of such
notice; or
(e) The Company shall consent to the appointment of
or taking possession by a receiver, assignee, custodian,
sequestrator, trustee or liquidator (or other similar
official) of itself or of a substantial part of its property
or shall fail to pay its debts generally as they come due (as
provided in 11 U.S.C. ss. 303(h)(1)), or shall make a general
assignment for the benefit of its creditors, or shall commence
a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its
debts under bankruptcy or insolvency or similar laws, as now
or hereafter constituted or shall file an answer admitting the
material allegations of a petition filed against it in any
involuntary proceeding, or shall otherwise seek relief under
the provisions of any now existing or future bankruptcy,
insolvency or other similar law providing for the
reorganization or winding-up of corporations, or providing for
an arrangement, composition, extension or adjustment with its
creditors; or
(f) An order, judgment or decree shall be entered in
any proceeding by any court of competent jurisdiction
appointing, without the consent of the Company, a receiver,
trustee or liquidator of the Company or of any substantial
part of its property, or any substantial part of the property
of the Company shall be sequestered, and any such order,
judgment, decree, appointment or sequestration shall remain in
force undismissed, unstayed or unvacated for a period of sixty
(60) days after the date of entry thereof; or
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(g) A petition against the Company in a proceeding
under the bankruptcy laws, other insolvency or similar laws,
as now or hereafter in effect, shall be filed and shall not be
withdrawn or dismissed within sixty (60) days thereafter, or,
in case the approval of such petition by a court of competent
jurisdiction is required, the petition as filed or amended
shall be approved by such a court as property filed and such
approval shall not be withdrawn or the proceeding dismissed
within sixty (60) days thereafter, or a decree or order for
relief in respect of the Company shall be entered by a court
of competent jurisdiction in an involuntary case under such
bankruptcy, insolvency or similar laws, as now or hereafter
constituted and such decree or order shall remain unstayed in
effect for a period of sixty (60) days, or if, under the
provisions of any law providing for reorganization or
winding-up of corporations which may apply to the Company, any
court of competent jurisdiction shall assume jurisdiction,
custody or control of the Company or of any substantial part
of its property and such jurisdiction, custody or control
shall remain in force unrelinquished, unstayed or unterminated
for a period of sixty (60) days; or
(h) final judgment or judgments for the payment of
money in excess of $____________ shall be outstanding against
the Company for more than thirty (30) days from the date of
its entry and has not been discharged in full, vacated, bonded
(in a manner sufficient to stay enforcement) or stayed; or
(i) the Company shall default in the observance or
performance of any agreement or condition relating to any
Indebtedness (as hereinafter defined) or contained in any
instrument or agreement evidencing, securing or relating
thereto, or any other event shall occur or condition exist,
the effect of which default or other event or condition being
that any outstanding Indebtedness in excess of $__________ (or
the equivalent in any foreign currency) has become payable
prior to its stated maturity or due date (and such
acceleration is not (i) promptly waived by the holders of such
Indebtedness, (ii) being contested in good faith by
appropriate proceedings or (iii) in the case of any
Indebtedness of the type described in clause (D) below,
satisfied by the Company promptly upon the same becoming due);
it being understood and agreed for purposes of this Section
6.01(i) that "Indebtedness" means the Company's obligations
for (A) borrowed money, (B) under any lease, (C) in respect of
Taxes imposed upon the Company's income or profits or upon any
property belonging to the Company, it being acknowledged that
for purposes of this clause 6.01(i), any such Indebtedness
shall be deemed to be "payable prior to its stated maturity or
due date" at such time as nonpayment of the same results in
the imposition of a Lien on any property of the Company, or
(D) under any agreement whereby the Company guarantees the
obligations of any other Person for borrowed money or under a
lease by such Person; or
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(j) the Company shall cease to be a Certificated Air
Carrier and such circumstance results in either (i) the
inability of the Company to operate aircraft in revenue
service or (ii) the Indenture Trustee no longer being entitled
to the benefits of Section 1110 of the Bankruptcy Code, and in
either case such condition shall continue for a period of ten
(10) days; or
(k) the Lien of this Indenture shall cease to be a
valid first priority Lien (other than as a result of any
Permitted Lien) on (i) the Collateral (other than the
Aircraft) and such condition shall continue for a period of
ten (10) days after a responsible officer of the Company has
actual knowledge of such condition or (ii) the Aircraft.
Section 6.02. Remedies with Respect to Collateral
(a) Remedies Available. Upon the occurrence of any Event of
Acceleration and at any time thereafter so long as the same shall be continuing,
the Indenture Trustee (in accordance with the provisions of Article 7 hereof)
may, and upon the written instructions of a Majority in Interest of Noteholders,
the Indenture Trustee shall, do one or more of the following:
(i) By written notice to the Company, declare to be forthwith
due and payable the sum of (A) the aggregate unpaid principal amount of the
Notes, plus (B) the amount of accrued but unpaid interest on the Notes, plus
Breakage Costs and (C) all other sums then owing by the Company hereunder and
under the other Note Purchase Documents, without presentment, demand, protest,
notice or any other formality, all of which are hereby waived; provided that, if
an Event of Acceleration referred to in Section 6.01(e), (f) or (g) shall have
occurred, then in every such case (V) the aggregate unpaid principal amount of
the Notes, plus (W) the amount of accrued but unpaid interest on the Notes, plus
(X) Breakage Costs and all other sums then owing by the Company hereunder and
under the other Note Purchase Documents, shall immediately and without further
act become due and payable, without presentment, demand, protest, notice or any
other formality, all of which are hereby waived;
(ii) Subject to the provisions of Article 3 hereof:
(A) cause the Company, upon the written demand of the
Indenture Trustee, at the Company's cost and expense, to
deliver promptly, and the Company shall deliver promptly, all
or such part of the Airframe or any Engine as the Indenture
Trustee may so demand to the Indenture Trustee or its order,
or the Indenture Trustee, at its option, may enter upon the
premises where all or any part of the Airframe or any Engine
are located and take immediate possession (to the exclusion of
the Company and all Persons claiming under or through the
Company) of and remove the same together with any engine which
is not an Engine but which is installed on the Airframe,
subject to all of the rights of the owner, lessor, lienor or
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secured party of such engine (and, at the Indenture Trustee's
option, store the same at the Company's premises until
disposal thereof by the Indenture Trustee); all without
liability accruing to the Indenture Trustee or the Noteholders
for or by reason of such entry or taking of possession or
removal other than for restoration of property damaged by such
taking of possession or removal;
(B) sell all or any part of the Airframe and any
Engine at public or private sale, whether or not the Indenture
Trustee shall at the time have possession thereof, as the
Indenture Trustee may determine, or lease or otherwise dispose
of or hold, use or operate all or any part of the Airframe or
such Engine as the Indenture Trustee, in its sole discretion,
may determine, all free and clear of any rights or claims of
whatsoever kind of the Company and the Company shall remain
liable for any deficiency between the net sales proceeds and
the amount of the unpaid Obligations;
(C) exercise any or all of the rights and powers and
pursue any and all remedies which may be available to it under
Applicable Law.
Upon every taking of possession of Collateral under this
Section 6.02, the Indenture Trustee may, from time to time, at the Company's
cost and expense make all such expenditures for maintenance, insurance, repairs,
replacements, alterations, additions and improvements to and of the Collateral,
as it may deem proper. In each such case, the Indenture Trustee shall have the
right to maintain, store, lease, control or manage the Collateral and to
exercise all rights and powers of the Company relating to the Collateral in
connection therewith, as the Indenture Trustee shall deem best, including the
right to enter into any and all such agreements with respect to the maintenance,
insurance, storage, leasing, control, management or disposition of the
Collateral or any part thereof as the Indenture Trustee may determine; and the
Indenture Trustee shall be entitled to collect and receive directly all tolls,
rents, revenues, issues, income, products and profits of the Collateral and
every part thereof, without prejudice, however, to the right of the Indenture
Trustee under any provision of this Indenture to collect and receive all cash
held by, or required to be deposited with, the Indenture Trustee hereunder. Such
tolls, rents, revenues, issues, income, products and profits shall be applied to
pay the expenses of storage, leasing, control, management or disposition of the
Collateral, and of all maintenance, repairs, replacements, alterations,
additions and improvements, and to make all payments which the Indenture Trustee
may be required or may elect to make, if any, for taxes, assessments, insurance
or other proper charges upon the Collateral or any part thereof (including the
employment of engineers and accountants to examine, inspect and make reports
upon the properties and books and records of the Company), and all other
payments which the Indenture Trustee may be required or authorized to make under
any provision of this Indenture, as well as just and reasonable compensation for
the services of the Indenture Trustee, and of all Persons properly engaged and
employed by the Indenture Trustee.
In addition, the Company shall be liable for all legal fees
and other costs and expenses incurred by reason of the occurrence of any Event
of Acceleration or the exercise of the
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Indenture Trustee's remedies with respect thereto, including all costs and
expenses incurred in connection with the retaking or return of the Airframe or
any Engine in accordance with the terms hereof or under any Applicable Law,
which amounts shall, until paid, be secured by the Lien of this Indenture.
If an Event of Acceleration shall have occurred and be
continuing, at the request of the Indenture Trustee the Company shall promptly
execute and deliver to the Indenture Trustee such instruments of title and other
documents as the Indenture Trustee may deem necessary or advisable to enable the
Indenture Trustee or an agent or representative designated by the Indenture
Trustee, at such time or times and place or places as the Indenture Trustee may
specify, to obtain possession of all or any part of the Collateral to which the
Indenture Trustee shall at the time be entitled hereunder. If the Company shall
for any reason fail to execute and deliver such instruments and documents after
such request by the Indenture Trustee, the Indenture Trustee may obtain a
judgment conferring on the Indenture Trustee the right to immediate possession
and requiring the Company to execute and deliver such instruments and documents
to the Indenture Trustee, to the entry of which judgment the Company hereby
specifically consents to the fullest extent it may lawfully do so.
Nothing in the foregoing shall affect the right of each
Noteholder to receive all payments of principal of, and interest on, the Note or
Notes held by such Noteholder and all other amounts owing to such Noteholder as
and when the same may be due.
(b) Notice of Sale. The Indenture Trustee shall give the
Company at least fifteen (15) days' prior notice of any public sale or of the
date on or after which any private sale will be held, which notice the Company
hereby agrees is reasonable notice. The Noteholders (or the Indenture Trustee on
their behalf) shall be entitled at any sale pursuant to this Section 6.02, to
credit against the purchase price bid at such sale by such Noteholder (or the
Indenture Trustee on their behalf) all or any part of the unpaid Obligations
owing to such Noteholder and secured by the Lien of this Indenture.
(c) Rescission of Default. At any time after the Indenture
Trustee has declared the unpaid principal amount of all Notes then outstanding
to be due and payable and prior to the sale of any part of the Collateral
pursuant to this Article 6, a Majority in Interest of Noteholders, by written
notice to the Company and the Indenture Trustee, may rescind and annul such
declaration and its consequences if: (i) there has been paid to or deposited
with the Indenture Trustee an amount sufficient to pay all overdue installments
of principal of, and interest on, the Notes, that have become due otherwise than
by such declaration of acceleration, and (ii) all other Events of Acceleration,
other than nonpayment of principal or interest on the Notes that have become due
solely because of such acceleration have been cured or waived in accordance with
Section 6.02(d).
(d) Waiver of Defaults. Upon written instructions from a
Majority in Interest of Noteholders, the Indenture Trustee shall waive any
default hereunder and its consequences, except
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a default: (i) in the payment of the principal of, Breakage Costs, if any, or
interest on, or other amounts due under any Note or any other Note Purchase
Document or (ii) in respect of a covenant or provision hereof which under
Section 11.01(b) hereof cannot be modified or amended without the consent of
each Noteholder affected thereby (which defaults may be waived by all the
Noteholders affected thereby). Upon any such waiver, such default shall cease to
exist, and any Event of Acceleration arising therefrom shall be deemed to have
been cured for every purpose of the Note Purchase Documents; but no such waiver
shall extend to any subsequent or other default or impair any right consequent
thereon.
Section 6.03. Remedies Cumulative
Each and every right, power and remedy herein specifically
given to the Indenture Trustee or otherwise in this Indenture shall be
cumulative and shall be in addition to every other right, power and remedy
herein specifically given or now or hereafter existing at law, in equity or by
statute, and each and every right, power and remedy whether specifically herein
given or otherwise existing may be exercised from time to time and as often and
in such order as may be deemed expedient by the Indenture Trustee, and the
exercise or the beginning of the exercise of any power or remedy shall not be
construed to be a waiver of the right to exercise at the time or thereafter any
other right, power or remedy. No delay or omission by the Indenture Trustee in
the exercise of any right, remedy or power or in the pursuance of any remedy
shall impair any such right, power or remedy or be construed to be a waiver of
any default on the part of the Company or to be an acquiescence therein.
Section 6.04. Discontinuance of Proceedings
In case the Indenture Trustee shall have proceeded to enforce
any right, power or remedy under this Indenture by foreclosure, entry or
otherwise, and such proceedings shall have been discontinued or abandoned for
any reason or shall have been determined adversely to the Indenture Trustee,
then and in every such case the Company and the Indenture Trustee shall be
restored to their former positions and rights hereunder with respect to the
property, subject to the Lien of this Indenture, and all rights, remedies and
powers of the Indenture Trustee shall continue, as if no such proceedings had
been undertaken (but otherwise without prejudice).
ARTICLE 7 - DUTIES OF THE INDENTURE TRUSTEE
Section 7.01. Notice of Event of Acceleration; Action Upon
Event of Acceleration.
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If any payments of the principal of, interest or Breakage
Costs (if any) on, the Notes due and payable on any Payment Date shall not have
been paid in full on such Payment Date, the Indenture Trustee shall give
telephonic notice within three Business Days (followed by prompt written notice)
to the Company specifying the amount and nature of such deficiency in payment.
In the event the Indenture Trustee shall have knowledge of any other Event of
Acceleration, the Indenture Trustee shall give notice of such Event of
Acceleration to the Company and each Noteholder by telephone within five (5)
Business Days (to be promptly confirmed in writing). In the event the Indenture
Trustee shall have knowledge of an Event of Acceleration or if a Potential Event
of Acceleration relating to Section 6.01(a) shall have occurred, it shall
promptly give notice thereof to the Company's insurers as contemplated by
Section 4.06(c). Subject to the terms of Sections 6.02 and 7.03, the Indenture
Trustee shall take such action, or refrain from taking such action, with respect
to an Event of Acceleration as the Indenture Trustee shall be instructed in
writing by a Majority in Interest of Noteholders. If the Indenture Trustee shall
not have received instructions as above provided within twenty (20) days after
the mailing of notice of such Event of Acceleration to the Noteholders, the
Indenture Trustee may, but shall not be obligated to, take such action, or
refrain from taking such action, with respect to such Event of Acceleration or
such event or condition as it shall determine to be advisable in the best
interests of the Noteholders. The Indenture Trustee shall forthwith notify the
Noteholders if it elects to take such action. For all purposes of this
Indenture, in the absence of actual knowledge, the Indenture Trustee shall not
be deemed to have knowledge of an Event of Acceleration unless notified in
writing by the Company or one or more Noteholders; and actual knowledge (as used
in the foregoing clause) of the Indenture Trustee shall mean "actual knowledge"
of an officer in the corporate trust administration department of the Indenture
Trustee; provided, however, that the Indenture Trustee shall be deemed to have
actual knowledge of (i) the failure of the Company to pay any principal of and
Breakage Costs, if any, and interest on the Notes directly to the Indenture
Trustee on the date the same shall become due or (ii) the failure of the Company
to maintain insurance as required under Section 4.06 if the Indenture Trustee
shall receive notice thereof from an insurer or insurance broker. The Indenture
Trustee hereby agrees that not later than three (3) Business Days after such
non-payment or the receipt of such notice, it shall give telephonic notice of
such non-payment or receipt to the Company and each Noteholder, promptly
confirmed by written notice to such parties).
Section 7.02. Action Upon Instructions
Subject to the terms of Sections 7.01 and 7.03, upon the
written instructions at any time of a Majority in Interest of Noteholders, the
Indenture Trustee shall take such of the following actions as may be specified
in such instructions or this Indenture: (i) give such notice, direction or
consent, or exercise such right, remedy or power hereunder or in respect of all
or any part of the Collateral or (ii) take such other action as shall be
specified in such instruction; it being understood that without the written
instructions of a Majority in Interest of Noteholders the Indenture Trustee
shall not take any action pursuant to this Section 7.02.
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Upon the payment in full of the principal of and interest and
Breakage Costs, if any, on all Notes, and all other Obligations, the Indenture
Trustee shall in each case, upon the written request and the cost and expense of
the Company execute and deliver to, or as directed in writing by, the Company an
appropriate instrument (in due form for recording) releasing the Aircraft and
the balance of the Collateral from the Lien of this Indenture.
Section 7.03. Indemnification
(a) The Indenture Trustee shall not be required to take any
action or refrain from taking any action under Section 7.01 (other than the
first two sentences thereof) or 7.02 or Article 6 if it shall have reasonable
grounds for believing that repayment of any funds expended by it or adequate
indemnification against any risks incurred in connection therewith is not
reasonably assured to it; provided, that no indemnification shall be required
for the consequences of the Indenture Trustee's gross negligence, wilful
misconduct and, in receiving, handling or remitting funds only, its failure to
use ordinary care as Indenture Trustee. The Indenture Trustee shall not be
required to take any action under Section 7.01 or 7.02 or Article 6, nor shall
any other provision of this Indenture be deemed to impose a duty on the
Indenture Trustee to take any action, if the Indenture Trustee shall have been
advised in writing by independent counsel that such action is contrary to the
terms hereof or is otherwise contrary to law.
(b) Each Noteholder may, but shall not be required to,
participate in any indemnification of the Indenture Trustee given pursuant to
paragraph (a) of this Section 7.03. Each Noteholder so participating shall be
entitled to reimbursement for such participation ratably, without priority of
one over any other in the proportion of the amounts of such unreimbursed
payments made pursuant to this Section 7.03.
Section 7.04. No Duties Except as Specified in Indenture or
Instructions
The Indenture Trustee shall not have any duty or obligation to
manage, control, use, sell, dispose of or otherwise deal with the Aircraft or
any other part of the Collateral, or to otherwise take or refrain from taking
any action under, or in connection with, this Indenture, except as expressly
provided by the terms of this Indenture or as expressly provided in written
instructions received pursuant to the terms of Section 7.01 or 7.02; and no
implied duties or obligations shall be read into this Indenture against the
Indenture Trustee.
Section 7.05. No Action Except Under Indenture or Instructions
The Indenture Trustee agrees that it will not manage, control,
use, sell, dispose of or otherwise deal with the Aircraft or other property
constituting part of the Collateral except (i) in accordance with the powers
granted to, or the authority conferred upon, the Indenture Trustee pursuant to
this Indenture, or (ii) in accordance with the express terms or with written
instructions pursuant to Section 7.01 or 7.02.
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ARTICLE 8 - THE INDENTURE TRUSTEE
Section 8.01. Acceptance of Trusts and Duties
The Indenture Trustee accepts the trust hereby created and
applicable to it and agrees to perform the same but only upon the terms of this
Indenture and agrees to receive and disburse all moneys received by it
constituting part of the Collateral in accordance with the terms. The Indenture
Trustee shall have no liability hereunder or under the Note Purchase Agreement,
except for its own willful misconduct or gross negligence (or simple negligence
in the handling of funds) or breach of any of its representations, warranties or
covenants set forth herein or in the Note Purchase Agreement.
Section 8.02. [Intentionally Omitted]
Setion 8.03. Absence of Duties
Except in accordance with written instructions or requests
furnished pursuant to Section 7.01 or Section 7.02 and except as provided in,
and without limiting the generality of, Section 7.04, the Indenture Trustee
shall have no duty (i) to see to any registration of the Aircraft or any
recording or filing of this Indenture 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 the Company shall be in default with respect thereto, (iii) to confirm,
verify or inquire into the failure to receive any financial statements of the
Company or (iv) to inspect the Aircraft at any time or ascertain or inquire as
to the performance or observance of any of the Company's covenants under this
Indenture with respect to the Aircraft. Notwithstanding the foregoing the
Indenture Trustee will furnish to each Noteholder, so long as such Noteholder or
its nominees shall hold any of the Notes, promptly upon receipt thereof,
duplicates or copies of all reports, notices, requests, demands, certificates,
financial statements and other instruments furnished to the Indenture Trustee,
to the extent that the same shall not have been otherwise furnished to such
Noteholder pursuant to this Indenture or to the extent the Indenture Trustee
does not reasonably believe that the same shall have been furnished by the
Company directly to such Noteholder.
Section 8.04. No Representations or Warranties as to the
Aircraft or Documents
The Indenture Trustee shall not be deemed to have made any
representation or warranty as to the validity, legality or enforceability of
this Indenture, the Notes, or any Indenture Supplement or any other document or
instrument, or as to the correctness of any statement (other than a statement by
the Indenture Trustee) contained herein or therein, except as expressly set
forth in the Note Purchase Documents.
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Section 8.05. No Segregation of Moneys; No Interest
No moneys received by the Indenture Trustee hereunder need be
segregated in any manner except to the extent required by law, and any such
moneys may be deposited under such general conditions for the holding of trust
funds as may be prescribed by law applicable to the Indenture Trustee, and
except as otherwise agreed by the Indenture Trustee, the Indenture Trustee shall
not be liable for any interest thereon.
Section 8.06. Reliance; Agents; Advice of Counsel.
The Indenture Trustee shall incur no liability to anyone
acting upon any signature, instrument, notice, resolution, request, consent,
order, certificate, report, opinion, bond or other document or paper believed by
it to be genuine and believed by it to be signed by the proper party or parties.
The Indenture Trustee may accept a copy of a resolution of the Board of
Directors of the Company or any Noteholder, certified by the Secretary or an
Assistant Secretary of such party as duly adopted and in full force and effect,
as conclusive evidence that such resolution has been duly adopted by said Board
and that the same is in full force and effect. As to any fact or matter the
manner of ascertainment of which is not specifically described herein, the
Indenture Trustee may for all purposes rely on a certificate, signed by an
officer of the Company, as to such fact or matter, and such certificate shall
constitute full protection to the Indenture Trustee for any action taken or
omitted to be taken by it in good faith in reliance thereon. The Indenture
Trustee shall furnish to the Company upon request such information and copies of
such documents as the Indenture Trustee may have and as are necessary for the
Company to perform its duties under Article 2. The Indenture Trustee shall
assume, and shall be fully protected in assuming, that the Company is authorized
to enter into this Indenture and to take all actions permitted to be taken by it
pursuant to the provisions hereof, and shall not inquire into the authorization
of the Company with respect thereto. In the administration of the trust
hereunder, the Indenture Trustee may execute any trust or power and perform its
duties hereunder directly or through agents or attorneys and may, at the
Company's cost and expense, consult with independent counsel, accountants and
other skilled persons to be selected and employed by it, and the Indenture
Trustee shall not be liable for anything done, suffered, or omitted in good
faith by it in accordance with the written advice or opinion of any such
independent counsel, accountants or other skilled persons acting within such
persons' area of competence (so long as the Indenture Trustee shall have
exercised reasonable care in selecting such persons).
Section 8.07. Compensation and Expenses of Indenture Trustee
The Company agrees to pay upon written demand the reasonable
and customary fees and reasonable out-of-pocket costs and expenses (including
legal fees and expenses) of the Indenture Trustee in the performance of its
responsibilities hereunder and agrees to indemnify the Indenture Trustee against
any taxes imposed upon it relating thereto (other than taxes, fees or charges
based on or measured by any fees or compensation received by the Indenture
Trustee for services rendered in connection with the transactions contemplated
hereby). The Indenture Trustee agrees that it shall
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have no right against the Noteholders or, except as provided in Sections 5.02
and 5.03, the Collateral, for any fee as compensation for its services
hereunder. The provisions of this Section 8.07 with respect to costs and
expenses shall survive the termination of this Indenture.
ARTICLE 9 - [RESERVED]
ARTICLE 10 - SUCCESSOR INDENTURE TRUSTEE
Section 10.01. Resignation of Indenture Trustee; Appointment
of Successor
(a) The resignation or removal of the Indenture Trustee and
the appointment of a successor Indenture Trustee shall become effective only
upon the successor Indenture Trustee's acceptance of appointment as provided in
this Section 10.01. The Indenture Trustee or any successor thereto may resign at
any time without cause by giving at least thirty (30) days' prior written notice
to the Company and each Noteholder. A Majority in Interest of Noteholders may at
any time remove the Indenture Trustee without cause by an instrument in writing
delivered to the Company and the Indenture Trustee. In addition, unless an Event
of Acceleration or Material Potential Event of Acceleration has occurred and is
continuing, the Company may remove the Indenture Trustee: (i) if the Indenture
Trustee fails to comply with Section 10.01(c), (ii) if the Indenture Trustee is
adjudged a bankrupt or an insolvent, (iii) if a receiver or public officer takes
charge of the Indenture Trustee or its property, (iv) if the Indenture Trustee
becomes incapable of performing its duties hereunder, or (v) for cause, in each
case by giving written notice to the Indenture Trustee and each Noteholder.
In the case of the resignation or removal of the Indenture
Trustee, the Company may appoint a successor Indenture Trustee subject to the
approval of a Majority in Interest of Noteholders. If a successor Indenture
Trustee shall not have been appointed and accepted its appointment hereunder
within sixty (60) days after the Indenture Trustee gives notice of resignation
as provided above, the retiring Indenture Trustee, the Company or a Majority in
Interest of Noteholders may petition any court of competent jurisdiction for the
appointment of a successor Indenture Trustee. Any successor Indenture Trustee so
appointed by such court shall immediately and without further act be superseded
by any successor Indenture Trustee appointed as provided above within one year
from the date of the appointment by such court.
(b) Any successor Indenture Trustee, however appointed, shall
execute and deliver to the Company and to the predecessor Indenture Trustee an
instrument accepting such appointment, and thereupon such successor Indenture
Trustee, without further act, shall become vested with all the estates,
properties, right, powers, duties and trusts of the predecessor Indenture
Trustee hereunder in the trusts hereunder applicable to it with like effect as
if originally named the Indenture Trustee herein and the predecessor Indenture
Trustee shall be released of all future duties
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and obligations hereunder; but nevertheless, upon the written request of such
successor Indenture Trustee, such predecessor Indenture Trustee shall execute
and deliver, at the Company's cost and expense, an instrument transferring to
such successor Indenture Trustee, upon the trusts herein expressed applicable to
it, all the estates, properties, rights, powers and trusts of such predecessor
Indenture Trustee, and such predecessor Indenture Trustee shall duly assign,
transfer, deliver and pay over to such successor Indenture Trustee all moneys or
other property then held by such predecessor Indenture Trustee hereunder.
(c) The successor Indenture Trustee shall be a bank or trust
company having a combined capital and surplus of at least $__________, if there
be such an institution willing, able and legally qualified to perform the duties
of the Indenture Trustee hereunder upon reasonable or customary terms.
(d) Any corporation into which the Indenture Trustee may be
merged or converted or with which it may be consolidated, or any corporation
resulting from any merger, conversion or consolidation to which the Indenture
Trustee shall be a party, or any corporation to which substantially all the
corporate trust business of the Indenture Trustee may be transferred, shall,
subject to the terms of paragraph (c) of this Section, be the Indenture Trustee
under this Indenture without further act.
Section 10.02 Appointment of Separate Trustees. (a) At any
time or times, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Collateral may at the time be located or
in which any action of the Indenture Trustee may be required to be performed or
taken or if the Indenture Trustee shall be advised by counsel satisfactory to it
that it is so necessary or prudent in the interests of the Noteholders, the
Indenture Trustee, by an instrument in writing signed by it, and without the
concurrence of the Company, may appoint one or more individuals or corporations
to act as separate trustee or separate trustees or co-trustee, acting jointly
with the Indenture Trustee, or to act as separate trustee or trustees of all or
any part of the Collateral with such powers as may be provided in an agreement
supplemental hereto.
(b) The Indenture Trustee and, at the request of the Indenture
Trustee, the Company, shall execute, acknowledge and deliver all such
instruments as may be required by the legal requirements of any jurisdiction or
by any such separate trustee or separate trustees or co-trustee for the purpose
of more fully confirming such title, rights or duties to such separate trustee
or separate trustees or co-trustee and the Company hereby makes, constitutes and
appoints the Indenture Trustee its agent and attorney-in-fact for it and in its
name, place and stead to execute, acknowledge and deliver the same in the event
that the Company shall not itself execute and deliver the same within twenty
(20) days after receipt by it of such request so to do. Upon the acceptance in
writing of such appointment by any such separate trustee or separate trustees or
co-trustee, it, she or they shall be vested with such interest in the Collateral
or any part thereof and with such rights and duties as shall be specified in the
instrument of appointment, jointly with the Indenture Trustee (except insofar as
local law makes it necessary for any such separate trustee or separate trustees
or
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co-trustee to act alone) subject to all the terms of this Indenture. Any
separate trustee or separate trustees or co-trustee may, at any time by an
instrument in writing, constitute the Indenture Trustee its or her
attorney-in-fact and agent with full power and authority to do all acts and
things and to exercise all discretion on its or her behalf and in its or her
name. In case any such separate trustee or co-trustee shall die, become
incapable of acting, resign or be removed, the interest in the Collateral and
all assets, property, rights, powers, trusts, obligations and duties of such
separate trustee or co-trustee shall, so far as permitted by law, vest in and be
exercised by the Indenture Trustee, without the appointment of a successor to
such separate trustee or co-trustee unless and until a successor is appointed.
(c) All provisions of this Indenture which are for the benefit
of the Indenture Trustee shall extend to and apply to each separate trustee or
co-trustee appointed pursuant to the foregoing provisions of this Section 10.02.
(d) Every separate trustee and co-trustee hereunder shall, to
the extent permitted by law, be appointed and act and the Indenture Trustee
shall act, subject to the following provisions and conditions:
(i) all powers, duties, obligations and rights
conferred upon the Indenture Trustee in respect of the
receipt, custody, investment and payment of monies shall be
exercised solely by the Indenture Trustee;
(ii) all other rights, powers, duties and obligations
conferred or imposed upon the Indenture Trustee shall be
conferred or imposed upon and exercised or performed by the
Indenture Trustee and such separate trustee or separate
trustees or co-trustee jointly except to the extent that under
any law of any jurisdiction in which any particular act or
acts are to be performed, the Indenture Trustee shall be
incompetent or unqualified to perform such act or acts, in
which event such rights, powers, duties and obligations
(including, if applicable, the holding of title to the
Collateral in any such jurisdiction) shall be exercised and
performed by such separate trustee or separate trustees or
co-trustee;
(iii) no power hereby given to, or with respect to
which it is hereby provided may be exercised by, any such
separate trustee or separate trustees or co-trustee shall be
exercised hereunder by such Person except jointly with, or
with the consent of, the Indenture Trustee; and
(iv) no trustee hereunder shall be personally liable
by reason of any act or omission of any other trustee
hereunder.
If at any time the Indenture Trustee shall deem it no longer necessary or
prudent in order to conform to any such law, or take any such action or shall be
advised by such counsel that it is no longer legally required or necessary or
prudent in the interest of the Noteholders or in the event the
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Indenture Trustee shall have been requested to do so by a Majority in Interest
of Noteholders, the Indenture Trustee shall execute and deliver an indenture
supplemental hereto and all other instruments and agreements necessary or proper
to remove any separate trustee or separate trustees or co-trustee.
(e) Any request, approval or consent in writing by the
Indenture Trustee to any separate trustee or separate trustees or co-trustee
shall be sufficient warrant to such separate trustee or separate trustees or
co-trustee, as the case may be, to take such action as may be so requested,
approved or consented to.
(f) Notwithstanding any other provision of this Section 10.02,
the powers of any separate trustee or separate trustees or co-trustee appointed
pursuant to this Section 10.02 shall not in any case exceed those of the
Indenture Trustee hereunder.
ARTICLE 11 - SUPPLEMENTS AND AMENDMENTS TO THIS
INDENTURE AND OTHER DOCUMENTS
Section 11.01. Supplemental Indentures Without Consent of
Noteholders
(a) The Company and the Indenture Trustee, at any time and
from time to time, without notice to or the consent of the Noteholders, may
enter into one or more indentures supplemental hereto for any of the following
purposes:
(i) to correct or amplify the description of any
property at any time subject to the Lien of this Indenture or
better to assure, convey and confirm unto the Indenture
Trustee any property subject or required to be subject to the
Lien of this Indenture or to subject to the Lien of this
Indenture any Airframe or Engine or any airframe or engine
substituted for any Airframe or Engine in accordance with the
terms hereof; or
(ii) to add to the covenants of the Company, for the
benefit of the Noteholders, or to surrender any right or power
herein conferred upon the Company; or
(iii) to provide for the appointment of a separate
trustee or trustees or co-trustee pursuant to Section 10.02.
(b) Supplemental Indentures With Consent of Majority in
Interest of the Noteholders. With the written consent of a Majority in Interest
of Noteholders, the Company may, and the Indenture Trustee, subject to Section
11.02, shall, at any time and from time to time, enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Indenture or
of modifying in any
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manner the rights and obligations of the Noteholders and of the Company under
this Indenture; provided, however, without the consent of each Noteholder
affected thereby, no such supplemental indenture shall:
(i) change the final maturity of the principal of any
Note, or change the dates or amounts of payment of any
installment of the principal of or Breakage Costs (if any) or
interest on any Note or other amounts, or reduce the principal
amount thereof or the Breakage Costs (if any) or interest
thereon or other amounts, or change to a location outside the
United States the place of payment where, or the coin or
currency in which, any Note or the Breakage Costs (if any) or
interest thereon or other amounts is payable, or impair the
right to institute suit for the enforcement of any such
payment of principal or Breakage Costs (if any) or interest or
other amounts on or after the date such principal or Breakage
Costs (if any) or interest or other amounts becomes due and
payable; or
(ii) create any lien with respect to the Collateral
ranking prior to, or on a parity with, the security interest
created by this Indenture, or deprive any Noteholder of the
benefit of the Lien on the Collateral created by this
Indenture; or
(iii) reduce the percentage in principal amount of
the Notes, the consent of whose holders is required for any
such supplemental indenture, or the consent of whose holders
is required for any waiver (of compliance with certain
provisions of this Indenture, or of certain defaults hereunder
and their consequences) provided for in this Indenture; or
(iv) modify any provisions of this Section 11.01(b),
except to provide that certain other provisions of this
Indenture cannot be modified or waived without the consent of
the holder of each Note affected thereby.
Section 11.02. Indenture Trustee Protected.
If in the opinion of the Indenture Trustee any document
required to be executed pursuant to the terms of Section 11.01 or 11.02
adversely affects any right, duty, immunity or indemnity in favor of the
Indenture Trustee under this Indenture, or the Note Purchase Agreement, the
Indenture Trustee may in its discretion decline to execute such document.
Section 11.03. Requirement of Substance, Not Form.
It shall not be necessary for any consent of the Noteholders
under Section 11.01(b) to approve the particular form of any proposed
supplemental indenture, but it shall be sufficient if such consent shall approve
the substance thereof.
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Section 11.04. Documents Mailed to Noteholders.
Promptly after the execution by the Indenture Trustee of any
document entered into pursuant to this Article 11, the Indenture Trustee shall
mail, by first-class mail, postage prepaid, a conformed copy thereof to each
Noteholder at its address last known to the Indenture Trustee, but the failure
of the Indenture Trustee to mail such conformed copies shall not impair or
affect the validity of such document.
ARTICLE 12 - MISCELLANEOUS
Section 12.01. Termination of Indenture.
This Indenture and the trust created hereby shall terminate
and this Indenture shall be of no further force or effect upon the payment in
full of the principal amount of, Breakage Costs (if any), and interest on all
Notes outstanding hereunder and all other sums payable to the Indenture Trustee,
the Noteholders and any Indemnified Persons hereunder and under the Note
Purchase Documents (notwithstanding that amounts may be outstanding under the
Other Note Purchase Documents), except as otherwise provided in Section 7.2 of
the Note Purchase Agreement and except to the extent monies are distributable
under clauses sixth and seventh of Section 5.03 . Subject to the exception set
forth in the preceding sentence, upon such termination, the Indenture Trustee
shall, at the Company's cost and expense, execute such termination statements
and other documents as are reasonably requested by the Company to evidence the
release of the Lien of this Indenture. Except as aforesaid otherwise provided,
this Indenture and the trusts created hereby shall continue in full force and
effect in accordance with the terms hereof.
Section 12.02. No Legal Title to Collateral in Noteholder.
No Noteholder shall have legal title to any part of the
Collateral. No transfer, by operation of law or otherwise, of an Note or other
right, title and interest of a Noteholder in and to the Collateral or this
Indenture shall operate to terminate this Indenture or the trusts hereunder or
entitle any successor or transferee of such Noteholder to an accounting or to
the transfer to it of legal title to any part of the Collateral.
Section 12.03. Sale of Aircraft by Indenture Trustee is
Binding.
Any sale or other conveyance of the Aircraft by the Indenture
Trustee made pursuant to the terms of this Indenture shall bind the Noteholders
and the Company, and shall be effective to transfer or convey all right, title
and interest of the Indenture Trustee, the Company, and the Noteholders in and
to the Aircraft. No purchaser or other grantee shall be required to inquire as
to the authorization, necessity, expediency or regularity of such sale or
conveyance or as to the application of any sale or other proceeds with respect
thereto by the Indenture Trustee.
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Section 12.04. Further Assurances. (a) Forthwith upon the
execution and delivery of each Indenture Supplement from time to time and upon
the execution and delivery of any amendment to this the Indenture, the Company
at its own cost and expense will cause such Indenture Supplement or amendment to
be duly filed and recorded, and maintained of record, in accordance with the
Applicable Laws of the government of registry of the Aircraft. In addition, the
Company will, at its own cost and expense, cause to be done, executed,
acknowledged and delivered all and every such further acts, conveyances and
assurances as any Noteholder or the Indenture Trustee shall reasonably require
for accomplishing the purposes of this Agreement and the other Note Purchase
Documents and to establish, protect and preserve the rights, title and interest
of the Noteholders and the Indenture Trustee in and to the Collateral and under
the Note Purchase Documents; provided that any instrument or other document so
executed by the Company will not expand any obligations or limit any rights of
the Company in respect of the transactions contemplated by any of the Note
Purchase Documents. The Company shall not intentionally take any action which
will jeopardize any such right, title and interest, including anything which
will adversely affect the registration of the Aircraft with the FAA or any other
Aeronautical Authority in a jurisdiction where the Aircraft is then registered
in accordance with Section 4.02(e).
(b) The Company agrees at its own expense to furnish to the
Indenture Trustee promptly after execution and delivery of any supplement and
amendment hereto, an opinion of counsel satisfactory to the Indenture Trustee
stating that in the opinion of such counsel, such supplement or amendment to the
Indenture (or a financing statement, continuation statement or similar notice
thereof if and to the extent permitted or required by Applicable Law) has been
properly recorded or filed for record in all public offices in which such
recording or filing is necessary to protect the right, title and interest of the
Indenture Trustee hereunder.
Section 12.05. No Representation or Warranties as to Aircraft
or Note Purchase Documents. NONE OF THE INDENTURE TRUSTEE (IN ITS INDIVIDUAL
CAPACITY OR IN ITS CAPACITY AS INDENTURE . TRUSTEE) OR THE NOTEHOLDERS MAKES OR
SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED,
AS TO, AND SHALL HAVE NO LIABILITY IN RELATION TO, THE TITLE, DESCRIPTION,
AIRWORTHINESS, VALUE, COMPLIANCE WITH SPECIFICATIONS, CONDITION, DESIGN,
QUALITY, DURABILITY, OPERATION, MERCHANTABILITY, CONSTRUCTION, PERFORMANCE OR
FITNESS FOR USE OR PURPOSE OF THE AIRCRAFT OR ANY PART THEREOF, AS TO THE
ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, AS TO THE
ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT, AS TO THE
ABSENCE OF OBLIGATIONS BASED ON STRICT LIABILITY IN TORT OR AS TO THE QUALITY OF
THE MATERIAL OR WORKMANSHIP OF THE AIRCRAFT OR ANY PART THEREOF OR ANY OTHER
REPRESENTATION OR WARRANTY WITH RESPECT TO THE AIRCRAFT OR ANY PART THEREOF
WHATSOEVER.
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Section 12.06. Indenture and Notes for Benefit of Indenture
Trustee and Noteholders Only.
Nothing in this Indenture, whether express or implied, shall
be construed to give to any Person other than the Company, the Indenture
Trustee, and the Noteholders any legal or equitable right, remedy or claim under
or in respect of this Indenture or any Note.
Section 12.07. Section 1110 of the Bankruptcy Code.
It is the understanding and intention of the parties hereto
that the security interest created hereby shall entitle the holders from time to
time of the Notes to all of the benefits of Section 1110 of Chapter 11 of the
Bankruptcy Code in the event of any reorganization of the Company under such
chapter.
Section 12.08. Notices
Unless otherwise expressly specified or permitted by the terms
hereof, all notices required or permitted under the terms and provisions hereof
shall be in writing, and sent by United States mail, with proper postage for
first class registered or certified mail prepaid, delivered personally, or sent
by telecopy or overnight courier addressed (i) if to the Company, at its office
at 300 W. Morgan Street, Suite 1200, Durham, NC 27701, Attention: General
Counsel (telecopy no.: (919) 956-7568), (ii) if to the Indenture Trustee, at its
office at 25 South Charles Street, Mail Code 101-591, Baltimore, Maryland 21201,
Attention: Corporate Trust Department (telecopy (410) 244-4236), (iii) if to any
Noteholder, at the address set forth in the register maintained pursuant to
Section 2.11, or at such address as such Noteholder shall have furnished by
notice to the Company and the Indenture Trustee, and (iv) if to any of the
foregoing Persons, at such other address as such Person shall from time to time
designate by written notice to the other parties hereto in accordance with this
Section 12.08.
Written notice shall be deemed given when it is in fact
received (by mail or otherwise) by any addressee at the respective addresses
specified above.
Notwithstanding any other provision, if any payment of
principal of, Breakage Costs, if any, and interest on the Notes is not received
by the Indenture Trustee when due, the Indenture Trustee shall on the next
succeeding Business Day use its reasonable best efforts to give immediate
written notice by telecopy or its equivalent or by telephone (confirmed in
writing) to the Company and each Noteholder, which notice shall be effective
when given.
Section 12.09. Separate Counterparts.
This Indenture may be executed in any number of counterparts
(and each of the parties hereto shall not be required to execute the same
counterpart). Each counterpart of this
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Indenture including a signature page executed by each of the parties hereto
shall be an original counterpart of this Indenture, but all of such counterparts
together shall constitute one instrument.
Section 12.10. Successors and Assigns.
All covenants and agreements contained herein and in the Note
Purchase Agreement shall be binding upon, and inure to the benefit of, the
Company and its successors and permitted assigns, and the Indenture Trustee and
its successors and permitted assigns, and each Noteholder and its successors and
permitted assigns, all as herein provided. Any request, notice, direction,
consent, waiver or other instrument or action by any Noteholder shall bind the
successors and assigns of such Noteholder.
Section 12.11. Governing Law
This Indenture shall in all respects be governed by, and
construed in accordance with, the laws of the State of New York, including all
matters of construction, validity and performance. This Indenture is being
delivered in the State of New York.
Section 12.12. Normal Commercial Relations
Anything contained in this Indenture to the contrary
notwithstanding, the Company or the Indenture Trustee or any Affiliate of the
Company or the Indenture Trustee (in its individual capacity or otherwise) may
enter into commercial banking or other financial transactions, and conduct
banking or other commercial relationships, fully to the same extent as if this
Indenture were not in effect, including, without limitation, the making of loans
or other extensions of credit for any purpose whatsoever.
Section 12.13 Severability
Any provision of this Indenture which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
Section 12.14. No Oral Modifications or Continuing Waivers
No terms or provisions of this Indenture or the Notes may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party or other Person against whom enforcement of the
change, waiver, discharge or termination is sought and any other party or other
Person whose consent is required pursuant to this Indenture; and any waiver of
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the terms hereof or of any Note shall be effective only in the specific instance
and for the specific purpose given.
Section 12.15. Headings
The headings of the various Articles and Sections herein and
in the table of contents hereto are for the convenience of reference only and
shall not define or limit any of the terms or provisions hereof.
Section 12.16. Cross-Collateralization
Notwithstanding anything in Section 12.10 or otherwise herein
to the contrary, the parties hereto acknowledge that the Collateral is subject
to a security interest in favor of the Indenture Trustee, as Indenture Trustee
hereunder and as Indenture Trustee under the Other Indentures, to secure the
Obligations and the Other Obligations as provided herein and that the Indenture
Trustee is executing this Indenture as Indenture Trustee hereunder and as
Indenture Trustee under the Other Indentures for purposes of effecting such
cross-collateralization and as Indenture Trustee under the Other Indentures
shall be entitled to the benefits of this Indenture to the extent relating to
such cross-collateralization.
* * *
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IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed by their respective officers or attorneys-in-fact,
as the case may be, thereunto duly authorized, as of the day and year first
above written.
MIDWAY AIRLINES CORPORATION
By
Name:
Title:
THE FIRST NATIONAL BANK OF MARYLAND
as Indenture Trustee
By
Name:
Title:
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APPENDIX A
The definitions stated herein shall, except as otherwise
provided, apply equally to both the singular and plural forms of the terms
defined.
"Additional Insured" means the Indenture Trustee, in its
individual and trust capacities, the Security Trustee, in its individual and
trust capacities, and each of the Noteholders and each of their respective
successors and permitted assigns and the respective directors, officers and
employees of the foregoing.
"Aeronautical Authority" means as of any time of
determination, the FAA or other governmental authority having jurisdiction over
the Aircraft or the Airframe and Engines or engines attached thereto under the
laws of the country in which the Aircraft is then registered.
"Affiliate," with respect to a specified Person, means any
other Person directly or indirectly controlling or controlled by or under direct
or indirect common control with such Person. For the purposes of this
definition, "control" when used with respect to any specified Person, means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise, and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"After-Tax Basis" means, with respect to any payment to be
received or accrued by any Person, the amount of such payment supplemented by a
further payment or payments so that the sum of all such payments, after
deduction of the net amount of all Taxes actually payable to any Taxing
authority as a result of the receipt or accrual of such payments, shall be equal
to the payment to be received or accrued.
"Agreement," this Agreement," "herein," "hereby," or other
like terms shall mean the Note Purchase Document in which such term is used.
"Aircraft" means the Airframe (or any Replacement Airframe
substituted therefor pursuant to Section 4.05 of the Indenture) together with
the two Engines delivered in connection therewith as indicated in the Indenture
Supplement covering such Airframe (or any Replacement Engine substituted for any
of said Engines pursuant to Section 4.04 of the Indenture), whether or not any
of such initial or substitute Engines may from time to time be installed on such
Airframe or may be installed on any other airframe or on any other aircraft.
"Airframe" means (A) the Canadair Regional Jet Model
CL-600-2B19 Series 200ER aircraft delivered by the Manufacturer under the
Purchase Agreement (except the Engines or engines from time to time installed
thereon), identified by U.S. registration number and manufacturer's serial
number in an Indenture Supplement; (B) any and all Parts (other than Engines or
engines) so long
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as the same shall be incorporated or installed in or attached to such Airframe
or which have been removed therefrom, but which remain subject to the Lien of
the Indenture and (C) any Replacement Airframe that may from time to time be
substituted, pursuant to Section 4.05 of the Indenture, for such Airframe.
"Applicable Law" means all applicable laws, statutes,
treaties, rules, codes, ordinances, regulations, permits, certificates, orders,
interpretations, licenses and permits of any federal, state, county, municipal,
foreign, international, supranational, regional or other Governmental Authority,
agency, board, body or instrumentality and judgments, decrees, injunctions,
writs, orders or like action of any court, arbitrator or other administrative,
judicial or quasi-judicial tribunal or agency of competent jurisdiction.
"Bankruptcy Code" means the United States Bankruptcy Reform
Act of 1978, as amended.
"Bills of Sale" means the FAA Bill of Sale and the Full
Warranty Bill of Sale.
"Breakage Costs" means, with respect to the prepayment or
repayment of any Note, an amount equal to the excess, if any, of (i) the present
value, as of the date of the relevant prepayment or repayment of such Note, of
the respective installments of principal of and interest on such Note that, but
for such prepayment or repayment, would have been payable on each Payment Date
after such prepayment or repayment over (ii) the principal amount of such Note
then being prepaid or repaid. Such present value shall be determined by
discounting the amounts of such installments from their respective Payment Dates
to the date of such prepayment or repayment at a rate equal to the Treasury Rate
determined on the basis of a Designated Maturity equal to the then Remaining
Weighted Average Life of such Note plus 0.5% (or in the case of any (x)
prepayment of such Note made within six months after the holder of such Note has
made demand for the payment of any Increased Cost or of any amount pursuant to
Article 6 of the Note Purchase Agreement in respect of withholding Taxes or (y)
repayment of the Notes pursuant to Section 6.02 of the Indenture, the Treasury
Rate determined on the basis of a Designated Maturity equal to the then
Remaining Weighted Average Life of such Note plus 1.00%). Each holder of a Note
will furnish to the Company and the Indenture Trustee a certificate setting
forth the calculation and amount of the Breakage Costs with respect to its Note,
which account shall be conclusive absent manifest error.
"Business Day" means any day other than a Saturday, Sunday or
day on which commercial banking institutions in New York, New York, Baltimore,
Maryland (or in the event the Indenture Trustee administers its corporate
business in a location other than Baltimore, Maryland such other location) and
in the jurisdiction in which the Company has its chief executive offices are
authorized by law to be closed.
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"Certificated Air Carrier" means a Citizen of the United
States who is an air carrier holding a valid air carrier operating certificate
issued pursuant to 49 U.S.C. ch. 447 for aircraft capable of carrying ten (10)
or more individuals.
"Citizen of the United States" means a citizen of the United
States as defined in ss. 40102(a)(15) of the Transportation Code, or any
analogous part of any successor or substituted legislation or regulation at the
time in effect.
"Civil Reserve Air Fleet Program" means the Civil Reserve Air
Fleet Program administered by the United States Government pursuant to Executive
Order No. 11490, as amended, or any substantially similar program.
"Closing Date" shall be the date on which the Initial Lender
makes the Loan pursuant to Section 2.1(a) of the Note Purchase Agreement.
"Code" means the United States Federal Internal Revenue Code
of 1986, as it may be from time to time amended.
"Collateral" has the meaning given such term in Section 3.01
of the Indenture.
"Company" means Midway Airlines Corporation, a Delaware
corporation, and its successors and permitted assigns.
"Department of Transportation" means the United States
Department of Transportation and any agency or instrumentality of the United
States Government succeeding to its functions.
"Designated Maturity" means, with respect to any determination
of a Treasury Rate, the maturity of the United States Treasury Notes designated
pursuant to the definition of "Breakage Costs" as being those to be used in the
calculation of such Treasury Rate.
"Dollars", "Dollar" and "$" means the lawful currency of the
United States of America.
"Engine" means: (A) each of the two General Electric CF34-3B1
engines listed by manufacturer's serial number in the Indenture Supplement,
whether or not from time to time installed on the Airframe or installed on any
other aircraft; (B) any Replacement Engine that may from time to time be
substituted, pursuant to Section 4.04 of the Indenture, for such Engine; and (C)
any and all Parts (other than Engines or engines) incorporated or installed in
or attached thereto or which have been removed therefrom, but which remain
subject to the Lien of the Indenture.
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"Engine Manufacturer's Consent" means the Engine Consent and
Agreement of the Engine Manufacturer to the assignment of the Engine Warranty
pursuant to Section 3.01 of the Indenture.
"Engine Warranty" means the proposed General Terms Agreement
No. CF34-0897-065 in respect of the Engines expected to be provided to the
Company by the Engine Manufacturer.
"Engine Manufacturer" means The General Electric Company, a
New York company, and its successors and assigns.
"Event of Acceleration" has the meaning given such term in
Section 6.01 of the Indenture.
"Event of Loss" with respect to the Aircraft, Airframe or
either Engine means any of the following events with respect to such property:
(a) payment of an insurance settlement with respect
to such property on the basis of an actual, constructive or compromised total
loss;
(b) destruction or damage beyond repair or which
renders such property permanently unfit for normal use;
(c) theft or disappearance for a period in excess of
sixty (60) consecutive days;
(d) the confiscation, condemnation, taking or seizure
of title by any government or instrumentality or agency thereof;
(e) with respect to the Airframe only, the
requisition or taking of use of the Aircraft or Airframe by a foreign government
or instrumentality or agency thereof, or by an instrumentality or agency of the
United States whose obligations do not bear the full faith and credit of the
United States, for a continuous period of more than six months;
(f) with respect to an Engine, the requisition for
use by any government or instrumentality or agency thereof, and any event deemed
to be an Event of Loss with respect to an Engine under Section 4.02(b) of the
Indenture; or
(g) as a result of any rule, regulation, order or
other action by the FAA, or other governmental body having jurisdiction, the use
of the Aircraft for the transportation of passengers shall have been prohibited
for a period of twelve (12) consecutive months, unless the Company prior to
expiration of such period shall be diligently carrying forward all necessary
steps to permit the normal use of the Aircraft and shall within such twelve (12)
month
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period have conformed at least one Canadair Regional Jet Series 200ER
aircraft (but not necessarily the Aircraft) to the requirements of any such law,
rule, regulation, order or action, and shall be diligently pursuing conformance
of the Aircraft in a non-discriminatory manner, but in any event if such use
shall have been prohibited for a period of eighteen (18) continuous months. An
Event of Loss with respect to the Aircraft shall be deemed to have occurred if
an Event of Loss has occurred with respect to the Airframe.
"Existing Indebtedness" means the loan made by the Existing
Lender to the Company to finance on an interim basis the acquisition of the
Aircraft by the Company from the Manufacturer, together with accrued and unpaid
interest thereon.
"Existing Lender" means Bombardier Capital Inc., a
Massachusetts corporation.
"Existing Mortgage Termination" means a termination of
mortgage executed by the Existing Lender evidencing repayment in full of
Existing Indebtedness.
"FAA" means the United States Federal Aviation Administration,
the Administrator thereof and any agency or instrumentality of the United States
government succeeding to their functions.
"FAA Bill of Sale" means that Bill of Sale for the Aircraft or
for a Replacement Aircraft on AC Form 8050-2 or such other form as may be
acceptable to the FAA for recordation with it, naming the Company as purchaser.
"Fixed Rate" means the rate set forth in Section 2.03(a) of
the Indenture.
"Full Warranty Bill of Sale" means (i) the full warranty bill
of sale for the Aircraft executed by Bombardier Capital Inc. in favor of the
Company and (ii) a full warranty bill of sale for a Replacement Aircraft,
executed by the seller thereof in favor of the Company.
"Governmental Authority" means (a) any federal, state, county,
provincial, municipal, foreign, international, regional or other governmental or
regulatory authority, agency, department, board, body, instrumentality,
commission, court or any political subdivision of any of the foregoing, and (b)
each person who shall, from time to time, be vested with the control and
supervision of, or have jurisdiction over, the registration, airworthiness,
operation or other matters relating to aviation including any competent airport
authority, air traffic control or navigation authority (including European
Organization for the Safety of Air Navigation (Eurocontrol) and the Federal
Aviation Administration of the United States of America or any person acting on
its behalf).
"Indemnified Person" has the meaning set forth in Section 5.2
of the Note Purchase Agreement.
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"Indenture" means the Trust Indenture and Security Agreement
[N570ML] dated as of ______________, between the Company and the Indenture
Trustee, in the form attached to the Note Purchase Agreement as Exhibit A, as
supplemented by the Trust Indenture and Security Agreement Supplement No. 1
referred to in clause (a) of the definition of Indenture Supplement as the same
may be further amended, modified or supplemented from time to time.
"Indenture Supplement" means (a) the Trust Indenture and
Security Agreement Supplement No. 1, substantially in the form of Annex B to the
Indenture, describing with particularity the Aircraft and the Engines and
creating a purchase money equipment security interest in the Airframe and
Engines and (b) any other supplement to the Indenture from time to time executed
and delivered substantially in the form of Annex B to the Indenture.
"Indenture Trustee" means The First National Bank of Maryland,
in its capacity as indenture trustee under the Indenture on behalf of the
Noteholders, and its permitted successors and assigns.
"Independent Appraisal" means a written report by an
independent aircraft consultant of nationally recognized standing, which is
experienced in appraising used aircraft and is familiar with maintenance
standards generally, which report states that (i) such appraiser has inspected
the Replacement Aircraft, has reviewed the records relating thereto and has read
the maintenance requirements of the Indenture and, (ii) such appraiser has read
Section 4.05(c) of the Indenture, (iii) that, in such appraiser's opinion, such
appraiser has made an adequate examination or investigation to opine as to
whether or not Section 4.05(c) has been complied with and (iv) that Section
4.05(c) has been complied with.
"Initial Lender" means Canadian Regional Aircraft Finance
Transaction No. 1 Limited, a Jersey, Channel Islands company.
"Initial Lender's Note" has the meaning specified in Section
2.1(a) of the Note Purchase Agreement.
"Lender's Liens" means any Liens arising as a result of (i)
claims against or affecting the Indenture Trustee, any Noteholder or any
Affiliate thereof unrelated to its participation in the transactions
contemplated by the Note Purchase Documents or (ii) any act or omission of the
Indenture Trustee or any Noteholder or any Affiliate thereof in violation of the
Note Purchase Documents.
"Lien" means any mortgage, pledge, lien, charge, encumbrance,
lease, exercise of rights, security interest or claim (including any right of
ownership).
"Loan" has the meaning given to such term in Section 2.1(a) of
the Note Purchase Agreement.
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"Maintenance Program" means an FAA-approved maintenance
program for the Aircraft of the Company or a Permitted Lessee (or at such
Permitted Lessee's option during a Permitted Lease, a similar maintenance
program approved by the central civil aviation authority of the country of
registry, if such program requires substantially equivalent maintenance
standards as those required under the laws of the United States, France, the
United Kingdom, Germany, Japan, The Netherlands or Canada).
"Majority in Interest of Noteholders" means the holders of
more than 66 2/3% in aggregate unpaid principal amount of all Notes, if any,
outstanding as of such date, excluding any Notes owned or held by the Company or
any Affiliate of the Company.
"Manufacturer" means Bombardier Inc., a Canadian company, and
its successors and assigns.
"Manufacturer's Consent" means the Consent and Agreement dated
as of _______________ of the Manufacturer to the assignment of the warranties
under the Purchase Agreement relating to the Aircraft pursuant to Section 3.01
of the Indenture.
"Material Potential Event of Acceleration" means a Potential
Event of Acceleration arising under Sections 6.01(a), (b), (e), (f), (g), (j) or
(k) of the Indenture.
"Mortgage Convention" means the Convention on the
International Recognition of Rights in Aircraft, June 19, 1948, 4 U.S.T. 1830,
T.I.A.S. No. 2847, 310 U.N.T.S. 151.
"Noteholder" means and includes the Initial Lender and each
subsequent registered holder from time to time of a Note issued under the
Indenture for so long as the Initial Lender or such subsequent holder shall hold
such Note.
"Note Purchase Agreement" means the Note Purchase Agreement
[N570ML] dated as of _______________, among the Company, the Indenture Trustee,
and the Initial Lender, as the same may be amended, modified or supplemented
from time to time.
"Note Purchase Documents" means the Note Purchase Agreement,
the Indenture, the Notes, the Manufacturer's Consent, the Purchase Agreement,
the Bill of Sale, the FAA Bill of Sale, the Engine Warranty and the Engine
Manufacturer's Consent.
"Notes" means the notes issued by the Company under the
Indenture, substantially in the form set forth in Annex A of the Indenture.
"Obligations" means the Company's obligation to make the due
and punctual (i) repayment of the Notes and interest and Breakage Costs, if any,
from time to time due thereon as
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provided in the Note Purchase Agreement and the Notes and the Indenture and (ii)
payment of all other sums payable by the Company under the Note Purchase
Documents.
"Obsolete Parts" has the meaning set forth in Section 4.04(d)
of the Indenture.
"Officer's Certificate" means as to any company a certificate
signed by the Chairman, the Vice Chairman, the President, any Vice President,
any Assistant Vice President, the Treasurer or any Assistant Treasurer, the
Secretary, or any Assistant Secretary.
"Opinion of Counsel" means a written opinion of legal counsel,
who in the case of counsel for the Company may be (i) the Company's General
Counsel or Associate General Counsel, (ii) Fulbright & Jaworski L.L.P. or a
successor firm or (iii) other counsel designated by the Company and satisfactory
to the Indenture Trustee.
"Other Indentures" means each of the other four Trust
Indenture and Security Agreements entered into (or to be entered into) between
the Indenture Trustee and the Company, contemplated to be in form and substance
similar to the Indenture, and relating to aircraft similar to the Aircraft which
have been purchased (or will be purchased) by the Company pursuant to the
Purchase Agreement, pursuant to which the Company has issued (or intends to
issue) notes to the Initial Lender.
"Other Noteholders" means the "Noteholders" as defined in each
of the Other Indentures.
"Other Note Purchase Documents" means the "Note Purchase
Documents" as defined in each of the Other Indentures.
"Other Obligations" means the "Obligations" as defined in each
of the Other Indentures.
"Overdue Rate" means the Fixed Rate plus 2%.
"Parts" means any and all appliances, parts, instruments,
appurtenances, accessories, furnishings, seats, and other equipment of whatever
nature (other than Engines or engines) which may from time to time be
incorporated or installed in or attached to any Airframe or any Engine or which
have been removed therefrom, but which remain subject to the Lien of the
Indenture, exclusive of any items leased by the Company from third parties and
not required to be installed on the Aircraft in accordance with the Indenture or
otherwise required in the navigation or operation of the Aircraft.
"Payment Date" means each ________ and ________, commencing
_____________.
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<PAGE>
"Permitted Air Carrier" means (i) (A) a Certificated Air
Carrier or (B) a foreign air carrier that is principally based and a domiciliary
of a country that is either a party to the Mortgage Convention (other than
Mexico) or listed on Annex E to the Indenture, in each case which shall not then
be subject to a proceeding or final order under applicable bankruptcy,
insolvency or reorganization laws or (ii) any other air carrier consented to by
the Indenture Trustee, which consent shall not be unreasonably withheld or
delayed; provided that, with respect to any Airframe interchange pursuant to
Section 4.02(b)(iii) of the Indenture, a "Permitted Air Carrier" shall, in
addition to meeting the requirements set forth in clauses (i)(A) or (i)(B)
above, also be (i) an air carrier with which the Company has an alliance or code
sharing or other similar relationship or (ii) any other air carrier consented to
by the Indenture Trustee, which consent shall not be unreasonably withheld or
delayed.
"Permitted Investments" means (i) direct obligations of the
United States of America and agencies guaranteed by the United States government
having a final maturity of one year or less from date of purchase thereof; (ii)
certificates of deposit issued by, or bankers' acceptances of, or time deposits
with any bank, trust company or national banking association incorporated or
doing business under the laws of the United States of America or one of the
states thereof having combined capital and surplus and retained earnings as of
its last report of condition of at least $___________ and having a short term
debt rating of A1 by Standard & Poor's Corporation or P1 by Moody's Investors
Service, Inc. (or, if neither such organization shall provide such ratings at
any time, a rating equal to the highest ratings assigned by any nationally
recognized rating organization in the United States of America) and having a
final maturity of one year or less from date or purchase thereof; (iii)
commercial paper of any holding company of a bank, trust company or national
banking association described in (ii) and commercial paper of any corporation or
finance company incorporated or doing business under the laws of the United
States of America or any state thereof having a rating assigned to such
commercial paper of A1 by Standard & Poor's Corporation or P1 by Moody's
Investors Service, Inc. (or, if neither such organization shall rate such
commercial paper at any time, a rating equal to the highest ratings assigned by
any nationally recognized rating organization in the United States of America)
and having a final maturity of 270 days or less from the date of purchase
thereof; (iv) repurchase agreements with any financial institution having
combined capital and surplus and retained earnings as of its last report of
condition of at least $___________ when subject to an executed Master Repurchase
Agreement and which are fully collateralized by obligations described in clause
(i) above where delivery must be taken, and having a final maturity of 90 days
or less from the date of purchase thereof; or (v) any mutual fund the portfolio
of which includes investments of the types described in (i) through (iv) above,
including any proprietary mutual fund of the Indenture Trustee for which such
entity or an Affiliate is investment advisor or provides other services to such
mutual fund and receives reasonable compensation for such services. If any of
the above investments are unavailable, the entire amount to be invested may be
used to purchase Federal Funds overnight from an entity described in (ii) above.
"Permitted Lease" means any lease permitted by the terms of
Section 4.02(b)(ix) of the Indenture.
-9-
<PAGE>
"Permitted Lessee" means (i) any Certificated Air Carrier and
(ii) any foreign air carrier which is principally based in and a domiciliary of
a country listed on Annex D to the Indenture, provided that, at the time of
entering into the lease with such Permitted Lessee, the United States of America
maintains normal diplomatic relations with such country.
"Permitted Liens" has the meaning given such term in Section
4.01 of the Indenture.
"Person" means an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association, joint
venture, governmental authority or other entity of whatever nature.
"Potential Event of Acceleration" means an event which but for
the giving of notice or the lapse of time or both would constitute an Event of
Acceleration.
"Prepayment Date" means, in any instance, the date selected by
the Company (which shall be a Business Day) on which the Notes are to be prepaid
by the Company pursuant to Section 2.03(b) or Section 2.03(c) of the Indenture,
as the case may be.
"Purchase Agreement" means Bombardier Regional Aircraft
Division Purchase Agreement PA-0393, dated ________________, between the
Manufacturer and the Company (as heretofore amended, modified and supplemented),
but solely as such Purchase Agreement, as amended, modified and supplemented,
relates to the Aircraft.
"Purchase Price" has the meaning given such term in Section
2.1(a) of the Note Purchase Agreement.
"Remaining Weighted Average Life" means on a given date with
respect to any Note the number of days equal to the quotient obtained by
dividing (i) the sum of each of the products obtained by multiplying (a) the
amount of each then remaining scheduled payment of principal of such Note by (b)
the number of days from and including such prepayment date to but excluding the
dates on which each such payment of principal is scheduled to be made; by (ii)
the then outstanding principal amount of such Note.
"Replacement Aircraft" means any Aircraft of which a
Replacement Airframe is part.
"Replacement Airframe" means a Canadair Regional Jet Model
CL-600-2B19 Series 200ER aircraft (except Engines or engines from time to time
installed thereon) which has a value and utility at least equal to, and is in a
good operating condition as, the Airframe which it is replacing, assuming such
Airframe was of the value and utility and in the condition and repair required
by the terms of the Indenture and which is in passenger configuration, which
shall have been made subject to the Lien of the Indenture pursuant to Section
4.05 thereof.
-10-
<PAGE>
"Replacement Closing Date" has the meaning given such term in
Section 4.05(a) of the Indenture.
"Replacement Engine" means a General Electric CF34-3B1 engine
(or engine of the same or another manufacturer of a comparable or an improved
model and suitable for installation and use on the Airframe) which has a value
and utility at least equal to, and is in as good operating condition as, the
Engine which it is replacing, assuming such Engine was of the value and utility
and in the condition and repair required by the terms of the Indenture, and
which shall have been made subject to the Lien of the Indenture pursuant to
Section 4.04 or 4.05 of the Indenture; provided that, such engine shall be of
the same make and the same or improved model as, and compatible with, the other
Engine, and shall be an engine of a type then being utilized by the Company on
other Canadair Regional Jet Series 200 aircraft operated by the Company.
"Secured Obligations" has the meaning set forth in Section
3.01 of the Indenture.
"Security Trustee" means NatWest Aerospace Trust Company
Limited, as Security Trustee under the Deed of Charge, Assignment and Priorities
dated ____________, among, inter alia, the Initial Lender and National
Westminster Bank plc, as at any time amended, modified, restated, novated or
replaced by and corresponding agreement or agreements (the "Deed of Charge"), or
any other person acting as Security Trustee under the Deed of Charge as from
time to time designated in writing to the Company.
"Taxes" means all taxes (including, without limitation, sales,
personal property, transfer, fuel, value-added, excise, franchise, gross
receipts, import, export transportation, stamp, documentary, income and minimum
taxes), fees, assessments and charges (including license and registration fees)
and all levies, imposts, duties or withholdings of any nature whatsoever,
together with any penalties, fines or interest thereon imposed by any
Governmental Authority (including any international organization) or any
political subdivision or fiscal or taxing authority thereof.
"Transaction Costs" means all of the fees, costs and expenses
referred to in Section 7.1 of the Note Purchase Agreement.
"Transportation Code" means Title 49 of the United States
Code, subtitle VII, as amended and in effect on the Closing Date or as
subsequently amended, or any successor or substituted legislation at the time in
effect and applicable, and the regulations promulgated pursuant thereto.
"Treasury Rate" means for any Designated Maturity, the average
yield to maturity of, and resulting from the bidding for, the most recently
auctioned United States Treasury Notes with maturities equal to such Designated
Maturity on the date three Business Days prior to the relevant calculation of
Breakage Costs; and if United States Treasury
-11-
<PAGE>
Notes with such a maturity are not then auctioned and publicly traded, the
weighted average yield to maturity of United States Treasury Notes with
maturities next above and below such Designated Maturity (calculated as provided
below); such yields in each case to be determined by averaging (and rounding
upward to the nearest whole multiple of 1/1000 of 1% per annum, if the average
is not such a multiple) the yields of the relevant United States Treasury Notes
(rounded, if necessary, to the nearest 1/1000 of 1% with any figure of 1/2000 of
1% or above rounded upward) as displayed on the applicable Telerate screen (page
7677), or if such screen is not available, as quoted by two reputable dealers in
United Stated Treasury Notes selected by a Majority in Interest of Noteholders,
in either case, at approximately 11:00 a.m. New York time on the date, and
notified to the Company, the Indenture Trustee and the Noteholders; any weighted
average yield of United States Treasury Notes with two maturities is to be
calculated in accordance with the following formula:
(Y2-Y1)(DM-X1)
-------------------------------
WAY=Y1+ (X2-X1)
Where:
WAY = Weighted Average Yield
DM = relevant Designated Maturity
X1 = whole integer in years closest to and less than DM
which equals the maturity of a United States Treasury
Note then publicly traded.
X2 = whole integer in years closest to and greater than
DM which equals the maturity of a United States
Treasury Note then publicly traded.
Y1 = yield, determined as provided above, of United
States Treasury Notes then most recently auctioned
with maturities equal to X1.
Y2 = yield, determined as provided above, of United
States Treasury Notes then most recently auctioned
with maturities equal to X2.
"Uniform Commercial Code" means the Uniform Commercial Code as
in effect from time to time in any relevant jurisdiction.
-12-
<PAGE>
Annex A
[FORM OF NOTE]
PROMISSORY NOTE
DUE AUGUST 5, 2014
Issued in Connection with One Canadair Regional Jet Model CL-600-2B19 Series
200ER Aircraft, Registration Number N570ML
No. _ New York, New York
$ , 1998
MIDWAY AIRLINES CORPORATION (the "Company"), hereby promises to pay to
________________________________________________________________, or registered
assigns, the principal sum of Dollars ($ ), in thirty three (33) installments,
each installment to be due and payable on a Payment Date and in an amount equal
to the amount set forth in Annex A hereto opposite such Payment Date, together
with interest on the unpaid principal amount hereof from time to time
outstanding from and including the date hereof until such principal amount is
paid in full at 6.932% per annum computed on the basis of a 360-day year
comprising twelve 30-day months, payable in arrears on each Payment Date and on
the date this Note is paid in full, and under certain circumstances, Breakage
Costs, all as more fully provided in the Trust Indenture and Security Agreement
[N570ML], dated as of _____________ (herein called the "Indenture", the defined
terms therein not otherwise defined herein being used herein with the same
meanings) between the Company and The First National Bank of Maryland, as
Indenture Trustee.
Payments with respect to the principal amount hereof and
interest and Breakage Costs, if any, thereon shall be payable in U.S. dollars in
immediately available funds at the principal corporate trust administration
office of the Indenture Trustee, or as otherwise provided in the Indenture. Each
such payment shall be made on the date such payment is due and without any
presentment or surrender of this Note, except that in the case of any final
payment with respect to this Note, this Note shall be surrendered to the
Indenture Trustee for delivery to the Company for cancellation upon payment in
full of such final payment. Whenever the date scheduled for any payment to be
made hereunder or under the Indenture shall not be a Business Day, then such
payment need not be made on such scheduled date but shall be made on the next
succeeding Business Day with the same force and effect as if made on such
scheduled date and no interest shall accrue on the amount of such payment from
and after such scheduled date if such payment is made on such next succeeding
Business Day.
<PAGE>
Each holder hereof, by its acceptance of this Note, agrees
that each payment of principal, interest and Breakage Costs due in respect of
each Note shall, except as otherwise provided in the Indenture, be applied,
first, to the payment of Breakage Costs, if any, and interest on such Note (as
well as any interest on overdue principal and, to the extent permitted by law,
interest and other amounts payable thereunder) due thereunder, second, to the
payment of the principal of such Note then due and third, the balance, if any,
remaining thereafter, to the payment of the principal of such Note remaining
unpaid (provided that such Note shall not be subject to prepayment without the
consent of the affected Noteholder except as permitted by Sections 2.03(b) and
(c) of the Indenture). The amounts paid pursuant to clause third above shall be
applied to the installments of principal of such Note in inverse order of
maturity. Any payment of amounts other than principal, interest and Breakage
Costs in respect of each Note shall be paid by the Indenture Trustee directly to
the Noteholder entitled thereto.
This Note shall bear interest at the Overdue Rate on any part
of the principal amount hereof, interest or Breakage Costs, if any, or any other
amounts due under the Note Purchase Documents not paid when due for any period
during which the same shall be overdue, payable on demand.
This Note is one of the Notes referred to in the Indenture
which have been or are to be issued by the Company pursuant to the terms of the
Indenture. The Collateral is held by the Indenture Trustee as security for the
Notes. Reference is hereby made to the Indenture for a statement of the rights
of the holder of, and the nature and extent of the security for, this Note, as
well as for a statement of the terms and conditions of the trusts created by the
Indenture, all of which terms and conditions in the Indenture each holder hereof
agrees to by its acceptance of this Note.
This Note is a registered Note and is transferable, as
provided in the Indenture, only upon surrender of this Note for registration of
transfer duly endorsed by, or accompanied by a written statement of transfer
duly executed by, the registered holder hereof or his attorney duly authorized
in writing. Prior to the due presentation for registration of transfer of this
Note, the Company and the Indenture Trustee may deem and treat the registered
holder of this Note as the absolute owner and holder hereof for the purpose of
receiving payment of all amounts payable with respect hereto and for all other
purposes and shall not be affected by any notice to the contrary.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION, AND MAY BE
OFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION
IS AVAILABLE.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
-2-
<PAGE>
Unless the certificate of authentication hereon has been
executed by or on behalf of the Indenture Trustee by manual signature, this Note
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
-3-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be
executed by one of its authorized officers as of the date hereof.
MIDWAY AIRLINES CORPORATION
By
Title:
-4-
<PAGE>
This is one of the Notes referred to in the within mentioned Indenture.
THE FIRST NATIONAL BANK
OF MARYLAND
as Indenture Trustee
By
Authorized Officer
-5-
<PAGE>
Annex B
FORM OF TRUST INDENTURE AND
SECURITY AGREEMENT SUPPLEMENT
Trust Indenture and Security Agreement Supplement No. _, dated
[________________] ("Indenture Supplement"), of Midway Airlines Corporation (the
"Company") for the benefit of The First National Bank of Maryland, as Indenture
Trustee (the "Indenture Trustee").
W I T N E S S E T H:
WHEREAS, the Trust Indenture and Security Agreement [N570ML],
dated as of ______________ (the "Indenture"), between the Company and The First
National Bank of Maryland, as Indenture Trustee (the "Indenture Trustee"),
provides for the execution and delivery of supplements thereto substantially in
the form hereof which shall particularly describe the Aircraft (such term and
other defined terms in the Indenture being used herein with the same meanings),
and shall specifically grant a security interest in the Aircraft to the
Indenture Trustee; and
WHEREAS, the Indenture relates to the Airframe and Engines
described below, and a counterpart of the Indenture is attached to and made a
part of this Indenture Supplement; and
WHEREAS, the Company hereby acknowledges that the Aircraft
referred to below is included in the property of the Company covered by the
terms and conditions of the Indenture, subject to the security interest created
thereunder:
AIRFRAME
Manufacturer Model FAA Registration No. Manufacturer's
- -------------------------- ------------------------------ ------------------------------- --------------------------
Serial No.
Canadair CL-600-2B19 [N570ML] [7206]
[N571ML] [7209]
ENGINES
Manufacturer Model Manufacturer's Serial No.
- ----------------------------------------- --------------------------------- ----------------------------------------
General Electric Company CF34-3B1 [GE-E-872225
GE-E-872224]
-6-
<PAGE>
[GE-E-872244
GE-E-872260]
Each Engine is of 750 or more "rated take-off horsepower" or the equivalent of
such horsepower.
NOW, THEREFORE, in order to secure the equal and ratable
payment when due of the principal, of, and Breakage Costs, if any, and interest
(including interest on all past due amounts of principal, interest and Breakage
Costs, if any) on all of the Notes from time to time outstanding under the
Indenture and to secure the payment of all other Obligations and all Other
Obligations and the performance and observance by the Company of all the
agreements, covenants and provisions in the Note Purchase Documents and the
Other Note Purchase Documents on its part to be performed or observed for the
benefit of the Noteholders and the Other Noteholders, subject to the terms and
conditions of the Indenture, and in consideration of the premises and of the
covenants contained in the Indenture and of the acceptance of the Notes by the
holders thereof, and of the sum of $_____ paid to the Company by the Indenture
Trustee at or before the delivery hereof, the receipt whereof is hereby
acknowledged, the Company does hereby mortgage, bargain, sell, transfer, convey,
confirm, assign, pledge, hypothecate and grant unto the Indenture Trustee, as
Indenture Trustee under the Indenture and as Indenture Trustee under the Other
Indentures its successors in trust and assigns, for the security and benefit of
the Noteholders and the Other Noteholders as aforesaid forever, a continuing
first priority security interest in, and first priority mortgage lien on, the
property comprising the Airframe and Engines described above, whether or not
such Engines shall be installed in or attached to the Airframe.
To have and to hold all and singular the aforesaid property
unto the Indenture Trustee, its successors and assigns, forever, in trust for
the benefit, security and protection of the Noteholders and for the uses and
purposes and subject to the terms and provisions set forth in the Indenture.
This Supplement shall be construed as supplemental to the
Indenture and shall form a part thereof, and the Indenture is hereby
incorporated by reference herein and is hereby ratified, approved and confirmed.
This Supplement is being delivered in the State of New York
and shall be governed by New York law, including all matters of construction,
validity and performance.
* * *
-7-
<PAGE>
IN WITNESS WHEREOF, the Company and the Indenture Trustee have
caused this Supplement No. ____ to be duly executed by one of its duly
authorized officers, as of the day and year first above written.
MIDWAY AIRLINES CORPORATION
By:
Name:
Title:
THE FIRST NATIONAL BANK OF MARYLAND
By:
Name:
Title:
-8-
<PAGE>
Annex C
AMORTIZATION SCHEDULE
INTENTIONALLY OMITTED
<PAGE>
Annex D
Lists of Countries
Permitted for Re-Registration
Australia Ireland
Austria Italy
Belgium Japan
Canada Luxembourg
Denmark Netherlands
Finland New Zealand
France Sweden
Germany Switzerland
Greece United Kingdom
Iceland
Permitted for Leasing
Australia Jamaica
Austria Japan
Belgium Liechtenstein
Bermuda Luxembourg
Canada Monaco
Denmark Netherlands
Finland New Zealand
France Norway
Germany Portugal
<PAGE>
Iceland Sweden
Ireland Switzerland
Italy United Kingdom
<PAGE>
Annex E
LIST OF COUNTRIES -- REGARDING POOLING
Australia
Bermuda
Canada
Finland
Japan
New Zealand
United Kingdom
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1997
<CASH> 57,320
<SECURITIES> 751
<RECEIVABLES> 9,727
<ALLOWANCES> (1,673)
<INVENTORY> 2,109
<CURRENT-ASSETS> 74,957
<PP&E> 51,182
<DEPRECIATION> (4,608)
<TOTAL-ASSETS> 142,112
<CURRENT-LIABILITIES> 52,804
<BONDS> 39,495
0
0
<COMMON> 85
<OTHER-SE> 49,728
<TOTAL-LIABILITY-AND-EQUITY> 142,112
<SALES> 0
<TOTAL-REVENUES> 186,275
<CGS> 0
<TOTAL-COSTS> 171,158
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> 15,231
<INCOME-TAX> 6,306
<INCOME-CONTINUING> 8,925
<DISCONTINUED> 0
<EXTRAORDINARY> 15,969
<CHANGES> 0
<NET-INCOME> 24,894
<EPS-PRIMARY> 4.11
<EPS-DILUTED> 3.46
</TABLE>
