-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HjaPACrp5x5YlpxqZ19Z/RB8zqiGpef8wBNBDTAupy8MVvJZwQMoaldRtaEoEcv4 2P17ajG/raI00Phu0pgbeQ== 0000912057-96-010820.txt : 19960529 0000912057-96-010820.hdr.sgml : 19960529 ACCESSION NUMBER: 0000912057-96-010820 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960524 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRNET SYSTEMS INC CENTRAL INDEX KEY: 0001011696 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 311458309 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-03092 FILM NUMBER: 96572615 BUSINESS ADDRESS: STREET 1: 3939 INTERNATIONAOL GATEWAY CITY: COLUMBUS STATE: OH ZIP: 43219 BUSINESS PHONE: 6142379777 MAIL ADDRESS: STREET 1: 3939 INTERNATIONAL GATEWAY STREET 2: 3939 INTERNATIONAL GATEWAY CITY: COLUMBUS STATE: OH ZIP: 43219 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996 REGISTRATION NO. 333-3092 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- AIRNET SYSTEMS, INC. (Exact name of Registrant as specified in its charter) ------------------- OHIO 4500 31-1458309 (State or other (Primary Standard (I.R.S. Employer Identification jurisdiction of Industrial Number) incorporation or Classification Code organization) Number)
3939 INTERNATIONAL GATEWAY, COLUMBUS, OHIO 43219 (614) 237-9777 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------ ERIC P. ROY AIRNET SYSTEMS, INC. 3939 INTERNATIONAL GATEWAY COLUMBUS, OHIO 43219 (614) 237-9777 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: RONALD A. ROBINS, JR. STEVEN R. FINLEY VORYS, SATER, SEYMOUR AND GIBSON, DUNN & CRUTCHER LLP PEASE 52 EAST GAY STREET 200 PARK AVENUE COLUMBUS, OHIO 43215 NEW YORK, NEW YORK 10166 (614) 464-6400 (212) 351-4000
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. ------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY THE ITEMS OF PART I OF FORM S-1
FORM S-1 ITEM NUMBER AND CAPTION PROSPECTUS CAPTION ------------------------------------------------------ ------------------------------------------------------ 1. Forepart of the Registration Statement and Outside Outside Front Cover Page Front Cover Page of Prospectus....................... 2. Inside Front and Outside Back Cover Pages of Inside Front Cover and Outside Back Cover Pages Prospectus........................................... 3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors Earnings to Fixed Charges............................ 4. Use of Proceeds....................................... Use of Proceeds; Prior S Corporation Status 5. Determination of Offering Price....................... Outside Front Cover Page; Underwriting 6. Dilution.............................................. Dilution 7. Selling Security Holders.............................. Principal Shareholders 8. Plan of Distribution.................................. Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered............ Description of Capital Stock 10. Interests of Named Experts and Counsel................ Legal Matters; Experts 11. Information with Respect to the Registrant............ Prospectus Summary; Risk Factors; Prior S Corporation Status; Offering Related Transactions; Use of Proceeds; Dividend Policy; Financial Statements; Selected Financial Data; Selected Unaudited Condensed Pro Forma Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Principal Shareholders; Certain Relationships and Related Party Transactions; Description of Certain Indebtedness 12. Disclosure of Commission Position on Indemnification Not Applicable for Securities Act Liabilities.......................
SUBJECT TO COMPLETION, DATED MAY 7, 1996 5,600,000 SHARES AIRNET SYSTEMS COMMON SHARES The 5,600,000 common shares, par value $.01 per share (the "Common Shares"), offered hereby are being offered by AirNet Systems, Inc. (the "Company"). Prior to the Offering, there has been no public market for the Common Shares. It is currently estimated that the initial public offering price will be between $12.00 and $14.00 per share. See "Underwriting" for the factors to be considered in determining the initial public offering price. Application has been made for listing the Common Shares for quotation on The Nasdaq National Market under the symbol "ANSY." Any investment in the Common Shares offered hereby involves a high degree of risk. For a discussion of certain risks of an investment in the Common Shares offered hereby, see "Risk Factors" on pages 8 to 11. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------
Underwriting Price to Discounts and Proceeds to Public Commissions* Company+ Per Share........................ $ $ $ Total++.......................... $ $ $
- ------------ * The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." + Before deducting expenses of the Offering payable by the Company estimated to be $900,000. ++ The Company has granted the Underwriters a 30-day option to purchase up to 840,000 additional Common Shares on the same terms per share solely to cover over-allotments, if any. If such option is exercised in full, the total price to public will be $ , the total underwriting discounts and commissions will be $ and the total proceeds to Company will be $ . See "Underwriting." ------------------- The Common Shares are being offered by the Underwriters as set forth under "Underwriting" herein. It is expected that the delivery of certificates therefor will be made at the offices of Dillon, Read & Co. Inc., on or about , 1996, against payment therefor in New York funds. The Underwriters include: DILLON, READ & CO. INC. THE ROBINSON-HUMPHREY COMPANY, INC. The date of this Prospectus is , 1996 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND HAS BEEN ADJUSTED TO REFLECT (I) THE REINCORPORATION OF THE COMPANY IN OHIO AND THE CORRESPONDING 422.57:1 SPLIT OF THE COMMON SHARES PRIOR TO THE OFFERING MADE HEREBY (THE "OFFERING"); (II) AN INCREASE IN THE AUTHORIZED NUMBER OF COMMON SHARES TO 40,000,000; AND (III) THE CANCELLATION OF AN OUTSTANDING WARRANT TO PURCHASE 2,483,537 COMMON SHARES AND THE EXERCISE OF AN OUTSTANDING WARRANT TO PURCHASE 167,227 COMMON SHARES. REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" REFER COLLECTIVELY TO AIRNET SYSTEMS, INC. AND ITS PREDECESSOR ENTITIES. THE COMPANY AirNet Systems, Inc. operates a fully integrated national air transportation network that operates between 85 cities in more than 40 states and delivers over 13,000 time-critical shipments each working day. The Company's U.S. Check-Registered Trademark- division, which generates approximately 86% of the Company's revenues, is the leading transporter of canceled checks and related information for the U.S. banking industry, meeting more than 1,100 daily deadlines. The Company's TIMEXPRESS-Registered Trademark- division, which generates approximately 12% of the Company's revenues, provides specialized, high-priority delivery service for customers requiring a reliable late pick-up and early delivery service combined with prompt, on-line delivery information. The Company's People Dedicated to Quality ("PDQ") division offers retail aviation fuel sales and related ground services for customers in Columbus, Ohio. The Company currently operates a fleet of 81 aircraft (23 Learjet and 58 light twin engine aircraft), which fly approximately 85,000 miles per night, primarily Monday through Thursday. The Company also provides ground pick-up and delivery services throughout the nation, utilizing a fleet of 87 Company-owned ground vehicles as well as a ground transportation network of over 350 independent contractors. The Company uses its own air transportation network as well as commercial airlines, when appropriate, to provide same-day and same-night delivery services for itself, as well as for certain major overnight document and parcel delivery companies. Later pick-ups and earlier deliveries than those offered by other national carriers are the differentiating characteristics of the Company's time-critical delivery network. In addition, the Company offers other value- added services to its customers, such as on-line delivery information. The Company consistently has achieved on-time performance levels exceeding 95%. In order to maintain this performance, the Company utilizes a number of proprietary customer service and management information systems to track, sort, dispatch and control the flow of checks and small packages throughout the Company's delivery system. Delivery times and certain shipment information are available on-line and on the Internet. For example, ComCheck-SM-, a unique proprietary software system, provides bank customers access to delivery time, shipment information and retrieval of historical proof-of-delivery information, critical data that enable banks to manage their cash position and maximize float revenue. OnTime-SM- and Ship-Link-SM-, Company-developed software programs, provide scheduling and pricing information, as well as on-line delivery and shipper acknowledgment data for small package customers. The Company also has developed several internal software programs to enhance dispatch monitoring, cost control and customer service functions. The Company believes that the market for reliable, time-critical deliveries is growing as a result of a number of global trends, including: (i) corporations requiring just-in-time inventory parts; (ii) medical laboratories requiring same-day deliveries; (iii) consolidating ground-based small package couriers requiring a national air delivery network; and (iv) global air freight forwarders requiring a domestic connection for their international networks that can deliver on a same-day/same-night or pre-8:00 a.m. basis. As the Company's banking customers typically require services four nights per week, there exists substantial available flight time and aircraft for the Company to pursue these business opportunities. The Company believes its flexible and reliable air transportation network and its demonstrated expertise in providing time-critical deliveries position the Company to provide such additional services at premium prices. 3 BUSINESS STRATEGY The principal components of the Company's operating and growth strategy are as follows: FOCUS ON UNIQUE AIRCRAFT TYPE AND ROUTE STRUCTURE. The Company's fast and reliable fleet of 23 Learjets and 58 light twin engine aircraft is positioned around a highly efficient and flexible national route structure designed to facilitate late pick-up and early delivery times, minimize delays and simplify flight scheduling. The Company's hub-and-spoke system, with a primary hub in Columbus and several mini-hubs across the nation, enables the Company to match the varying load capacities of its aircraft with the shipment weight and volume of each destination city and to consolidate shipments at its mini-hubs and primary hub. ATTRACT, RETAIN AND MOTIVATE THE HIGHEST QUALITY PERSONNEL AVAILABLE. Central to the Company's high service-oriented culture is a commitment to hiring, retaining and motivating exceptionally talented associates who are focused on a set of core values designed by the Company to provide a working environment where integrity, accountability, open communication, team management and responsibility and quality performance are explicitly stated goals. The Company believes that its current compensation and benefits packages, proposed stock ownership incentives and corporate culture will continue to provide a competitive advantage in attracting and motivating its associates. EXPAND U.S. CHECK-REGISTERED TRADEMARK- POSITION IN THE BANKING INDUSTRY. The Company intends to strengthen its leadership position in the transportation of canceled bank checks by adding routes and aircraft to its air transportation network to facilitate even more late pick-up and early delivery times covering a greater number of cities. These capabilities, combined with the Company's value-added services (such as ComCheck-SM-) not currently offered by competing canceled bank check delivery companies, should enable the Company to expand its position in this market. GROW TIMEXPRESS-Registered Trademark- PACKAGE DELIVERY SERVICE. The Company believes that its TIMEXPRESS-Registered Trademark- service offers a more flexible pick-up and delivery schedule for small packages than those offered by other national carriers, and appeals to customers with time-sensitive delivery requirements. To date, growth in the Company's TIMEXPRESS-Registered Trademark-business has been constrained by limited load capacity on existing U.S. Check-Registered Trademark- routes. The Company intends to purchase aircraft to provide additional capacity for the delivery of canceled bank checks and small packages. The Company believes significant opportunities exist for expanding its small package delivery business by more aggressively marketing the TIMEXPRESS-Registered Trademark- brand-name and by contracting to deliver for some of the national overnight package delivery companies whose infrastructures cannot be easily modified to meet same-day/same-night or pre-8:00 a.m. delivery deadlines. PURSUE STRATEGIC ACQUISITION OPPORTUNITIES. The fragmented nature of the air and ground package delivery industry, outside of the major national carriers, provides the Company with opportunities for strategic acquisitions. The Company believes it is well-positioned to consolidate regional air freight operators and ground couriers by acquiring high-quality candidates. The Company believes it has a demonstrated expertise in evaluating acquisition opportunities based on the potential for revenue growth and profitability, as well as a proven track record for efficiently integrating such acquisitions. HISTORY AND OFFERING RELATED TRANSACTIONS The Company was founded in 1974 and began transporting canceled checks on a point-to-point basis out of Pontiac, Michigan. In 1980, the Company established its primary hub in Columbus, Ohio to serve as the central point for its nationwide air distribution system. In 1984, the Company formed TIMEXPRESS-Registered Trademark- and began to deliver small package freight on a national scale. In 1988, the Company entered into a non-competition agreement (the "Wright Agreement") with Wright International Express, Inc. ("WIE") and its sole shareholder Donald W. Wright, Sr., and acquired certain key assets of WIE. WIE was the Company's primary private sector competitor in the canceled check transportation business. In 1989, the Company completed the acquisition of Air Continental, Inc., the other principal private sector competitor engaged in the interstate transportation of canceled checks. Today, the Company's only significant competitor in the transportation of canceled checks is the Interdistrict Transportation System (the "ITS") operated by the Federal Reserve System (the "Federal Reserve"). 4 As part of the Wright Agreement, as amended, the Company agreed to pay a percentage of the Company's cash flow on an on-going basis to Donald Wright and granted him a warrant to purchase 2,483,537 Common Shares (the "Donald Wright Warrant") and a warrant to Jeffrey Wright, Donald Wright's son, to purchase 167,227 Common Shares (the "Jeffrey Wright Warrant" and, collectively with the Donald Wright Warrant, the "Wright Warrants"), which warrants are exercisable upon the closing of the Offering. The Company has agreed to repurchase the Donald Wright Warrant upon the closing of the Offering for $29.9 million, or the equivalent of $12.04 per Common Share underlying such warrant, and will cancel the Donald Wright Warrant upon its repurchase. Gerald G. Mercer, the Company's Chairman and Chief Executive Officer, has agreed to purchase the Jeffrey Wright Warrant upon the closing of the Offering for $2.0 million, or the equivalent of $12.04 per Common Share underlying such warrant, and will exercise the Jeffrey Wright Warrant immediately following such purchase. Upon the repurchase by the Company of the Donald Wright Warrant, the Wright Agreement will be terminated in its entirety, and no further payments will be made. In connection with the repurchase and cancellation of the Donald Wright Warrant, the Company expects to receive a tax benefit asset of approximately $7.0 million. The benefit from this asset will be realized as cash savings by offsetting income taxes otherwise payable on future taxable income. The tax benefit will have no effect on the Company's income statement currently or for any future period; however, the tax benefit will be reflected as additional paid-in capital on the Company's balance sheet. In connection with offering related transactions, the Company will incur non-recurring, non-cash expenses in the quarter in which the Company completes the Offering totaling approximately $19.8 million (assuming an initial public offering price of $13.00 per share). Approximately $15.0 million of such $19.8 million results from the termination of certain Stock Purchase Agreements between the Company and seven executive officers, pursuant to which the executive officers purchased an aggregate of 1,484,908 Common Shares. In addition, if the initial public offering price is less than $12.95 per share, the Company will incur an additional non-recurring expense in the fiscal quarter in which the Company completes the Offering in connection with the repurchase and cancellation of the Donald Wright Warrant and the purchase of the Jeffrey Wright Warrant equal to the difference between $12.95 and the initial public offering price multiplied by 2,650,764, the number of Common Shares underlying the Wright Warrants. The Company's principal executive offices are located at 3939 International Gateway, Columbus, Ohio 43219 and its telephone number is (614) 237-9777. THE OFFERING Common Shares offered....................... 5,600,000 Common Shares to be outstanding after the Offering................................... 11,477,835(1) Use of proceeds............................. To repay certain indebtedness incurred in connection with the payment of undistributed S Corporation earnings to the Company's existing shareholders, to repurchase and cancel the Donald Wright Warrant and to repay certain bank indebtedness. See "Use of Proceeds," "Certain Relationships and Related Party Transactions" and "Prior S Corporation Status." Proposed Nasdaq National Market symbol...... ANSY
-------------------------- (1) Does not include 1,150,000 Common Shares reserved for issuance under the Company's Incentive Stock Plan. See "Management -- Incentive Stock Plan." RISK FACTORS Any investment in the Common Shares offered hereby involves a high degree of risk. For a discussion of certain risks of an investment in the Common Shares offered hereby, see "Risk Factors" on pages 8 through 11. 5 SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31, -------------------------------------------- --------------------------------- PRO FORMA PRO FORMA 1993 1994 1995 1995(1) 1995 1996 1996(1) --------- --------- --------- ----------- --------- --------- ----------- INCOME STATEMENT DATA: Revenues........................... $ 58,590 $ 63,446 $ 67,462 $ 67,462 $ 32,452 $ 35,509 $ 35,509 Air transportation expenses........ 43,437 44,570 46,111 46,111 22,652 24,604 24,604 Fixed based operations............. 1,150 1,081 956 956 446 390 390 Selling, general, administrative (2)............................... 3,927 3,788 3,405 3,405 1,656 2,238 2,238 Executive compensation (3)......... 2,985 4,883 6,587 3,000 2,997 3,120 1,500 Wright Agreement expenses (4)...... 1,339 1,813 2,328 -- 1,207 728 -- --------- --------- --------- ----------- --------- --------- ----------- Income from operations............. 5,752 7,311 8,075 13,990 3,494 4,429 6,777 Interest expense................... 1,123 1,093 1,452 308 611 736 180 --------- --------- --------- ----------- --------- --------- ----------- Net income......................... $ 4,629 $ 6,218 $ 6,623 $ 2,883 $ 3,693 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- PRO FORMA DATA: Income before taxes................ 13,682 6,597 Taxes on income.................... 5,472 2,639 ----------- ----------- Net income......................... $ 8,210 $ 3,958 ----------- ----------- ----------- ----------- Net income per common share........ $ 0.72 $ 0.34 ----------- ----------- ----------- ----------- Pro forma weighted average common shares outstanding (in thousands) (5)............................... 11,478 11,478 OTHER OPERATING DATA: Number of aircraft (end of period)........................... 70 73 78 78 74 81 81 On-time performance (6)............ 97.6% 96.4% 97.7% 97.7 % 97.0% 94.9% 94.9 % EBITDA (7)......................... $ 11,614 $ 13,644 $ 15,429 $ 21,344 $ 6,971 $ 8,585 $ 10,933 Cash flows provided by (used in): Operating activities............. 10,810 14,722 15,310 14,008 6,524 8,025 6,763 Investing activities............. (8,248) (12,814) (14,223) (14,223 ) (6,230) (5,437) (5,437 ) Financing activities............. (2,551) (2,000) (1,107) (783 ) (549) (2,824) (2,540 )
MARCH 31, 1996 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA(8) AS ADJUSTED(9) --------- --------------- --------------- BALANCE SHEET DATA: Working capital..................................................... $ 656 $ 940 $ 7,169 Net property and equipment.......................................... 34,082 34,082 34,082 Total assets........................................................ 52,651 57,339 57,339 Total debt.......................................................... 17,531 40,531 3,639 Shareholders' equity................................................ 23,036 6,264 43,156
-------------------------------- (1) Adjusted to reflect the following pro forma adjustments as if the transactions had been completed as of the beginning of the periods indicated: (i) the reduction of compensation expense payable to the Company's executive officers; (ii) the reduction of costs in connection with the termination of the Stock Purchase Agreements and the Deferred Compensation Agreements; (iii) the elimination of non-competition payments and the elimination of amortization expense associated with the Wright covenant not to compete asset, both of which are related to the termination of the Wright Agreement; (iv) the reduction in interest expense related to the repayment of existing debt from the proceeds of the Offering; and (v) the recording of federal and state income taxes as if the Company had been a C Corporation during each such period. See "Selected Unaudited Condensed Pro Forma Financial Data," "Certain Relationships and Related Party Transactions," "Prior S Corporation Status," "Offering Related Transactions" and Note 12 of the Notes to the Company's Financial Statements. The Income Statement Data do not reflect significant non-recurring charges totaling approximately $19.8 million that will be incurred at the time of the Offering. These charges include non-cash expenses of approximately $15.0 million (assuming an initial public offering price of $13.00 per share) in connection with the termination of the Stock Purchase Agreements and $2.6 million relating to the write-off of the covenant not to compete asset in connection with the termination of the Wright Agreement. The $15.0 million expense will result in a corresponding increase in additional paid-in capital but no change in total shareholders' equity. In addition, the Company will record a deferred tax expense of $2.1 million as a result of the termination of the Company's S Corporation status. In addition, if the 6 initial public offering price is less than $12.95 per share, the Company will incur an additional non-recurring expense in the fiscal quarter in which the Company completes the Offering in connection with the repurchase and cancellation of the Donald Wright Warrant and the purchase of the Jeffrey Wright Warrant equal to the difference between $12.95 and the initial public offering price multiplied by 2,650,764. See "Offering Related Transactions" and "Prior S Corporation Status." (2) Excludes executive compensation and expenses related to the Wright Agreement, which expenses appear separately in this presentation. (3) Except for the pro forma periods, includes executive compensation and expenses associated with the Stock Purchase Agreements and the Deferred Compensation Agreements. See "Certain Relationships and Related Party Transactions -- Stock Purchase Agreements" and "-- Deferred Compensation Agreements." Data for pro forma periods ended September 30, 1995 and March 31, 1996 assume the Company's revised compensation arrangements and the payment of 100% of the potential bonuses under such arrangements. See "Management -- Compensation of Executive Officers." (4) Includes annual non-competition payments and amortization expenses in connection with the Wright Agreement and the associated Wright covenant not to compete asset. (5) The pro forma weighted average common shares outstanding is based on the weighted average common shares outstanding, using the treasury stock method, for the applicable period, as adjusted for the 5,600,000 Common Shares to be issued by the Company in the Offering, the net proceeds of which will be used to repay debt, to repurchase and cancel the Donald Wright Warrant and to fund planned distributions to existing shareholders. (6) On-time performance is defined as the annualized percentage of times that the Company's U.S. Check-Registered Trademark- division meets its customers' delivery requirements. (7) "EBITDA" is defined as net income before interest expense, taxes on income, depreciation and amortization. EBITDA should not be construed as an alternative to income from operations or cash flows from operating activities (each as determined in accordance with generally accepted accounting principles). (8) Adjusted to reflect the following pro forma transactions as if they had occurred on March 31, 1996: (i) distributions of the AAA Notes to existing shareholders from the AAA account in the amount of $23.0 million; (ii) the recognition of a net deferred tax liability of $2.1 million resulting from the termination of the Company's S Corporation status; (iii) the termination of the Stock Purchase Agreements and the Deferred Compensation Agreements and the elimination of a $3.7 million liability associated therewith; (iv) the repayment of notes receivable from existing shareholders of $0.3 million; and (v) the termination of the Wright Agreement, the write-off of the covenant not to compete asset of $2.6 million and the recording of a related tax benefit asset of $7.0 million. See "Selected Unaudited Condensed Pro Forma Financial Data," "Certain Relationships and Related Party Transactions," "Prior S Corporation Status," "Offering Related Transactions" and Note 12 of the Notes to the Company's Financial Statements. (9) Adjusted to reflect the Offering (assuming an initial public offering price of $13.00 per share) and the use of the net proceeds therefrom after deducting estimated underwriting discounts and expenses payable by the Company in connection with the Offering. See "Use of Proceeds." 7 RISK FACTORS ANY INVESTMENT IN THE COMMON SHARES BEING OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN EVALUATING ANY INVESTMENT IN THE COMMON SHARES. COMPETITION The market for scheduled air and ground delivery service is highly competitive. The Company's U.S. Check-Registered Trademark-division competes primarily against the Federal Reserve's ITS, which has significantly greater financial and other resources than the Company. The Federal Reserve is regulated by the Monetary Control Act of 1980 (the "Monetary Control Act"), which in general requires that the Federal Reserve price its services on a cost basis plus a set percentage private market adjustment. Failure by the Federal Reserve to comply with the Monetary Control Act could have an adverse competitive impact on the Company. In addition, there can be no assurance that the Monetary Control Act will not be amended, modified or repealed, or that new legislation affecting the Company's business will not be enacted. Although the entrance of such major participants in the next-day and second-day air delivery market as United Parcel Service ("UPS") and Federal Express Corporation ("FedEx") into the business of same-day and early morning delivery has not had a material adverse effect on the Company's business to date, there can be no assurance that these competitors will not have such an effect in the future. See "Business -- Competition." INTEREST RATE FLUCTUATIONS The value of the Company's canceled check transportation services to its banking customers is directly related to the federal funds rate, which is determined by the Federal Reserve and represents the rate of interest that banks can earn on timely delivered shipments of canceled checks. If the federal funds rate were to drop to historically low levels, the resulting diminution in the value of the Company's services to its banking customers could adversely affect the Company's business. See "Industry Overview -- How Banks Clear and Settle Canceled Bank Checks." BANKING INDUSTRY CONSOLIDATION The banking industry, including commercial banks, savings banks and Federal Reserve banks, represents the Company's largest category of customers, accounting for approximately 86% of the Company's revenues in fiscal 1995. The prevalent trend in the banking industry over the past several years has been consolidation. The number of banks in the U.S. has decreased by approximately 25% since 1987, as banks have acquired and merged with each other. As the number of banks decreases, the Company may become increasingly dependent on certain of its customers. Although such consolidation has not had a material adverse impact on the Company's business to date, there can be no assurance that the consolidation trend will not have an adverse effect on the Company's business in the future. TECHNOLOGY Some analysts have predicted that the increased use of electronic funds transfers will lead to a "checkless society," which could adversely affect demand for the Company's delivery services to the financial services industry. In addition, some banking industry analysts have predicted the development of various forms of imaging technology that could reduce or eliminate the need for prompt delivery of canceled checks. Similarly, technological advances in the nature of "electronic mail" and "telefax" have affected the demand for on-call delivery services by small package delivery customers. While none of these technological advances has had any significant adverse impact on the Company's business to date, there can be no assurance that these or similar technologies, or other regulatory or technological changes in the check clearance and national payments systems, will not have an adverse effect on the Company's business in the future. RISKS RELATED TO GROWTH THROUGH ACQUISITIONS One of the Company's business strategies is to increase its revenues, earnings and market share through the acquisition of companies that will complement its existing operations or provide it with an entry into markets it does not currently serve. Growth through acquisition involves substantial risks, including the risk of improper valuation of the acquired business and the risk of inadequate integration. There can be no assurance that suitable acquisition candidates will be available, that the Company will be able to acquire or profitably manage such additional 8 companies or that future acquisitions will produce returns that justify the investment. In addition, the Company may compete for acquisition and expansion opportunities with companies that have significantly greater resources than the Company. See "Business -- Business Strategy." The Company currently intends to finance future acquisitions by using Common Shares for all or a portion of the consideration to be paid, which may result in substantial dilution to the purchasers of the Common Shares offered hereby. In the event that the Common Shares do not maintain a sufficient valuation, or potential acquisition candidates are unwilling to accept the Common Shares as part of the consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, in order to pursue its acquisition strategy. If the Company does not have sufficient cash resources, its growth could be limited and its existing operations could be impaired unless it is able to obtain additional capital through subsequent debt or equity financings. There can be no assurance that the Company will be able to obtain such financing or that, if available, such financing will be on terms acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." INDEPENDENT OWNER/OPERATORS From time to time, federal and state authorities, including the Internal Revenue Service, have sought to assert, and at times have successfully asserted, that independent owner/operators in the transportation industry are employees rather than independent contractors, thus requiring the payment of payroll and related taxes. The Company believes that the independent contractors utilized by the Company are not employees under existing interpretations of federal and state laws. However, there can be no assurance that federal and/or state authorities will not challenge this position, or that laws or regulations, including tax laws, or interpretations thereof, will not change. If these independent contractors should be deemed to be employees of the Company, the Company would be required to pay for and administer added benefits to them. As a result, the Company's operating costs would increase. Additionally, the Company could be liable for additional taxes, penalties and interest for prior periods and additional taxes for future periods, which could have a material adverse effect on the Company's business. See "Business -- Operations." DEPENDENCE ON KEY PERSONNEL The Company's operations are dependent on the continued efforts of its executive officers and on its senior management, particularly Gerald G. Mercer, the Company's President and Chief Executive Officer, and Eric P. Roy, the Company's Executive Vice President, Chief Financial Officer and Chief Operating Officer. If the executive officers of the Company become unable or decide not to continue in their present positions, or if a material number of such senior management fail to continue with the Company and the Company is unable to attract and retain other skilled associates, the Company's business could be adversely affected. The Company does not have an employment agreement with any of its executive officers. See "Management." DEPENDENCE ON KEY SUPPLIER The Company currently utilizes the services of Garrett Aviation exclusively for major period inspections and core overhauls of its 30-series Learjets. This reliance upon a sole supplier involves several risks, including a risk of the unavailability of these services and a reduced control of pricing and completion times for such services. Failure to receive such services from Garrett Aviation or an alternate supplier on a timely basis or a substantial increase in the price of such services could have an adverse effect on the Company's business. See "Business -- Operations -- Flight Operations -- Aircraft Maintenance." PERMITS AND LICENSING; REGULATION The Company's delivery operations are subject to various federal, state and local regulations that in many instances require permits and licenses. Failure by the Company to maintain required permits or licenses, or to comply with applicable regulations, could result in substantial fines or possible revocation of the Company's authority to conduct certain of its operations. Furthermore, acquisitions by the Company could be impeded by delays in obtaining approvals for the transfer of permits or licenses, or failure to obtain such approvals. See "Business -- Regulation." The Company's flight operations are regulated by the Federal Aviation Administration (the "FAA") under Part 135 of the Federal Aviation Regulations. Among other things, these regulations govern permissible flight and 9 duty time for aviation flight crews. The FAA is currently contemplating certain changes in flight and duty time guidelines, which, if adopted, could increase the Company's operating costs. These changes, if adopted, could also require the Company and other operators regulated by the FAA to hire additional flight crew personnel. No changes of this nature have been adopted at this time. In addition, Congress, from time to time, has considered various means, including excise taxes, to raise revenues directly from the airline industry to pay for air traffic control facilities and personnel. If such an excise tax or other charge were implemented, the Company's operating costs could increase. BENEFITS OF THE OFFERING TO CURRENT SHAREHOLDERS The Company intends to use a portion of the net proceeds of the Offering to repay the AAA Notes (as defined below) in an aggregate principal amount estimated to be $23.0 million at the time of the Offering to the Company's existing shareholders. The principal amount of the AAA Notes will be approximately equal to the accumulated earnings of the Company on which taxes either have been paid or are payable by the existing shareholders. See "Prior S Corporation Status." In addition, the Offering will provide the existing shareholders with liquidity through the creation of a public market. See "Shares Eligible for Future Sale." The Company is obligated to repurchase the Donald Wright Warrant upon the closing of the Offering for $29.9 million, or the equivalent of $12.04 per Common Share underlying such warrant, and will use a portion of the net proceeds of the Offering for such repurchase. Upon such repurchase, Donald W. Wright, Sr. will no longer own any equity interest in the Company, and the Wright Agreement will be terminated. See "Certain Relationships and Related Party Transactions -- Wright Agreement" and "-- Wright Warrants." SIGNIFICANT VOTING CONTROL OF DIRECTORS AND EXECUTIVE OFFICERS Gerald G. Mercer, the Company's Chairman, President and Chief Executive Officer, will beneficially own approximately 38.3% of the outstanding Common Shares upon the closing of the Offering (or 35.7% if the Underwriters' over-allotment option is exercised in full). The other directors and executive officers as a group will beneficially own an additional 12.9% of the outstanding Common Shares upon the closing of the Offering (or 12.1% if the Underwriters' over-allotment option is exercised in full). Accordingly, Mr. Mercer will have significant voting power with respect to, and in conjunction with the other directors and executive officers may be able to control, the election of the Board of Directors of the Company and, in general, the determination of the outcome of the various matters submitted to the shareholders for approval. Although there are no formal shareholder arrangements with respect to voting for the election of directors or other matters, there can be no assurance that Mr. Mercer and the other directors and executive officers will not vote their Common Shares in the same manner with respect to such elections or matters submitted to shareholders for approval. See "Principal Shareholders" and "Description of Capital Stock." DILUTION Purchasers of the Common Shares offered hereby will experience an immediate and substantial dilution of $9.29 in the net tangible book value per share of their investment (assuming an initial public offering price of $13.00 per share). In the event the Company issues additional Common Shares in the future, including Common Shares that may be issued in connection with future acquisitions, purchasers of Common Shares in this Offering may experience further dilution in the net tangible book value per share of the Common Shares. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE IMPACT ON MARKET PRICE Sales of a substantial number of Common Shares in the public market following the Offering, or the perception that such sales could occur, could have an adverse effect on the price of the Common Shares and may make it more difficult for the Company to sell Common Shares in the future at times and for prices that it deems appropriate. The Company and all of the directors and executive officers of the Company have agreed, subject to certain exceptions, not to offer, sell, contract to sell, transfer or otherwise encumber or dispose of, directly or indirectly, any Common Shares, or securities convertible into or exchangeable for Common Shares, for a period of 180 days from the date of this Prospectus without the prior written consent of Dillon, Read & Co. Inc. Dillon, Read & Co. Inc., in its sole discretion, and at any time without prior notice, may release all or any portion of the Common Shares subject to the 10 lock-up agreements described herein. When such lock-up restrictions lapse, the Common Shares may be sold in the public market or otherwise disposed of in compliance with the Securities Act of 1933, as amended (the "Securities Act"). See "Shares Eligible for Future Sale" and "Underwriting." NO PRIOR PUBLIC MARKET; DETERMINATION OF INITIAL OFFERING PRICE, VOLATILITY OF COMMON SHARES PRICE Prior to the Offering, there has been no public market for the Common Shares. Although the Company has made application for listing the Common Shares for quotation on The Nasdaq National Market, there can be no assurance that an active trading market will develop or be sustained. The initial public offering price of the Common Shares will be determined by negotiations among the Company and the Managing Underwriters (as defined herein) and may not be indicative of the market price of the Common Shares after completion of the Offering. The price of the Common Shares in the future may be volatile. A variety of events, including quarter-to-quarter variations in operating results, news announcements, trading volume, general market trends and other factors, could result in wide fluctuations in the price of the Common Shares. For a discussion of the factors to be considered in determining the initial public offering price, see "Underwriting." POTENTIAL ANTI-TAKEOVER EFFECT AND POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF CERTAIN CHARTER AND CODE OF REGULATIONS PROVISIONS AND THE OHIO GENERAL CORPORATION LAW Certain provisions of the Company's Articles of Incorporation and Code of Regulations and of the Ohio Revised Code (the "Ohio GCL"), together or separately, could discourage potential acquisition proposals, delay or prevent a change in control of the Company and limit the price that certain investors might be willing to pay in the future for the Common Shares. Among other things, these provisions (i) require certain supermajority votes; and (ii) establish certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at shareholders' meetings. Pursuant to the Company's Articles of Incorporation, upon the closing of the Offering, the Board of Directors of the Company will have authority to issue up to 10,000,000 preferred shares without further shareholder approval. Such preferred shares could have dividend, liquidation, conversion, voting and other rights and privileges that are superior or senior to the Common Shares. Issuance of preferred shares could result in the dilution of the voting power of the Common Shares, adversely affect holders of the Common Shares in the event of liquidation of the Company or delay, defer or prevent a change in control of the Company. In addition, Section 1701.831 of the Ohio GCL contains provisions that require shareholder approval of any proposed "control share acquisition" of any Ohio corporation at any of three ownership thresholds: 20%, 33 1/3% and 50%; and Chapter 1704 of the Ohio GCL contains provisions that restrict certain business combinations and other transactions between an Ohio corporation and interested shareholders. See "Description of Capital Stock -- Potential Anti-Takeover Effects of Articles of Incorporation, Code of Regulations and the Ohio General Corporation Law." PRIOR S CORPORATION STATUS In July 1988, the Company elected to be treated as an S Corporation under subchapter S of the Internal Revenue Code of 1986, as amended (the "Code") for federal income tax purposes and comparable state tax laws. As a result of the S Corporation election, the Company's shareholders have been taxed directly on the Company's income, whether or not such income was distributed, and the Company has not been subject to federal income tax at the corporate level. Since July 1988, the Company has made periodic distributions to its shareholders. The balance of taxed or taxable accumulated earnings which have not been distributed is reflected in an "accumulated adjustments account" (the "AAA account"). In connection with the Offering, the Company's S Corporation status will terminate and the Company will make a distribution of promissory notes (the "AAA Notes") in an aggregate principal amount estimated to be $23 million at the time of the Offering to its existing shareholders from the AAA account. The aggregate principal amount of the AAA Notes will be approximately equal to the undistributed earnings in the AAA account on which the shareholders either have paid or will be required to pay income taxes. A portion of the proceeds of the Offering will be used to repay the AAA Notes. See "Use of Proceeds." 11 OFFERING RELATED TRANSACTIONS In addition to the termination of the Company's S Corporation status and the distribution of the AAA Notes described above, the following transactions will occur in connection with the Offering: TERMINATION OF STOCK PURCHASE AGREEMENTS WITH EXISTING SHAREHOLDERS On April 1, 1994, the Company entered into Stock Purchase Agreements with seven executive officers, pursuant to which these executive officers purchased an aggregate of 1,484,908 Common Shares for an aggregate purchase price of approximately $364,000, which was paid by the delivery of promissory notes. Upon the closing of the Offering, the Stock Purchase Agreements will be terminated, and the promissory notes will be paid. See "Certain Relationships and Related Party Transactions -- Stock Purchase Agreements." The Stock Purchase Agreements have resulted in expenses of $2.3 million and $1.3 million for the year ended September 30, 1995, and the six months ended March 31, 1996, respectively, which expenses will cease upon the termination of the Stock Purchase Agreements in connection with the Offering. The Company's pro forma income statements have been adjusted accordingly. The anticipated repayment by the seven executive officers of the Stock Purchase Agreement notes in the remaining aggregate principal amount of $284,000 will result in a decrease in notes receivable and a corresponding increase in cash, as reflected in the Company's pro forma balance sheet at March 31, 1996. In addition, the distribution of the AAA Notes will eliminate the $1.7 million liability relating to the Stock Purchase Agreements. The elimination of this liability has been reflected in the Company's pro forma balance sheet at March 31, 1996. See "Selected Unaudited Condensed Pro Forma Financial Data" and Note 12 of the Notes to the Company's Financial Statements. In addition, as a result of the termination of the Stock Purchase Agreements, the Company will incur a non-recurring, non-cash expense estimated to be $15.0 million (assuming an initial public offering price of $13.00 per share) in the fiscal quarter in which the Offering is closed. This expense will result in a corresponding increase in additional paid-in capital, but no change in total shareholders' equity. This expense is not tax deductible and represents the portion of the distribution of the AAA Notes to the seven executive officers not previously recorded as compensation expense plus the difference between the net offering price and the net book value of the 1,484,908 shares on the date the Stock Purchase Agreements are terminated. This accounting treatment is required since the stock purchase plan is being accounted for in a manner similar to a variable stock option plan. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." TERMINATION OF DEFERRED COMPENSATION AGREEMENTS WITH EXISTING SHAREHOLDERS Between 1986 and 1991, the Company entered into Deferred Compensation Agreements with seven executive officers, pursuant to which the Company is obligated to pay these executive officers deferred compensation equal in each case to a percentage of the increase in the Company's net book value. In connection with the Offering and the distribution of the AAA Notes, the seven executive officers have agreed to forego their remaining deferred compensation payments in the aggregate amount of $2.0 million and to terminate the Deferred Compensation Agreements upon the closing of the Offering. See "Certain Relationships and Related Party Transactions -- Deferred Compensation Agreements." The Deferred Compensation Agreements have resulted in expenses of $0.3 million and $0.1 million for the year ended September 30, 1995, and the six months ended March 31, 1996, respectively, which expenses will cease upon termination of the Deferred Compensation Agreements in connection with the Offering. The Company's pro forma income statements have been adjusted accordingly. The elimination of the liability associated with the Deferred Compensation Agreements will result in an increase of $2.0 million in shareholders' equity on the Company's pro forma balance sheet at March 31, 1996. See "Selected Unaudited Condensed Pro Forma Financial Data" and Note 12 of the Notes to the Company's Financial Statements. REDUCTION IN EXECUTIVE OFFICER COMPENSATION Following the closing of the Offering, the Company expects to restructure the compensation arrangements with its executive officers. See "Management -- Compensation of Executive Officers." The reduction of compensation expense for executive officers will result in an adjustment to the Company's pro forma income statement of 12 $1.0 million and $0.2 million for the year ended September 30, 1995, and the six months ended March 31, 1996, respectively. See "Selected Unaudited Condensed Pro Forma Financial Data" and Note 12 of the Notes to the Company's Financial Statements. TERMINATION OF THE WRIGHT AGREEMENT In 1988, in consideration for the agreement of WIE and Donald W. Wright, Sr. not to compete with the Company, the Company entered into the Wright Agreement, which, as amended, provides for annual payments, tied to the cash flows and debt to equity ratio of the Company, to Donald Wright and certain designees. Upon the repurchase by the Company of the Donald Wright Warrant, the Wright Agreement will be terminated in its entirety, and no further payments will be made. See "Certain Relationships and Related Party Transactions -- Wright Agreement." The termination of the Wright Agreement will result in an adjustment to the Company's pro forma income statement of $2.1 million and $0.6 million for the year ended September 30, 1995, and the six months ended March 31, 1996, respectively. Elimination of amortization expense in connection with the write-off of the covenant not to compete asset related to the Wright Agreement will result in an additional adjustment to the Company's pro forma income statement of $0.3 million and $0.1 million for the year ended September 30, 1995, and the six months ended March 31, 1996, respectively. In addition, the write-off of the covenant not to compete asset will result in a decrease of $2.6 million in shareholders' equity on the Company's pro forma balance sheet at March 31, 1996, and a corresponding non-cash expense in the fiscal quarter in which the Offering is closed. See "Selected Unaudited Condensed Pro Forma Financial Data" and Note 12 of the Notes to the Company's Financial Statements. PURCHASE OF WRIGHT WARRANTS In further consideration for the agreement by WIE and Donald Wright not to compete with the Company, the Company issued the Wright Warrants to Donald Wright and Jeffrey Wright. The Wright Warrants entitle the Wright Trust (as defined below), as assignee of Donald Wright, and Jeffrey Wright to purchase an aggregate of 2,650,764 Common Shares for an aggregate exercise price of $3,200 at any time on or after the closing of the Offering. The Company has agreed to repurchase the Donald Wright Warrant upon the closing of the Offering for $29.9 million, or the equivalent of $12.04 per Common Share underlying such warrant, and will cancel the Donald Wright Warrant upon its repurchase. Gerald G. Mercer has agreed to purchase the Jeffrey Wright Warrant upon the closing of the Offering for $2.0 million, or the equivalent of $12.04 per Common Share underlying such warrant, and will exercise the Jeffrey Wright Warrant immediately following such purchase. See "Certain Relationships and Related Party Transactions -- Wright Warrants." In connection with the repurchase and cancellation of the Donald Wright Warrant and the corresponding tax treatment, the Company will realize a related tax benefit asset estimated to be $7.0 million. The benefit from this asset will be realized as cash savings by offsetting income taxes otherwise payable on future taxable income. The tax benefit will have no effect on the Company's income statement currently or for any future period; however, the tax benefit will be reflected as additional paid-in capital on the Company's balance sheet. See "Selected Unaudited Condensed Pro Forma Financial Data" and Note 12 of the Notes to the Company's Financial Statements. NON-RECURRING EXPENSES In connection with the termination of the Stock Purchase Agreements, the Company will incur a non-recurring, non-cash expense estimated to be $15.0 million (assuming an initial public offering price of $13.00 per share) in the fiscal quarter in which the Offering is closed. In connection with the termination of the Wright Agreement, the Company will expense $2.6 million as a result of the write-off of the covenant not to compete asset. In connection with the termination of the Company's S Corporation status, the Company will incur a deferred income tax expense of $2.1 million. In addition, if the initial public offering price is less than $12.95 per share, the Company will incur an additional non-recurring expense in the fiscal quarter in which the Company completes the Offering in connection with the repurchase and cancellation of the Donald Wright Warrant and the purchase of the Jeffrey Wright Warrant equal to the difference between $12.95 and the initial public offering price multiplied by 2,650,764. 13 NEW CREDIT AGREEMENT Simultaneously with the closing of the Offering, the Company will enter into a $50.0 million, five-year, unsecured revolving credit agreement (the "New Credit Agreement"). The Company has received a commitment from NBD Bank, the agent and sole lender under the Existing Credit Agreement (as defined below), to act as agent and underwriter under the New Credit Agreement. The closing of the Offering will be conditioned upon the concurrent closing of the New Credit Agreement. See "Description of Certain Indebtedness -- New Credit Agreement." USE OF PROCEEDS The net proceeds to the Company from the sale of the 5,600,000 Common Shares offered hereby (assuming an initial public offering price of $13.00 per share) after deducting estimated underwriting discounts and expenses payable by the Company in connection with the Offering are estimated to be $66.8 million (approximately $77.0 million if the Underwriters' over-allotment option is exercised in full). Of the net proceeds to be received by the Company, (i) approximately $23.0 million will be used to repay the outstanding principal amount of the AAA Notes, (ii) $29.9 million will be used to repurchase and cancel the Donald Wright Warrant and (iii) approximately $13.9 million will be used to repay outstanding indebtedness under the Existing Credit Agreement which bore interest at the weighted average rate of 7.4% on March 31, 1996, and matures at various dates between December 31, 1996 and May 1, 2000. See "Prior S Corporation Status," "Certain Relationships and Related Party Transactions -- Wright Warrants" and "Description of Certain Indebtedness -- Existing Credit Agreement." The repayment of the AAA Notes described above is being made in connection with the Company's distribution from its AAA account to its existing shareholders of an amount approximately equal to the undistributed earnings in the AAA account on which the shareholders either have paid or will be required to pay income taxes up to the time of the termination of the Company's S Corporation status. See "Prior S Corporation Status." Following the closing of the Offering and of the $50.0 million New Credit Agreement, the Company anticipates that it will have approximately $3.6 million drawn down and approximately $28.2 million in additional funds available under such New Credit Agreement, which funds may be used for general corporate purposes, including to finance acquisitions of additional aircraft, as well as acquisitions of companies that will complement the Company's existing operations or provide it with an entry into new markets. Although, from time to time, the Company has had discussions with various companies regarding possible acquisition, the Company currently does not have any definitive plans, arrangements or understandings, whether written or oral, with any company regarding an acquisition. See "Description of Certain Indebtedness -- New Credit Agreement" and "Business -- Business Strategy." DIVIDEND POLICY The Company anticipates that, after payment of the S Corporation distributions to existing shareholders and the termination of the Company's S Corporation status in connection with the Offering, any future earnings will be retained to finance the Company's operations and for the growth and development of its business. See "Prior S Corporation Status." Accordingly, the Company does not currently anticipate paying cash dividends on its Common Shares in the foreseeable future. The payment of any future dividends will be subject to the discretion of the Board of Directors of the Company and will depend on the Company's results of operations, financial position and capital requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal restrictions on the payment of dividends, and other factors the Board of Directors deems relevant. The Company's New Credit Agreement effectively will prohibit the Company from paying cash dividends on its Common Shares in excess of 50% of Net Income (as defined therein). See "Description of Certain Indebtedness -- New Credit Agreement." 14 CAPITALIZATION The following table sets forth the current portion of long-term debt and capitalization of the Company as of March 31, 1996 on an actual basis, pro forma as of such date to reflect the transactions set forth in note (1) hereto and pro forma as adjusted as of such date to reflect the transactions set forth in note (1) hereto and the sale of the 5,600,000 Common Shares offered hereby (assuming an initial public offering price of $13.00 per share) and the application of the net proceeds therefrom, after deducting estimated underwriting discounts and expenses payable by the Company in connection with the Offering. See "Use of Proceeds." This table should be read in conjunction with the Financial Statements of the Company, including the Notes thereto, appearing elsewhere in this Prospectus.
MARCH 31, 1996 -------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED --------- ------------- ------------ (DOLLARS IN THOUSANDS) Current portion of long-term debt............................... $ 6,229 $ 6,229 $ -- --------- ------------- ------------ --------- ------------- ------------ Long-term debt, less current portion (2)........................ $ 11,302 $ 34,302 $ 3,639 Shareholders' equity: Preferred Shares, $.01 par value; 10,000,000 shares authorized; no shares issued and outstanding................. -- -- -- Common Shares, $.01 par value; 40,000,000 shares authorized; 5,710,608 shares issued and outstanding (actual); 5,877,835 shares issued and outstanding (pro forma); 11,477,835 shares issued and outstanding (as adjusted) (3)..................... 57 59 115 Additional paid-in capital.................................... 350 21,205 58,041 Retained earnings (deficit)................................... 22,913 (15,000) (15,000) Notes receivable from shareholders............................ (284) -- -- --------- ------------- ------------ Total shareholders' equity.................................. 23,036 6,264 43,156 --------- ------------- ------------ Total capitalization........................................ $ 34,338 $ 40,566 $ 46,795 --------- ------------- ------------ --------- ------------- ------------
- ------------------------ (1) Assumes the following transactions occurred as of March 31, 1996: (i) distributions to existing shareholders from the AAA account in the amount of $23.0 million in AAA Notes; (ii) the recognition of a net deferred tax liability of $2.1 million resulting from the termination of the Company's S Corporation status; (iii) the termination of the Stock Purchase Agreements and the Deferred Compensation Agreements and the elimination of $3.7 million of liability associated therewith; (iv) the repayment of notes receivable from existing shareholders of $0.3 million; (v) the termination of the Wright Agreement, the write-off of the covenant not to compete asset of $2.6 million and the recording of a related tax benefit asset of $7.0 million; (vi) the reclassification of the remaining undistributed earnings of the Company prior to becoming a C Corporation from retained earnings to additional paid-in capital; and (vii) the recording of the $15.0 million non-cash expense, with the corresponding increase to additional paid-in capital, resulting from the termination of the Stock Purchase Agreements. See "Selected Unaudited Condensed Pro Forma Financial Data," "Certain Relationships and Related Party Transactions," "Prior S Corporation Status," "Offering Related Transactions" and Note 12 of the Notes to the Company's Financial Statements. (2) See Note 4 of Notes to Financial Statements for a description of the Company's long-term debt. (3) Excludes 1,150,000 Common Shares reserved for issuance under the Company's Incentive Stock Plan. See "Management -- Incentive Stock Plan." 15 DILUTION The net tangible book value of the Company as of March 31, 1996, was $19.8 million, or $3.47 per Common Share outstanding. Net tangible book value per Common Share represents total tangible assets of the Company less total liabilities, divided by the number of Common Shares outstanding. After giving effect to the adjustments described under "Offering Related Transactions," the pro forma net tangible book value as of March 31, 1996 would have been approximately $5.7 million, or $0.96 per share. After giving further effect to the Offering (assuming an initial public offering price of $13.00 per share) and the application of the net proceeds to the Company therefrom after deducting estimated underwriting discounts and expenses payable by the Company in connection with the Offering; the pro forma net tangible book value of the Company at March 31, 1996, would have been $42.6 million or $3.71 per share, representing an immediate increase in net tangible book value of $2.75 per share to existing shareholders and an immediate dilution of $9.29 per share to new investors in the Common Shares offered hereby. See "Prior S Corporation Status" and "Use of Proceeds." The following table illustrates the resulting dilution with respect to the Common Shares offered hereby:
Assumed public offering price per share..................... $ 13.00 Net tangible book value per share as of March 31, 1996...... $ 3.47 Adjustment in net tangible book value per share attributable to Offering Related Transactions (1)....................... (2.51) --------- Pro forma net tangible book value per share................. 0.96 --------- Increase in net tangible book value per share attributable to the Offering............................................ 2.75 Pro forma net tangible book value per share after the Offering................................................... 3.71 --------- Dilution per share to new investors......................... $ 9.29 --------- ---------
- ------------------------ (1) See "Offering Related Transactions." The following table summarizes, on a pro forma basis as of March 31, 1996, the number of Common Shares purchased from the Company, the aggregate net consideration paid and the average price per share paid by the existing shareholders and by new investors purchasing Common Shares in the Offering without giving effect to estimated underwriting discounts and expenses of the Offering, and assuming an initial public offering price of $13.00 per share:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------------- -------------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ ----------- ------------- ----------- ----------- Existing shareholders............ 5,877,835 51.2% $ 364,583 0.5% $ 0.06 New investors.................... 5,600,000 48.8 72,800,000 99.5 13.00 ------------ ----- ------------- ----- Total........................ 11,477,835 100.0% $ 73,164,583 100.0% ------------ ----- ------------- ----- ------------ ----- ------------- -----
16 SELECTED FINANCIAL DATA The selected financial data presented below as of and for each of the years in the five-year period ended September 30, 1995, have been derived from the Financial Statements of the Company, which have been audited by Ernst & Young LLP, independent auditors. The selected financial data set forth below for the Company as of and for the six months ended March 31, 1995 and 1996 have been derived from unaudited financial statements of the Company that have been prepared on the same basis as the audited Financial Statements and include all adjustments, consisting of normal recurring accruals, that the Company considers necessary for a fair presentation of the financial position and results of operations for the periods presented. Operating results for the six-month period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 1996. The selected financial data presented below should be read in conjunction with the more detailed information contained in the Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus.
SIX MONTHS YEAR ENDED SEPTEMBER 30, ENDED MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA: Revenues: Air transportation: Check delivery...................... $ 46,924 $ 49,000 $ 49,358 $ 54,047 $ 58,264 $ 27,960 $ 30,570 Small package delivery.............. 6,975 7,719 7,967 8,241 8,192 3,973 4,460 Fixed base operations................. 1,274 1,335 1,265 1,158 1,006 519 479 --------- --------- --------- --------- --------- --------- --------- 55,173 58,054 58,590 63,446 67,462 32,452 35,509 Costs and expenses: Air transportation: Wages and benefits.................. 6,160 6,890 7,594 8,186 9,195 4,557 4,876 Aircraft fuel....................... 7,699 7,331 7,151 6,958 7,445 3,599 3,875 Aircraft maintenance................ 5,361 5,134 5,427 5,721 6,034 3,075 3,291 Aircraft leases..................... 4,058 4,766 4,405 3,260 1,043 634 379 Ground couriers and outside services........................... 8,396 8,031 7,950 8,347 8,611 4,138 4,551 Depreciation and amortization....... 4,496 5,120 5,862 6,333 7,354 3,477 4,156 Other............................... 4,014 4,534 5,048 5,765 6,429 3,172 3,476 Fixed base operations................. 1,270 1,217 1,150 1,081 956 446 390 Selling, general, administrative: Executive compensation.............. 2,257 2,530 2,738 3,285 3,952 1,835 1,719 Other executive compensation (1).... 463 814 247 1,598 2,635 1,162 1,401 Wright Agreement expenses (1)(2).... 963 1,240 1,339 1,813 2,328 1,207 728 Other............................... 2,247 3,446 3,927 3,788 3,405 1,656 2,238 --------- --------- --------- --------- --------- --------- --------- Total costs and expenses................ 47,384 51,053 52,838 56,135 59,387 28,958 31,080 --------- --------- --------- --------- --------- --------- --------- Income from operations.................. 7,789 7,001 5,752 7,311 8,075 3,494 4,429 Interest expense........................ 1,857 1,240 1,123 1,093 1,452 611 736 --------- --------- --------- --------- --------- --------- --------- Net income (3).......................... $ 5,932 $ 5,761 $ 4,629 $ 6,218 $ 6,623 $ 2,883 $ 3,693 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- OTHER OPERATING DATA: Number of aircraft (end of period)...... 66 68 70 73 78 74 81 On-time performance (4)................. 98.2% 97.5% 97.6% 96.4% 97.7% 97.0% 94.9% EBITDA (5).............................. $ 12,285 $ 12,121 $ 11,614 $ 13,644 $ 15,429 $ 6,971 $ 8,585 Cash flows provided by (used in): Operating activities................ 11,865 9,709 10,810 14,722 15,310 6,524 8,025 Investing activities................ (6,375) (5,456) (8,248) (12,814) (14,223) (6,230) (5,437) Financing activities................ (5,276) (4,128) (2,551) (2,000) (1,107) (549) (2,824)
17
SEPTEMBER 30, ----------------------------------------------------- MARCH 31, 1991 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- ----------- BALANCE SHEET DATA: Working capital.................................. $ 2,055 $ 5,348 $ 6,216 $ 3,390 $ 1,062 $ 656 Net property and equipment....................... 17,159 17,395 19,438 25,570 32,834 34,082 Total assets..................................... 33,038 33,637 35,829 42,141 49,037 52,651 Total debt....................................... 15,017 13,850 13,169 16,250 19,228 17,531 Shareholders' equity............................. 11,235 14,036 16,794 17,931 20,469 23,036
- -------------------------- (1) Certain expenses of the Company, such as executive compensation, expenses associated with the Stock Purchase Agreements and the Deferred Compensation Agreements and payments made in connection with the Wright Agreement vary based on the Company's income and/or cash flows for the relevant periods. See "Certain Relationships and Related Party Transactions." (2) Includes annual non-competition payments and amortization expenses in connection with the Wright Agreement and the associated Wright covenant not to compete asset. See "Certain Relationships and Related Party Transactions -- Wright Agreement." (3) Reflects the Company as an S Corporation during the periods presented. Accordingly, the Selected Financial Data do not contain a provision for income taxes. See "Prior S Corporation Status." (4) On-time performance is defined as the annualized percentage of times that the Company's U.S. Check-Registered Trademark- division met its customers' delivery requirements. (5) "EBITDA" is defined as net income before interest expense, taxes on income, depreciation and amortization. EBITDA should not be construed as an alternative to income from operations or cash flows from operating activities (each as determined in accordance with generally accepted accounting principles). 18 SELECTED UNAUDITED CONDENSED PRO FORMA FINANCIAL DATA The selected unaudited condensed pro forma financial data have been derived from the historical financial statements of the Company. The unaudited pro forma income statement data for the fiscal year ended September 30, 1995 and the six months ended March 31, 1996, give effect to (i) the Company's C Corporation election and (ii) the transactions described under "Offering Related Transactions" as if such transactions had occurred at the beginning of each such period. The unaudited condensed pro forma balance sheet data give effect to such transactions and to the Offering and the use of the net proceeds therefrom after deducting estimated underwriting discounts and expenses payable by the Company as if such transactions had occurred on March 31, 1996. See "Prior S Corporation Status," "Offering Related Transactions" and "Use of Proceeds." THE SELECTED UNAUDITED CONDENSED PRO FORMA FINANCIAL DATA AND ACCOMPANYING NOTES SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO APPEARING ELSEWHERE HEREIN. THE UNAUDITED PRO FORMA FINANCIAL DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DO NOT PURPORT TO REPRESENT WHAT THE COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS ACTUALLY WOULD HAVE BEEN HAD THE TRANSACTIONS DESCRIBED THEREIN BEEN COMPLETED AS OF THE DATE OR AT THE BEGINNING OF THE PERIODS INDICATED, OR TO PROJECT THE COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS AT ANY FUTURE DATE OR FOR ANY FUTURE PERIOD.
YEAR ENDED SEPTEMBER 30, 1995 SIX MONTHS ENDED MARCH 31, 1996 --------------------------------------- --------------------------------------- HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ----------- ------------- ----------- ----------- ------------- ----------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) INCOME STATEMENT DATA (1): Revenues: Air transportation: Check delivery.................. $ 58,264 $ 58,264 $ 30,570 $ 30,570 Small package delivery.......... 8,192 8,192 4,460 4,460 Fixed base operations............. 1,006 1,006 479 479 ----------- ----------- ----------- ----------- 67,462 67,462 35,509 35,509 Costs and expenses: Air transportation: Wages and benefits.............. 9,195 9,195 4,876 4,876 Aircraft fuel................... 7,445 7,445 3,875 3,875 Aircraft maintenance............ 6,034 6,034 3,291 3,291 Aircraft leases................. 1,043 1,043 379 379 Ground couriers and outside services....................... 8,611 8,611 4,551 4,551 Depreciation and amortization... 7,354 7,354 4,156 4,156 Other........................... 6,429 6,429 3,476 3,476 Fixed base operations............. 956 956 390 390 Selling, general, administrative: Executive compensation.......... 3,952 $ (952)(2) 3,000 1,719 $ (219)(2) 1,500 Other executive compensation.... 2,635 (2,635)(3) -- 1,401 (1,401)(3) -- Wright Agreement expenses....... 2,328 (2,328)(4) -- 728 (728)(4) -- Other........................... 3,405 3,405 2,238 2,238 ----------- ------------- ----------- ----------- ------------- ----------- Total costs and expenses............ 59,387 (5,915) 53,472 31,080 (2,348) 28,732 ----------- ------------- ----------- ----------- ------------- ----------- Income from operations.............. 8,075 5,915 13,990 4,429 2,348 6,777 Interest expense.................... 1,452 (1,144)(5) 308 736 (556)(5) 180 ----------- ------------- ----------- ----------- ------------- ----------- Income before income taxes.......... $ 6,623 $ 7,059 13,682 $ 3,693 $ 2,904 6,597 ----------- ------------- ----------- ------------- ----------- ------------- ----------- ------------- Pro forma income taxes (6).......... 5,472 2,639 ----------- ----------- Pro forma net income................ $ 8,210 $ 3,958 ----------- ----------- ----------- ----------- Pro forma net income per common share.............................. $ 0.72 $ 0.34 ----------- ----------- ----------- ----------- Pro forma weighted average common shares outstanding (in thousands) (7)................................ 11,478 11,478
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MARCH 31, 1996 ---------------------------------------------------------------------- PRO FORMA OFFERING PRO FORMA AS HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED ----------- --------------- ----------- ------------- ------------ BALANCE SHEET DATA: Assets: Current assets............................ $ 15,317 $ 284(8) $ 15,601 $ 66,794(9) $ 15,601 (66,794)(9) Property, plant and equipment, net........ 34,082 -- 34,082 -- 34,082 Intangibles, net.......................... 3,200 (2,596)(10) 604 -- 604 Other assets.............................. 52 7,000 (10 7,052 -- 7,052 ----------- --------------- ----------- ------------- ------------ Total assets.............................. $ 52,651 $ 4,688 $ 57,339 $ -- $ 57,339 ----------- --------------- ----------- ------------- ------------ ----------- --------------- ----------- ------------- ------------ Liabilities and equity: Other current liabilities................. $ 8,432 $ -- $ 8,432 $ -- $ 8,432 Current portion of long-term debt......... 6,229 -- 6,229 (6,229)(9) -- ----------- --------------- ----------- ------------- ------------ Total current liabilities................. 14,661 -- 14,661 (6,229) 8,432 ----------- --------------- ----------- ------------- ------------ Notes payable............................. 11,302 23,000 (11 34,302 (30,663)(9) 3,639 Deferred compensation..................... 3,652 (3,652)(12) -- -- -- Deferred taxes............................ -- 2,112 (13 2,112 -- 2,112 Shareholders' equity...................... 23,036 (16,772)(14) 6,264 36,892(9) 43,156 ----------- --------------- ----------- ------------- ------------ Total liabilities and equity.............. $ 52,651 $ 4,688 $ 57,339 $ -- $ 57,339 ----------- --------------- ----------- ------------- ------------ ----------- --------------- ----------- ------------- ------------
- ------------------------ (1) The unaudited pro forma income statement data do not reflect significant non-recurring expenses which will be incurred at the time of the Offering. These expenses include non-cash expenses, with a corresponding increase in additional paid-in capital, of approximately $15.0 million (assuming an initial public offering price of $13.00 per share) in connection with the termination of the Stock Purchase Agreements and $2.6 million relating to the write-off of the covenant not to compete asset in connection with the termination of the Wright Agreement. In addition, the Company will record a net deferred tax expense of $2.1 million as a result of the termination of the Company's S Corporation status. See "Offering Related Transactions" and "Prior S Corporation Status." (2) Adjustments reflect the reduction in compensation to the Company's executive officers under revised compensation arrangements and the payment of 100% of potential bonuses under such arrangements. (3) Adjustments reflect the reduction in costs in connection with the termination of the Stock Purchase Agreements and the Deferred Compensation Agreements. See "Certain Relationships and Related Party Transactions." (4) Adjustments reflect the reduction in costs in connection with the elimination of non-competition payments and the elimination of amortization expense associated with the Wright covenant not to compete asset in connection with the termination of the Wright Agreement. See "Offering Related Transactions -- Termination of the Wright Agreement." (5) Adjustments reflect the reduction in interest expense related to the repayment of existing debt from the proceeds of the Offering. See "Use of Proceeds." (6) Adjustments reflect the recording of federal and state income taxes at an effective rate of 40% as if the Company had been a C Corporation during each such period. See "Prior S Corporation Status." (7) The pro forma weighted average common shares outstanding is based on the weighted average common shares outstanding, using the treasury stock method, for the applicable period, as adjusted for the 5,600,000 Common Shares to be issued in the Offering, the net proceeds of which will be used to repay debt, to repurchase and cancel the Donald Wright Warrant and to fund planned distributions to existing shareholders. 20 (8) Adjustments reflect the repayment of notes receivable from existing shareholders. See "Offering Related Transactions -- Termination of Stock Purchase Agreements with Existing Shareholders." (9) Adjustments reflect the Offering (assuming an initial offering price of $13.00 per share) and the use of the net proceeds therefrom after deducting estimated underwriting discounts and expenses payable by the Company in connection with the Offering. See "Use of Proceeds." (10) Adjustments reflect the termination of the Wright Agreement, the write-off of the covenant not to compete asset of $2.6 million and the recording of a related tax benefit asset of $7.0 million. See "Offering Related Transactions -- Termination of the Wright Agreement." (11) Adjustments reflect the distribution of the AAA Notes to the existing shareholders. See "Prior S Corporation Status." (12) Adjustments reflect the termination of the Deferred Compensation Agreements and Stock Purchase Agreements and the elimination of the associated liabilities. See "Offering Related Transactions -- Termination of Stock Purchase Agreements with Existing Shareholders" and "-- Termination of Deferred Compensation Agreements with Existing Shareholders." (13) Adjustments reflect the recognition of a net deferred tax liability resulting from the termination of the Company's S Corporation status. See "Prior S Corporation Status." (14) Reflects adjustments to shareholders' equity as follows (dollars in thousands): Repayment of notes receivable..................................... $ 284 Write-off of covenant not to compete asset........................ (2,596) Recording of tax benefit asset related to exercise of Wright Warrants......................................................... 7,000 AAA account distributions......................................... (23,000) Elimination of liabilities related to Deferred Compensation Agreements and Stock Purchase Agreements......................... 3,652 Recognition of net deferred tax liability......................... (2,112) --------- $ (16,772) --------- ---------
21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION IS BASED UPON AND SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO, THE SELECTED FINANCIAL DATA AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. GENERAL The Company derives its revenues primarily from fees charged for air and ground delivery services. Check and small package delivery services account for approximately 98% of the Company's revenues. Costs of the delivery services consist primarily of the fuel, maintenance, wages and benefits related to the operation of the Company's fleet of aircraft, salaries and related benefits paid to the Company's drivers, fees paid to independent contractors and operating and maintenance expenses related to the Company's delivery vehicles. See "Business - -- Services -- Aircraft Fleet" and "Business -- Services -- Vehicles." The remaining revenues are generated by the Company's fixed base operation and are related to the sale of aviation fuels, maintenance and other services provided at the Company's Columbus, Ohio facility. IMPACT ON OPERATIONS The Financial Statements have been or will be affected by several factors, including: (i) the corporate strategic decision to acquire, rather than to lease, aircraft; (ii) S Corporation distributions; (iii) a change in Federal Reserve bank regulations affecting the ability of commercial banks to compete with Federal Reserve banks; (iv) the incurrence of non-recurring, non-cash expenses in the quarter in which the Offering occurs; (v) development of a fuel rebate/surcharge program for the Company's customers; (vi) taxes on income in connection with the termination of the Company's S Corporation status; (vii) the tax benefit associated with the exercise of the Donald Wright Warrant; and (viii) the growth of the National Clearinghouse Association (the "NCHA"). CORPORATE STRATEGIC DECISION TO ACQUIRE AIRCRAFT. In fiscal 1993, the Company made a strategic decision to replace leased aircraft, particularly jet aircraft, with purchased aircraft. The Company was able to pursue this strategy as a result of the Company's strong financial condition and its ability to take on additional debt to fund such acquisitions. As aircraft leases expired, the Company began purchasing replacement aircraft. Since October 1, 1992, the Company has acquired 11 Learjets, nine of which replaced leased aircraft. The resulting savings in lease expense have been in excess of $4.0 million, offset somewhat by increased interest expense due to increased debt and increased depreciation expense. In fiscal 1994, the Company decided also to begin replacing some of its leased light twin engine aircraft with larger twin engine aircraft with increased payload capacities, and the Company has since acquired nine Piper Chieftains. S CORPORATION DISTRIBUTIONS. Since the Company elected S Corporation status in July 1988, it has made distributions to its shareholders for the purpose of funding their income tax payments on the income generated by the Company, which income is taxable to the shareholders whether or not distributed. In fiscal 1994, the Company began making S Corporation distributions in an amount in excess of the amount necessary to pay applicable income taxes. These additional distributions were made from cash generated from operations and totaled $3.1 million through the end of fiscal 1995. The Company distributed an additional $0.5 million during the six months ended March 31, 1996. In addition, in connection with the Offering and the conversion to a C Corporation, the Company will distribute the AAA Notes in an aggregate principal amount estimated to be $23.0 million, which should approximate the value of the Company's AAA account at the time of the Offering. See "Prior S Corporation Status." MODIFICATION OF FEDERAL RESERVE BANK REGULATIONS. In January 1994, the banking industry determined that the Federal Reserve banks had an unfair advantage in the marketplace for check clearing services. Prior to such determination, Federal Reserve banks were allowed to present checks to the Federal Reserve for payment in immediately available funds without having to pay a presentment fee. Commercial banks are often required to pay a presentment fee to other commercial banks in exchange for the right to draw immediately against deposits of such banks. The Federal Reserve responded by initiating a regulatory policy called "Same-Day Settlement," which mandates that if a bank is presented with a check drawn on its deposits, such bank must pay the presenting bank in immediately available funds, without charging any additional fees, provided that the check is presented by 8:00 a.m. 22 Same-Day Settlement has allowed commercial banks to compete more favorably with the Federal Reserve banks and, correspondingly, has increased demand for the Company's delivery services, as the Company can deliver to most locations in the U.S. prior to the 8:00 a.m. deadline. NON-RECURRING EXPENSES. The Company will incur significant non-recurring expenses immediately following the Offering. These expenses will include non-cash expenses of approximately $15.0 million (assuming an initial public offering price of $13.00 per share) in connection with the termination of the Stock Purchase Agreements and $2.6 million relating to the write-off of the covenant not to compete asset in connection with the termination of the Wright Agreement. In addition, the Company will record a deferred tax expense of $2.1 million as a result of the termination of the Company's S Corporation status. The $15.0 million expense will result in a corresponding increase in additional paid-in capital, but no change in total shareholders' equity. In addition, if the initial public offering price is less than $12.95 per share, the Company will incur an additional non-recurring expense in the fiscal quarter in which the Company completes the Offering in connection with the repurchase and cancellation of the Donald Wright Warrant and the purchase of the Jeffrey Wright Warrant equal to the difference between $12.95 and the initial public offering price multiplied by 2,650,764, the number of Common Shares underlying the Wright Warrants. The Company does not expect these non-recurring expenses to have a significant impact on the Company's operations and cash flows, although they will have a material, negative impact on the Company's reported earnings for the fiscal quarter in which they are incurred and for the 1996 fiscal year. See "Offering Related Transactions -- Non-Recurring Expenses," "Certain Relationships and Related Party Transactions -- Stock Purchase Agreements" and "-- Wright Warrants." DEVELOPMENT OF A FUEL REBATE/SURCHARGE PROGRAM. In January 1990, as jet fuel prices rose dramatically, the Company developed a fuel rebate/surcharge program. Pursuant to this program, as the OPIS-CMH (Oil Price Information Service -- Columbus, Ohio Station) price of jet fuel exceeds $.75 per gallon, the Company's customers are surcharged. In turn, as the OPIS-CMH price falls below $.68 per gallon, the Company's customers receive a rebate. TAXES ON INCOME. In July 1988, the Company elected to be treated as an S Corporation under Subchapter S of the Code and comparable provisions of certain state tax laws, and since then has paid no federal income tax. For reporting purposes, the Company records a charge for state taxes for those states which do not recognize Subchapter S status. Prior to the closing of the Offering, the Company will terminate its S Corporation status and thereafter will be responsible for federal and state income taxes. See "Selected Unaudited Condensed Pro Forma Financial Data." TAX BENEFIT FROM THE EXERCISE OF THE DONALD WRIGHT WARRANT. The Company expects to receive a tax benefit asset from the repurchase and cancellation of the Donald Wright Warrant of approximately $7.0 million. See "Offering Related Transactions -- Purchase of Wright Warrants" and "Certain Relationships and Related Party Transactions -- Wright Warrants." This tax benefit will be recorded on the Company's balance sheet and may be used to offset taxes payable on future income of the Company. The tax benefit will have no effect on the Company's income statement currently or for any future period, but will positively affect cash flows. See "Selected Unaudited Condensed Pro Forma Financial Data" and Note 12 of the Notes to the Company's Financial Statements. NATIONAL CLEARINGHOUSE ASSOCIATION. Established by a joint venture owned in part by the Company's existing shareholders and approved by the Federal Reserve in 1991, the NCHA is a consortium of over 60 bank holding companies that have joined together to reduce check-clearing costs by means of a multi-bank, private net settlement arrangement. See "Industry Overview -- How Banks Clear and Settle Canceled Bank Checks -- The National Clearinghouse Association" and "Certain Relationships and Related Party Transactions -- Float Control, Inc./CHEXS Partnership." The volume of checks cleared through the NCHA has grown steadily each month since 1991, and this continued growth has resulted in increased volume and revenues for the Company, which is the principal transporter of canceled checks for the NCHA and its member bank holding companies. 23 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, items in the Company's income statements as a percentage of revenues for the periods indicated.
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, ---------------------------------- ---------------------- 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- Revenues: Air transportation: Check delivery............................................ 84.2% 85.2% 86.4% 86.2% 86.1% Small package delivery.................................... 13.6 13.0 12.1 12.2 12.6 Fixed base operations....................................... 2.2 1.8 1.5 1.6 1.3 ----- ----- ----- ----- ----- Total revenues................................................ 100.0% 100.0% 100.0% 100.0% 100.0% Costs and Expenses: Air transportation: Wages and benefits........................................ 13.0% 12.9% 13.6% 14.0% 13.7% Aircraft fuel............................................. 12.2 11.0 11.0 11.1 10.9 Aircraft maintenance...................................... 9.3 9.0 8.9 9.5 9.3 Aircraft leases........................................... 7.5 5.1 1.5 2.0 1.1 Ground couriers and outside services...................... 13.6 13.2 12.8 12.8 12.8 Depreciation and amortization............................. 10.0 10.1 10.9 10.7 11.7 Other..................................................... 8.6 9.1 9.5 9.8 9.8 Fixed base operations....................................... 1.9 1.7 1.4 1.4 1.1 Selling, general, administrative: Executive compensation.................................... 4.7 5.2 5.9 5.6 4.8 Other executive compensation.............................. 0.4 2.5 3.9 3.6 3.9 Wright Agreement expenses................................. 2.3 2.9 3.5 3.7 2.1 Other..................................................... 6.7 5.8 5.1 5.1 6.3 ----- ----- ----- ----- ----- Total costs and expenses...................................... 90.2 88.5 88.0 89.3 87.5 ----- ----- ----- ----- ----- Income from operations........................................ 9.8 11.5 12.0 10.7 12.5 Interest expense.............................................. 1.9 1.7 2.2 1.9 2.1 ----- ----- ----- ----- ----- Net income.................................................... 7.9% 9.8% 9.8% 8.8% 10.4% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995 REVENUES. Revenues for the six months ended March 31, 1996 were $35.5 million, an increase of $3.0 million, or 9.4% compared to $32.5 million for the six months ended March 31, 1995. Of this increase, $0.7 million was due to two additional days of operations during the six months ended March 31, 1996, $1.1 million was due to price increases and $1.2 million was due to a higher level of business activity. Revenues from check delivery for the six months ended March 31, 1996, were $30.6 million, an increase of $2.6 million or 9.3%, compared to $28.0 million for the six months ended March 31, 1995. Revenues from small package delivery for the six months ended March 31, 1996 were $4.5 million, an increase of $0.5 million or 12.3%, compared to $4.0 million for the six months ended March 31, 1995. Revenues from fixed base operations for the six months ended March 31, 1996 were comparable to revenues of $0.5 million for the six months ended March 31, 1995. WAGES AND BENEFITS. Wages and benefits expense for the six months ended March 31, 1996 was $4.9 million, an increase of $0.3 million or 7.0%, compared to $4.6 million for the six months ended March 31, 1995. The increase was due primarily to normal pay rate increases, as well as increased health insurance costs. The increase was also due to the Company increasing its 401(k) matching contribution from 25% to 50% of contributions on a maximum of 6% of an associate's pay. AIRCRAFT FUEL. Aircraft fuel expense for the six months ended March 31, 1996 was $3.9 million, an increase of $0.3 million or 7.7%, compared to $3.6 million for the six months ended March 31, 1995. The increase was due 24 primarily to increased fuel prices and to two additional days of operations during the six months ended March 31, 1996 compared to the six months ended March 31, 1995. The increase also reflects increased flight hours of Piper Chieftains which have greater fuel consumption but larger payloads than previously used aircraft, as well as increased Learjet flight hours. AIRCRAFT MAINTENANCE. Aircraft maintenance expense for the six months ended March 31, 1996 was $3.3 million, an increase of $0.2 million or 7.0%, compared to $3.1 million for the six months ended March 31, 1995. The increase was primarily due to higher parts prices and more aircraft being maintained. AIRCRAFT LEASES. Aircraft leases expense for the six months ended March 31, 1996 was $0.4 million, a decrease of $0.2 million or 40.3%, compared to $0.6 million for the six months ended March 31, 1995. The decrease was primarily due to the Company's leasing fewer Learjets and fewer light twin engine aircraft during the six months ended March 31, 1996 compared to the six months ended March 31, 1995, reflecting the Company's decision to acquire rather than lease aircraft. GROUND COURIERS AND OUTSIDE SERVICES. Ground couriers and outside services expense includes the cost of independent contractors as well as Company associates. Ground couriers and outside services expense for the six months ended March 31, 1996 was $4.6 million, an increase of $0.5 million or 10.0%, compared to $4.1 million for the six months ended March 31, 1995. Of such increase, $0.1 million was due to two additional days of operations during the six months ended March 31, 1996 compared to the six months ended March 31, 1995. The remainder of the increase was due to the addition of new Company couriers, price increases from independent contractors and the need for additional services because of increased business activity. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the six months ended March 31, 1996 was $4.2 million, an increase of $0.7 million or 19.5% compared to $3.5 million for the six months ended March 31, 1995. $0.6 million of the increase was due to the increase in depreciation expense of flight equipment for the six months ended March 31, 1996 compared to the six months ended March 31, 1995 attributable to the Company's decision to acquire rather than lease aircraft. OTHER. Other expenses for the six months ended March 31, 1996 were $3.5 million, an increase of $0.3 million or 9.6%, compared to $3.2 million for the six months ended March 31, 1995. This increase was primarily due to an increase in insurance expense as a result of an adjustment to the Company's insurance premium due to the increased value of the Company's fleet. The increase in other expenses was also due to an increase in commercial freight expense, an increase in landing fees, and an increase in office and hanger rental expense due to a June 1995 expansion of the Company's facilities and a July 1995 rent increase. EXECUTIVE COMPENSATION. Executive compensation expense for the six months ended March 31, 1996 was $1.7 million, a decrease of $0.1 million or 6.3%, compared to $1.8 million for the six months ended March 31, 1995. The decrease was due to a decrease in performance-based bonuses in the 1996 period. OTHER EXECUTIVE COMPENSATION. Other executive compensation expense includes the appreciation in the book value of the Common Shares acquired by certain executive officers pursuant to the Stock Purchase Agreements. Other executive compensation expense for the six months ended March 31, 1996 was $1.4 million, an increase of $0.2 million or 20.6%, compared to $1.2 million for the six months ended March 31, 1995. See "Certain Relationships and Related Party Transactions -- Stock Purchase Agreements." OTHER SELLING, GENERAL AND ADMINISTRATIVE. Other selling, general and administrative expenses for the six months ended March 31, 1996 were $2.2 million, an increase of $0.5 million or 35.1% compared to $1.7 million for the six months ended March 31, 1995. This increase was due to an increase in general insurance, property and real estate taxes and state taxes. Also included in other selling, general and administrative expenses for the six months ended March 31, 1996 was $0.1 million for the settlement of a wrongful termination lawsuit. INTEREST EXPENSE. Interest expense for the six months ended March 31, 1996 was $0.7 million, an increase of $0.1 million or 20.4%, compared to $0.6 million for the six months ended March 31, 1995. The increase was due to increased borrowings which were used primarily for capital expenditures. 25 FISCAL 1995 COMPARED TO FISCAL 1994 REVENUES. Revenues were $67.5 million for fiscal 1995, an increase of $4.1 million or 6.3%, compared to $63.4 million for fiscal 1994. Revenues from check delivery were $58.3 million for fiscal 1995, an increase of $4.3 million or 7.8%, compared to $54.0 million for fiscal 1994. This increase was due to the increased level of business activity, at least part of which can be attributed to the implementation of Same-Day Settlement in January 1994. The increase in revenues from check delivery was also due in part to the increase in the Company's shipping volume as a result of increased participation in the NCHA throughout 1994 and 1995. Of the overall increase in revenues for fiscal 1995 compared to fiscal 1994, approximately $2.0 million was due to rate increases implemented by the Company on January 1, 1995 and 1994. Revenues from small package delivery were $8.2 million for fiscal 1995 compared to $8.2 million for fiscal 1994. A 4.7% increase in revenues from new business and increased business from existing customers was offset by a $0.4 million loss of business from the U.S. Postal Service. Revenues from fixed based operations were $1.0 million for fiscal 1995, a decrease of $0.2 million or 13.1%, compared to $1.2 million for fiscal 1994. This decrease was due to a $0.3 million decrease in revenues generated from retail maintenance as a result of the Company's decision to reduce retail work due to the maintenance demands of its own growing fleet of aircraft. This decrease was partially offset by a $0.1 million increase in revenues from retail fuel sales. WAGES AND BENEFITS. Wages and benefits expense was $9.2 million for fiscal 1995, an increase of $1.0 million or 12.3%, compared to $8.2 million for fiscal 1994. Of the increase, $0.6 million was due to increased costs of benefits. The Company increased its discretionary contribution to the Company's 401(k) plan by $0.2 million, and group health insurance costs increased by $0.4 million. The Company is self-insured for health care benefits and such claims were greater in fiscal 1995 than in fiscal 1994. AIRCRAFT FUEL. Aircraft fuel expense was $7.4 million for fiscal 1995, an increase of $0.4 million or 7.0%, compared to $7.0 million for fiscal 1994. This increase was due, in part, to an increase in hours flown. The increase in aircraft fuel expense was also due, in part, to minor increases in aviation fuel prices during fiscal 1995. Fuel rebates were $0.4 million for fiscal 1995, an increase of $0.1 million or 61.6%, compared to $0.3 million for fiscal 1994. AIRCRAFT MAINTENANCE. Aircraft maintenance expense was $6.0 million for fiscal 1995, an increase of $0.3 million or 5.5%, compared to $5.7 million for fiscal 1994. The increase was due, in part, to higher parts costs and use of outsourced maintenance facilities for more routine maintenance in fiscal 1995 compared to fiscal 1994. Outsourcing maintenance work was necessary because rotating the Company's fleet to one of the Company's maintenance facilities became increasingly difficult as flight hours increased in fiscal 1995. AIRCRAFT LEASES. Aircraft leases expense was $1.0 million for fiscal 1995, a decrease of $2.3 million or 68.0%, compared to $3.3 million for fiscal 1994. This decrease was due to the Company's continued strategy of acquiring rather than leasing aircraft. During the last month of fiscal 1994 and the first month of fiscal 1995, the Company acquired three Learjets that it had previously leased. By the end of fiscal 1995, the Company leased only one Learjet and 12 light twin engine aircraft. GROUND COURIERS AND OUTSIDE SERVICES. Ground couriers and outside services expense was $8.6 million for fiscal 1995, an increase of $0.3 million or 3.2%, compared to $8.3 million for fiscal 1994. This increase was due to a $0.4 million increase in the cost of ground agents due to the additional agents needed to handle increased volume in shipments, partially offset by a $0.1 million decrease in the cost of independent contractors due to the loss of the U.S. Postal Service business. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $7.4 million for fiscal 1995, an increase of $1.1 million or 16.1%, compared to $6.3 million for fiscal 1994. Almost all of this increase was due to an increase in depreciation of flight equipment as a result of the Company's strategy to acquire rather lease aircraft. OTHER. Other expenses were $6.4 million for fiscal 1995, an increase of $0.6 million or 11.5%, compared to $5.8 million for fiscal 1994. This increase was due to an increase in insurance expense in fiscal 1995 compared to 26 fiscal 1994, partially due to an increase in aircraft insurance of $0.4 million due to a rate increase and a year-end adjustment for increased fleet value, and partially due to an increase in workers' compensation insurance of $0.2 million due to a rate increase and an increase in payroll. FIXED BASE OPERATIONS. Fixed based operations expense was $1.0 million for fiscal 1995, a decrease of $0.1 million or 11.6%, compared to $1.1 million for fiscal 1994. This decrease was due to a decrease in the cost of retail maintenance and a non-cash charge taken in fiscal 1995 to write down the value of the Company's Norwalk, Ohio facility. EXECUTIVE COMPENSATION. Executive compensation expense was $4.0 million for fiscal 1995, an increase of $0.7 million or 20.3%, compared to $3.3 million for fiscal 1994. The increase was primarily due to a $0.6 million increase in performance-based bonuses in fiscal 1995 compared to fiscal 1994. OTHER EXECUTIVE COMPENSATION. Other executive compensation expense was $2.6 million for fiscal 1995, an increase of $1.0 million or 64.9%, compared to $1.6 million for fiscal 1994. Other executive compensation includes the appreciation in the book value of the Common Shares acquired by certain executive officers pursuant to the Stock Purchase Agreements, which were executed in April 1994. The increase in fiscal 1995 expense resulted from such appreciation for a full fiscal year compared to the fiscal 1994 expense which relates only to a six month period. See "Certain Relationships and Related Party Transactions -- Stock Purchase Agreements." WRIGHT AGREEMENT. Wright Agreement expense was $2.3 million for fiscal 1995, an increase of $0.5 million or 28.4%, compared to $1.8 million for fiscal 1994. The increase was due to additional payments made pursuant to the Wright Agreement in fiscal 1995 based on the financial performance of the Company. See "Certain Relationships and Related Party Transactions -- Wright Agreement." OTHER SELLING, GENERAL AND ADMINISTRATIVE. Other selling, general and administrative expenses were $3.4 million for fiscal 1995, a decrease of $0.4 million or 10.1%, compared to $3.8 million for fiscal 1994. The decrease was primarily due to a $0.3 million decrease in the loss on disposal of assets and a $0.1 million decrease in professional fees in fiscal 1995 compared to fiscal 1994, partially offset by computer-related expenses associated with the development and implementation of handheld bar code scanners. INTEREST EXPENSE. Interest expense was $1.5 million for fiscal 1995, an increase of $0.4 million or 32.9%, compared to $1.1 million for fiscal 1994. This increase was primarily due to the Company's increased capital expenditures, including the acquisition of additional aircraft during the 13 months beginning September 1994 which increased debt by $5.3 million. The increase in interest expense was partially offset by a decrease in aircraft lease expense. During fiscal 1995, the Company also amended the Existing Credit Agreement to allow the Company to borrow funds at variable Eurodollar rates tied to the Company's debt to equity ratio. FISCAL 1994 COMPARED TO FISCAL 1993 REVENUES. Total revenues were $63.4 million for fiscal 1994, an increase of $4.8 million or 8.3%, compared to $58.6 million for fiscal 1993. Revenues from check delivery were $54.0 million for fiscal 1994, an increase of $4.6 million or 9.5%, compared to $49.4 million for fiscal 1993. Of the increase, $2.3 million was due to rate increases implemented by the Company on January 1, 1994 and 1993, and $0.5 million was due to the return of several customers in the Southeast who had used a competitor for part of fiscal 1993. Increased participation in the NCHA also led to increased volume and revenues in fiscal 1994. Revenues from small package delivery were $8.2 million for fiscal 1994, an increase of $0.2 million or 3.4%, compared to $8.0 million for fiscal 1993. This increase was due to an increase in business activity and a rate increase, partially offset by a $0.6 million decrease in revenues from the U.S. Postal Service during fiscal 1994. Although the loss of the Postal Service had a significant impact on revenues, the impact on net income was small because it was low margin business. Revenues from fixed based operations were $1.2 million for fiscal 1994, a decrease of $0.1 million or 8.5%, compared to $1.3 million for fiscal 1993. This decrease was due to diminished retail maintenance revenues as a result of the Company's decision to reduce retail activities due to the maintenance demands of its growing fleet of aircraft. 27 WAGES AND BENEFITS. Wages and benefits expense was $8.2 million for fiscal 1994, an increase of $0.6 million or 7.8%, compared to $7.6 million for fiscal 1993. This increase was due to increased wages in fiscal 1994 due to the addition of 18 associates as package handlers, partially offset by a reduction in the administrative staff by six associates. AIRCRAFT FUEL. Aircraft fuel expense was $7.0 million for fiscal 1994, a decrease of $0.2 million or 2.7%, compared to $7.2 million for fiscal 1993. The decrease was due to lower fuel prices in fiscal 1994. Fuel rebates were $0.3 million for fiscal 1994, an increase of $0.1 million or 26.4%, compared to $0.2 million for fiscal 1993. AIRCRAFT MAINTENANCE. Aircraft maintenance expense was $5.7 million for fiscal 1994, an increase of $0.3 million or 5.4%, compared to $5.4 million in fiscal 1993. This increase was due to the addition of aircraft to the Company's fleet. AIRCRAFT LEASES. Aircraft leases expense was $3.3 million for fiscal 1994, a decrease of $1.1 million or 26.0%, compared to $4.4 million for fiscal 1993. This decrease was due to the Company's strategic decision to purchase rather than lease aircraft. In fiscal 1994, the Company acquired four Learjets and four Piper Chieftains, all of which replaced leased aircraft. GROUND COURIERS AND OUTSIDE SERVICES. Ground couriers and outside services expense was $8.3 million for fiscal 1994, an increase of $0.4 million or 5.0%, compared to $7.9 million for fiscal 1993. This increase was due to a $0.7 million increase in ground agent expenses for fiscal 1994 compared to fiscal 1993 due to the additional agents needed to handle increased volume in shipments, partially offset by a decrease of $0.3 million due to a decrease in other outside services as a result of the loss of the U.S. Postal Service business. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $6.3 million for fiscal 1994, an increase of $0.4 million or 8.0%, compared to $5.9 million for fiscal 1993. The increase was due to the acquisition of new aircraft during fiscal 1994 at a total cost of $6.9 million. OTHER. Other expenses were $5.8 million for fiscal 1994, an increase of $0.8 million or 14.2%, compared to $5.0 million for fiscal 1993. Of this increase, $0.2 million was due to an increase in insurance expense, partially due to an increase in automobile insurance expense. FIXED BASE OPERATIONS. Fixed base operations expense was $1.1 million for fiscal 1994, a decrease of $0.1 million or 6.0%, compared to $1.2 million for fiscal 1993. The decrease was due to a reduction in retail maintenance activity for fiscal 1994. EXECUTIVE COMPENSATION. Executive compensation expense was $3.3 million for fiscal 1994, an increase of $0.6 million or 20.0%, compared to $2.7 million for fiscal 1993. This increase was due in part to increases in executive salaries and performance-based bonuses in fiscal 1994. OTHER EXECUTIVE COMPENSATION. Other executive compensation expense was $1.6 million for fiscal 1994, an increase of $1.4 million or 547.0%, compared to $0.2 million for fiscal 1993. Of this increase, $0.5 million was attributable to the Deferred Compensation Agreements, with the remainder due to the appreciation in the value of the Common Shares acquired by certain executive officers pursuant to the Stock Purchase Agreements, which were executed in April 1994. Other executive compensation expense for fiscal 1993 was related solely to the Deferred Compensation Agreements. See "Certain Relationships and Related Party Transactions -- Deferred Compensation Agreements" and "-- Stock Purchase Agreements." WRIGHT AGREEMENT. Wright Agreement expense was $1.8 million for fiscal 1994, an increase of $0.5 million or 35.4%, compared to $1.3 million for fiscal 1993. The increase was due to additional payments made pursuant to the Wright Agreement in fiscal 1994 based on the financial performance of the Company. See "Certain Relationships and Related Party Transactions -- Wright Agreement." OTHER SELLING, GENERAL AND ADMINISTRATIVE. Other selling, general and administrative expenses were $3.8 million for fiscal 1994, a decrease of $0.1 million or 3.5%, compared to $3.9 million for fiscal 1993. There were no significant changes in any one expense account for fiscal 1994 compared to fiscal 1993. 28 INTEREST EXPENSE. Interest expense was $1.1 million for fiscal 1994 and $1.1 million for fiscal 1993. Although the Company's debt was higher in fiscal 1994 compared to fiscal 1993 due to additional financing for capital acquisitions, interest rates were more favorable, and the Company, because of its improving financial condition, was able to borrow funds at lower Eurodollar rates as compared to its previous prime based borrowings. LIQUIDITY AND CAPITAL RESOURCES GENERAL. The Company's principal sources of liquidity are internally generated funds and credit arrangements. The Company plans to repay a significant portion of its existing bank debt with proceeds from the Offering and has received a commitment from NBD Bank to provide a new credit facility upon the closing of the Offering. See "Use of Proceeds" and "Description of Certain Indebtedness -- New Credit Agreement." The Company believes that the new credit facility will allow it to expand through the acquisition of additional aircraft and other capital equipment and through the possible acquisition of other companies. See "Business -- Business Strategy." EXISTING CREDIT AGREEMENT. The Company is party to various credit arrangements with NBD Bank, its primary lender. The Company currently has an $8.0 million revolving credit loan which matures June 30, 1997. Outstanding borrowings under the revolving credit loan were $6.7 million as of March 31, 1996. In addition, the Company had term notes totaling $10.8 million as of March 31, 1996, with maturities ranging between December 31, 1996 and May 1, 2000. The Company's weighted average interest rate at March 31, 1996 was 7.4%. NEW CREDIT AGREEMENT. Simultaneously with the closing of the Offering, the Company will enter into the New Credit Agreement to replace the Existing Credit Agreement. The New Credit Agreement will provide the Company with a $50.0 million, five year, unsecured revolving credit facility and will provide the Company with significantly more favorable terms and conditions than the Existing Credit Agreement. The New Credit Agreement will contain financial covenants which contain different baselines or measure financial ratios different from those in the Existing Credit Agreement, including minimum Tangible Net Worth (85% of post-Offering Tangible Net Worth plus 50% of annual Net Income), a Funded Debt to EBITDA ratio (not to exceed 2.5:1.0), a Funded Debt to Total Capitalization ratio (not to exceed 0.5:1.0) and a Cash Flow Coverage ratio (not to be less than 1.05:1.0 through June 29, 1997 or less than 1.1:1.0 through September 29, 1997 or less than 1.2:1.0 thereafter) (capitalized terms, in each case, as defined therein). The Company believes that the New Credit Agreement will provide it with additional financial and operating flexibility. Specifically, the New Credit Agreement will increase the Company's availability, permit the Company to borrow more easily at Eurodollar-based rates and will facilitate acquisitions. Availability under the New Credit Agreement will be limited to certain specified percentages of accounts receivable, parts inventory and the wholesale value of the Company's aircraft and equipment. Under the New Credit Agreement, the Company would have had an additional $14.3 million of availability at March 31, 1996, and the Company estimates that total availability under the New Credit Agreement will be approximately $31.8 million upon the closing of the Offering, of which approximately $3.6 million will have been drawn down. The Company expects that the net proceeds from the Offering, together with existing financing arrangements, will be sufficient to fund the Company's operations for at least the next 18 months. CAPITAL EXPENDITURES. Capital expenditures totaled $5.4 million in the six months ended March 31, 1996, $14.5 million in fiscal 1995, $12.9 million in fiscal 1994 and $8.4 million in fiscal 1993. The Company anticipates capital expenditures will total approximately $12.1 million in fiscal 1996. Expenditures were for flight equipment, delivery vehicles, facility improvements and data processing equipment. The Company anticipates that it will continue to acquire flight equipment as necessary to maintain growth and continue offering quality service to its customers. The Company also expects to continue developing management information systems as they relate to its package delivery business as well as electronic initiatives within the nation's payment mechanism. S CORPORATION DISTRIBUTIONS. The Company elected S Corporation status in July 1988 and has made distributions to its shareholders for the purpose of paying taxes on income generated by the Company which is taxable to the shareholders. In addition, the Company began in 1994 to make distributions in excess of those necessary to pay taxes. These additional distributions totaled $3.1 million through the end of fiscal 1995. At or prior to the closing of the Offering, the Company will terminate its S Corporation status. Prior to termination of its S Corporation status, the Company will distribute the AAA Notes in an aggregate principal amount estimated to be $23.0 million, which will approximate the balance of the Company's AAA account. See "Prior S Corporation Status." 29 CASH FLOWS FROM OPERATING ACTIVITIES. Cash flows from operating activities were $8.0 million, $15.3 million and $14.7 million for the six months ended March 31, 1996 and fiscal years 1995 and 1994, respectively. SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS The Company's operations historically have been somewhat seasonal and somewhat dependent on the number of bank holidays falling during the week. Because financial institutions are the Company's principal customers, the Company's air system is scheduled around the needs of financial institution customers. When financial institutions are closed, there is no need for the Company to operate a full system. The Company's first quarter is often the most impacted by bank holidays (including Thanksgiving and Christmas) recognized by its primary customers. When these holidays fall on Monday through Thursday, the Company's revenues and net income are adversely affected. The Company's annual results fluctuate as well. There can be a difference of two or three days of system operation from one year to the next. For example, the Company operated a full system on 197 days in fiscal 1995, 199 days in fiscal 1994 and 198 days in fiscal 1993. Operating results are also affected by the weather. The Company generally experiences higher maintenance costs during its second quarter. Winter weather also requires additional costs for de-icing, hangar rental and other aircraft services. The Company's cash flows are also influenced by the budget cycles of its primary customers. Many financial institutions have calendar year budget cycles and desire to pay for December services prior to year end. This results in increased cash flows for the Company's first quarter but decreased cash flows in January and February. INFLATION Historically, inflation has not been a significant factor to the Company. Although the value of the Company's service to its primary customers is enhanced by higher interest rates, the volume of business has not changed historically with fluctuating interest rates. The Company has attempted to minimize the effects of inflation on its operating results through rate increases and cost controls, including development of a fuel rebate/surcharge program. Pursuant to this program, as the OPIS-CMH price of jet fuel exceeds $.75 per gallon, the Company's customers are surcharged. ENVIRONMENTAL MATTERS The Company feels that compliance with environmental matters has not had, and is not expected to have, a material effect on operations. Although the Company believes that it is in compliance with all applicable noise level regulations and is working proactively with various local governments to minimize noise issues, future noise pollution regulations could require the replacement of several of the Company's aircraft. 30 INDUSTRY OVERVIEW The expedited delivery and distribution industry in the U.S. is a highly fragmented business, composed of thousands of companies providing largely two-day, next-day and same-day pick-up and delivery services. The Air Courier Conference Association estimates that the annual revenues of the air delivery industry total at least $35 billion. The Company believes that the industry can be divided into the following market segments: (i) highly specialized, time-critical deliveries, including delivery of canceled bank checks; (ii) air courier document and parcel delivery; (iii) air freight forwarding; and (iv) corporate transportation and logistics support. While the Company participates primarily in one niche of the highly specialized, time-critical deliveries market segment (transportation of canceled bank checks), it believes that its highly flexible, nationwide air transportation network can be utilized for expedited delivery and distribution of goods within any of the above-mentioned industry segments. HIGHLY SPECIALIZED, TIME-CRITICAL DELIVERIES. There are a number of special transportation services required by individuals, hospitals, scientific laboratories and industries, such as medical samples and canceled bank checks, which require time-critical and reliable service to avoid the costly consequences of late or missed deliveries. Data for most of this industry segment, with the exception of the transportation of canceled bank checks, are not available, due to the highly specialized nature of the products that are delivered. The growth in the need for overnight deliveries of canceled bank checks can be measured by the growth in the number of bank checks actually written annually on a nationwide basis and the aggregate dollar value of these checks. Federal Reserve statistics from 1985 through 1995, profiled below, show a compound annual growth rate in the number of checks written of 2.3% over the period to 61.6 billion checks in 1995. Similarly, the dollar value of checks written grew at a compound annual rate of 3.2% over the same period, reaching $42.2 trillion in 1995. Additionally, The Tower Group, an independent research firm, has projected that the number of checks written should total 70 billion by the year 2000. The following tables set forth the number of checks written and the aggregate dollar value of such checks from 1985 through 1995:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC VOLUME OF CHECKS WRITTEN (IN BILLIONS) 1985 48.9 1986 50.1 1987 51.6 1988 53.2 1989 54.3 1990 56.8 1991 58.0 1992 58.9 1993 60.2 1994 61.0 1995 61.6
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DOLLAR VALUE OF CHECKS WRITTEN (IN TRILLIONS) 1985 $ 30.8 1986 $ 31.8 1987 $ 32.8 1988 $ 34.1 1989 $ 35.1 1990 $ 36.0 1991 $ 37.4 1992 $ 38.5 1993 $ 39.6 1994 $ 40.9 1995 $ 42.2
Other than the Company, the only national provider of air transportation services to the U.S. banking industry for canceled checks is the Federal Reserve's ITS. Within Federal Reserve districts, the transportation of canceled checks is handled mostly by ground vehicles operated by regional or local banks, or the ITS. Between Federal Reserve districts, there are numerous regional carriers who contract with banks and groups of banks to provide such services. Some of these providers may include regional air courier and document delivery companies, but none of them commands a significant share of the national market or is capable of providing national service. In addition, many banks require a wide variety of pick-ups, deliveries and available endpoints, as well as superior on-time performance and management information systems to enable them to manage float and make appropriate draw down decisions, which few of these other delivery companies currently can provide. See "-- How Banks Clear and Settle Canceled Bank Checks." 31 AIR COURIER DOCUMENT AND PARCEL DELIVERY MARKET. Comprised mostly of same-day and next-day pick-up and delivery services, this market is dominated by several large companies with national hub-and-spoke delivery systems which provide service based upon established pick-up and delivery schedules rather than those requested by the customer. These carriers include FedEx, UPS, the U.S. Postal Service, Airborne Express and DHL, among others. In addition to these carriers, there are several multi-regional companies that focus on same-day and early next-day deliveries custom tailored to the customers' requested pick-up and delivery times. Numerous other firms operate only on a regional basis, and provide similar services. Finally, there are hundreds of small, closely-held owner-operator businesses which operate in only one location with little or no national market share. AIR FREIGHT FORWARDING MARKET. Traditionally dominated by the large domestic and international passenger airline companies, who utilize excess cargo space in their fleet of passenger aircraft to shuttle freight internationally and domestically, the air freight forwarding market has expanded significantly to include participants focused solely on international delivery, who then subcontract for local delivery. This market has grown with the globalization of world markets, as corporations increasingly source raw materials from multiple origins throughout the world, contract for or perform manufacturing and assembly operations in many different countries and distribute their products worldwide. International freight companies have increasingly been seeking flexible air distribution networks operating domestically that can connect with their cross-Pacific and cross-Atlantic delivery routes and meet the custom-tailored needs of their customers on a same-day or next-day basis. CORPORATE TRANSPORTATION AND LOGISTICS SUPPORT MARKET. Corporations that have complex sourcing and distribution systems are seeking to minimize inventory carrying costs and reduce expenses associated with the movements of raw materials. The increasingly time-sensitive nature of product delivery schedules due to shorter product life cycles and "just-in-time" inventory management has led to growth in this market segment. Many companies are concluding that they perform transportation logistics functions less effectively than third party providers. As a result, companies have looked to outsource these functions to reduce costs while enhancing cost-efficiency and reliability of the logistics function. HOW BANKS CLEAR AND SETTLE CANCELED BANK CHECKS Banks attempt to clear checks expeditiously in order to convert their non-earning assets into interest-bearing assets. A check deposit cannot begin to earn interest until the physical item has been routed from the bank where it was first deposited to the bank on which the funds were drawn. The elapsed time between the deposit of the check and the delivery of the check to a Federal Reserve bank or the bank on which it was drawn results in "float." Banks desire to minimize float in order to maximize the availability of funds and the corresponding ability to earn income on those funds. In 1995, approximately 61.6 billion checks were written in the U.S. Of that number, approximately 25% were "transit" checks, or checks presented in one Federal Reserve district for payment, while drawn "out-of-district." Banks use sophisticated, computerized check-sorting equipment to sort checks at a rate in excess of 80,000 items per hour, per machine. The individual average dollar value of all checks written is approximately $700, while the average transit check is approximately $1,300 because of the higher level of corporate trade payment involved. Many large commercial banks daily clear gross transit checks valued at more than $500 million, which equates to daily interest income value of up to $75,000 (assuming a federal funds rate of 5.5%). The expedited sorting and delivery of canceled bank checks allows banks and their customers to share in this value. THE NATIONAL CLEARINGHOUSE ASSOCIATION The NCHA is a consortium of over 60 bank holding companies that have joined together to reduce check-clearing costs by means of a multi-bank, private net settlement arrangement located at The Huntington National Bank. The NCHA was developed by the CHEXS Partnership (as defined below). The CHEXS Partnership is owned by affiliates of The Huntington National Bank and Littlewood Shain and Company, and by Float Control, Inc. Float Control, Inc. is a corporation owned by the executive officers of the Company, Donald W. Wright, Sr. and Jeffrey Wright. See "Certain Relationships and Related Party Transactions -- Float Control, Inc./CHEXS Partnership." The bank members of the NCHA benefit from their affiliation with the NCHA by receiving a quick, convenient and efficient settlement at a single location of "out-of-district" checks deposited at their banks. Currently, the NCHA clears approximately 3.5 to 4.0 million checks each working day. 32 BUSINESS OVERVIEW The Company operates a fully integrated national air transportation network that operates between 85 cities in more than 40 states and delivers over 13,000 time-critical shipments each working day. The Company's U.S. Check-Registered Trademark- division, which generates approximately 86% of the Company's revenues, is the leading transporter of canceled checks and related information for the U.S. banking industry, meeting more than 1,100 daily deadlines. The Company's TIMEXPRESS-Registered Trademark- division, which generates approximately 12% of the Company's revenues, provides specialized, high-priority delivery service for customers requiring a reliable late pick-up and early delivery service combined with prompt, on-line delivery information. The Company's PDQ division offers retail aviation fuel sales and related ground services for customers in Columbus, Ohio. The Company currently operates a fleet of 81 aircraft (23 Learjet and 58 light twin engine aircraft), which fly approximately 85,000 miles per night, primarily Monday through Thursday. The Company also provides ground pick-up and delivery services throughout the nation, utilizing a fleet of 87 Company-owned ground vehicles as well as a ground transportation network of over 350 independent contractors. The Company uses its own air transportation network as well as commercial airlines, when appropriate, to provide same-day and same-night delivery services for itself, as well as for certain major overnight document and parcel delivery companies. Later pick-ups and earlier deliveries than those offered by other national carries are the differentiating characteristics of the Company's time-critical delivery network. In addition, the Company offers other value-added services to its customers, such as on-line delivery information. The Company consistently has achieved on-time performance levels exceeding 95%. In order to maintain this performance, the Company utilizes a number of proprietary customer service and management information systems to track, sort, dispatch and control the flow of checks and small packages throughout the Company's delivery system. Delivery times and certain shipment information are available on-line and on the Internet. For example, ComCheck-SM-, a unique proprietary software system, provides bank customers access to delivery time, shipment information and retrieval of historical proof of delivery information, critical data that enable banks to manage their cash position and maximize float revenue. OnTime-SM- and Ship-Link-SM-, Company developed software programs, provide scheduling and pricing information, as well as on-line delivery and shipper acknowledgment data for small package customers. The Company also has developed several internal software programs to enhance dispatch monitoring, cost control and customer service functions. The Company believes that the market for reliable, time-critical deliveries is growing as a result of a number of global trends, including: (i) corporations requiring just-in-time inventory parts, to lower production costs; (ii) medical laboratories requiring same-day deliveries; (iii) consolidating ground-based small package couriers requiring a national air delivery network; and (iv) global air freight forwarders requiring a domestic connection for their international networks that can deliver on a same-day/same-night or pre-8:00 a.m. basis. As the Company's banking customers typically require services four nights per week, there exists substantial available flight time and aircraft for the Company to pursue these business opportunities by flying during the day and on weekends when the Company's aircraft are not otherwise servicing the Company's banking customers. The Company believes that its flexible and reliable air transportation network and its demonstrated expertise in providing time-critical deliveries position the Company to provide such additional services at premium prices. BUSINESS STRATEGY The principal components of the Company's operating and growth strategy are to (i) focus on unique aircraft type and route structure; (ii) attract, retain and motivate the highest quality personnel available; (iii) expand its U.S. Check-Registered Trademark- position in the banking industry; (iv) grow its TIMEXPRESS-Registered Trademark- package delivery service; and (v) pursue strategic acquisition opportunities. These strategies are discussed in more detail below: FOCUS ON UNIQUE AIRCRAFT TYPE AND ROUTE STRUCTURE. The Company's fast and reliable fleet of 23 Learjets and 58 light twin engine aircraft is positioned around a highly efficient and flexible national route structure designed to facilitate late pick-up and early delivery times, minimize delays and simplify flight scheduling. The Company's hub-and-spoke system, with a primary hub in Columbus and several mini-hubs across the nation, enables the Company to match the varying load capacities of its aircraft with the shipment weight and volume of each destination city and 33 to consolidate shipments at its mini-hubs and primary hub. The Company's hubs are located primarily in less congested regional airports. These locations, in conjunction with the Company's off-peak departure and arrival times, provide easy take-offs and landings, convenient loading and unloading, fast refueling and maintenance, as well as lower cost distribution center space. The Company's four strategically located maintenance bases help minimize aircraft down time. The Company's focus on Learjets and light twin engine aircraft has also enabled it to develop an in-house expertise in purchasing, flying, maintaining and operating its fleet at high profitability levels. ATTRACT, RETAIN AND MOTIVATE THE HIGHEST QUALITY PERSONNEL AVAILABLE. As a service organization, the Company recognizes the importance of hiring, retaining and motivating the highest quality personnel available who are focused on a set of core values designed by the Company to provide a working environment where integrity, accountability, open communication, team management and responsibility and quality performance are explicitly stated goals. The Company regularly holds team-building sessions, continuing education for its associates and on-the-job training programs for associates. The Company provides its associates with competitive compensation and benefits packages. In connection with the Offering, the Company intends to offer stock options to a significant number of the Company's associates and to encourage stock ownership by associates thereafter. The Company believes that its current compensation and benefits package, proposed stock ownership incentives and corporate culture will give the Company a significant competitive advantage. EXPAND U.S. CHECK-REGISTERED TRADEMARK- POSITION IN THE BANKING INDUSTRY. The Company intends to strengthen its leadership position in the transportation of canceled bank checks by adding routes and aircraft to its air transportation network to facilitate even more late pick-up and early delivery times covering a greater number of cities. These capabilities, combined with the Company's value-added services (such as ComCheck-SM-) not currently offered by competing canceled bank check delivery companies, should enable the Company to expand its position in this market. GROW TIMEXPRESS-Registered Trademark- PACKAGE DELIVERY SERVICE. The Company delivers packages on a same-day/same-night and pre-8:00 a.m. basis for TIMEXPRESS-Registered Trademark- and certain other national and regional overnight document and package delivery companies via the U.S. Check-Registered Trademark- air transportation system and the commercial airline system when necessary. The Company believes that its TIMEXPRESS-Registered Trademark- service offers a more flexible pick-up and delivery schedule for small packages than those offered by other national carriers, and appeals to customers with time-sensitive delivery requirements. To date, growth in the Company's TIMEXPRESS-Registered Trademark- business has been constrained by limited load capacity on existing U.S. Check-Registered Trademark- routes which typically operate at night four days a week. The Company intends to purchase aircraft to provide additional capacity for the delivery of canceled bank checks and small packages. The Company believes significant opportunities exist for expanding its small package delivery business by more aggressively marketing the TIMEXPRESS-Registered Trademark- brand-name and by contracting to deliver for some of the national overnight package delivery companies whose infrastructures cannot be easily modified to meet same-day/same-night or pre-8:00 a.m. delivery deadlines. PURSUE STRATEGIC ACQUISITION OPPORTUNITIES. The fragmented nature of the air and ground package delivery industry, outside of the major national carriers, provides the Company with opportunities for strategic acquisitions. The Company believes that it is well-positioned to consolidate regional air freight operators and ground couriers by acquiring high-quality candidates. The Company would like to expand its delivery network through the acquisition of other air delivery companies and additional aircraft serving new routes. In addition, by acquiring companies in markets where the Company already has a presence, management expects to recognize substantial operating advantages by consolidating overlapping delivery routes. The Company believes it has a demonstrated expertise in evaluating acquisition opportunities based on the potential for revenue growth and profitability, as well as a proven track record for efficiently integrating such acquisitions. 34 AIRCRAFT FLEET The Company operates a fleet of 81 aircraft, of which 70 are owned and the remainder are leased from unrelated third party lessors. The Company's fleet was comprised of the following aircraft at May 1, 1996:
MAXIMUM MAXIMUM MAXIMUM PAYLOAD(1) RANGE(2) SPEED(3) AIRCRAFT TYPE NUMBER (LBS.) (N. MILES) (KNOTS) - ---------------------------------------------- ------------- ------------- ----------- ------------- Learjets, Model 35............................ 8 4,200 2,000 440 Learjets, Model 35A........................... 9 4,200 2,000 440 Learjets, Model 25............................ 6 3,500 1,000 440 Piper Navajo Chieftain........................ 9 1,500 800 175 Piper Aerostar................................ 14 1,000 900 190 Beech Baron................................... 25 1,000 700 180 Cessna 310.................................... 10 900 600 170
- ------------------------ (1) Maximum payload in pounds for a one-hour flight plus required fuel reserves. (2) Maximum range in nautical miles, assuming zero wind, full fuel and full payload. (3) Maximum speed in knots, assuming full payload. The Learjet is among the most reliable, fastest and most fuel-efficient small jet aircraft available in the world. The 30-series Learjets allow the Company to carry up to 4,200 pounds of cargo in certain lane segments. The 30-series also allows for non-stop lane segments of up to 2,000 miles within the Company's network. These Learjets also meet all Stage 3 noise requirements currently being implemented across the country. The Learjet 25 is a smaller aircraft with slightly smaller payload and range capabilities. The Company intends to phase-out these aircraft and replace them with the more efficient Lear 35 or other Stage 3 aircraft. The Company's Learjet fleet provides it with nationwide connectivity. Long lane segments from all corners of the nation converge on the Company's hub in Columbus, as well as "mini-hubs" located in Atlanta, Chicago, Charlotte, Dallas, Denver, Des Moines and New York. Smaller, light twin engine aircraft typically provide service to the various "spoke" cities in the Company's network, which include virtually all of the nation's large metropolitan areas. The Company acquires and operates pre-owned aircraft, typically between 15 and 20 years old. These aircraft are reasonably priced and are relatively modern, as they have undergone no significant design changes in the last 20 years. Further, when appropriately maintained (the Company performs its own major airframe inspections and overhauls on its aircraft fleet), these aircraft show little or no evidence of erosion in either performance or safety. OPERATIONS The Company provides to its customers complete transportation and informational services for national distribution of canceled bank checks and small packages. Operations include over 13,000 nightly deliveries in over 40 states, flying over 85,000 miles per night. The Company's ground and air infrastructure includes the following key elements: GROUND OPERATIONS The first major component of the Company's ground operations involves the pick-up of shipments for delivery, as well as bar code scanning for data entry into the Company's ComCheck-SM- and OnTime-SM- management information systems. Upon delivery to the originating airport, the Company's ground crews load shipments into U.S. Check-Registered Trademark- aircraft for delivery. The Company's ground personnel are trained in proper freight handling techniques, and wear safety belts when appropriate to minimize the risk of injury. At the Company's hub in Columbus, aircraft fueling operations include trained fuelers and ground support equipment including six fuel trucks and approximately 86,500 gallons of fuel storage capacity. The Company provides training for ground support personnel on an ongoing basis, including emergency procedures. The Company's main sort facility is also in Columbus, with approximately 80 associates loading and unloading aircraft and fine sorting shipments to their final destination. These processes are all controlled by the Company's central dispatch, which is also located in Columbus. 35 VEHICLES. The Company operates a fleet of 87 ground transportation vehicles, all of which are owned by the Company. The Company utilizes a computerized system for monitoring vehicle maintenance and conducts in-house training sessions throughout the year to maximize safety. Vehicles range in size from passenger cars to full-size vans, depending on the market being serviced. In some situations, Company drivers may utilize their own vehicles, in which case they are reimbursed for direct vehicle expenses. In addition, where appropriate, the Company utilizes over 350 independent contractors to further augment its ground delivery network. DRIVERS. The Company employs 206 full and part-time drivers, which constitute approximately 33% of its workforce. The ground courier industry has typically experienced a high turnover rate, which the Company has mitigated over time by offering health insurance and other benefits to its drivers. INDEPENDENT CONTRACTORS. In certain situations where management has deemed cost-effective and appropriate, the Company has utilized the services of independent contractors. From time to time, federal and state authorities have sought to assert that independent owner/operators in the transportation industry are employees, rather than independent contractors. The Company believes that independent contractors utilized by the Company are not employees under existing interpretations of federal and state laws. In order to avoid such issues, the Company will continue to attempt to assure that its arrangements with independent contractors are structured so that they will not be deemed to be employees. FUELING. The Company's PDQ division provides aircraft fueling and parking for certain of its customers at its facility in Columbus. This division accounts for approximately 1% of the Company's annual revenues. FLIGHT OPERATIONS The Company's flight operations are headquartered in Columbus. The Company hires and trains its pilots, requiring each to attend a Company-run, two-week training program. This flight school includes training on the Company's flight simulator prior to any actual flight time. Additionally, new pilots typically apprentice as co-pilots in order to gain familiarity with the U.S. Check-Registered Trademark- route system and the unique demands of night flying. Periodic simulator training and ongoing cockpit resource management training provide the Company's pilots with updated techniques and safety methods. The Company believes it has the highest level of training provided by any operator of similar aircraft in the nation. AIRCRAFT MAINTENANCE. Aircraft maintenance is also headquartered in Columbus. This facility operates 24 hours a day, 365 days a year. The Company employs 72 experienced aircraft and avionics technicians in four separate locations across the country (Columbus, Denver, Hartford and Minneapolis), performing all levels of maintenance from 100-hour inspections on its light twin engine aircraft to 7,200-hour/12-year inspections on its fleet of Learjets. These technicians also perform several types of periodic engine inspections and overhauls. In conjunction with Learjet, Company personnel have developed revised and enhanced inspection programs for its Learjet fleet, which the Company believes has provided a superior inspection process at reduced cost. Avionics trouble-shooting and repair, done internally by the Company since 1989, provide for maximum efficiency and minimum aircraft downtime for its entire fleet. The Company currently utilizes the services of Garrett Aviation exclusively for major period inspections and core overhauls of its 30-series Learjets. DISPATCH. The Company's central dispatch function ties together all components of the air operation. Departure and arrival times are continuously updated, and weather conditions throughout the nation are constantly monitored. Company dispatchers remain in constant contact with pilots, outbased hub managers, fuelers and maintenance and ground delivery personnel to ensure that no gaps exist in the Company's delivery process. ROUTE SCHEDULING. The scheduling of aircraft within the Company's route system is determined by the concentration of the Company's bank customers in particular metropolitan areas. Currently the Company operates between 85 cities each working day. Revisions, additions and deletions of routes occur when the Company adds new customers or determines that load factors necessitate additional aircraft on a particular lane segment. 36 DELIVERY SERVICES The Company provides complete transportation and informational services for its customers in the U.S. banking industry, serviced by its U.S. Check-Registered Trademark- division, as well as its small package delivery customers, serviced by its TIMEXPRESS-Registered Trademark- division. Although the services are provided by one air transportation system, providing significant economies of scale, each customer base receives customized service to meet its particular delivery needs. CANCELED BANK CHECK DELIVERY SERVICES. A typical shipment of canceled bank checks is picked up from the sending bank by a Company courier. Shipments are pre-sorted by bank personnel and bundled as to final destination using Company-supplied, color-coded bags. The shipment is then transported to the local airport where it enters the Company's air transportation system and is scanned via bar code technology, which reads information pertaining to the shipper, receiver, airbill number and applicable deadline. This data is then promptly downloaded into the Company's ComCheck-SM- computer system, where it is available to the Company's customer service representatives ("CSRs"). Upon arrival at the Company's Columbus hub or one of the Company's mini-hubs, the shipment is off-loaded, sorted by destination and reloaded onto the Company's aircraft. At the destination city, the shipment is off-loaded for the final time and delivered by Company courier to the receiving bank or Federal Reserve branch. When delivered, the shipment is once again scanned and promptly downloaded into the Company's computer system. Delivery information for all shipments is then available on-line to the Company's customer base as well as the CSRs. The Company's customer service department is available to handle any inquiries, discrepancies or supply requests, as well as provide proof of delivery documentation, all of which are value-added features of the Company's service. The Company provides delivery service for three sets of banking industry deadlines. The U.S. Check-Registered Trademark- "Basic" program, which has a 9:30 p.m. -- 10:00 p.m. hub time in Columbus, provides delivery service between 12:01 a.m. and 2:00 a.m. to approximately the northeastern third of the nation. The "Premium" program, which has an 11:00 p.m. -- 11:30 p.m. hub time in Columbus and Charlotte, provides delivery service at approximately 3:00 a.m. to the eastern half of the nation. Finally, the U.S. Check-Registered Trademark- "City" program, which has a 4:00 a.m. -- 5:30 a.m. hub time in Columbus, provides delivery service at approximately 8:00 a.m. to all cities served by the U.S. Check-Registered Trademark-network. The Company prices these services based on the tier of service and by the pound on a customer by customer basis. SMALL PACKAGE DELIVERY SERVICES. The Company's TIMEXPRESS-Registered Trademark- delivery service utilizes the same transportation network as the U.S. Check-Registered Trademark- bank delivery system, which enables TIMEXPRESS-Registered Trademark- to offer to its customers late pick-up and early delivery times. A typical TIMEXPRESS-Registered Trademark- shipment is either picked up by a Company courier or delivered to the airport by the customer, at which point shipment information, including shipper, receiver and airbill number, is entered into the TIMEXPRESS-Registered Trademark- OnTime-SM- computer system. The shipment then enters the Company's air transportation network. Upon arrival at its destination city (having gone through sorting and transportation procedures similar to the Company's bank shipments), the shipment is off-loaded and delivered to its destination by Company personnel or independent contractors. Upon delivery, the shipment information is again noted with consignee information and promptly entered into the OnTime-SM- system, which again provides on-line and Internet access for TIMEXPRESS-Registered Trademark- customers. The Company also provides airport-to-airport service for certain of its customers, including UPS, FedEx and other consolidating freight forwarders. This service does not typically require the same level of information reporting, but fills a significant need for these TIMEXPRESS-Registered Trademark- customers whose infrastructures cannot be easily modified to meet same-day, same-night or pre-8:00 a.m. delivery deadlines. CUSTOMERS The highly specialized needs of the Company's customer base combined with the Company's performance level over the years have resulted in a high level of customer retention for both U.S. Check-Registered Trademark- and TIMEXPRESS-Registered Trademark-. This customer retention level, in turn, creates a level of stability in the Company's revenue base that allows for product development and continued dedication of resources to providing the highest possible level of service to customers in the U.S. banking industry and other small package delivery customers. U.S. BANKING INDUSTRY. The banking industry, including commercial banks, savings banks and Federal Reserve banks, represents the Company's largest category of customers and in 1995 accounted for approximately 86% of the 37 Company's revenues. This customer list represents 92 of the nation's 100 largest bank holding companies. The Company provides daily service (four nights per week) for its entire customer base, and has contracts with many of its large customers. The Company's time-critical canceled check delivery service enables the Company's banking customers to offer competitive services, products and pricing. No single customer accounted for more than 10% of the U.S. Check-Registered Trademark- division's fiscal 1995 revenues. SMALL PACKAGE DELIVERY CUSTOMERS. The Company's TIMEXPRESS-Registered Trademark- small package delivery system accounted for approximately 12% of the Company's revenues in 1995. Customers for this service include industrial and service corporations, medical companies, UPS, FedEx and consolidating freight forwarders. Similar to the Company's banking industry customers, its small package delivery customers tend to be nightly shippers, with a high level of retention. No single customer accounted for more than 10% of the TIMEXPRESS-Registered Trademark- division's fiscal 1995 revenues. OTHER CUSTOMERS. The remainder of the Company's billing base is provided from fuel sales at the Company's facility at Columbus. No single customer accounted for more than 10% of the Company's other fiscal 1995 revenues. CUSTOMER SERVICE The Company's customer service department helps to provide many of the Company's value-added features. In addition to providing prompt, courteous replies to all customer inquiries utilizing a common tone of service, the CSRs help provide proof of delivery documentation when required, assist with ordering supplies and provide prompt shipment tracking information when requested. The Company's management information systems assist in the customer service function in many ways, including: (i) shipment and delivery information is available on-line, via the utilization of bar code technology, to both banking and small package customers through ComCheck-SM- and OnTime-SM-, respectively; (ii) current and historical (dating back as far as 45 days) proof-of-delivery documentation can be requested and provided on-line through the ComCheck-SM- and OnTime-SM- systems; (iii) supplies can be ordered on-line through ComCheck-SM- and OnTime-SM-, providing a user-friendly environment for the Company's customers; (iv) OnTime-SM- performance data is reviewed constantly by management, graphed and reported quarterly for trend monitoring purposes, so that any fluctuations in customer service can be addressed immediately; (v) the Company's dispatch function includes the ability to relay all relevant shipper information on-line throughout the organization, assuring a smooth dissemination of information regarding special pick-ups and deliveries; and (vi) internal management reports include load factor analysis and capacity reporting, so the Company can modify the network as appropriate to provide additional lift where demanded by customers. All relevant information referred to above is available on-line to the Company's CSRs who are then empowered to keep the Company's customer base fully informed on a prompt basis. MARKETING The Company has typically marketed directly to its bank customer base, with little need for national advertising. Banking industry sales efforts have included assisting in the design of customized clearing systems for bank customers which match the appropriate aircraft with the bank's needs for more processing time or specific deadlines sought by the sending bank. Marketing efforts in this area have included promotion of the NCHA. The success of the NCHA has had a complementary effect on the Company, as more checks are now transported through the private sector. The Company has been an exhibitor at numerous industry trade shows such as the Bank Administration Institute ("BAI") Float Management Conference, the BAI Check Processing Conference and the Air Courier Conference of America. This process has enabled the Company to maintain close contact with its customer base. Small package delivery services have also typically been directly marketed to companies requiring this unique, specialized service, as well as to consolidating freight forwarders and national integrated carriers such as FedEx and UPS. This approach has enabled the Company to direct volume to lane segments with space available. The Company feels opportunities for expansion exist in this area, and it will aggressively develop this level of service through an expanded sales force and more aggressive promotion of the TIMEXPRESS-Registered Trademark- brand name. HUMAN RESOURCES The Company believes it has achieved a significant competitive advantage within its industry through its major commitment to human resources. All levels of the Company's management strive to operate within the spirit 38 of the Company's core values, which are: (i) Honesty, Integrity, Trust and Respect -- the Company believes its customers expect these qualities and the Company strives to deliver them; (ii) Accountability -- the Company believes its associates are accountable to the customer in the marketplace, to peers in the workplace and, ultimately, to God; (iii) Open and Free Communication -- the Company strives to communicate from the bottom to the top, from the top down, and with the marketplace; by providing a medium for involvement, creativity and encouragement for all its people and the customer; (iv) Team Management Style with Shared Responsibilities -- the Company strives to delegate the decision-making process as far down as possible, encouraging involvement and shared responsibilities; and (v) Quality Performance -- the Company's goal is simple: to be the best, by focused teamwork with self-policing, quality-controlled systems and hiring and educating the best personnel available, and then motivating and compensating them appropriately. Additionally, representatives of the Company's human resources team periodically travel throughout the country to the Company's outbase facilities to help ensure compliance with the Company's core values and other personnel policies. All Company personnel are part of a Company-wide drug-testing program. Management believes this program, which goes beyond the requirements of the Company's regulators, helps to ensure the highest possible performance levels. The Company also conducts random drug and alcohol testing in compliance with Federal Aviation Administration regulations. Management training and professional development seminars are periodically held for, and attended by, all levels of Company personnel. The Company also aggressively compensates for performance, with excellent performance recognized and rewarded through incentive-based compensation. ASSOCIATES The chart below summarizes the three-year history of the Company's workforce. The Company's associates are not represented by any unions or covered by any collective bargaining agreements. The Company has experienced no work stoppages and believes that its relationship with associates is good.
AT MARCH 31, ------------------------------------- DEPARTMENT 1994 1995 1996 - -------------------------------------------------------------- ----- ----- ----- Management/Administration..................................... 103 117 111 Flight........................................................ 118 123 124 Maintenance................................................... 70 71 72 Driver/Courier/Ramp/Sort...................................... 233 292 314 -- -- -- Total..................................................... 524 603 621 -- -- -- -- -- --
PROPERTIES AND FACILITIES The Company operates ground courier facilities at 40 locations. The land and building used for the Company's headquarters, located in Columbus, Ohio, are leased from Gerald G. Mercer under a lease agreement which expires on February 29, 2000. Mr. Mercer owns the building and leases the land from The Port Authority of Columbus under a 25-year lease which expires on December 31, 2009, subject to a 20-year renewal option. The building currently has 80,000 square feet, of which the Company leases approximately 73,000 square feet. The Company's headquarters is currently used for operations, aircraft maintenance, vehicle maintenance, general and administrative functions, and training. In addition, several facilities also contain or are primarily used for storage and warehouse space. See "Certain Relationships and Related Party Transactions -- Lease of Company Headquarters." The Company operates at numerous locations throughout the country. The mini-hub locations generally include an office and/or a section of the lessor's hangar or ramp that is allocated to the Company. The Company's facilities rental expense for the fiscal year ended September 30, 1995, and six months ended March 31, 1996, was approximately $1.5 million and $0.8 million, respectively. For additional information concerning the Company's leases, see the Company's Financial Statements included elsewhere herein. COMPETITION The air and ground courier industry is highly competitive. The Company's primary competitor is the Federal Reserve's ITS. The actions of the Federal Reserve are regulated by the Monetary Control Act, which, in summary, requires the Federal Reserve to price its services at actual cost plus a private sector adjustment factor of 7%. The 39 Company believes that the purpose of the Monetary Control Act is to curtail the possibility of predatory pricing by the Federal Reserve when it competes with the private sector. No assurance beyond the remedies of law can be given that the Federal Reserve will comply with the Monetary Control Act. In the private sector, there are a large number of smaller, regional carriers that transport canceled checks, none with a significant interstate market share. The two largest private sector air carriers, FedEx and UPS, both carry canceled checks where the deadlines being pursued fit into their existing system, but this has not represented a significant market share of this industry segment to date. The Company provides customized service for its customer base, often with later pick-ups and earlier deliveries than the large, national carriers. Both FedEx and UPS utilize the Company's transportation network for certain situations where they require customized service. No assurance can be provided that FedEx, UPS or any other large national carrier will not attempt to compete more directly with the Company in the future. The Company competes with commercial airlines and numerous other carriers in its small package transportation business. The Company's market share in this industry is less than 1%. The Company believes that this market represents a significant expansion opportunity. The Company also has a minor presence in the same-day or next-flight-out industry. The Company believes that there are a number of competitors in this industry, including FedEx and UPS. To the extent the Company elects to increase its presence in the same-day industry, it will compete against these companies. The Company will emphasize its information technology, competitive pricing and historically high on-time performance levels to compete in this market. REGULATION The Company is regulated under Part 135 of the Federal Aviation Regulations by the Federal Aviation Administration. In connection with the operation of Company vehicles and aircraft, the Company is subject to regulation by the U.S. Department of Transportation with respect to the handling of hazardous materials. The Company holds nationwide general commodities authority from the Interstate Commerce Commission to operate as a common carrier on an interstate basis within the contiguous 48 states. The Company's delivery operations are subject to various state and local regulations, and, in many instances, require permits and licenses from state authorities. The Company believes that it has all permits, approvals and licenses required to conduct its operations and that it is in compliance with applicable regulatory requirements relating to its operations. Failure of the Company to comply with the applicable regulations could result in substantial fines or possible revocation of one or more of the Company's operating permits. LEGAL PROCEEDINGS There are no pending legal proceedings involving the Company other than routine litigation incidental to the Company's business. In the opinion of the Company's management, such proceedings should not, individually or in the aggregate, have a material adverse effect on the Company's results of operations or financial condition. TRADEMARKS The Company utilizes various service marks, trademarks and tradenames in connection with its services. While the Company considers its service marks, trademarks and tradenames to be important in the conduct of its business, the business of the Company is not dependent on any individual service mark, trademark or tradename. 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information as of May 6, 1996, regarding each of the Company's directors and executive officers:
NAME AGE POSITION - ------------------------ --- -------------------------------------------------------------- Gerald G. Mercer 48 Chairman of the Board, President and Chief Executive Officer Eric P. Roy 41 Director, Executive Vice President, Treasurer, Chief Operating Officer and Chief Financial Officer Glenn M. Miller 49 Vice President, Operations Charles A. Renusch 54 Vice President, Sales Guy S. King 43 Vice President, Sales Lincoln L. Rutter 39 Vice President, Sales Kendall W. Wright 48 Vice President, Sales William R. Sumser 40 Vice President, Finance, Controller and Secretary Donald D. Strench 39 Vice President, Corporate Development Adele Mercer 41 Director Tony C. Canonie, Jr. 49 Director nominee Russell M. Gertmenian 48 Director nominee J.F. Keeler, Jr. 55 Director nominee
Upon the closing of the Offering, the Company anticipates that Ms. Mercer will resign as a director and the size of the Board of Directors will be increased to seven. The Company has reached an agreement with Messrs. Canonie, Gertmenian and Keeler to join the Board of Directors upon the closing of the Offering. Mr. Gertmenian, a partner with Vorys, Sater, Seymour and Pease, has served as the Company's principal outside counsel since 1988. Messrs. Canonie and Keeler have no other affiliation with the Company. It is anticipated that Messrs. Canonie, Gertmenian and Keeler will be appointed to serve, at least initially, as members of the Compensation and Audit Committees of the Board of Directors, which committees will be created upon the closing of the Offering. Additionally, as soon as practicable following the closing of the Offering, the Company intends to appoint two additional independent directors who have no other affiliation with the Company. GERALD G. MERCER has served as Chairman of the Board, President and Chief Executive Officer of the Company since founding the Company in 1974. Mr. Mercer led the negotiations for the successful acquisitions of WIE and Air Continental, Inc. in 1988 and 1989, respectively. He served as President of the Michigan Association of Aviation Businesses in 1986, and has been a member of the Young Presidents' Organization since 1986. Mr. Mercer has been a guest speaker at several major universities throughout the country. ERIC P. ROY has been a Director of the Company since 1994 and has served as Chief Financial Officer of the Company since 1986. Mr. Roy was named Executive Vice President and Chief Operating Officer in 1991. Prior to 1986, Mr. Roy served as Controller, Treasurer and President of Air Freight Services, Inc., a controlled group of 12 aviation-related companies. Mr. Roy assisted in negotiating and arranged financing for the acquisitions of WIE and Air Continental, Inc. GLENN M. MILLER has served as Vice President, Operations for the Company since 1975. Mr. Miller successfully coordinated all operational details involved in the acquisitions of WIE and Air Continental, Inc. CHARLES A. RENUSCH has served as Vice President, Sales (Northeast Region) for the Company since 1980. Prior to joining the Company, Mr. Renusch was responsible for Bank Float and Transportation for the National Bank of 41 Detroit, N.A. Mr. Renusch designed the net settlement process utilized by the Check Express System, which currently settles over four million transactions per business day. See "Certain Relationships and Related Party Transactions -- Float Control, Inc./CHEXS Partnership." GUY S. KING has served as Vice President, Sales (TIMEXPRESS-Registered Trademark-) for the Company since 1989. Prior to 1989, Mr. King served the Company in numerous functions dating back to 1976, including dispatch and pilot, before eventually founding the Company's TIMEXPRESS-Registered Trademark- small package transportation department in 1984. Mr. King has served on the Board of Directors of the Air Courier Conference of America since 1993. LINCOLN L. RUTTER has served as Vice President, Sales (West Region) for the Company since 1988. Prior to joining the Company, he served as Vice President of Sales of WIE, as well as Float Manager for Colorado National Bank of Denver. KENDALL W. WRIGHT has served as Vice President, Sales (Southeast Region) for the Company since 1988. Prior to joining the Company, he served as Vice President of Sales for WIE. WILLIAM R. SUMSER has served the Company as Vice President and Secretary since March 1996, as Controller since 1988 and as Assistant Vice President from 1988 through March 1996. Mr. Sumser has a total of 18 years of financial experience, and is responsible for the Company's daily cash management, financial reporting and purchasing functions. DONALD D. STRENCH has served as Vice President, Corporate Development for the Company since April 1996. Prior to joining the Company, Mr. Strench served in various financial positions for American Airlines, Inc. between September 1986 and March 1996, including Vice President, Corporate Development. ADELE MERCER has been a director of the Company since 1994. Ms. Mercer is the wife of Mr. Mercer. TONY C. CANONIE, JR. has been nominated and has agreed to serve as a Director of the Company commencing upon the closing of the Offering. Since 1990, Mr. Canonie has served as Chief Executive Officer of Canonie Ventures Inc., a venture capital and advisory services firm specializing in the waste industry. From 1989 to 1990, Mr. Canonie served as Chief Executive Officer of Grace Environmental Inc., a subsidiary of W.R. Grace & Co. RUSSELL M. GERTMENIAN has been nominated and has agreed to serve as a Director of the Company commencing upon the closing of the Offering. Mr. Gertmenian has been a partner of Vorys, Sater, Seymour and Pease since 1979 and currently serves as a member of such firm's Executive Committee. Mr. Gertmenian is a director of Liqui-Box Corporation, a manufacturer of flexible plastic packaging systems. J.F. KEELER, JR. has been nominated and has agreed to serve as a Director of the Company commencing upon the closing of the Offering. Mr. Keeler is President, Chief Executive Officer and Chairman of the Board of The Fishel Company, a national utilities construction firm, which he first joined in 1967. Mr. Keeler is a director of Bank One, N.A. and serves on the Board of Directors of the Columbus Chamber of Commerce. Directors of the Company are elected annually. Officers of the Company are elected annually and serve at the discretion of the Board of Directors. COMPENSATION OF THE BOARD OF DIRECTORS Directors who are officers or associates of the Company will receive no additional compensation for their services as members of the Board of Directors or as members of Board committees. Directors who are not officers or associates of the Company will be paid a quarterly fee of $1,500, as well as additional fees of $1,000 for each meeting of the Board or of a Board committee attended by such Director. The Company's Directors are reimbursed for their out-of-pocket expenses incurred in connection with their service as directors, including travel expenses. In addition, pursuant to the Incentive Stock Plan, each Director will receive an annual option to purchase 2,000 Common Shares. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth certain information regarding cash and non-cash compensation paid by the Company during the fiscal year ended September 30, 1995, to the Company's Chief Executive Officer, and to each of the Company's four other most highly compensated executive officers whose salary and bonus exceeded $100,000 42 (collectively, the "Named Executive Officers"), during such year. The Company did not grant any stock options or restricted stock awards to any of the Named Executive Officers during the 1995 fiscal year, and the dollar value of perquisite and other personal benefits, if any, received by each of the Named Executive Officers in fiscal year 1995 was less than established reporting thresholds. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------ ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) - --------------------------------------------------------------------- ---------- ------------ ----------------- Gerald G. Mercer .................................................... $ 826,376 $ 1,161,333 $ 6,022 Chairman of the Board, President and Chief Executive Officer Eric P. Roy ......................................................... 129,332 167,646 59,363 Executive Vice President, Chief Financial Officer and Chief Operating Officer Glenn M. Miller ..................................................... 129,332 235,681 146,787 Vice President, Operations Charles A. Renusch .................................................. 129,332 201,232 147,173 Vice President, Sales Guy S. King ......................................................... 129,332 144,857 31,380 Vice President, Sales
- ------------------------ (1) "All Other Compensation" for the Named Executive Officers consists of amounts contributed by the Company to the accounts of the Named Executive Officers under the Savings Plan (as defined below) and, except with respect to Mr. Mercer, amounts paid pursuant to the Deferred Compensation Agreements. See "-- Section 401(k) Savings Plan" and "Certain Relationships and Related Party Transactions -- Deferred Compensation Agreements." Following the closing of the Offering, the Company expects to restructure the compensation arrangements with its executive officers. The Company expects that (i) the annual base salaries for Messrs. Mercer, Roy, Miller, Renusch and King will be approximately $400,000, $275,000, $200,000, $200,000 and $200,000, respectively, and (ii) such officers will receive bonus compensation based upon the achievement of certain performance objectives. It is currently contemplated that such bonus compensation will not exceed 60% of annual base salaries. The Company expects that annual base salaries for the four other executive officers will be approximately $200,000 plus similar performance-based bonuses. The Company believes that any bonuses will be in line with comparable companies, and any arrangements will be subject to final Compensation Committee approval. The final terms of any such restructured arrangements could differ from those described above. Other than the Incentive Stock Plan (described below), which was adopted by the Board of Directors and approved by the shareholders of the Company on May 1, 1996, and the Stock Purchase Agreements with seven executive officers, which will be terminated upon the closing of the Offering, the Company has no stock option or stock purchase plans. Except for the automatic grants to non-associate Directors, no grants have been made or approved under the Incentive Stock Plan. See "-- Incentive Stock Plans" and "Certain Relationships and Related Party Transactions -- Stock Purchase Agreements." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company has never had a Compensation Committee or other committee of the Board of Directors performing similar functions. Decisions concerning compensation of executive officers of the Company were made by the Company's Chief Executive Officer. The Board of Directors will establish a Compensation Committee upon the closing of the Offering. 43 INCENTIVE STOCK PLAN The purpose of the AirNet Systems, Inc. 1996 Incentive Stock Plan (the "Incentive Stock Plan") is to attract and retain key personnel, including consultants and advisors to and directors of the Company, and to enhance their interest in the Company's continued success and to allow all associates an opportunity to have an ownership interest in the Company. The Incentive Stock Plan provides for the grant of incentive and nonqualified stock options, restricted stock and performance shares (individually, an "Award" or, collectively, "Awards"). In addition, the Incentive Stock Plan provides for the purchase of Common Shares through payroll deduction by all associates of the Company who have satisfied certain eligibility requirements. No Award under the Incentive Stock Plan may be granted after May 1, 2006. The maximum number of Common Shares available to be issued under the Incentive Stock Plan is 1,150,000. The maximum number of Common Shares for which certain individuals (the Chief Executive Officer and the four other highest paid officers) may receive options (incentive and non-qualified) is limited to 50,000 Common Shares over a one-year period. The Common Shares to be delivered under the Incentive Stock Plan will be made available from the authorized but unissued Common Shares or from Common Shares held in treasury. The Incentive Stock Plan contains customary provisions with respect to adjustments for stock splits and similar transactions and the rights of participants upon mergers and other business combinations. The Incentive Stock Plan will be administered by the Compensation Committee of the Board of Directors (the "Committee"), on which only non-associate directors who are "disinterested" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), may serve. The Committee has the discretion to select from among eligible associates those to whom Awards will be granted and determine the terms and conditions applicable to each Award. With respect to all non-executive officers (I.E., associates who are not subject to the provisions of Section 16 of the Exchange Act), the Company's Chief Executive Officer may make recommendations to the Committee. The Committee also has the sole and complete authority to interpret the provisions of the Incentive Stock Plan. The Committee's decisions will be binding on the Company and the participants in the Incentive Stock Plan. Key associates of, and consultants and advisors to, the Company and any future subsidiaries who can make substantial contributions to the successful performance of the Company are eligible to be granted Awards under the Incentive Stock Plan. It is anticipated that the Committee's determinations of which eligible individuals will be granted Awards and the terms thereof will be based on each individual's present and potential contribution to the success of the Company and its subsidiaries. The approximate number of persons initially eligible to receive Awards under the Incentive Stock Plan has not yet been determined. Further, the Incentive Stock Plan provides that associates will be given the opportunity to purchase additional Common Shares through a payroll deduction program. The Incentive Stock Plan also provides that, on an annual basis and without any further action by the Committee or the Board, the Company will grant director options, as described below, to each non-associate director of the Board. STOCK OPTIONS. The Committee may grant non-qualified stock options to associates, advisors and consultants but may grant incentive options only to associates. The Committee has discretion to fix the exercise price of such options, which, in the case of an incentive stock option, may not be less than the fair market value of the Common Shares at the date of grant. In the case of an incentive stock option granted to a 10% shareholder of the Company, the exercise price may not be less than 110% of the fair market value of the Common Shares at the date of grant. The Committee also has broad discretion as to the terms and conditions under which options will be exercisable. Incentive stock options will expire not later than ten years after the date on which they are granted (or five years in the case of an incentive stock option granted to a 10% shareholder of the Company). The exercise price of the options may be satisfied in cash or, in the discretion of the Committee, by exchanging Common Shares owned by the optionee, or by a combination of the preceding. DIRECTOR OPTIONS. Under the Incentive Stock Plan, each director who is not an associate of the Company or of a subsidiary, and who was not a director of the Company on May 1, 1996, will receive, on the first business day after each annual meeting of shareholders, provided that the director continues to serve on the Board on such date, a grant of a non-qualified stock option to purchase 2,000 Common Shares at an exercise price equal to the fair market value of the Common Shares on the date of grant. A director option will be exercisable until the earlier of (i) the tenth anniversary of the date of grant and (ii) three months (one year in the case of a director who becomes disabled 44 or dies) after the date the director ceases to be a director, provided, however, that if a director ceases to be a director after having been convicted of, or pled guilty to, a felony, the director option will be canceled on the date the director ceases to be a director. The exercise price of the director options may be satisfied in cash or, in the discretion of the Committee, by exchanging Common Shares owned by the director, or by a combination of cash and Common Shares. RESTRICTED STOCK AWARDS. An award of restricted stock is an Award of Common Shares that is subject to such restrictions as the Committee deems appropriate, including forfeiture conditions and restrictions on transfer for a period specified by the Committee. Awards of restricted stock may be granted under the Incentive Stock Plan for or without consideration. Restrictions on restricted stock may lapse in installments based on factors selected by the Committee. The Committee, in its sole discretion, may waive or accelerate the lapsing of restrictions in whole or in part. Prior to the expiration of the restricted period, except as otherwise provided by the Committee, a participant who has been granted restricted stock will, from the date of grant, have the rights of a shareholder of the Company in respect of such Common Shares, including the right to vote such Common Shares and to receive dividends and other distributions thereon, subject to the restrictions set forth in the Incentive Stock Plan and in the instrument evidencing such Award. The shares of restricted stock will be held by the Company, or by an escrow agent designated by the Company, during the restricted period and may not be sold, assigned, transferred, pledged or otherwise encumbered until the restrictions have lapsed. The Committee has authority to determine the duration of the restricted period and the conditions under which restricted stock may be forfeited, as well as the other terms and conditions of such awards. PERFORMANCE SHARE AWARDS. A performance share award is an Award of a number of units that represent the right to receive a specified number of Common Shares or cash, or both, upon satisfaction of certain specified performance goals, subject to such terms and conditions as the Committee determines. Performance Awards will be earned to the extent such performance goals established by the Committee are achieved over a period of time specified by the Committee. The Committee has discretion to determine the value of each performance Award, to adjust the performance goals as it deems equitable to reflect events affecting the Company or changes in law or accounting principles or other factors, and to determine the extent to which performance Awards that are earned may be paid in the form of cash, Common Shares or a combination of both. STOCK PURCHASE PLAN. Periodically, all associates of the Company who have at least one year of service with the Company will be given the opportunity to purchase Common Shares under the Incentive Stock Plan through a payroll deduction program. Pursuant to this program, associates will be able to purchase Common Shares at a price equal to between 85% and 100% of fair market value. Certain restrictions contained in Section 423 of the Code apply to this payroll deduction program, including a limitation on the maximum value of Common Shares that may be purchased by an individual associate in any calendar year. Upon purchase of Common Shares through payroll deduction, the Company will issue share certificates to the participating associates. The Committee has broad discretion as to the specific terms and conditions of each Award and any rules applicable thereto, including the effect, if any, of a change in control of the Company. The terms of each Award are to be evidenced by a written instrument delivered to the participant. The Common Shares issued under the Incentive Stock Plan are subject to applicable tax withholding by the Company which, to the extent permitted by Rule 16b-3 under the Exchange Act, may be satisfied by the withholding of Common Shares issuable under the Incentive Stock Plan. Any Awards granted under the Incentive Stock Plan may not be assigned or transferred except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order. The Incentive Stock Plan may be amended or terminated at any time by the Board of Directors; provided, however, that no such amendment or termination may adversely affect an optionee's or grantee's rights under any Award theretofore granted under the Incentive Stock Plan, except with the consent of such optionee or grantee, and except that no amendment may be made without shareholder approval if the Committee determines that such approval is necessary to comply with any tax or regulatory requirement, including any approval that is required as a prerequisite for exemptive relief from Section 16 of the Exchange Act, for which or with which the Committee determines that it is desirable to qualify or comply. 45 CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE INCENTIVE STOCK PLAN STOCK OPTIONS. When an optionee exercises a non-qualified stock option, the difference between the option price and any higher fair market value of the Common Shares, generally on the date of exercise, will be ordinary income to the optionee and generally will be allowed as a deduction for federal income tax purposes to the Company. Any gain or loss realized by an optionee on disposition of the Common Shares acquired upon exercise of a non-qualified stock option generally will be capital gain or loss to such optionee, long-term or short-term depending on the holding period, and will not result in any additional tax consequences to the Company. The optionee's basis in the Common Shares for determining gain or loss on the disposition will be the fair market value of such Common Shares determined generally at the time of exercise. When an optionee exercises an incentive stock option while employed by the Company or a subsidiary or within three months (one year for death or disability) after termination of employment, no ordinary income will be recognized by the optionee at that time, but the excess (if any) of the fair market value of the Common Shares acquired upon such exercise over the option exercise price will be an adjustment to taxable income for purposes of the federal alternative minimum tax applicable to individuals. If the Common Shares acquired upon exercise of the incentive stock option are not disposed of prior to the expiration of one year after the date of acquisition and two years after the date of grant of the option, the excess (if any) of the sales proceeds over the aggregate option exercise price of such Common Shares will be long-term capital gain, but the employer will not be entitled to any tax deduction with respect to such gain. Generally, if the Common Shares are disposed of prior to the expiration of such periods (a "disqualifying disposition"), the excess of the fair market value of such Common Shares at the time of exercise over the aggregate option price (but not more than the gain on the disposition if the disposition is a transaction on which a loss, if realized, would be recognized) will be ordinary income at the time of such disqualifying disposition (and the Company will generally be entitled to a federal income tax deduction in like amount). Any gain realized by the optionee as a result of a disqualifying disposition that exceeds the amount treated as ordinary income will be capital in nature, long-term or short-term depending on the holding period. If an incentive stock option is exercised more than three months (one year after death or disability) after termination of employment, the tax consequences are the same as described above for non-qualified options. RESTRICTED STOCK. In the absence of an election by a participant pursuant to Section 83(b) of the Code, the grant of restricted Common Shares will not result in taxable income to the participant or a deduction for the Company in the year of grant. The value of such restricted Common Shares will be taxable to the participant in the year in which the restrictions lapse. Alternatively, a participant may elect to treat as income in the year of grant the fair market value of the restricted Common Shares on the date of grant pursuant to Section 83(b) of the Code, by making the election within 30 days after the date of such grant. If such an election were made, such participant would not be allowed to deduct at a later date the amount included as taxable income if he or she should forfeit the restricted Common Shares to the Company. The Company will generally be entitled to a federal income tax deduction equal to the amount of ordinary income recognized by the participant in the year such income is recognized. Prior to the lapse of restrictions, dividends paid on the Common Shares subject to such restrictions will be taxable to the participant as additional compensation in the year received free of restrictions, and the Company will be allowed a corresponding federal income tax deduction. STOCK PURCHASE PLAN. Common Shares purchased pursuant to the stock purchase plan at 100% of fair market value will be taxed as if such Common Shares had been acquired on the open market. Therefore, any gain or loss realized by an associate on disposition of the Common Shares acquired pursuant to the stock purchase plan generally will be capital gain or loss to such associate, long-term or short-term depending on the holding period, and will not result in any additional tax consequences to the Company. If an associate purchases Common Shares pursuant to the stock purchase plan at less than 100% of fair market value, then such associate shall treat as ordinary income in the year in which such associate disposes of such Common Shares (or the year closing with such associate's death) an amount equal to the lesser of (i) the excess of the fair market value at the time of such disposition or death over the amount paid for the Common Shares or (ii) the excess of the fair market value of the Common Shares at the time the Common Shares were purchased over the amount paid for the Common Shares. 46 SPECIAL RULES. Special rules apply to a participant who is subject to Section 16 of the Exchange Act. Certain additional special rules apply if the exercise price for a stock option is paid in Common Shares previously owned by the optionee rather than in cash and if the Award is held, following the death of a participant, by the executors of the participant's estate. SECTION 401(k) SAVINGS PLAN The Company maintains a defined contribution savings plan which is intended to qualify under Section 401(k) of the Code (the "Savings Plan"). Under the terms of the Savings Plan, all associates who have worked a minimum of six months for the Company may contribute up to 15% of their annual earnings to the Savings Plan. The Company may elect, in its discretion, to make a matching contribution to the Savings Plan. Currently, the Company's annual matching contributions under the Savings Plan do not exceed 3% of total compensation. In addition, the Company makes profit-sharing contributions on behalf of eligible associates. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS LEASE OF COMPANY HEADQUARTERS The Company leases approximately 73,000 square feet of office, warehouse and hangar space in Columbus, Ohio (including the Company's headquarters) pursuant to a lease agreement dated June 29, 1988 with Mr. Mercer. Pursuant to the lease agreement, the Company pays base rent of $10.28 per square foot plus operating expenses which were approximately an additional $2.41 per square foot for fiscal 1995. The lease expires on February 29, 2000. The Company paid rent of approximately $592,000, $622,650 and $707,305 in fiscal years 1993, 1994 and 1995, respectively, to Mr. Mercer. The Company believes that the terms of this lease are no less favorable to the Company than those reasonably available from unrelated third parties for comparable space. WRIGHT AGREEMENT In consideration for the agreement of WIE and Donald W. Wright, Sr. not to compete with the Company, the Company entered into the Wright Agreement, which, as amended, provides for annual payments to Donald Wright. Such annual payments are tied to the cash flow and debt to equity ratio of the Company and are subject to certain minimum payment amounts. Pursuant to the Wright Agreement, as amended, such payments are guaranteed through 2018 to Donald Wright during his lifetime in the form of an annuity and upon his death are to be made to Donald Wright's designees. The Company's expenses for payments made to Donald Wright in connection with the Wright Agreement totaled approximately $1.1 million, $1.6 million, $2.1 million and $0.6 million in fiscal years 1993, 1994 and 1995 and the six months ended March 31, 1996, respectively. Upon the repurchase of the Donald Wright Warrant by the Company, the Wright Agreement will be terminated in its entirety, and no further payments will be made. WRIGHT WARRANTS Pursuant to the Wright Agreement, and in further consideration for Donald Wright's agreement not to compete with the Company, the Company issued four warrants to purchase in the aggregate 35% of the Company's then outstanding shares of common stock in the event of an initial public offering of the Company's capital stock. Two of such warrants have since been canceled. The remaining warrants, as amended, entitle Donald Wright to purchase 2,483,537 Common Shares (approximately 29.7% of the Common Shares on a fully diluted basis at the time of exercise) for $3,000 and Jeffrey Wright, Donald Wright's son, to purchase 167,227 Common Shares (2.0% of the Common Shares on a fully diluted basis) for $200. On February 26, 1996, Donald Wright transferred the Donald Wright Warrant to the Donald W. Wright, Sr. Family Irrevocable Trust dated December 9, 1994 (the "Wright Trust"). As amended, the Wright Warrants permit the Wright Trust (as assignee of Donald Wright) and Jeffrey Wright to exercise the Wright Warrants at any time on or after the closing of an initial public offering of the Company's capital stock, provided that such closing occurs prior to July 31, 2018. In addition, the Wright Warrants entitle the Wright Trust and Jeffrey Wright to certain piggyback registration rights in connection with an offering of capital stock by the Company. The Wright Trust and Jeffrey Wright have waived such registration rights in connection with the Offering. The Company has agreed to repurchase the Donald Wright Warrant upon the closing of the Offering for $29.9 million, or the equivalent of $12.04 per Common Share underlying such warrant, and will cancel the 47 Donald Wright Warrant upon its repurchase. Gerald G. Mercer has agreed to purchase the Jeffrey Wright Warrant upon the closing of the Offering for $2.0 million, or the equivalent of $12.04 per Common Share underlying such warrant, and will exercise the Jeffrey Wright Warrant immediately following such purchase. Upon cancellation or exercise, as the case may be, the Wright Warrants shall be terminated in their entirety, including any ongoing registration rights which might otherwise continue. In connection with the repurchase and cancellation of the Donald Wright Warrant and the corresponding tax treatment, the Company expects to realize a related tax benefit estimated to be $7.0 million. This tax benefit will be recorded on the Company's balance sheet and may be used against future income of the Company for tax purposes. The tax benefit will have no effect on the Company's income statement currently or for any future period. See "Selected Unaudited Condensed Pro Forma Financial Data" and Note 12 of the Notes to the Company's Financial Statements. If the initial public offering price is less than $12.95 per share, the Company will incur a non-recurring expense in the fiscal quarter in which the Company completes the Offering in connection with the repurchase and cancellation of the Donald Wright Warrant and the purchase of the Jeffrey Wright Warrant equal to the difference between $12.95 and the initial public offering price multiplied by 2,650,764. See "Offering Related Transactions -- Non-Recurring Expenses." STOCK PURCHASE AGREEMENTS On April 1, 1994, the Company entered into Stock Purchase Agreements with seven executive officers, including each of the Named Executive Officers other than Mr. Mercer, pursuant to which the executive officers purchased an aggregate of 1,484,908 Common Shares for an aggregate purchase price of approximately $364,000, which was paid by the delivery of promissory notes from the executive officers. Pursuant to the terms of the Stock Purchase Agreements, the executive officers cannot sell their respective Common Shares to any party other than the Company. In the event of certain triggering events, such as termination, death or disability, the Company is obligated to purchase the Common Shares held by a particular executive officer at a price ranging from the net book value of the Common Shares held, if less than the original amount paid, to the appreciation in the book value of the Company from the date the Common Shares were issued to the date of such triggering event. The Stock Purchase Agreements provide that in the event the Company sells all or substantially all of its assets, or if a majority of its voting stock is sold or otherwise disposed of by its shareholders, prior to such a triggering event, the executive officer will receive the fair market value of his Common Shares. As amended, the Stock Purchase Agreements provide that upon the initial public offering of the Common Shares, the redemption provisions will become inapplicable, and the executive officers will be able to sell their Common Shares without limitation, subject to the restrictions imposed by the Securities Act and by the Underwriters. See "Shares Eligible for Future Sale." Upon the closing of the Offering, the Stock Purchase Agreements will be terminated, and the promissory notes will be fully paid. In connection with the termination of the Stock Purchase Agreements, the Company will incur a non-recurring, non-cash expense of approximately $15.0 million (assuming an initial public offering price of $13.00 per share) in the quarter in which the Offering is closed. This expense will result in a corresponding increase in additional paid-in capital, but will have no effect on total shareholders' equity. See "Offering Related Transactions -- Non-Recurring Expenses" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEFERRED COMPENSATION AGREEMENTS Between 1986 and 1991, the Company entered into Deferred Compensation Agreements with seven executive officers, including all of the Named Executive Officers other than Mr. Mercer. Pursuant to the Deferred Compensation Agreements, the Company is obligated to pay these executive officers a certain percentage of the increase in the Company's net book value. The accrual of benefits under the Deferred Compensation Agreements was frozen as of March 31, 1994, in connection with the execution of the Stock Purchase Agreements. Distributions since such date have been based on the net book value of the Company as of March 31, 1994. The Company paid deferred compensation to the seven executive officers of approximately $247,000, $546,000 and $308,000 for the 1993, 1994 and 1995 fiscal years, respectively. 48 In connection with the Offering and the distribution from the AAA account of the AAA Notes, the seven executive officers have agreed to forego their remaining deferred compensation payments in the aggregate amount of $3.7 million. The Deferred Compensation Agreements will be terminated upon the closing of the Offering. FLOAT CONTROL, INC./CHEXS PARTNERSHIP Float Control, Inc. is a company, owned by certain executive officers of the Company, Donald W. Wright, Sr. and Jeffrey Wright, which owns a 19% interest in Check Exchange System Co. (the "CHEXS Partnership"). The other participants in the CHEXS Partnership are affiliates of The Huntington National Bank and Littlewood, Shain and Company. The CHEXS Partnership operates a national net settlement switch utilized by members of the NCHA, which the CHEXS Partnership helped to found. The national net settlement switch operates as a clearinghouse for NCHA member banks, pursuant to which such banks are able to settle transactions with other NCHA members by utilizing the switch rather than having to maintain a separate account with each such member. Canceled bank checks which are settled through the NCHA typically are routed through the Company's air transportation system. From time to time, the Company has made loans to Float Control, Inc. Since October 1, 1992, the largest aggregate balance owed by Float Control, Inc. to the Company was approximately $95,000. As of March 31, 1996, less than $1,000 was outstanding, all of which will be repaid prior to the closing of the Offering. In addition, in fiscal 1993, the Company paid Charles A. Renusch, an executive officer and existing shareholder of the Company, $200,000 for his efforts on behalf of Float Control, Inc. to establish the national net settlement switch. See "Industry Overview -- How Banks Clear and Settle Canceled Bank Checks -- National Clearinghouse Association." COMPANY GUARANTY OF PERSONAL DEBT The Company is currently guaranteeing a five-year bank loan from NBD Bank to Mr. Mercer, the Company's Chairman, President and Chief Executive Officer, and his wife Adele Mercer, a director, which loan is collateralized by the Company's facilities in Columbus, which Mr. Mercer owns and leases to the Company. The loan bears interest at the prime rate set by NBD Bank plus 0.5%, matures on December 31, 1998 and had outstanding balances of $850,000 and $800,000 at September 30, 1995 and March 31, 1996, respectively. NBD Bank has agreed to terminate the Company's guaranty at or prior to the closing of the Offering. INDEMNIFICATION AGREEMENTS The Company's existing shareholders have agreed to indemnify the Company for any corporate level federal income taxes which might be imposed upon the Company for any period prior to the termination of the Company's S Corporation status. As an S Corporation, the Company has not been subject to federal income taxes at the corporate level, and the Company has no reason to believe that any such corporate level federal taxes will be imposed for any such period. See "Prior S Corporation Status." In addition, Mr. Mercer has agreed to indemnify the Company with respect to certain environmental liabilities with respect to underground storage tanks on a Michigan property formerly owned by Mr. Mercer and leased to the Company. The Company ceased its operations at this property in 1988, at which time Mr. Mercer sold the property to an unaffiliated third party. The aggregate amount of any such liabilities is estimated by the Company to be less than $100,000. DWARF LEASING Since January 1992, the Company has leased four light twin engine aircraft from Dwarf Leasing, Inc., a corporation owned by Glenn M. Miller, Eric P. Roy, Guy S. King, Kendall W. Wright and William R. Sumser, who are executive officers of the Company. Total lease expenses were $129,600, $129,600, $99,000 and $21,000 for the fiscal years ended September 30, 1993, 1994 and 1995 and for the six months ended March 31, 1996, respectively. In fiscal 1995, the Company purchased two of such aircraft and, in February 1996, purchased the remaining aircraft. The total purchase price of such aircraft was $455,000. The Company believes that the terms of such leases and such purchases were no less favorable than those reasonably available from unaffiliated third parties. PEDIA PALS, INC. Pedia Pals, Inc. is a company which is engaged in the development of children-friendly medical devices for use in pediatrics and which is owned, in part, by certain of the Company's executive officers. Since fiscal 1993, the 49 Company has loaned Pedia Pals, Inc. an aggregate of $233,000 for general working capital purposes, which amount bears interest at the prime rate set by NBD Bank and which amount will be repaid in full prior to the closing of the Offering. LOANS TO CERTAIN EXECUTIVE OFFICERS The Company has provided Mr. Mercer a revolving credit facility to cover personal items paid on behalf of Mr. Mercer by the Company, including charges for fuel, maintenance and insurance for personal aircraft. This facility is represented by a note from Mr. Mercer to the Company which bears interest equal to the Company's cost of funds. Since the beginning of fiscal 1993, the highest balance outstanding with respect to this note was $1,038,000, and the balance as of March 31, 1996 was $1,038,000. Mr. Mercer will repay this note in full upon the closing of the Offering. In addition, the Company is currently paying for certain renovations of the Columbus, Ohio facility, which is owned by Mr. Mercer and leased to the Company. The total amount of such renovations is estimated to be $1.1 million. Mr. Mercer will reimburse the Company for such expenditures, plus interest at a floating rate approximately equal to the Company's borrowing costs, upon the closing of the Offering. Following such renovations, the Company's lease payments to Mr. Mercer will be increased to reflect the expansion of and improvements to the Company's facility. See "-- Lease of Company Headquarters." The Company loaned Glenn M. Miller $150,000 on December 11, 1995 in connection with Mr. Miller's purchase of a piece of property for private use. The loan to Mr. Miller is unsecured, matures on December 31, 1997 and bears interest at the prime rate, as determined by NBD Bank. Mr. Miller repaid $75,000 of such loan on December 29, 1995 and intends to repay the balance upon the closing of the Offering. NCI PARTNERS NCI Partners is a partnership of all of the Company's executive officers except Mr. Mercer and Mr. Strench. The partnership was formed pursuant to a succession plan to assure that the Company would continue under current management in the event of the deaths of Mr. Mercer and his wife, Adele Mercer. Therefore, on December 7, 1992, the partnership acquired life insurance policies on Mr. Mercer and his wife in the aggregate amount of $40.0 million, with the partnership as the sole beneficiary. Proceeds from the life insurance policies would be used to acquire the Common Shares owned by Mr. Mercer from the Mercers' estate. Premiums for these life insurance policies in the aggregate amount of approximately $65,000 per year have been paid by the Company and subsequently reimbursed by NCI Partners. At or prior to the closing of the Offering, NCI Partners will reimburse the Company for all such premiums, NCI Partners will be dissolved and the policies will be canceled. 50 PRINCIPAL SHAREHOLDERS The table below sets forth the number and percentage of outstanding Common Shares beneficially owned by (i) each director and executive officer of the Company; (ii) all directors and executive officers of the Company as a group; and (iii) each person known by the Company to own beneficially more than five percent of any class of the Company's voting securities, in each case, as of May 1, 1996, and as adjusted to reflect the sale of Common Shares being offered hereby (assuming that the Underwriters' over-allotment option is not exercised). The Company believes that each individual or entity named has sole investment and voting power with respect to Common Shares indicated as beneficially owned by such individual or entity, except as otherwise noted. The address of each of the executive officers and directors is c/o AirNet Systems, Inc., 3939 International Gateway, Columbus, Ohio 43219. At May 1, 1996, there were eight holders of record of Common Shares.
SHARES BENEFICIALLY OWNED PRIOR TO SHARES BENEFICIALLY OFFERING OWNED AFTER OFFERING ---------------------- ---------------------- EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS NUMBER PERCENT NUMBER PERCENT - -------------------------------------------------------------------- ---------- ---------- ---------- ---------- Gerald G. Mercer (1)................................................ 4,392,927 74.7% 4,392,927 38.3% Glenn M. Miller..................................................... 543,425 9.3 543,425 4.7 Charles A. Renusch.................................................. 380,313 6.5 380,313 3.3 Eric P. Roy......................................................... 226,920 3.9 226,920 2.0 Guy S. King......................................................... 105,642 1.8 105,642 * Lincoln L. Rutter................................................... 85,781 1.5 85,781 * Kendall W. Wright................................................... 85,781 1.5 85,781 * William R. Sumser................................................... 57,046 * 57,046 * Donald D. Strench................................................... -- -- -- -- Adele Mercer........................................................ -- -- -- -- All executive officers and directors as a group (10 persons)........ 5,877,835 100.0 5,877,835 51.2
- ------------------------ * Less than one percent. (1) Includes 167,227 Common Shares subject to the Jeffrey Wright Warrant which Mr. Mercer has agreed to purchase upon the closing of the Offering. See "Certain Relationships and Related Party Transactions -- Wright Warrants." 51 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Company consists of 40,000,000 Common Shares, par value $.01 per share, and 10,000,000 preferred shares, par value $.01 per share. As of May 1, 1996, 5,710,608 Common Shares were issued and outstanding and 2,650,764 Common Shares were reserved for issuance pursuant to the Wright Warrants. In addition, 1,150,000 authorized Common Shares have been reserved for issuance under the Company's Incentive Stock Plan. There are no preferred shares issued and outstanding. COMMON SHARES Holders of Common Shares are entitled to one vote for each Common Share held of record on all matters presented to a vote of shareholders, including the election of directors. Holders of Common Shares have no cumulative voting rights and no preemptive rights to purchase or subscribe for any stock or other securities. There are no conversion rights or redemption or sinking fund provisions with respect to the Common Shares. Subject to preferences that may be applicable to any outstanding preferred shares and subject to the applicable debt instruments of the Company, holders of Common Shares are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of liquidation, dissolution or winding up of the affairs of the Company, holders of Common Shares are entitled to share pro rata in distribution of the assets of the Company remaining after payment or provision for payment of liabilities and the liquidation payments to holders of outstanding preferred shares. All outstanding Common Shares are, and the Common Shares offered hereby when issued and paid for will be, fully paid and nonassessable. Application has been made for listing the Common Shares for quotation on The Nasdaq National Market. PREFERRED SHARES The Company's Board of Directors has the authority to issue up to 10,000,000 preferred shares in one or more series and to fix, by resolution, the designations, preferences and relative, participating, optional or other rights, if any, but currently not the voting rights, and the qualifications, limitations or restrictions thereof, if any, including the number of shares in such series (which the Board may increase or decrease as permitted by Ohio law), liquidation preferences, dividend rates, conversion rights and redemption provisions of the shares constituting any series, without any further vote or action by the Company's shareholders. Any series of preferred shares so issued could have priority over the Common Shares with respect to dividend or liquidation rights or both. In addition, the issuance of preferred shares, or the issuance of rights to purchase such shares, could have the effect of delaying, deferring or preventing a change of control of the Company or an unsolicited acquisition proposal. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Shares is First Chicago/NBD Corporation. ANTI-TAKEOVER EFFECTS OF ARTICLES OF INCORPORATION, CODE OF REGULATIONS AND THE OHIO GENERAL CORPORATION LAW Certain provisions of the Articles of Incorporation and Code of Regulations of the Company and of the Ohio GCL summarized in the following paragraphs may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders. NO SHAREHOLDER ACTION BY WRITTEN CONSENT Section 1701.54 of the Ohio GCL requires that an action by written consent of the shareholders in lieu of a meeting be unanimous, except that, pursuant to Section 1701.11, the code of regulations may be amended by an action by written consent of holders of shares entitling them to exercise two-thirds of the voting power of the corporation or, if the articles of incorporation or code of regulations otherwise provide, such greater or lesser amount, but not less than a majority. The Company's Code of Regulations provides that, upon the closing of the Offering, no action to amend the Code of Regulations may be taken by a written consent of shareholders without a meeting. This provision may have the effect of delaying, deferring or preventing a tender offer or takeover attempt that a shareholder might consider in its best interest. 52 SUPERMAJORITY VOTING PROVISIONS The Code of Regulations provides that the provisions relating to the elimination of shareholder action by written consent to amend the Code of Regulations, removal of directors only for cause, indemnification of directors and supermajority voting may not be repealed or amended in any respect, and no other provision may be adopted, amended or repealed which would have the effect of modifying or permitting the circumvention of such provisions, without the vote of the holders of not less than 66 2/3% of the total voting power of the Company. ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS The Code of Regulations provides that shareholders seeking to bring business before an annual meeting of shareholders, or to nominate candidates for election as directors at an annual or special meeting of shareholders, must provide timely notice thereof in writing. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be received no later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. The Code of Regulations also specifies certain requirements for a shareholder's notice to be in proper written form. These provisions may preclude some shareholders from bringing matters before the shareholders at an annual or special meeting or from making nominations for directors at an annual or special meeting; provided that nothing in such provisions shall prevent any shareholder from submitting a shareholder proposal in compliance with Rule 14a-8 of the Exchange Act. CONTROL SHARE ACQUISITION STATUTE Section 1701.831 of the Ohio GCL (the "Control Share Acquisition Statute") requires shareholder approval of any proposed "control share acquisition" of an Ohio corporation. A "control share acquisition" is the acquisition, directly or indirectly, by any person (including any individual, partnership, corporation, limited liability company, society, association or two or more persons who have a joint or common interest) of shares of a corporation that, when added to all other shares of the corporation that may be voted, directly or indirectly, by the acquiring person, would entitle such person to exercise or direct the exercise of 20% or more (but less than 33 1/3%) of the voting power of the corporation in the election of directors or 33 1/3% or more (but less than a majority) of such voting power or a majority or more of such voting power. Under the Control Share Acquisition Statute, the control share acquisition must be approved in advance by the holders of a majority of the outstanding voting shares represented at a meeting at which a quorum is present and by the holders of a majority of the portion of the outstanding voting shares represented at such a meeting excluding the voting shares owned by the acquiring shareholder and certain "interested shares," including shares owned by officers elected or appointed by the directors of the corporation and by directors of the corporation who are also associates of the corporation. The purpose of the Control Share Acquisition Statute is to give shareholders of Ohio corporations a reasonable opportunity to express their views on a proposed shift in control, thereby reducing the coercion inherent in an unfriendly takeover. The provisions of the Control Share Acquisition Statute grant to the shareholders of the Company the assurance that they will have adequate time to evaluate the proposal of the acquiring person, that they will be permitted to vote on the issue of authorizing the acquiring person's purchase program to go forward in the same manner and with the same proxy information that would be available to them if a proposed merger of the Company were before them and, most importantly, that the interests of all shareholders will be taken into account in connection with such vote and the probability will be increased that they will be treated equally regarding the price to be offered for their Common Shares if the implementation of the proposal is approved. The Control Share Acquisition Statute applies not only to traditional tender offers but also to open market purchases, privately negotiated transactions and original issuances by an Ohio corporation, whether friendly or unfriendly. The procedural requirements of the Control Share Acquisition Statute could render approval of any control share acquisition difficult in that a majority of the voting power of the Company, excluding "interested shares," must be represented at the meeting and must be voted in favor of the acquisition. It is recognized that any corporate defense against persons seeking to acquire control may have the effect of discouraging or preventing offers 53 which some shareholders might find financially attractive. On the other hand, the need on the part of the acquiring person to convince the shareholders of the Company of the value and validity of his offer may cause such offer to be more financially attractive in order to gain shareholder approval. MERGER MORATORIUM STATUTE Chapter 1704 of the Ohio GCL (the "Merger Moratorium Statute") generally prohibits a wide range of business combinations and other transactions (including mergers, consolidations, asset sales, loans, disproportionate distributions of property and disproportionate issuances or transfers of shares or rights to acquire shares) between an Ohio corporation and a person that owns, alone or with other related parties, shares representing at least 10% of the voting power of such corporation (an "Interested Shareholder") for a period of three years after such person becomes an Interested Shareholder, unless, prior to the date that the Interested Shareholder became such, the directors approve either the transaction or the acquisition of the corporation's shares that resulted in the person becoming an Interested Shareholder. Following the three-year moratorium period, the corporation may engage in covered transactions with an Interested Shareholder only if, among other things, (i) the transaction receives the approval of the holders of 2/3 of all the voting shares and the approval of the holders of a majority of the voting shares held by persons other than an Interested Shareholder or (ii) the remaining shareholders receive an amount for their shares equal to the higher of the highest amount paid in the past by the Interested Shareholder for the corporation's shares or the amount that would be due the shareholders if the corporation were to dissolve. The Merger Moratorium Statute is designed to prevent many of the self-dealing activities that often accompany highly-leveraged acquisitions by prohibiting an Interested Shareholder from using the corporation or its assets or shares for his special benefit. The Merger Moratorium Statute will encourage potential tender offerors to negotiate with the Board of Directors of the Company to ensure that the shareholders of the Company receive fair and equitable consideration for their shares. However, the Merger Moratorium Statute presents potential pitfalls for unwary shareholders. Close attention to the impact of common corporate actions, such as the grant of associate stock options and loans to Interested Shareholders in the ordinary course of business, is necessary to determine whether such actions are encompassed by the Merger Moratorium Statute. 54 DESCRIPTION OF CERTAIN INDEBTEDNESS The following summary sets forth the material terms of the New Credit Agreement which will be filed as an exhibit to the Registration Statement of which this Prospectus is a part. Capitalized terms used but not defined herein have the meanings set forth in the New Credit Agreement. NEW CREDIT AGREEMENT The Company has received a commitment from NBD Bank, as agent, to underwrite the New Credit Agreement. NBD Bank is the sole lender under the Existing Credit Agreement. Under the New Credit Agreement, NBD Bank and the other lenders will provide up to $50.0 million in a five year, unsecured revolving credit facility. The New Credit Agreement will be initially funded concurrently with, and is conditioned upon, the closing of the Offering. At that time, the total indebtedness outstanding under the Existing Credit Agreement which is not repaid from the net proceeds of the Offering (currently anticipated to be approximately $3.6 million) will be repaid from funds borrowed under the New Credit Agreement. AMOUNT OF ADDITIONAL CREDIT AVAILABLE. The New Credit Agreement provides for two tranches of revolving credit borrowings. Pursuant to Tranche A, the Company may borrow up to $20.0 million against 80% of eligible accounts receivable and 50% of eligible inventory, provided that inventory advances may not exceed $4.0 million. Pursuant to Tranche B, the Company may borrow up to $30.0 million against 75% of the quick retail value of its aircraft and eligible machinery and equipment. Based on such borrowing base limitations, and after application of the net proceeds from the Offering and funds borrowed under the New Credit Agreement to repay all outstanding indebtedness under the Existing Credit Agreement, the Company expects to have approximately $31.8 million of financing available under the New Credit Agreement. The New Credit Agreement also includes a standby and commercial letter of credit subfacility of up to $3.0 million. INTEREST. The New Credit Agreement will bear interest, at the Company's option at (a) a fixed rate to be agreed upon by the Company and the lenders or (b) a floating rate initially equal to (i) the higher of 0.5% per annum over the Federal Funds Rate or NBD Bank's Prime rate or (ii) LIBOR plus a margin of between 0.7% per annum and 1.125% per annum depending upon the Company's Funded Debt to EBITDA ratio. GUARANTEES. The New Credit Agreement will be guaranteed by any future subsidiaries of the Company. COVENANTS. The New Credit Agreement will include certain negative covenants, including covenants which impose limitations on the ability of the Company to, among other things: (i) sell all or substantially all of the assets of the Company; (ii) merge or consolidate; (iii) incur indebtedness outside of the New Credit Agreement; and (iv) make acquisitions for consideration in excess of $3.0 million without consent. In addition, the New Credit Agreement will contain financial covenants which contain different baselines or measure financial ratios different from those in the Existing Credit Agreement, including minimum Tangible Net Worth (85% of post-Offering Tangible Net Worth plus 50% of annual Net Income), a Funded Debt to EBITDA ratio (not to exceed 2.5:1.0), a Funded Debt to Total Capitalization ratio (not to exceed 0.5:1.0) and a Cash Flow Coverage ratio (not to be less than 1.05:1.0 through June 29, 1997 or less than 1.1:1.0 through September 29, 1997 or less than 1.2:1.0 thereafter) (capitalized terms, in each case, as defined therein). FEES. Upon the closing of the New Credit Agreement, the Company will be required to pay underwriting and other fees totaling $125,000 plus the reasonable fees of NBD Bank's counsel, in addition to the $125,000 in fees paid at the time the commitment to enter into the New Credit Agreement was accepted. The New Credit Agreement will also provide for a $10,000 annual agency fee and a facility fee of between 0.2% per annum and 0.375% per annum based on the Company's Funded Debt to EBITDA ratio. Because the terms, conditions and covenants of the New Credit Agreement are subject to the negotiation, execution and delivery of definitive documentation, certain of the actual terms, conditions and covenants may differ from those described above. 55 EXISTING CREDIT AGREEMENT At the time of the initial funding under the New Credit Agreement, the total indebtedness outstanding under the Existing Credit Agreement which is not repaid from the net proceeds of the Offering (currently anticipated to be $3.6 million) will be rolled over into the New Credit Agreement. For a description of the terms of the Existing Credit Agreement, see Note 4 to the Company's Financial Statements. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 11,477,835 Common Shares outstanding (12,317,835 Common Shares if the Underwriters exercise their over-allotment option in full). Of those Common Shares, the 5,600,000 Common Shares (6,440,000 Common Shares if the Underwriters exercise their over- allotment option in full) sold in the Offering will be freely transferable without restriction under the Securities Act, except for any such shares which may be acquired by an affiliate of the Company (as that term is defined in Rule 144 under the Securities Act). The remaining 5,877,835 outstanding Common Shares held by current shareholders constitute either "restricted securities," within the meaning of Rule 144, or securities held by affiliates and will only be eligible for sale in the open market after the Offering subject to the contractual lockup provisions and applicable requirements of Rule 144 described below. In general, under Rule 144, as currently in effect, if a period of at least two years has elapsed between the later of the date on which restricted securities were acquired from the Company and the date on which they were acquired from an affiliate, then the holder of such restricted securities (including an affiliate) is entitled to sell a number of Common Shares within any three-month period that does not exceed the greater of (i) one percent of the then outstanding Common Shares or (ii) the average weekly reported volume of trading of the Common Shares during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of such sales, notices of such sales and the availability of current public information concerning the Company. Affiliates also must sell Common Shares not constituting restricted securities in accordance with the foregoing volume limitations and other requirements but without regard to the two-year holding period. Under Rule 144(k), if a period of at least three years has elapsed between the later of the date on which restricted securities were acquired from the Company and the date on which they were acquired from an affiliate, a holder of such restricted securities who is not an affiliate at the time of the sale and has not been an affiliate for at least three months prior to the sale would be entitled to sell the Common Shares immediately without regard to the volume limitations and other conditions described above. Sales of a significant number of Common Shares could have an adverse impact on the market price of the Common Shares. The Company and all of the Company's executive officers and directors have agreed not to offer, sell, contract to sell, pledge, grant any option for the sale of, or otherwise dispose or cause the disposition of, any Common Shares or securities convertible into or exchangeable or exercisable for such shares, for a period of 180 days after the date of this Prospectus, without the prior written consent of Dillon, Read & Co. Inc., except that the Company may award options and Common Shares pursuant to the Incentive Stock Plan and may issue Common Shares in connection with a transaction registered on Form S-4. On the effective date of the Registration Statement of which this Prospectus forms a part, the Company expects to file a registration statement on Form S-8 under the Securities Act covering 1,150,000 Common Shares reserved for issuance under the Company's Incentive Stock Plan. Upon the filing of such registration statement, Common Shares issued upon exercise of options or other awards granted under the Incentive Stock Plan generally will be available for sale in the open market by non-affiliates of the Company. 56 UNDERWRITING The names of the Underwriters of the Common Shares offered hereby and the aggregate number of Common Shares which each has severally agreed to purchase from the Company, subject to the terms and conditions specified in the Underwriting Agreement, are as follows:
UNDERWRITER NUMBER OF SHARES - --------------------------------------------------------------------------- ----------------- Dillon, Read & Co. Inc..................................................... The Robinson-Humphrey Company, Inc......................................... -------- Total.................................................................. 5,600,000 -------- --------
The Managing Underwriters are Dillon, Read & Co. Inc. and The Robinson-Humphrey Company, Inc. The Underwriters are committed to purchase all of the Common Shares, if any are so purchased. The Underwriting Agreement contains certain provisions whereby, if any Underwriter defaults in its obligation to purchase such Common Shares, and the aggregate obligations of the Underwriters so defaulting do not exceed ten percent of the Common Shares offered hereby, some or all of the remaining Underwriters must assume such obligations. The Underwriters propose to offer the Common Shares directly to the public initially at the offering price per share set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, concessions not in excess of $ per share to certain other dealers. The offering of the Common Shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and withdrawal, cancellation or modification of the offer without notice. The Underwriters reserve the right to reject any order for the purchase of the Common Shares. After the public offering of the Common Shares, the public offering price and the concessions may be changed by the Managing Underwriters. The Company has granted to the Underwriters an option for 30 days from the date of this Prospectus to purchase up to 840,000 additional Common Shares at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise such option only to cover over-allotments of the Common Shares offered hereby. To the extent the Underwriters exercise this option, each Underwriter will be obligated, subject to certain conditions, to purchase the number of additional Common Shares proportionate to such Underwriter's initial commitment. The Company has agreed to indemnify the Underwriters against certain liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Company and all of the directors and executive officers of the Company have agreed, subject to certain exceptions, that they will not offer, sell, contract to sell, transfer or otherwise encumber or dispose of any Common Shares, or securities convertible into or exchangeable for, Common Shares for a period of 180 days from the date of this Prospectus, without the prior consent of Dillon, Read & Co. Inc., except the Company may issue options and Common Shares pursuant to the Incentive Stock Plan and may issue Common Shares in connection with a transaction registered on Form S-4. Prior to the Offering, there has been no public market for the Common Shares. Consequently, the initial public offering price for the Common Shares will be determined by negotiation between the Company and the Managing Underwriters. Factors considered in determining the public offering price were prevailing market conditions, the state of the Company's development, recent financial results of the Company, the future prospects of the Company and its industry, market valuations of securities of companies engaged in activities deemed by the Managing Underwriters to be similar to those of the Company and other factors deemed relevant. The Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. 57 LEGAL MATTERS The validity of the Common Shares offered hereby will be passed upon for the Company by Vorys, Sater, Seymour and Pease, Columbus, Ohio, and for the Underwriters by Gibson, Dunn & Crutcher LLP, New York, New York. Russell M. Gertmenian, a partner in Vorys, Sater, Seymour and Pease, has agreed to serve as a director of the Company upon the closing of the Offering. EXPERTS The financial statements of AirNet Systems, Inc. at September 30, 1994 and 1995, and for each of the three years in the period ended September 30, 1995, included in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company, after the Offering of Common Shares described herein, will be subject to the informational requirements of the Exchange Act, and in accordance therewith, will be required to file periodic reports and other information with the Commission. Such information can be inspected without charge after the Offering at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its Regional Offices located at Suite 1400, Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661 and at 7 World Trade Center, 13th Floor, New York, New York 10048, and copies of such materials may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed fees. The Company has filed with the Commission a Registration Statement on Form S-1 (herein, together with all amendments thereto, the "Registration Statement") under the Securities Act with respect to the Common Shares offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information contained in the Registration Statement and the exhibits and financial statements thereto, to which reference is hereby made. The Registration Statement, including the exhibits thereto, may be inspected and copies thereof can be obtained as described in the preceding paragraph with respect to periodic reports and other information filed by the Company under the Exchange Act. The Company intends to furnish its shareholders with annual reports containing audited financial statements, which have been certified by the Company's independent auditors. 58 AIRNET SYSTEMS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ----- Report of Independent Auditors............................................................................. F-2 Balance Sheets as of September 30, 1994 and 1995 and March 31, 1996 (Unaudited)............................ F-3 Statements of Income for the fiscal years ended September 30, 1993, 1994 and 1995 and for the six months ended March 31, 1995 and 1996 (Unaudited)................................................................. F-4 Statements of Shareholders' Equity for the fiscal years ended September 30, 1993, 1994 and 1995 and for the six months ended March 31, 1996 (Unaudited)............................................................... F-5 Statements of Cash Flows for the fiscal years ended September 30, 1993, 1994 and 1995 and for the six months ended March 31, 1995 and 1996 (Unaudited).......................................................... F-6 Notes to Financial Statements.............................................................................. F-7
F-1 REPORT OF INDEPENDENT AUDITORS To the Shareholders AirNet Systems, Inc. We have audited the accompanying balance sheets of AirNet Systems, Inc. (the Company), formerly New Creations, Inc., as of September 30, 1994 and 1995, and the related statements of income, shareholders' equity, and cash flows for the each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AirNet Systems, Inc. at September 30, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Columbus, Ohio November 27, 1995, except for Notes 11 and 12 as to which the date is May 1, 1996 F-2 AIRNET SYSTEMS, INC. BALANCE SHEETS ASSETS
SEPTEMBER 30, PRO FORMA ---------------------- MARCH 31, MARCH 31, 1994 1995 1996 1996 ---------- ---------- ---------- ----------- (UNAUDITED) (UNAUDITED) (NOTE 12) Current assets: Cash......................................... $ 257,419 $ 238,394 $ 2,928 Accounts receivable: Trade, less allowances of $40,000 and $2,000 in 1994 and 1995, respectively..... 6,402,564 6,057,987 6,496,228 Shareholders, affiliates and employees..... 415,540 303,490 1,313,028 Spare parts and supplies..................... 3,491,092 3,932,956 4,110,622 Prepaid expenses............................. 1,494,069 2,195,115 3,394,530 ---------- ---------- ---------- Total current assets........................... 12,060,684 12,727,942 15,317,336 Net property and equipment (NOTE 2):........... 25,569,896 32,833,612 34,081,906 Other assets: Intangibles, net of accumulated amortization of $2,969,000 and $3,404,000 in 1994 and 1995, respectively (NOTE 3)................. 3,854,178 3,418,276 3,200,325 Other accounts receivable.................... 550,000 -- -- Deposits..................................... 106,160 57,060 51,860 ---------- ---------- ---------- Total assets................................... $42,140,918 $49,036,890 $52,651,427 ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................. $3,280,653 $3,937,894 $6,290,892 Accrued expenses............................. 376,624 556,778 409,932 Salaries and related liabilities............. 1,339,409 1,605,619 1,731,252 Current portion of notes payable (NOTE 4).... 3,674,286 5,565,706 6,229,186 ---------- ---------- ---------- Total current liabilities...................... 8,670,972 11,665,997 14,661,262 Notes payable, less current portion (NOTE 4)... 12,575,952 13,662,633 11,301,802 Deferred compensation (NOTES 7 AND 8).......... 2,963,392 3,238,856 3,651,928 Shareholders' equity (NOTE 11): Preferred stock, $.01 par value; 10,000,000 shares authorized; and no shares issued and outstanding................................. -- -- -- Common stock, $.01 par value; 40,000,000 shares authorized, 5,710,608 shares issued and outstanding in 1994 and 1995; 5,877,835 pro forma................................... 57,106 57,106 57,106 $ 58,778 Additional paid-in capital................... 349,534 349,534 349,534 21,205,641 Retained earnings (deficit).................. 17,888,345 20,385,860 22,913,651 (15,000,000) Notes receivable from shareholders (NOTE 8).......................................... (364,383) (323,096) (283,856) -- ---------- ---------- ---------- ----------- Total shareholders' equity..................... 17,930,602 20,469,404 23,036,435 $ 6,264,419 ---------- ---------- ---------- ----------- ----------- Total liabilities and shareholders' equity..... $42,140,918 $49,036,890 $52,651,427 ---------- ---------- ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES. F-3 AIRNET SYSTEMS, INC. STATEMENTS OF INCOME
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31, ------------------------------------------- ---------------------------- 1993 1994 1995 1995 1996 ------------- ------------- ------------- ------------- ------------- (UNAUDITED) Revenues: Air transportation (net of excise taxes of $1,776,000, $1,841,000 and $1,810,000 for the year ended 1993, 1994 and 1995, respectively): Check delivery.......................... $ 49,357,903 $ 54,046,381 $ 58,263,706 $ 27,960,098 $ 30,569,670 Small package delivery.................. 7,967,447 8,241,332 8,191,723 3,972,980 4,460,319 Fixed base operations..................... 1,265,347 1,158,044 1,006,529 519,317 478,942 ------------- ------------- ------------- ------------- ------------- 58,590,697 63,445,757 67,461,958 32,452,395 35,508,931 Costs and expenses: Air transportation: Wages and benefits...................... 7,593,967 8,185,759 9,195,208 4,557,172 4,875,987 Aircraft fuel........................... 7,150,558 6,958,282 7,444,878 3,598,983 3,875,170 Aircraft maintenance.................... 5,426,981 5,720,763 6,033,739 3,075,195 3,291,213 Aircraft leases......................... 4,405,303 3,260,273 1,042,653 634,204 378,377 Ground couriers and other outside services............................... 7,949,977 8,346,805 8,611,022 4,137,743 4,550,751 Depreciation and amortization........... 5,862,239 6,332,667 7,353,753 3,476,468 4,155,918 Other................................... 5,048,025 5,765,303 6,429,319 3,171,947 3,475,923 Fixed base operations..................... 1,150,199 1,081,502 955,792 446,078 390,153 Selling, general and administrative expenses: Executive compensation.................. 2,738,214 3,284,619 3,952,388 1,834,996 1,719,494 Executive compensation related to employee stock purchase agreements and deferred compensation plan (NOTES 7 AND 8)..................................... 247,003 1,598,176 2,635,157 1,162,056 1,400,792 Non-competition agreement with Wright (NOTE 3)............................... 1,339,323 1,813,114 2,327,726 1,207,375 727,378 Other................................... 3,927,039 3,787,703 3,404,796 1,655,998 2,238,322 ------------- ------------- ------------- ------------- ------------- Total costs and expenses.................. 52,838,828 56,134,966 59,386,431 28,958,215 31,079,478 ------------- ------------- ------------- ------------- ------------- Income from operations...................... 5,751,869 7,310,791 8,075,527 3,494,180 4,429,453 Interest expense............................ 1,122,923 1,092,990 1,452,066 611,371 736,167 ------------- ------------- ------------- ------------- ------------- Net income.................................. $ 4,628,946 $ 6,217,801 $ 6,623,461 $ 2,882,809 $ 3,693,286 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Unaudited pro forma information (NOTE 12): Historical income before income taxes..... $ 6,623,461 $ 3,693,286 Pro forma adjustments other than income taxes.................................... 7,059,535 2,904,094 ------------- ------------- Pro forma income before income taxes...... 13,682,996 6,597,380 Pro forma taxes on income................. 5,473,198 2,638,952 ------------- ------------- Pro forma net income...................... $ 8,209,798 $ 3,958,428 ------------- ------------- ------------- ------------- Pro forma net income per common share..... $ .72 $ .34 ------------- ------------- ------------- ------------- Weighted average common shares outstanding.............................. 11,477,835 11,477,835
SEE ACCOMPANYING NOTES. F-4 AIRNET SYSTEMS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK NOTES ---------------------- ADDITIONAL RECEIVABLE NUMBER OF PAID-IN RETAINED FROM SHARES AMOUNT CAPITAL EARNINGS SHAREHOLDERS TOTAL ----------- --------- ----------- ------------- ------------- ------------- BALANCE, OCTOBER 1, 1992.............. 422,570 $ 4,226 $ -- $ 14,031,304 $ -- $ 14,035,530 Year ended September 30, 1993 -- Net income.......................... -- -- -- 4,628,946 -- 4,628,946 Shareholder distributions -- including stock dividend........... 3,803,130 38,031 -- (1,908,782) -- (1,870,751) ----------- --------- ----------- ------------- ------------- ------------- BALANCE, SEPTEMBER 30, 1993........... 4,225,700 42,257 -- 16,751,468 -- 16,793,725 Year ended September 30, 1994 -- Net income.......................... -- -- -- 6,217,801 -- 6,217,801 Issued stock (NOTE 8)............... 1,484,908 14,849 349,534 -- (364,383) -- Shareholders distributions.......... -- -- -- (5,080,924) -- (5,080,924) ----------- --------- ----------- ------------- ------------- ------------- BALANCE, SEPTEMBER 30, 1994........... 5,710,608 57,106 349,534 17,888,345 (364,383) 17,930,602 Year ended September 30, 1995 -- Net income.......................... -- -- -- 6,623,461 -- 6,623,461 Repayment of notes (NOTE 8)......... -- -- -- -- 41,287 41,287 Shareholders distributions.......... -- -- -- (4,125,946) -- (4,125,946) ----------- --------- ----------- ------------- ------------- ------------- BALANCE, SEPTEMBER 30, 1995........... 5,710,608 57,106 349,534 20,385,860 (323,096) 20,469,404 Six months ended March 31, 1996 (Unaudited) -- Net income.......................... -- -- -- 3,693,286 -- 3,693,286 Repayment of notes (NOTE 8)......... -- -- -- -- 39,240 39,240 Shareholders distributions.......... -- -- -- (1,165,495) -- (1,165,495) ----------- --------- ----------- ------------- ------------- ------------- BALANCE, MARCH 31, 1996 (UNAUDITED)... 5,710,608 $ 57,106 $ 349,534 $ 22,913,651 $ (283,856) $ 23,036,435 ----------- --------- ----------- ------------- ------------- ------------- ----------- --------- ----------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES. F-5 AIRNET SYSTEMS, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30 SIX MONTHS ENDED MARCH 31, --------------------------------------------- ---------------------------- 1993 1994 1995 1995 1996 ------------- -------------- -------------- ------------- ------------- (UNAUDITED) OPERATING ACTIVITIES Net income................................ $ 4,628,946 $ 6,217,801 $ 6,623,461 $ 2,882,809 $ 3,693,286 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........... 5,925,728 6,394,898 7,435,602 3,507,934 4,194,933 Amortization of intangibles............. 435,545 435,902 435,902 217,951 217,951 Provision for (losses) recoveries on accounts receivable.................... 17,823 (63,436) (38,384) (30,000) (18,000) Deferred compensation................... 163,304 1,009,826 275,465 (32,382) 413,072 Loss (gain) on disposition of assets.... 280,350 287,468 73,472 (31,308) (6,020) Changes in operating assets and liabilities: Accounts receivable................... (174,232) (760,059) 495,011 (175,959) (1,429,779) Spare parts and supplies.............. (374,794) 151,609 (441,864) (69,800) (177,666) Prepaid expenses...................... (237,935) (118,210) (701,046) (714,082) (1,199,415) Accounts payable...................... (228,379) 989,483 657,241 699,698 2,352,998 Accrued expenses...................... (50,438) (25,339) 180,154 61,933 1,174,474 Salaries and related liabilities...... 230,728 119,825 266,210 163,834 (1,195,687) Other, net............................ 193,093 81,950 49,100 43,500 5,200 ------------- -------------- -------------- ------------- ------------- Net cash provided by operating activities............................... 10,809,739 14,721,718 15,310,324 6,524,128 8,025,347 INVESTING ACTIVITIES Purchases of property and equipment....... (8,378,145) (12,926,629) (14,543,850) (6,230,228) (5,437,207) Proceeds from sale of equipment........... 129,729 112,193 321,059 -- -- ------------- -------------- -------------- ------------- ------------- Net cash used in investing activities..... (8,248,416) (12,814,436) (14,222,791) (6,230,228) (5,437,207) FINANCING ACTIVITIES Proceeds from shareholder notes receivable............................... -- -- 41,287 41,287 39,240 Net (repayment) borrowings under revolving credit facilities........................ (3,000,000) 875,000 1,350,000 475,000 (850,000) Repayment of long-term debt............... (220,740) (2,280,021) (10,311,899) (6,836,187) (3,595,351) Proceeds from issuance of long-term debt..................................... 2,540,000 4,486,000 11,940,000 6,540,000 2,748,000 Distributions to shareholders............. (1,870,751) (5,080,924) (4,125,946) (768,716) (1,165,495) ------------- -------------- -------------- ------------- ------------- Net cash used in financing activities..... (2,551,491) (1,999,945) (1,106,558) (548,616) (2,823,606) ------------- -------------- -------------- ------------- ------------- Net (decrease) increase in cash........... 9,832 (92,663) (19,025) (254,716) (235,466) Cash at beginning of period............... 340,250 350,082 257,419 257,419 238,394 ------------- -------------- -------------- ------------- ------------- Cash at end of period..................... $ 350,082 $ 257,419 $ 238,394 $ 2,703 $ 2,928 ------------- -------------- -------------- ------------- ------------- ------------- -------------- -------------- ------------- -------------
SEE ACCOMPANYING NOTES. F-6 AIRNET SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995 AND UNAUDITED FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996) 1. SIGNIFICANT ACCOUNTING POLICIES AirNet Systems, Inc. (the Company), formerly New Creations, Inc., operates a fully integrated national air transportation network which provides delivery service for time-critical shipments for customers in the U.S. banking industry and in other industries. The Company also offers retail aviation fuel sales and related ground services for customers in Columbus, Ohio. BASIS OF PRESENTATION The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue on air transportation services is recognized when the packages are delivered to their destination. Revenue on fixed based operations is recognized when the maintenance services are complete or fuel is delivered. ACCOUNTS RECEIVABLE For fiscal 1995, approximately 89% and 84% of the Company's revenues and related receivables, respectively, were generated from customers within the banking industry. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risks of specific customers, historical trends and other information. SPARE PARTS AND SUPPLIES Spare parts and supplies are valued at the lower of cost (weighted average method) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Engines, overhauls and major inspections, which have been capitalized and included in flight equipment, are depreciated and amortized on the basis of hours flown. Airframes, other flight equipment and other property and equipment (primarily furniture and equipment, leasehold improvements and vehicles) are depreciated using the straight-line method over the estimated useful lives of the assets, as summarized below: Airframes............................................................. 7 years Other flight equipment................................................ 2 - 3 years Other property and equipment.......................................... 3 - 7 years
Leasehold improvements are amortized over the lease terms or the estimated useful lives of the assets, whichever is less. PREPAID EXPENSES The Company prepays certain engine repair and overhaul services. Such prepaid balances were $391,994 and $1,026,571 at September 30, 1994 and 1995, respectively, and are included with prepaid expenses on the balance sheet. INCOME TAXES The Company operates as an S Corporation under the Internal Revenue Code and, consequently, is not subject to federal and certain state income taxes. The shareholders generally include the Company's income in their own income for tax purposes. Where the Company remains liable for certain state and local income taxes, provision has been made for such taxes. F-7 AIRNET SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995 AND UNAUDITED FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Effective October 1, 1993, the Company elected to adopt Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and assets determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The adoption of SFAS No. 109 did not have a material impact on the Company's financial condition or results of operations. INTANGIBLES Intangibles include non-competition agreements with former competitors. The balances are being amortized on the straight-line method over periods ranging from ten to eighteen years. STOCK OPTION PLANS The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for its stock option arrangements and intends to continue to do so. STATEMENT OF CASH FLOWS Cash paid for interest was $1,144,252, $1,078,470 and $1,264,522 for the years ended September 30, 1993, 1994 and 1995, respectively. With respect to non-cash activities, the Company converted a $550,000 note receivable under a land contract to property during the year ended September 30, 1995. INTERIM FINANCIAL REPORTING In the opinion of management, the unaudited information as of March 31, 1996 and for the six months ended March 31, 1995 and 1996 includes all adjustments (consisting of normal recurring adjustments) the Company considers necessary for a fair presentation of such financial statements in accordance with generally accepted accounting principles. Operating results for the six months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending September 30, 1996. 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
SEPTEMBER 30, ---------------------------- 1994 1995 ------------- ------------- Flight equipment.......................................................... $ 48,944,182 $ 62,021,356 Other property and equipment.............................................. 3,765,637 5,060,676 ------------- ------------- 52,709,819 67,082,032 Less accumulated depreciation............................................. 27,139,923 34,248,420 ------------- ------------- $ 25,569,896 $ 32,833,612 ------------- ------------- ------------- -------------
3. BUSINESS ACQUISITION In 1988, the Company acquired certain of the assets of Wright International Express, Inc. (WIE), an air freight transportation company, and entered into a covenant not to compete with WIE and its principal shareholder (Donald Wright). The original acquisition agreement (Wright Agreement) provided for annual payments to Donald Wright as consideration for his agreement not to compete with the Company. Subsequently, the Wright Agreement has been amended and now provides for annual contingent payments based on the lesser of a percentage of net income, as defined in the original acquisition agreement, or $900,000. The amended agreement also provides for additional payments based on the Company's cash flow and debt to equity ratio. Payments under the amended agreement are guaranteed through 2018 to Donald Wright during his lifetime or upon death to such person as F-8 AIRNET SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995 AND UNAUDITED FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996) 3. BUSINESS ACQUISITION (CONTINUED) designated by Donald Wright prior to his death and are being expensed in the periods incurred. Such expenses to Donald Wright totaled approximately $1,086,000, $1,559,000 and $2,074,000 in 1993, 1994 and 1995, respectively, and $1,081,000 and $601,000 for the six months ended March 31, 1995 and 1996, respectively. In the event of a third party offer to acquire the Company, Donald Wright has the option of making the acquisition on the same terms. If Donald Wright does not exercise the option and the sale is consummated, Donald Wright is entitled to receive 32% of the sale proceeds and the payments described above will terminate. The Company has also issued warrants to Wright for the purchase of up to 29.7025% of the outstanding shares of its common stock for $3,000 (the Donald Wright Warrant) and to Wright's son, to purchase 2% of the Company's then outstanding shares of common stock for $200 (the Jeffrey Wright Warrant). The Donald and Jeffrey Wright Warrants are exercisable only in the event of an initial public offering by the Company at any time prior to July 31, 2018. In addition, the warrants entitle Donald Wright and Jeffrey Wright to certain piggyback registration rights in connection with an offering of capital stock by the Company. 4. NOTES PAYABLE The Company had borrowings from a bank as follows:
SEPTEMBER 30, ---------------------------- 1994 1995 ------------- ------------- Term notes................................................................ $ 10,075,238 $ 11,703,339 Revolving credit facility................................................. 6,175,000 7,525,000 ------------- ------------- 16,250,238 19,228,339 Current portion of notes payable.......................................... 3,674,286 5,565,706 ------------- ------------- $ 12,575,952 $ 13,662,633 ------------- ------------- ------------- -------------
Borrowings under the revolving credit facility are limited to the lesser of $8,000,000, less outstanding letters of credit or the sum of (1) 80% of eligible accounts receivable, (2) the lesser of 50% of eligible aircraft parts inventory or $2,000,000 and (3) $2,000,000. Repayment is due on or before June 30, 1997. The maximum amount available under the revolving credit facility at September 30, 1995 was $475,000. The interest rate on each of the individual borrowings under the revolving credit facility is, at the Company's election, either the prime rate (8.75% at September 30, 1995) or the Eurodollar rate plus 1.75% (7.375% at September 30, 1995). At September 30, 1995, borrowings under the revolving credit facility bearing interest at the prime rate totaled $1,525,000, while borrowings bearing interest at the Eurodollar rate totaled $6,000,000. The revolving credit facility is secured by all of the Company's assets. The Company's revolving credit facility requires the maintenance of certain minimum working capital and net worth levels and restricts the amount of additional debt and capital expenditures. F-9 AIRNET SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995 AND UNAUDITED FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996) 4. NOTES PAYABLE (CONTINUED) Term notes consist of the following (secured by aircraft):
SEPTEMBER 30, ---------------------------- 1994 1995 ------------- ------------- Due $126,190 monthly to November 1997, plus interest at 7.55%............. $ 4,795,238 $ 3,280,952 Due $480,000 quarterly to December 1996, plus interest at the Eurodollar rate plus 1.75% (7.63% at September 30, 1995)............................ -- 2,880,000 Due $64,285 monthly to July 1998, plus interest at the Eurodollar rate plus 1.75% (7.63% at September 30, 1995)................................. -- 2,185,720 Due $23,333 monthly to May 2000, plus interest at 8.13%................... -- 1,306,667 Due $25,000 monthly to July 1999, plus interest at 7.54%.................. -- 1,150,000 Due $25,000 monthly to August 1998, plus interest at 8.3%................. -- 900,000 Term notes, repaid during 1995............................................ 5,280,000 -- ------------- ------------- Total term notes...................................................... $ 10,075,238 $ 11,703,339 ------------- ------------- ------------- -------------
The aggregate annual maturities of long-term debt for the five years following September 30, 1995 are summarized as follows: 1996 -- $5,565,706; 1997 - -- $11,170,706; 1998 -- $1,775,261; 1999 -- $530,000; and 2000 -- $186,666. The carrying amounts of long-term debt reported on the balance sheet approximate fair value. 5. LEASE OBLIGATIONS The Company leases certain flight equipment under noncancelable operating leases expiring through 1997. Total rental expense under flight equipment operating leases was approximately $4,405,303, $3,260,273 and $1,042,653 for the years ended September 30, 1993, 1994 and 1995, respectively. The Company leases one facility from its majority shareholder through 2000. Total rental expense incurred under the facility lease from this shareholder was $592,000, $622,650 and $707,305 for the years ended September 30, 1993, 1994 and 1995, respectively. At September 30, 1995, future minimum payments by year and in the aggregate under noncancelable operating leases with initial or remaining terms exceeding one year are as follows: 1996 -- $1,030,200; 1997 -- $772,600; 1998 -- $750,600; 1999 -- $750,600; and 2000 -- $312,750. 6. RELATED PARTY TRANSACTIONS The Company has guaranteed a five year bank loan to its majority shareholder which is collateralized by the Company's facilities. The loan bears interest at prime plus .5% and had a balance outstanding of $850,000 at September 30, 1995. 7. DEFERRED COMPENSATION PLANS The Company has entered into deferred compensation agreements with certain key employees. Under the terms of the agreements, the Company is obligated to pay the employees a certain percentage, ranging from one to ten percent and totaling 27%, of the Company's net book value. Concurrent with the stock purchase agreements described in Note 8, the accrual of benefits under the agreements was curtailed as of March 31, 1994. Distributions are based on the Company's March 31, 1994 net book value and are payable in ten equal annual installments which began in December 1994. The Company recognized compensation expense related to the agreements of approximately $247,000, $546,000 and $308,000 for the years ended September 30, 1993, 1994 and 1995, respectively, and $149,000 and $103,000 for the six months ended March 31, 1995 and 1996, respectively. F-10 AIRNET SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995 AND UNAUDITED FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996) 8. SHAREHOLDERS' EQUITY On April 1, 1994, the Company entered into stock purchase agreements with certain key executives whereby the executives purchased 1,484,908 shares of the Company's common stock. The Company accepted notes receivable from the executives as payment for the shares sold. The notes receivable are collectible in ten equal annual installments through 2005 and bear interest at 5%. Under the terms of the agreements, the executives may not transfer or sell their respective shares to any party other than the Company. Upon the separation of any of these executives from the Company, the Company is obligated to purchase the shares held by the respective executive at a price ranging from the net book value of the shares held, if less than the original amount paid, to the appreciation in the book value of the stock from the date the shares were issued to the date of the respective executive's separation from the Company. Distribution of the repurchase price to the respective executive can be paid in equal annual installments over periods ranging from three to ten years and is governed by the nature of the executive's separation from the Company. Based on the nature of this restricted stock plan, the Company is accounting for it in a manner similar to a variable stock option plan. Accordingly, compensation expense has been recognized each accounting period for the increase in the repurchase price of the shares. This expense was $1,052,000 and $2,327,000 for the years ended September 30, 1994 and 1995, respectively, and $1,013,000 and $1,298,000 for the six months ended March 31, 1995 and 1996, respectively. 9. RETIREMENT PLAN The Company has a 401(k) retirement savings plan. All associates who have worked a minimum of six months may contribute up to 15% of their annual earnings to the plan. The Company's contributions, which are determined at the discretion of the Company, were approximately $151,000, $210,000 and $355,000 for the years ended September 30, 1993, 1994 and 1995, respectively. 10. CONTINGENCIES The Company is subject to claims and lawsuits in the ordinary course of its business. In the opinion of management, the outcome of these actions, which are not clearly determinable at the present time, are either adequately covered by insurance, or if not insured, will not, in the aggregate, have a material adverse impact upon the Company's financial position or the results of future operations. 11. SUBSEQUENT EVENTS (UNAUDITED) On May 1, 1996, the Company reincorporated through a merger with an Ohio corporation. The authorized capital stock of the Company consists of 40,000,000 common shares, $.01 par value, and 10,000,000 preferred shares, $.01 par value. The outstanding shares of the existing company were converted into common shares of the new company on a 422.57 for one basis. The Company's name was changed from New Creations, Inc. to AirNet Systems, Inc. These changes have been reflected in the accompanying financial statements. The Company filed a registration statement with the Securities and Exchange Commission for the sale of 5,600,000 of its authorized and unissued common shares. The Company adopted an Incentive Stock Plan on May 1, 1996 (Incentive Stock Plan). The purpose of the Incentive Stock Plan is to attract and retain key personnel, including consultants and advisors to the Company, to enhance their interest in the Company's continued success and to allow associates an opportunity to have an ownership in the Company through stock options, stock awards and a stock purchase plan. The maximum number of common shares available to be issued under the Incentive Stock Plan will be 1,150,000 and no award under the Incentive Stock Plan may be granted after May 1, 2006. In connection with the planned public offering, the Company will terminate its status as an S Corporation and, accordingly, will record an additional net deferred tax liability of $2,112,000 as a result of this change in tax status. F-11 AIRNET SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995 AND UNAUDITED FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996) 11. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) With the election to terminate its S Corporation status, the Company anticipates paying distributions of approximately $23,000,000 to the shareholders of the Company for undistributed earnings associated with the Company's S Corporation status. The Company anticipates using proceeds from the anticipated sale of shares to repurchase and cancel the Donald Wright Warrant and repay debt to be incurred to make the planned distribution, with remaining proceeds to pay down existing debt. Simultaneous with the closing of the public offering, the Company will enter into a new credit agreement to replace the existing agreement. The new agreement will provide the Company with a $50,000,000, five year, unsecured revolving credit facility. It will bear interest, at the Company's option of (a) an agreed upon fixed rate or (b) a floating rate initially equal to (i) the higher of .5% per annum over the Federal Funds rate or the banks prime rate or (ii) LIBOR plus a margin. The new agreement will limit the availability of funds to certain specified percentages of accounts receivable, inventory and the wholesale value of aircraft and equipment. In addition, the following actions are anticipated in connection with the public offering: - Upon the closing date of the public offering the Company plans to repurchase and cancel the Donald Wright Warrant (equivalent to 2,483,537 shares) for $29,901,785 with a charge to additional paid-in capital and the majority shareholder of the Company intends to acquire the Jeffrey Wright Warrant (equivalent to 167,227 shares) for $2,013,413 and convert that warrant for the number of shares indicated. In connection with the repurchase of the Donald Wright Warrant, the Company expects to receive a tax benefit of approximately $7,000,000. - The Company will terminate the Wright Agreement and write-off the unamortized asset relating to a covenant not to compete of approximately $2,596,000. - The Company will terminate all of the stock purchase agreements with certain key executives and the notes related to these agreements will be fully paid. In connection with the stock purchase agreements, the Company will incur a non-recurring and non-cash charge of approximately $15,000,000 at the time the public offering is consummated. Additional paid-in capital will be increased by the same amount and shareholders' equity will be unchanged. The pro forma income statement described in Note 12 has not been adjusted to reflect this non-recurring charge. - The distribution of the undistributed earnings to shareholders of the Company will eliminate a $1,654,000 liability relating to the stock purchase agreements. - The Company will terminate all of the deferred compensation agreements with certain key executives which were curtailed on March 31, 1994. The key executives will forego their remaining deferred compensation payments in the aggregate amount of $1,998,000. - The existing shareholders will repay outstanding notes receivable totaling $284,000. - The Company's guaranty of the five-year bank loan to the majority shareholder will be terminated at or prior to the consummation of the public offering. F-12 AIRNET SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995 AND UNAUDITED FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996) 12. PRO FORMA INFORMATION (UNAUDITED) PRO FORMA BALANCE SHEET INFORMATION The pro forma balance sheet at March 31, 1996 reflects the following transactions as if they had occurred at that date: a.) In connection with termination of the S Corporation election: (i) The anticipated S Corporation distributions in the amount of $23,000,000. (ii) The recognition of additional net deferred tax liability of $2,112,000. (iii) Reclassification of remaining undistributed earnings of the S Corporation from retained earnings to additional paid-in capital. b.) The termination of the Wright Agreement, including the exercise of the Jeffrey Wright warrant for $200, the write-off of the covenant not to compete asset of $2,596,000, and the recording of a related tax benefit of $7,000,000 to be realized by the Company. c.) The elimination of the deferred compensation agreements liability of $1,998,000 and the liability relating to the stock purchase agreements of $1,654,000. d.) The recognition of a non-recurring and non-cash expense relating to the termination of the stock purchase agreements, with a corresponding increase to additional paid-in capital, of approximately $15,000,000. e.) The anticipated repayment of the notes receivable from shareholders of $284,000. PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS The pro forma statements of income information presents the pro forma effects on the historical financial information reflecting certain transactions as if they occurred on October 1, 1994 and 1995. The following adjustments have been reflected in the pro forma statements of income information:
YEAR ENDED SIX MONTHS SEPTEMBER 30, ENDED MARCH 31, 1995 1996 -------------- --------------- 1. The elimination of interest expense relating to the debt to be repaid...... $ 1,144,000 $ 556,000 2. The elimination of payments under the Wright Agreement..................... 2,074,000 601,000 3. The elimination of amortization expense relating to the covenant not to compete asset write-off.................................................... 254,000 127,000 4. The elimination of deferred compensation expense for certain key employees.................................................................. 308,000 103,000 5. A reduction of compensation expense for executive officers based on new employment agreements...................................................... 952,000 219,000 6. The elimination of employee stock purchase agreement expense for certain key employees.............................................................. 2,327,000 1,298,000 -------------- --------------- Total.................................................................. $ 7,059,000 $ 2,904,000 -------------- --------------- -------------- ---------------
Prior to the closing of the public offering, the Company will terminate its status as an S Corporation. The pro forma adjustments reflect increased provisions for income taxes at an effective rate of 40%. F-13 AIRNET SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995 AND UNAUDITED FOR THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996) 12. PRO FORMA INFORMATION (UNAUDITED) (CONTINUED) PRO FORMA NET INCOME PER SHARE Pro forma net income per common share is based on the weighted average number of shares of common stock outstanding during the period (using the treasury stock method), plus the estimated number of shares required to fund the repurchase and cancellation of the Donald Wright Warrant, the planned distribution to shareholders and the estimated number of shares to be issued to repay $13,900,000 of existing debt. Supplemental pro forma income before taxes and net income considering only the repayment of existing debt would have been $7,768,000 and $4,661,000, respectively, for the year ended September 30, 1995, and $4,250,000 and $2,550,000, respectively, for the six months ended March 31, 1996. Supplemental pro forma income per share would have been $.66 for the year ended September 30, 1995 and $.36 for the six months ended March 31, 1995, based on the weighted average number of shares of common stock outstanding during the period, plus the estimated number of shares to be issued to repay $13,900,000 of existing debt. F-14 - ------------------------------------------------ ------------------------------------------------ - ------------------------------------------------ ------------------------------------------------ No dealer, salesperson or other person has been authorized to give any information or to make any representation in connection with the offering other than those contained in this Prospectus in connection with the offer contained herein, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy Common Shares in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction or in which the person making such offer or solicitation is not qualified to do so. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company since the date hereof. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary........................ 3 Risk Factors.............................. 8 Prior S Corporation Status................ 11 Offering Related Transactions............. 12 Use of Proceeds........................... 14 Dividend Policy........................... 14 Capitalization............................ 15 Dilution.................................. 16 Selected Financial Data................... 17 Selected Unaudited Condensed Pro Forma Financial Data........................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 22 Industry Overview......................... 31 Business.................................. 33 Management................................ 41 Certain Relationships and Related Party Transactions............................. 47 Principal Shareholders.................... 51 Description of Capital Stock.............. 52 Description of Certain Indebtedness....... 55 Shares Eligible for Future Sale........... 56 Underwriting.............................. 57 Legal Matters............................. 58 Experts................................... 58 Additional Information.................... 58 Index to Financial Statements............. F-1
------------------------ Until , 1996 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. AIRNET SYSTEMS ------------ 5,600,000 SHARES COMMON SHARES PROSPECTUS , 1996 ------------------ DILLON, READ & CO. INC. THE ROBINSON-HUMPHREY COMPANY, INC. - ------------------------------------------------ ------------------------------------------------ - ------------------------------------------------ ------------------------------------------------ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated (except for the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and The Nasdaq National Market listing fee) fees and expenses payable by the Company in connection with the distribution of the Common Shares: Securities and Exchange Commission registration fee................... $ 31,090 National Association of Securities Dealers, Inc. filing fee........... 9,516 Nasdaq National Market listing fee.................................... 48,295 Printing and engraving costs.......................................... 125,000 Legal fees and expenses............................................... 250,000 Accountants' fees and expenses........................................ 400,000 Blue sky qualification fees and expenses.............................. 15,000 Transfer agent fees................................................... 5,000 Miscellaneous......................................................... 16,099 -------- Total............................................................. $900,000 -------- --------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Division (E) of Section 1701.13 of the Ohio Revised Code governs indemnification by a corporation and provides as follows: (E) (1) A corporation may indemnify or agree to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee, member, manager, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, associate, or agent of another corporation, domestic or foreign, nonprofit or for profit, a limited liability company, or a partnership, joint venture, trust or other enterprise, against expenses, including attorney's fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, if he had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful. (2) A corporation may indemnify or agree to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, member, manager, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, member, manager, or agent of another corporation, domestic or foreign, nonprofit or for profit, a limited liability company, or a partnership, joint venture, trust, or other enterprise, against expenses, including attorney's fees, actually and reasonably incurred by him in connection with the defense or settlement of such action or suit, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any of the following: (a) Any claim, issue, or matter as to which such person is adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless, and only to the extent that, the court of common pleas or the court in which such action or suit was brought determines, upon II-1 application, that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court of common pleas or such other court shall deem proper; (b) Any action or suit in which the only liability asserted against a director is pursuant to section 1701.95 of the Revised Code. (3) To the extent that a director, trustee, officer, employee, member, manager, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in division (E)(1) or (2) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses, including attorney's fees, actually and reasonably incurred by him in connection with the action suit or proceeding. (4) Any indemnification under division (E)(1) or (2) of this section, unless ordered by a court, shall be made by the corporation only as authorized in the specific case, upon a determination that indemnification of the director, trustee, officer, employee, member, manager, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in division (E)(1) or (2) of this section. Such determination shall be made as follows: (a) By a majority vote of a quorum consisting of directors of the indemnifying corporation who were not and are not parties to or threatened by the action, suit, or proceeding referred to in division (E)(1) or (2) of this section; (b) If the quorum described in division (E)(4)(a) of this section is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the corporation or any person to be indemnified within the past five years; (c) By the shareholders; or (d) By the court of common pleas or the court in which such action, suit or proceeding referred to in division (E)(1) or (2) of this section was brought. Any determination made by the disinterested directors under division (E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this section shall be promptly communicated to the person who threatened or brought the action or suit by or in the right of the corporation under division (E)(2) of this section, and, within ten days after receipt of such notification, such person shall have the right to petition the court of common pleas or the court in which such action or suit was brought to review the reasonableness of such determination. (5) (a) Unless at the time of a director's act or omission that is the subject of an action, suit, or proceeding referred to in division (E)(1) or (2) of this section, the articles or the regulations of a corporation state, by specific reference to this division, that the provisions of this division do not apply to the corporation and unless the only liability asserted against a director in an action, suit, or proceeding referred to in division (E)(1) or (2) of this section is pursuant to section 1701.95 of the Revised Code, expenses, including attorney's fees, incurred by a director in defending the action, suit, or proceeding shall be paid by the corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding, upon receipt of an undertaking by or on behalf of the director in which he agrees to both of the following: (i) Repay such amount if it is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the corporation or undertaken with reckless disregard for the best interests of the corporation; (ii) Reasonably cooperate with the corporation concerning the action, suit, or proceeding. (b) Expenses, including attorney's fees, incurred by a director, trustee, officer, employee, member, manager, or agent in defending any action, suit, or proceeding referred to in division (E)(1) or (2) of this section, may be paid by the corporation as they are incurred, in advance of the final disposition of the II-2 action, suit, or proceeding, as authorized by the directors in the specific case, upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee, member, manager, or agent to repay such amount, if it ultimately is determined that he is not entitled to be indemnified by the corporation. (6) The indemnification authorized by this section shall not be exclusive of, and shall be in addition to, any other rights granted to those seeking indemnification under the articles, the regulations, any agreement, a vote of shareholders or disinterested directors, or otherwise, both as to action in their official capacities and as to action in another capacity while holding their offices or positions, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, member, manager, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. (7) A corporation may purchase and maintain insurance or furnish similar protection, including, but not limited to, trust funds, letters of credit, or self-insurance, on behalf of or for any person who is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, member, manager, or agent of another corporation, domestic or foreign, nonprofit or for profit, a limited liability company, or a partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. Insurance may be purchased from or maintained with a person in which the corporation has a financial interest. (8) The authority of a corporation to indemnify persons pursuant to division (E)(1) or (2) of this section does not limit the payment of expenses as they are incurred, indemnification, insurance, or other protection that may be provided pursuant to divisions (E)(5), (6), and (7) of this section. Divisions (E)(1) and (2) of this section do not create any obligation to repay or return payments made by the corporation pursuant to division (E)(5), (6), or (7). (9) As used in division (E) of this section, "corporation" includes all constituent entities in a consolidation or merger and the new or surviving corporation, so that any person who is or was a director, officer, employee, trustee, member, manager, or agent of such a constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee, member, manager, or agent of another corporation, domestic or foreign, nonprofit or for profit, a limited liability company, or a partnership, joint venture, trust, or other enterprise, shall stand in the same position under this section with respect to the new or surviving corporation as he would if he had served the new or surviving corporation in the same capacity. Section 5.01 of the Registrant's Code of Regulations governs indemnification by Registrant and provides as follows: SECTION 5.01. MANDATORY INDEMNIFICATION. The corporation shall indemnify any officer or director of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action threatened or instituted by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, member, manager or agent of another corporation (domestic or foreign, nonprofit or for profit), limited liability company, partnership, joint venture, trust or other enterprise, against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs), judgments, fines and amounts paid in settlement if actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. A person claiming indemnification under this Section 5.01 shall be presumed, in respect of any act or omission giving rise to such claim for indemnification, to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal matter, to have had no reasonable cause to believe his conduct was unlawful, and the termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, rebut such presumption. II-3 Reference is also made to Section 10 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying directors and officers of the Company against certain liabilities. In addition, the Registrant intends to purchase insurance coverage which will insure directors and officers against certain liabilities which might be incurred by them in such capacity. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On April 1, 1994, the Company entered into Stock Purchase Agreements with seven executive officers, including each of the Named Executive Officers other than Mr. Mercer, pursuant to which the executive officers purchased an aggregate of 1,484,908 Common Shares for an aggregate purchase price of approximately $364,000, which was paid in the form of notes from the executive officers. Pursuant to the terms of the Stock Purchase Agreements, the executive officers cannot sell their respective Common Shares to any party other than the Company. In the event of certain triggering events, such as termination, death or disability, the Company is obligated to purchase the Common Shares held by a particular executive officer at a price ranging from the net book value of the Common Shares held, if less than the original amount paid, to the appreciation in the book value of the Company from the date the Common Shares were issued to the date of such triggering event. The Stock Purchase Agreements provide that, in the event the Company sells all or substantially all of its assets, or if a majority of its voting stock is sold or otherwise disposed of by its shareholders, prior to such a triggering event, the executive officer will receive the fair market value of his Common Shares. As amended, the Stock Purchase Agreements provide that, upon the initial public offering of the Company's Common Shares, the redemption provisions will become inapplicable, and the executive officers will be able to sell their Common Shares without limitation, subject to the restrictions imposed by the Securities Act and by the Underwriters. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS: 1.1+ Form of Underwriting Agreement 3.1+ Amended Articles of the Company (incorporated by reference to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 3, 1996) 3.2+ Code of Regulations of the Company (incorporated by reference to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 3, 1996) 4.1+ Form of Stock Certificate for Common Shares of the Company (incorporated by reference to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 3, 1996) 4.2+ Covenant Not to Compete and Asset Purchase Agreement dated as of July 1, 1988 among WIE, Donald W. Wright, Sr. and the Company, as amended through March 15, 1996 4.3+ Amendment and Waiver to Covenant Not to Compete and Asset Purchase Agreement dated as of March 28, 1996 among WIE, Donald W. Wright, Sr., the Wright Trust and the Company 4.4+ Warrant for the Purchase of Shares of Common Stock -- No. 1 (canceled) 4.5+ Warrant for the Purchase of Shares of Common Stock -- No. 2 (canceled) 4.6+ Form of Warrant for the Purchase of Shares of Common Stock -- No. 5 (replacing No. 1) 4.7+ Form of Warrant for the Purchase of Shares of Common Stock -- No. 6 (replacing No. 2) 4.8+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Glenn M. Miller 4.9+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Charles A. Renusch 4.10+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Eric P. Roy 4.11+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Guy S. King
II-4 4.12+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Lincoln L. Rutter 4.13+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Kendall W. Wright 4.14+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and William R. Sumser 4.15+ Form of Amendment to Employee Stock Purchase Agreement dated as of May 2, 1996 between the Company and each of Messrs. Miller, Renusch, Roy, King, Rutter, Wright and Sumser (each separate amendment is substantially identical in all respects) 5.1+ Opinion of Vorys, Sater, Seymour and Pease as to the legality of the Common Shares being offered 10.1+ Loan Agreement dated as of July 15, 1990 between the Company and NBD Bank, as amended 10.2+ Deferred Compensation Agreement dated as of December 18, 1986 between the Company and Glenn M. Miller, as amended 10.3+ Deferred Compensation Agreement dated as of December 19, 1986 between the Company and Charles A. Renusch, as amended 10.4+ Deferred Compensation Agreement dated as of February 10, 1989 between the Company and Eric P. Roy, as amended 10.5+ Deferred Compensation Agreement dated as of February 10, 1989 between the Company and Guy S. King, as amended 10.6+ Deferred Compensation Agreement dated as of October 17, 1990 between the Company and Lincoln L. Rutter, as amended 10.7+ Deferred Compensation Agreement dated as of July 18, 1991 between the Company and William R. Sumser, as amended 10.8+ Deferred Compensation Agreement dated as of October 1, 1991 between the Company and Kendall W. Wright, as amended 10.9+ Form of Amendment to Deferred Compensation Agreement dated as of May 2, 1996 between the Company and each of Messrs. Miller, Renusch, Roy, King, Rutter, Sumser and Wright (each separate amendment is substantially identical in all respects) 10.10+ Incentive Stock Plan 10.11 Indemnification Agreement dated as of May 15, 1996, among the Company and Messrs. Miller, Renusch, Roy, King, Rutter, Sumser and Wright 10.12 Indemnification Agreement dated as of May 15, 1996, among Mr. Mercer and the Company 10.13+ Lease Agreement dated June 29, 1988 between Mr. Mercer and the Company, as amended 10.14 Form of Loan Agreement dated as of May , 1996 among the Company, the banks listed therein and NBD Bank, as agent 11.1+ Statement re: Computation of Pro Forma Per Common Share Earnings 23.1+ Consent of Ernst & Young LLP 23.2+ Consent of Vorys, Sater, Seymour and Pease (included in Exhibit 5.1) 23.3+ Consent of Tony C. Canonie, Jr., director nominee 23.4+ Consent of Russell M. Gertmenian, director nominee 23.5+ Consent of J.F. Keeler, Jr., director nominee 24.1+ Powers of Attorney 27.1+ Financial Data Schedule
- ------------------------ * To be filed by amendment. + Previously filed II-5 (B) FINANCIAL STATEMENT SCHEDULES: None. ITEM 17. UNDERTAKINGS (1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted against the registrant by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (2) The undersigned hereby undertakes that: (a) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (b) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) The undersigned hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Columbus, State of Ohio, on May 24, 1996. AIRNET SYSTEMS, INC. By: /s/ GERALD G. MERCER ----------------------------------- Gerald G. Mercer CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------------------ ------------------------------------- -------------- Chairman of the Board of Directors, /s/ GERALD G. MERCER President and Chief Executive - ------------------------------------ Officer (Principal Executive May 24, 1996 Gerald G. Mercer Officer) Director, Executive Vice President, /s/ ERIC P. ROY* Chief Operating Officer, Chief - ------------------------------------ Financial Officer and Treasurer May 24, 1996 Eric P. Roy (Principal Financial and Accounting Officer) /s/ ADELE MERCER* - ------------------------------------ Director May 24, 1996 Adele Mercer *By: /s/ GERALD G. MERCER - ------------------------------------ ATTORNEY-IN-FACT
II-7 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION - --------- ------------------------------------------------------------------------------------- 1.1+ Form of Underwriting Agreement 3.1+ Amended Articles of the Company (incorporated by reference to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 3, 1996) 3.2+ Code of Regulations of the Company (incorporated by reference to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 3, 1996) 4.1+ Form of Stock Certificate for Common Shares of the Company (incorporated by reference to the Company's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on May 3, 1996) 4.2+ Covenant Not to Compete and Asset Purchase Agreement dated as of July 1, 1988 among WIE, Donald W. Wright, Sr. and the Company, as amended through March 15, 1996 4.3+ Amendment and Waiver to Covenant Not to Compete and Asset Purchase Agreement dated as of March 28, 1996 among WIE, Donald W. Wright, Sr., the Wright Trust and the Company 4.4+ Warrant for the Purchase of Shares of Common Stock -- No. 1 (canceled) 4.5+ Warrant for the Purchase of Shares of Common Stock -- No. 2 (canceled) 4.6+ Form of Warrant for the Purchase of Shares of Common Stock -- No. 5 (replacing No. 1) 4.7+ Form of Warrant for the Purchase of Shares of Common Stock -- No. 6 (replacing No. 2) 4.8+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Glenn M. Miller 4.9+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Charles A. Renusch 4.10+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Eric P. Roy 4.11+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Guy S. King 4.12+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Lincoln L. Rutter 4.13+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and Kendall W. Wright 4.14+ Employee Stock Purchase Agreement dated as of April 1, 1994 between the Company and William R. Sumser 4.15+ Form of Amendment to Employee Stock Purchase Agreement dated as of May 2, 1996 between the Company and each of Messrs. Miller, Renusch, Roy, King, Rutter, Wright and Sumser (each separate amendment is substantially identical in all respects) 5.1+ Opinion of Vorys, Sater, Seymour and Pease as to the legality of the Common Shares being offered 10.1+ Loan Agreement dated as of July 15, 1990 between the Company and NBD Bank, as amended 10.2+ Deferred Compensation Agreement dated as of December 18, 1986 between the Company and Glenn M. Miller, as amended
EXHIBIT NUMBER EXHIBIT DESCRIPTION - --------- ------------------------------------------------------------------------------------- 10.3+ Deferred Compensation Agreement dated as of December 19, 1986 between the Company and Charles A. Renusch, as amended 10.4+ Deferred Compensation Agreement dated as of February 10, 1989 between the Company and Eric P. Roy, as amended 10.5+ Deferred Compensation Agreement dated as of February 10, 1989 between the Company and Guy S. King, as amended 10.6+ Deferred Compensation Agreement dated as of October 17, 1990 between the Company and Lincoln L. Rutter, as amended 10.7+ Deferred Compensation Agreement dated as of July 18, 1991 between the Company and William R. Sumser, as amended 10.8+ Deferred Compensation Agreement dated as of October 1, 1991 between the Company and Kendall W. Wright, as amended 10.9+ Form of Amendment to Deferred Compensation Agreement dated as of May 2, 1996 between the Company and each of Messrs. Miller, Renusch, Roy, King, Rutter, Sumser and Wright (each separate amendment is substantially identical in all respects) 10.10+ Incentive Stock Plan 10.11 Indemnification Agreement dated as of May 15, 1996, among the Company and Messrs. Miller, Renusch, Roy, King, Rutter, Sumser and Wright 10.12 Indemnification Agreement dated as of May 15, 1996 among Mr. Mercer and the Company 10.13+ Lease Agreement dated June 29, 1988 between Mr. Mercer and the Company, as amended 10.14 Form of Loan Agreement dated as of May , 1996 among the Company, the banks listed therein and NBD Bank, as agent 11.1+ Statement re: Computation of Pro Forma Per Common Share Earnings 23.1+ Consent of Ernst & Young LLP 23.2+ Consent of Vorys, Sater, Seymour and Pease (included in Exhibit 5.1) 23.3+ Consent of Tony C. Canonie, Jr., director nominee 23.4+ Consent of Russell M. Gertmenian, director nominee 23.5+ Consent of J.F. Keeler, Jr., director nominee 24.1+ Powers of Attorney 27.1+ Financial Data Schedule
- ------------------------ * To be filed by amendment. + Previously filed EX-10.11 2 EXHIBIT 10.11 Exhibit 10.11 INDEMNIFICATION AGREEMENT This Indemnification Agreement, dated as of May 15, 1996, is entered into by and among Eric P. Roy, Glenn M. Miller, Charles A. Renusch, Guy S. King, Lincoln L. Rutter, Kendall W. Wright and William R. Sumser (collectively referred to as the "Shareholders") and AirNet Systems, Inc. (formerly known as New Creations, Inc.) (the "Company"). WHEREAS, in July 1988, the Company elected to be treated as an S Corporation under subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, as an S Corporation, the Company has not paid federal income taxes at the corporate level; WHEREAS, in connection with its public offering (the "Public Offering") of 5,600,000 Common Shares, par value $0.01 per share, the Company will terminate its S Corporation status; and NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of Eric P. Roy, Glenn M. Miller, Charles A. Renusch, Guy S. King, Lincoln L. Rutter, Kendall W. Wright and William R. Sumser hereby agrees, jointly and severally, to indemnify and hold harmless the Company and its successors and assigns against, and to reimburse the Company and its successors and assigns for, any corporate level income taxes which might be imposed upon the Company or its predecessor company with respect to any period ending on or prior to the termination of the Company's S corporation status, and any interest and penalty associated therewith, and any expense (including legal fees and expenses) incurred in connection with any claim relating thereto, to which the Company and its successors and assigns may become subject at any time. This agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Ohio. This agreement may not be amended or terminated without the consent of a majority of the independent directors of the Company. This agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which shall together constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the date and year first above written. --------------------------------------- Eric P. Roy --------------------------------------- Glenn M. Miller --------------------------------------- Charles A. Renusch --------------------------------------- Guy S. King --------------------------------------- Lincoln L. Rutter --------------------------------------- Kendall W. Wright --------------------------------------- William R. Sumser AIRNET SYSTEMS, INC. --------------------------------------- By: Its: -2- EX-10.12 3 EXHIBIT 10.12 Exhibit 10.12 INDEMNIFICATION AGREEMENT This Indemnification Agreement, dated as of May 15, 1996, is entered into by and between Gerald G. Mercer (the "Shareholder") and AirNet Systems, Inc. (formerly known as New Creations, Inc.) (the "Company"). WHEREAS, in July 1988, the Company elected to be treated as an S Corporation under subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, as an S Corporation, the Company has not paid federal income taxes at the corporate level; WHEREAS, in connection with its public offering (the "Public Offering") of 5,600,000 Common Shares, par value $0.01 per share, the Company will terminate its S Corporation status; and NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Gerald G. Mercer hereby agrees to indemnify and hold harmless the Company and its successors and assigns against, and to reimburse the Company and its successors and assigns for, any corporate level income taxes which might be imposed upon the Company or its predecessor company with respect to any period ending on or prior to the termination of the Company's S corporation status, and any interest and penalty associated therewith, and any expense (including legal fees and expenses) incurred in connection with any claim relating thereto, to which the Company and its successors and assigns may become subject at any time. In addition, Gerald G. Mercer hereby agrees to indemnify and hold harmless the Company and its successors and assigns against, and to reimburse the Company and its successors for, any losses, claims, damages or liabilities (or actions in respect thereof) arising from the property formerly owned by Mr. Mercer located at 6544 Highland Road, Pontiac, Michigan 48054. This agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Ohio. This agreement may not be amended or terminated without the consent of a majority of the independent directors of the Company. This agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which shall together constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the date and year first above written. ----------------------------------- Gerald G. Mercer AIRNET SYSTEMS, INC. ----------------------------------- By: Its: -2- EX-10.14 4 EXHIBIT 10.14 DRAFT DATED MAY 17, 1996 AIRNET SYSTEMS, INC. __________________________________________ LOAN AGREEMENT dated as of May __, 1996 __________________________________________ The Banks party hereto, and NBD BANK, as Agent TABLE OF CONTENTS Article Page - ------- --- I. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Certain Definitions . . . . . . . . . . . . . . . . . . 1.2 Other Definitions; Rules of Construction . . . . . . . . . . . . . . . . . . . . II. THE COMMITMENTS AND THE ADVANCES . . . . . . . . . . . . . . 2.1 Commitment of the Banks . . . . . . . . . . . . . . . . 2.2 Termination and Reduction of Commitments. . . . . . . . . . . . . . . . . . . . . . 2.3 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Disbursement of Advances. . . . . . . . . . . . . . . . 2.5 Conditions for First Disbursement . . . . . . . . . . . 2.6 Further Conditions for Disbursement . . . . . . . . . . 2.7 Subsequent Elections as to Borrowings; Etc.. . . . . . . . . . . . . . . . . . . 2.8 Limitation of Requests and Elections. . . . . . . . . . 2.9 Minimum Amounts; Limitation on Number of Loans. . . . . . . . . . . . . . . . . . . 2.10 Extension of Termination Dates. . . . . . . . . . . . . III. PAYMENTS AND PREPAYMENTS OF ADVANCES . . . . . . . . . . . . 3.1 Principal Payments and Prepayments. . . . . . . . . . . 3.2 Interest Payments . . . . . . . . . . . . . . . . . . . 3.3 Letter of Credit Reimbursement Payments . . . . . . . . . . . . . . . . . . . . . . 3.4 Payment Method. . . . . . . . . . . . . . . . . . . . . 3.5 No Setoff or Deduction. . . . . . . . . . . . . . . . . 3.6 Payment on Non-Business Day; Payment Computations . . . . . . . . . . . . . . . . 3.7 Additional Costs. . . . . . . . . . . . . . . . . . . . 3.8 Illegality and Impossibility. . . . . . . . . . . . . . 3.9 Indemnification . . . . . . . . . . . . . . . . . . . . -i- IV. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . 4.1 Corporate Existence and Power . . . . . . . . . . . . . 4.2 Corporate Authority . . . . . . . . . . . . . . . . . . 4.3 Binding Effect. . . . . . . . . . . . . . . . . . . . . 4.4 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . 4.5 Litigation. . . . . . . . . . . . . . . . . . . . . . . 4.6 Financial Condition . . . . . . . . . . . . . . . . . . 4.7 Use of Advances . . . . . . . . . . . . . . . . . . . . 4.8 Consents, Etc.. . . . . . . . . . . . . . . . . . . . . 4.9 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 4.10 Title to Properties; Acquisition. . . . . . . . . . . . 4.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 4.12 Environmental Matters . . . . . . . . . . . . . . . . . 4.13 No Defaults . . . . . . . . . . . . . . . . . . . . . . 4.14 No Burdensome Restriction . . . . . . . . . . . . . . . 4.15 Initial Public Offering . . . . . . . . . . . . . . . . 4.16 FAA Certifications. . . . . . . . . . . . . . . . . . . 4.17 Airworthiness Certificates. . . . . . . . . . . . . . . V COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Affirmative Covenants . . . . . . . . . . . . . . . . . (a) Preservation of Corporate Existence, Etc.. . . . . . . . . . . . . . . (b) Compliance with Laws, Etc.. . . . . . . . . . . (c) Maintenance of Properties; Insurance. . . . . . . . . . . . . . . . . . (d) Reporting Requirements. . . . . . . . . . . . . (e) Accounting; Access to Records, Books, Etc. . . . . . . . . . . . . (f) Further Assurances. . . . . . . . . . . . . . . 5.2 Negative Covenants . . . . . . . . . . . . . . . . . . (a) Tangible Net Worth. . . . . . . . . . . . . . . (b) Funded Debt to Ratio . . . . . . . . . . . . . (c) Funded Debt to Total Capitalization . . . . . . . . . . . . (d) Cash Flow Coverage Ratio. . . . . . . . . . . . -ii- (e) Liens . . . . . . . . . . . . . . . . . . . . . (f) Merger; Etc.. . . . . . . . . . . . . . . . . . (g) Disposition of Assets, Etc. . . . . . . . . . . (h) Dividends and Other Restricted Payments . . . . . . . . . . . . . . . . . . (i) Investment Loans and Advances . . . . . . . . . (j) Indebtedness. . . . . . . . . . . . . . . . . . (k) Nature of Business. . . . . . . . . . . . . . . (l) Transactions with Affiliates. . . . . . . . . . (m) Additional Covenants. . . . . . . . . . . . . . VI. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Events of Default . . . . . . . . . . . . . . . . . . . 6.2 Remedies. . . . . . . . . . . . . . . . . . . . . . . . VII. THE AGENT AND THE BANKS. . . . . . . . . . . . . . . . . . . 7.1 Appointment and Authorization . . . . . . . . . . . . . 7.2 Agent and Affiliates. . . . . . . . . . . . . . . . . . 7.3 Scope of Agent's Duties . . . . . . . . . . . . . . . . 7.4 Reliance by Agent . . . . . . . . . . . . . . . . . . . 7.5 Default . . . . . . . . . . . . . . . . . . . . . . . . 7.6 Liability of Agent. . . . . . . . . . . . . . . . . . . 7.7 Nonreliance on Agent and Other Banks. . . . . . . . . . . . . . . . . . . . . 7.8 Indemnification . . . . . . . . . . . . . . . . . . . . 7.9 Successor Agent . . . . . . . . . . . . . . . . . . . . 7.10 Sharing of Payments . . . . . . . . . . . . . . . . . . 7.11 Withholding Tax Exemption . . . . . . . . . . . . . . . VIII. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . 8.1 Amendments, Etc.. . . . . . . . . . . . . . . . . . . . 8.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . 8.3 No Waiver By conduct; Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . 8.4 Reliance on and Survival of Various Provisions . . . . . . . . . . . . . . . . . -iii- 8.5 Expenses; Indemnification . . . . . . . . . . . . . . . 8.6 Successors and Assigns. . . . . . . . . . . . . . . . . 8.7 Counterparts. . . . . . . . . . . . . . . . . . . . . . 8.8 Governing Law . . . . . . . . . . . . . . . . . . . . . 8.9 Table of Contents and Headings. . . . . . . . . . . . . 8.10 Construction of Certain Provisions. . . . . . . . . . . 8.11 Integration and Severability. . . . . . . . . . . . . . 8.12 Independence of Covenants . . . . . . . . . . . . . . . 8.13 Interest Rate Limitation. . . . . . . . . . . . . . . . EXHIBITS - -------- Exhibit A. . . . . . . . . Revolving Credit A Note Exhibit B. . . . . . . . . Revolving Credit B Note Exhibit C. . . . . . . . . Request for Advance Exhibit D. . . . . . . . . Request for Conversion Exhibit E. . . . . . . . . Assignment and Acceptance SCHEDULES - ---------- Schedule 2.10. . . . . . . Extension Request Schedule 4.4 . . . . . . . Subsidiaries Schedule 4.5 . . . . . . . Litigation Schedule 4.6 . . . . . . . Contingent Liabilities Schedule 4.12. . . . . . . Environmental Matters Schedule 5.2(e). . . . . . Liens Schedule 5.2(j). . . . . . Indebtedness -iv- THIS LOAN AGREEMENT, dated as of May ___, 1996 (this "Agreement"), is among AIRNET SYSTEMS, INC., an Ohio corporation (the "Company"), the lenders party hereto from time to time (collectively, the "Banks" and individually, a "Bank") and NBD BANK, a Michigan banking corporation, as agent for the Banks (in such capacity, the "Agent"). INTRODUCTION The Company desires to obtain a revolving credit facility, including letters of credit, in the aggregate principal amount of $20,000,000 for working capital and general corporate purposes, and a revolving credit facility in aggregate principal amount of $30,000,000 to pay off certain outstanding debt, make acquisitions, and purchase aircraft and equipment, and the Banks are willing to establish such credit facilities in favor of the Company on the terms and conditions herein set forth. In consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 CERTAIN DEFINITIONS. As used herein the following terms shall have the following respective meanings: "ADVANCE" shall mean any Loan and any Letter of Credit Advance. "AFFILIATE", when used with respect to any Person shall mean any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. For purposes of this definition "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), with respect to any Person, shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "APPLICABLE LENDING OFFICE" shall mean, with respect to any Advance made by any Bank or with respect to such Bank's Commitment, the office of such Bank or of any Affiliate of such Bank located at the address specified as the applicable lending office for such Bank set forth next to the name of such Bank in the signature pages hereof or any other office or Affiliate of such Bank or of any Affiliate of such Bank hereafter selected and notified to the Company and the Agent by such Bank. "APPLICABLE MARGIN" shall mean the following margin based upon the Funded Debt Ratio as adjusted on the first day of each fiscal quarter of the Company based upon the Funded Debt Ratio as of the last day of the fiscal quarter preceding the fiscal quarter most recently ended, PROVIDED, THAT, the Eurodollar Rate shall not be adjusted pursuant to any change in the Applicable -1- Margin for any outstanding Eurodollar Rate Loan until after the end of the Eurodollar Interest Period for such Eurodollar Rate Loan.
- ------------------------------------------------------------------------------------------------ Funded Debt Ratio Applicable Margin Applicable Margin Applicable Margin for for Eurodollar Rate for Facility Fees Letter of Credit Fees Loan Under Section 2.3(a) Under Section 2.3(b) - ------------------------------------------------------------------------------------------------ less than 1.0 0.700% 0.200% 0.700% - ------------------------------------------------------------------------------------------------ greater than or equal to 0.875% 0.225% 0.875% 1.0 but less than 2.0 - ------------------------------------------------------------------------------------------------ greater than or equal to 1.000% 0.250% 1.000% 2.0 but less than 2.5 - ------------------------------------------------------------------------------------------------ greater than or equal to 1.125% 0.375% 1.125% 2.5 but less than 3.0 - ------------------------------------------------------------------------------------------------
"BORROWING" shall mean the aggregation of Advances, including each Letter of Credit issuance, of the Banks to be made to the Company, or continuations and conversions of any Loans, made pursuant to Article II on a single date and, in the case of any Eurodollar Rate Loans, for a single Eurodollar Interest Period, which Borrowings may be classified for purposes of this Agreement by reference to the type of Loans or the type of Advance comprising the related Borrowing, e.g., a "Eurodollar Rate Borrowing" is a Borrowing comprised of Eurodollar Rate Loans and a "Letter of Credit Borrowing" is an Advance comprised of a single Letter of Credit. "BORROWING BASE A" shall mean an amount from time to time equal to 75% of the quick liquidation value of aircraft and other equipment, in each case acceptable to the Required Banks, owned by the Company. As used in this definition, quick liquidation value shall mean the expected value if such aircraft or equipment if sold "as is, where is" to a broker selected by the Agent. Additionally, any aircraft or equipment (a) which is not in the possession of the Company or is subject to any Lien, (b) that is located outside the United States, or (c) that is otherwise unacceptable to the Agent shall not be included in the calculation of Borrowing Base A. Borrowing Base A may be reset from time to time at the option of the Agent or the Required Banks. "BORROWING BASE B" shall mean an amount from time to time equal to the sum of (a) 80% of the Company's "acceptable accounts receivable," plus (b) the lesser of (i) 50% of the net book value of the Company's "acceptable aircraft parts inventory" and (ii) $4,000,000. As used herein, "acceptable accounts receivable" shall mean the open accounts receivable of the -2- Company except (i) those due from Affiliates, officers, directors or shareholders of the Company, (ii) those which are over 90 days old from the date of invoice, (iii) those which are subject to offset, (iv) those in respect of which the amount is in dispute, (v) those which are payable by any Person as to which 10% or more of the aggregate accounts receivable payable by such Person to the Company do not otherwise constitute acceptable accounts receivable, provided that up to $100,000 of such accounts receivable which would otherwise constitute acceptable accounts receivable but for this clause (v) shall be included in Borrowing Base B, (vi) those which are payable by any Person that is subject to any bankruptcy, insolvency, liquidation, reorganization or similar proceeding or otherwise that it is generally not paying its debts as they become due, and (vii) those which are for any other reason at any time reasonably deemed by the Lender to be unacceptable. As used herein, "acceptable aircraft parts inventory" shall mean that inventory consisting of aircraft spare parts owned by the Company, except such inventory (i) that is not in the possession of the Company, (ii) that is held for lease or is the subject of any lease, and (iii) that for any other reason is at any time reasonably deemed by the Agent to be unacceptable. "BUSINESS DAY" shall mean a day other than a Saturday, Sunday or other day on which the Agent is not open to the public for carrying on substantially all of its banking functions in Detroit, Michigan. "CAPITAL LEASE" of any Person shall mean any lease which, in accordance with generally accepted accounting principles, is or should be capitalized on the books of such Person. "CASH FLOW COVERAGE RATIO" shall mean, as of the last day of any fiscal quarter of the Company and determined for the Company and its Subsidiaries on a Consolidated basis, the ratio of (a) EBITDA plus the amount of rent paid under operating leases, and minus the amount of capital expenditures which are not financed by long term debt, in each case for the four consecutive fiscal quarter period then ending, to (b) Interest Expense, plus the amount of rent paid under operating leases, in each case as calculated for the four fiscal quarters then ending, and plus the current portion of Funded Debt and, to the extent not included in such current portion of Funded Debt, one-sixth of the principal balance of the Revolving Credit A Loans, in each case as of the last day of such fiscal quarter. "CHANGE IN CONTROL" means the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of voting stock of the Company. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations thereunder. "COMMITMENT" shall mean, with respect to each Bank, the commitment of each such Bank to make Loans and to participate in Letter of Credit Advances made through the Agent pursuant to Section 2.1, in amounts not exceeding in aggregate principal amount outstanding at any time the respective commitment amounts for each such Bank set forth next to the name of -3- each such Bank in the signature pages hereof, as such amounts may be reduced from time to time pursuant to Section 2.2. The Commitment of each Bank to make Revolving Credit A Advances under Section 2.1(a) is herein referred to as its "REVOLVING CREDIT A COMMITMENT" and the Commitment of each Bank to make Revolving Credit B Loans under Section 2.1(b) is herein referred to as its "REVOLVING CREDIT B COMMITMENT". "CONSOLIDATED" shall mean, when used with reference to any financial term in this Agreement, the aggregate for two or more Persons of the amounts signified by such term for all such Persons determined on a consolidated basis in accordance with generally accepted accounting principles. "CONTINGENT LIABILITIES" of any Person shall mean, as of any date, all obligations of such Person or of others for which such Person is contingently liable, as obligor, guarantor, surety, accommodation party, partner or in any other capacity, or in respect of which obligations such Person assures a creditor against loss or agrees to take any action to prevent any such loss (other than endorsements of negotiable instruments for collection in the ordinary course of business), including without limitation all reimbursement obligations of such Person in respect of any letters of credit, surety bonds or similar obligations (including, without limitation, bankers acceptances) and all obligations of such Person to advance funds to, or to purchase assets, property or services from, any other Person for no purpose other than to maintain the financial condition of such other Person. "CONTRACTUAL OBLIGATION" shall mean as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "DEFAULT" shall mean any event or condition which might become an Event of Default with notice or lapse of time or both. "DOLLARS" and "$" shall mean the lawful money of the United States of America. "EBITDA" means, for any period, Net Income for such period plus all amounts deducted in determining such Net Income on account of (a) Interest Expense, (b) income taxes, and (c) depreciation and amortization expense. "EFFECTIVE DATE" shall mean the effective date specified in the final paragraph of this Agreement. "ENVIRONMENTAL LAWS" at any date shall mean all provisions of law, statute, ordinances, rules, regulations, judgments, writs, injunctions, decrees, orders, awards and standards promulgated by the government of the United States of America or any foreign government or by any state, province, municipality or other political subdivision thereof or therein, or by any court, agency, instrumentality, regulatory authority or commission of any of the foregoing concerning the protection of, or regulating the discharge of substances into, the environment. -4- "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations thereunder. "ERISA AFFILIATE" shall mean, with respect to any Person, any trade or business (whether or not incorporated) which, together with such Person or any Subsidiary of such Person, would be treated as a single employer under Section 414 of the Code and the regulations promulgated thereunder. "EURODOLLAR BUSINESS DAY" shall mean, with respect to any Eurodollar Rate Loan, a day which is both a Business Day and a day on which dealings in Dollar deposits are carried out in the London interbank market. "EURODOLLAR INTEREST PERIOD" shall mean, with respect to any Eurodollar Rate Loan, the period commencing on the day such Eurodollar Rate Loan is made or converted to a Eurodollar Rate Loan and ending on the day which is one, two, three or six months thereafter, as the Company may elect under Section 2.4 or 2.7, and each subsequent period commencing on the last day of the immediately preceding Eurodollar Interest Period and ending on the day which is one, two, three or six months thereafter, as the Company may elect under Section 2.4 or 2.7, PROVIDED, HOWEVER, that (a) any Eurodollar Interest Period which commences on the last Eurodollar Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Eurodollar Business Day of the appropriate subsequent calendar month, (b) each Eurodollar Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall end on the next succeeding Eurodollar Business Day or, if such next succeeding Eurodollar Business Day falls in the next succeeding calendar month, on the next preceding Eurodollar Business Day, and (c) no Eurodollar Interest Period which would end after Termination Date A with respect to any Revolving Credit A Loan or after Termination Date B with respect to any Revolving Credit B Loan shall be permitted. "EURODOLLAR RATE" shall mean, with respect to any Eurodollar Rate Loan and the related Eurodollar Interest Period, the per annum rate that is equal to the sum of: (a) the Applicable Margin, plus (b) the rate per annum obtained by dividing (i) the per annum rate of interest at which deposits in Dollars for such Eurodollar Interest Period and in an aggregate amount comparable to the amount of such Eurodollar Rate Loan to be made by the Agent in its capacity as a Bank hereunder are offered to the Agent by other prime banks in the London interbank market at approximately 11:00 a.m. London time on the second Eurodollar Business Day prior to the first day of such Eurodollar Interest Period by (ii) an amount equal to one minus the stated maximum rate (expressed as a decimal) of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) that are specified on the first day of such Eurodollar Interest Period by the Board of Governors of the Federal Reserve System (or any successor agency thereto) for determining the maximum reserve requirement with respect -5- to eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of such Board) maintained by a member bank of such System; all as conclusively determined by the Agent, absent manifest error, such sum to be rounded up, if necessary, to the nearest whole multiple of one one-hundredth of one percent (1/100 of 1%). "EURODOLLAR RATE LOAN" shall mean any Loan which bears interest at the Eurodollar Rate. "EVENT OF DEFAULT" shall mean any of the events or conditions described in Section 6.1. "FAA" shall mean, collectively, the United States Department of Transportation and/or United States Federal Aviation Administration and/or the Administrator of the United States Federal Aviation Administration and/or the Secretary of Transportation or any Person, governmental department, bureau, commission or agency succeeding to the functions of any of the foregoing. "FEDERAL FUNDS RATE" shall mean the per annum rate that is equal to the average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published by the Federal Reserve Bank of New York for such day, or, if such rate is not so published for any day, the average of the quotations for such rates received by the Agent from three federal funds brokers of recognized standing selected by the Agent in its discretion; all as conclusively determined by the Agent, such sum to be rounded up, if necessary, to the nearest whole multiple of one one-hundredth of one percent (1/100 of 1%), which Federal Funds Rate shall change simultaneously with any change in such published or quoted rates. "FIXED RATE LOAN" shall mean any Eurodollar Rate Loan or any Negotiated Rate Loan. "FLOATING RATE" shall mean the per annum rate equal to the sum of (a) the Applicable Floating Rate Margin plus (b) the greater of (i) the Prime Rate in effect from time to time , and (ii) the sum of one-half percent (1/2%) per annum plus the Federal Funds Rate in effect from time to time; which Floating Rate shall change simultaneously with any change in such Prime Rate or Federal Funds Rate, as the case may be. "FLOATING RATE LOAN" shall mean any Loan which bears interest at the Floating Rate. "FUNDED DEBT" as of any date, shall mean: (a) all debt for borrowed money and similar monetary obligations evidenced by bonds, notes, debentures, Capital Lease obligations or otherwise, including without limitation obligations in respect of the deferred purchase price of properties or assets, in each case whether direct or indirect; (b) all liabilities secured by any Lien -6- existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; (c) all reimbursements obligations under outstanding letters of credit in respect of drafts which (i) may be presented or (ii) have been presented and have not yet been paid, and (d) all Contingent Liabilities relating to any of the obligations of others similar in character to those described in the foregoing clauses (a) through (c), all as determined for the Company and its Subsidiaries on a Consolidated basis. "FUNDED DEBT RATIO" shall mean, as of any date, the ratio of (a) Funded Debt as of such date to (b) EBITDA, as calculated for the four consecutive fiscal quarters of the Company most recently ended. "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" shall mean generally accepted accounting principles applied on a basis consistent with that reflected in the financial statements referred to in Section 4.6. "GUARANTIES" shall mean each guaranty executed by any Guarantor, as amended or modified from time to time, which Guaranties shall be in form and substance acceptable to the Agent. "GUARANTORS" shall mean each present and future Subsidiary of the Company. "HAZARDOUS MATERIALS" includes, without limitation, any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances or related materials defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, ET SEQ.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, ET SEQ.), the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901, ET SEQ.) and in the regulations adopted and publications promulgated pursuant thereto, or any other federal, state or local government law, ordinance, rule or regulation. "INDEBTEDNESS" of any Person shall mean, as of any date, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person as lessee under any Capital Lease, (c) all obligations which are secured by any Lien existing on any asset or property of such Person whether or not the obligation secured thereby shall have been assumed by such Person (to the extent of such Lien if such obligation is not assumed), (d) all obligations of such Person for the unpaid purchase price for goods, property or services acquired by such Person, except for trade accounts payable arising in the ordinary course of business that are not past due, (e) all obligations of such Person to purchase goods, property or services where payment therefor is required regardless of whether delivery of such goods or property or the performance of such services is ever made or tendered (generally referred to as "take or pay contracts"), (f) all liabilities of such Person in respect of Unfunded Benefit Liabilities under any Plan of such Person or of any ERISA Affiliate, (g) all obligations of such Person in respect of any interest rate or currency swap, rate cap or other similar transaction (valued in an amount equal to the highest -7- termination payment, if any, that would be payable by such Person upon termination for any reason on the date of determination), and (h) all Contingent Liabilities. "INTEREST EXPENSE" means, for any period, total interest and related expense (including, without limitation, that portion of any Capitalized Lease obligation attributable to interest expense in conformity with Generally Accepted Accounting Principles, amortization of debt discount, all capitalized interest, the interest portion of any deferred payment obligations, all commissions, discounts and other fees and charges owed with respect to letter of credit and bankers acceptance financing, the net costs and net payments under any interest rate hedging, cap or similar agreement or arrangement, prepayment charges, agency fees, administrative fees, commitment fees and capitalized transaction costs allocated to interest expense) paid, payable or accrued during such period, without duplication for any period, with respect to all outstanding Indebtedness of the Company or any of its Subsidiaries, all as determined for the Company and its Subsidiaries on a Consolidated basis. "INTEREST PAYMENT DATE" shall mean (a) with respect to any Fixed Rate Loan, the last day of each Interest Period with respect to such Fixed Rate Loan and, in the case of any Interest Period exceeding three months, those days that occur during such Interest Period at intervals of three months after the first day of such Interest Period, and (b) in all other cases, the last Business Day of each March, June, September and December occurring after the date hereof, commencing with the first such Business Day occurring after the date of this Agreement. "INTEREST PERIOD" shall mean any Eurodollar Interest Period or Negotiated Interest Period. "LETTER OF CREDIT" shall mean a standby letter of credit having a stated expiry date or a date upon which the draft must be reimbursed not later than twelve months after the date of issuance and not later than the fifth Business Day before the Termination Date B issued by the Agent on behalf of the Banks for the account of the Company under an application and related documentation acceptable to the Agent requiring, among other things, immediate reimbursement by the Company to the Agent in respect of all drafts or other demand for payment honored thereunder and all expenses paid or incurred by the Agent relative thereto. "LETTER OF CREDIT ADVANCE" shall mean any issuance of a Letter of Credit under Section 2.4 made pursuant to Section 2.1(b) in which each Bank acquires a pro rata risk participation pursuant to Section 2.4(d). "LETTER OF CREDIT DOCUMENTS" shall have the meaning ascribed thereto in Section 3.3(b). "LIEN" shall mean any pledge, assignment, hypothecation, mortgage, security interest, deposit arrangement, option, conditional sale or title retaining contract, sale and leaseback transaction, financing statement filing, lessor's or lessee's interest under any lease, subordination -8- of any claim or right, or any other type of lien, charge, encumbrance, preferential arrangement or other claim or right. "LOAN" shall mean any Revolving Credit A Loan and any Revolving Credit B Loan. Any such Loan or portion thereof may also be denominated as a Floating Rate Loan or a Eurodollar Rate Loan and such Loans are referred to herein as "types" of Loans. "LOAN DOCUMENTS" shall mean, collectively, this Agreement, the Notes, the Guarantors and all agreements, instruments and documents executed pursuant thereto at any time. "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a) the business, assets, operations, prospects or condition (financial or otherwise) of the Company, or any Guarantor, (b) the ability of the Company to perform its obligations under any Loan Document, or (c) the validity or enforceability of any Loan Document or the rights or remedies of the Agent or the Banks under any Loan Document. "MULTIEMPLOYER PLAN" shall mean any "multiemployer plan" as defined in Section 4001(a)(3) of ERISA or Section 414(f) of the Code. "NEGOTIATED RATE" shall mean, with respect to any Negotiated Rate Loan, the rate per annum agreed upon between the Company and the Banks at the time such Negotiated Rate Loan is made. "NEGOTIATED INTEREST PERIOD" shall mean, with respect to any Negotiated Rate Loan, the period commencing on the day such Negotiated Rate Loan is made or converted to a negotiated Rate Loan and ending on the date agreed upon between the Company and the Banks at the time such Negotiated Rate Loan is made, and each subsequent period commencing on the last day of the immediately preceding Negotiated Interest Period and ending on the date agreed upon between the Company and the Banks at the time such Negotiated Rate Loan is elected to be continued as a Negotiated Rate Loan by the Company under Section 2.4 or 2.7, PROVIDED, HOWEVER, that no Negotiated Rate Interest Period which would end after the Termination Date A with respect to any Revolving Credit A Loan or after Termination Date B with respect to any Revolving Credit B Loan shall be permitted. "NEGOTIATED RATE LOAN" shall mean any Loan which bears interest at the Negotiated Rate. "NET INCOME" means, for any period, the Consolidated net income (or loss) of the Company and its Subsidiaries for such period taken as a single accounting period, determined in accordance with Generally Accepted Accounting Principles; PROVIDED that in determining Consolidated Net Income there shall be excluded, without duplication: (a) the income of any Person in which any Person other than the Company has a joint interest or partnership interest, except to the extent of the amount of dividends or other distributions actually paid to the Company by such Person during such period, (b) the proceeds of any insurance policy, (c) gains -9- from the sale, exchange, transfer or other disposition of property or assets not in the ordinary course of business of the Company and its Subsidiaries and related tax effects in accordance with Generally Accepted Accounting Principles, and (d) any other extraordinary or non-recurring gains of the Company or any of its Subsidiaries, and related tax effects in accordance with Generally Accepted Accounting Principles. "NET WORTH" of any Person shall mean, as of any date, the amount of any capital stock, paid in capital and similar equity accounts plus (or minus in the case of a deficit) the capital surplus and retained earnings of such Person and the amount of any foreign currency translation adjustment account shown as a capital account of such Person. "NOTE" shall mean any Revolving Credit A Note or any Revolving Credit B Note. "OVERDUE RATE" shall mean (a) in respect of principal of Floating Rate Loans, a rate per annum that is equal to the sum of three percent (3%) per annum plus the Floating Rate, (b) in respect of principal of Fixed Rate Loans, a rate per annum that is equal to the sum of three percent (3%) per annum plus the per annum rate in effect thereon until the end of the then current Fixed Interest Period for such Loan and, thereafter, a rate per annum that is equal to the sum of three percent (3%) per annum plus the Floating Rate, and (c) in respect of other amounts payable by the Company hereunder (other than interest), a per annum rate that is equal to the sum of three percent (3%) per annum plus the Floating Rate. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "PERMITTED LIENS" shall mean Liens permitted by Section 5.2(e) hereof. "PERSON" shall include an individual, a corporation, an association, a partnership, a trust or estate, a joint stock company, an unincorporated organization, a joint venture, a trade or business (whether or not incorporated), a government (foreign or domestic) and any agency or political subdivision thereof, or any other entity. "PLAN" shall mean, with respect to any Person, any pension plan (including a Multiemployer Plan) subject to Title IV of ERISA or to the minimum funding standards of Section 412 of the Code which has been established or maintained by such Person, any Subsidiary of such Person or any ERISA Affiliate, or by any other Person if such Person, any Subsidiary of such Person or any ERISA Affiliate could have liability with respect to such pension plan. "PRIME RATE" shall mean the per annum rate announced by the Agent from time to time as its "prime rate" (it being acknowledged that such announced rate may not necessarily be the lowest rate charged by the Agent to any of its customers); which Prime Rate shall change simultaneously with any change in such announced rate. -10- "PROHIBITED TRANSACTION" shall mean any transaction involving any Plan which is proscribed by Section 406 of ERISA or Section 4975 of the Code. "REPORTABLE EVENT" shall mean a reportable event as described in Section 4043(b) of ERISA including those events as to which the thirty (30) day notice period is waived under Part 2615 of the regulations promulgated by the PBGC under ERISA. "REQUIRED BANKS" shall mean Banks holding not less than (i) 66-2/3% percent of the aggregate principal amount of the Advances then outstanding or (ii) 66- 2/3% percent of the Commitments if no Advances are then outstanding. "REQUIREMENT OF LAW" shall mean as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon such Person or any of its property to which such Person or any of its property is subject. "REVOLVING CREDIT A LOAN" shall mean any borrowing under Section 2.4 evidenced by the Revolving Credit A Notes and made pursuant to Section 2.1(a). "REVOLVING CREDIT A ADVANCES" shall mean the Revolving Credit A Loans and the Letter of Credit Advances. "REVOLVING CREDIT A NOTE" shall mean any promissory note of the Company evidencing the Revolving Credit A Loans, in substantially the form annexed hereto as Exhibit A, as amended or modified from time to time and together with any promissory note or notes issued in exchange or replacement therefor. "REVOLVING CREDIT B LOAN" shall mean any borrowing under Section 2.4 evidenced by the Revolving Credit B Notes and made pursuant to Section 2.1(b). "REVOLVING CREDIT B NOTE" shall mean any promissory note of the Company evidencing the Revolving Credit B Loans, in substantially the form annexed hereto as Exhibit B, as amended or modified from time to time and together with any promissory note or notes issued in exchange or replacement therefor. "SUBSIDIARY" of any Person shall mean any other Person (whether now existing or hereafter organized or acquired) in which (other than directors qualifying shares required by law) at least a majority of the securities or other ownership interests of each class having ordinary voting power or analogous right (other than securities or other ownership interests which have such power or right only by reason of the happening of a contingency), at the time as of which any determination is being made, are owned, beneficially and of record, by such Person or by one -11- or more of the other Subsidiaries of such Person or by any combination thereof. Unless otherwise specified, reference to "Subsidiary" shall mean a Subsidiary of the Company. "TANGIBLE NET WORTH" of any Person shall mean, as of any date, (a) the Net Worth of such Person, less (b) the net book value of all items of the following character which are included in the assets of such Person to the extent they exceed 10% of the total assets of such Person: (i) goodwill, including, without limitation, the excess of cost over book value of any asset, (ii) organization or experimental expenses, (iii) unamortized debt discount and expense, (iv) patents, trademarks, trade names and copyrights, (v) treasury stock, (vi) deferred taxes and deferred charges, (vii) franchises, licenses and permits, and (viii) other assets which are deemed intangible assets under Generally Accepted Accounting Principles. "TERMINATION DATE A" shall mean the earlier to occur of (a) the date five years after the Effective Date or such later date as Termination Date A may be extended pursuant to Section 2.10 and (b) the date on which the Commitment shall be terminated pursuant to Section 2.2 or 6.2. "TERMINATION DATE B" shall mean the earlier to occur of (a) the date five years after the Effective Date or such later date as Termination Date B may be extended pursuant to Section 2.10 and (b) the date on which the Revolving Credit B Commitments shall be terminated pursuant to Section 2.2 or 6.2. "TOTAL CAPITALIZATION" shall mean the sum of the Consolidated Net Worth of the Company and its Subsidiaries plus the Funded Debt. "TOTAL LIABILITIES" of any Person shall mean, as of any date, all obligations which, in accordance with Generally Accepted Accounting Principles, are or should be classified as liabilities on a balance sheet of such Person and all Contingent Liabilities of such Person. "UNFUNDED BENEFIT LIABILITIES" shall mean, with respect to any Plan as of any date, the amount of the unfunded benefit liabilities determined in accordance with Section 4001(a)(18) of ERISA. 1.2 OTHER DEFINITIONS; RULES OF CONSTRUCTION. As used herein, the terms "AGENT", "BANKS", "COMPANY" and "THIS AGREEMENT" shall have the respective meanings ascribed thereto in the introductory paragraph of this Agreement. Such terms, together with the other terms defined in Section 1.1, shall include both the singular and the plural forms thereof and shall be construed accordingly. All computations required hereunder and all financial terms used herein shall be made or construed in accordance with Generally Accepted Accounting Principles unless such principles are inconsistent with the express requirements of this Agreement; PROVIDED that, if the Company notifies the Agent that the Company wishes to amend any covenant in Article V to eliminate the effect of any change in Generally Accepted Accounting Principles in the operation of such covenant (or if the Agent notifies the Company that the Required Banks wish to amend Article V for such purpose), then the Company's compliance with such covenant -12- shall be determined on the basis of Generally Accepted Accounting Principles in effect immediately before the relevant change in Generally Accepted Accounting Principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Banks. Use of the terms "HEREIN", "HEREOF", and "HEREUNDER" shall be deemed references to this Agreement in its entirety and not to the Section or clause in which such term appears. References to "SECTIONS" and "SUBSECTIONS" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. ARTICLE II THE COMMITMENTS AND THE ADVANCES 2.1 COMMITMENT OF THE BANKS. (a) REVOLVING CREDIT A. Each Bank agrees, for itself only, subject to the terms and conditions of this Agreement, to make Revolving Credit A Loans to the Company pursuant to Section 2.4 from time to time from and including the Effective Date to but excluding the Termination Date A, not to exceed in aggregate principal amount at any time outstanding the amount determined pursuant to Section 2.1(c). (b) REVOLVING CREDIT B LOANS AND LETTER OF CREDIT ADVANCES. Each Bank agrees, for itself only, subject to the terms and conditions of this Agreement, to make Revolving Credit B Loans to the Company pursuant to Section 2.4 and Section 3.3 and to participate in Letter of Credit Advances to Company pursuant to Section 2.4, from time to time from and including the Effective Date to but excluding the Termination Date B, not to exceed in aggregate principal amount at any time outstanding the amount determined pursuant to Section 2.1(c). (c) LIMITATION ON AMOUNT OF ADVANCES. Notwithstanding anything in this Agreement to the contrary, (i) the aggregate principal amount of the Revolving Credit A Loans made (A) by any Bank at any time outstanding shall not exceed the amount of its respective Revolving Credit A Commitment as of the date any such Advance is made and (B) by all Banks at any time outstanding shall not exceed the amount of Borrowing Base A, (ii) the aggregate principal amount of the Revolving Credit B Loans made and Letter of Credit Advances participated in (A) by any Bank at any time shall not exceed the amount of its respective Revolving Credit B Commitment as of the date any such Advance is made and (B) by all Banks at any time shall not exceed the amount of Borrowing Base, B, PROVIDED, HOWEVER, that the aggregate principal amount of Letter of Credit Advances outstanding at any time shall not exceed $3,000,000. 2.2 TERMINATION AND REDUCTION OF COMMITMENTS. (a) The Company shall have the right to terminate or reduce the Commitments at any time and from time to time at its option, PROVIDED that (i) the Company shall give notice of such termination or reduction to the Agent (with sufficient executed copies for each Bank) specifying the amount and effective date thereof, (ii) each partial reduction of the Commitments shall be in a minimum amount of $2,000,000 and -13- in an integral multiple of $2,000,000 and shall reduce the Commitments of all of the Banks proportionately in accordance with the respective commitment amounts for each such Bank set forth in the signature pages hereof next to name of each such Bank, (iii) no such termination or reduction shall be permitted with respect to any portion of the Commitments as to which a request for a Advance pursuant to Section 2.4 is then pending and (iv) the Revolving Credit A Commitments may not be terminated if any Revolving Credit A Advances are then outstanding and may not be reduced below the principal amount of Revolving Credit A Advances then outstanding and the Revolving Credit B Commitments may not be terminated if any Revolving Credit B Loans are then outstanding and may not be reduced below the principal amount of the Revolving Credit B Loans then outstanding. The Commitments or any portion thereof terminated or reduced pursuant to this Section 2.2, whether optional or mandatory, may not be reinstated. (b) For purposes of this Agreement, a Letter of Credit Advance (i) shall be deemed outstanding in an amount equal to the sum of the maximum amount available to be drawn under the related Letter of Credit on or after the date of determination and on or before the stated expiry date thereof plus the amount of any draws under such Letter of Credit that have not been reimbursed as provided in Section 3.3 and (ii) shall be deemed outstanding at all times on and before such stated expiry date or such earlier date on which all amounts available to be drawn under such Letter of Credit have been fully drawn, and thereafter until all related reimbursement obligations have been paid pursuant to Section 3.3. As provided in Section 3.3, upon each payment made by the Agent in respect of any draft or other demand for payment under any Letter of Credit, the amount of any Letter of Credit Advance outstanding immediately prior to such payment shall be automatically reduced by the amount of each Revolving Credit B Loan deemed advanced in respect of the related reimbursement obligation of the Company. 2.3 FEES. (a) The Company agrees to pay to each Bank a facility fee on the daily average amount of its respective Revolving Credit A Commitments and Revolving Credit B Commitments, for the period from the Effective Date to but excluding the relevant Termination Date at a rate equal to the Applicable Margin. Accrued facility fees shall be payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing on the first such Business Day occurring after the Effective Date, and on the Termination Date A and Termination Date B. (b) On or before the date of issuance of any Letter of Credit, the Company agrees (i) to pay to the Banks a fee computed at the rate of the Applicable Margin of the maximum amount available to be drawn from time to time under such Letter of Credit for the period from and including the date of issuance of such Letter of Credit to and including the stated expiry date of such Letter of Credit, and (ii) to pay an additional fee to the Agent for its own account computed at the rate of 0.125% per annum of such maximum amount for such period. Such fees are nonrefundable and the Company shall not be entitled to any rebate of any portion thereof if such Letter of Credit does not remain outstanding through its stated expiry date or for any other reason. The Company further agrees to pay to the Agent, on demand, such other customary administrative fees, charges and expenses of the Agent in respect of the issuance, negotiation, acceptance, amendment, transfer and payment of such Letter of Credit or otherwise -14- payable pursuant to the application and related documentation under which such Letter of Credit is issued. (c) The Company agrees to pay to the Agent such fees in such amounts as may from time to time be agreed upon by the Company and the Agent. 2.4 DISBURSEMENT OF ADVANCES. 0.0.0.0.1 The Company shall give the Agent notice of its request for each Advance in substantially the form of Exhibit C hereto not later than 10:00 a.m. Detroit time (i) three Eurodollar Business Days prior to the date such Advance is requested to be made if such Advance is to be made as a Eurodollar Rate Loan, (ii) five Business Days prior to the date any Letter of Credit Advance is requested to be made, and (iii) one Business Day prior to the date such Advance is requested to be made in all other cases, which notice shall specify whether a Revolving Credit A Loan or Revolving Credit B Loan is requested, whether a Eurodollar Rate Loan, a Negotiated Rate Loan or Floating Rate Loan or a Letter of Credit Advance is requested and, in the case of each requested Fixed Rate Loan, the Interest Period to be initially applicable to such Loan and, in the case of each Letter of Credit Advance, such information as may be necessary for the issuance thereof by the Agent. The Agent, not later than the Business Day next succeeding the day such notice is given, shall provide notice of such requested Advance to each Bank. Subject to the terms and conditions of this Agreement, the proceeds of each such requested Loan shall be made available to the Company by depositing the proceeds thereof in immediately available funds, in an account maintained and designated by the Company at the principal office of the Agent. Subject to the terms and conditions of this Agreement, the Agent shall, on the date any Letter of Credit Advance is requested to be made, issue the related Letter of Credit on behalf of the Banks for the account of the Company. Notwithstanding anything herein to the contrary, the Agent may decline to issue any requested Letter of Credit on the basis that the beneficiary, the purpose of issuance or the terms or the conditions of drawing are contrary to a policy of the Bank. (b) Each Bank, on the date any Borrowing in the form of a Loan is requested to be made, shall make its pro rata share of such Borrowing available in immediately available, freely transferable, cleared funds for disbursement to the Company pursuant to the terms and conditions of this Agreement at the principal office of the Agent. Unless the Agent shall have received notice from any Bank prior to the date such Borrowing is requested to be made under this Section 2.4 that such Bank will not make available to the Agent such Bank's pro rata portion of such Borrowing, the Agent may assume that such Bank has made such portion available to the Agent on the date such Borrowing is requested to be made in accordance with this Section 2.4. If and to the extent such Bank shall not have so made such pro rata portion available to the Agent, the Agent may (but shall not be obligated to) make such amount available to the Company, and such Bank and the Company severally agree to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such amount is made available to the Company by the Agent until the date such amount is repaid to the Agent, at the Federal Funds Rate in the case of any Bank and at the interest rate applicable to such Advance in the case of the Company. If such Bank shall pay such amount to the Agent together with interest, such amount so paid shall constitute a Loan by such Bank as a part of such the -15- related Borrowing for purposes of this Agreement. The failure of any Bank to make its pro rata portion of any such Borrowing available to the Agent shall not relieve any other Bank of its obligations to make available its pro rata portion of such Borrowing on the date such Borrowing is requested to be made, but no Bank shall be responsible for failure of any other Bank to make such pro rata portion available to the Agent on the date of any such Borrowing. (c) All Revolving Credit A Loans made under this Section 2.4 shall be evidenced by the Revolving Credit A Notes and all Revolving Credit B Loans made under the Section 2.4 shall be evidenced by the Revolving Credit B Notes, and all such Loans shall be due and payable and bear interest as provided in Article III. Each Bank is hereby authorized by the Company to record on the schedule attached to the Notes, or in its books and records, the date, amount and type of each Loan and the duration of the related Eurodollar Interest Period (if applicable), the amount of each payment or prepayment of principal thereon, and the other information provided for on such schedule, which schedule or books and records, as the case may be, shall constitute prima facie evidence of the information so recorded, PROVIDED, HOWEVER, that failure of any Bank to record, or any error in recording, any such information shall not relieve the Company of its obligation to repay the outstanding principal amount of the Loans, all accrued interest thereon and other amounts payable with respect thereto in accordance with the terms of the Notes and this Agreement. Subject to the terms and conditions of this Agreement, the Company may borrow Revolving Credit Loans under this Section 2.4 and under Section 3.3, prepay Revolving Credit Loans pursuant to Section 3.1 and reborrow Revolving Credit Loans under this Section 2.4 and under Section 3.3. (d) Nothing in this Agreement shall be construed to require or authorize any Bank to issue any Letter of Credit, it being recognized that the Agent has the sole obligation under this Agreement to issue Letters of Credit on behalf of the Banks, and the Revolving Credit B Commitment of each Bank with respect to Letter of Credit Advances is expressly conditioned upon the Agent's performance of such obligations. Upon such issuance by the Agent, each Bank shall automatically acquire a pro rata risk participation interest in such Letter of Credit Advance based on the amount of its respective Revolving Credit B Commitment. If the Agent shall honor a draft or other demand for payment presented or made under any Letter of Credit, the Agent shall provide notice thereof to each Bank on the date such draft or demand is honored unless the Company shall have satisfied its reimbursement obligation under Section 3.3 by payment to the Agent on such date. Each Bank, on such date, shall make its pro rata share of the amount paid by the Agent available in immediately available funds at the principal office of the Agent for the account of the Agent. If and to the extent such Bank shall not have made such pro rata portion available to the Agent, such Bank and the Company severally agree to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such amount was paid by the Agent until such amount is so made available to the Agent at a per annum rate equal to the Federal Funds Rate. If such Bank shall pay such amount to the Agent together with such interest, such amount so paid shall constitute a Revolving Credit B Loan by such Bank as part of the Revolving Credit B Borrowing disbursed in respect of the reimbursement obligation of the Company under Section 3.3 for purposes of this Agreement. The failure of any Bank to make its pro rata portion of any such amount paid by the Agent available -16- to the Agent shall not relieve any other Bank of its obligation to make available its pro rata portion of such amount, but no Bank shall be responsible for failure of any other Bank to make such pro rata portion available to the Agent. 2.5 CONDITIONS FOR FIRST DISBURSEMENT. The obligation of the Banks to2.5 make the first Advance hereunder is subject to receipt by each Bank and the Agent of the following documents and completion of the following matters, in form and substance satisfactory to each Bank and the Agent: (a) CHARTER DOCUMENTS. Certificates of recent date of the appropriate authority or official of the Company's and each Guarantor's state of incorporation (listing all charter documents on file in that office if such listing is available) and certifying as to the good standing and corporate existence of the Company and together with copies of such charter documents certified as of a recent date by such authority or official; (b) BY-LAWS AND CORPORATE AUTHORIZATIONS. Copies of the by-laws of the Company and each Guarantor and together with all authorizing resolutions and evidence of other corporate action taken by the Company and each Guarantor to authorize the execution, delivery and performance by the Company Guarantor of the Loan Documents and the consummation by the Company Guarantor of the transactions contemplated hereby, certified as true and correct as of the Effective Date by a duly authorized officer of the Company and each Guarantor; (c) INCUMBENCY CERTIFICATE. Certificates of incumbency of the Company and each Guarantor containing, and attesting to the genuineness of, the signatures of those officers authorized to act on behalf of the Company and each Guarantor in connection with the Loan Documents and the consummation by the Company and each Guarantor of the transactions contemplated hereby, certified as true and correct as of the Effective Date by a duly authorized officer of the Company and each Guarantor; (d) NOTES. The Notes duly executed on behalf of the Company for each Bank; (e) LEGAL OPINIONS. The favorable written opinion of counsel for the Company and the Guarantors in the form and substance acceptable to the Agent; (f) FEES. The fees required to be paid as of the Effective Date under Section 2.3; (g) INITIAL PUBLIC OFFERING. Evidence satisfactory to the Agent that the Company has completed an initial public offering of equity and received therefrom proceeds of at least $30,000,000, all on terms and conditions satisfactory to the Agent; (h) PAYMENT OF INDEBTEDNESS. Simultaneously with the first Advance hereunder, the Company shall have paid in full all indebtedness and liabilities outstanding -17- pursuant to the Loan Agreement between the Company, formerly known as New Creations, Inc., and NBD Bank, dated July 18, 1990, as amended, and any other indebtedness required by the Agent; (i) GUARANTIES. The Guaranties duly executed on behalf of each Guarantor; and (j) APPRAISALS. Appraisals, in form and substance and performed by an independent third party appraiser, acceptable to the Agent. 2.6 FURTHER CONDITIONS FOR DISBURSEMENT. The obligation of the Banks to make any Advance (including the first Advance), or any continuation or conversion under Section 2.7 is further subject to the satisfaction of the following conditions precedent: (a) The representations and warranties contained in Article IV hereof shall be true and correct on and as of the date such Advance is made (both before and after such Advance is made) as if such representations and warranties were made on and as of such date; (b) No Default or Event of Default shall exist or shall have occurred and be continuing on the date such Advance is made (whether before or after such Advance is made); (c) In the case of any Letter of Credit Advance, the Company shall have delivered to the Agent an application for the related Letter of Credit and other related documentation requested by and acceptable to the Agent appropriately completed and duly executed on behalf of the Company. The Company shall be deemed to have made a representation and warranty to the Banks at the time of the making of, and the continuation or conversion of, each Advance to the effects set forth in clauses (a) and (b) of this Section 2.6. For purposes of this Section 2.6 the representations and warranties contained in Section 4.6 hereof shall be deemed made with respect to both the financial statements referred to therein and the most recent financial statements delivered pursuant to Section 5.1(d)(ii) and (iii). 2.7 SUBSEQUENT ELECTIONS AS TO LOANS. The Company may elect (a) to continue a Fixed Rate Loan, or a portion thereof, as a Fixed Rate Loan or (b) to convert a Fixed Rate Loan, or a portion thereof, to a Loan of another type or (c) to convert a Floating Rate Loan, or a portion thereof, to a Fixed Rate Loan in each case by giving notice thereof to the Agent in substantially the form of Exhibit D hereto not later than 10:00 a.m. Detroit time four Eurodollar Business Days prior to the date any such continuation of or conversion to a Fixed Rate Loan is to be effective and not later than 10:00 a.m. Detroit time one Business Day prior to the date such continuation or conversion is to be effective in all other cases, PROVIDED that an outstanding Fixed Rate Loan may only be converted on the last day of the then current Interest Period with respect to such Loan, and PROVIDED, FURTHER, if a continuation of a Loan as, or a conversion of a Loan -18- to, a Fixed Rate Loan is requested, such notice shall also specify the Interest Period to be applicable thereto upon such continuation or conversion. The Agent, not later than the Business Day next succeeding the day such notice is given, shall provide notice of such election to the Banks. If the Company shall not timely deliver such a notice with respect to any outstanding Fixed Rate Loan, the Company shall be deemed to have elected to convert such Fixed Rate Loan to a Floating Rate Loan on the last day of the then current Interest Period with respect to such Loan. 2.8 LIMITATION OF REQUESTS AND ELECTIONS. Notwithstanding any other provision of this Agreement to the contrary, if, upon receiving a request for a Eurodollar Rate Loan pursuant to Section 2.4, or a request for a continuation of a Eurodollar Rate Loan as a Eurodollar Rate Loan of the then existing type, or a request for a conversion of a Floating Rate Loan to a Eurodollar Rate Loan pursuant to Section 2.7, (a) in the case of any Eurodollar Rate Loan, deposits in Dollars for periods comparable to the Eurodollar Interest Period elected by the Company are not available to any Bank in the London interbank market, or (b) the Eurodollar Rate will not adequately and fairly reflect the cost to any Bank of making, funding or maintaining the related Eurodollar Rate Loan, or (c) by reason of national or international financial, political or economic conditions or by reason of any applicable law, treaty or other international agreement, rule or regulation (whether domestic or foreign) now or hereafter in effect, or the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank with any guideline, request or directive of such authority (whether or not having the force of law), including without limitation exchange controls, it is impracticable, unlawful or impossible for, or shall limit or impair the ability of, (i) any Bank to make or fund the relevant Loan or to continue such Loan as a Loan of the then existing type or to convert a Loan to such a Loan or (ii) the Company to make or any Bank to receive any payment under this Agreement at the place specified for payment hereunder or to freely convert any amount paid into Dollars at market rates of exchange or to transfer any amount paid or so converted to the address of its principal office specified in Section 8.2, then the Company shall not be entitled, so long as such circumstances continue, to request a Loan of the affected type pursuant to Section 2.4 or a continuation of or conversion to a Loan of the affected type pursuant to Section 2.7. In the event that such circumstances no longer exist, the Banks shall again consider requests for Loans of the affected type pursuant to Section 2.4, and requests for continuations of and conversions to Loans of the affected type pursuant to Section 2.7. 2.9 MINIMUM AMOUNTS; LIMITATION ON NUMBER OF LOANS; ETC. Except for (a) Advances which exhaust the entire remaining amount of the Commitments, and (b) payments required pursuant to Section 3.1(c) or Section 3.8, each Advance and each continuation or conversion pursuant to Section 2.7 and each prepayment thereof shall be in a minimum amount of $100,000 in integral multiples of $100,000 in case of each Fixed Rate Loan, in the minimum amount of $25,000 in the case of Floating Rate Loans and in the minimum amount of $100,000 in the case of Letter of Credit Advances. -19- 2.10 EXTENSION OF TERMINATION DATES. Termination Date A and Termination Date B may be extended as set forth in this Section 2.10. (a) Notwithstanding anything contained in this Agreement to the contrary, not later than December 1 of each year, commencing December 1, 1997, the Company may, by delivery of a duly completed extension request to the Agent in the form of SCHEDULE 2.10 hereto (an "Extension Request"), irrevocably request that each Bank extend Termination Date B or Termination Date A for a one year period. (b) (i) The Agent shall, promptly after receipt of any such Extension Request pursuant to subsection (a) above, notify each Bank by providing them a copy of such Extension Request. (ii) Each Bank shall, on or before the first January 15 following receipt of the Extension Request notify the Agent whether it consents to the request of the Company set forth in such Extension Request, such consent to be in the sole discretion of such Bank. If any Bank does not so notify the Agent of its decision such Bank shall be deemed not to have consented to such request of the Company. (iii) The Agent shall promptly notify the Company which Banks have consented to such request (a "Consenting Bank"). If the Agent does not so notify the Company on or before the first January 31 following such Extension Request, the Agent shall be deemed to have notified the Company that the Banks have not consented to the Company's request. (iv) Each Bank that elects not to extend the requested Termination Date(s) or fails to so notify the Agent of such consent (a "Non- Consenting Bank") hereby agrees that if any other Bank or financial institution acceptable to the Company and the Agent offers to purchase such Non-Consenting Bank's Commitment(s) for a purchase price equal to the sum of all amounts then owing with respect to the Loans and all other amounts accrued for the account of such Non-Consenting Bank and any amounts which may become owing as a result of such purchase under Section 3.9, such Non-Consenting Bank will, promptly or upon the existing Termination Date(s) for such Non-Consenting Bank, as elected by the Company, assign, sell and transfer all of its right, title and obligations with respect to the foregoing to such other Bank or financial institution pursuant to and on the terms specified in the form of Assignment and Acceptance attached hereto as EXHIBIT E. (v) Notwithstanding anything herein to the contrary, the Termination Date(s) will not be extended if the aggregate Commitments of each Consenting Bank plus the additional Commitments of each Bank or other financial institution replacing any Non-Consenting Bank pursuant to clause (iv) above and agreeing to the Extension Request does not equal 100% of the then existing aggregate Commitments. If the Termination Date(s) are extended hereunder, it will not be extended for the Non-Consenting Banks, and each Non-Consenting Bank's Commitment(s) shall remain in effect and not be terminated until the -20- Termination Date(s) that is then in effect for it subject to the purchase of such Non-Consenting Bank's Commitment pursuant to clause (iv) above. ARTICLE III. PAYMENTS AND PREPAYMENTS OF ADVANCES 3.1 PRINCIPAL PAYMENTS AND PREPAYMENTS. (a) Unless earlier payment is required under this Agreement (i) the Company shall pay to the Banks on the Termination Date A the entire outstanding principal amount of the Revolving Credit A Advances, and (ii) the Company shall pay the Banks on the Termination Date B the entire outstanding principal amount of the Revolving Credit B Loans. (b) The Company may at any time and from time to time prepay all or a portion of the Loans, without premium or penalty, PROVIDED that (i) the Company may not prepay any portion of any Loan as to which an election for a continuation of or a conversion to a Fixed Rate Loan is pending pursuant to Section 2.4, and (ii) unless earlier payment is required under this Agreement, any Fixed Rate Loan may only be prepaid on the last day of the then current Interest Period with respect to such Loan. Upon the giving of such notice, the aggregate principal amount of such Loan or portion thereof so specified in such notice, together with such accrued interest and other amounts, shall become due and payable on the specified prepayment date. (c) Anytime that the aggregate principal balance outstanding under Revolving Credit A Note exceeds Borrowing Base A, the Company shall prepay Revolving Credit A Note by an amount equal to such excess. Anytime the sum of the aggregate principal balance outstanding under Revolving Credit B Note plus the aggregate principal amount of all outstanding Letters of Credit exceeds Borrowing Base B, the Company shall prepay Revolving Credit B Note by an amount equal to such excess, and, if a deficiency still remains after Revolving Credit B Note has been paid in full, the Company will provide cash collateral in a manner and by written agreement satisfactory to the Agent to secure the outstanding Letters of Credit in an amount equal to the remaining deficiency. 3.2 INTEREST PAYMENTS. The Company shall pay interest to the Banks on the unpaid principal amount of each Loan, for the period commencing on the date such Loan is made until such Loan is paid in full, on each Interest Payment Date and at maturity (whether at stated maturity, by acceleration or otherwise), and thereafter on demand, at the following rates per annum: (a) During such periods that such Loan is a Floating Rate Loan, the Floating Rate. -21- (b) During such periods that such Loan is a Eurodollar Rate Loan, the Eurodollar Rate applicable to such Loan for each related Eurodollar Interest Period. (c) During such periods that such Loan is a Negotiated Rate Loan, the Negotiated Rate applicable to such Loan for each related Negotiated Interest Period. Notwithstanding the foregoing paragraphs (a), (b) and (c), the Company shall pay interest on demand by the Agent at the Overdue Rate on the outstanding principal amount of any Loan and any other amount payable by the Company hereunder (other than interest) at any time on or after an Event of Default if required in writing by the Required Banks. 3.3 LETTER OF CREDIT REIMBURSEMENT PAYMENTS. (a) (i) The Company agrees to pay to the Banks, on the day on which the Agent shall honor a draft or other demand for payment presented or made under any Letter of Credit, an amount equal to the amount paid by the Agent in respect of such draft or other demand under such Letter of Credit and all expenses paid or incurred by the Agent relative thereto. Unless the Company shall have made such payment to the Banks on such day, upon each such payment by the Agent, the Agent shall be deemed to have disbursed to the Company, and the Company shall be deemed to have elected to satisfy its reimbursement obligation by, a Revolving Credit B Loan bearing interest at the Floating Rate for the account of the Banks in an amount equal to the amount so paid by the Agent in respect of such draft or other demand under such Letter of Credit. Such Revolving Credit B Loan shall be disbursed notwithstanding any failure to satisfy any conditions for disbursement of any Loan set forth in Article II hereof and, to the extent of the Revolving Credit B Loan so disbursed, the reimbursement obligation of the Company under this Section 3.3 shall be deemed satisfied; PROVIDED, HOWEVER, that nothing in this Section 3.3 shall be deemed to constitute a waiver of any Default or Event of Default caused by the failure to the conditions for disbursement or otherwise. (ii) If, for any reason (including without limitation as a result of the occurrence of an Event of Default with respect to the Company pursuant to Section 6.1(h)), Floating Rate Loans may not be made by the Banks as described in Section 3.3(a)(i), then (A) the Company agrees that each reimbursement amount not paid pursuant to the first sentence of Section 3.3(a)(i) shall bear interest, payable on demand by the Agent, at the interest rate then applicable to Floating Rate Loans, and (B) effective on the date each such Floating Rate Loan would otherwise have been made, each Bank severally agrees that it shall unconditionally and irrevocably, without regard to the occurrence of any Default or Event of Default, in lieu of deemed disbursement of Loans, to the extent of such Bank's Revolving Credit B Commitment, purchase a participating interest in each reimbursement amount. Each Bank will immediately transfer to the Agent, in same day funds, the amount of its participation. Each Bank shall share on a pro rata basis (calculated by reference to its Revolving Credit B Commitment) in any interest which accrues thereon and in all repayments thereof. If and to the extent that any Bank shall not have so made the amount of such participating interest available to the Agent, such Bank and the Company severally agree to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by the Agent until the date -22- such amount is paid to the Agent, at (x) in the case of the Company, the interest rate then applicable to Floating Rate Loans and (y) in the case of such Bank, the Federal Funds Rate. (b) The reimbursement obligation of the Company under this Section 3.3 shall be absolute, unconditional and irrevocable and shall remain in full force and effect until all obligations of the Company to the Banks hereunder shall have been satisfied, and such obligations of the Company shall not be affected, modified or impaired upon the happening of any event, including without limitation, any of the following, whether or not with notice to, or the consent of, the Company: (i) Any lack of validity or enforceability of any Letter of Credit or any documentation relating to any Letter of Credit or to any transaction related in any way to such Letter of Credit (the "Letter of Credit Documents"); (ii) Any amendment, modification, waiver, consent, or any substitution, exchange or release of or failure to perfect any interest in collateral or security, with respect to any of the Letter of Credit Documents; (iii) The existence of any claim, setoff, defense or other right which the Company may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Persons or entities for whom any such beneficiary or any such transferee may be acting), the Agent or any Bank or any other Person or entity, whether in connection with any of the Letter of Credit Documents, the transactions contemplated herein or therein or any unrelated transactions; (iv) Any draft or other statement or document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) Payment by the Agent to the beneficiary under any Letter of Credit against presentation of a documents which do not comply with the terms of the Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (vi) Any failure, omission, delay or lack on the part of the Agent or any Bank or any party to any of the Letter of Credit Documents to enforce, assert or exercise any right, power or remedy conferred upon the Agent, any Bank or any such party under this Agreement or any of the Letter of Credit Documents, or any other acts or omissions on the part of the Agent, any Bank or any such party; (vii) Any other event or circumstance that would, in the absence of this clause, result in the release or discharge by operation of law or otherwise of the Company from the performance or observance of any obligation, covenant or agreement contained in this Section 3.3. -23- No setoff, counterclaim, reduction or diminution of any obligation or any defense of any kind or nature which the Company has or may have against the beneficiary of any Letter of Credit shall be available hereunder to the Company against the Agent or any Bank. Nothing in this Section 3.3 shall limit the liability, if any, of the Banks to the Company pursuant to Section 8.5. 3.4 PAYMENT METHOD. (a) All payments to be made by the Company hereunder will be made to the Agent for the account of the Banks in Dollars and in immediately available, freely transferable, cleared funds not later than 1:00 p.m. at the principal office of the Agent specified in Section 8.2. Payments received after 1:00 p.m. at the place for payment shall be deemed to be payments made prior to 1:00 p.m. at the place for payment on the next succeeding Business Day. The Company hereby authorizes the Agent to charge its account with the Agent in order to cause timely payment of amounts due hereunder to be made (subject to sufficient funds being available in such account for that purpose). (b) At the time of making each such payment, the Company shall, subject to the other terms and conditions of this Agreement, specify to the Agent that Loan or other obligation of the Company hereunder to which such payment is to be applied. In the event that the Company fails to so specify the relevant obligation or if an Event of Default shall have occurred and be continuing, the Agent may apply such payments as it may determine in its sole discretion. (c) On the day such payments are deemed received, the Agent shall remit to the Banks their pro rata shares of such payments in immediately available funds to the Banks at their respective address in the United States specified for notices pursuant to Section 8.2. In the case of payments of principal and interest on any Borrowing, such pro rata shares shall be determined with respect to each such Bank by the ratio which the outstanding principal balance of its Loan included in such Borrowing bears to the outstanding principal balance of the Loans of all of the Banks included in such Borrowing, and in the case of fees paid pursuant to Section 2.3 and other amounts payable hereunder (other than the Agent's fees payable pursuant to Section 2.3(d) and amounts payable to any Bank under Section 3.7), such pro rata shares shall be determined with respect to each such Bank by the ratio which the Commitment of such Bank bears to the Commitments of all the Banks. 3.5 NO SETOFF OR DEDUCTION. All payments of principal of and interest on the Loans and other amounts payable by the Company hereunder shall be made by the Company without setoff or counterclaim, and, subject to the next succeeding sentence, free and clear of, and without deduction or withholding for, or on account of, any present or future taxes, levies, imposts, duties, fees, assessments, or other charges of whatever nature, imposed by any governmental authority, or by any department, agency or other political subdivision or taxing authority. If any such taxes, levies, imposts, duties, fees, assessments or other charges are imposed, the Company will pay such additional amounts as may be necessary so that payment of principal of and interest on the Loans and other amounts payable hereunder, after withholding or deduction for or on account thereof, will not be less than any amount provided to be paid hereunder and, in any such case, the Company will furnish to the Banks certified copies of all -24- tax receipts evidencing the payment of such amounts within 45 days after the date any such payment is due pursuant to applicable law. 3.6 PAYMENT ON NON-BUSINESS DAY; PAYMENT COMPUTATIONS. Except as otherwise provided in this Agreement to the contrary, whenever any installment of principal of, or interest on, any Loan or any other amount due hereunder becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, in the case of any installment of principal, interest shall be payable thereon at the rate per annum determined in accordance with this Agreement during such extension. Computations of interest and other amounts due under this Agreement shall be made on the basis of a year of 360 days for the actual number of days elapsed, including the first day but excluding the last day of the relevant period. 3.7 ADDITIONAL COSTS. 0.0.0.0.1 In the event that any applicable law, treaty or other international agreement, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank or the Agent, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank or the Agent with any guideline, request or directive of any such authority (whether or not having the force of law), shall (a) affect the basis of taxation of payments to any Bank or the Agent of any amounts payable by the Company under this Agreement (other than taxes imposed on the overall net income of any Bank or the Agent, by the jurisdiction, or by any political subdivision or taxing authority of any such jurisdiction, in which any Bank or the Agent, as the case may be, has its principal office), or (b) shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by any Bank or the Agent, or (c) shall impose any other condition with respect to this Agreement, or any of the Commitments, the Notes or the Loans or any Letter of Credit, and the result of any of the foregoing is to increase the cost to any Bank or the Agent, as the case may be, of making, funding or maintaining any Fixed Rate Loan or any Letter of Credit or to reduce the amount of any sum receivable by any Bank or the Agent, as the case may be, thereon, then the Company shall pay to such Bank or the Agent, as the case may be, from time to time, upon request by such Bank (with a copy of such request to be provided to the Agent) or the Agent, additional amounts sufficient to compensate such Bank or the Agent, as the case may be, for such increased cost or reduced sum receivable to the extent, in the case of any Fixed Rate Loan, such Bank or the Agent is not compensated therefor in the computation of the interest rate applicable to such Fixed Rate Loan. A statement as to the amount of such increased cost or reduced sum receivable, prepared in good faith and in reasonable detail by such Bank or the Agent, as the case may be, and submitted by such Bank or the Agent, as the case may be, to the Company, shall be conclusive and binding for all purposes absent manifest error in computation. (b) In the event that any applicable law, treaty or other international agreement, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank or the Agent, or any interpretation or administration thereof by any governmental authority charged with the interpretation or -25- administration thereof, or compliance by any Bank or the Agent with any guideline, request or directive of any such authority (whether or not having the force of law), including any risk-based capital guidelines, affects or would affect the amount of capital required or expected to be maintained by such Bank or the Agent (or any corporation controlling such Bank or the Agent) and such Bank or the Agent, as the case may be, determines that the amount of such capital is increased by or based upon the existence of such Bank's or the Agent's obligations hereunder and such increase has the effect of reducing the rate of return on such Bank's or the Agent's (or such controlling corporation's) capital as a consequence of such obligations hereunder to a level below that which such Bank or the Agent (or such controlling corporation) could have achieved but for such circumstances (taking into consideration its policies with respect to capital adequacy), then the Company shall pay to such Bank or the Agent, as the case may be, from time to time, upon request by such Bank (with a copy of such request to be provided to the Agent) or the Agent, additional amounts sufficient to compensate such Bank or the Agent (or such controlling corporation) for any increase in the amount of capital and reduced rate of return which such Bank or the Agent reasonably determines to be allocable to the existence of such Bank's or the Agent's obligations hereunder. A statement as to the amount of such compensation, prepared in good faith and in reasonable detail by such Bank or the Agent, as the case may be, and submitted by such Bank or the Agent to the Company, shall be conclusive and binding for all purposes absent manifest error in computation. Such Bank or the Agent may, at its option, specify that such amounts be paid by way of an increase in the commitment fees payable by the Company pursuant to Section 2.3(a). 3.8 ILLEGALITY AND IMPOSSIBILITY. In the event that any applicable law, treaty or other international agreement, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank with any guideline, request or directive of such authority (whether or not having the force of law), including without limitation exchange controls, shall make it unlawful or impossible for any Bank to maintain any Loan under this Agreement, (b) shall make it impracticable, unlawful or impossible for, or shall in any way limit or impair ability of, the Company to make or any Bank to receive any payment under this Agreement at the place specified for payment hereunder, the Company shall upon receipt of notice thereof from such Bank, repay in full the then outstanding principal amount of each Loan so affected, together with all accrued interest thereon to the date of payment and all amounts owing to such Bank under Section 3.8, (a) on the last day of the then current Eurodollar Interest Period applicable to such Loan if such Bank may lawfully continue to maintain such Loan to such day, or (b) immediately if such Bank may not continue to maintain such Loan to such day. 3.9 INDEMNIFICATION. If the Company makes any payment of principal with respect to any Fixed Rate Loan on any other date than the last day of the Interest Period applicable thereto (whether pursuant to Section 3.1(c), Section 3.7, Section 6.2 or otherwise), or if the Company fails to borrow any Fixed Rate Loan after notice has been given to the Banks in accordance with Section 2.4, or if the Company fails to make any payment of principal or interest in respect of a Fixed Rate Loan when due, the Company shall reimburse each Bank on demand -26- for any resulting loss or expense incurred by each such Bank, including without limitation any loss incurred in obtaining, liquidating or employing deposits from third parties, whether or not such Bank shall have funded or committed to fund such Loan. A statement as to the amount of such loss or expense, prepared in good faith and in reasonable detail by such Bank and submitted by such Bank to the Company, shall be conclusive and binding for all purposes absent manifest error in computation. Calculation of all amounts payable to such Bank under this Section 3.9 shall be made as though such Bank shall have actually funded or committed to fund the relevant Fixed Rate Loan through the purchase of an underlying deposit in an amount equal to the amount of such Loan in the relevant market and having a maturity comparable to the related Interest Period; PROVIDED, HOWEVER, that such Bank may fund any Fixed Rate Loan in any manner it sees fit and the foregoing assumption shall be utilized only for the purpose of calculation of amounts payable under this Section 3.9. ARTICLE IV. REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Banks and the Agent that: 4.1 CORPORATE EXISTENCE AND POWER. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio, and is duly qualified to do business, and is in good standing, in all additional jurisdictions where such qualification is necessary under applicable law, except where the failure to be so qualified would not have a Material Adverse Effect. The Company and each Guarantor has all requisite corporate power to own or lease the properties used in its business and to carry on its business as now being conducted and as proposed to be conducted, and to execute and deliver the Loan Documents to which it is a party and to engage in the transactions contemplated by the Loan Documents. 4.2 CORPORATE AUTHORITY. The execution, delivery and performance by the Company and each Guarantor of the Loan Documents have been duly authorized by all necessary corporate action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction order or award of any arbitrator, court or governmental authority, or of the terms of the Company's or any Guarantor's charter or by-laws, or of any contract or undertaking to which the Company or any Guarantor is a party or by which the Company or any Guarantor or their respective property may be bound or affected or result in the imposition of any Lien except for Permitted Liens. 4.3 BINDING EFFECT. Each Loan Document to which it is a party is the legal, valid and binding obligation of the Company and each Guarantor enforceable against the Company and each Guarantor in accordance with their respective terms. 4.4 SUBSIDIARIES. SCHEDULE 4.4 hereto correctly sets forth the corporate name, jurisdiction of incorporation and ownership of each Subsidiary of the Company. Each such -27- Subsidiary and each corporation becoming a Subsidiary of the Company after the date hereof is and will be a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is and will be duly qualified to do business in each additional jurisdiction where such qualification is or may be necessary under applicable law, except where the failure to be so qualified would not have a Material Adverse Effect. Each Subsidiary of the Company has and will have all requisite corporate power to own or lease the properties used in its business and to carry on its business as now being conducted and as proposed to be conducted. All outstanding shares of capital stock of each class of each Subsidiary of the Company have been and will be validly issued and are and will be fully paid and nonassessable and, except as otherwise indicated in SCHEDULE 4.4 hereto or disclosed in writing to the Bank from time to time, are and will be owned, beneficially and of record, by the Company or another Subsidiary of the Company free and clear of any Liens, except for Permitted Liens. 4.5 LITIGATION. Except as set forth in SCHEDULE 4.5 hereto, there is no action, suit or proceeding pending or, to the best of the Company's knowledge, threatened against or affecting the Company or any of its Subsidiaries before or by any court, governmental authority or arbitrator, which if adversely decided might result, either individually or collectively, in any Material Adverse Effect and, to the best of the Company's knowledge, there is no basis for any such action, suit or proceeding. 4.6 FINANCIAL CONDITION. The Consolidated balance sheet of the Company and its Subsidiaries and the Consolidated statements of income, and cash flow of the Company and its Subsidiaries for the fiscal year ended September 30, 1995 and reported on by Ernst & Young LLP, independent certified public accountants, and the interim Consolidated balance sheet and interim Consolidated statements of income, and cash flow of the Company and its Subsidiaries, as of or for the six month period ended on March 31, 1996, copies of which have been furnished to the Banks, fairly present, and the financial statements of the Company and its Subsidiaries delivered pursuant to Section 5.1(d) will fairly present, the Consolidated financial position of the Company and its Subsidiaries as at the respective dates thereof, and the Consolidated results of the operations of the Company and its Subsidiaries for the respective periods indicated, all in accordance with Generally Accepted Accounting Principles consistently applied (subject, in the case of said interim statements, to year-end audit adjustments and the absence of footnotes). There has been no Material Adverse Effect since September 30, 1995. There is no material Contingent Liability of the Company or any of its Subsidiaries that is not reflected in such financial statements or in the notes thereto. All Contingent Liabilities of the Company and its Subsidiaries as of the Effective Date are listed on Schedule 4.6 hereto. 4.7 USE OF LOANS. The Company will use the proceeds of the Revolving Credit A Loans to pay off the indebtedness described in Section 2.5(h), to make acquisitions and to purchase aircraft and other equipment and shall use the proceeds of the Revolving Credit B Loans for working capital and other general corporate purposes. Neither the Company nor any of its Subsidiaries extends or maintains, in the ordinary course of business, credit for the purposes, whether immediate, incidental, or ultimate, of buying or carrying margin stock (within the -28- meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan will be used for the purpose, whether immediate, incidental, or ultimate, of buying or carrying any such margin stock or maintaining or extending credit to others for such purpose. After applying the proceeds of each Loan, such margin stock will not constitute more than 25% of the value of the assets (either of the Company alone or of the Company and its Subsidiaries on a Consolidated basis) that are subject to any provisions of this Agreement that may cause the Advances to be deemed secured, directly or indirectly, by margin stock. 4.8 CONSENTS, ETC. No consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental Person or entity, including without limitation any creditor, lessor or stockholder of the Company or any of its Subsidiaries, is required on the part of the Company in connection with the execution, delivery and performance of the Loan Documents or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of the Loan Documents. 4.9 TAXES. The Company and its Subsidiaries have filed all tax returns (federal, state and local) required to be filed and have paid all taxes shown thereto to be due, including interest and penalties, or have established adequate financial reserves on their respective books and records for payment thereof. Neither the Company nor any of its Subsidiaries knows of any actual or proposed tax assessment or any basis therefor, and no extension of time for the assessment of deficiencies in any federal or state tax has been granted by the Company or any Subsidiary. 4.10 TITLE TO PROPERTIES. Except as otherwise disclosed in the latest year end balance sheet delivered pursuant to Section 4.6 or 5.1(d) of this Agreement, the Company or one or more of its Subsidiaries have good and marketable fee simple title to all of the real property, and a valid and indefeasible ownership interest in all of the other properties and assets reflected in said balance sheet or subsequently acquired by the Company or any Subsidiary. All of such properties and assets are free and clear of any Lien, except for Permitted Liens. 4.11 ERISA. The Company, its Subsidiaries, their ERISA affiliates and their respective Plans are in compliance in all material respects with those provisions of ERISA and of the Code which are applicable with respect to any Plan. No Prohibited Transaction and no Reportable Event has occurred with respect to any such Plan. None of the Company, any of its Subsidiaries or any of their ERISA Affiliates is an employer with respect to any Multiemployer Plan. The Company, its Subsidiaries and their ERISA Affiliates have met the minimum funding requirements under ERISA and the Code with respect to each of their respective Plans, if any, and have not incurred any liability to the PBGC of any Plan. The execution, delivery and performance of this Agreement the Notes does not constitute a Prohibited Transaction. There is no material unfunded benefit liability, determined in accordance with Section 4001(a)(18) of ERISA, with respect to any Plan of the Company, its Subsidiaries or their ERISA Affiliates. -29- 4.12 ENVIRONMENTAL AND SAFETY MATTERS. The Company and each Subsidiary is in substantial compliance with all material federal, state and local laws, ordinances and regulations relating to safety and industrial hygiene or to the environmental condition, including without limitation all Environmental Laws in jurisdictions in which the Company or any Subsidiary owns or operates, or has owned or operated, a facility or site, or arranges or has arranged for disposal or treatment of hazardous substances, solid waste, or other wastes, accepts or has accepted for transport any hazardous substances, solid wastes or other wastes or holds or has held any interest in real property or otherwise. Except as disclosed on SCHEDULE 4.12, no demand, claim, notice, suit, suit in equity, action, administrative action, investigation or inquiry whether brought by any governmental authority, private Person or entity or otherwise, arising under, relating to or in connection with any Environmental laws is pending or threatened against the Company or any of its Subsidiaries, any real property in which the Company or any such Subsidiary holds or has held an interest or any past or present operation of the Company or any Subsidiary. Neither the Company nor any of its Subsidiaries (a) is the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic substances, radioactive materials, hazardous wastes or related materials into the environment, (b) has received any notices of any toxic substances, radioactive materials, hazardous waste or related materials in, or upon any of its properties in violation of any Environmental Laws, or (c) knows of any basis for such investigation, notice or violation, except as disclosed on SCHEDULE 4.12 hereto, and as to such matters disclosed on such Schedule, none will have a Material Adverse Effect. Except as disclosed on SCHEDULE 4.12, to the best of the knowledge of the Company after due inquiry, no release, threatened release or disposal of hazardous waste, solid waste or other wastes is occurring or has occurred on, under or to any real property in which the Company or any of its Subsidiaries holds any interest or performs any of its operations, in violation of any Environmental Law. 4.13 NO DEFAULT. Neither the Company nor any Subsidiary is in default or has received any written notice of default under or with respect to any of its Contractual Obligations in any respect which could have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 4.14 NO BURDENSOME RESTRICTIONS. No Requirement of Law or Contractual Obligation applicable to the Company or any Subsidiary could have a Material Adverse Effect on the financial condition or business of the Company and its Subsidiaries. 4.15 INITIAL PUBLIC OFFERING. The Company has completed an initial public offering of equity and, 100% of the proceeds of such initial public offering, net only of reasonable costs and expenses incurred in connection therewith and a payment to Don Wright or a trust established by him for certain equity interests in the Company in an amount not to exceed $29,900,000, which net amount is equal to or greater than $30,000,000. 4.16 FAA CERTIFICATIONS. The Company is, and at all times will be a "Citizen of the United States" as defined in Section 40102(a)(15) of 490 U.S.C., an air carrier as to which -30- the provisions of Section 1110 of the United States Bankruptcy Code apply, and an air carrier certificated under Sections 41102(a) and 44705 of 49 U.S.C. 4.17 AIRWORTHINESS CERTIFICATES. An airworthiness certificate has been duly issued for each of the aircraft of the Company, all such airworthiness certificates are in full force and effect, each aircraft is in such operating condition, except for such repairs and maintenance in the ordinary course of business, as may be required to permit each such aircraft to be utilized in commercial charter operations and otherwise in material compliance with all applicable laws and regulations. ARTICLE V COVENANTS 5.1 AFFIRMATIVE COVENANTS. The Company covenants and agrees that, until the later of Termination Date A or Termination Date B and thereafter until payment in full of the principal of and accrued interest on the Notes and the payment and performance of all other obligations and liabilities of the Company under the Loan Documents, unless the Required Banks shall otherwise consent in writing, it shall, and shall cause each of its Subsidiaries to: (a) PRESERVATION OF CORPORATE EXISTENCE, ETC. Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and its qualification as a foreign corporation in good standing in each jurisdiction in which such qualifications is necessary under applicable law, except where the failure to be so qualified would not have a Material Adverse Effect and the rights, licenses, permits (including those required under Environmental Laws and those required by the FAA), franchises, patents, copyrights, trademarks and trade names material to the conduct of its businesses; and defend all of the foregoing against all claims, actions, demands, suits or proceedings at law or in equity or by or before any governmental instrumentality or other agency or regulatory authority. (b) COMPLIANCE WITH LAWS, ETC. Comply in all material respects with all applicable laws, rules, regulations and orders of any governmental authority, whether federal, state, local or foreign (including without limitation ERISA, the Code, FAA regulations and Environmental Laws), in effect from time to time, except where the failure to so comply would not have a Material Adverse Effect; and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income, revenues or property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise, which, if unpaid, might give rise to Liens upon such properties or any portion thereof, except to the extent that payment of any of the foregoing is then being contested in good faith by appropriate legal proceedings and with respect to which adequate financial reserves have been established on the books and records of the Company or such Subsidiary. -31- (c) MAINTENANCE OF PROPERTIES; INSURANCE. Maintain, preserve and protect all property that is material to the conduct of the business, as such business exists from time to time, of the Company or any of its Subsidiaries and keep such property in good repair, working order and condition and from time to time make, or cause to be made all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times in accordance with customary and prudent business practices for similar businesses; and maintain in full force and effect insurance with responsible and reputable insurance companies or associations in such amounts, on such terms and covering such risks, including fire and other risks insured against by extended coverage, with such deductibles and self insurance amounts as is usually carried by companies engaged in similar businesses and of similar sizes and owning similar properties similarly situated and maintain in full force and effect public liability insurance, insurance against claims for Personal injury or death or property damage occurring in connection with any of its activities or any of any properties owned, occupied or controlled by it, in such amount as it shall reasonably deem necessary, and maintain such other insurance as may be required by law or as may be reasonably requested by the Required Banks for purposes of assuring compliance with this Section 5.1(c). (d) REPORTING REQUIREMENTS. Furnish to the Banks and the Agent the following: (i) Promptly and in any event within three calendar days after becoming aware of the occurrence of (A) any Event of Default or any event or condition which, with notice or lapse of time, or both, would constitute an Event of Default, (B) the commencement of any material litigation against, by or affecting the Company or any of its Subsidiaries, and any material developments therein, (C) entering into any material contract or undertaking that is not entered into in the ordinary course of business, (D) any formal investigation or enforcement action by the FAA, or by (E) any development in the business or affairs of the Company or any of its Subsidiaries which has resulted in or which is likely in the reasonable judgment of the Company, to result in a Material Adverse Effect, a statement of the chief financial officer or controller of the Company setting forth details of such Event of Default or such event or condition or such litigation and the action which the Company or such Subsidiary, as the case may be, has taken and proposes to take with respect thereto; (ii) As soon as available and in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Company, the Consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such quarter, and the related Consolidated and consolidating statements of income for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding fiscal year, all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief financial officer or controller of the Company as having been prepared in accordance with Generally Accepted Accounting Principles, together with a certificate of the chief financial officer or controller of the Company stating (A) -32- that no Event of Default or Default has occurred and is continuing or, if an Event of Default or Default has occurred and is continuing, a statement setting forth the details thereof and the action which the Company has taken and proposes to take with respect thereto, (B) that a computation (which computation shall accompany such certificate and shall be in reasonable detail) showing compliance with Section 5.2(a), (b), (c) and (d) hereof is in conformity with the terms of this Agreement, and (C) that there have been no substantive changes in Schedule 4.12; (iii) As soon as available and in any event within 90 days after the end of each fiscal year of the Company, a copy of the Consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such fiscal year and the related Consolidated and consolidating statements of income and the Consolidated statement of cash flow of the Company and its Subsidiaries for such fiscal year, with a customary audit report of Ernst & Young LLP, or other independent certified public accountants selected by the Company and acceptable to the Required Banks, without qualifications unacceptable to the Required Banks, together with a certificate of such accountants stating that they have reviewed this Agreement and stating further whether, in the course of their review of such financial statements, they have become aware of any Event of Default or any Default, and together with a computation by the Company (which computation shall accompany such certificate and shall be in reasonable detail) showing compliance with Section 5.2 (a), (b), (c) and (d) hereof is in conformity with the terms of this Agreement; (iv) Promptly after the sending or filing thereof, copies of all reports, proxy statements and financial statements which the Company or any of its Subsidiaries sends to or files with any of their respective security holders or any securities exchange or the Securities and Exchange Commission or any successor agency thereof; (v) Promptly and in any event within 10 calendar days after receiving or becoming aware thereof (A) a copy of any notice of intent to terminate any Plan of the Company, its Subsidiaries or any ERISA Affiliate filed with the PBGC, (B) a statement of the chief financial officer or controller of the Company setting forth the details of the occurrence of any Reportable Event with respect to any such Plan, (C) a copy of any notice that the Company, any of its Subsidiaries or any ERISA Affiliate may receive from the PBGC relating to the intention of the PBGC to terminate any such Plan or to appoint a trustee to administer any such Plan, or (D) a copy of any notice of failure to make a required installment or other payment within the meaning of Section 412(n) of the Code or Section 302(f) of ERISA with respect to any such Plan; (vi) Promptly and in any event within ten days after receipt, a copy of any management letter or comparable analysis prepared by the auditors for the Company or any of its Subsidiaries; (vii) as soon as available and in any event within 15 days after the end of each month, a borrowing base certificate in form and detail satisfactory to the Agent, -33- calculating Borrowing Base A and Borrowing Base B and signed by the chief financial officer or controller of the Company; (viii) on or within 15 days of April 30, 1998 and on or within 15 days of each second year thereafter, current appraisals, in form satisfactory to the Agent and performed by an independent third party appraiser acceptable to the Agent, of all aircraft and equipment included in Borrowing Base B; and (ix) Promptly, such other information respecting the business, properties, operations or condition, financial or otherwise, of the Company or any of it Subsidiaries as any Bank or the Agent may from time to time reasonably request. (e) ACCOUNTING; ACCESS TO RECORDS, BOOKS, ETC. Maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in accordance with Generally Accepted Accounting Principles and to comply with the requirements of this Agreement and, at any reasonable time and from time to time, permit any Bank or the Agent or any agents or representatives thereof to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Company and its Subsidiaries, and to discuss the affairs, finances and accounts of the Company and its Subsidiaries with their respective directors, officers, employees and independent auditors, and by this provision the Company does hereby authorize such Persons to discuss such affairs, finances and accounts with any Bank or the Agent. (f) FURTHER ASSURANCES. Will execute and deliver, or cause to be executed and delivered within 30 days after request therefor by the Required Banks or the Agent, a Guaranty for each Subsidiary of the Company, whether now existing or hereafter arising or formed, and all further instruments and documents and take all further action that may be necessary or desirable, or that the Agent may request, in order to give effect to, and to aid in the exercise and enforcement of the rights and remedies of the Banks and the Agent under, the Loan Documents. In addition, the Company agrees to deliver to the Agent and the Banks from time to time upon the acquisition or creation of any Subsidiary not listed in SCHEDULE 4.4 hereto supplements to SCHEDULE 4.4 such that such Schedule, together with such supplements, shall at all times accurately reflect the information provided for thereon. 5.2 NEGATIVE COVENANTS. Until the later of Termination Date A and Termination Date B and thereafter until payment in full of the principal of and accrued interest on the Notes and the payment and performance of all other obligations and liabilities of the Company under the Loan Documents, the Company agrees that, unless the Required Banks shall otherwise consent in writing it shall not, and shall not permit any of its Subsidiaries to: (a) TANGIBLE NET WORTH. Permit or suffer the Consolidated Tangible Net Worth of the Company and its Subsidiaries at any time to be less than the sum of (i) 85% of the Consolidated Tangible Net Worth of the Company and its Subsidiaries as of the Effective Date, after giving effect to Section 2.5 hereof, including without limitation the completion of the -34- initial public offering described at Section 2.5(g) (and the Company agrees to deliver to the Agent a certificate and calculation in reasonable detail showing the Tangible Net Worth of the Company and its Subsidiaries as of the Effective Date after giving effect to such transactions on or prior to thirty (30) days after the Effective Date), plus (b) 50% of the Consolidated net income of the Company and its Subsidiaries, commencing with the fiscal year ending September 30, 1996, provided that, if such net income is negative in any fiscal year of the Company, the amount added for such fiscal year shall be zero and such amount shall not reduce the amount added pursuant to any other fiscal year. (b) FUNDED DEBT RATIO. Permit or suffer the Funded Debt Ratio to exceed 2.50 to 1.0 at any time. (c) FUNDED DEBT TO TOTAL CAPITALIZATION. Permit or suffer the ratio of Funded Debt to Total Capitalization to exceed 0.5 to 1.0 at any time (d) CASH FLOW COVERAGE RATIO. Permit or suffer the Cash Flow Coverage Ratio to be less than (i) 1.05 to 1.0 for any fiscal quarter commencing September 30, 1996 through the fiscal quarter ending June 30, 1997, (ii) 1.1 to 1.0 for the fiscal quarter ending September 30, 1997, or (iii) 1.2 to 1.0 as of the end of any fiscal quarter thereafter. (e) LIENS. Create, incur or suffer to exist any Lien on any of the assets, rights, revenues or property, real, Personal or mixed, tangible or intangible, whether now owned or hereafter acquired, of the Company or any of its Subsidiaries, other than: (i) Liens for taxes not delinquent or for taxes being contested in good faith by appropriate proceedings and as to which adequate financial reserves have been established on its books and records; (ii) Liens (other than any Lien imposed by ERISA) created and maintained in the ordinary course of business which do not secure obligations for borrowed money and are not material in the aggregate and which would not have a Material Adverse Effect and which constitute (A) pledges or deposits under worker's compensation laws, unemployment insurance laws or similar legislation, (B) good faith deposits in connection with bids, tenders, contracts or leases to which the Company or any of its Subsidiaries is a party for a purpose other than borrowing money or obtaining credit, including rent security deposits, (C) Liens imposed by law, such as those of carriers, warehousemen and mechanics, if payment of the obligation secured thereby is not yet due, (D) Liens securing taxes, assessments or other governmental charges or levies not yet subject to penalties for nonpayment, except to the extent such Liens arise from nonpayment of any of such taxes or other assessments and governmental charges if such payment is then being contested in good faith by appropriate legal proceedings and with respect to which adequate financial reserves have been established on the books and records of the Company, and (E) pledges or deposits to secure public or statutory obligations of the Company or any of its Subsidiaries, or surety, customs or appeal bonds to which the Company or any of its Subsidiaries is a party; -35- (iii) Liens affecting real property which constitute minor survey exceptions or defects or irregularities in title, minor encumbrances, easements or reservations of, or rights of others for, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of such real property, PROVIDED that all of the foregoing, in the aggregate, do not at any time materially detract from the value of said properties or materially impair their use in the operation of the businesses of the Company or any of its Subsidiaries; (iv) Each Lien existing on the Effective Date and described in Schedule 5.2(e) hereof, but no extension or renewal thereof shall be permitted; and (v) Any Lien created to secure payment of a portion of the purchase price of, or existing at the time of acquisition of, any tangible fixed asset acquired by the Company or any of its Subsidiaries may be created or suffered to exist upon such fixed asset if the outstanding principal amount of the Indebtedness secured by such Lien does not at any time exceed the purchase price paid by the Company or such Subsidiary for such fixed asset and the aggregate principal amount of all Indebtedness secured by such Liens does not exceed $250,000; PROVIDED that such Lien does not encumber any other asset at any time owned by the Company or such Subsidiary, and PROVIDED, FURTHER, that not more than one such Lien shall encumber such fixed asset at any one time. (f) ACQUISITIONS; MERGER; ETC. Purchase or otherwise acquire, whether in one or a series of transactions, all or a substantial portion of the business, assets, rights, revenues or property, real, Personal, or mixed, tangible or intangible, of any Person, or all or a substantial portion of the capital stock of or other ownership interest in any other Person; nor merge or consolidate or amalgamate with any other Person or take any other action having a similar effect, nor enter into any joint venture or similar arrangement with any other Person, PROVIDED, HOWEVER, that this Section 5.2(f) shall not prohibit any of the foregoing transactions described in this Section 5.2(f) if each of the following conditions is satisfied: (i) the Company shall be the surviving or continuing corporation thereof, (ii) immediately after such merger or acquisition or other transaction, no Default or Event of Default shall exist or shall have occurred and be continuing and, prior to the consummation of such merger or acquisition, the Company shall have provided to the Banks an opinion of counsel and a certificate of the chief financial officer or controller of the Company (attaching computations to demonstrate compliance with all financial covenants hereunder after giving effect to such merger or acquisition and attaching such pro forma financial statements as may be reasonably requested by the Agent), each stating that such merger or acquisition or other transaction complies with this Section 5.2(f) and that any other conditions under this Agreement relating to such transaction have been satisfied, (iii) the board of directors of the corporation with which the Company or its Subsidiaries is involved in such transaction has approved the transaction, and (iv) if any such merger, acquisition or other transaction involves consideration in excess of $3,000,00, the Required Banks shall have approved in writing such merger, acquisition or other transaction. -36- (g) DISPOSITION OF ASSETS; ETC. Sell, lease, license, transfer, assign or otherwise dispose of any its business, assets, rights, revenues or property, real, Personal or mixed, tangible or intangible, whether in one or a series of transactions, other than inventory sold in the ordinary course of business upon customary credit terms and sales of scrap or obsolete material or equipment, PROVIDED, HOWEVER that this Section 5.2(g) shall not prohibit any such sale, lease, license, transfer, assignment or other disposition if the aggregate book value (disregarding any write-downs of such book value other than ordinary depreciation and amortization) of all of the business, assets, rights, revenues and property disposed of after the date of this Agreement shall be less than $2,500,000 in the aggregate for any calendar year and if, immediately after such transaction, no Default or Event of Default shall exist or shall have occurred and be continuing. (h) DIVIDENDS AND OTHER RESTRICTED PAYMENTS. Make, pay, declare or authorize any dividend, payment or other distribution in respect of any class of its capital stock or any dividend, payment or distribution in connection with the redemption, purchase, retirement or other acquisition, directly or indirectly, of any shares of its capital stock other than such dividends, payments or other distributions to the extent payable solely in shares of the capital stock of the Company, if a Default or Event of Default shall exist or shall have occurred and be continuing, or would be caused thereby. For purposes of this Section 5.2(h), "capital stock" shall include capital stock and any securities exchangeable for or convertible into capital stock and any warrants, rights or other options to purchase or otherwise acquire capital stock or such securities. (i) LOANS AND ADVANCES. Make any loan or advance of any of its funds or property or make any other extension of credit to any Person other than (i) advances by the Company to any of its Subsidiaries, (ii) advances by any Subsidiary of the Company to the Company or to another Subsidiary of the Company, and (iii) extensions of trade credit made in the ordinary course of business on customary credit terms and commission, travel and similar advances made to officers and employees in the ordinary course of business. (j) INDEBTEDNESS. Create, incur, assume or in any manner become liable in respect of, or suffer to exist, any Indebtedness other than: (i) The Advances; (ii) The Indebtedness described in Schedule 5.2(j) hereto, but no increase in the amount thereof or extension thereof shall be permitted; (iii) Indebtedness in aggregate outstanding principal amount not exceeding $250,000 which is secured by one or more liens permitted by Section 5.2(e)(v) hereof; (iv) Indebtedness of any Subsidiary of the Company owing to the Company or to any other Subsidiary of the Company; (v) Other Indebtedness of the Company or any of its Subsidiaries owing to NBD Bank or its Affiliates. -37- (k) NATURE OF BUSINESS. Make any substantial change in the nature of its business from that engaged in on the date of this Agreement or engage in any other businesses other than those in which it is engaged on the date of this Agreement. (l) TRANSACTIONS WITH AFFILIATES. Enter into, become a party to, or become liable in respect of, any contract or undertaking with any Affiliate except in the ordinary course of business and on terms not less favorable to the Company or such Subsidiary than those which could be obtained if such contract or undertaking were an arms length transaction with a Person other than an Affiliate. (m) ADDITIONAL COVENANTS. If at any time the Company or any Subsidiary shall enter into or be a party to any instrument or agreement, including all such instruments or agreements in existence as of the date hereof and all such instruments or agreements entered into after the date hereof, relating to or amending any terms or conditions applicable to any of its Indebtedness which includes covenants, terms, conditions or defaults not substantially provided for in this Agreement or more favorable to the lender or lenders thereunder than those provided for in this Agreement, then the Company shall promptly so advise the Agent and the Banks. Thereupon, if the Agent shall request, upon notice to the Company, the Agent and the Banks shall enter into an amendment to this Agreement or an additional agreement (as the Agent may request), providing for substantially the same covenants, terms, conditions and defaults as those provided for in such instrument or agreement to the extent required and as may be selected by the Agent. ARTICLE VI. DEFAULT 6.1 EVENTS OF DEFAULT. The occurrence of any one of the following events or conditions shall be deemed an "Event of Default" hereunder unless waived pursuant to Section 8.1: (a) NONPAYMENT. The Company shall fail to pay when due any principal of or interest on the Notes or any fees or any other amount payable hereunder, and such failure shall remain unremedied for 2 Business Days; or (b) MISREPRESENTATION. Any representation or warranty made by the Company in Article IV hereof or in any other certificate, report, financial statement or other document furnished by or on behalf of the Company in connection with this Agreement, shall prove to have been incorrect in any material respect when made or deemed made; or (c) CERTAIN COVENANTS. The Company shall fail to perform or observe any term, covenant or agreement contained in Article V hereof, and any such failure shall remain unremedied for 10 calendar days after notice thereof shall have been given to the Company by the Agent; or -38- (d) OTHER DEFAULTS. The Company or any Guarantor shall fail to perform or observe any other term, covenant or agreement contained in any Loan Document, and any such failure shall remain unremedied for 15 calendar days after notice thereof shall have been given to the Company by the Agent; or (e) CROSS DEFAULT. The Company or any of its Subsidiaries shall fail to pay any part of the principal of, the premium, if any, or the interest on, or any other payment of money due under any of its Indebtedness (other than Indebtedness hereunder), beyond any period of grace provided with respect thereto, which individually or together with other such Indebtedness as to which any such failure exists has an aggregate outstanding principal amount in excess of $2,000,000; or if the Company or any of its Subsidiaries fails to perform or observe any other term, covenant or agreement contained in any agreement, document or instrument evidencing or securing any such Indebtedness having such aggregate outstanding principal amount, or under which any such Indebtedness was issued or created, beyond any period of grace, if any, provided with respect thereto if the effect of such failure is to cause or permit the holders of such Indebtedness (or trustee on behalf of such holders) to cause payment in respect of such Indebtedness to become due prior to its due date; or (f) JUDGMENTS. One or more Judgments or orders for the payment of money in an aggregate amount of $2,000,000 shall be rendered against the Company or any of its Subsidiaries, or any other judgment or order (whether or not for the-payment of money) shall be rendered against or shall affect the Company or any of its Subsidiaries which causes or could cause a Material Adverse Effect, and either (i) such judgment or order shall have remained unsatisfied and the Company or such Subsidiary shall not have taken action necessary to stay enforcement thereof by reason of pending appeal or otherwise, prior to the expiration of the applicable period of limitations for taking such action or, if such action shall have been taken, a final order denying such stay shall have been rendered, or (ii) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order; or (g) ERISA. The occurrence of a Reportable Event that results in or could result in liability of the Company, any Subsidiary of the Company or their ERISA Affiliates to the PBGC or to any Plan and such Reportable Event is not corrected within sixty (60) days after the occurrence thereof; or the occurrence of any Reportable Event which could constitute grounds for termination of any Plan of the Company, its Subsidiaries or their ERISA Affiliates by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan and such Reportable Event is not corrected within sixty (60) days after the occurrence thereof; or the filing by the Company, any Subsidiary of the Company or any of their ERISA -39- Affiliates of a notice of intent to terminate a Plan or the institution of other proceedings to terminate a Plan; or the Company, any Subsidiary of the Company or any of their ERISA Affiliates shall fail to pay when due any liability to the PBGC or to a Plan; or the PBGC shall have instituted proceedings to terminate, or to cause a trustee to be appointed to administer, any Plan of the Company, its Subsidiaries or their ERISA Affiliates; or any Person engages in a Prohibited Transaction with respect to any Plan which results in or could result in liability of the Company, any Subsidiary of the Company, any of their ERISA Affiliates, any Plan of the Company, its Subsidiaries or their ERISA Affiliates or fiduciary of any such Plan; or failure by the Company, any Subsidiary of the Company or any of their ERISA Affiliates to make a required installment or other payment to any Plan within the meaning of Section 302(f) of ERISA or Section 412(n) of the Code that results in or could result in liability of the Company, any Subsidiary of the Company or any of their ERISA Affiliates to the PBGC or any Plan; or the withdrawal of the Company, any of its Subsidiaries or any of their ERISA Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a) (2) of ERISA; or the Company, any of its Subsidiaries or any of their ERISA Affiliates becomes an employer with respect to any Multiemployer Plan without the prior written consent of the Required Banks; or (h) INSOLVENCY, ETC. The Company or any of its Subsidiaries shall be dissolved or liquidated (or any judgment, order or decree therefor shall be entered), or shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or shall institute, or there shall be instituted against the Company or any of its Subsidiaries, any proceeding or case seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or seeking the entry of an order for relief, or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its assets, rights, revenues or property, and, if such proceeding is instituted against the Company or such Subsidiary and is being contested by the Company or such Subsidiary, as the case may be, in good faith by appropriate proceedings, such proceeding shall remain undismissed or unstayed for a period of 60 days: or the Company or such Subsidiary shall take any action (corporate or other) to authorize or further any of the actions described above in this subsection; (i) CHANGE IN CONTROL. Any Change in Control shall occur; or (j) LOAN DOCUMENTS. Any material provision of any Loan Document shall at any time for any reason cease to be valid and binding and enforceable against any obligor thereunder, or the validity, binding effect or enforceability thereof shall be contested by any Person, or any obligor, shall deny that it has any or further liability or obligation thereunder, or any Loan Document shall be terminated invalidated or set aside, or be declared ineffective or inoperative or in any way cease to give or provide to the Banks and the Agent the benefits purported to be created thereby; or (k) LAWS AND REGULATIONS. Any material violation of the 49 U.S.C. or any FAA regulation applicable to the Company or the Guarantor or to any aircraft owned and/or operated by the Company or Guarantor or to any aircraft owned and/or operated by the Company or the Guarantor is not cured within 30 days; provided, however, that no Event of Default under this clause (k) shall be deemed to exist if the Company and the Guarantors have commenced and diligently pursued appropriate action to cure such violation and such default may be and is cured within 30 days after such 30 day grace period; provided, further, that among other material -40- violations, any violation resulting in a formal investigation or an enforcement action by the FAA shall be presumed material. 6.2 REMEDIES. (a) Upon the occurrence and during the continuance of any Event of Default, the Agent may and, upon being directed to do so by the Required Banks, shall by notice to the Company (i) terminate the Commitments or (ii) declare the outstanding principal of, and accrued interest on, the Notes, all unpaid reimbursement obligations in respect of drawings under Letters of Credit and all other amounts owing under this Agreement to be immediately due and payable, or (iii) demand immediate delivery of cash collateral, and the Company agrees to deliver such cash collateral upon demand, in an amount equal to the maximum amount that may be available to be drawn at any time prior to the stated expiry of all outstanding Letters of Credit, or any one or more of the foregoing, whereupon the Commitments shall terminate forthwith and all such amounts, including such cash collateral, shall become immediately due and payable, PROVIDED that in the case of any event or condition described in Section 6.1(h) with respect to the Company, the Commitments shall automatically terminate forthwith and all such amounts, including such cash collateral, shall automatically become immediately due and payable without notice; in all cases without demand, presentment, protest, diligence, notice of dishonor or other formality, all of which are hereby expressly waived. Such cash collateral delivered in respect of outstanding Letters of Credit shall be deposited in a special cash collateral account to be held by the Agent as collateral security for the payment and performance of the Company's obligations under this Agreement to the Banks and the Agent. (b) The Agent may and, upon being directed to do so by the Required Banks, shall, in addition to the remedies provided in Section 6.2(a), exercise and enforce any and all other rights and remedies available to it, whether arising under the Loan Documents or under applicable law, in any manner deemed appropriate by the Agent, including suit in equity, action at law, or other appropriate proceedings, whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in any Loan Document or in aid of the exercise of any power granted in any Loan Document. (c) Upon the occurrence and during the continuance of any Event of Default, each Bank may at any time and from time to time, without notice to the Company (any requirement for such notice being expressly waived by the Company set off and apply against any and all of the obligations of the Company now or hereafter existing under this Agreement, Whether owing to such Bank or any other Bank or the Agent, any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of the Company and any property of the Company from time to time in possession of such Bank, irrespective of whether or not such Bank shall have made any demand hereunder and although such obligations may be contingent and -41- unmatured. The Company hereby grants to the Banks and the Agent a lien on and security interest in all such deposits, indebtedness and property as collateral security for the payment and performance of the obligations of the Company under the Loan Documents. The rights of such Bank under this Section 6.2(c) are in addition to other rights and remedies (including, without limitation, other rights of setoff) which such Bank may have. ARTICLE VII. THE AGENT AND THE BANKS 7.1 APPOINTMENT AND AUTHORIZATION. Each Bank hereby irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. The provisions of this Article VII are solely for the benefit of the Agent and the Banks, and the Company shall not have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Company. 7.2 AGENT AND AFFILIATES. NBD Bank in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent. NBD Bank and its affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, and generally engage in any kind of banking, trust, financial advisory or other business with the Company, or any of its respective Subsidiaries as if it were not acting as Agent hereunder, and may accept fees and other consideration therefor without having to account for the same to the Banks. 7.3 SCOPE OF AGENT'S DUTIES. The Agent shall have no duties or responsibilities except those expressly set forth herein, and shall not, by reason of this Agreement, have a fiduciary relationship with any Bank, and no implied covenants, responsibilities, duties, obligations or liabilities shall be read into this Agreement or shall otherwise exist against the Agent. As to any matters not expressly provided for by the Loan Documents (including, without limitation, collection and enforcement actioned under the Notes), the Agent shall not be required to exercise any discretion or take any action, but the Agent shall take such action or omit to take any action pursuant to the reasonable written instructions of the Required Banks and may request instructions from the Required Banks. The Agent shall in all cases be fully protected in acting, or in refraining from acting, pursuant to the written instructions of the Required Banks (or all of the Banks, as the case may be, in accordance with the requirements of this Agreement), which instructions and any action or omission pursuant thereto shall be binding upon all of the Banks; PROVIDED, HOWEVER, that the Agent shall not be required to act or omit to act if, in the judgment of the Agent, such action or omission may expose the Agent to Personal liability or is contrary to any Loan Document or applicable law. -42- 7.4 RELIANCE BY AGENT. The Agent shall be entitled to rely upon any certificate, notice, document or other communication (including any cable, telegram, telex, facsimile transmission or oral communication) believed by it to be genuine and correct and to have been sent or given by or on behalf of a proper Person. The Agent may treat the payee of any Note as the holder thereof unless and until the Agent receives written notice of the assignment thereof pursuant to the terms of this Agreement signed by such payee and the Agent receives the written agreement of the assignee that such assignee is bound hereby to the same extent as if it had been an original party hereto. The Agent may employ agents (including without limitation collateral agents) and may consult with legal counsel (who may be counsel for the Company), independent public accountants and other experts selected by it and shall not be liable to the Banks, except as to money or property received by it or its authorized agents, for the negligence or misconduct of any such agent selected by it with reasonable care or for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. 7.5 DEFAULT. The Agent shall not be deemed to have knowledge of the occurrence of any Default or Event of Default, unless the Agent has received written notice from a Bank or the Company specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice, the Agent shall give written notice thereto to the Banks. 7.6 LIABILITY OF AGENT. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable to the Banks for any action taken or not taken by it or them in connection herewith with the consent or at the request of the Required Banks or in the absence of its or their own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any recital, statement, warranty or representation contained in any Loan Document, or in any certificate, report, financial statement or other document furnished in connection with this Agreement, (ii) the performance or observance of any of the covenants or agreements of the Company, (iii) the satisfaction of any condition specified in Article II hereof, or (iv) the validity, effectiveness, legal enforceability, value or genuineness of any Loan Documents or any collateral subject thereto or any other instrument or document furnished in connection herewith. 7.7 NONRELIANCE ON AGENT AND OTHER BANKS. Each Bank acknowledges and agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decision in taking or not taking action under this Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by the Company of the Loan Documents or any other documents referred to or provided for herein or to inspect the properties or books of the Company or any Subsidiary and, except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder, the -43- Agent shall not have any duty or responsibility to provide any Bank with any information concerning the affairs, financial condition or business of the Company, or any of its Subsidiaries which may come into the possession of the Agent or any of its Affiliates. 7.8 INDEMNIFICATION. The Banks agree to indemnify the Agent (to the extent not reimbursed by the Company, but without limiting any obligation of the Company to make such reimbursement), ratably according to the respective principal amounts of the Advances then outstanding made by each of them (or if no Advances are at the time outstanding, ratably according to the respective amounts of their Commitments), from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever (including, without limitation, fees and disbursements of counsel) which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or the transactions contemplated hereby or any action taken or omitted by the Agent under this Agreement, PROVIDED, HOWEVER, that no Bank shall be liable for any portion of such claims, damages, losses, liabilities, costs or expenses resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of- pocket expenses (including without limitation fees and expenses of counsel) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Company but without limiting the obligation of the Company to make such reimbursement. Each Bank agrees to reimburse the Agent promptly upon demand for its ratable share of any amounts owing to the Agent by the Banks pursuant to this Section. If the indemnity furnished to the Agent under this Section shall, in the judgment of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity from the Banks and cease, or not commence, to take any action until such additional indemnity is furnished. 7.9 SUCCESSOR AGENT. The Agent may resign as such at any time upon ten days' prior written notice to the Company and the Banks. In the event of any such resignation, the Required Banks shall, by an instrument in writing delivered to the Company and the Agent, appoint a successor, which shall be a commercial bank organized under the laws of the United States or any State thereof and having a combined capital and surplus of at least $500,000,000. If a successor is not so appointed or does not accept such appointment before the Agent's resignation becomes effective, the retiring Agent may appoint a temporary successor to act until such appointment by the Required Banks is made and accepted or if no such temporary successor is appointed as provided above by the retiring Agent, the Required Banks shall thereafter perform all the duties of the Agent hereunder until such appointment by the Required Banks is made and accepted. Any successor to the Agent shall execute and deliver to the Company and the Banks an instrument accepting such appointment and thereupon such successor Agent, without further act, deed, conveyance or transfer shall become vested with all of the properties, rights, interests, powers, authorities and obligations of its predecessor hereunder with like effect as if originally named as Agent hereunder. Upon request of such successor Agent, the Company and the retiring Agent shall execute and deliver such instruments of conveyance, assignment and further assurance -44- and do such other things as may reasonably be required for more fully and certainly vesting and confirming in such successor Agent all such properties, rights, interests, powers, authorities and obligations. The provisions of this Article VII shall thereafter remain effective for such retiring Agent with respect to any actions taken or omitted to be taken by such Agent while acting as the Agent hereunder. 7.10 SHARING OF PAYMENTS. The Banks agree among themselves that, in the event that any Bank shall obtain payment in respect of any Advance or any other obligation owing to the Banks under this Agreement through the exercise of a right of set-off, banker's lien, counterclaim or otherwise in excess of its ratable share of payments received by all of the Banks on account of the Advances and other obligations (or if no Advances are outstanding, ratably according to the respective amounts of the Commitments), such Bank shall promptly purchase from the other Banks participation in such Advances and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all of the Banks share such payment in accordance with such ratable shares. The Banks further agree among themselves that if payment to a Bank obtained by such Bank through the exercise of a right of set-off, banker's lien, counterclaim or otherwise as aforesaid shall be rescinded or must otherwise be restored, each Bank which shall have shared the benefit of such payment shall, by repurchase of participation theretofore sold, return its share of that benefit to each Bank whose payment shall have been rescinded or otherwise restored. The Company agrees that any Bank so purchasing such a participation may, to the fullest extent permitted by law, exercise all rights of payment, including set-off, banker's lien or counterclaim, with respect to such participation as fully as if such Bank were a holder of such Advance or other obligation in the amount of such participation. The Banks further agree among themselves that, in the event that amounts received by the Banks and the Agent hereunder are insufficient to pay all such obligations or insufficient to pay all such obligations when due, the fees and other amounts owing to the Agent in such capacity shall be paid therefrom before payment of obligations owing to the Banks under this Agreement. Except as otherwise expressly provided in this Agreement, if any Bank or the Agent shall fail to remit to the Agent or any other Bank an amount payable by such Bank or the Agent to the Agent or such other Bank pursuant to this Agreement on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Agent or such other Bank at a rate per annum equal to the rate at which borrowings are available to the payee in its overnight federal funds market. It is further understood and agreed among the Banks and the Agent that if the Agent shall engage in any other transactions with the Company and shall have the benefit of any collateral or security therefor which does not expressly secure the obligations arising under this Agreement except by virtue of a so-called dragnet clause or comparable provision, the Agent shall be entitled to apply any proceeds of such collateral or security first in respect of the obligations arising in connection with such other transaction before application to the obligations arising under this Agreement. 7.11 WITHHOLDING TAX EXEMPTION. At least five Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America, or a state thereof, agrees that -45- it will deliver to each of the Company and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Company and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Company or the Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Company and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. Each such Bank delivering such forms shall indemnify the Company and the Agent, and hold harmless the Company and the Agent from, all losses and damages suffered by the Company or the Agent for any inaccuracies in any such forms. ARTICLE VIII. MISCELLANEOUS 8.1 AMENDMENTS, ETC. 1. No amendment, modification, termination or waiver of any provision of any Loan Document nor any consent to any departure therefrom shall be effective unless the same shall be in writing and signed by the Company and Required Banks and, to the extent any rights or duties of the Agent may be affected thereby, the Agent, PROVIDED, HOWEVER, that no such amendment, modification, termination, waiver or consent shall, without the consent of the Agent and all of the Banks, (i) authorize or permit the extension of time for, or any reduction of the amount of, any payment of the principal of, or interest on, the Notes or any Letter of Credit reimbursement obligation, or any fees or other amount payable hereunder, or (ii) amend, extend or terminate the respective Commitments of any Bank set forth on the signature pages hereof or the definition of Required Banks. (b) Any such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (c) Notwithstanding anything herein to the contrary, no Bank that is in default of any of its obligations to fund any amount due under this Agreement shall be entitled to vote (whether to consent or to withhold its consent) with respect to any amendment, modification, termination or waiver of any provision of this Agreement or any departure therefrom or any direction from the Banks to the Agent, and, for purposes of determining the -46- Required Banks at any time when any Bank is in default under this Agreement, the Commitments and Advances of such defaulting Banks shall be disregarded. 8.2 NOTICES. (a) Except as otherwise provided in Section 8.2(c) hereof, all notices and other communications hereunder shall be in writing and shall be delivered or sent to the Company at 3939 International Gateway, Columbus, Ohio 43219, Attention: Chief Financial Officer or Controller, Facsimile No. (614) 237-1915, Telephone No. (614) 237-9777, and to the Agent and the Banks at the respective addresses for notices set forth on the signatures pages hereof, or to such other address as may be designated by the Company, the Agent or any Bank by notice to the other parties hereto. All notices and other communications shall be deemed to have been given at the time of actual delivery thereof to such address, or, unless sooner delivered, (i) if sent by certified or registered mail, postage prepaid, to such address, on the third day after the date of mailing, (ii) if sent by telex, upon receipt of the appropriate answerback, or (iii) if sent by facsimile transmission, upon confirmation of receipt by telephone at the number specified for confirmation, PROVIDED, HOWEVER, that notices to the Agent shall not be effective until received. (b) Notices by the Company to the Agent with respect to terminations or reductions of the Commitments pursuant to Section 2.2, requests for Advances pursuant to Section 2.4, requests for continuations or conversions of Loans pursuant to Section 2.7 and notices of prepayment pursuant to Section 3.1 shall be irrevocable and binding on the Company. (c) Any notice to be given by the Company to the Agent pursuant to Sections 2.4, 2.7 or 3.1 and any notice to be given by the Agent or any Bank hereunder, may be given by telephone, and all such notices given by the Company must be immediately confirmed in writing in the manner provided in Section 8.2(a). Any such notice given by telephone shall be deemed effective upon receipt thereof by the party to whom such notice is to be given. The Company shall indemnify and hold harmless the Banks and the Agent from any and all losses, damages, liabilities and claims arising from their good faith reliance on any such telephone notice. 8.3 NO WAIVER BY CONDUCT; REMEDIES CUMULATIVE. No course of dealing on the part of the Agent or any Bank, nor any delay or failure on the part of the Agent or any Bank in exercising any right, power or privilege hereunder shall operate as a waiver of such right, power or privilege or otherwise prejudice the Agent's or such Bank's rights and remedies hereunder; nor shall any single or partial exercise thereof preclude any further exercise thereof or the exercise of any other right, power or privilege. No right or remedy conferred upon or reserved to the Agent or any Bank under any Loan Document is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right or remedy granted thereunder or now or hereafter existing under any applicable law. Every right and remedy granted by any Loan Document or by applicable law to the Agent or any Bank may be exercised from time to time and as often as may be deemed expedient by the Agent or any Bank and, unless contrary to the express provisions of any Loan Document, irrespective of the occurrence or continuance of any Default or Event of Default. -47- 8.4 RELIANCE ON AND SURVIVAL OF VARIOUS PROVISIONS. All terms, covenants, agreements, representations and warranties of the Company made herein or in any other Loan Document or in any certificate, report, financial statement or other document furnished by or on behalf of the Company in connection with this Agreement shall be deemed to be material and to have been relied upon by the Banks, notwithstanding any investigation heretofore or hereafter made by any Bank or on such Bank's behalf, and those covenants and agreements of the Company set forth in Section 3.7, 3.9 and 8.5 hereof shall survive the repayment in full of the Advances and the termination of the Commitments. 8.5 EXPENSES; INDEMNIFICATION. (a) The Company agrees to pay, or reimburse the Agent for the payment of, on demand, (i) the reasonable fees and expenses of counsel to the Agent, including without limitation the fees and expenses of Dickinson, Wright, Moon, Van Dusen & Freeman, in connection with the preparation, execution, delivery and administration of the Loan Documents and in connection with advising the Agent as to its rights and responsibilities with respect thereto, and in connection with any amendments, waivers or consents in connection therewith, and (ii) all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing or recording of the Loan Documents (or the verification of filing, recording, perfection or priority thereof) or the consummation of the transactions contemplated hereby, and any and all liabilities with respect to or resulting from any delay in paying or omitting to pay such taxes or fees, and (iii) all reasonable costs and expenses of the Agent and the Banks (including reasonable fees and expenses of counsel and whether incurred through negotiations, legal proceedings or otherwise)) in connection with any Default or Event of Default or the enforcement of, or the exercise or preservation of any rights under, the Loan Documents or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement and (iv) all reasonable costs and expenses of the Agent and the Banks (including reasonable fees and expenses of counsel) in connection with any action or proceeding relating to a court order, injunction or other process or decree restraining or seeking to restrain the Agent from paying any amount under, or otherwise relating in any way to, any Letter of Credit and any and all costs and expenses which any of them may incur relative to any payment under any Letter of Credit. (b) The Company hereby indemnifies and agrees to hold harmless the Banks and the Agent, and their respective officers, directors, employees and agents, harmless from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever which the Banks or the Agent or any such Person may incur or which may be claimed against any of them by reason of or in connection with any Letter of Credit, and neither any Bank nor the Agent or any of their respective officers, directors, employees or agents shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or for any acts or omissions of any beneficiary in connection therewith; (ii) the validity, sufficiency or genuineness of documents or of any endorsement thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by the Agent to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of any Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (iv) any error, omission, interruption or -48- delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit; or (v) any other event or circumstance whatsoever arising in connection with any Letter of Credit; PROVIDED, HOWEVER, that the Company shall not be required to indemnify the Banks and the Agent and such other Persons, and the Banks shall be liable to the Company to the extent, but only to the extent, of any direct, as opposed to consequential or incidental, damages suffered by the Company which were caused by (A) the Agent's wrongful dishonor of any Letter of Credit after the presentation to it by the beneficiary thereunder of a draft or other demand for payment and other documentation strictly complying with the terms and conditions of such Letter of Credit, or (B) the Agent's payment by the Agent to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of the Letter of Credit to the extent, but only to the extent, that such payment constitutes gross negligence of wilful misconduct of the Agent. It is understood that in making any payment under a Letter of Credit the Agent will rely on documents presented to it under such Letter of Credit as to any and all matters set forth therein without further investigation and regardless of any notice or information to the contrary, and such reliance and payment against documents presented under a Letter of Credit substantially complying with the terms thereof shall not be deemed gross negligence or wilful misconduct of the Agent in connection with such payment. It is further acknowledged and agreed that the Company may have rights against the beneficiary or others in connection with any Letter of Credit with respect to which the Banks are alleged to be liable and it shall be a precondition of the assertion of any liability of the Banks under this Section that the Company shall first have exhausted all remedies in respect of the alleged loss against such beneficiary and any other parties obligated or liable in connection with such Letter of Credit and any related transactions. (c) In consideration of the execution and delivery of this Agreement by each Bank and the extension of the Commitments, the Company hereby indemnifies, exonerates and holds the Agent, each Bank and each of their respective officers, directors, employees and agents (collectively, the "INDEMNIFIED PARTIES") free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "INDEMNIFIED LIABILITIES"), incurred at any time by the Indemnified Parties or any of them as a result of, or arising out of, or relating to: (i) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Advance; (ii) the entering into and performance of this Agreement and any other agreement or instrument executed in connection herewith by any of the Indemnified Parties (including any action brought by or on behalf of the Company as the result of any determination by the Required Banks not to fund any Advance); -49- (iii) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by the Company or any of its Subsidiaries of any portion of the stock or assets of any Person, whether or not the Agent or such Bank is party thereto; (iv) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the protection of the environment or the release by the Company or any of its Subsidiaries of any Hazardous Material; or (v) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releasing from, any real property owned or operated by the Company or any of its Subsidiaries of any Hazardous Material (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, the Company or such Subsidiary, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the activities of the Indemnified Party on the property of the Company conducted subsequent to a foreclosure on such property by the Banks or by reason of the relevant Indemnified Party's gross negligence or willful misconduct or breach of this Agreement, and if and to the extent that the foregoing undertaking may be unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Company shall be obligated to indemnify the Indemnified Parties for all Indemnified Liabilities subject to and pursuant to the foregoing provisions, regardless of whether the Company or any of its Subsidiaries had knowledge of the facts and circumstances giving rise to such Indemnified Liability. 8.6 SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, PROVIDED that the Company may not, without the prior consent of the Banks, assign its rights or obligations under any Loan Document and the Banks shall not be obligated to make any Advance hereunder to any entity other than the Company. (b) Any Bank may sell to any financial institution or institutions, and such financial institution or institutions may further sell, a participation interest (undivided or divided) in, the Advances and such Bank's rights and benefits under the Loan Documents, and to the extent of that participation interest such participant or participants shall have the same rights and benefits against the Company under Section 3.7, 3.9 and 6.2(c) as it or they would have had if such participant or participants were the Bank making the Advances to the Company hereunder, PROVIDED, HOWEVER, that (i) such Bank's obligations under this Agreement shall remain unmodified and fully effective and enforceable against such Bank, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of its Notes for all purposes of this Agreement, (iv) the Company, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and (v) such Bank shall -50- not grant to its participant any rights to consent or withhold consent to any action taken by such Bank or the Agent under this Agreement other than action requiring the consent of all of the Banks hereunder. (c) The Agent from time to time in its sole discretion may appoint agents for the purpose of servicing and administering this Agreement and the transactions contemplated hereby and enforcing or exercising any rights or remedies of the Agent provided under the Loan Documents or otherwise. In furtherance of such agency, the Agent may from time to time direct that the Company provide notices, reports and other documents contemplated by this Agreement (or duplicates thereof) to such agent. The Company hereby consents to the appointment of such agent and agrees to provide all such notices, reports and other documents and to otherwise deal with such agent acting on behalf of the Agent in the same manner as would be required if dealing with the Agent itself. (d) Each Bank may, with the prior written consent of the Company (which shall not be unreasonably withheld and may not be withheld if an Event of Default has occurred and is continuing) and the Agent, assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); PROVIDED, HOWEVER, that (i) each such assignment shall be of a uniform, and not a varying, percentage of all rights and obligations, (ii) except in the case of an assignment of all of a Bank's rights and obligations under this Agreement, (A) the amount of the Commitment of the assigning Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000, and in integral multiples of $1,000,000 thereafter, or such lesser amount as the Company and the Agent may consent to and (B) after giving effect to each such assignment, the amount of the Commitment of the assigning Bank shall in no event be less than $5,000,000, (iii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance in the form of EXHIBIT E hereto (an "ASSIGNMENT AND ACCEPTANCE"), together with any Note or Notes subject to such assignment and a processing and recordation fee of $3,000, and (iv) any Bank may without the consent of the Company or the Agent, and without paying any fee, assign to any Affiliate of such Bank that is a bank or financial institution all of its rights and obligations under this Agreement. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (y) the Bank assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). -51- (e) By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.6 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Bank. (f) The Agent shall maintain at its address designated on the signature pages hereof a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitment of, and principal amount of the Advances owing to, each Bank from time to time (the "REGISTER"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Company, the Agent and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Company or any Bank at any reasonable time and from time to time upon reasonable prior notice. (g) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee, together with any Note or Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company. Within five Business Days after its receipt of such notice, the Company shall execute and deliver to the Agent in exchange for the surrendered Note or Notes a new Note to the order of such assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Bank has retained a Commitment hereunder, a new Note to the order of the assigning Bank in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated -52- the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of EXHIBIT E hereto. (h) The Company shall not be liable for any costs or expenses of any Bank in effectuating any participation or assignment under this Section 8.6. (i) The Banks may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.6, disclose to the assignee or participant or proposed assignee or participant any information relating to the Company. (j) Notwithstanding any other provision set forth in this Agreement, any Bank may at any time create a security interest in, or assign, all or any portion of its rights under this Agreement (including, without limitation, the Loans owing to it and the Note or Notes held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System; PROVIDED that such creation of a security interest or assignment shall not release such Bank from its obligations under this Agreement. 8.7 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 8.8 GOVERNING LAW. This Agreement is a contract made under, and shall be governed by and construed in accordance with, the law of the State of Michigan applicable to contracts made and to be performed entirely within such State and without giving effect to choice of law principles of such State. The Company and the Banks further agree that any legal or equitable action or proceeding with respect to the Loan Documents or the transactions contemplated hereby shall be brought in any court of the State of Michigan, or in any court of the United States of America sitting in Michigan, and the Company and the Banks hereby submit to and accept generally and unconditionally the jurisdiction of those courts with respect to its Person and property, and, in the case of the Company irrevocably appoints its chief financial officer as its agent for service of process and irrevocably consents to the service of process in connection with any such action or proceeding by Personal delivery to such agent or to the Company or by the mailing thereof by registered or certified mail, postage prepaid to the Company or such Guarantor at its address for notices pursuant to Section 8.2. Nothing in this paragraph shall affect the right of the Banks and the Agent to serve process in any other manner permitted by law or limit the right of the Banks or the Agent to bring any such action or proceeding against the Company or property in the courts of any other jurisdiction. The Company and the Banks hereby irrevocably waives any objection to the laying of venue of any such action or proceeding in the above described courts. 8.9 TABLE OF CONTENTS AND HEADINGS. The table of contents and the headings of the various subdivisions hereof are for the convenience of reference only and shall in no way modify any of the terms or provisions hereof. -53- 8.10 CONSTRUCTION OF CERTAIN PROVISIONS. If any provision of this Agreement refers to any action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person, whether or not expressly specified in such provision. 8.11 INTEGRATION AND SEVERABILITY. The Loan Documents embody the entire agreement and understanding between the Company, the Guarantors, the Agent and the Banks, and supersede all prior agreements and understandings, relating to the subject matter hereof. In case any one or more of the obligations of the Company under the Loan Documents shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Company shall not in any way be affected or impaired thereby, and such invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Company under any Loan Document in any other jurisdiction. 8.12 INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any such covenant, the fact that it would be permitted by an exception to, or would be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or such condition exists. 8.13 INTEREST RATE LIMITATION. Notwithstanding any provisions of any Loan Document, in no event shall the amount of interest paid or agreed to be paid by the Company exceed an amount computed at the highest rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of any Loan Document at the time performance of such provision shall be due, shall involve exceeding the interest rate limitation validly prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, IPSO FACTO, the obligations to be fulfilled shall be reduced to an amount computed at the highest rate of interest permissible under applicable law, and if for any reason whatsoever any Bank shall ever receive as interest an amount which would be deemed unlawful under such applicable law such interest shall be automatically applied to the payment of principal of the Advances outstanding hereunder (whether or not then due and payable) and not to the payment of interest, or shall be refunded to the Company if such principal and all other obligations of the Company to the Banks have been paid in full. 8.14 WAIVER OF JURY TRIAL. THE BANKS, THE AGENT AND THE COMPANY, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF ANY LOAN DOCUMENTS OR ANY RELATED INSTRUMENT OR AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY OF THEM. NEITHER ANY BANK, THE AGENT, NOR THE COMPANY SHALL SEEK TO CONSOLIDATE, BY -54- COUNTERCLAIM OR OTHERWISE, ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY ANY PARTY HERETO EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY SUCH PARTY. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered on the ____ day of May, 1996, which shall be the Effective Date of this Agreement, notwithstanding the day and year first above written. AIRNET SYSTEMS, INC. By__________________________________ Its________________________________ Address for Notices: NBD BANK, as a Bank and as Agent 611 Woodward Avenue By__________________________________ Detroit, Michigan 48226 Its_________________________________ Attention: Michigan Banking Division Facsimile No.: (313) 225-2290 Telephone No.:(313) 225-2227 Commitment Amount: $50,000,000 (comprised of a Revolving Credit A Commitment of $20,000,000, and a Revolving Credit B Commitment of $30,000,000) Percentage of Total Commitments:100% -55- SCHEDULE 2.10 FORM EXTENSION REQUEST EXHIBIT A FORM REVOLVING CREDIT A NOTE EXHIBIT B REVOLVING CREDIT B NOTE EXHIBIT C REQUEST FOR ADVANCE EXHIBIT D REQUEST FOR CONTINUATION OR CONVERSION OF LOAN EXHIBIT E ASSIGMENT AND ACCEPTANCE -----END PRIVACY-ENHANCED MESSAGE-----