-----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, FqAbxjOAnbAJIuhTxlOvPbtqwNgRzFmOh6nxFLj1Pr9WVb/HBV1PX7XcU0X1ToI/ rORc22WrybO92iejtnUhWw== 0000950144-97-003442.txt : 19971210 0000950144-97-003442.hdr.sgml : 19971210 ACCESSION NUMBER: 0000950144-97-003442 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASA HOLDINGS INC CENTRAL INDEX KEY: 0001023944 STANDARD INDUSTRIAL CLASSIFICATION: 4512 IRS NUMBER: 582258221 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-29558 FILM NUMBER: 97569458 BUSINESS ADDRESS: STREET 1: 100 HARTSFIELD CENTRE PARKWAY SUITE 800 CITY: ATLANTA STATE: GA ZIP: 30354 BUSINESS PHONE: 4047661400 MAIL ADDRESS: STREET 1: 100 HARTSFIELD CENTRE PARKWAY SUITE 800 CITY: ATLANTA STATE: GA ZIP: 30354 10-K 1 ASA HOLDINGS, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1996 [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ____________ Commission file number 33-13071 ASA HOLDINGS, INC. (Exact name of Registrant as specified in its charter) GEORGIA 58-2258221 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 HARTSFIELD CENTRE PARKWAY SUITE 800, ATLANTA, GEORGIA 30354 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (404) 766-1400 Securities registered pursuant to Section 12(b) of the Act: NONE NONE (Title of class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.10 PAR VALUE (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 2 FACING PAGE Page 2 of 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 3, 1997, the aggregate market value of voting stock held by non-affiliates of the Registrant, based on the $22.75 closing sales price of such stock on The Nasdaq Stock Market's National Market on that date, was approximately $464,054,000. As of March 3, 1997, the Registrant had 29,963,570 shares of Common Stock outstanding. Documents Incorporated by Reference Portions of the Registrant's Proxy Statement to be used in connection with the solicitation of proxies for the Registrant's annual meeting of shareholders to be held May 21, 1997, are incorporated by reference into Part III of this Report on Form 10-K. 3 ASA HOLDINGS, INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I .....................................................................................1 ITEM 1. BUSINESS...........................................................................1 General ..........................................................................1 Delta Connection...................................................................2 Route System.......................................................................3 Fares ..........................................................................5 Flight Equipment...................................................................6 Personnel and Operations...........................................................7 Maintenance........................................................................8 Aviation Fuel......................................................................9 Marketing.........................................................................10 Competition and Industry Considerations...........................................11 Economy .........................................................................11 Seasonality.......................................................................12 Regulation........................................................................12 Insurance.........................................................................15 Extraordinary Events..............................................................15 Executive Officers................................................................15 ITEM 2. PROPERTIES........................................................................16 ITEM 3. LEGAL PROCEEDINGS.................................................................17 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.................................18 PART II ....................................................................................19 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...............................................................19 Market Information................................................................19 Dividends and Share Repurchases...................................................20 Recent Sales of Unregistered Securities...........................................21 ITEM 6. SELECTED FINANCIAL DATA...........................................................21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................................24 Reorganization....................................................................24 Liquidity and Capital Resources...................................................25 Accounting Standards..............................................................29 Results of Operations.............................................................29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................34 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................................55 PART III ....................................................................................55 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................55
4 ITEM 11. EXECUTIVE COMPENSATION..........................................................55 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................................................55 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................55 PART IV .....................................................................................56 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................................................................56 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT...................................65 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES..................................67
5 PART I ITEM 1. BUSINESS General ASA Holdings, Inc. ("ASA HOLDINGS") is incorporated under the laws of the State of Georgia. Its principal offices are located at 100 Hartsfield Centre Parkway, Suite 800, Atlanta, Georgia 30354 and its telephone number is (404) 766-1400. ASA Holdings is a holding company the principal assets of which are the shares of its wholly owned subsidiaries Atlantic Southeast Airlines, Inc., a Georgia corporation ("ASA"), and ASA Investments, Inc., a Delaware corporation ("ASA INVESTMENTS"). ASA Holdings considers the airline business of ASA to be its only industry segment. All references herein to the "COMPANY" shall refer collectively to ASA Holdings, ASA, and ASA Investments. ASA Holdings became the parent holding company for ASA and ASA Investments pursuant to a corporate reorganization that was effective after the close of business on December 31, 1996 (the "REORGANIZATION"). Pursuant to the Reorganization, ASA merged with a wholly owned subsidiary of ASA Holdings (the "MERGER"). Prior to the Merger, ASA Holdings was a wholly owned subsidiary of ASA. Pursuant to the Merger, each issued and outstanding share of ASA's common stock, $0.10 par value per share ("ASA COMMON STOCK"), was automatically converted into one share of ASA Holdings' common stock, $0.10 par value per share ("HOLDINGS COMMON STOCK"), except for shares of ASA Common Stock then held by ASA as treasury shares, which were cancelled as part of the Merger. See "DIVIDENDS AND SHARE REPURCHASES" herein. Immediately after the consummation of the Merger, on December 31, 1996, ASA effected a dividend of all the capital stock of ASA's wholly owned subsidiary, ASA Investments, to ASA Holdings. ASA is a certificated air carrier providing regularly scheduled, high frequency airline service between (i) Hartsfield Atlanta International Airport in Atlanta, Georgia (the "ATLANTA HUB") and 36 other airports in Alabama, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia and (ii) Dallas/Fort Worth International Airport in Dallas, Texas (the "DALLAS/FORT WORTH HUB") and 22 other airports in Arkansas, Kansas, Louisiana, Mississippi, Oklahoma and Texas. ASA is the largest regional carrier serving Hartsfield Atlanta International Airport with more flights per week than any other regional carrier. ASA currently operates over 3,800 flights per week. A majority of ASA's flights are utilized primarily by business, government and military passengers to make connections with flights operated by Delta Air Lines, Inc. ("DELTA") and other air carriers from the Atlanta and Dallas/Fort Worth hubs. As of March 3, 1997, ASA's operating fleet consisted of 75 turboprop airplanes, 12 of which seat 66 passengers and the remaining 63 of which seat 30 passengers, and 5 jets that seat 88 passengers each. In January 1997, ASA announced its intention to expand its fleet through the acquisition of 30 jets that seat 50 passengers each. See "FLIGHT EQUIPMENT" herein. 6 In fiscal 1996, ASA Holdings reported a record $56.6 million profit and an 18.1% increase in earnings per share. Revenues increased 14.2% and net income increased 10.7%. ASA also carried a record number of passengers in fiscal 1996. See "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" herein. The sole business of ASA Investments is to manage certain cash assets contributed to it by ASA Holdings and its other subsidiaries. As of December 31, 1996, ASA Investments had total assets of approximately $132,000,000. Delta Connection Since 1984, ASA has operated from the Atlanta and Dallas/Fort Worth hubs as a "Delta Connection" carrier pursuant to a marketing agreement (the "DELTA CONNECTION AGREEMENT") with Delta. As a Delta Connection carrier, ASA's flights are shown under Delta's two letter code designation (DL) in the automated airline reservation systems used throughout the industry and in the Official Airline Guide. ASA is assigned a series of distinctive Delta flight numbers that travel agents and airline reservation personnel are able to distinguish as those operated as a Delta Connection carrier. Passengers served by Delta Connection carriers are able to take advantage of the cost savings inherent in through fares and are offered Delta frequent flyer mileage and a full range of promotional fares provided by Delta and ASA. In addition, ASA is able to offer its passengers coordinated schedules for timely connections with Delta flights. See "FARES" and "MARKETING" herein. Approximately 80% of ASA's passengers during fiscal 1996 connected with or from Delta flights at the Atlanta or the Dallas/Fort Worth hubs. See "ROUTE SYSTEM" herein. ASA believes that its marketing agreement with Delta is similar to those that exist between Delta and other Delta Connection Carriers and in substance to those that exist between other major and regional air carriers. The Delta Connection Agreement has been in effect since 1984 and may be terminated by either party by giving no less than 30-days' advance written notice. ASA believes that its relationship with Delta is good and does not anticipate any termination of the Delta Connection Agreement. Given ASA's relationship with Delta, ASA's results of operations and financial condition may be favorably or adversely impacted by Delta's decisions regarding its flight routes and other operational matters. ASA has historically benefited from its relationship with Delta but there can be no assurance that such benefits will occur in the future. Any material modification of this relationship with Delta could have a material adverse effect on ASA and ASA Holdings. As of March 3, 1997, Delta Air Lines Holdings, Inc., a wholly owned subsidiary of Delta ("DELTA HOLDINGS"), owned approximately 27% of the outstanding Holdings Common Stock. Pursuant to the terms of a Stock Agreement among Delta, Delta Holdings, ASA Holdings and ASA dated as of March 17, 1997, (the "STOCK AGREEMENT"), (a) at Delta's request, ASA Holdings will include at least two designees of Delta or Delta Holdings who are reasonably acceptable to ASA Holdings on the slate of nominees for election as members of ASA Holdings' Board of Directors and (b) ASA Holdings will use its reasonable best efforts to assure that the designated individuals are elected to ASA Holdings' Board of Directors so long as Delta or Delta Holdings continue to own at least 10% of the 2 7 outstanding Holdings Common Stock. Prior to the Reorganization, Delta had rights substantially similar to those which it has under the Stock Agreement pursuant to a written agreement with ASA. Route System As of March 3, 1997, ASA's route system included service between the Atlanta hub and 36 other airports in Alabama, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia. ASA also operates a similar hub and spoke operation in Dallas/Fort Worth. As of March 3, 1997, ASA provided service from the Dallas/Fort Worth hub to 22 airports in Arkansas, Kansas, Louisiana, Mississippi, Oklahoma and Texas. For information regarding ASA's operating fleet, see "FLIGHT EQUIPMENT" herein. ASA's flight schedules are structured to facilitate the connection of its passengers with Delta's flights at the Atlanta and Dallas/Fort Worth hubs. Approximately 80% of ASA's passengers connected with or from Delta flights at the Atlanta or Dallas/Fort Worth hubs. See "DELTA CONNECTION" herein. The following tables describe ASA's route system as of March 3, 1997:
ATLANTA HUB Air Mileage Date Service Airport Served From Atlanta Hub Commenced - - ------------------------------------------------------------------------- Albany, GA 146 8/1/82 Alexandria, LA 485 12/1/95 Asheville, NC 164 8/1/82 Augusta, GA 143 4/24/83 Brunswick, GA 238 6/1/81 Charleston, WV 363 2/1/86 Charlotte, NC 227 4/1/91 Chattanooga, TN 106 6/1/91 Columbus, GA 83 6/27/79 Columbus, MS 241 12/15/84 Dothan, AL 171 10/31/82 Evansville, IN 350 6/1/89 Fayetteville, NC 331 11/1/85 Florence, SC 273 9/11/92 Fort Walton Beach, FL 250 11/15/82 Gainesville, FL 300 10/1/85 Greensboro/High-Point/ Winston-Salem, NC 306 6/1/91 Greenville/Spartanburg, SC 153 4/25/82 Gulfport/Biloxi, MS 352 3/2/91
3 8
ATLANTA HUB Air Mileage Date Service Airport Served From Atlanta Hub Commenced - - --------------------------------------------------------------------------- Jackson, MS 341 4/4/93 Jacksonville, NC 399 12/15/92 Lafayette, LA 503 12/1/95 Lexington, KY 303 12/15/90 Louisville, KY 321 4/4/93 Lynchburg, VA 389 7/1/94 Macon, GA 79 3/20/80 Meridian, MS 267 11/1/84 Montgomery, AL 147 6/1/82 Myrtle Beach, SC 317 9/1/86 Panama City, FL 247 3/1/84 Pensacola, FL 272 4/1/91 Roanoke, VA 357 12/15/85 Tallahassee, FL 223 12/15/85 Tri-Cities, TN 227 10/31/82 Valdosta, GA 208 9/9/81 Wilmington, NC 377 9/17/90
DALLAS/FORT WORTH HUB Air Mileage From Date Service Airport Served Dallas/Fort Worth Hub Commenced - - ------------------------------------------------------------------------------ Alexandria, LA 297 10/1/87 Amarillo, TX 313 7/1/93 Beaumont/Port Arthur, TX 270 2/1/87 Columbus, MS 491 12/1/95 Corpus Christi, TX 354 6/1/93 Fayetteville, AR 270 12/15/86 Fort Smith, AR 227 12/15/86 Houston, TX (Intercontinental) 224 10/1/93 Houston, TX (Hobby) 247 5/1/94 Killeen, TX 130 5/1/87 Lafayette, LA 351 12/15/87 Lawton, OK 140 2/1/87 Lubbock, TX 282 7/1/93 Meridian, MS 485 12/1/95 Monroe, LA 293 9/12/94 Oklahoma City, OK 175 7/1/93 San Antonio, TX 247 10/1/93 Shreveport, LA 190 12/1/95 Texarkana, AR 181 12/15/86
4 9
DALLAS/FORT WORTH HUB Air Mileage From Date Service Airport Served Dallas/Fort Worth Hub Commenced - - ------------------------------------------------------------------------------ Tulsa, OK 237 6/1/93 Wichita, KS 328 7/1/93 Wichita Falls, TX 113 12/15/86
ASA provides service on all of its routes every weekday with reduced service on weekends. Fares ASA derives its revenues primarily from local fares and through fares. Local fares are those fares for one way and round trips that are not combined with the fare of another air carrier. Through fares are fares for transportation provided jointly by ASA and another carrier and are normally less than the sum of the fares that would otherwise be charged by each carrier for that portion of the total trip provided by it. ASA operates as a Delta Connection carrier pursuant to a marketing program with Delta. See "DELTA CONNECTION" herein. In addition to the Delta Connection Agreement, ASA is a party to interline passenger, reservation, ticketing and baggage agreements with each of the other major air carriers with which ASA transacts any significant amount of business. These agreements permit each carrier to reserve seats and sell tickets for flights on the other contracting carrier, provide that each carrier will honor ticket forms of the other carriers and provide for an interline baggage exchange system at airport terminals. ASA distributes revenues derived from through fares among the participating air carriers using various proration formulas. The most widely used method of settlement involves a straight rate prorate division, unless the carriers enter into agreements providing otherwise. The various pricing structures are generally presented in the Airline Tariff Publishing Company's electronic tariff, Passenger Interline Pricing Prorate System (PIPPS). Air carriers are permitted to set domestic ticket prices without governmental regulation. See "REGULATION" herein. As a result, the industry generally is subject to substantial price competition. See "COMPETITION AND INDUSTRY CONSIDERATIONS" herein. The aviation trust fund tax, a 10% federal excise tax on tickets sold, expired effective January 1, 1996, was reinstated effective August 27, 1996, expired again effective January 1, 1997, and was reinstated again effective March 7, 1997. In addition, legislation that was effective in 1992 allows public airports to impose passenger facility charges of up to $3.00 per departing or connecting 5 10 passenger. Price competition may have an impact on ASA's ability to pass these charges on to its customers. See "COMPETITION AND INDUSTRY CONSIDERATIONS" herein. Flight Equipment As of March 3, 1997, ASA's operating fleet consisted of 75 turboprop airplanes, 12 of which seat 66 passengers and the remaining 63 of which seat 30 passengers, and 5 jets which seat 88 passengers each. The age of this fleet ranged from 3 to 12 years. The following table describes ASA's current operating fleet as of March 3, 1997:
Number of Number of Aircraft Aircraft Aircraft Type Owned Leased Average Age - - ---------------------------------------------------------- --------------------- ---------------------- ATR-72 Turboprop (66 passenger capacity) 4 8 3.2 years Embraer Brasilia Turboprop (EMB-120) (30 passenger capacity) 59 4 7.8 years BAe 146-200 Jet - 5 9.5 years (88 passenger capacity)
ASA's Embraer Brasilia EMB-120 turboprop aircraft ("BRASILIAS") operate on mainly medium to long-haul routes from the Atlanta and Dallas/Fort Worth hubs. ASA's Brasilias are very fuel efficient and, because of their operating economy, can provide high frequency service in markets with relatively low volumes of passenger traffic. These aircraft are powered by two Pratt & Whitney turboprop engines and accommodate 30 passengers. ASA leases four of the Brasilias pursuant to operating leases. Two leases expire in December 1998, one will expire in June 1999 and one will expire in December 1999. As of March 3, 1997, ASA operated three ATR-72 turboprop aircraft ("ATRs") from the Dallas/Fort Worth hub and nine ATRs from the Atlanta hub. ASA expects to allocate all 12 ATRs to the Atlanta hub after May 1, 1997. ASA has used the ATRs to replace smaller aircraft and increase capacity in existing markets where the volumes are higher than can economically be handled by the Brasilias. The ATRs are 66-passenger aircraft, powered by two Pratt & Whitney turboprop engines, and are built by Avions de Transport Regional, a joint enterprise involving Alenia-Aeritalia & Selenia S.P.A., an Italian aircraft manufacturer, and Aerospatiale Societe Nationale Industrielle, a French aircraft manufacturer. ASA leases eight ATRs pursuant to a lease with a seven-year term. ASA also owns four ATRs, the majority of the purchase price of which was provided by bank financing. ASA has an option to acquire 16 additional ATRs. ASA operates five British Aerospace BAe 146-200 jets ("BAe JETS"). The BAe Jets are each powered by four Allied Signal high by-pass jet engines. The BAe Jets feature very low noise levels, a wide passenger aisle, ample overhead storage and five-abreast seating. The Federal Aviation 6 11 Administration ("FAA") certified BAe Jets to operate with a maximum capacity of 108 passengers. ASA is operating the BAe Jets in an 88-passenger configuration to provide more spacious seating for its passengers. ASA uses the BAe Jets where volume requirements necessitate the use of that size aircraft. Four BAe Jets were added to ASA's flight schedule in December 1995 and a fifth BAe Jet was added on February 1, 1996. ASA used the BAe Jets to expand service from the Atlanta hub to Panama City and Fort Walton Beach, Florida; Tri-Cities and Chattanooga, Tennessee; Asheville, North Carolina; Myrtle Beach, South Carolina and Gulfport, Mississippi. ASA replaced Delta's jet service in all of these markets except Fort Walton Beach, Myrtle Beach and Gulfport. ASA acquired each of these five previously-operated BAe Jets under an operating lease for a term of five years (which can be terminated after two years at ASA's option). Four of the leases are scheduled to expire in December 2000 and the fifth lease is scheduled to expire in February 2001. ASA has the option to extend each of these leases, upon terms to be decided, within 12 months of the expiration of the original lease term. ASA has options to lease up to 15 additional BAe Jets. On January 7, 1997, ASA announced its intentions to acquire 30 Canadair Regional Jet aircraft ("CRJs") and to secure options to acquire up to an additional 60 CRJs, subject to the effectiveness of a definitive acquisition agreement with Bombardier, Inc., a definitive financing commitment with the Export Development Corporation of Canada and a definitive agreement with General Electric Company with respect to the acquisition of the Model CF34-3B1 engines and related spare parts. ASA expects to begin taking delivery of the 50-passenger CRJs during the second half of 1997 at the rate of one aircraft per month. ASA estimates that the cost of the first 30 CRJs, including spare parts, will be approximately $600 million. ASA plans to use the new CRJs primarily for growth in new long-haul markets as well as to replace some turboprop aircraft on existing routes from its Atlanta hub. The CRJs are more effective than the BAe Jets over long-haul routes because the CRJs are faster. ASA has pledged 48 of the Brasilias it owns and all four of the ATRs it owns, as well as a significant portion of its spare parts, to secure long-term indebtedness of ASA. Personnel and Operations ASA's employees perform substantially all phases of ASA's operations, including ticketing, maintenance, ground and in-flight service and training. As of March 3, 1997, ASA had approximately 2,433 employees, of which 1,064 were flight personnel, 956 were ground service personnel, 306 were maintenance personnel and the remainder were management, supervisory and clerical employees. As of March 3, 1997, ASA Holdings had three employees, all of whom provide management services for ASA Holdings' subsidiaries, and ASA Investments had two employees, both of whom were management employees. During 1987, the Airline Pilots Association ("ALPA") was certified to represent ASA's pilots. ASA and ALPA negotiated a three-year collective bargaining agreement which was effective from October 1992 through October 1995. In September 1988, ASA's flight attendants voted to join the Association of Flight Attendants ("AFA"). ASA and AFA entered into a three year collective bargaining agreement which was effective in June 1991. In June 1994, ASA and AFA executed a letter of agreement which extended this collective bargaining agreement until June 1995. Pursuant 7 12 to applicable regulations, the collective bargaining agreements with both of these unions became amendable in 1995 and are currently being renegotiated. ASA has been negotiating under federal mediation with ALPA and AFA for approximately one year. See "REGULATION-LABOR REGULATION" herein. There are no union affiliations with any other groups of ASA's, ASA Holdings' or ASA Investments' employees. ASA operates as a Delta Connection carrier pursuant to a marketing program with Delta. See "DELTA CONNECTION" herein. ASA is also a party to interline passenger, reservation, ticketing and baggage agreements with each of the other major air carriers with which ASA transacts any significant amount of business. See "FARES" herein. In addition to carrying passengers, ASA carries mail, freight and small packages on its flights. Maintenance ASA is subject to the jurisdiction of and regulation by the FAA with respect to ASA's maintenance and operations. See "REGULATION" herein. ASA's aircraft and engines are maintained in accordance with the standards and procedures recommended and approved by the manufacturers and the FAA. ASA provides maintenance for its aircraft using its own personnel, facilities and parts. ASA employs personnel with appropriate FAA Airframe and Powerplant licenses to ensure adequate maintenance of its aircraft. ASA employs major outside repair agencies to perform its engine overhauls, most individual component repairs or overhauls, and some major checks on certain aircraft types. ASA's FAA-approved maintenance program specifies the number of days, hours or operating cycles between inspections and overhauls of the airframes and their component parts. The nature and extent of each inspection and overhaul is specifically prescribed by the approved maintenance program. ASA uses an FAA approved alternative for overhauls on each of its three engine types: Pratt & Whitney PW118 engines on the Brasilias, Pratt & Whitney PW127 engines on the ATRs, and Allied Signal ALF502R-5 engines on the BAe Jets. "On condition" engine overhaul intervals are set by engine condition monitoring and continuous airworthiness maintenance programs. In addition, all engines contain time-limited components, each of which has a maximum amount of time (measured by operating hours) or a maximum number of operating cycles (measured by takeoffs and landings) after which the component must be removed from the engine assembly and overhauled or scrapped. From time to time, the FAA issues airworthiness directives ("ADs") and other regulations relating to, among other things, retirement of older aircraft, collision avoidance systems, airborne windshear avoidance systems, noise abatement, aircraft safety and increased inspections and maintenance procedures. Some of these ADs require air carriers to undertake inspections and to make unscheduled modifications and improvements on aircraft, engines and related components and parts. The ADs sometimes cause ASA to incur substantial, unplanned expense and, occasionally, 8 13 aircraft or engines must be removed from service prematurely in order to undergo mandated inspections or modifications on an accelerated basis. Since 1988 various air carriers, in cooperation with the FAA, have been engaged in an in-depth review of the adequacy of existing maintenance procedures applicable to older versions of most of the aircraft types in general use in the industry. To date, this review has not included aircraft used by ASA. While certain of these potential aging aircraft ADs may, at some time in the future, necessitate unscheduled removals from service and increased maintenance costs, ASA does not anticipate that its compliance will have a material adverse impact on costs or operations. Aviation Fuel ASA's operations are significantly affected by the availability and price of aviation fuel. Fuel costs, including taxes and "into plane" fees, constituted 11.54% of ASA's operating costs in 1996. Based on ASA's fiscal 1996 fuel consumption, every $0.01 change in the average annual price per gallon of aviation fuel caused an approximate $435,000 change in ASA's annual fuel expense. The following table shows ASA's fuel consumption and costs for fiscal years 1996, 1995 and 1994:
Average Price Percent of Fiscal Year Gallons Consumed Cost Per Gallon Operating Expense ----------- ---------------- ---- ---------- ----------------- 1996 43,357,461 $33,479,356 $0.77 11.54% 1995 38,872,025 $24,075,274 $0.62 9.52% 1994 38,151,901 $23,533,851 $0.62 10.33%
Aircraft fuel expense increased 39.1% in 1996 compared with 1995, primarily because the average fuel price per gallon increased 24.2% to $0.77 cents per gallon and gasoline consumption increased 11.5%. This fuel price increase reduced net income by $4.1 million, or $0.13 per share, for 1996. See "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" herein. Changes in aviation fuel prices have an industry wide impact and will tend to affect ASA's competitors in the same manner as ASA. There can be no assurance that ASA will be able to increase its fares in response to any future increases in fuel prices. See "COMPETITION AND INDUSTRY CONSIDERATIONS" herein. ASA currently obtains approximately 51% of its fuel requirements from Chevron USA, Inc. at the Atlanta hub and approximately 24% of its fuel requirements from fuel suppliers at the Dallas/Fort Worth hub. ASA obtains the rest of its fuel requirements from various suppliers at other airports. 9 14 ASA's fuel contracts do not provide protection against price increases or for assured availability of supplies. Although ASA is currently able to obtain adequate supplies of fuel, it is impossible to predict the future availability or price of fuel. Political disruptions involving the oil producing countries, changes in government policy concerning aircraft fuel production, transportation or marketing, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages and fuel price increases in the future. ASA's business could be significantly adversely affected by such shortages and price increases. The Omnibus Budget Reconciliation Act of 1993 imposed a 4.3 cent per gallon tax on commercial aviation fuel purchased for use in domestic operations. Air carriers were exempt from this tax until October 1995. While additional exemptions have been proposed, there can be no assurance that ASA will not continue to be required to pay this tax. Marketing ASA markets its passenger, air freight and small package services primarily through direct sales activity and cooperative advertising programs. The direct sales activity focuses on high-volume sources of business, such as travel agencies and ticketing outlets located on major military installations. Since 1984, ASA has operated from the Atlanta and Dallas/Fort Worth hubs as a Delta Connection carrier pursuant to a marketing agreement with Delta. See "DELTA CONNECTION" herein. Cooperative advertising programs with Delta, such as Delta's frequent flyer program and Delta Dream Vacations, are used to promote ASA's flights to the Atlanta and Dallas/Fort Worth hubs, and Delta's services from Atlanta and Dallas/Fort Worth to various long-haul destinations. ASA's passengers accrue mileage in Delta's frequent flyer program, which offers incentives to maximize travel on flights offered by Delta and Delta Connection carriers. This program allows participants to accrue mileage for award travel while flying on Delta, Delta Connection carriers and other participating air carriers. Mileage credits may also be accrued for the use of certain services offered by program partners such as hotels, car rental agencies and credit card companies. Mileage vouchers can be redeemed for free or upgraded travel on Delta, Delta Connection carriers and other participating air carriers and for other program partner awards. Delta has reserved the right to terminate the frequent flyer program with six months advance notice and to change the program's terms and conditions at any time without notice. ASA does not accrue for incremental costs associated with the Delta frequent flyer program's mileage accumulation because the impact is immaterial both on a quarterly and annual basis. ASA's management believes that the low percentage of free passenger miles, its load factor and the restrictions applied to free travel awards minimize the displacement of revenue passengers and that the displacement that occurs is not significant. ASA expenses, as incurred, all incremental costs of providing earned free travel awards under Delta's frequent flyer program. ASA makes payments to Delta for Delta frequent flyer mileage earned by passengers flying on ASA's routes where those passengers do not connect to Delta flights. ASA does not receive any payments related to providing carriage to passengers utilizing frequent flyer mileage earned on Delta flights. 10 15 Competition and Industry Considerations Management of ASA believes that its services are utilized primarily by business, government and military travelers. ASA competes primarily with other air carriers and, particularly with respect to its shorter flights, with ground transportation such as automobiles and buses. Delta provides air service from the Atlanta hub to approximately 31% of the airports served by ASA out of Atlanta. Under the Delta Connection program, ASA's flights are coordinated for timely connections with Delta. The flights provided by Delta and ASA to the same markets are at different times. ASA generally provides service to these markets at times when ASA can more efficiently serve the market. Other air carriers provide service to approximately 11% of ASA's airports from the Atlanta hub. ASA competes primarily with American/American Eagle at the Dallas/Fort Worth hub. Other air carriers provide service to approximately 86% of ASA's airports from the Dallas/Fort Worth hub. The airline industry historically has been highly competitive. ASA's management believes that its ability to compete with ground transportation and other air carriers depends upon the public acceptability of its aircraft and ASA's provision of convenient, frequent and reliable service to its markets at reasonable rates. Air carriers' profit levels are highly sensitive to, and during recent years have been severely impacted by, changes in fuel costs, fare levels and passenger demand. Passenger demand and fares can be affected by, among other things, the general state of the economy, international events and actions taken by other air carriers with respect to fares. See also "ECONOMY" and "SEASONALITY" below. Air carriers are permitted to set domestic ticket prices without governmental regulation. As a result, the industry generally is subject to substantial price competition. ASA has in the past both responded to discounting actions taken by other carriers and initiated discounting actions itself. ASA's management expects that low-fare competition is likely to continue from time to time in its markets. If price reductions are not offset by increases in revenue passenger miles, ASA's operating results could be adversely affected. Economy The airline industry is a highly volatile industry. The state of the economy is the primary determinant of the level of passenger travel. Leisure travel is highly discretionary and can easily be postponed during economic down-turns or no growth economic periods. While business travel is not as discretionary, business travel generally diminishes in uncertain times as business tends to tighten cost controls. 11 16 Seasonality ASA's operations at the Atlanta and Dallas/Fort Worth hubs are primarily dependent upon business, government and military related travel and are not subject to wide seasonal variations. However, some seasonal decline in business travel does occur at these hubs during holiday periods and during portions of the winter months (i.e., January and February). ASA estimates that pleasure travel accounted for approximately 20% of ASA's passengers during 1996. Pleasure travel generally increases during the summer months and at holiday periods. Demand for air travel, especially by pleasure and other discretionary customers, is also affected by factors such as favorable economic conditions and fare levels. See "FARES" and "ECONOMY" herein. ASA's operations are also unfavorably affected by inclement weather which results in cancelled flights, particularly during winter months. The following chart indicates the number of passengers carried by ASA by quarter during its last three fiscal years:
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - - ---- ----------- ----------- ----------- ----------- 1996 836,902 985,747 931,812 877,660 1995 680,871 808,338 789,681 788,007 1994 714,953 800,161 819,311 785,869
Regulation Historically, the U. S. Department of Transportation (the "DOT") and the FAA have exercised regulatory authority over the operations of all air carriers pursuant to the Federal Aviation Act of 1958, as amended (the "1958 ACT"). Most domestic economic regulation of passenger and freight services was eliminated pursuant to the Airline Regulation Act of 1978 and other legislation amending the 1958 Act (collectively the "ACT"). The FAA's jurisdiction extends primarily to the safety and operational provisions of the Act. The DOT's responsibility primarily involves regulation of the economic and consumer protection aspects of airline operation. Both the DOT and the FAA have authority to institute administrative and judicial proceedings to enforce federal aviation laws and their own regulations, rules and orders. Both civil and criminal sanctions may be assessed for violations. ASA is also subject to various other federal, state and local laws and regulations affecting its operations. The United States Postal Service has authority over certain aspects of the transportation of mail. The Communications Act of 1934, as amended, governs ASA's use and operation of radio facilities. Labor relations are generally governed by the Railway Labor Act. Environmental matters (including noise pollution) are governed by various federal, state and local governmental entities. The United States Department of Justice has jurisdiction over mergers and acquisitions involving air carriers. Because it carries military passengers, ASA is also subject to review by the Department of Defense. 12 17 DOT REGULATION. Because of the economic deregulation of the airline industry, unrestricted authority to operate domestic air transportation (including the carrying of passengers and cargo) is available to any air carrier the DOT determines is "fit" to operate. The DOT also has jurisdiction over economic and consumer protection matters such as advertising, denied boarding compensation, baggage handling, smoking aboard aircraft, handicapped access, computer reservation systems, enforcement of minimum standards of customer service, regulation of federal compensation payments for essential air service, and ownership and control of air carriers. The DOT is also authorized to prohibit unjust discrimination and to require periodic reports from air carriers. The DOT has authorized ASA's flight operations pursuant to a Certificate of Public Convenience and Necessity (a "401 CERTIFICATE") issued under Part 401 of the Act during the first quarter of 1993. The 401 Certificate requires ASA to maintain DOT-prescribed minimum levels of insurance and to comply with all applicable statutes, rules and regulations, and subjects ASA to expanded reporting requirements. The DOT must issue a 401 Certificate to an air carrier before it will be permitted to operate aircraft with more than 60 seats. ASA initiated the use of larger aircraft having more than 60 seats during the second quarter of 1993. Prior to receiving the 401 Certificate, ASA qualified as a commuter air carrier that was exempt from certain provisions of the Act and certain regulatory functions of the DOT. On December 20, 1995, a new federal regulation was issued by the FAA which requires all air carriers to accomplish the following by March 20, 1997 (earlier in certain instances): (a) establish a director of safety, and (b) for those air carriers operating aircraft under Part 135 of the Act (30 seats or less), re-certify their operation of those aircraft in accordance with Part 121 of the Act. Prior to March 20, 1997, Part 135 carriers did not have to dispatch all their aircraft or train their pilots to the higher Part 121 standards. Beginning in 1982, ASA operated as both a Part 135 and a Part 121 carrier because it operated aircraft in both categories. ASA began training all of its pilots under Part 121 in 1993, although it was not required to do so. ASA was certified to operate the Brasilias under Part 121 on March 18, 1997. ASA does not anticipate incurring any significant costs in complying with this new regulation. Under the Act, the DOT has the authority to designate ASA as an "essential air carrier" in any community in which it is the only carrier providing service and that is an "essential air service community." Except for such "essential air carrier" service, the economic deregulation of the airline industry permits unrestricted competition with respect to ASA's routes, services, fares and rates. An air carrier that serves an "essential air service community" is required to give advance notice to the DOT if it plans to terminate service to that community. Otherwise, air carriers may terminate service to a community without restriction. ASA is currently the only air carrier that provides service between the Atlanta hub and the following "essential air service communities": Albany, Brunswick, Columbus, Macon and Valdosta, Georgia; Columbus, Gulfport and Meridian, Mississippi; Asheville, North Carolina; Dothan, Alabama; Fort Walton Beach and Panama City, Florida. The service provided by ASA to these "essential air service communities" is on an unsubsidized basis. FAA REGULATION. As part of its safety and operational regulatory authority, the FAA regulates flying operations generally, including, among other things, control of navigable air space; airport access; aircraft certification and maintenance; equipment and ground facilities; flight operations dispatch and other communications; weather observation; the training and qualifications 13 18 of flight, maintenance and other operational and technical personnel; record keeping and other matters affecting air safety generally. To ensure compliance with its regulations, the FAA requires air carriers to obtain operating, airworthiness and other certificates that are subject to suspension or revocation for cause. ASA holds a valid air carrier operating certificate issued by the FAA. ASA's certificates have never been suspended and, to the knowledge of ASA's management, it is in compliance with all applicable FAA regulations. LABOR REGULATION. The Railway Labor Act ("RLA") governs the labor relations of employers and employees in the airline industry. Comprehensive provisions are set forth in the RLA establishing the right of the airline employees to organize and bargain collectively along craft or class lines and imposing a duty upon the air carriers and their employees to make reasonable efforts to maintain collective bargaining agreements. The RLA provides that collective bargaining agreements do not terminate, but instead become amendable at a particular date and stay in force while a new collective bargaining agreement is being negotiated. The RLA also contains detailed procedures regarding negotiation, mediation and arbitration that must be exhausted before lawful work stoppages can occur once a collective bargaining agreement becomes amendable. Pursuant to the RLA, ASA has collective bargaining agreements with two unions representing its pilots and flight attendants. See "PERSONNEL AND OPERATIONS" herein. ENVIRONMENTAL REGULATION. The United States Environmental Protection Agency (the "EPA") is authorized to regulate aircraft emissions. ASA's management believes that the engines on ASA's current aircraft and on all aircraft ASA has ordered comply with applicable EPA standards. Federal and state environmental laws require that underground storage tanks be upgraded to new construction standards and equipped with leak detection. These requirements were phased into effect based on the age, construction and use of existing tanks. Federal and state environmental laws also govern the use and operation of above ground storage tanks. ASA operates no underground or above ground storage tanks for the storage of fuels. ASA pays fixed base operators at various airports to store fuels. ASA's management believes it is otherwise in compliance with these laws. NOISE REGULATIONS. The FAA requires air carriers to comply with certain noise restrictions concerning their aircraft. Air carriers must bring existing aircraft into compliance with these regulations by retrofit or engine replacement. ASA's current aircraft and all aircraft ASA has ordered are in compliance with these regulations. In addition, several state legislatures and other governmental administrative bodies have, from time to time, considered noise reduction measures of various sorts. At the present time, ASA does not provide service to any airport to which any such noise regulations apply. 14 19 Insurance For the fiscal year ended December 31, 1996 ASA maintained insurance coverage with major insurance carriers with coverage up to $25 million for damage per aircraft and $300 million of third party liability per occurrence (for personal injury and property damage, including baggage and cargo liability). The per aircraft deductibles range from $25,000 to $500,000 depending on the type of aircraft. In addition, ASA carries Hull War Risk coverage on certain aircraft where ASA believes, based on information currently available to it, such insurance is necessary to protect it and its property against material loss. ASA's also maintains workers compensation insurance in compliance with state law in each state in which ASA operates. ASA does not maintain business interruption insurance. In the opinion of its management, the Company maintains insurance policies of types customary in the airline industry and in amounts and with insurance carriers it believes, based on information currently available to it, are adequate to protect it and its property against material loss. There can be no assurance, however, that the amount of insurance carried by the Company will be sufficient to protect it from material loss. Extraordinary Events On August 21, 1995, ASA suffered a tragic loss when one of its flights crashed. The propeller manufacturer (through its insurer) has agreed to address all claims arising from this accident without acknowledging fault. Accordingly, ASA's management does not believe that ASA has any liability in this matter, based on factual information currently available to it. Therefore, ASA has not accrued a liability for potential claims. On November 26, 1996, the National Transportation Safety Board (the "NTSB") released the results of their investigation of the crash. See "LEGAL PROCEEDINGS" herein. See also "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" herein. Executive Officers The following information is furnished with respect to the executive officers of ASA Holdings as of March 3, 1997:
Executive Officer Executive Officers Age Since (1) - - ------------------ --- --------- George F. Pickett 55 1979 John W. Beiser 56 1979 Ronald V. Sapp 52 1985 R. Mark Bole 38 1997
(1) If years prior to 1997 are included, tenure in this position with ASA prior to the Reorganization is included. 15 20 George F. Pickett is ASA Holdings' and ASA's Chairman of the Board and Chief Executive Officer and a member of the Board of Directors of both companies. He has served as Chairman of the Board and Chief Executive Officer of ASA since February 1994 and of ASA Holdings since its inception in September 1996. Since ASA's inception in 1979 and until February 1994, he served as ASA's President and Chief Executive Officer. Mr. Pickett has been a member of the Board of Directors of both ASA and ASA Holdings since their respective inception. John W. Beiser is ASA Holdings' and ASA's President and a member of the Board of Directors of both companies. He has served as President of ASA since February 1994 and of ASA Holdings since its inception. He has served as Secretary of both companies since their respective inception. In addition, Mr. Beiser was ASA's Vice President from its inception until 1985 when he was designated as ASA's Senior Vice President-Sales and Services. Mr. Beiser has been a member of the Board of Directors of ASA since 1982 and of ASA Holdings since its inception. Ronald V. Sapp is ASA Holdings' and ASA's Vice President-Finance and Chief Financial Officer. Mr. Sapp has been Vice President-Finance and Chief Financial Officer for ASA since 1985 and for ASA Holdings since the Reorganization was effective. He served as ASA's Treasurer from 1985 until February 1997 and as ASA Holdings' Treasurer between September 1996 and February 1997. From 1983 to 1985, Mr. Sapp served as Vice President-Finance and Treasurer of Air Atlanta, Inc., a scheduled passenger airline. From 1979 to 1983, Mr. Sapp served as Vice President and Controller of Air California, Inc., a scheduled passenger airline. R. Mark Bole was named ASA Holdings' and ASA's Assistant Vice President-Treasurer in February 1997. He was ASA's Assistant Vice President-Assistant Treasurer from February 1996 until February 1997 and held the same positions with ASA Holdings from the effective date of the Reorganization until February 1997. Mr. Bole served as a Vice President of Wachovia Bank of Georgia, N.A., from May 1991 until February 1996. ITEM 2. PROPERTIES ASA has entered into agreements with other air carriers to provide ground handling services (either directly or through outside vendors) to ASA in 20 of the cities it serves. In addition, ASA performs ground handling services for other air carriers at six airports. ASA maintains ticketing, gate and baggage claim facilities at each of the other airports it serves pursuant to direct leases or use agreements with local airport authorities or other carriers. ASA leases its apron, gate, ticketing and baggage claim facilities at the Dallas/Fort Worth hub from Delta pursuant to a Ground Service Agreement. At 12 airports, ASA operates under month-to-month use agreements. ASA is currently negotiating 13 other leases that have expired. ASA is operating month to month at these airports. The leases or use agreements at the remaining airports have remaining terms generally ranging from one month to 14 years. 16 21 Substantially all the maintenance and repairs on ASA's aircraft operating from the Atlanta hub (except for major engine, propeller and component overhauls) are performed at ASA's 79,000 square foot hangar and maintenance facility in Macon, Georgia. ASA leases the hangar facilities pursuant to a 30-year lease with renewal options until the year 2028. ASA also maintains a limited inventory of spare parts and has maintenance personnel at the Atlanta hub in a facility located near ASA's ramp and gate space that is leased from The City of Atlanta. ASA leases a maintenance facility in Texarkana, Arkansas. Substantially all the maintenance and repairs on ASA's aircraft operating from the Dallas/Fort Worth hub are performed at this facility. In addition, ASA maintains a limited inventory of spare parts and has maintenance personnel at the Dallas/Fort Worth hub. During 1996, ASA relocated all of its operations to 15 gates on Concourse C North at the Atlanta hub. The relocation has significantly enhanced the convenience of connections between flights operated by ASA and Delta in Atlanta. ASA Holdings and ASA maintain their principal offices and ASA's training center in approximately 38,000 square feet of office space at 100 Hartsfield Centre Parkway, Suite 800, Atlanta, Georgia, under a lease expiring in 1999. ASA's operations control center, located at its principal offices in Atlanta, provides weather information, fuel information, weight limitations, routing instructions and other information to ASA's pilots. ITEM 3. LEGAL PROCEEDINGS Except as described below, there are no material legal proceedings pending in which the Company is a party or to which any of the Company's property is subject. In addition, in the opinion of its management, ASA maintains insurance policies of types customary in the airline industry and in amounts and with insurance carriers it believes, based on information currently available to it, are adequate to protect it and its property against material loss. There can be no assurance, however, that the amount of insurance carried by the Company will be sufficient to protect it from material loss. On August 21, 1995, ASA suffered a tragic loss when one of its flights crashed. There were 26 passengers and three crew members on board that flight. Of those individuals, there were nine fatalities (including one crew member), 12 individuals either were not hospitalized or were released the day after the crash with minor injuries and eight individuals were more seriously injured. No one 17 22 was injured or killed on the ground. The crash also caused minor damage to a few trees adjacent to the pasture in which the plane came to rest. ASA had the crash site cleaned in accordance with the EPA's guidelines and regulations. ASA has received insurance proceeds from its insurance company related to the hull value of the aircraft and the debt related to this aircraft was paid with part of these insurance proceeds. A number of claims and lawsuits have been filed in connection with this matter. The propeller manufacturer (through its insurer) has agreed to address all claims arising from this accident without acknowledging fault. Accordingly, the Company's management does not believe that the Company has any liability in this matter, based on factual information currently available to it. Therefore, ASA has not accrued a liability for potential claims. Neither the propeller manufacturer nor its insurer has entered into any written indemnity agreement with ASA or its insurer and neither is legally obligated to indemnify either ASA or its insurer for expenses actually incurred in connection with the crash. In addition, ASA maintains insurance coverage which it believes, based on factual information currently available to it, is sufficient to cover claims associated with this incident if ASA were found to be at fault. On November 26, 1996, the NTSB released the results of their investigation of the crash. The NTSB concluded that the probable cause of the accident was the in-flight fatigue fracture and separation of a propeller blade that resulted in excessive drag, loss of wing lift and reduced directional control of the aircraft. The NTSB further concluded that the fracture in the propeller blade was caused by a fatigue crack resulting from multiple corrosion pits that were not discovered by the propeller manufacturer because of its inadequate and ineffective corporate inspection and repair techniques, training, documentation and communication. The NTSB also determined that factors contributing to the accident included failure of the propeller manufacturer and the FAA to require recurrent on-wing ultrasonic inspections for the affected propellers. Finally, the NTSB concluded that (a) the flight crew was trained, certified and qualified to conduct the flight, (b) the flight crew was in good health and held the proper FAA medical certificates, (c) there was no evidence that the performance of any crew member was impaired by alcohol, drugs or fatigue, (d) the flight was conducted in accordance with applicable FAA regulations and company requirements and (e) ASA maintained the aircraft in accordance with applicable FAA regulations and company operations specifications. After the results of the NTSB investigation were announced, ASA was dismissed from all existing lawsuits with respect to the crash. See also "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" herein. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report the only matter to be submitted to a vote of security holders of ASA through the solicitation of proxies or otherwise was at a special meeting of ASA's shareholders held on December 23, 1996, at which the shareholders voted on a proposal to consider and approve the Reorganization and to adopt and approve an 18 23 Amended and Restated Agreement and Plan of Merger dated November 6, 1996, by and among ASA Holdings, ASA and Atlantic Southeast Merging Co., a Georgia corporation and wholly owned subsidiary of ASA Holdings. See "BUSINESS-GENERAL" herein. The votes with respect to this proposal were as follows: 20,650,616 for, 570,672 against, 40,671 abstained, and no broker non-votes. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Holdings Common Stock is traded in The Nasdaq Stock Market's National Market system under the symbol "ASAI." As of March 3, 1997, there were approximately 1,087 shareholders of record (approximately 9,600 beneficial holders) of Holdings Common Stock. As of March 3, 1997, the closing price of Holdings Common Stock was $22.75. The transfer agent for Holdings Common Stock is SunTrust Bank, Atlanta. Prior to the consummation of the Reorganization on December 31, 1996, ASA Common Stock was traded in The Nasdaq Stock Market's National Market system under the symbol "ASAI." Set forth below are the reported high and low closing sales price for ASA Common Stock for the fiscal quarters indicated as reported by The Nasdaq Stock Market. The quotations reflect actual sales prices without retail mark-up, mark-down or commissions.
Fiscal year ended December 31, 1996 High Low - - ----------------------------------- ---- --- Quarter Ended March 31, 1996 $28.50 $17.88 Quarter Ended June 30, 1996 $29.38 $22.00 Quarter Ended September 30, 1996 $28.38 $20.25 Quarter Ended December 31, 1996 $25.00 $19.88 Fiscal year ended December 31, 1995 High Low - - ----------------------------------- ---- --- Quarter Ended March 31, 1995 $21.00 $15.25 Quarter Ended June 30, 1995 $30.75 $18.00 Quarter Ended September 30, 1995 $34.25 $21.75 Quarter Ended December 31, 1995 $27.88 $20.75
19 24 Dividends and Share Repurchases ASA Holdings' Board of Directors established the quarterly cash dividend payable on Holdings Common Stock at $.10 per share during the first quarter of 1997. Prior to the Reorganization, ASA paid cash dividends on ASA Common Stock totaling $.38 per share during 1996 and $.34 per share during 1995. The 1997 increase represented the eighth consecutive annual increase in cash dividends by ASA Holdings or ASA, as appropriate, since dividends were first paid by ASA in 1989. ASA Holdings expects to continue the payment of quarterly cash dividends at the rates last approved by its Board of Directors. However, ASA Holdings' Board of Directors will reconsider the declaration and the amount of cash dividends periodically, in its sole discretion, and there can be no assurance as to the declaration or the amount of dividends ASA Holdings will pay in the future. ASA Holdings' payment of dividends in the future may depend upon the results of operations and financial condition of the Company and other factors that ASA Holdings' Board of Directors deems relevant. Prior to the Reorganization, ASA entered into credit agreements in connection with the acquisition of aircraft (some of which financings do not mature until 2006). Certain of these credit agreements included restrictive covenants that limited the payment of cash dividends and the repurchase of ASA Common Stock by ASA. These agreements were amended prior to the Reorganization. Included in these amendments were provisions that removed such limitations on the transfer of funds by ASA in the form of cash dividends, loans or advances except to the extent that such transfers would otherwise cause ASA to breach other financial covenants. During the first three quarters of 1996, and in 1995 and 1994, ASA paid dividends of $8.9 million, $11.2 million, and $10.9 million, respectively, on ASA Common Stock and acquired approximately $2.8 million, $3.3 million and $2.8 million, respectively, of ASA Common Stock without exceeding these previously existing limitations. ASA's Board of Directors authorized ASA to repurchase on the open market up to $50.0 million of ASA Common Stock at any time during fiscal 1994 and 1995 and up to an additional $50.0 million of ASA Common Stock during fiscal 1996. These repurchases were authorized by the Board to be in addition to the repurchases allowed under the existing credit agreements. Because these repurchase programs were not within the limitations set forth in the credit agreements, ASA's lenders consented to the repurchase programs, in advance, as required by the various credit agreements. Pursuant to these repurchase programs, ASA repurchased approximately $49.3 million of ASA Common Stock through December 31, 1995, and an additional $34.7 million of ASA Common Stock during 1996. As of December 31, 1996, ASA had repurchased an aggregate of 4,393,100 shares of ASA Common Stock within the limitations of the restrictive covenants and pursuant to the separate repurchase programs. All such repurchased shares of ASA Common Stock were held as treasury stock. These shares of treasury stock were cancelled as part of the Reorganization. In January 1997, ASA Holdings announced that its Board of Directors had authorized a common stock repurchase program of up to $50.0 million during fiscal 1997. The shares will be held as treasury stock and will be used for general corporate purposes or cancelled. Repurchases are subject to market conditions. ASA Holdings is not subject to any such limitations on the payment of cash dividends or the repurchase of Holdings Common Stock. ASA Investments is free of any limitations on the transfer of funds to ASA Holdings in the form of cash dividends, advances or loans. ASA may make cash dividends, advances or loans to ASA Holdings except to the extent that any such 20 25 distributions would otherwise cause ASA to breach the financial covenants in its credit agreements. At December 31, 1996, approximately $35 million was available for distribution by ASA under the most restrictive of these provisions. Immediately after the consummation of the Merger, on December 31, 1996, ASA effected a dividend of all of the capital stock of ASA Investments to ASA Holdings as part of the Reorganization. At December 31, 1996, approximately $129 million of net assets was available for distribution by ASA Investments to ASA Holdings. Recent Sales of Unregistered Securities ASA sold no ASA Common Stock that was not registered under the Securities Act of 1933, as amended (the "SECURITIES ACT") during the period beginning January 1, 1994, and ending with the effectiveness of the Merger on December 31, 1996. ASA Holdings sold no Holdings Common Stock that was not registered under the Securities Act during the period beginning with the effectiveness of the Merger and ending March 3, 1997. ITEM 6. SELECTED FINANCIAL DATA The financial schedule on the following two pages sets forth certain selected financial data of the Company for each year since 1987. The information in this schedule should be read in conjunction with the Company's financial statements and the notes thereto in the section entitled "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" herein and the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" herein. All information contained in this section with respect to periods ending prior to December 31, 1996, refers collectively to ASA and its subsidiaries, ASA Holdings and ASA Investments, and with respect to periods ending on December 31, 1996, refers collectively to ASA Holdings and its subsidiaries, ASA and ASA Investments. 21 26 ASA HOLDINGS, INC. SELECTED CONSOLIDATED FINANCIAL AND STATISTICAL DATA (Dollars in thousands except per share amounts)
1996 1995 1994 1993 1992 ------------- -------------- ------------- ------------- ------------- OPERATING FINANCIAL DATA Operating Revenues: Passenger revenues $ 367,250 $ 318,360 $ 305,846 $ 283,410 $ 230,980 Other revenues 8,050 10,365 6,244 5,053 4,599 Total Operating Revenues 375,300 328,725 312,090 288,463 235,579 Operating Expenses: Depreciation, amortization and obsolescence 27,534 27,695 27,171 24,172 22,046 Other operating expenses 262,614 225,155 200,647 186,671 152,719 Total Operating Expenses 290,148 252,850 227,818 210,843 174,765 Income from Operations 85,152 75,875 84,272 77,620 60,814 Non-Operating (Income) Expense: Interest income (10,673) (11,998) (7,500) (4,970) (4,829) Interest expense, net 5,862 7,609 6,199 5,180 6,326 Other (1,144) (510) (47) (12) - Total Non-Operating (Income) Expense (5,955) (4,899) (1,348) 198 1,497 Income before Taxes and Accounting Change 91,107 80,774 85,620 77,422 59,317 Income Taxes 34,494 29,637 32,964 31,090 22,250 Cumulative Effect of Accounting Change - - - 4,212 - Net Income $ 56,613 $ 51,137 $ 52,656 $ 50,544 $ 37,067 Net Income per Share * $1.83 $1.55 $1.54 $1.47 $1.09 Weighted Average Shares (000)* 30,991 32,964 34,188 34,395 34,165 Operating Margin 23% 23% 27% 27% 26% Net Margin 15% 16% 17% 18% 16%
1991 1990 1989 1988 1987 ------------- ------------- ------------- -------------- ------------- OPERATING FINANCIAL DATA Operating Revenues: Passenger revenues $ 216,605 $ 184,496 $ 177,348 $ 135,320 $ 116,094 Other revenues 5,311 2,733 2,782 1,824 3,051 Total Operating Revenues 221,916 187,229 180,130 137,144 119,145 Operating Expenses: Depreciation, amortization and obsolescence 21,780 19,011 16,304 13,985 9,303 Other operating expenses 147,608 128,352 119,856 103,911 91,198 Total Operating Expenses 169,388 147,363 136,160 117,896 100,501 Income from Operations 52,528 39,866 43,970 19,248 18,644 Non-Operating (Income) Expense: Interest income (6,015) (7,601) (6,326) (3,484) (3,341) Interest expense, net 7,013 6,508 5,854 5,302 3,959 Other (66) (31) (94) (1,152) 15 Total Non-Operating (Income) Expense 932 (1,124) (566) 666 633 Income before Taxes and Accounting Change 51,596 40,990 44,536 18,582 18,011 Income Taxes 19,093 15,600 16,924 7,065 6,750 Cumulative Effect of Accounting Change - - - - - Net Income $ 32,503 $ 25,390 $ 27,612 $ 11,517 $ 11,261 Net Income per Share * $0.95 $0.73 $0.76 $0.31 $0.28 Weighted Average Shares (000)* 34,050 34,938 36,299 37,743 39,943 Operating Margin 24% 21% 24% 14% 16% Net Margin 15% 14% 15% 8% 9%
* Adjusted for stock splits on November 26, 1991 and February 18, 1993 22 27 ASA HOLDINGS, INC. SELECTED CONSOLIDATED FINANCIAL AND STATISTICAL DATA (Dollars in thousands except per share amounts)
1996 1995 1994 1993 1992 ------------- -------------- ------------- ------------- ------------- OTHER FINANCIAL DATA Working Capital $ 147,719 $ 141,677 $ 140,391 $ 126,975 $ 93,372 Total Assets $ 486,237 $ 512,699 $ 519,684 $ 474,599 $ 430,752 Long-Term Debt, excluding Current Portion $ 94,618 $ 120,210 $ 152,610 $ 135,963 $ 145,804 Total Liabilities $ 226,021 $ 259,844 $ 272,214 $ 249,512 $ 252,013 Shareholders' Equity $ 260,216 $ 252,855 $ 247,470 $ 225,087 $ 178,738 Shareholders' Equity per Share * $8.68 $7.98 $7.45 $6.55 $5.23 Return on Average Shareholders' Equity 22% 20% 22% 25% 23% Shareholders' Equity to Total Liabilities 1.2:1 1.0:1 .9:1 .9:1 .7:1 Cash Dividends Declared per Share * 38(CENT) 34(cent) 32(cent) 28(cent) 24(cent) Long-Term Debt to Shareholders' Equity .4:1 .5:1 .6:1 .6:1 .8:1 Shares Outstanding at End of Year (000) * 29,994 31,704 33,224 34,340 34,180 STATISTICAL DATA Revenue Passengers Carried (000) 3,632 3,067 3,120 2,661 2,417 Revenue Passenger Miles (000,000) 874 763 780 641 547 Available Seat Miles (000,000) 1,781 1,688 1,654 1,367 1,077 Yield per Revenue Passenger Mile 42.0(CENT) 41.7(cent) 39.2(cent) 44.2(cent) 42.2(cent) Operating Cost per Available Seat Mile 16.3(CENT) 15.0(cent) 13.8(cent) 15.4(cent) 16.2(cent) Passenger Load Factor 49.1% 45.2% 47.2% 46.9% 50.8% Break-Even Load Factor 37.2% 34.1% 34.2% 34.3% 38.0% Average Passenger Trip Length (miles) 241 249 250 241 226 Flights per Week (end of period) 3,814 3,886 4,163 4,087 3,507
1991 1990 1989 1988 1987 ------------- ------------- ------------- -------------- ------------- OTHER FINANCIAL DATA Working Capital $ 78,721 $ 59,590 $ 55,525 $ 42,011 $ 41,955 Total Assets $ 377,603 $ 325,311 $ 287,971 $ 231,626 $ 209,906 Long-Term Debt, excluding Current Portion $ 139,356 $ 127,724 $ 111,749 $ 90,109 $ 82,061 Total Liabilities $ 229,683 $ 204,956 $ 179,613 $ 139,958 $ 124,702 Shareholders' Equity $ 147,910 $ 120,355 $ 108,358 $ 91,668 $ 85,204 Shareholders' Equity per Share * $4.35 $3.57 $3.07 $2.47 $2.20 Return on Average Shareholders' Equity 24% 22% 28% 13% 14% Shareholders' Equity to Total Liabilities .6:1 .6:1 .6:1 .7:1 .7:1 Cash Dividends Declared per Share * 20(cent) 15.9(cent) 8(cent) - - Long-Term Debt to Shareholders' Equity .9:1 1.1:1 1.0:1 1.0:1 1.0:1 Shares Outstanding at End of Year (000) * 34,034 33,750 35,314 37,075 38,762 STATISTICAL DATA Revenue Passengers Carried (000) 2,251 2,002 2,001 1,586 1,456 Revenue Passenger Miles (000,000) 501 427 413 320 290 Available Seat Miles (000,000) 1,020 856 791 753 678 Yield per Revenue Passenger Mile 43.2(cent) 43.2(cent) 42.9(cent) 42.3(cent) 40.0(cent) Operating Cost per Available Seat Mile 16.6(cent) 17.2(cent) 17.2(cent) 15.7(cent) 14.8(cent) Passenger Load Factor 49.2% 49.9% 52.3% 42.5% 42.8% Break-Even Load Factor 37.7% 39.0% 39.3% 36.7% 36.3% Average Passenger Trip Length (miles) 223 213 207 202 199 Flights per Week (end of period) 3,360 3,124 3,033 2,827 2,904
* Adjusted for stock splits on November 26, 1991 and February 18, 1993 23 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reorganization ASA Holdings is a holding company the principal assets of which are the shares of its wholly owned subsidiaries ASA and ASA Investments. ASA Holdings became the parent holding company for ASA and ASA Investments pursuant to the Reorganization, which was effective after the close of business on December 31, 1996. In May 1996, ASA's Board of Directors approved the Reorganization subject to the approval of ASA's shareholders. Pursuant to the Reorganization, ASA merged with a wholly owned subsidiary of ASA Holdings. As part of the merger, each issued and outstanding share of ASA's common stock (other than treasury stock, which was cancelled) was converted into one share of ASA Holdings' common stock. Immediately after the merger on December 31, 1996, ASA effected a dividend to ASA Holdings of all of the capital stock of ASA Investments. As a result of the Reorganization, ASA and ASA Investments became wholly owned subsidiaries of ASA Holdings. ASA Holdings considers the airline business of ASA to be its only industry segment. There was no significant impact on the consolidated financial statements as a result of these transactions. All references to the "COMPANY" contained in this section refer collectively to ASA and its subsidiaries, ASA Holdings and ASA Investments, prior to December 31, 1996, and to ASA Holdings and its subsidiaries, ASA and ASA Investments, beginning December 31, 1996. All significant intercompany transactions have been eliminated. ASA's material lenders consented to the Reorganization where ASA's credit agreements made such consent necessary. In addition, during 1996 ASA renegotiated the restrictive covenants in its credit agreements. The renegotiated credit agreements currently contain restrictive covenants that limit, among other things, the sale or lease of assets; the acquisition of stock of other entities; the ratio of total liabilities to tangible net worth; and maintenance of minimum tangible net worth and funds flow coverage. In addition, the transfer of funds by ASA in the form of cash dividends, loans or advances is limited solely to the extent that such transfers would cause ASA to breach other financial covenants. ASA Holdings and ASA Investments are not subject to the restrictive covenants of ASA's credit agreements except to the extent that ASA is restricted in its ability to transfer funds to ASA Holdings or ASA Investments in the form of cash dividends, loans or advances. ASA Holdings' Board of Directors believes that the holding company structure makes available to ASA Holdings and its subsidiaries a greater selection of financing, acquisition and organizational alternatives than was available to ASA prior to the reorganization. The holding company structure provides greater flexibility than was available to ASA primarily because (a) any new subsidiaries formed by ASA Holdings will be insulated from the liabilities of and risks associated with ASA's operation of a commercial airline; (b) ASA will be better insulated from the liabilities of any risks associated with the operation of businesses by other subsidiaries of ASA Holdings; 24 29 (c) ASA Holdings and its other subsidiaries will not be restricted by credit agreements that have been or may be entered into by ASA that include restrictive covenants; (d) ASA Holdings and its other subsidiaries will not be constrained by the other contracts that, from time to time, are binding on ASA; (e) ASA will not be constrained by, the credit agreements or other contracts entered into by ASA Holdings' other subsidiaries; (f) depending on the business, ASA Holdings and its subsidiaries may be free from certain direct constraints on ASA imposed by regulatory requirements; and (g) the holding company structure accommodates any future acquisition opportunities, whether the acquisition is inside or outside of ASA's current line of business, because ASA Holdings can now acquire additional businesses directly, thereby permitting these businesses to remain independent of ASA's operations. Liquidity and Capital Resources The Company's working capital increased to $147.7 million with a current ratio of 3.5:1 at December 31, 1996 compared with working capital of $141.7 million and a current ratio of 3.1:1 at December 31, 1995. Cash, cash equivalents and investments in marketable securities increased $2.0 million in 1996. Cash provided by operations in 1996 was $93.3 million and the Company received $4.9 million from the disposal of property. These sources of cash were primarily offset by long-term debt repayments in the amount of $32.4 million, the purchase of property and equipment in the amount of $15.3 million, $11.7 million of dividends paid and $37.4 million of common stock repurchases. ASA has an unsecured line of credit totaling $8 million with one of its banks. At December 31, 1996, $.7 million of this line was committed to support a letter of credit. The remainder is available for general working capital purposes on an as needed basis. At December 31, 1996, there were no outstanding amounts against the line of credit. Management believes that, as a result of the Reorganization, borrowings from banks, other financial institutions or the securities markets are available to ASA Holdings on substantially the same terms as were available to ASA prior to the Reorganization. ASA Holdings also can now borrow money directly and use it internally or contribute it to ASA or any other subsidiary. In addition, any of the subsidiaries can borrow money independently. Total assets were down by $26.5 million at December 31, 1996 primarily due to a $23.1 million decrease in net property and equipment. Net flight equipment was lower primarily due to approximately $5.2 million related to the sale of Dash-7 and Bandierante aircraft and engines which had been previously phased-out of operations and a $32.2 million increase in accumulated depreciation, offset by $8.2 million of additions in 1996. Other property and equipment increased primarily due to approximately $6 million of costs related to the relocation of ASA's operations to Concourse C at the Atlanta airport, which has significantly enhanced the convenience of connections between flights operated by ASA and Delta in Atlanta. 25 30 Current liabilities were down by $9.1 million to $60.0 million at December 31, 1996 compared with $69.1 million at December 31, 1995. The current portion of long-term debt decreased by $6.8 million due to $4.4 million of debt payments, including the accelerated debt retirement due to the loss of an aircraft, and a $2.4 million reclassification to long-term debt. Interest payable decreased by $1.6 million due to less debt outstanding and the timing of debt payments at year-end, and taxes payable decreased by $1.1 million due to the timing of property tax payments. The Company's long-term debt to equity ratio decreased to 0.4:1 at December 31, 1996 compared with 0.5:1 in 1995. Long-term debt decreased by $25.6 million due to $28.0 million of long-term debt payments offset by a reclassification of $2.4 million from current maturities. Forty-eight E-120 Brasilia aircraft and four ATR-72 aircraft, as well as a significant portion of the ASA's spare parts, are pledged to secure long-term debt. Current maturities of long-term debt, aircraft lease payments, compliance with FAA directives and other capital expenditures were funded from the Company's cash reserves and internally generated funds during fiscal 1996. Shareholders' equity per share increased to $8.68 at December 31, 1996 from $7.98 at the end of 1995. Net worth increased $7.4 million in 1996 primarily due to earnings of $56.6 million, offset by $11.7 million of dividends paid and $37.4 million of common stock repurchases. During 1996, ASA renegotiated the restrictive covenants in its credit agreements. See "REORGANIZATION" above. ASA Holdings and ASA Investments are not subject to the restrictive covenants in ASA's credit agreements except to the extent that ASA is restricted in its ability to transfer funds to ASA Holdings or ASA Investments in the form of cash dividends, loans or advances. ASA's dividend to ASA Holdings of all of the shares of ASA Investments' capital stock in connection with the Reorganization provided ASA Holdings with approximately $129 million of net assets that are free of the restrictive covenants in ASA's credit agreements and lease arrangements. In addition, approximately $35 million of net assets was available at December 31, 1996, for distribution by ASA to ASA Holdings under the most restrictive of these agreements. The net number of shares of common stock outstanding decreased by 1.7 million to 30.0 million at December 31, 1996 due to the repurchase of common stock. Prior to the amendment of these credit agreements, ASA was limited in the amount of cash it could apply to the repurchase of common stock and the payment of dividends generally to 30% of average annual earnings. During the first three quarters of 1996 and in 1995, these limitations allowed ASA to pay dividends on its common stock in the amount of approximately $8.9 and $11.2 million, and acquire approximately $2.8 and $3.3 million of its common stock. In 1994, ASA acquired approximately $2.8 million of its common stock under the previous terms of the agreements. ASA's Board of Directors authorized ASA to repurchase up to an additional $50.0 million of its common stock on the open market at any time on or before December 31, 1995 and up to an additional $50.0 million of ASA common stock during 1996. These repurchases were authorized by the Board to be in addition to the repurchases allowed under the existing credit agreements. Because these common stock repurchase programs were not within the limitations set forth in the credit agreements, they were consented to by ASA's lenders, in advance, as required by the credit agreements. Pursuant 26 31 to these repurchase programs, ASA repurchased approximately $49.3 million of its common stock through December 31, 1995 and an additional $34.7 million of its common stock during 1996. All of the repurchased shares of common stock were held as treasury stock. In connection with the Reorganization on December 31, 1996, all of the shares of treasury stock were cancelled. In January 1997, ASA Holdings announced that its Board of Directors authorized it to repurchase up to $50.0 million of its common stock on the open market during 1997. The repurchased shares will be held as treasury stock and used for general corporate purposes or will be cancelled. Repurchases are subject to market conditions. ASA Holdings is authorized to issue up to 150 million shares of its common stock whereas ASA was authorized to issue up to only 50 million shares of ASA's common stock prior to the Reorganization. These additional shares may be issued for a variety of corporate purposes, including, without limitation, (a) to effect stock splits, (b) to raise additional capital in future public offerings, (c) to facilitate corporate acquisitions, or (d) to pay performance based compensation to employees of ASA Holdings and its subsidiaries. ASA Holdings' Board of Directors is able to approve the issuance of additional shares without shareholder approval. Any such issuances of additional shares would result in dilution of the current equity interest of existing shareholders. The issuance of such additional securities will be subject to certain limitations imposed by the rules of The Nasdaq Stock Market and by general fiduciary principles. ASA Holdings does not have any current plans or pending proposals to issue additional shares of Holdings common stock other than pursuant to ASA Holdings' Stock Appreciation Rights Plan (the "SARS PLAN"). In January 1997, ASA announced its intentions to acquire 30 CRJs from Bombardier, Inc. of Canada and to secure options to acquire an additional 60 aircraft, subject to the effectiveness of a definitive acquisition agreement with Bombardier, a definitive financing commitment with the Export Development Corporation of Canada and a definitive agreement with General Electric Company with respect to the acquisition of the engines and related spare parts. At this time, ASA has not determined whether the acquisition will be a purchase or lease arrangement or both. ASA estimates that the cost of the 30 aircraft, including spare parts, will be approximately $600 million. Delivery is scheduled to begin during the second half of 1997 at the rate of one per month. The CRJ is a 50-passenger jet with four-abreast seating that ASA will use to promote growth in new markets as well as replace some turboprop equipment on existing routes. On August 21, 1995, ASA suffered a tragic loss when one of its flights crashed. On November 26, 1996, the NTSB, in a unanimous vote, determined that the probable cause of the accident was the in-flight fatigue fracture and separation of a propeller blade that resulted in excessive drag, loss of wing lift and reduced directional control of the aircraft. The NTSB further concluded that the fracture in the propeller blade was caused by a fatigue crack from multiple corrosion pits that were not discovered by the propeller manufacturer because of its inadequate and ineffective corporate inspection and repair techniques, training, documentation and communication. Accordingly, ASA's management does not feel that ASA was at fault, based on the factual information currently available to it. ASA has received insurance proceeds from its insurance company related to the hull value of the aircraft, and the debt related to this aircraft was paid with part of these insurance proceeds. A number of claims and lawsuits have been filed in connection with this matter. The propeller 27 32 manufacturer (through its insurer) has agreed to address all claims arising from this accident without acknowledging fault. Accordingly, the Company's management does not believe that the Company has any liability in this matter, based on factual information currently available to it. Therefore, ASA has not accrued a liability for potential claims. Neither the propeller manufacturer nor its insurer has entered into any written indemnity agreement with ASA or its insurer, and neither is legally obligated to indemnify either ASA or its insurer for expenses actually incurred in connection with the crash. In addition, ASA maintains insurance coverage which it believes, based on factual information currently available to it, is sufficient to cover claims associated with this incident. After the results of the NTSB investigation were announced, ASA was dismissed from all existing lawsuits with respect to the crash. Approximately 25% of ASA's workforce are members of the unions representing pilots and flight attendants. In 1995, collective bargaining agreements with both of these unions became amendable and are currently being renegotiated. The Railway Labor Act, which governs labor relations for these unions, contains detailed provisions that must be exhausted before work stoppages can occur once a collective bargaining agreement becomes amendable. Federal mediation between ASA and the pilots and flight attendants has been ongoing for approximately one year. ASA has negotiated to receive interest rate subsidies on certain indebtedness through the export support program of the Federative Republic of Brazil. Outstanding debt aggregating approximately $83.1 million at December 31, 1996 is subject to subsidy payments which reduce the stated interest rates on such debt to an average of approximately 3.34%. Of this amount, subsidies on outstanding debt aggregating approximately $77.0 million are at risk to ASA if the Federative Republic of Brazil does not meet its obligations under the export support program. For the remaining debt that is subject to such subsidies, the lenders have assumed such risk by building such subsidy payments into ASA's payment obligations. During 1996, 1995 and 1994, ASA reduced its interest expense by approximately $2.8, $3.7 and $3.8 million, respectively, as a result of these interest rate subsidies. The amount of net interest paid during 1996, 1995 and 1994 was approximately $7.3, $7.4 and $4.7 million, respectively. As indicated above, there can be no assurance that ASA will continue to receive such subsidy payments. In 1984, ASA and Delta implemented a marketing program called the "Delta Connection". At December 31, 1996, Delta Air Lines Holdings, Inc. (an affiliate of Delta) owned approximately 27% of ASA Holdings' outstanding common stock. Delta leases reservation equipment and terminal facilities to ASA, and provides certain services to ASA, including reservation and ground handling services. Given ASA's relationship with Delta, ASA's results of operations and financial condition may be favorably or adversely impacted by Delta's decisions regarding flight routes and other operational matters. ASA has historically benefited from its relationship with Delta, but there can be no assurance that such benefits will occur in the future. Based on information currently available to it, the Company believes that available resources will be sufficient to meet its existing expenditure commitments (including current maturities of long-term debt and aircraft lease payments) as well as its anticipated capital expenditures and other working capital requirements for the foreseeable future. Financial resources anticipated to be 28 33 available to the Company for such purposes include existing cash reserves, internally generated funds, amounts available under the existing line of credit, and short and long-term financing arrangements that the Company believes are available to it. Accounting Standards Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement 121 in the first quarter of 1996 and the effect of adoption was not significant. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", encourages companies to recognize expense for stock-based awards based on their fair value on the date of grant. At a minimum, Statement 123 requires pro forma disclosures in the Company's 1996 financial statements. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations and provide the necessary disclosures required by Statement 123, rather than adopt the expense recognition provisions of this Statement. Results of Operations The Company set new records in passenger traffic, operating revenues and net income in 1996. Total operating revenues were $375.3 million in 1996 compared with $328.7 million in 1995 and $312.1 million in 1994. Operating revenues were up 14% in 1996 primarily due to a 15% increase in revenue passenger miles ("RPMs") flown to 874 million. RPMs were higher in 1996 due to the number of passengers carried increasing by 18% to 3.6 million while the average trip length decreased by 3% to 241 miles. In late 1995, ASA replaced Delta's service to several markets with the BAe 146 jet aircraft. Higher passenger traffic in 1996 was largely attributable to an increase in traffic in markets served by the BAe 146 aircraft. ASA's load factor for 1996 was 49.1% compared with 45.2% for 1995. The average passenger yield (passenger revenue divided by RPMs) increased by .7% to 42.0 cents in 1996 compared with 41.7 cents in 1995, while average passenger fare decreased by 3% to $101.11 in 1996 compared with $103.81 in 1995. Passenger fares vary based on a number of factors including competition, fare discounting and economic conditions. Operating revenues in 1995 increased 5% over 1994 primarily due to a 6% increase in the average passenger yield offset by a 2% decrease in RPMs. ASA's average load factor in 1995 was 45.2%, down from 47.2% in 1994. For the year ended December 31, 1996, net income increased by 11% to $56.6 million compared with $51.1 million for 1995. Net income per share for 1996 increased to $1.83 on 31.0 million weighted average shares outstanding compared with $1.55 on 33.0 million weighted 29 34 average shares outstanding for 1995. The decrease in the average number of shares outstanding was due to the stock repurchase programs mentioned above in the "LIQUIDITY AND CAPITAL RESOURCES" section. In 1994, net income was $52.7 million or $1.54 per share on 34.2 million weighted average shares outstanding. Operating expenses increased 15% in 1996 and 11% in 1995. The Company experienced a 9% increase in the cost per available seat mile (ASM) flown to 16.3 cents compared with 15.0 cents in 1995. Capacity (the number of ASMs) was up 6% in 1996 due to changes in aircraft as described in the "LIQUIDITY AND CAPITAL RESOURCES" section above. Operating expenses in 1996 included $.7 million of expense related to the Company's SARs plan due to a 2% increase in the Company's stock price and additional vesting, while 1995 included $2.4 million of expense associated with stock appreciation rights ("SARs") due to a 39% increase in the stock price and additional vesting. Included in operating expenses for 1995 was approximately $2.3 million of "start-up" expenses associated with adding the BAe 146 aircraft to the fleet. Excluding the effect of the SARs expense and BAe start-up costs, operating expenses would have increased 17% in 1996 compared with 1995. Operating costs are higher primarily due to more expensive jet fuel, higher marketing related expenses, increased maintenance costs for the E-120 Brasilia turboprop fleet, and rent on the BAe 146 jet aircraft. The BAe 146 aircraft are currently being flown over shorter haul routes, and therefore their rent expense per ASM is higher than the Company's system average. Operating expenses in 1995 were up 11% compared with 1994. Included in 1995 were $2.3 million of BAe 146 start-up costs and $2.4 million of SARs expense compared with a $4.2 million credit in 1994 due to a 55% decline in the stock price. Excluding the effect of the BAe start-up costs and SARs expense, operating expenses would have increased 7% in 1995 compared with 1994 primarily due to (a) higher labor and related costs due to a 5% increase in the average number of employees; (b) higher maintenance expense due to the frequency of scheduled maintenance inspections and overhauls of time controlled components; and (c) higher aircraft rent expense due to a partial year's rent on four E-120 Brasilia aircraft and four BAe 146 jets leased in 1995. The following table compares components of operating cost per ASM for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 ---- ---- ---- Labor and related 4.2(CENT) 4.3(cent) 3.7(cent) Fuel 1.9 1.4 1.4 Direct maintenance 2.6 2.4 2.2 Passenger related 2.1 1.8 1.8 Depreciation and aircraft rent 2.4 2.2 2.1 Other 3.1 2.9 2.6 ------- ------- ----- Total operating expense per ASM 16.3(CENT)15.0(cent)13.8(cent)
30 35 The following table presents various components of operating expense as a percentage of total operating expense for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 ---- ---- ---- Labor and related 25% 29% 27% Fuel 12 9 10 Direct maintenance 16 16 15 Passenger related 13 12 13 Depreciation and aircraft rent 15 15 16 Other 19 19 19 ---- ---- ---- Total operating expense 100% 100% 100%
The Company's break-even load factor was 37.2% in 1996 compared with 34.1% in 1995 and 34.2% in 1994. The higher break-even load factor in 1996 was primarily the result of higher operating expenses. The slightly lower break-even load factor in 1995 compared with 1994 was primarily attributable to a 6% increase in the average passenger yield offset by a 9% increase in the cost per available seat mile. Labor and related costs were $74.2 million in 1996, $72.3 million in 1995 and $60.9 million in 1994. The average number of employees in 1996 was 2,398, an increase of 6% over 1995 which contributed to higher labor and related costs. As mentioned above, 1996 included $.7 million of expense related to the SARs plan in comparison with $2.4 million of expense in 1995. In contrast, 1994 included a $4.2 million credit to SARs expense resulting from a decline in the Company's stock price and the related reversal of previously accrued SARs expense. Excluding SARs expense, labor and related costs per ASM would have been 4.1 cents for 1996 and 1995, and 3.9 cents for 1994 as compared with 4.2, 4.3 and 3.7 cents, respectively. Fuel expense was $33.5 million, $24.1 million and $23.5 million in 1996, 1995 and 1994, respectively. Fuel consumption increased 12% in 1996 while the average fuel price per gallon, including taxes and into plane fees, increased 25% in 1996 to 77.2 cents from 61.9 cents in 1995 primarily due to the increase in crude oil prices during 1996 and the additional 4.3 cent per gallon transportation fuel tax in October 1995. In August 1993, the United States government increased taxes on fuel, including aircraft fuel, by 4.3 cents per gallon. ASA was exempt from this tax increase until October 1995. This new tax increased the Company's operating expenses by $1.9 million in 1996 and $.4 million in 1995. The average price per gallon, including taxes and into plane fees, remained constant in 1995 compared with 1994, with consumption increasing 2%. Changes in aviation fuel prices have an industry wide impact and will tend to affect ASA's competitors in the same manner as ASA. Lower fuel prices may be offset by increased price competition and lower revenues for all carriers. There can be no assurance that ASA will be able to increase its fares in response to any future increases in fuel prices. 31 36 Direct maintenance expense, excluding labor and related costs, increased to $46.2 million in 1996 from $40.3 million and $35.5 million in 1995 and 1994, respectively. This 15% increase in 1996 was primarily due to a 6% increase in capacity and increased maintenance inspections and overhauls of time controlled components. As with any air carrier, ASA's fleet of aircraft is aging and requires more frequent maintenance. The leased BAe 146 jet aircraft are maintenance mature aircraft that are under maintenance plans. Charges for the BAe 146 are incurred for each hour that the airframe, engines, landing gear, etc. are flown, and the charges for these maintenance plans are expensed on a monthly basis. The anticipated addition of new CRJ aircraft, which will hold 50 passengers and are expected to be used over longer haul routes, will create a higher capacity over which maintenance costs can be spread. Maintenance expenses in 1995 were higher compared with 1994 primarily due to the timing for scheduled maintenance inspections and overhauls. Passenger related expenses, which include a majority of the expenses under the caption "Reservation, commission and other" on the Company's Income Statement, were $36.8 million, $30.2 million and $29.0 million in 1996, 1995 and 1994, respectively. The increase of $6.6 million in 1996 compared with 1995 was primarily due to an increase in travel agency commissions, credit card discounts and reservation fees. These expenses are directly related to the 18% increase in passengers carried in 1996 versus 1995. Passenger related expenses were approximately 10% of passenger revenue in 1996 compared with 9% of passenger revenue in both 1995 and 1994. Delta began charging ASA higher fees for reservation service/systems in April 1995 and higher credit card fees in October 1995. Aircraft rental costs were approximately $16.9 million in 1996 compared with $10.3 million in 1995 and $9.4 million in 1994. The increased expense in 1996 was primarily attributable to three E-120 Brasilia aircraft and four BAe 146 aircraft leased during the fourth quarter of 1995, as well as a fifth BAe 146 aircraft leased in January 1996. Depreciation expense remained relatively constant at $26.5, $26.8 and $26.0 million for 1996, 1995 and 1994, respectively. Other expenses increased to $56.1 million in 1996 compared with $48.9 million in 1995 and $43.5 million in 1994. The increases in 1996 were due primarily to higher station security fees, liability insurance and interrupted trip and baggage claim expenses. The increases in 1995 were due primarily to the same expenses as indicated for 1996 plus higher station rent and hull insurance expense. Interest expense decreased to $5.9 million in 1996 compared with $7.6 million in 1995 and $6.2 million in 1994. The decrease in 1996 was attributable to lower interest rates on ASA's outstanding floating rate debt and less total debt outstanding. The increase in 1995 compared with 1994 was attributable to a full year of interest expense for the four ATR-72 aircraft purchased in 1994 as well as the upward trend in interest rates in 1995. Interest income was $10.7 million in 1996 compared with $12.0 million in 1995 and $7.5 million in 1994. A decline in interest rates contributed to lower interest income in 1996. Higher average cash available for investment and a rise in interest rates contributed to the increase in interest income for 1995. 32 37 The Company's effective income tax rate differs from the statutory rate of 35% due primarily to the impact of state income taxes, net of federal tax benefit. In 1995, deferred tax liabilities and deferred tax expense were reduced by $1.3 million due to the resolution of prior years' income tax audits. 33 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ASA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 --------------- --------------- ASSETS Current Assets Cash and cash equivalents $ 137,468,791 $ 66,402,694 Marketable securities 52,653,227 121,697,247 Receivables, less allowance for uncollectible accounts of $204,347 in 1996 and $266,343 in 1995 - Note J 6,552,616 11,715,607 Expendable parts, less allowance for obsolescence of $4,202,742 in 1996 and $4,048,772 in 1995 8,145,369 6,439,628 Other current assets 2,904,208 4,487,636 --------------- --------------- 207,724,211 210,742,812 Property and Equipment - Note B Flight equipment 456,809,305 474,188,485 Other property and equipment 15,515,205 8,734,697 Advance payments on property and equipment 136,342 88,113 --------------- --------------- 472,460,852 483,011,295 Less accumulated depreciation and amortization 203,180,823 190,612,743 --------------- --------------- 269,280,029 292,398,552 Other Assets 9,232,637 9,558,130 --------------- --------------- TOTAL ASSETS $ 486,236,877 $ 512,699,494 =============== ===============
See notes to consolidated financial statements. 34 39 ASA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 --------------- --------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current portion of long-term debt $ 25,576,213 $ 32,390,437 Accounts payable - Note J 18,402,087 20,945,977 Air traffic liability 4,345,769 1,934,289 Accrued compensation and related expenses 7,286,476 6,697,331 Accrued interest payable 1,318,550 2,941,011 Other accrued expenses 3,075,765 4,156,667 --------------- --------------- 60,004,860 69,065,712 Long-Term Debt - Note B 94,617,877 120,209,650 Other Non-Current Liabilities 1,763,471 1,369,128 Deferred Income Taxes - Note E 69,634,773 69,199,527 Commitments and Contingencies - Notes B, C and F Shareholders' Equity - Notes A, G and H Common stock, $.10 par; authorized - 150,000,000 shares; issued - 29,993,570 and 34,386,670 shares, respectively 2,999,357 3,438,667 Capital in excess of par - 45,887,347 Retained earnings 257,218,657 258,857,819 Unrealized holding (loss) gain on investments (2,118) 72,444 --------------- --------------- 260,215,896 308,256,277 Less treasury stock at cost - 2,683,100 shares in 1995 - Note G - 55,400,800 --------------- --------------- Total Shareholders' Equity 260,215,896 252,855,477 --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 486,236,877 $ 512,699,494 =============== ===============
See notes to consolidated financial statements. 35 40
ASA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1996 1995 1994 ---------------- ---------------- --------------- REVENUES Operating Revenues: Passenger $ 367,250,428 $ 318,360,153 $ 305,846,064 Other 8,049,998 10,365,287 6,243,518 ---------------- ---------------- --------------- Total Operating Revenues 375,300,426 328,725,440 312,089,582 EXPENSES Operating Expenses: Flying operations 85,074,131 68,956,898 65,063,156 Maintenance 61,376,727 54,309,317 49,036,093 Passenger service 18,664,839 16,049,620 14,199,904 Aircraft and traffic servicing 45,390,058 40,229,297 36,333,282 Reservation, commission and other 39,344,575 32,148,818 30,480,757 General and administrative 12,078,785 13,159,314 5,284,986 Depreciation, amortization and obsolescence 27,534,057 27,695,335 27,170,678 Other 684,815 301,734 249,185 ---------------- ---------------- --------------- Total Operating Expenses (Including payments to Delta Air Lines, Inc. of $11.9, $9.6 and $5.8 million) 290,147,987 252,850,333 227,818,041 Income from Operations 85,152,439 75,875,107 84,271,541 Non-Operating (Income) Expenses: Interest: Income (10,672,964) (11,997,712) (7,499,615) Expense 5,862,866 7,609,317 6,199,299 Other, net (1,143,983) (510,315) (47,891) ---------------- ---------------- --------------- (5,954,081) (4,898,710) (1,348,207) Income before Income Taxes 91,106,520 80,773,817 85,619,748 Income Taxes - Note E: Current 34,058,554 26,289,595 24,897,824 Deferred 435,246 3,346,805 8,066,176 ---------------- ---------------- --------------- 34,493,800 29,636,400 32,964,000 ---------------- ---------------- --------------- NET INCOME $ 56,612,720 $ 51,137,417 $ 52,655,748 ================ ================ =============== EARNINGS PER SHARE $1.83 $1.55 $1.54 Weighted Average Number of Shares Outstanding 30,990,599 32,964,138 34,187,833
See notes to consolidated financial statements. 36 41
ASA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996 1995 1994 --------------- --------------- --------------- OPERATING ACTIVITIES: Net Income $ 56,612,720 $ 51,137,417 $ 52,655,748 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 26,518,027 26,794,942 26,027,910 Amortization and provision for obsolescence 1,016,030 900,393 1,142,768 Amortization of engine overhauls 6,656,680 7,710,438 6,570,952 Deferred income taxes 435,246 3,346,805 8,066,176 Other (107,722) (174,173) 1,253,601 Changes in Operating Assets and Liabilities: Receivables 5,187,991 (5,014,461) 104,232 Expendable parts (1,859,712) 640,194 (1,830,457) Other assets 742,274 (3,147,901) 409,523 Accrued compensation and related expenses 983,488 3,014,807 (4,821,546) Accrued interest payable (1,622,461) (195,201) 1,494,320 Other liabilities (1,213,312) 10,971,435 2,041,278 Income taxes payable - (1,243,399) (2,998,093) --------------- --------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 93,349,249 94,741,296 90,116,412 INVESTING ACTIVITIES: Purchase of Marketable Securities (189,882,992) (198,048,934) (186,608,304) Proceeds from Sale of Marketable Securities 258,806,167 210,597,389 165,574,532 Purchases of Property and Equipment including Advance Payments (15,321,851) (13,851,990) (67,944,372) Other 5,699,260 5,329,796 537,249 --------------- --------------- --------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 59,300,584 4,026,261 (88,440,895) FINANCING ACTIVITIES: Proceeds from Long-Term Debt - - 43,782,329 Principal Payments on Long-Term Debt (32,405,997) (28,264,141) (24,862,330) Dividends Paid (11,731,958) (11,203,992) (10,926,232) Acquisition of Treasury Stock (37,445,781) (35,423,612) (19,977,188) --------------- --------------- --------------- NET CASH USED IN FINANCING ACTIVITIES (81,583,736) (74,891,745) (11,983,421) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 71,066,097 23,875,812 (10,307,904) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 66,402,694 42,526,882 52,834,786 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 137,468,791 $ 66,402,694 $ 42,526,882 =============== ============== ===============
See notes to consolidated financial statements. 37 42
ASA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Capital in Retained Shares Amount Excess of Par Earnings Other ----------- ------------- ---------------- ---------------- ----------- Balance, January 1, 1994 34,339,772 $ 3,433,977 $ 44,458,248 $ 177,194,878 $ - Net Income 52,655,748 Dividends Paid (32(cent)per share) (10,926,232) Exercise of Stock Appreciation Rights 23,935 2,394 779,803 Unrealized Holding Loss on Investments, Net (151,377) Purchase of Treasury Stock ----------- ------------- ---------------- ---------------- ----------- Balance, December 31, 1994 34,363,707 3,436,371 45,238,051 218,924,394 (151,377) Net Income 51,137,417 Dividends Paid (34(cent)per share) (11,203,992) Exercise of Stock Appreciation Rights 22,963 2,296 649,296 Unrealized Holding Gain on Investments, Net 223,821 Purchase of Treasury Stock ----------- ------------- ---------------- ---------------- ----------- Balance, December 31, 1995 34,386,670 3,438,667 45,887,347 258,857,819 72,444 NET INCOME 56,612,720 DIVIDENDS PAID (38(CENT)PER SHARE) (11,731,958) UNREALIZED HOLDING LOSS ON INVESTMENTS, NET (74,562) PURCHASE OF TREASURY STOCK CANCELLATION OF TREASURY STOCK (4,393,100) (439,310) (45,887,347) (46,519,924) ----------- ------------- ---------------- ---------------- ----------- BALANCE, DECEMBER 31, 1996 29,993,570 $ 2,999,357 $ - $ 257,218,657 $ (2,118) =========== ============= ================ ================ ===========
ASA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Treasury Stock Shares Amount ------------- -------------- Balance, January 1, 1994 - $ - Net Income Dividends Paid (32(cent)per share) Exercise of Stock Appreciation Rights Unrealized Holding Loss on Investments, Net Purchase of Treasury Stock (1,140,000) (19,977,188) ------------- ------------ Balance, December 31, 1994 (1,140,000) (19,977,188) Net Income Dividends Paid (34(cent)per share) Exercise of Stock Appreciation Rights Unrealized Holding Gain on Investments, Net Purchase of Treasury Stock (1,543,100) (35,423,612) ------------- ------------ Balance, December 31, 1995 (2,683,100) (55,400,800) NET INCOME DIVIDENDS PAID (38(CENT)PER SHARE) UNREALIZED HOLDING LOSS ON INVESTMENTS, NET PURCHASE OF TREASURY STOCK (1,710,000) (37,445,781) CANCELLATION OF TREASURY STOCK 4,393,100 92,846,581 ------------- ------------ BALANCE, DECEMBER 31, 1996 - $ - ============= ============
See notes to consolidated financial statements. 38 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation and Business: ASA Holdings, Inc. (ASA Holdings) is a holding company the principal assets of which are the shares of its wholly owned subsidiaries, Atlantic Southeast Airlines, Inc. (ASA) and ASA Investments, Inc. (ASA Investments). ASA Holdings became the parent holding company for ASA and ASA Investments pursuant to a corporate reorganization (the Reorganization), which was effective after the close of business on December 31, 1996. In May 1996, ASA's Board of Directors approved the Reorganization subject to the approval of ASA's shareholders. The shareholders approved the Reorganization on December 23, 1996. Pursuant to the Reorganization, ASA merged with a wholly owned subsidiary of ASA Holdings. As part of the merger, each issued and outstanding share of ASA's common stock (other than treasury stock, which was cancelled) was converted into one share of ASA Holdings' common stock. Immediately after the merger on December 31, 1996, ASA effected a dividend to ASA Holdings of all of the capital stock of ASA Investments. As a result of the Reorganization, ASA and ASA Investments became the wholly owned subsidiaries of ASA Holdings. There was no significant impact on the consolidated financial statements as a result of these transactions. All references to the Company contained herein refer collectively to ASA and its subsidiaries, ASA Holdings and ASA Investments, prior to December 31, 1996, and to ASA Holdings and its subsidiaries, ASA and ASA Investments, beginning December 31, 1996. All significant intercompany transactions have been eliminated. ASA, ASA Holdings' principal operating subsidiary, is a large regional airline serving airports in the Southeastern and Southwestern United States. ASA derives its revenues primarily through the air transportation of passengers and cargo in scheduled airline service under a marketing agreement with Delta Air Lines, Inc. (Delta). Under this agreement, ASA's flights are listed on reservation systems as connecting Delta flights. Delta Air Lines Holdings, Inc., a subsidiary of Delta, owns approximately 27% of ASA Holdings' common stock (See Note J). ASA Investments operates as an investment entity which manages cash assets contributed to it by ASA Holdings or its other subsidiaries. Use of Estimates: 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 inevitably will differ from those estimates, and such differences may be material to the financial statements. 39 44 Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Such investments include U.S. Government agency securities, corporate commercial paper and overnight repurchase agreements. The Company believes that the credit risk is minimal. Marketable Securities: The Company's investment in marketable securities consists of debt instruments of the U.S. Treasury, U.S. Government agencies and municipal authorities. All such marketable securities have a maturity of less than one year. These investments are classified as available for sale and reported at fair market value. Expendable Parts: Flight equipment expendable parts are valued at average cost less an allowance for obsolescence. Expendable parts are charged to maintenance expense as used. Property, Equipment and Depreciation: Flight equipment and other property and equipment are stated at cost. Major additions, betterments and renewals are capitalized. Depreciation of costs less estimated residual values is computed on the straight-line basis over the estimated useful lives of the related assets as follows: Flight equipment 3 - 15 years Other property and equipment 4 - 28 years For income tax purposes, accelerated depreciation methods are used. Maintenance: The cost of major engine overhauls for owned aircraft is capitalized and amortized to maintenance expense over the estimated overhaul life. Overhaul expense is accrued or amortized for leased aircraft in accordance with lease provisions. Intangibles: Excess of cost over fair value of tangible assets acquired is amortized by the straight-line method over a 40-year period. Also included in other assets are deferred financing fees, reorganization costs and deferred gate assignment costs. These deferred assets are amortized over periods from one to 20 years. Accumulated amortization for these intangible assets and deferred costs at December 31, 1996 and 1995 was $2,910,829 and $2,462,580, respectively. Also included in other assets is restricted cash which serves as collateral for a portion of ASA's financing (See Note B). The cost of routine development of new or extended routes and the pre-operating costs incurred in connection with aircraft acquisitions are charged to expense as incurred. Passenger Revenue Recognition: ASA issues Delta ticket stock for passenger sales. Passenger revenues are recognized at the time transportation is provided. As a "Delta Connection" carrier, ASA participates in Delta's frequent flyer incentive program. ASA does not accrue for incremental costs associated with the program's mileage accumulation since the impact is immaterial both on a quarterly and annual basis. Included in air traffic liability are cargo liabilities and amounts resulting from timing differences in billings with Delta. 40 45 Income Taxes: The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for temporary differences in the recognition of income and expenses for financial reporting and income tax reporting. Earnings per Share: Earnings per share are based on the weighted average number of shares of common stock outstanding and dilutive common stock equivalents (See Notes G and H). Recent Pronouncements: Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement 121 in the first quarter of 1996 and the effect of adoption was not significant. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", encourages companies to recognize expense for stock-based awards based on their fair value on the date of grant. At a minimum, Statement 123 requires pro forma disclosures in the Company's 1996 financial statements. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations and provide the necessary disclosures required by Statement 123, rather than adopt the expense recognition provisions of this Statement (See Note H). NOTE B - LONG-TERM DEBT ASA's long-term debt was as follows:
December 31, 1996 1995 ---------------- ----------------- Notes payable to banks. ASA pledged aircraft and support equipment with a net book value of $46,850,141 as collateral. Payments are due in semi-annual installments of $3,758,836 plus interest at 6.5% to 1999. $ 9,648,266 $ 20,004,170 Notes payable to banks. ASA pledged aircraft and support equipment with a net book value of $22,184,014 as collateral. Payments are due in semi-annual installments of $1,718,711 plus interest at 6.125% to 6.5% to 1999. 6,837,627 10,275,048 Notes payable to banks. ASA pledged aircraft and support equipment with a net book value of $7,260,700 as collateral. Payments are due in quarterly installments of $259,662 plus interest at 7% to 1999. 2,856,285 3,894,935
41 46
December 31, 1996 1995 ========= --------- Notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $12,288,908 as collateral. Payments are due in semi-annual installments of $788,901 plus interest at 5.35% to 5.7875% to 2000. 6,048,214 7,626,015 Floating rate note payable to bank. ASA pledged aircraft and support equipment with a net book value of $4,304,768 as collateral. Payments are due in semi-annual installments of $264,615 plus interest based on floating six month LIBOR to 2000. Rate at December 31, 1996 was 6.1688%. 2,116,920 2,646,150 Floating rate note payable to bank. ASA pledged a Euro-time deposit of an equal amount as collateral. Payments are due in semi-annual installments of $264,926 plus interest based on floating six month LIBOR to 2000. Rate at December 31, 1996 was 6.425%. 2,119,411 2,649,263 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $17,369,218 as collateral. Payments are due in semi-annual installments of $1,069,327 plus interest based on floating six month LIBOR to 2001. Rates at December 31, 1996 were 6.5375% - 6.69375%. 9,623,945 11,762,599 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $17,706,185 as collateral. Payments are due in semi-annual installments of $1,051,214 plus interest based on floating six month LIBOR to 2002. Rates at December 31, 1996 were 6.35% - 6.4938%. 9,981,855 12,084,284 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $49,149,262 as collateral. Payments are due in semi-annual installments of $2,727,240 plus interest based on floating six month LIBOR to 2003. Rates at December 31, 1996 were 6.25% - 6.325%. 33,846,816 41,748,628 Floating rate notes payable to bank. ASA pledged aircraft and support equipment with a net book value of $43,637,615 as collateral. Payments are due in mortgage style semi-annual installments estimated at $1,470,792 (subject to change) plus interest based on floating six month LIBOR to 2006. Rates at December 31, 1996 were 6.03516% to 6.1875%. 37,114,751 39,908,995 ---------------- ----------------- 120,194,090 152,600,087 Less current portion 25,576,213 32,390,437 ---------------- ----------------- $ 94,617,877 $ 120,209,650 ================ =================
42 47 As of December 31, 1996, maturities on long-term debt were: 1997 $ 25,576,213 1998 21,876,209 1999 18,671,639 2000 15,382,312 2001 11,632,669 After 2001 27,055,048 ----------------- $ 120,194,090 =================
During 1996, ASA renegotiated the restrictive covenants in its credit agreements. The renegotiated credit agreements currently contain restrictive covenants that limit, among other things, the sale or lease of assets; the acquisition of stock of other entities; ratio of total liabilities to tangible net worth; and maintenance of minimum tangible net worth and funds flow coverage. In addition, the transfer of funds by ASA in the form of cash dividends, loans or advances is limited solely to the extent that the payment of such transfers would cause ASA to breach other financial covenants. ASA Holdings and ASA Investments are not subject to the restrictive covenants of ASA's credit agreements, except to the extent that ASA is restricted in its ability to transfer funds to ASA Holdings or ASA Investments in the form of cash dividends, loans or advances. At December 31, 1996, approximately $35 million of net assets was available for distribution by ASA to ASA Holdings under the most restrictive of these provisions. At December 31, 1996, approximately $129 million of net assets was available for distribution by ASA Investments to ASA Holdings. ASA has negotiated to receive interest rate subsidies on certain indebtedness through the export support program of the Federative Republic of Brazil. Outstanding debt aggregating $83,079,338 at December 31, 1996 is subject to subsidy payments which reduce the stated interest rates on such debt to an average of approximately 3.34%. However, subsidies on outstanding debt aggregating $77,031,124 are at risk to ASA if the Federative Republic of Brazil does not meet its obligations under the export support program. For the remaining debt that is subject to such subsidies, the lenders have assumed such risk by building such subsidy payments into ASA's payment obligations. During 1996, 1995 and 1994, ASA reduced its interest expense by $2,826,564, $3,726,620 and $3,800,430, respectively, as a result of these interest rate subsidies. The amount of net interest paid during 1996, 1995 and 1994 was $7,314,112, $7,446,255 and $4,702,987, respectively. As indicated above, ASA is at risk with respect to certain of these subsidy payments. While the Company has no reason to believe, based on information currently available to it, that ASA will not continue to receive such subsidy payments from the Federative Republic of Brazil in the future, there can be no assurance that such a default will not occur. 43 48 NOTE C - AIRCRAFT COMMITMENTS As of December 31, 1996, ASA had no aircraft purchase commitments. In January 1997, ASA announced its intentions to acquire 30 Canadair Regional Jet aircraft from Bombardier, Inc. and to secure options to acquire an additional 60 aircraft, subject to the effectiveness of a definitive acquisition agreement with Bombardier, a definitive financing commitment with the Export Development Corporation of Canada and a definitive agreement with General Electric Company with respect to the acquisition of the engines and spare parts. At this time, ASA has not determined whether the acquisition will be a purchase or lease arrangement or both. ASA estimates that the cost of the 30 aircraft, including spare parts, will be approximately $600 million. NOTE D - LINES OF CREDIT ASA has an $8,000,000 bank line of credit available at LIBOR plus .4%. This line of credit expires in February 1998 and is renewed annually. At December 31, 1996 and 1995, there was $.7 million of this line committed to support a letter of credit. The remainder is available for general working capital purposes on an as needed basis. At December 31, 1996 and 1995, there were no outstanding amounts against the line of credit. NOTE E - INCOME TAXES Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income tax liabilities and assets as of December 31, 1996 and 1995 are as follows:
1996 1995 ------------------ ------------------- Deferred income tax liabilities: Tax over book depreciation $ 72,736,336 $ 72,277,493 Other 110,225 172,151 ------------------ ------------------- Total deferred income tax liabilities 72,846,561 72,449,644 Deferred income tax assets: Asset valuation reserves 749,755 1,565,805 Other 2,462,033 1,684,312 ------------------ ------------------- Total deferred income tax assets 3,211,788 3,250,117 ------------------ ------------------- Net deferred income tax liabilities $ 69,634,773 $ 69,199,527 ================== ===================
44 49 For financial reporting purposes, the provision for income taxes includes the following components for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 ---------------- -------------------- ---------------- Federal: Current $ 30,993,254 $ 23,397,695 $ 22,124,324 Deferred 396,046 2,978,705 7,178,897 ---------------- -------------------- ---------------- 31,389,300 26,376,400 29,303,221 ---------------- -------------------- ---------------- State: Current 3,065,300 2,891,900 2,773,500 Deferred 39,200 368,100 887,279 ---------------- -------------------- ---------------- 3,104,500 3,260,000 3,660,779 ---------------- -------------------- ---------------- $ 34,493,800 $ 29,636,400 $ 32,964,000 ================ ==================== ================
A reconciliation of the provision for income taxes at the applicable federal statutory income tax rate to the income tax expense as reported is as follows for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 ------------------- ------------------- ------------------- Income tax expense at statutory rate $ 31,887,282 $ 28,270,836 $ 29,966,912 State income taxes, net of federal tax benefit 2,004,211 2,160,835 2,489,421 Other 602,307 (795,271) 507,667 ------------------- ------------------- ------------------- Income tax expense $ 34,493,800 $ 29,636,400 $ 32,964,000 =================== =================== ===================
In 1995, prior years' income tax audits were resolved and the Company reduced its deferred tax liabilities and deferred tax expense by approximately $1.3 million. The Company paid income taxes in the amount of $33,389,841 in 1996, $27,259,730 in 1995 and $27,801,152 in 1994. NOTE F - COMMITMENTS AND CONTINGENCIES ASA's current fleet includes the following aircraft under operating leases:
NON-CANCELLABLE # OF AIRCRAFT TYPE OF AIRCRAFT LEASE TERM ------------- ---------------- --------------- 8 ATR-72 7 years 4 EMB-120 3.1 - 4.4 years 5 BAe 146 2 years
45 50 ASA has the option to extend each of the BAe 146 aircraft leases. ASA leases facilities from local airport authorities or other carriers as well as office space for its corporate headquarters and hangar facilities. These leases are operating leases and have terms ranging from one month to 22 years. Total rental expense on operating leases for the years ended December 31, 1996, 1995 and 1994 was $24,041,093, $17,591,292 and $14,597,677, respectively. Minimum future lease payments under all non-cancellable operating leases are as follows: 1997 $ 21,206,239 1998 15,807,881 1999 13,809,966 2000 12,750,678 2001 12,553,759 After 2001 38,202,729 ------------ $114,331,252 ============
On August 21, 1995, ASA suffered a tragic loss when one of its flights crashed. On November 26, 1996, the National Transportation Safety Board (NTSB), in a unanimous vote, determined that the probable cause of the accident was the in-flight fatigue fracture and separation of a propeller blade that resulted in excessive drag, loss of wing lift and reduced directional control of the aircraft. The NTSB further concluded that the fracture in the propeller blade was caused by a fatigue crack from multiple corrosion pits that were not discovered by the propeller manufacturer because of its inadequate and ineffective corporate inspection and repair techniques, training, documentation and communication. Accordingly, ASA's management does not feel that ASA was at fault, based on the factual information currently available to it. ASA has received insurance proceeds from its insurance company related to the hull value of the aircraft, and the debt related to this aircraft was paid with part of these insurance proceeds. A number of claims and lawsuits have been filed in connection with this matter. The propeller manufacturer (through its insurer) has agreed to address all claims arising from this accident without acknowledging fault. Accordingly, the Company's management does not believe that the Company has any liability in this matter, based on factual information currently available to it. Therefore, ASA has not accrued a liability for potential claims. Neither the propeller manufacturer nor its insurer has entered into any written indemnity agreement with ASA or its insurer, and neither is legally obligated to indemnify either ASA or its insurer for expenses actually incurred in connection with the crash. In addition, ASA maintains adequate insurance coverage which it believes, based on factual information currently available to it, is sufficient to cover claims associated with this incident. After the results of the NTSB investigation were announced, ASA was dismissed from all existing lawsuits with respect to the crash. 46 51 Approximately 25% of ASA's workforce are members of the unions representing pilots and flight attendants. In 1995, collective bargaining agreements with both of these unions became amendable and are currently being renegotiated. Federal mediation between ASA and the pilots and flight attendants has been ongoing for approximately one year. The Railway Labor Act, which governs labor relations for these unions, contains detailed provisions that must be exhausted before work stoppages can occur once a collective bargaining agreement becomes amendable. NOTE G - DIVIDENDS AND COMMON STOCK TRANSACTIONS During the fourth quarter of 1996, ASA renegotiated certain restrictive covenants in its credit agreements. Limitations on ASA's payment of dividends and ASA's repurchases of common stock were removed, except to the extent that the transfer of funds in the form of cash dividends, loans or advances would cause ASA to breach other financial covenants (See Note B). ASA Holdings and ASA Investments are not subject to such restrictions except to the extent that ASA is restricted in its ability to transfer funds to ASA Holdings or ASA Investments in the form of cash dividends, loans or advances. Prior to the amendment of these credit agreements, ASA was limited in the amount of cash it could apply to the repurchase of common stock and the payment of dividends generally to 30% of average annual earnings. During the first three quarters of 1996 and in 1995, ASA paid dividends on its common stock in the amount of $8,882,569 and $11,203,992 and acquired approximately $2,785,000 and $3,329,000 of its common stock, without exceeding these previously existing limitations. In 1994, ASA acquired approximately $2,777,000 of its common stock under the previous terms of the agreements. ASA's Board of Directors authorized ASA to repurchase on the open market up to an additional $50,000,000 of its common stock at any time on or before December 31, 1995 and up to an additional $50,000,000 of ASA common stock during fiscal 1996. These repurchases were authorized by the Board to be in addition to the repurchases allowed under the existing credit agreements. Because these common stock repurchase programs were not within the limitations set forth in the credit agreements, they were consented to by ASA's lenders, in advance, as required by the credit agreements. Pursuant to these repurchase programs, ASA repurchased approximately $49,295,000 of its common stock through December 31, 1995 and an additional $34,661,000 of its common stock during 1996. All of the repurchased shares of common stock were held as treasury stock. In connection with the Reorganization on December 31, 1996, all of the shares of treasury stock were cancelled. In January 1997, ASA Holdings announced that its Board of Directors authorized it to repurchase up to $50,000,000 of its common stock on the open market during 1997. During 1996, ASA paid a total of $11,731,958 in dividends at 9.5 cents per share per quarter. In January 1997, ASA Holdings' Board of Directors increased the regular quarterly cash dividend to 10 cents per share. 47 52 NOTE H - STOCK PLANS The Company has a Stock Appreciation Rights (SARs) plan which allows for up to 900,000 shares of ASA Holdings' common stock to be issued to certain employees. The plan provides for the appreciation in market value, at the date of exercise, over the grant price to be issued in shares of common stock, cash or a combination thereof, as determined by the Board of Directors and set at the time of each SAR grant. SARs outstanding at December 31, 1996 are exercisable over a period of five years at certain intervals, as provided in the form of each grant. Grants are made by a committee of the Board of Directors. SARs transactions are as follows:
NUMBER OF SARS GRANT PRICE -------------- ----------- Outstanding at January 1, 1994 416,200 $17.13 - $21.13 Exercised (122,200) 21.13 Granted 235,700 36.75 ---------- ---------------------- Outstanding at December 31, 1994 529,700 17.13 - 36.75 Exercised (150,300) 21.13 Granted 411,000 17.13 ---------- ---------------------- Outstanding at December 31, 1995 790,400 17.13 - 36.75 Exercised - - Granted - - ---------- ---------------------- Outstanding at December 31, 1996 790,400 $17.13 - $36.75 ---------- ----------------------
In January 1997, an additional 414,100 SARs were granted at an exercise price of $22.38. In 1996 and 1995, SARs increased expense by $729,000 and $2,416,000, respectively. In 1994, the Company reversed previously accrued expenses associated with SARs resulting in a credit to expense of approximately $4,198,000 due to a decline in the price of its common stock. In connection with the exercise of SARs, the Company made cash payments of $434,445 and issued 22,963 shares of common stock in 1995, and made cash payments of $521,529 and issued 23,935 shares of common stock in 1994. Assuming full vesting, shares issuable under SARs outstanding at December 31, 1996 were 57,601 and all SARS are fully vested as of February 1997. As indicated in Note A, the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its SARs. However, the Financial Accounting Standards Board Opinion No. 123, "Accounting for Stock-Based Compensation", requires pro forma information regarding net income and earnings per share as if the Company had accounted for its SARs granted subsequent to 48 53 December 31, 1994 under the fair value method of that Statement. The fair value of these SARs was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1995 and 1996: a risk-free interest rate of 6%; a dividend yield of 2%; a volatility factor of the expected common stock market price of .472; and a weighted-average expected life of the SAR of five years. The fair value of the SARs granted in 1995 was computed to be $7.11. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's employee stock plan has characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the SARs. For purposes of pro forma disclosures, the estimated fair value of the SARs is amortized over the vesting period of the related SARs. The Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share information):
1996 1995 ------- -------- Net Income - as reported $56,613 $51,137 Net Income - pro forma $56,524 $50,844 Earnings per Share - as reported $1.83 $1.55 Earnings per Share - pro forma $1.82 $1.54
NOTE I - EMPLOYEE BENEFIT PLANS All employees of the Company who have completed one year of employment are generally eligible to participate in ASA's Investment Savings Plan. For each dollar of salary reduction elected by an employee (up to 6% of an employee's earnings), the Company has made a matching contribution of 20 cents to 50 cents (depending on the number of years of participation for each participant). The amounts contributed by the Company for 1996, 1995 and 1994 were approximately $920,000, $915,000 and $820,000, respectively. The Company has an Executive Deferred Compensation Plan for certain employees, as designated by a committee of the Board of Directors. The Company contributes from 10% to 15% of each participant's base salary to the plan. Approximately $126,000, $122,000 and $100,000 were contributed in 1996, 1995 and 1994, respectively. The Company has a Supplemental Executive Retirement Plan (SERP) which was approved by the Board of Directors in May 1995. The SERP provides supplemental retirement income to certain key executive employees at the time of their retirement or termination of employment from 49 54 the Company, on or after the attainment of age 55. During 1996 and 1995, respectively, the Company recorded expense of approximately $142,000 and $131,000 related to the SERP. At December 31, 1996 and 1995, respectively, other non-current liabilities included approximately $913,000 and $681,000 related to the SERP. The Company has no material liability for post-retirement or post-employment benefits under Statements of Financial Accounting Standards No. 106 and 112. NOTE J - RELATED PARTY TRANSACTIONS Delta Air Lines Holdings, Inc. (an affiliate of Delta) owns 7,995,000 shares or approximately 27% of ASA Holdings' outstanding common stock. ASA leases reservation equipment and certain terminal facilities from Delta and Delta provides certain services to ASA including reservation and ground handling services. Expenses paid to Delta under these agreements were approximately $11,883,000 in 1996, $9,642,000 in 1995, and $5,762,000 in 1994. Other information related to Delta is as follows:
1996 1995 ---------- ---------- Accounts Receivable from Delta at December 31: $ 121,000 $ 129,000 Accounts Payable to Delta at December 31: $1,747,000 $2,275,000
Given ASA's relationship with Delta, ASA's results of operations and financial condition may be favorably or adversely impacted by Delta's decisions regarding its flight routes and other operational matters. ASA's flight schedules are structured to facilitate the connection of its passengers with Delta flights at ASA's Atlanta and Dallas/Fort Worth hubs. ASA has historically benefited from its relationship with Delta, but there can be no assurance that such benefits will occur in the future. NOTE K - MARKETABLE SECURITIES AND FAIR VALUE INFORMATION The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value. 50 55 Marketable securities: Investments are classified as available for sale and reported at fair value (estimated based on quoted market prices). The gross unrealized holding loss of $3,432 as of December 31, 1996 and the $117,414 holding gain as of December 31, 1995 are reflected as adjustments to shareholders' equity, net of related income taxes. Realized gains and losses other than interest income were not material. Long-term debt: The fair values of the Company's long-term debt are estimated using discounted cash flow analyses, based on the Company's estimate of current borrowing rates for credit facilities with maturities which approximate the weighted average maturities for its existing long-term debt. Off-balance sheet financial instruments: The Company receives interest rate subsidies on certain long-term debt instruments (See Note B). The fair values of these off-balance sheet instruments are estimated using discounted cash flow analyses based on the Company's estimate of current borrowing rates. The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1996 and 1995 are as follows:
CARRYING AMOUNTS ESTIMATED FAIR VALUE 1996 1995 1996 1995 --------------- --------------- ------------------- ------------------- Cash and cash equivalents $ 137,468,791 $ 66,402,694 $ 137,468,791 $ 66,402,694 Marketable securities 52,653,227 121,697,247 52,653,227 121,697,247 Total long-term debt (including current maturities) (120,194,090) (152,600,087) (119,894,051) (152,501,958) Off-balance sheet financial instruments - - 5,700,053 8,305,613
51 56 ASA HOLDINGS, INC. REPORT OF MANAGEMENT The management of ASA Holdings, Inc. is responsible for the preparation, content, integrity and objectivity of the financial statements and other information presented in this report. The financial statements, which were prepared in conformity with generally accepted accounting principles applied on a consistent basis, have been audited by Ernst & Young LLP, independent auditors. The Company maintains a system of internal controls that provides reasonable assurance as to the integrity and reliability of the financial statements, that its assets are safeguarded against loss or unauthorized use and that fraudulent financial reporting is prevented and detected. The Board of Directors pursues its responsibilities through its Audit Committee composed entirely of directors who are not employees of the Company. The Audit Committee meets periodically and privately with the Company's independent auditors and Company management to review accounting, auditing, internal control and financial reporting matters. /s/ George F. Pickett - - ------------------------- George F. Pickett Chairman of the Board and Chief Executive Officer /s/ Ronald V. Sapp - - --------------------------- Ronald V. Sapp Chief Financial Officer and Vice President - Finance 52 57 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors ASA Holdings, Inc. We have audited the accompanying consolidated balance sheets of ASA Holdings, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ASA Holdings, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Atlanta, Georgia January 31, 1997 53 58 ASA HOLDINGS, INC. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
FIRST SECOND THIRD FOURTH YEAR ---------- ---------- ---------- ----------- ----------- 1996 OPERATING REVENUES $ 89,405 $ 104,238 $ 94,670 $ 86,987 $ 375,300 OPERATING INCOME 17,063 28,823 25,462 13,804 85,152 INCOME BEFORE INCOME TAXES 18,221 29,960 26,821 16,105 91,107 NET INCOME $ 11,297 $ 18,430 $ 16,549 $ 10,337 $ 56,613 NET INCOME PER SHARE $ 0.36 $ 0.59 $ 0.53 $ 0.35 $ 1.83 WEIGHTED AVERAGE SHARES OUTSTANDING 31,490 31,325 30,975 30,181 30,991 STOCK PRICE DATA HIGH $ 28.50 $ 29.38 $ 28.38 $ 25.00 $ 29.38 LOW $ 17.88 $ 22.00 $ 20.25 $ 19.88 $ 17.88 1995 Operating Revenues $ 71,891 $ 90,049 $ 84,225 $ 82,560 $ 328,725 Operating Income 14,375 23,294 23,108 15,098 75,875 Income before Income Taxes 15,008 24,258 24,522 16,986 80,774 Net Income $ 9,560 $ 14,967 $ 15,130 $ 11,480 $ 51,137 Net Income per Share $ 0.29 $ 0.45 $ 0.46 $ 0.35 $ 1.55 Weighted Average Shares Outstanding 33,069 33,113 33,107 32,558 32,964 Stock Price Data High $ 21.00 $ 30.75 $ 34.25 $ 27.88 $ 34.25 Low $ 15.25 $ 18.00 $ 21.75 $ 20.75 $ 15.25
54 59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No change in or disagreements with ASA's accountants took place during ASA's fiscal years ended December 31, 1996 and 1995, or during the subsequent interim period through March 3, 1997. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the data under the heading "ELECTION OF DIRECTORS" and "SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the Proxy Statement to be used in connection with the solicitation of proxies for ASA Holdings' annual meeting of shareholders to be held May 21, 1997, to be filed with the Securities and Exchange Commission (the "COMMISSION"). ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the data under the heading "EXECUTIVE COMPENSATION" in the Proxy Statement to be used in connection with the solicitation of proxies for ASA Holdings' annual meeting of shareholders to be held May 21, 1997, to be filed with the Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the data under the heading "VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF -- SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS" in the Proxy Statement to be used in connection with the solicitation of proxies for ASA Holdings' annual meeting of shareholders to be held May 21, 1997, to be filed with the Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the data under the heading "ELECTION OF DIRECTORS -- COMPENSATION COMMITTEE INTERLOCKS AND ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION DECISIONS" in the Proxy Statement to be used in connection with the solicitation of proxies for ASA Holdings' annual meeting of shareholders to be held May 21, 1997, to be filed with the Commission. 55 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: l. The following financial statements of the Registrant required by Item 8 of Form 10-K are included as pages [34] through [51] of this Report on Form 10-K: Consolidated Balance Sheets as of December 31, 1996 and 1995; Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994; Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994; Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994; and Notes to Consolidated Financial Statements. 2. The following financial statement schedule[s] of the Registrant required by Item 8 and Item 14(d) of Form 10-K are included as pages [67] through [68] of this Report on Form 10-K: Schedule I - Condensed Financial Information of Registrant Schedule II - Valuation and Qualifying Accounts and Reserves Schedules other than those listed above have been omitted because they are not applicable or required under the accounting regulations and related instructions of the Commission. 3. The following exhibits required by Item 601 of Regulation S-K and by Item 14(c) of Form 10-K are filed herewith or incorporated by reference as indicated. Exhibit numbers refer to Item 601 of Regulation S-K: The exhibits listed on the Exhibit Index on pages 62 through 69 of this Report are incorporated herein by reference. The management contracts or compensatory plans or arrangements required to be filed as exhibits to this Report pursuant to Item 14(c) are identified in the Exhibit Index. (b) ASA filed no current reports on Form 8-K during the fourth quarter of 1996. 56 61 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT ASA HOLDINGS, INC. CONDENSED BALANCE SHEET
December 31, 1996 (In Thousands) ASSETS Current Assets Receivables from Affiliates $ 2,807 Investment in Subsidiaries 260,217 Other Assets 1,214 -------- Total Assets $264,238 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities $ 2,364 Accrued Compensation and Related Expenses Other Accrued Expenses 100 -------- 2,464 Non-Current Liabilities 1,558 Shareholders' Equity Common Stock Par Value 2,999 Retained Earnings 257,217 -------- 260,216 -------- Total Liabilities and Shareholders' Equity $264,238 ======== See accompanying note.
57 62 ASA HOLDINGS, INC. CONDENSED STATEMENT OF INCOME
December 31, 1996 (In Thousands) Net Income before Equity in Earnings of Subsidiaries - Equity in Earnings of Subsidiaries $ 56,613 ----------- Net Income $ 56,613 =========== CONDENSED STATEMENT OF CASH FLOWS Net Income $ 56,613 Adjustment to Reconcile Net Income to Net Cash Provided by Operating Activities: Undistributed earnings of subsidiaries (56,613) ----------- Net Cash Provided by Operating Activities - Increase (Decrease) in Cash - Cash at Beginning of Year - ----------- Cash at End of Year - ===========
Note to Condensed Financial Statements Note A - Basis of Presentation ASA Holdings, Inc., the parent company, was formed pursuant to a corporate reorganization which was effective December 31, 1996. ASA Holdings, Inc. holds all of the outstanding shares of Atlantic Southeast Airlines, Inc. and ASA Investments, Inc. The Company's investment in subsidiaries is stated at equity. 58 63 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES December 31, 1996
- - -------------------------------------------------------------------------------------------- Col. A Col. B Col. C - - -------------------------------------------------------------------------------------------- Additions -------------------------- Charged Charged to Balance at to other beginning of cost and accounts Description period expenses (describe) Year ended December 31, 1994 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 195,970 $ 120,000 Allowance for obsolescence of expendable parts 2,938,200 565,913 -------------- ------------ -------------- $ 3,134,170 $ 685,913 $ 0 Year ended December 31, 1995 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 280,569 $ 20,000 Allowance for obsolescence of expendable parts 3,504,113 546,339 -------------- ------------ -------------- $ 3,784,682 $ 566,339 $ 0 Year ended December 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 266,343 $ (25,000) Allowance for obsolescence of expendable parts 4,048,772 567,788 -------------- ------------ -------------- $ 4,315,115 $ 542,788 $ 0 ============== ============ ==============
Col. A Col. D Col. E - - ---------------------------------------------- ------------------ ----------- ------------------ ----------- Balance at Deductions end of Description (describe) period Year ended December 31, 1994 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ (35,401) (A) $ 280,569 Allowance for obsolescence of expendable parts 3,504,113 ----------- ----------- $ (35,401) $ 3,784,682 Year ended December 31, 1995 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ (34,226) (A) $ 266,343 Allowance for obsolescence of expendable parts (1,680) (B) 4,048,772 ----------- ----------- $ (35,906) $ 4,315,115 Year ended December 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ (36,996) (A) $ 204,347 Allowance for obsolescence of expendable parts (413,818) (B) 4,202,742 ----------- ----------- $ (450,814) $ 4,407,089 =========== ===========
(A) Uncollectible Accounts charged off during the period. (B) Obsolete parts charged off during the period. 59 64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASA HOLDINGS, INC. By: /s/ George F. Pickett ----------------------------------------- George F. Pickett Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: March 31, 1997 60 65 We, the undersigned officers and directors of ASA Holdings, Inc., hereby severally constitute George F. Pickett and John W. Beiser and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, any and all amendments to this report, and generally do all such things in our name and behalf in such capacities to enable ASA Holdings, Inc. to comply with the applicable provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys, or either of them, to any and all such amendments. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ George F. Pickett March 31, 1997 - - --------------------------------- George F. Pickett, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) and Director /s/ John W. Beiser March 31, 1997 - - --------------------------------- John W. Beiser, President, Secretary and Director /s/ Ronald V. Sapp March 31, 1997 - - --------------------------------- Ronald V. Sapp, Vice President - Finance (Principal Financial and Accounting Officer) /s/ Jean A. Mori March 31, 1997 - - --------------------------------- Jean A. Mori, Director /s/ Parker H. Petit March 31, 1997 - - --------------------------------- Parker H. Petit, Director /s/ Ralph W. Voorhees March 31, 1997 - - --------------------------------- Ralph W. Voorhees, Director /s/ Alan M. Voorhees March 31, 1997 - - --------------------------------- Alan M. Voorhees, Director
61 66 EXHIBIT INDEX Exhibit Number and Description 3(a) Articles of Incorporation. (Incorporated by reference to Exhibit 3(a) to the Registration Statement on Form S-4 [Registration No. 333-13071], as amended [the "REORGANIZATION REGISTRATION STATEMENT"].) 3(b) Bylaws. (Incorporated by reference to Exhibit 3(b) to the Reorganization Registration Statement.) 4 Instruments defining the rights of security holders, including indentures. See Exhibits 3(a) and 3(b).) 10(a) Stock Agreement dated as of March 17, 1997, between ASA Holdings, ASA, Delta and Delta Holdings. Attached hereto as Exhibit 10(a). 10(b) Delta Connection Agreement dated July 1, 1986, between ASA and Delta. (Incorporated by reference to Exhibit 10(e) to ASA's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, file number 0-11097, filed with the Commission on March 27, 1992.) Letter Agreement dated February 19, 1987 from Delta and agreed to and accepted by ASA. (Incorporated by reference to Exhibit 10(a) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Amendment to the Delta Connection Agreement dated December 17, 1987, between Delta and ASA. (Incorporated by reference to Exhibit 10(b) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Amendment to the Delta Connection Agreement effective July 1, 1988, between Delta and ASA. (Incorporated by reference to Exhibit 10(c) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Amendment to the Delta Connection Agreement dated March 4, 1992, between Delta and ASA. (Incorporated by reference to Exhibit 10(d) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Amendment to the Connection Carrier Agreement dated as of August 1, 1994, between Delta and ASA. (Incorporated by reference to Exhibit 10(e) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in these exhibits. 10(c) Office Lease Agreement dated December 18, 1991, by and between ASA and Trident Partners. (Incorporated by reference to Exhibit 10(q) to ASA's Annual Report on Form 10-K for the year ended December 31, 1991, file number 0-11097, filed with the Commission on March 27, 1992.) 62 67 10(d) Lease Agreement dated April 1, 1988, between ASA and Macon - Bibb County Industrial Authority. (Incorporated by reference to Exhibit 10(k) to ASA's Annual Report on Form 10-K for the year ended December 31, 1992, file number 0-11097, filed with the Commission on March 31, 1993.) 10(e) Credit Agreement dated as of December 24, 1986, among ASA, ASA Investments, and Manufacturers Hanover Leasing International Corp., American Security Bank, N.A., Barclays Bank PLC, B.S.F.E. - Banque de la Societe Financiere Europeene, Canadian Imperial Bank of Commerce, Citizens and Southern National Bank, Continental Illinois National Bank and Trust Company of Chicago, Kawasaki Lease Financing Inc., National Bank of Canada, National Bank of Georgia and The Royal Bank of Canada. (Incorporated by reference to Exhibit 10(f) to ASA's Annual Report on Form 10-K for the year ended December 31, 1991, file number 0-11097, filed with the Commission on March 27, 1992.) Amendment No. 1 dated as of February 20, 1987. (Incorporated by reference to Exhibit 10(f) to ASA's Annual Report on Form 10-K for the year ended December 31, 1992, file number 0-11097, filed with the Commission on March 31, 1993.) Amendment No. 2 dated as of May 23, 1989. (Incorporated by reference to Exhibit 19(a) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, file number 0-11097, filed with the commission on November 11, 1989.) Amendment No. 3 dated as of August 17, 1989. (Incorporated by reference to Exhibit 19(b) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, file number 0-11097, filed with the Commission on November 11, 1989.) Fourth Amendment dated September 17, 1996. (Incorporated by reference to Exhibit 10(f) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the Fourth Amendment. 10(f) Single Payment Note, dated January 26, 1987, payable to SunTrust Bank. (Incorporated by reference to Exhibit 10(g) to ASA's Annual Report on Form 10-K for the year ended December 31, 1991, file number 0-11097, filed with the Commission on March 27, 1992.) 10(g) Credit Agreement dated as of April 23, 1987, among ASA, ASA Investments, Inc., Manufacturers Hanover Leasing International Corp., Kawasaki Lease Financing, Inc. and Credit Lyonnais, Cayman Islands Branch. (Incorporated by reference to Exhibit 10(i) to ASA's Annual Report on Form 10-K for the year ended December 31, 1991, file number 0-11097, filed with the Commission on March 27, 1992.) Amendment No. 1 dated as of May 23, 1989. (Incorporated by reference to Exhibit 19(c) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, file number 0-11097, filed with the Commission on November 11, 1989.) Second Amendment dated as of October 31, 1989. (Incorporated by reference to Exhibit 10(s) to ASA's Annual Report on Form 10-K for the year ended December 31, 1989, file number 0-11097, filed with the Commission on March 30, 1990.) Third Amendment dated September 17, 1996. (Incorporated by reference to Exhibit 10(h) to ASA's Quarterly Report on Form 10-Q for the quarter ended 63 68 September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the Third Amendment. 10(h) Credit Agreement dated June 15, 1990 between ASA and Bank of America National Trust and Savings Association ("BANK OF AMERICA"). Attached as Exhibit 10(h) hereto. First Amendment dated September 13, 1996 (Incorporated by reference to Exhibit 10(j) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10(i) Credit Agreement dated December 1, 1990 between ASA and Wachovia Bank of Georgia, N.A. ("WACHOVIA"). Attached as Exhibit 10(i) hereto. Amendatory Agreement dated July 6, 1993. Second Amendment dated September 13, 1996. (Incorporated by reference to Exhibit 10(l) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the Second Amendment. 10(j) Credit Agreement dated February 25, 1991 between ASA and Bank of America. Attached as Exhibit 10(j) hereto. First Amendment dated September 13, 1996 (Incorporated by reference to Exhibit 10(n) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10(k) Credit Agreement dated April 19, 1991 between ASA and Wachovia. Attached as Exhibit 10(k) hereto. First Amendment dated September 13, 1996 (Incorporated by reference to Exhibit 10(p) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10(l) Credit Agreement dated June 1, 1992, among ASA, Wachovia, in both its capacities as Lender and Agent, and the Bank of Tokyo - Mitsubishi, LTD., Atlanta Agency f/k/a The Bank of Tokyo, Ltd., Atlanta Agency. Attached as Exhibit 10(l) hereto. First Amendment dated September 13, 1996. (Incorporated by reference to Exhibit 10(r) to ASA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10(m) Credit Agreement with Trust Company Bank dated as of April 20, 1994. (Incorporated by reference to Exhibit 10(a) to ASA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, file number 0-11097, filed with the Commission on May 13, 1994.) 64 69 Confidential treatment has been granted by the Commission with respect to certain provisions in this Credit Agreement. First Amendment dated September 11, 1996. (Incorporated by reference to Exhibit 10(t) to ASA's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996, file number 0-11097, filed with the Commission on November 14, 1996.) Confidential treatment has been applied for with respect to certain provisions in the First Amendment. 10(n) Aircraft Purchase Agreement dated August 27, 1990, between ASA and Embraer - Empresa Brasileira de Aeronautica S.A. (Incorporated by reference to Exhibit 10(t) to ASA's Annual Report on Form 10-K for the year ended December 31, 1990, file number 0-11097, filed with the Commission on March 29, 1991.) Confidential treatment has been granted for with respect to certain provisions in this exhibit. 10(o) Purchase Agreement Assignment [N630AS] dated June 22, 1995; Purchase Agreement Assignment [N631AS] dated June 22, 1995; Purchase Agreement Assignment [N632AS] dated June 22, 1995; Purchase Agreement Assignment [N633AS] dated June 22, 1995; Purchase Agreement Assignment [N634AS] dated June 22, 1995; Purchase Agreement Assignment [N635AS] dated June 22, 1995; Purchase Agreement Assignment [N636AS] dated June 22, 1995; and Purchase Agreement Assignment [N637AS] dated June 22, 1995 all between the Company and First Security Bank of Utah, N.A. (Incorporated by reference to Exhibit 10(c) to ASA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on August 14, 1995.) 10(p) Aircraft Purchase Agreement dated as of April 15, 1993, between ASA and Embraer-Empresa Brasileira de Aeronautica S.A., related Letter Agreements (I), (II), and (III) dated as of April 15, 1993, and a Second Amendment dated as of April 15, 1993, to a Letter Supplement dated as of November 21, 1988. (Incorporated by reference to Exhibit 10(a) to ASA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, file number 0-11097, filed with the Commission on August 16, 1993.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(q) Participation Agreement dated as of May 1, 1993 between the Company and Antoine Finance Corporation. (Incorporated by reference to Exhibit 10(b) to ASA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, file number 0-11097, filed with the Commission on August 16, 1993.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(r) Unconditional Guaranty of Performance between the Company and Avions de Agreement between the Company and Avions de Transport Regional dated February 10, 1993 and related letter agreements. (Incorporated by reference to Exhibit 10(d) to ASA's quarterly report on Form 10-Q for the quarter ended June 30, 1993, file number 0-11097, filed with the Commission on August 16, 1993.) 65 70 10(s) Purchase Agreement Assignment No. 1 dated May 10, 1993, Purchase Agreement Assignment No. 2 dated May 12, 1993, Purchase Agreement Assignment No. 3 dated May 26, 1993, Purchase Agreement Assignment No. 4 dated June 16, 1993, Purchase Agreement Assignment No. 5 dated June 23, 1993, and Purchase Agreement Assignment No. 6 dated July 21, 1993, all with respect to ATR 72 Purchase Agreement between the Company and Avions de Transport Regional dated February 10, 1993 and related letter agreements. (Incorporated by reference to Exhibit 10(e) to ASA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, file number 0-11097, filed with the Commission on August 16, 1993.) Purchase Agreement Assignment No. 7 dated August 25, 1993, Purchase Agreement Assignment No. 8 dated September 9, 1993, and Purchase Agreement Assignment No. 9 dated September 23, 1993. (Incorporated by reference to Exhibit 10(b) to ASA's quarterly report on Form 10-Q for the quarter ended September 30, 1993, file number 0-11097, filed with the Commission on November 15, 1993.) 10(t) Collateral Assignment of Purchase Agreement with Trust Company Bank dated as of April 20, 1994 with respect to ATR 72 Purchase Agreement between the Company and Avions de Transport Regional dated February 10, 1993. (Incorporated by reference to Exhibit 10(b) to ASA's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, file number 0-11097, filed with the Commission on May 13, 1994.) 10(u) Sublease Agreement [N630AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N630AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N630AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N630AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(d) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(v) Sublease Agreement [N631AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N631AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N631AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N631AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(e) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(w) Sublease Agreement [N632AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N632AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N632AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N632AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(f) to ASA's Quarterly Report on Form 10-Q/A for the quarter 66 71 ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(x) Sublease Agreement [N633AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N633AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N633AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N633AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(g) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(y) Sublease Agreement [N634AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N634AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N634AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N634AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(h) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(z) Sublease Agreement [N635AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N635AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N635AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N635AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(i) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(aa) Sublease Agreement [N636AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N636AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N636AS] dated June 22, 1995; and Nondisturbance and Recognition Agreement [N636AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(j) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(ab) Sublease Agreement [N637AS] dated as of June 22, 1995, between the Company and Antoine Finance Corporation and related Sublease Supplement [N637AS] dated June 22, 1995; Sublease Tax Indemnity Agreement [N637AS] dated June 22, 1995; and 67 72 Nondisturbance and Recognition Agreement [N637AS] dated June 22, 1995. (Incorporated by reference to Exhibit 10(k) to ASA's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on February 23, 1996.) Confidential treatment has been granted by the Commission with respect to certain provisions in this exhibit. 10(ac) Agreement to Lease Used British Aerospace 146 Series 200 Aircraft between British Aerospace Holdings, Inc. Asset Management Organization and the Company dated as of October 2, 1995. (Incorporated by reference to Exhibit 10(ac) to ASA's Annual Report on Form 10-K for the year ended December 31, 1995, file number 0-11097, filed with the Commission on April 1, 1996.) 10(ad) JetSpares Agreement, dated as of October 2, 1995, between British Aerospace Holdings, Inc., Avro International Aerospace Division, and ASA. (Incorporated by reference to Exhibit 10(ad) to ASA's Annual Report on Form 10-K for the year ended December 31, 1995, file number 0-11097, filed with the Commission on April 1, 1996.) 10(ae) Engine Maintenance Cost Protection Program Agreement between AlliedSignal, Inc., AlliedSignal Engines and the Company dated as of October 2, 1995. (Incorporated by reference to Exhibit 10(ae) to ASA's Annual Report on Form 10-K for the year ended December 31, 1995, file number 0-11097, filed with the Commission on April 1, 1996.) 10(af) Customer Support Agreement (ALF 502 Series TurboFan Engines) between AlliedSignal Aerospace-Engine Division and the Company dated as of October 2, 1995. (Incorporated by reference to Exhibit 10(af) to ASA's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, file number 0-11097, filed with the Commission on April 1, 1996.) 10(ag) 1990 Stock Appreciation Rights Plan of Atlantic Southeast Airlines, Inc. (Incorporated by reference to Exhibit 19(a) to ASA's Quarterly Report for the quarter ended June 30, 1990, file number 0-11097, filed with the Commission on August 13, 1990.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THE ANNUAL REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10(ah) Atlantic Southeast Airlines, Inc. Executive Deferred Compensation (Retirement) Plan dated May 15, 1990. (Incorporated by reference to Exhibit 19(b) to ASA's Quarterly Report for the quarter ended June 30, 1990, file number 0-11097, filed with the Commission on August 13, 1990.) First Amendment to Executive Deferred Compensation (Retirement) Plan dated December 31, 1992. (Incorporated by reference to Exhibit 10(s) to ASA's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, file number 0-11097, filed with the Commission on March 31, 1993.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THE ANNUAL REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 68 73 10(ai) Founding Officer Agreement dated June 27, 1990, between ASA and George F. Pickett. (Incorporated by reference to Exhibit 19(c) to ASA's Quarterly Report for the quarter ended June 30, 1990, file number 0-11097, filed with the Commission on August 13, 1990.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THE ANNUAL REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10(aj) Founding Officer Agreement dated June 27, 1990, between ASA and John W. Beiser. (Incorporated by reference to Exhibit 19(d) to ASA's Quarterly Report for the quarter ended June 30, 1990, file number 0-11097, filed with the Commission on August 13, 1990.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THE ANNUAL REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 10(ak) Atlantic Southeast Airlines, Inc. Supplemental Executive Retirement Plan effective May 24, 1995. (Incorporated by reference to Exhibit 10(a) to ASA's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, file number 0-11097, filed with the Commission on August 14, 1995.) (MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THE ANNUAL REPORT ON FORM 10-K PURSUANT TO ITEM 14(C) OF FORM 10-K.) 11 Statement re Computation of Per Share Earnings. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 24 Power of Attorney (Included on the signature page of this Form 10-K.) 27 Financial Data Schedule. 99 Information required by Form 11-K with respect to the Atlantic Southeast Airlines, Inc. Investment Savings Plan will be filed as an amendment to this Form 10-K within 180 days after the end of the fiscal year of the plan as permitted by Rule 15d-21 under the Securities Exchange Act of 1933. 69 EX-10.A 2 STOCK AGREEMENT 1 EXHIBIT 10(a) STOCK AGREEMENT THIS STOCK AGREEMENT (the "Agreement") is made and executed this 17th day of March, 1997, by and among DELTA AIR LINES, INC., a Delaware corporation ("Delta"), DELTA AIR LINES HOLDINGS, INC., a Delaware corporation ("Delta Holdings"), ATLANTIC SOUTHEAST AIRLINES, INC., a Georgia corporation ("Airlines"), and ASA HOLDINGS, INC., a Georgia corporation ("ASA Holdings"). WHEREAS, Delta previously acquired capital stock in Airlines pursuant to that certain Stock Purchase Agreement dated May 28, 1986, between Delta and Airlines (the "Purchase Agreement"); WHEREAS, Delta has previously assigned all its right, title and interest in and to any and all capital stock owned by Delta in Airlines to Delta Holdings, whereupon Delta ceased to be a shareholder of record of Airlines and currently is not a shareholder of record of any capital stock in or to Airlines or ASA Holdings; and WHEREAS, effective 11:59 p.m. E.S.T. on December 31, 1996, Airlines undertook a reorganization transaction (the "Subject Transaction") pursuant to which Airlines has become a wholly owned subsidiary of ASA Holdings; and WHEREAS, under the Subject Transaction, all capital stock owned of record by Delta Holdings in Airlines was automatically converted to the same number of shares of capital stock in ASA Holdings, whereupon Delta Holdings ceased to own of record any capital stock in Airlines; and WHEREAS, the parties desire to (i) set forth herein the applicable terms, conditions and other provisions originally contained under the Purchase Agreement which shall apply as between Delta and Delta Holdings, as applicable, on the one hand, and ASA Holdings, on the other, with respect to all capital stock now owned or hereafter acquired by Delta Holdings in ASA Holdings (the "Subject Stock") and (ii) except as noted in subclause (i), terminate in its entirety the Purchase Agreement. NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, the parties hereto agree as follows: I. RECITALS. All parties acknowledge and agree that all of the foregoing recitals are true and correct. II. TERMINATION. In accordance with Section 7.8 of the Purchase Agreement, the parties acknowledge and agree that the Purchase Agreement is hereby amended in its entirety as hereinafter provided. 2 III. COVENANTS. 3.1 ASA Holdings' Board of Directors. ASA Holdings agrees that, if Delta or Delta Holdings shall so request, (i) as promptly as practicable, ASA Holdings will take such action as may be necessary to cause the election to ASA Holdings' Board of Directors of two designees selected by Delta or Delta Holdings and reasonably acceptable to ASA Holdings and (ii) for as long as Delta or Delta Holdings owns at least 10% of the outstanding common stock of ASA Holdings, ASA Holdings will include at least two designees of Delta or Delta Holdings reasonably acceptable to ASA Holdings on the slate of nominees for election as directors nominated by the ASA Holdings' Board of Directors and will use its reasonable best efforts to assure that such individuals are elected to ASA Holdings' Board of Directors (including, without limitation, by soliciting proxies in favor of their election). 3.2 Equity Accounting. ASA Holdings will furnish to Delta and Delta Holdings all information that is required by generally accepted accounting principles to enable Delta and Delta Holdings to account for its investment in ASA Holdings pursuant to the equity method if Delta or Delta Holdings elects or is required by generally accepted accounting principles to do so. To the extent reasonably requested by Delta or Delta Holdings, ASA Holdings will, and will cause its employees, independent public accountants and other representatives to, provide information regarding ASA Holdings to, and otherwise cooperate with, Delta and Delta Holdings so as to enable Delta and Delta Holdings to prepare financial statements in accordance with generally accepted accounting principles and to comply with its reporting requirements and other disclosure obligations under applicable federal securities laws and regulations. 3.3 Registration Rights. (a) Demand Rights. If, at any time Delta Holdings shall desire to sell any or all of the Subject Stock, or any "New Securities" (as defined in Section 3.4 hereof) acquired by Delta Holdings pursuant to Section 3.4 hereof (for purposes of this Section 3.3, the "Subject Stock" shall include such New Securities), under circumstances requiring registration under the Securities Act of 1933, as amended (the "Securities Act"), and shall so advise ASA Holdings by written notice (which notice shall specify the number of shares of the Subject Stock proposed to be sold, describe the method of proposed sale and contain an undertaking by Delta Holdings to provide all such information and to take all such action as may be required in order to permit ASA Holdings to comply with all applicable requirements of the Securities and Exchange Commission (the "SEC") and to obtain acceleration of the effective date of such registration statement), ASA Holdings shall promptly prepare and file a registration statement with the SEC relating to such Subject Stock designated in such notice and use its reasonable best efforts to cause such registration statement to become effective and remain effective for a period of not less than six months (or such lesser period as the parties may agree); provided, however, that ASA Holdings shall not be obligated to effect more than three such registrations. If the plan of distribution specified by Delta Holdings with respect to any such registration involves the selection of a managing underwriter or underwriters, such managing underwriter or underwriters shall be chosen by Delta Holdings, subject to the reasonable approval of 2 3 ASA Holdings. In connection with any such registration, ASA Holdings will make such filings, and will use its reasonable best efforts to cause such filings to become effective, so that the Subject Stock proposed to be sold shall be registered or qualified for sale under the securities or Blue Sky laws of such jurisdictions as shall be reasonably appropriate for the distribution of the Subject Stock covered by the registration statement; provided, however, that ASA Holdings shall not be required to register as a broker or dealer in any jurisdiction where it is not then so registered or to qualify to do business as a foreign corporation in any jurisdiction where it is not then so qualified or to file any general consent to service of process. (b) Piggyback Rights. If, at any time ASA Holdings shall propose the registration under the Securities Act of an underwritten offering of shares of capital stock, ASA Holdings shall give written notice to Delta and Delta Holdings of such proposed registration and will use its reasonable best efforts to include in such registration such number of shares of the Subject Stock as Delta Holdings shall request in writing within 15 days after receipt of ASA Holdings' notice and to cause such Subject Stock to be offered to the public on the same terms (including the method of distribution and, in the case of shares of the same class of stock, the offering price) applicable to the other shares of capital stock to be included in such offering; provided, however, that if the managing underwriter or underwriters of such offering shall determine in good faith and so advise ASA Holdings in writing that the number of shares of capital stock proposed to be sold in such offering (including the shares of the Subject Stock proposed to be sold by Delta Holdings) exceeds the number which can be sold in such offering, ASA Holdings shall be required to include in such offering only such number of shares of the Subject Stock, which, when added to the number of shares of capital stock proposed to be sold by ASA Holdings in such offering, can, in the good faith judgment of the managing underwriter or underwriters, be sold without adversely affecting the success of the offering (it being understood, however, that if other holders of capital stock of ASA Holdings shall have requested the inclusion of their shares in such registration, the number of shares held by Delta Holdings and the number of shares of capital stock of ASA Holdings held by such other holders to be included in such offering shall be determined on a pro-rata basis). (c) Expenses. ASA Holdings shall pay all fees and expenses in connection with any registration effected pursuant to this Section 3.3, except for underwriting discounts and commissions to brokers or dealers attributable to the Subject Stock being sold by Delta Holdings and the fees and disbursements of any counsel and accountants retained by Delta Holdings in connection with such registration. (d) Indemnification. In the case of any registration effected pursuant to this Section 3.3, ASA Holdings and Delta Holdings will each provide the other and any underwriter retained in connection therewith with customary indemnities. 3.4 Preemptive Rights. (a) For so long as Delta Holdings owns at least 10% of the outstanding common stock of ASA Holdings, if ASA Holdings proposes to issue any shares of any class of its voting securities 3 4 (such securities, together with any voting securities which Delta Holdings has the right to acquire under this Section 3.4(a) upon the exercise of any employee stock options or upon the issuance of any voting securities for consideration other than cash, hereinafter collectively referred to as the "New Securities"), ASA Holdings shall promptly advise Delta and Delta Holdings in writing of the terms on which the New Securities are to be issued. Delta Holdings shall have the right, which may be exercised at any time within 30 days following such notice, to acquire on the same terms and conditions as such proposed issuance (or, in the case of the issuance of any New Securities upon the exercise of any employee stock options, at the market price of such securities on the date of exercise, or in the case of the issuance of any New Securities for consideration other than cash, at a cash price equal to the fair market value of such non-cash consideration on the date that ASA Holdings first agrees to issue such New Securities) its pro rata share of the New Securities. Delta Holdings' pro rata share of the New Securities shall be determined by multiplying the total number of New Securities by a fraction, the numerator of which is the total number of votes represented by the voting securities then owned by Delta Holdings and the denominator of which is the total number of votes represented by all of the then outstanding voting securities. (b) Notwithstanding the foregoing, ASA Holdings need not notify Delta and Delta Holdings of the issuance of New Securities upon the exercise of employee stock options or of any other issuances of New Securities which in the aggregate represent less than 1% of the total number of votes represented by all then outstanding voting securities, but shall notify Delta and Delta Holdings within 15 days after the end of each fiscal quarter of ASA Holdings (or more frequently if requested by Delta Holdings) as to the number of shares of New Securities so issued during such quarter. Delta Holdings' right under this Section 3.4 to purchase its pro rata share of New Securities may, at the election of Delta Holdings, be exercised at any time within 30 days following the notice given pursuant to this Section 3.4(b) or such right to purchase New Securities after a notice given pursuant to this Section 3.4(b) shall cumulate and may be carried forward and exercised by Delta Holdings at the time of and together with the subsequent purchase of additional New Securities by Delta Holdings pursuant to the next notice received by Delta Holdings pursuant to Subsection (a) of this Section 3.4. (c) For purposes of this Section 3.4, (i) the term "voting securities" shall mean any securities of ASA Holdings entitled to vote generally in the election of directors; (ii) the term "current market price" of any voting securities shall mean, on the day in question, the last reported sale price (regular way) on the principal national securities exchange on which such securities are listed or admitted to trading, or if they are not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices of such securities as reported through the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or any comparable system, or if price quotations for such securities are not reported through NASDAQ or a comparable system, the average of the closing bid and asked prices of such securities as furnished by two members of the National Association of Securities Dealers, selected from time to time by ASA Holdings for that purpose; and (iii) the term "fair market value" of any non-cash consideration on the date in question shall mean the fair market value of such consideration as mutually agreed by ASA Holdings and Delta Holdings, or if such parties are unable to agree, as determined by an investment 4 5 banking firm mutually agreeable to both parties. In the event that the parties are unable to agree on an investment banking firm, then each party shall name its own investment banking firm and such firms shall select a third investment banking firm to determine the "fair market value" of any non-cash consideration. The fees and expenses of such third investment banking firm shall be borne equally by ASA Holdings and Delta Holdings. 3.5 Right of First Refusal. If at a time when Delta Holdings owns at least 5% of the outstanding common stock of ASA Holdings, Delta Holdings proposes to sell any voting securities (as defined in Section 3.4(c)) then owned by it either (i) to five or fewer persons pursuant to a registration statement prepared as a result of Delta Holdings' exercise of its demand rights under Section 3.3(a), or (ii) in a private sale without registration under the Securities Act, Delta Holdings shall promptly advise ASA Holdings in writing of the price and terms on which such voting securities are to be sold and, if known, the intended purchaser of such voting securities. ASA Holdings shall have the right, which may be exercised at any time within 30 days following such notice, to acquire all, but not less than all, of the voting securities proposed to be sold at the same price and on the same terms as such proposed sale; provided, however, that if such price is payable in whole or in part in consideration other than cash, the price payable by ASA Holdings shall be payable in cash and shall be equal to the fair market value of such non-cash consideration on the date Delta Holdings first agrees to sell such voting securities, determined as provided in Section 3.4(c). If ASA Holdings does not exercise its right to purchase the voting securities proposed to be sold, Delta Holdings shall be free to sell such voting securities at the same price and on the same terms contained in Delta Holdings' written notice to ASA Holdings within the one hundred twenty (120) day period following the expiration of ASA Holdings' thirty (30) day exercise period. 3.6 Covenant to Satisfy Conditions. Each of the parties hereto will use their respective reasonable best efforts, and cooperate with the other, to ensure that the conditions set forth in Article III hereof are satisfied as promptly as practicable. IV. MISCELLANEOUS. 4.1 Brokers. ASA Holdings and Delta Holdings each represent and warrant to the other that neither has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby. Delta Holdings and ASA Holdings each agrees to indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any such fees or commissions asserted by any person on the basis of any act or statement alleged to have been made by such party. 4.2 Expenses. Each party shall pay its own expenses incurred in connection with this Agreement and the transactions contemplated hereby. 4.3 Survival of Representations. All representations, warranties and agreements made by ASA Holdings and Delta Holdings in this Agreement shall survive the execution of this Agreement 5 6 and the consummation of any transaction contemplated herein and any investigation at any time made by or on behalf of any party hereto. 4.4 Adjustments. In the event of any change in the common stock of ASA Holdings by reason of stock dividend, split-up, recapitalization, combination, exchange of shares or the like, the number and kind of shares subject to this Agreement shall be appropriately adjusted. 4.5 Legend. The certificates representing the Subject Stock shall bear a legend in substantially the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR (ii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT, AND IN COMPLIANCE WITH THE APPLICABLE LAWS OF ANY STATE OR OTHER JURISDICTION. THE SALE, TRANSFER OR OTHER DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS ALSO SUBJECT TO RESTRICTIONS CONTAINED IN A STOCK AGREEMENT DATED MARCH 17, 1997, AMONG DELTA AIR LINES, INC., DELTA AIR LINES HOLDINGS, INC., ATLANTIC SOUTHEAST AIRLINES, INC., AND ASA HOLDINGS, INC., A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE SECRETARY OF ASA HOLDINGS, INC. 4.6 Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to its subject matter. There are no restrictions, agreements, promises, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein. This Agreement supersedes all prior agreements and understandings between all or any number of the parties with respect to its subject matter. 4.7 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 4.8 Amendment; Waiver. This Agreement may be amended only by a written instrument duly executed by each of ASA Holdings, Airlines, Delta, and Delta Holdings. To the extent permitted by law, any condition to a party's obligations hereunder may be waived in writing by such party. 4.9 Parties in Interest. This Agreement will be binding upon, inure to the benefit of and be enforceable by ASA Holdings, Airlines, Delta and Delta Holdings and their respective successors and assigns. This Agreement may not be assigned by the parties hereto, except that Delta Holdings 6 7 may assign its rights hereunder to Delta or to any directly or indirectly wholly owned subsidiary or parent of Delta or Delta Holdings; provided, however, that no such assignment shall relieve Delta Holdings of any of its obligations hereunder. 4.10 Specific Performance. ASA Holdings acknowledges and agrees that Delta Holdings would not have an adequate remedy at law and would be irreparably harmed in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that Delta Holdings shall be entitled to injunctive relief to prevent breaches of this Agreement and to specifically enforce the terms and provisions hereof, in addition to any other remedy to which it may be entitled, at law or in equity. 4.11 Notices. All notices, claims, certificates, requests, demands and other communications hereunder ("notices") will be given in writing and will be deemed to have been duly given when hand-delivered or, if mailed, three days after being mailed (registered or certified mail, postage prepaid, return receipt requested) addressed as follows: (a) If to Delta Holdings to: Delta Air Lines Holdings, Inc. Suite 1305 1105 North Market Street Wilmington, Delaware 19801 Attention: Secretary (b) If to Delta to: Delta Air Lines, Inc. Hartsfield Atlanta International Airport 1030 Delta Boulevard Atlanta, Georgia 30320 Attention: Chief Executive Officer copy to: Senior Vice President-General Counsel & Secretary Delta Air Lines, Inc. Hartsfield Atlanta International Airport 1030 Delta Boulevard Atlanta, Georgia 30320 7 8 (c) If to Airlines or ASA Holdings: ASA Holdings, Inc. 100 Hartsfield Centre Parkway, Suite 800 Atlanta, Georgia 30354 Attn: John W. Beiser, President copy to: Altman, Kritzer & Levick, P.C. 6400 Powers Ferry Road Suite 224 Atlanta, Georgia 30339 Attn: Craig H. Kritzer, Esq. or, in either case, such other address as the person to whom notice is to be given may have previously furnished to the others in the manner set forth above. 4.12 Governing Law. This Agreement will be governed by and construed in accordance with the internal laws of the State of Georgia, without regard to the principles of conflicts of law. 4.13 Counterparts. This Agreement may be executed simultaneously in counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument. (THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK) 8 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. DELTA AIR LINES, INC. By: /s/ Thomas J. Roeck, Jr. ----------------------------------------- Title: Senior Vice President-Finance and -------------------------------------- Chief Financial Officer ----------------------- DELTA AIR LINES HOLDINGS, INC. By: /s/ [illegible] ----------------------------------------- Title: Treasurer -------------------------------------- ATLANTIC SOUTHEAST AIRLINES, INC. By: /s/ John W. Beiser ----------------------------------------- Title: President -------------------------------------- ASA HOLDINGS, INC. By: /s/ John W. Beiser ----------------------------------------- Title: President -------------------------------------- 9 EX-10.H 3 CREDIT AGREEMENT DATED 6/15/90 1 EXHIBIT 10(h) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- CREDIT AGREEMENT dated as of June 15, 1990 between ATLANTIC SOUTHEAST AIRLINES, INC., Borrower, and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Lender. Three Embraer Model EMB-120 Brasilia Aircraft - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS; REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.02 Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 1.03 Section and Exhibit References, etc. . . . . . . . . . . . . . . . . . . 6 ARTICLE II PURCHASE OF NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.01 Purchase of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.02 Procedure for Purchase of Notes . . . . . . . . . . . . . . . . . . . . . 6 Section 2.03 Commitment Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE III SECURITY FOR BORROWER'S OBLIGATIONS . . . . . . . . . . . . . . . . . . . 7 Section 3.01 Security Interest in Collateral . . . . . . . . . . . . . . . . . . . . . 7 Section 3.02 Set-Off Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE IV PAYMENTS UNDER THE NOTES AND OTHER AMOUNTS PAYABLE BY BORROWER . . . . . . . . . . . . . . . . . . . . . . . 7 Section 4.01 How Payments are Made . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 4.02 Right to Prepay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.03 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.04 Mandatory Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.05 Amount of Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.06 Interest on Past Due Amounts . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.07 Reduction In Net Interest Payable by Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE V BORROWER'S REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 9 Section 5.01 Corporate Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 5.02 Corporate Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 5.03 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.04 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.05 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.06 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
i 3 Section 5.07 Status as United States Citizen and Air Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.08 Location of Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5.09 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5.10 Condition of Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5.11 Absence of ERISA Liability . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5.12 Delta Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5.13 Subsidiaries; Stock Ownership . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.14 Investment Company Status . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE VI AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.01 financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 6.02 Inspection of Collateral and Records . . . . . . . . . . . . . . . . . . 13 Section 6.03 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.04 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6.05 Citizenship and Air Carrier Status . . . . . . . . . . . . . . . . . . . 15 Section 6.06 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.07 Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.08 Performance of Delta Agreement . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VII CONDITIONS PRECEDENT TO THE PURCHASE OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.01 Conditions Precedent to the Purchase of the Initial Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 7.02 Conditions Precedent to the Purchase of All Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VIII EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 19 Section 8.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 8.02 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE IX BORROWER'S INDEMNITIES . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 9.01 General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 9.02 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE X YIELD PROTECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 10.01 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 10.02 Breakage Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 11.01 No Waivers; Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . 26
ii 4 Section 11.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 11.03 Transaction Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 11.04 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 11.05 Succesors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 11.06 Lender's Representations and Warranites . . . . . . . . . . . . . . . . . 27 Section 11.07 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 11.08 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 11.09 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 11.10 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 11.11 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 11.12 Finex Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Annex A Procedures for Purchasing Aircraft and Notes; Documentation Exhibit A Form of Note Exhibit B Form of Finex Agreement Exhibit C Form of Mortgage Exhibit D Form of Purchase Agreement Assignment Exhibit E Form of Consent Exhibit F Form of opinion of Borrower's counsel Exhibit G Form of opinion of Crowe & Dunlevy (Aircraft) Exhibit H Form of opinion of counsel to Embraer Exhibit I Form of Guarantee
iii 5 CREDIT AGREEMENT This Credit Agreement is entered into as of June 15, 1990 by and between Atlantic Southeast Airlines, Inc. ("Borrower"), a Georgia corporation, and Bank of America National Trust and Savings Association ("Lender") , a national banking association. Borrower and Lender agree as follows: ARTICLE I DEFINITIONS; REFERENCES SECTION 1.01 -- Definitions. The following terms, when capitalized as below, have the following meanings: "Act": the Federal Aviation Act of 1958, as amended, or its successor. "Agreement": this Credit Agreement. "Aircraft": three Embraer EMB-120 Brasilia aircraft to be delivered under the Purchase Agreement and in each case designated by Borrower (by notice to Lender at least three Business Days before the Purchase Date therefor) as an "Aircraft" to be financed under this Agreement. "Basic Documents": this Agreement, the Purchase Agreement, the Finex Agreement (s), the Guarantee, and the Mortgage; and each Note, Purchase Agreement Assignment, Consent, and Mortgage Supplement as executed and delivered. "Borrower Interest Rate" for a Note: a fixed interest rate equal to the Finex LIBO Rate for its Purchase Date, minus 2% per annum (computed on the basis of a year of 360 days), based on actual days elapsed, or such other interest rate as Borrower is actually required to pay on such Note under the Finex Program. "Borrower's Rebate": defined in Section 4.07. "Business Day": any day, other than a Saturday or Sunday, on which commercial banks are open for business in New York, New York, and London, England, and Lender is open for business in Los Angeles, California, and if such day is a Purchase Date or Interest Payment Date or relates to a notice by Borrower with respect to any Purchase Date, which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Collateral": the "Collateral" under the Mortgage. 6 "Commitment": Lender's commitment to purchase the Notes for an aggregate amount of $17,500,000; Borrower may reduce such amount upon 30 days prior written notice to Lender. "Commitment Fee": the fee required to be paid to Lender pursuant to section 2.03. "Commitment Period": the period from the date of execution of this Agreement to and including the earliest of (w) December 31, 1990, (x) the date upon which the third Aircraft is delivered to and accepted by Borrower pursuant to the Purchase Agreement, (y) the date on which the remaining Commitment is terminated pursuant to section 8.02, and (z) a date set by Borrower pursuant to a notice sent to Lender at least 30 days prior to such date. "Consent": a Consent and Agreement, substantially in the form of Exhibit E, relating to a Purchase Agreement Assignment and dated the same date as that Purchase Agreement Assignment. "Default": any event or condition that would become an Event of Default upon the giving of notice or lapse of time or both, or any Event of Default. "Delta Agreement": that certain agreement between Delta Air Lines, Inc. and Borrower dated June 1, 1986 and relating to joint marketing or code sharing for interconnecting flights. "Dollars" and "$": United States dollars. "Downpayment": 15% of Equipment Cost for the first $6,862,745.00 of Equipment Cost, and 100% of Equipment Cost in excess of $6,862,745.00, for an Equipment Portion, minus any amounts that Borrower paid to Vendor before the relevant Purchase Date (including deposits applied to such Equipment Portion), pursuant to the Purchase Agreement, relating to such Equipment Portion. "Embraer": Embraer-Empresa Brasileira de Aeronautica S.A., a Brazilian corporation, and its successors and assigns. "Equipment Cost": the purchase price for an Equipment Portion, as set forth (and as adjusted pursuant to) the Purchase Agreement. "Equipment Portion": an Aircraft and the Spare Parts purchased with that Aircraft. "ERISA": defined in section 5.11. "Event of Default": defined in section 8.01. "Event of Loss": defined in section 1.01 of the Mortgage. "FAA": the Federal Aviation Administration of the United States, or any instrumentality of the United States succeeding to its function. 2 7 "Financed Amount": the face amount of the Note for an Aircraft being purchased on a Purchase Date. "Finex Agreement": an agreement by that name, substantially in the form of Exhibit B. "Finex Bank": Multi-Banco Internacional de Investimentos S.A. (or any other Person serving as a Finex bank under a Finex Agreement), in its capacity as Finex bank under the Finex Agreement, and its successors in such capacity. "Finex Interest Payments": the Finex Interest Payments described in section 3.01 of the Finex Agreement. "Finex LIBOR" or "Finex LIBO Rate" for any Purchase Date or Interest Period: (x) the interest rate for such Purchase Date or Interest Period, published by Banco Central do Brasil two Business Days before that Purchase Date or the beginning of that Interest Period, respectively, as the 180-day interest rate applicable to transactions under the Finex Program, or (y) when applicable, the Alternate LIBO Rate for such Interest Period established pursuant to section 3.02 of the Finex Agreement. "Finex Program": the export support program (Fundo de Financiamento a Exportaceo) of the Federative Republic of Brazil as established by Resolution No. 509 of January 24, 1979 of Banco Central do Brasil, and in Circular Cacex/Finex No. 10 of the Carteira de Comercio Exterior (Cacex) of Banco do Brasil S.A., dated September 21, 1982, as from time to time supplemented or amended. "GAAP": generally accepted accounting principles as in effect in the United States and applied on a basis consistent with that used in the preparation of the financial statements referred to in section 5.05, except for changes therein with which Borrower's independent public accountants concur that are disclosed in the notes to the relevant financial statements. "Guarantee": the document by that name, executed by ASA Investments, Inc., in substantially the form of Exhibit I. "herein", "hereof", "hereunder", etc.: in, of, or under, etc. this Agreement (and not merely in, of, under, etc. the section or provision where that reference appears). "including": containing, embracing, or involving the enumerated item(s), but not necessarily limited to such item(s). "Indemnitee": Lender, or any agent (other than Finex Bank), employee, director, successor, or permitted assign of Lender. "Interest Payment Date" for a Note: each "180-day anniversary" of the Purchase Date for that Note; except that, for purposes of payment and of determining the beginning and end of each Interest Period (but not for the purpose of determining the following Interest Payment Date), any Interest Payment Date that 3 8 falls on a day which is not a Business Day shall instead occur on the following Business Day. "Interest Period" for a Note: each period beginning on the day after an Interest Payment Date for that Note (or, in the case of the first Interest Period for that Note, beginning on its Purchase Date) and ending on the following Interest Payment Date for that Note. "Lien": any mortgage, pledge, assignment, encumbrance, lien (statutory or other), or other security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, or any lease in the nature thereof). "Mortgage": the Security Agreement and Chattel Mortgage between Borrower and Lender, substantially in the form of Exhibit C. "Mortgage Supplement": defined in section 3.01. "Note": Borrower's promissory note, in the form of Exhibit A, issued in connection with a designated Aircraft, or a note issued in exchange or replacement for such a note. "1989 10-K": Borrower's annual report on Form 10-K for the year ended December 31, 1989. "1990 10-Q": Borrower's quarterly report on Form 10-Q for the quarter ended March 31, 1990. "Officer's Certificate": a certificate signed in the name of Borrower (or, with respect to section 6.04(c), of the Successor) by the chairman of the board, the president, a vice president, or the treasurer of Borrower (or the Successor). "or": at least one, but not necessarily only one, of the alternatives enumerated. "Permitted Lessee": defined in the Mortgage. "Permitted Lien": defined in the Mortgage. "Person": any individual, corporation, partnership, joint venture, or other legal or governmental entity. "Purchase Agreement": Purchase Agreement No. 162-COV/88 (including all attachments, exhibits, and letter agreements thereto) dated November 21, 1988, between Vendor and Borrower. "Purchase Agreement Assignment": a document by that name, substantially in the form of Exhibit D, executed and delivered on a Purchase Date with respect to the Aircraft then being delivered. "Purchase Date": a date on which Borrower purchases an Aircraft and, simultaneously, Lender purchases the related Note. "Reference Rate": the rate of interest publicly announced from time to time by Lender in San Francisco, California, as its 4 9 reference rate. It is a rate that Lender sets based upon various factors, including Lender's costs and desired return, general economic conditions, and other factors, and is used as a reference point for pricing some loans. Interest is payable for the actual number of days elapsed computed on the basis of a 360-day year on the unpaid principal amount. Lender may price loans at, above, or below its reference rate. Any change in the Reference Rate shall take effect on the day specified in the public announcement of such change. "Regulatory Change": any change after the date of this Agreement in federal, state, or foreign law or regulations or the adoption or making after such date of any interpretations or directives applying to a class of banks including Lender of or under any federal, state, or foreign law or mandatory regulations by any court or governmental or monetary authority charged with the interpretation or administration thereof. "SEC Filings": the 1989 10-K and the 1990 10-Q. "Spare Parts": the appliances, spare parts, and other items of equipment purchased with Aircraft under the Purchase Agreement. "Successor": defined in section 6.04(a). "Taxes": defined in the last sentence of section 9.02(a). "Taxing Authorities": defined in the first sentence of section 9.02(a). "Vendor": Embraer. SECTION 1.02 -- Use of Defined Terms. Any defined terms used in the plural preceded by "the" encompasses all members of the relevant class. Any defined term used in the singular preceded by "any" indicates any number of the members of the relevant class. Any agreement or instrument referred to in section 1.01 means such agreement or instrument as from time to time supplemented and amended. SECTION 1.03 -- Section and Exhibit References, etc. References to articles, sections, exhibits, and the like refer to those in or attached to this Agreement unless otherwise specified. ARTICLE II PURCHASE OF NOTES; PAYMENTS SECTION 2.01 -- Purchase of Notes. Subject to the satisfaction of the conditions precedent set forth in article VII, and on the terms and conditions set forth in this article II, on the Purchase Date for each Aircraft, Lender shall purchase the related Note from Finex Bank. The Financed Amount for each 5 10 Aircraft shall be 85% of the Equipment Cost for the related Equipment Portion, so that such total Equipment Cost shall be paid 15% by Borrower and 85% by the related Note, provided, that the Financed Amount for an Aircraft shall not exceed 85% of $6,862,745.00, and Borrower shall pay 100% of Equipment Cost in excess of $6,862,745.00 for any Equipment Portion. Each Note shall be purchased for its face amount. Lender's Commitment to purchase the Notes pursuant to this Agreement shall expire at 12:00 noon, New York City time, on the last day of the Commitment Period. SECTION 2.02 -- Procedure for Purchase of Notes. The procedure to be followed in the purchase of Notes is described in Annex A. At Lender's offices at 555 South Flower Street, Los Angeles, California 90071 (or such other location as the parties hereto agree upon), not later than 12:00 noon (New York City time) on the appropriate Purchase Date, upon fulfillment of the conditions set forth in article VII and compliance with the procedures set forth in Annex A, Lender will purchase the related Note from Finex Bank (who will have purchased that Note simultaneously from Vendor), with general corporate funds, in each case for a purchase price equal to its face amount (as set forth in section 2.01). SECTION 2.03 -- Commitment Fee. In partial consideration of the Lender's agreement to purchase the Notes, Borrower shall pay to Lender a Commitment Fee ("Commitment Fee") for the Commitment Period, payable in arrears son the first day of each quarter or partial quarter (for the prior quarter or partial quarter) after the execution and delivery of this Agreement during the Commitment Period, with a final payment on the last day of the Commitment Period, and computed at a rate per annum (calculated on the basis of a 360-day year and actual days elapsed) of 0.25% of the average daily unused portion of Lender's Commitment. The term "quarter" as used in this section shall mean the relevant calendar quarter ending on one of the following dates: March 31, June 30, September 30, or December 31. ARTICLE III SECURITY FOR BORROWER'S OBLIGATIONS SECTION 3.01 -- Security Interest in Collateral. To secure Borrower's obligations to Lender under each Note and the other Basic Documents to which it is or becomes a party, Borrower shall execute and deliver to Lender, on each Purchase Date, a supplement to the Mortgage (a "Mortgage Supplement"), substantially in the form of Schedule A to the Mortgage, granting to Lender a perfected purchase money security interest in the Aircraft being purchased from Vendor on such Purchase Date. SECTION 3.02 -- Set-Off Rights. If Borrower becomes insolvent, or any Event of Default occurs, any indebtedness that Lender then owes to Borrower and any other property of Borrower that Lender then holds may be offset and applied toward the payment of any obligation of Borrower to Lender under the Basic Documents, whether or not any such other obligation is then due. 6 11 ARTICLE IV PAYMENTS UNDER THE NOTES AND OTHER AMOUNTS PAYABLE BY BORROWER SECTION 4.01 -- How Payments Are Made. Borrower shall make its payments and prepayments of principal and interest due on the Notes, all amounts due as Commitment Fees hereunder, and all other amounts payable by Borrower to Lender under the Basic Documents, to Lender (ABA # 121-000-358 S.F.) at 1850 Gateway Blvd., Concord, California 94520, Attention: Dana Henderson for credit to PSO Account Administration #5693, Reference: Atlantic Southeast Airlines Note No. 1, 2, or 3 [as appropriate]or at such other 7 12 place as Lender from time to time notifies Borrower), in immediately available funds and in Dollars, no later than 10:00 a.m. (San Francisco time) on the date when due. Any payment made by Borrower to Lender after 10:00 a.m. (San Francisco time) on any day shall be deemed to have been made on the following Business Day. If any payment due under the Basic Documents come due on a day which is not a Business Day, such payment shall instead be made on the following Business Day, and interest or Commitment Fees, as the case may be, shall accrue at the applicable rate to the day of payment. SECTION 4.02 -- Right to Prepay. Unless a Default exists, Borrower shall have the right to prepay in full the outstanding principal amount of the Note issued with respect to any designated Aircraft, without premium or penalty. Any prepayment under this section 4.02 of the Note issued with respect to a designated Aircraft shall be made only on an Interest Payment Date for such Note, and Borrower shall give to Lender at least 60 days' prior written notice (which notice shall be irrevocable) or such prepayment. Upon any prepayment of any Note under this section 4.02, Borrower shall pay all accrued and unpaid interest on the principal of such Note to the date of prepayment, together with all other amounts payable under section 10.02 with respect to such prepayment. SECTION 4.03 -- Mandatory Prepayments. Following the occurrence of an Event of Loss with respect to any Aircraft, Borrower shall prepay the Note executed in connection with that Aircraft, in accordance with section 7.01(b) of the Mortgage, and shall pay all other amounts payable under section 10.02 with respect to such prepayment. Upon acceleration of the Notes pursuant to section 8.02, Borrower shall prepay such Notes, and shall pay all other amounts payable under section 10.02 with respect to such prepayment. SECTION 4.04 -- Mandatory Purchase. Upon the occurrence of a Prepayment Event, Lender shall have the right to require Borrower to purchase or cause the purchase of the Note for its then-outstanding principal amount, plus all accrued but unpaid interest on the Note to the date of such purchase. The payment described in the preceding sentence shall be due 10 days after Lender notifies Borrower that a Prepayment Event has occurred (if that Prepayment Event has not been cured by then), and shall be made in the manner prescribed by section 4.01. A "Prepayment Event" shall occur if (a) Borrower fails to keep an Aircraft registered with the FAA, or Lender fails or ceases to have a perfected first-priority interest in an Aircraft, or a Lien (other than a Permitted Lien) on an Aircraft exists; or (b) Borrower fails to obtain an FAA standard airworthiness certificate for an Aircraft within four weeks following the Purchase Date for such Aircraft. SECTION 4.05 -- Amount of Prepayment. A Note shall be deemed satisfied in full upon the prepayment of all principal of such Note, the payment of the interest due on or with respect to such Note on such prepayment date, and the payment of all past-due interest on or with respect to such Note. 8 13 SECTION 4.06 -- Interest on Past Due Amounts. Any amounts past due (by acceleration or otherwise) and at any time outstanding under any Note or from Borrower under any other Basic Document shall (to the extent permitted by law) bear interest, payable on demand, from the due date until payment in full, at a rate equal to 2% per annum above the Reference Rate. SECTION 4.07 -- Reduction in Net Interest Payable by Borrower. In consideration of this transaction's being classified as a "supplier's credit" by Cacex and of the total benefits receivable by Lender and its affiliates under the Finex Program as a result of Borrower's purchase and financing of the Aircraft under the Basic Documents, Lender agrees that the amount of interest that Borrower owes under each Note shall be automatically reduced by 0.65% per annum of the principal from time to time outstanding under the terms of that Note, and that Borrower shall not be responsible for or otherwise obligated to pay any interest under that Note which is attributable to that reduction for purposes of this Agreement or any of the other Basic Documents. For example, if a Note carries a stated interest rate of 6.5% per annum, Borrower actually shall pay interest on that Note based on a 5.85% per annum rate for timely payments. All per annum rates in this section are based on a 360-day year and actual days elapsed. ARTICLE V BORROWER'S REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: SECTION 5.01 -- Corporate Standing. Borrower is a duly organized corporation existing in good standing under the laws of Georgia, has the corporate power and legal authority to own or lease its properties and to carry on its business as now conducted and as now proposed to be conducted, and is duly qualified to do business in all jurisdictions wherein such qualification is necessary (except in any jurisdictions in which the failure to qualify would have no materially adverse effect on its business or on its ability to carry out its obligations under the Basic Documents to which it is (or is to become) a party). SECTION 5.02 -- Corporate Powers. Borrower's execution, delivery, and performance of the Basic Documents to which it is (or 9 14 is to become) a party are within Borrower's corporate powers; and the Basic Documents to which it is (or is to become) a party have been duly authorized by all necessary corporate action on Borrower's part, and do not contravene, result in a breach of, or require any consent under any law, judgment, decree, order, or contractual restriction binding on Borrower or any agreement or instrument to which Borrower is a party or to which it or any of its property is subject. SECTION 5.03 -- Binding Effect. The Basic Documents to which Borrower is (or is to become) a party are (or will be when executed and delivered) legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their terms, except as may be limited by bankruptcy, insolvency, or other similar laws affecting enforcement of creditors' rights generally. SECTION 5.04 -- Litigation. Except as disclosed in the SEC Filings, there are no pending or (to the best of Borrower's knowledge after due inquiry) threatened actions or proceedings before any court or administrative agency which may be expected to have a materially adverse effect on Borrower's business or financial condition or which seek to question or set aside any of the transactions herein contemplated. SECTION 5.05 -- Financial Statements. The audited balance sheet as of December 31, 1989 and unaudited balance sheet as of March 31, 1990 for Borrower and its consolidated subsidiaries, and the related results of operations for the year and quarter then ended, have been prepared in accordance with GAAP and correctly present Borrower's financial condition as of such dates and results of operations for such periods, and since March 31, 1990, there has been no materially adverse change in Borrower's business, assets, operations, or condition (financial or otherwise). SECTION 5.06 -- Taxes. Borrower has filed all tax returns which it is or was required to file, and has paid all taxes shown to be due and payable on those returns or on any assessment received by it, except such taxes of Borrower, if any, as are being contested diligently in good faith, and by appropriate proceedings, and as to which adequate reserves have been provided in accordance with GAAP. SECTION 5.07 -- Status as United States Citizen and Air Carrier. Borrower is a "citizen of the United States" as that term is used in section 101(16) of the Act, and is a duly certified "air carrier" within the meaning of the Act. SECTION 5.08 -- Location of Offices. Borrower's chief executive office and principal place of business, and the place where Borrower keeps its financial records concerning the Collateral, is located at its address referred to in section 11.02. SECTION 5.09 -- Governmental Consents. Neither the execution, delivery, and performance of any of the Basic Documents (other than the Finex Agreement), nor the consummation of any of the transactions contemplated thereby by Borrower or Vendor (including the importation of the Aircraft into the United States from Brazil), requires the consent or approval of, giving of notice 10 15 to, registration with, or taking of any other action in respect of any federal, state, or foreign governmental authority or agency (including any judicial body) except for (a) the filing and recording of the Mortgage, and of the FAA bill of sale, the FAA application for registration, and the Mortgage Supplement for each Aircraft with the FAA; (b) the filing and recording of UCC-1 financing statements for each Aircraft with the Superior Court Clerk Offices in Bibb, Clayton, and Fulton County, Georgia, and in the appropriate places in Texas and Arkansas; and (c) the registration of each Aircraft with the FAA pursuant to the Act, and except for any necessary action with respect to the Finex Program. SECTION 5.10 -- Condition of Aircraft. On each Purchase Date, the Aircraft to be delivered on such Purchase Date shall be in such condition as is sufficient to enable Borrower to obtain a standard U.S. certificate of airworthiness for such Aircraft and to enable such airworthiness certificate to be maintained in good standing; and, to Borrower's knowledge (which shall be based on acceptance tests by Borrower in accordance with its usual practices, to the extent permitted under the Purchase Agreement), such Aircraft shall otherwise conform in all material respects to the specifications for such Aircraft set forth in the Purchase Agreement. SECTION 5.11 -- Absence of ERISA Liability. Each employee pension benefit plan (as defined in section 3(2) of the Employee Retirement Income Security Act of 1974, as from time to time amended ("ERISA")) of Borrower is in compliance with the applicable provisions of ERISA and of the Internal Revenue Code of 1986, as from time to time amended, in all respects, except to the extent that noncompliance would not be materially adverse to Borrower's business, assets, financial condition, or ability to perform its obligations under the Basic Documents. SECTION 5.12 -- Delta Agreement. The Delta Agreement is (a) the only agreement between Delta Air Lines, Inc. and Borrower relating to Joint marketing or code sharing for interconnecting flights, and (b) in full force and effect. There exists no default under the terms of the Delta Agreement and there has not occurred any event that would ripen into a default upon the giving of notice or passage of time. 11 16 SECTION 5.13 -- Subsidiaries; Stock Ownership. Borrower owns 100% of the outstanding stock of ASA Investments, Inc. and Borrower has no material stock or other equity investment in any other corporation, partnership, or other Person. SECTION 5.14 -- Investment Company Status. The Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Note, or any amount owed by Borrower under any other Basic Document, remains outstanding or unpaid or Lender has any Commitment hereunder: SECTION 6.01 -- Financial Statements. Borrower shall furnish to Lender: (a) within 45 days after the end of each of the first three quarters in each fiscal year, consolidated statements of operations of Borrower and its consolidated subsidiaries for the period from the beginning of the then-current fiscal year to the end of such quarterly period, and balance sheets of Borrower and its consolidated subsidiaries, on a consolidated basis, as of the end of such quarter prepared in accordance with GAAP and setting forth in each case in comparative form figures for the corresponding period in the preceding year, all in reasonable detail and certified by the Chief Financial Officer of Borrower, subject to changes resulting from year-end adjustments, and Borrower's Form 10-Q for such period; (b) within 90 days after the end of each fiscal year, consolidated statements of operations of Borrower and its consolidated subsidiaries, for such year, and the balance sheets of Borrower and its consolidated subsidiaries, on a consolidated basis, as of the end of such year, setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail, and certified to Borrower by its independent certified public accountants and to Lender by Borrower's Chief Financial Officer, as presenting fairly the financial position and results of operations of Borrower and its consolidated subsidiaries and as having been prepared in accordance with GAAP, and Borrower's Form 10-K for such period; 12 17 (c) within two Business Days after any officer of Borrower obtains knowledge of any Default, an Officer's Certificate specifying its nature, the period of its existence, and what action Borrower proposes to take with respect to it; and (d) promptly upon request, such other data or information (financial or otherwise) regarding Borrower or the Collateral as Lender from time to time reasonably requests. SECTION 6.02 -- Inspection of Collateral and Records. Borrower shall permit any person(s) from time to time designated in writing by Lender, at Lender's expense (or at Borrower's expense if a Default exists at the time), to visit and inspect any of the Collateral and Borrower's (or any Permitted Lessee's) records with respect to the Collateral, at such times as Lender reasonably requests, and to discuss Borrower's affairs, finances, and accounts with Borrower's officers. No such inspection shall unreasonably interfere with Borrower's (or any Permitted Lessee's) operations or maintenance. Lender shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. Upon Lender's request, Borrower shall promptly notify Lender of the maintenance operations then scheduled on the Aircraft for the six-month period following such request. SECTION 6.03 -- Corporate Existence. Except as permitted by section 6.04, Borrower shall maintain its corporate existence in good standing in the state of its incorporation and in all jurisdictions where qualification is necessary (except in any jurisdiction in which the failure to qualify would have no materially adverse effect on its business or on its ability to carry out its obligations under the Basic Documents to which it is (or is to become) a party). Borrower shall preserve and renew its rights (charter and statutory), patents, and franchises, unless Borrower determines in good faith that the preservation thereof is no longer necessary or desirable in the conduct of its business and that the loss thereof will not adversely affect Lender's rights or Borrower's business, assets, operations, condition (financial or otherwise). SECTION 6.04 -- Merger. Borrower shall not consolidate with or merge into any other corporation, or convey, transfer, or lease all or substantially all of its assets as an entirety to any person, unless: (a) the Borrower is the surviving corporation; (b) the corporation formed by such consolidation or merger or the Person who acquires by conveyance, transfer, or lease all or substantially all of Borrower's assets as an entirety (the "Successor") (i) is a corporation organized and existing under the laws of the United States of America or any state or the District of Columbia, (ii) is a "citizen of the United State" as defined in section 101(16) of the Act, (iii) is an air carrier (within the meaning of section 101(3) of the Act) certificated under section 604(b) of the Act, (iv) executes and delivers to Lender an agreement, in form and substance satisfactory to Lender, containing an assumption by 13 18 the Successor of the due and punctual performance and observance of Borrower's obligations under the Basic Documents to which Borrower is then a party, and (v) makes such filings and recordings, including any filing or recording with the FAA pursuant to the Act or any filing under the UCC, as are necessary to evidence such consolidation, merger, conveyance, transfer, or lease with or to the Successor; (c) immediately after giving effect to such transaction, (i) no Default exists and (ii) Borrower's business, assets, operations, condition (financial or otherwise), and financial and other ability to perform its obligations under the Basic Documents will not be adversely affected by such transaction in any material respect; and (d) Borrower or the Successor delivers to Lender, promptly upon consummation of such transaction, an Officer's Certificate stating that the conditions precedent set forth in clauses (a) and (b) have been complied with and an opinion of counsel to Borrower or the Successor, in form and substance satisfactory to Lender, stating that the agreements entered into to effect such consolidation, merger, conveyance, transfer, or lease and such assumption agreements have been duly authorized, executed, and delivered by the Successor and that they (and the Basic Documents so assumed) constitute legal, valid, and binding obligations of the Successor, enforceable in accordance with their terms (to the same extent as the Basic Documents so assumed were enforceable against Borrower); and that all conditions precedent which are legal in nature provided for in this Agreement and relating to such transactions have been fulfilled. Upon any such consolidation, merger, conveyance, transfer, or lease, the Successor shall succeed to, shall be substituted for, and may exercise every right and power of Borrower under the Basic Documents to which Borrower is a party, with the same effect as if the Successor had been named as Borrower therein. No such conveyance, transfer, or lease of substantially all Borrower's assets as an entirety shall have the effect of releasing Borrower (or any Successor) from its liability under the Basic Documents to which it is a party. Nothing in this section shall permit any lease, sublease, or other arrangement for the use, operation, or possession of the Aircraft except in compliance with the applicable provisions of this Agreement and the Mortgage. SECTION 6.05 -- Citizenship and Air Carrier Status. Borrower will at all times remain a "citizen of the United States" as defined in section 101(16) of the Act and an "air carrier" within the meaning of the Act. SECTION 6.06 -- Compliance with ERISA. (a) Borrower will, at all times, make prompt payment of contributions that it is required to make to any employee benefit plan to which it is a party as are necessary to meet the minimum funding standards for such an employee benefit plan, as required by ERISA. 14 19 (b) Within two Business Days after the occurrence of any event or circumstance, including any event which is classified as a "Reportable Event" under ERISA, in connection with any employee benefit plan to which it is a party, that might constitute grounds for termination of an employee benefit plan to which Borrower is a party by the Pension Guaranty Benefit Corporation or might result in the appointment of a trustee by a United States District Court under section 4042 of ERISA to administer such employee benefit plan; Borrower will provide Lender with an Officer's Certificate describing the event or circumstance, stating the reasons for any such action by the Pension Benefit Guaranty Corporation or a United States District Court, and specifying the action Borrower proposes to take with respect thereto. SECTION 6.07 -- Disposition of Assets. Borrower will not dispose of any of its assets, other than in the ordinary course of its business, unless it receives full, fair, and reasonable consideration for such assets; and Borrower will not during any twelve-month period dispose of assets, other than in the ordinary course of its business, which have an aggregate book value in excess of $5,000,000; provided, that Borrower shall have the right to dispose of any aircraft for at least such aircraft's book value and such sale of an aircraft for at least book value will not be included in the calculation of the $5,000,000 of assets sold in a twelve-month period. The book value of an aircraft shall be determined in accordance with GAAP. For avoidance of doubt, the "ordinary course" of Borrower's business generally shall include (x) acquisitions or dispositions of marketable securities (other than acquisitions or dispositions exceeding 5% of any class of "equity security", as defined in the Securities Exchange Act of 1934) and (y) the disposition of parts of discontinued aircraft, engines, or propellers not constituting part of a program to reduce Borrower's fleet in any material respect. SECTION 6.08 -- Performance of Delta Agreement. Borrower shall faithfully perform all obligations it has under the Delta Agreement. ARTICLE VII CONDITIONS PRECEDENT TO THE PURCHASE OF NOTES SECTION 7.01 -- Conditions Precedent to the Purchase of the Initial Note. Lender's obligation to purchase the Note on the first Purchase Date is subject to the satisfaction (or Lender's waiver) of the following conditions precedent and Lender's receipt on or before such initial Purchase Date of the following, in form and substance satisfactory to Lender: (a) a certificate of Borrower's secretary, dated the Purchase Date, certifying attached copies of the resolutions of Borrower's board of directors evidencing approval of the transactions contemplated by the Basic Documents to which it is (or is to become) a party, and showing the names and specimen signature(s) (or copies thereof) of Borrower's 15 20 officer(s) authorized to sign this Agreement and the related documents to which it is (or is to become) a party, (b) an executed Finex Agreement, (c) an executed Mortgage, (d) an executed Guarantee, (e) an Officer's Certificate certifying an attached copy of the Purchase Agreement, and (f) copies of the SEC Filings. In addition, Borrower's obligation to close on the first Purchase Date is subject to its receipt of an executed letter agreement between Borrower and Lender, in form and substance satisfactory to each, concerning sections 4.02(d)(i) and 6.05 of the Mortgage. SECTION 7.02 -- Conditions Precedent to the Purchase of All Notes. Lender's obligation to purchase each Note (including the initial Note) is subject to the additional conditions precedent that: (a) Lender shall have received the following, each dated as of the pertinent Purchase Date, in form and substance satisfactory to Lender: 16 21 (i) the Note for the relevant Aircraft, executed by Borrower and endorsed by Vendor (without recourse) to the order of Finex Bank who in turn has endorsed (without recourse) to the order of Lender, (ii) an executed Mortgage Supplement with respect to the relevant Aircraft, (iii) an executed Purchase Agreement Assignment, with the related executed Consent, with respect to the relevant Aircraft, (iv) an Officer's Certificate to the effect that: (1) Borrower's representations and warranties in Article V of this Agreement and section 6 of the relevant Purchase Agreement Assignment are true and accurate as though made on the Purchase Date, and (2) no Default exists or will result from Lender's purchase of such Note, (v) a certificate of insurance describing the insurance maintained by Borrower with respect to the Aircraft being purchased and stating that such policies conform to the requirements of the Mortgage, (vi) an opinion from Borrower's counsel substantially in the form of Exhibit F, (vii) an opinion from Crowe & Dunlevy, special FAA counsel, substantially in the form of Exhibit G, covering the Aircraft that is the subject of the Note being purchased, (viii) an opinion of counsel to Embraer, substantially in the form of Exhibit H, and (ix) such additional opinion(s) (including, if requested, from Trotter Smith & Jacobs) and document(s) as Lender requests; (b) Lender shall have received copies of the necessary FAA Application for Aircraft Registration and FAA Bill of Sale pertaining to the Aircraft being purchased; (c) Borrower's representations and warranties in the Basic Documents shall be true and accurate as though made on and as of such Purchase Date; (d) no Default shall exist or shall result from Lender's purchase of such Note; (e) all filings, recordings, and other actions necessary to establish, protect, preserve, and perfect Lender's interests under the Mortgage shall have been duly made or taken; (f) all necessary consents, approvals, licenses, permits, declarations, or registrations then required in connection 17 22 with the execution, delivery, performance, validity, and enforceability of the Basic Documents and the transactions contemplated thereby shall have been obtained; (g) no change in the Finex Program shall have occurred or have been officially proposed in writing by Banco Central do Brasil or Cacex (or such other authority as, at the time, is competent to make official proposals of changes to the Finex Program) after the date of this Agreement if such change, if effective, could adversely affect the economic benefits available to Lender or Finex Bank in connection with the transactions contemplated by the Basic Documents (provided, that this condition shall be excused if (x) Borrower substitutes for the Note for that Aircraft a promissory note that is substantially identical to Exhibit A except that the interest rate shall be a floating rate, reset for each Interest Period, based on the six-month LIBO rate that Lender from time to time establishes, plus 0.85% per annum (based on a 360-day year and actual days elapsed), and (y) such other changes are made to the Basic Documents, at Borrower's expense, as Lender deems necessary to convert the financing hereunder to a non-Finex basis (and Lender agrees that such changes shall include appropriate provisions for Lender to use reasonable good faith efforts to seek and to make available (including reasonable good faith efforts to cause Finex Bank to seek and make available) to Borrower, promptly after receipt, any Finex interest subsidies that Lender or Finex Bank may become entitled to after the Purchase Date for that Aircraft, and that the Finex Bank for that Aircraft shall be reasonably satisfactory to Borrower)); (h) a copy of the approval of the application for coverage of the purchase of the Aircraft by the Finex Program; and (i) in Lender's reasonable judgment, since March 31, 1990, there shall have occurred no materially adverse change in the business, financial condition, or operations of Borrower. 18 23 ARTICLE VIII EVENTS OF DEFAULT; REMEDIES SECTION 8.01 -- Events of Default. Each of the following shall constitute an "Event of Default": (a) Borrower fails to make any payment due from Borrower on any Note or under any other Basic Document (including under section 4.04 hereof) when due; (b) any representation or warranty made by Borrower in the Basic Documents, or in any certificate or other document that it furnishes pursuant to the Basic Documents, proves to have been incorrect in any material respect when made; (c) Borrower fails to maintain the insurance required by the terms of the Mortgage; (d) the Delta Agreement is voluntarily terminated, or is amended to the detriment of Borrower; (e) Borrower fails to provide Lender with the Officer's Certificate required by section 6.01(c) or 6.06(b) within 10 days after any of Borrower's officers obtains notice of a Default or the ERISA-related event or circumstance occurs, respectively; (f) Borrower fails to perform any other material covenant or agreement in the Basic Documents, and (if remediable) such failure to perform continues for 30 days after Borrower's receipt of notice of such default from Lender; (g) Borrower (1) applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of all or a majority of its property, (2) makes a general assignment for the benefit of its creditors, (3) commences a voluntary case under the federal Bankruptcy Code (as now or hereafter in effect), (4) files a petition seeking to take advantage (as debtor) of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, or (5) fails to controvert in a timely manner, or acquiesces in writing to, any petition filed against it in an involuntary case under the federal Bankruptcy Code; (h) a proceeding or case is commenced, without Borrower's application or consent, in any court of competentjurisdiction, seeking (1) its liquidation,reorganization, dissolution, or winding-up, or the composition or readjustment of its debts, 19 24 (2) the appointment of a trustee, receiver, custodian, liquidator, or the like of Borrower or of all or a majority of its assets, or (3) similar relief in respect of Borrower under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case continues undismissed, or an order, judgment, or decree approving or ordering any of the foregoing is entered and continues unstayed and in effect, for a period of 60 days; or an order for relief against Borrower is entered in an involuntary case under the federal Bankruptcy Code; (i) loan, lease, or deferred purchase obligations of Borrower totalling more than $1 million are in default after the expiration of any applicable grace period, if the effect of such default is to permit such obligations to be accelerated or otherwise declared to be due and payable prior to their stated maturity, or Borrower defaults in the payment when due of more than $1 million of loan, lease, or deferred purchase obligations; (j) one or more judgment(s) is/are rendered by one or more court(s) of competent jurisdiction against Borrower for a total of more than $1 million and is/are not stayed or discharged, or fully bonded against, within 60 days of the date of entry; (k) any "Reportable Event" under ERISA shall have occurred, or any finding or determination shall be made with respect to an employee benefit plan to which Borrower is a party under Section 4041(c) or (e) of ERISA, or any fact or circumstance shall occur with respect to an employee benefit plan to which Borrower is a party, that, in the opinion of Lender, provides grounds for the commencement of any proceeding under Section 4042 of ERISA, or any proceeding shall be commenced under Section 4042 of ERISA with respect to an employee benefit plan to which Borrower is a party; (l) one or more events, occurrences, or circumstances occur(s) or exist(s) that, in Lender's reasonable good faith opinion (after good faith consultation with Borrower), has or had a materially adverse effect on the financial condition of Borrower and on the ability of Borrower to perform any of its obligations under the Basic Documents; or (m) Borrower shall deny any further liability under any Note or under any other Basic Document; SECTION 8.02 -- Remedies. If an Event of Default (other than under section 8.01 (g) or (h)) exists, Lender may declare all Notes to be immediately due and payable, whereupon (i) all Notes shall become and be immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which Borrower hereby waives, and (ii) the Commitment shall terminate. If an Event of Default under section 8.01(g) or (h) occurs, all Notes automatically shall become immediately due and payable and the Commitment automatically shall immediately 20 25 terminate, without presentment, demand, protest, or notice of any kind, all of which Borrower hereby waives. ARTICLE IX BORROWER'S INDEMNITIES SECTION 9.01 -- General Indemnity. Borrower assumes liability for, and agrees to indemnify each Indemnitee against, and on written demand to pay, or to reimburse each Indemnitee for the payment of, any and all liabilities, obligations, losses, damages, penalties, claims (including claims involving strict liability in tort), suits, actions, costs, expenses, and disbursements, including legal fees and expenses, of whatsoever kind and nature (collectively, "Liabilities") imposed on, incurred by, or asserted against any Indemnitee relating to or arising out of any Basic Document, the enforcement against Borrower of any of the terms of the Basic Documents, or any lease or relinquishment of possession of the Aircraft or any part thereof or any action or inaction of Borrower or of any lessee, assignee, or transferee of Borrower in connection therewith, the purchase of the Aircraft under the Purchase Agreement, the ownership of the Aircraft, the acquisition, delivery, nondelivery, acceptance, nonacceptance, rejection, registration, deregistration, insuring, storage, manufacture, assembly, transportation, importation, exportation, maintenance, condition, modification, testing, repair, fitness for use, merchantability, sale, abandonment, lease, sublease, assignment, transfer, transfer of title, possession, repossession, use, operation, return, or other application or disposition of the Aircraft or any component thereof, the condition upon return thereof after repossession following the occurrence of an Event of Default or following the exercise of remedies under the Mortgage, including latent or other defects, whether or not discoverable, loss of or damage to any property or the environment, death or injury of any person, and any claim for patent, trademark, copyright, or mask work infringement and the violation or infringement by Borrower of any laws, rules, or regulations, or (without limiting any of the foregoing) any breach by Borrower of, noncompliance by Borrower with, or misrepresentation made or deemed made by or on behalf of Borrower in, under, or in connection with the Purchase Agreement or any Purchase Agreement Assignment or any warranty, certificate, or agreement made or delivered in, under, or in connection with the Purchase Agreement or any Purchase Agreement Assignment; provided, that this section shall not require Borrower to pay or indemnify any Indemnitee under this section (i) for any Liability to the extent resulting from its acts of gross negligence or willful misconduct; (ii)for any Taxes (Borrower's duties in respect of Taxes being set forth in section 9.02) or for any cost or expense relating to the preparation, execution, delivery, or enforcement of the Basic Documents (Borrower's duties in respect of such costs and expenses being set forth in section 11.03); (iii) for any Liability that such Indemnitee incurs to the extent resulting from its breach of any of its representations, warranties, or covenants in any Basic Document; (iv) for any Liability to the extent resulting from a claim against such Indemnitee not related to any Aircraft, any action or inaction of Borrower or any lessee, assignee, or transferee of Borrower, or any 21 26 of the transactions contemplated by the Basic Documents; (v) for any Liability with respect to transfer taxes or other expenses payable with respect to the transfer of any Note, other than a transfer after the occurrence of an Event of Default; or (vi) for any violation or purported violation of any law relating to usury or the charging or collecting of excess interest or finance charges. If any Indemnitee obtains knowledge of any claim or liability required to be indemnified against under this section 9.01, such Indemnitee shall promptly notify Borrower, but the failure to do so shall not relieve Borrower from any liability that it otherwise would have to such Indemnitee under this section. Upon an Indemnitee's request, the defense of any Liability for which Borrower would be required to indemnify such Indemnitee hereunder shall be conducted by Borrower, with counsel selected by Borrower and satisfactory to Lender. However, if the defense of any such Liability is conducted by Lender, Lender shall select the counsel to conduct it, but shall consult with Borrower as to such selection; provided, that the decision as to which counsel to select shall be and remain Lender's. Borrower shall be obligated under this section 9.01 irrespective of whether the Indemnitee is also indemnified with respect to the same matter under any other Basic Document or other document by any other Person, and the Indemnitee may proceed directly against Borrower under this section 9.01 without first resorting to any such rights of indemnification. Upon the payment in full of any indemnities due and owing under this section 9.01, Borrower shall be subrogated to any right of the Indemnitee in respect of the matter against which indemnity has been given. Borrower's indemnities in this section shall survive expiration or termination of the Mortgage and payment in full of the Notes. Any payment or indemnity pursuant to this section 9.01 shall include the amount, if any, necessary to hold the Indemnitee harmless on an after-tax basis from all taxes required to be paid by such recipient with respect to such payment or indemnity under laws of any federal, state, or local government or taxing authority in the United States or by any foreign government or any political subdivision or taxing authority thereof. The amount of any payment or indemnity required under this section shall be determined by the Indemnitee reasonably and in good faith, and that determination shall be conclusive. Upon Borrower's request and at Borrower's expense, the Indemnitee will provide Borrower with a summary explanation of the basis for the Indemnitee's computations. SECTION 9.02 -- Taxes. (a) Indemnity. Except as provided in section 9.02(b), Borrower agrees to indemnify each Indemnitee against, and on written demand to pay or reimburse each Indemnitee for the payment of, any and all Taxes imposed upon or asserted against any Indemnitee, any Aircraft or any part thereof or interest therein, any Basic Document, any lease of any Aircraft or any part thereof, or the rentals received under such a lease, by any federal, state, or local government or other taxing authority in the United States (including any territory or possession of the United States) or by any foreign government or any political subdivision or taxing authority thereof where any part of an Aircraft is located, used, or registered ("Taxing Authorities") upon or with respect to (i) 22 27 the construction, mortgaging, financing, refinancing by or at the request of Borrower, purchase, acquisition, acceptance, nonacceptance, rejection, delivery, nondelivery, transport, insuring, ownership, registration, deregistration, assembly, possession, repossession, operation, use condition, maintenance, modification, repair, fitness for use, merchantability, testing, return, abandonment, storage, manufacture, leasing, subleasing, importation, exportation, sale, assignment, transfer, transfer of title, or other application or disposition of, or the imposition of any Lien (other than a Permitted Lien) or the incurrence of any liability to refund or pay over any amount as a result of any Lien (other than a Permitted Lien) on any Aircraft or any part thereof or interest therein, (ii) any amount paid or payable by Borrower or Finex Bank under the Basic Documents or the receipts or earnings arising from or received with respect to any Aircraft or any part thereof or interest therein, (iii) any Aircraft or any part thereof or interest therein, (iv) any of the Basic Documents and any other documents contemplated thereby or the execution, sale, delivery, acquisition, or filing of the Basic Documents, or (v) otherwise with respect to or in connection with the transactions effected under the Basic Documents. The term "Taxes" shall mean any and all fees, taxes, levies, imposts, duties, charges, assessments, or withholdings of any nature whatsoever, together with any and all penalties, fines, additions to tax, and interest thereon or computed by reference thereto. (b) Exclusions from Indemnity. The provisions of section 9.02(a) shall not apply to: (i) any Tax based on, or measured by, net income, capital, franchise, or net worth Taxes (other than sales taxes), including related surcharges and withholding taxes; provided, that the provisions of this clause (b)(i) shall not apply to any Taxes imposed in respect of the receipt or accrual of any indemnity payment made or payable pursuant to this section 9.02; (ii) any Tax based on or measured by the value of such Indemnitee's interest in any Basic Document, except to the extent imposed without regard to the presence of the Indemnitee, or any Note, in the jurisdiction of the Taxing Authority imposing that Tax; (iii) any Tax imposed on the Indemnitee as a result of a transfer or other disposition, by such Indemnitee or any of its predecessors in interest, of any interest in the Aircraft or any Basic Document, unless such transfer or disposition occurs after the occurrence of an Event of Default; or (iv) any Tax in the nature of a penalty, an addition to tax, interest, or fines resulting from the negligence or misconduct of the Indemnitee in connection with the preparation or filing of (or failure to prepare or file) tax returns, or the payment of or failure to pay its taxes, but in each case not if in any way attributable to Borrower's failure to notify such Indemnitee of its obligations to prepare and file its returns in respect of Taxes indemnified pursuant to this section 9.02 or to provide any information 23 28 necessary for the preparation or filing of such returns or the conduct of such proceedings or otherwise to perform its duties and responsibilities pursuant to the Basic Documents. (c) Calculation of General Tax Indemnity Payments. Any payment which Borrower is required to make to or for the account of any Indemnitee with respect to any Tax which is subject to indemnification under this section 9.02 shall be made on a net basis, taking into account offsetting credits or deductions available to such Indemnitee as a result of the payment of such Tax, and shall include the amount necessary to hold such Indemnitee harmless on an after-tax basis from the net amount of all Taxes required to be paid by such Indemnitee as the result of such payment (including any Taxes imposed on such indemnity payment) pursuant to the laws of any Taxing Authority. The amount of any payment or indemnity required under this section shall be determined by the Indemnitee reasonably and in good faith, and that determination shall be conclusive. Upon Borrower's request and at Borrower's expense, the Indemnitee will provide Borrower with a summary explanation of the basis for the Indemnitee's computations. (d) Reports. If Borrower shall timely file any report, return, or statement required to be filed with respect to any Tax which is subject to indemnification under this section 9.02, except for any such report, return, or statement which an Indemnitee has notified Borrower that it intends to file. Borrower shall file such report, return, or statement and send a copy to Lender and each Indemnitee affected by such report, return, or statement. Each Indemnitee shall promptly forward to Borrower any notice, bill, or advice received by it concerning any Tax. ARTICLE X YIELD PROTECTION SECTION 10.01 -- Additional Costs. (a) Borrower shall pay directly to Lender from time to time such amounts as are necessary to compensate Lender, on an after-tax basis, for any costs which are attributable to its purchase of or obligation to purchase any Note hereunder, or any reduction in any amount receivable by Lender in respect of any of such Notes (including payments under the Finex Agreement), resulting from (i) any Regulatory Change which imposes or modifies any reserve, special deposit, minimum capital, capital ratio, or similar requirements relating to any extensions of credit or other assets of or any deposits with or other liabilities of Lender, or the manner in which Lender funds (or allocates funds, on its books, for) its investments in any of the Notes, or (ii) any tax payable to any government or governmental authority outside the United States and imposed with respect to, or withheld from, payments due to Lender from Finex Bank or otherwise under the Finex Program (except to the extent that the amounts withheld are applied or are to be applied to Lender's obligations unrelated to the transactions contemplated by the Basic Documents). 24 29 (b) Determinations and allocations for purposes of this section 10.01 of the effect of any Regulatory Change pursuant to section l0.01(a) on Lender's costs or rate of return of maintaining or its obligations to purchase any Note, or on amounts receivable by it in respect of any Note, and of amounts required to compensate Lender under this section 10.01, shall be made by Lender reasonably and in good faith and shall be conclusive. Upon Borrower's request and at Borrower's expense, Lender will provide Borrower with a summary explanation of the basis for Lender's computations. SECTION 10.02 -- Breakage Costs. Borrower shall pay to Lender, upon Lender's request, such amount as is sufficient, in Lender's opinion, to compensate it for any loss, cost, or expense which is attributable to: (a) any payment, purchase, or conversion of any Note for any reason (including the acceleration of the maturity of the Notes pursuant to section 8.02 and the mandatory purchase of the Note pursuant to section 4.04) on a date other than an Interest Payment Date; or (b) any failure by Vendor for any reason (including the failure of any of the conditions precedent specified in article VII to be satisfied) to endorse and deliver any Note to Finex Bank on the Purchase Date specified in the relevant notice to Lender given pursuant to section 2.02. Such amount payable by Borrower (x) shall not include losses, costs, or expenses attributable to any date more than 180 days after the date of such payment, purchase, or conversion or such Purchase Date, and (y) shall be determined by Lender reasonably and in good faith, which determination shall be conclusive. Upon Borrower's request and at Borrower's expense, Lender will provide Borrower with a summary explanation of the basis for Lender's computations. ARTICLE XI MISCELLANEOUS SECTION 11.01 -- No Waivers; Cumulative Remedies. No failure or delay in exercising any power or right under any Basic Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude other or further exercise thereof or the exercise of any other right or power under any Basic Document. No notice to or demand on any party in any case shall, of itself, entitle such party to any other or further notice or demand in similar or other circumstances. SECTION 11.02 -- Notices. All communications and notices provided for under this Agreement shall be in writing (including telex, telegraph, and telecopy), shall be in English, and shall be mailed by certified mail (return receipt requested) or otherwise delivered to the parties at the addresses set forth by their signatures hereto, or, as to each party, at such other address as 25 30 it designates by notice to each other party. Each such notice shall be effective upon delivery. SECTION 11.03 -- Transaction Expenses. Borrower will pay on demand all out-of-pocket expenses in connection with the preparation, execution, delivery, administration, and enforcement of the Basic Documents, or in connection with any scheduled closing that is postponed or cancelled, including (i) all fees and expenses of (x) Trotter Smith & Jacobs, special counsel to Lender, (y) Castro, Barros, Sobral e Xavier, special Brazilian counsel, and (z) Crowe & Dunlevy, special FAA counsel; (ii) all FAA and UCC filing and lien search fees; (iii) all fees and expenses (including legal fees and expenses) of Lender in connection with actual or proposed amendments, waivers, or consents to or under this Agreement or the other Basic Documents (except for such amendments, waivers, or consents initiated by Lender); and (iv) all fees and expenses (including legal fees and expenses) of Lender in connection with the actual or proposed enforcement of any Basic Document against Borrower during the existence of any Default. The "legal fees and expenses" of Lender referred to in clauses (iii) and (iv) may include those of Lender's in-house counsel. SECTION 11.04 -- Amendments. Any provision of the Basic Documents, other than the Purchase Agreement, the Guarantee, or the Finex Agreement, may be amended, terminated, waived, or otherwise modified only in writing by Borrower and Lender. SECTION 11.05 -- Successors and Assigns. This Agreement shall bind and benefit Lender and Borrower and their successors and assigns, except that Borrower may not assign or transfer its rights under this Agreement without Lender's prior written consent. Lender may at any time with the Borrower's consent (which consent shall not be unreasonably withheld) sell, assign, grant participation(s) in, or otherwise transfer any Note, in whole or in part. SECTION 11.06 -- Lender's Representations and Warranties. Lender represents and warrants that: (a) it is a national banking association duly organized, validly existing, and in good standing under the laws of the United States, and has all corporate power, authority, and legal right under the laws of the United States to execute, deliver, and carry out the terms of each of the Basic Documents to which it is a party; (b) it has duly authorized, executed, and delivered this Agreement and the other Basic Documents to which it is a party; and (c) neither it nor anyone authorized to act on its behalf has directly or indirectly offered any beneficial interest in the Notes for sale to, or solicited any offer to acquire any such interest in the Notes from, any Person in such a manner as to require any of the Notes to be registered under the Securities Act of 1933, as amended, or any state securities law; provided, that the foregoing shall not be deemed to extend any such offer, sale, or solicitation by or on behalf of Borrower or any other Person. 26 31 SECTION 11.07 -- Governing Law. This Agreement shall be governed by the laws of Georgia. SECTION 11.08 -- Headings. Article and section headings used in this Agreement are for convenience only and are not a substantive part of this Agreement. SECTION 11.09 -- Execution in Counterparts. This Agreement may be executed in separate counterparts. SECTION 11.10 -- Survival of Representations and Warranties. All representations and warranties contained in this Agreement or made in writing in connection with this Agreement shall survive the execution and delivery of this Agreement and the Mortgage. SECTION 11.11 -- Severability. If any part of any provision contained in this Agreement, or any document contemplated hereby, is or becomes invalid or unenforceable under applicable law, that part shall be ineffective to the extent of such invalidity only, without in any way affecting the remaining parts of that provision or the remaining provisions. SECTION 11.12 -- Finex Agreement. Except to the extent otherwise provided in article X and section 7.02(g), all risks and benefits of the Finex Agreement are Lender's, not Borrower's. Except as so provided, Borrower shall not have any responsibility for payments owed to Lender under the Finex Agreement, regardless of whether or when they are paid, and Borrower shall have no right to any such payments, regardless of any payment or prepayment of any Note (including after an Event of Default or Event of Loss) or any purchase of any Note by any Person. [INTENTIONALLY LEFT BLANK] 27 32 IN WITNESS WHEREOF, Borrower and Lender have executed this Credit Agreement. ATLANTIC SOUTHEAST AIRLINES, INC. 1688 Phoenix Parkway College Park, Georgia 30349 Attn: Ronald V. Sapp Vice President-Finance and Treasurer By: /s/ Ronald V. Sapp Facsimile No.: (404) 991-0366 ------------------------------------ Title: Vice President-Finance ------------------------------- BANK OF AMERICA NATIONAL 555 South Flower Street TRUST AND SAVINGS ASSOCIATION Los Angeles, California 90071 Attn: Airline Aerospace #5770 Facsimile No.: (213) 228-2756 By: /s/ Douglas I. Robinson ------------------------------------ Title: Vice President ------------------------------- with a copy to: 1850 Gateway Blvd. #5693 Concord, California 94520 Attn: Corporate Service Center Facsimile No.: (415) 675-7531 28 EX-10.I 4 CREDIT AGREEMENT DATED 12/1/90 1 EXHIBIT 10(i) - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- CREDIT AGREEMENT dated as of December 1, 1990 between ATLANTIC SOUTHEAST AIRLINES, INC., Borrower and BARCLAYS BANK PLC, Lender. Two Embraer Model EMB-120 Brasilia Aircraft and Spare Parts - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS; REFERENCES SECTION 1.01 -- Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02 -- Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 1.03 -- Section and Exhibit References, etc. . . . . . . . . . . . . . . . 7 ARTICLE II PURCHASE AND EXCHANGE OF FINEX NOTES; PAYMENTS 7 SECTION 2.01 -- Purchase and Exchange of Finex Notes . . . . . . . . . . . . . . . 7 SECTION 2.02 -- Procedure for Purchase and Exchange of Finex Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.03 -- Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.04 -- Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III SECURITY FOR BORROWER'S OBLIGATIONS SECTION 3.01 -- Security Interest in Collateral . . . . . . . . . . . . . . . 8 SECTION 3.02 -- Set-Off Rights . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE IV PAYMENTS UNDER THE NOTES AND OTHER AMOUNTS PAYABLE BY BORROWER SECTION 4.01 -- How Payments Are Made . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 4.02 -- Right to Prepay . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 4.03 -- Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 4.04 -- Mandatory Purchase . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 4.05 -- Amount of Prepayment . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 4.06 -- Interest on Past Due Amounts . . . . . . . . . . . . . . . . . . . 10 ARTICLE V BORROWER'S REPRESENTATIONS AND WARRANTIES SECTION 5.01 -- Corporate Standing . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 5.02 -- Corporate Powers . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5.03 -- Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5.04 -- Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5.05 -- Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5.06 -- Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 5.07 -- Status as United States Citizen and Air Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
-i- 3 SECTION 5.08 -- Location of Offices . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 5.09 -- Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 5.10 -- Condition of Aircraft . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.11 -- Absence of ERISA Liability . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.12 -- Delta Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 5.13 -- Subsidiaries; Stock Ownership . . . . . . . . . . . . . . . . . . . 13 SECTION 5.14 -- Investment Company Status . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE VI AFFIRMATIVE COVENANTS SECTION 6.01 -- Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 6.02 -- Inspection of Collateral and Records . . . . . . . . . . . . . . . 14 SECTION 6.03 -- Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 6.04 -- Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 6.05 -- Citizenship and Air Carrier Status . . . . . . . . . . . . . . . . 17 SECTION 6.06 -- Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 6.07 -- Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 6.08 -- Performance of Delta Agreement . . . . . . . . . . . . . . . . . . 18 ARTICLE VII CONDTIONS PRECEDENT TO THE PURCHASE AND EXCHANGE OF FINEX NOTES SECTION 7.01 -- Conditions Precedent to the Purchase and Exchange of the Initial Finex Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 7.02 -- Conditions Precedent to the Purchase and Exchange of All Finex Notes . . . . . . . . . . . . . . . . 18 ARTICLE VIII EVENTS OF DEFAULT; REMEDIES SECTION 8.01 -- Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 8.02 -- Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE IX BORROWER'S INDEMNITIES SECTION 9.01 -- General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 9.02 -- Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE X ILLEGALITY AND YIELD PROTECTION SECTION 10.01 -- Illegality and Increased Costs . . . . . . . . . . . . . . . . . . . 30 SECTION 10.02 -- Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
-ii- 4 ARTICLE XI MISCELLANEOUS SECTION 11.01 -- No Waivers; Cumulative Remedies . . . . . . . . . . . . . . . . . . 32 SECTION 11.02 -- Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 11.03 -- Transaction Expenses . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 11.04 -- Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 11.05 -- Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 11.06 -- Lender's Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 11.07 -- Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 11.08 -- Judicial Proceedings . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 11.09 -- Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 11.10 -- Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . 34 SECTION 11.11 -- Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 11.12 -- Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 11.13 -- Finex Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Annex A Procedures for Purchasing Aircraft and Notes; Documentation Exhibit A-1 Form of Finex Note Exhibit A-2 Form of Note Exhibit B Form of Finex Agreement Exhibit C Form of Mortgage Exhibit D Form of Purchase Agreement Assignment Exhibit E Form of Consent Exhibit F Form of opinion of Borrower's counsel Exhibit G Form of opinion of Crowe & Dunlevy Exhibit H Form of opinion of counsel to Embraer Exhibit I Form of Guarantee
-iii- 5 CREDIT AGREEMENT This Credit Agreement is entered into as of December 1, 1990 by and between Atlantic Southeast Airlines, Inc. ("Borrower"), a Georgia corporation, and Barclays Bank PLC ("Lender"), an English banking corporation. Borrower and Lender agree as follows: ARTICLE I DEFINITIONS; REFERENCES SECTION 1.01 -- Definitions. The following terms, when capitalized as below, have the following meanings: "Act": the Federal Aviation Act of 1958, as amended, or its successor. "Agreement": this Credit Agreement. "Aircraft": two Embraer EMB-120 Brasilia aircraft to be delivered under the Purchase Agreement and in each case designated by Borrower (by notice to Lender at least three Business Days before the Purchase Date therefor, and not revoked by notice to Lender before the Purchase Date therefor) as an "Aircraft" to be financed under this Agreement. "Bank LIBOR": for any Interest Period, a rate per annum (calculated on the basis of a 360-day year and the actual number of days elapsed) equal to the consensus rate at which 180 day deposits in Dollars appears on the Reuters Screen LIBO Page at approximately 11:00 a.m. London, England time, on the day that is two London business days preceding the commencement of that Interest Period; provided, however, that if Bank LIBOR as defined above, cannot be determined by reference to the Reuters Screen LIBO Page, then Bank LIBOR shall be determined by reference to the date offered by the principal London office of Barclays Bank PLC. 6 -2- "Basic Documents": this Agreement, the Purchase Agreement, the Finex Agreement, the Guarantee, and the Mortgage; and each Note, Purchase Agreement Assignment, Consent, and Mortgage Supplement as executed and delivered. "Borrower Interest Rate" for any Note with respect to any Interest Period: an interest rate equal to Bank LIBOR for such Interest Period, plus 87.5 basis points per annum (computed on the basis of a year of 360 days), based on actual days elapsed. "Business Day": any day, other than a Saturday or Sunday, on which commercial banks are open for business in New York, New York, Atlanta, Georgia and London, England, and if such day is a Purchase Date or Interest Payment Date or relates to a notice by Borrower with respect to any Purchase Date, which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Collateral": the "Collateral" under the Mortgage. "Commitment": Lender's commitment to purchase and exchange the Finex Notes for an aggregate amount of the lesser of $11,000,000 and 85% of Equipment Cost for both Equipment Portions; Borrower may reduce such amount upon 30 days prior written notice to Lender. Upon the delivery of the second Aircraft, any remaining commitment amount shall expire. "Commitment Fee": the fee required to be paid to Lender pursuant to section 2.03. "Commitment Period": the period from the date of execution of this Agreement to and including the earliest of (w) June 30, 1991, (x) the date upon which the second Aircraft is delivered to and accepted by Borrower pursuant to the Purchase Agreement, (y) the date on which the remaining Commitment is terminated pursuant to section 8.02 or section 10.01, and (z) a date set by Borrower pursuant to a notice sent to Lender at least 30 days prior to such date. "Consent": a Consent and Agreement, substantially in the form of Exhibit E, relating to a Purchase Agreement Assignment and dated the same date as that Purchase Agreement Assignment. "Default": any event or condition that would become an Event of Default upon the giving of notice or lapse of time or both, or any Event of Default. "Delta Agreement": that certain agreement between Delta Air Lines, Inc. and Borrower dated June 1, 7 -3- 1986 and relating to joint marketing or code sharing for interconnecting flights. "Dollars": and "$": United States dollars. "Downpayment": for each Equipment Portion, the difference between the Equipment Cost and the Financed Amount for such Equipment Portion, provided that the Financed Amount shall be no more than 85% of such Equipment Cost. "Embraer": Embraer-Empresa Brasileira de Aeronautica S.A., a Brazilian corporation, and its successors and assigns. "Equipment Cost": the purchase price for an Equipment Portion, as set forth in (and as adjusted pursuant to) the Purchase Agreement. In no event will the total Equipment Cost for both Equipment Portions include the invoice price of any Spare Parts in excess of 5% of the invoice price of both Aircraft. "Equipment Portion": an Aircraft and the Spare Parts purchased with that Aircraft. "ERISA": defined in section 5.11. "Event of Default": defined in section 8.01. "Event of Loss": defined in section 1.01 of the Mortgage. "FAA": the Federal Aviation Administration of the United States, or any instrumentality of the United States succeeding to its function. "Facility Fee": the fee required to be paid to Lender pursuant to section 2.04. "Financed Amount": the face amount of the Note for an Aircraft being purcahsed on a Purchase Date. "Finex Agreement": an agreement by that name, substantially in the form of Exhibit B. "Finex Bank": Banco de Credito Nacional S.A., New York Branch, a New York Branch of Banco de Credito Nacional S.A., a banking corporation organized under the laws of the Federative Republic of Brazil (or any other Person serving as a Finex bank under a Finex Agreement), in its capacity as Finex bank under the Finex Agreement, and its successors in such capacity. "Finex Interest Payments": defined in section 3.03 of the Finex Agreement. 8 -4- "Finex Note": Borrower's promissory note, in the form of Exhibit A-1, issued in connection with a designated Equipment Portion. "Finex Program:" the export support program (Fundo de Financiamento a Exportaceo) of the Federative Republic of Brazil as established by Resolution No. 509 of January 24, 1979 of Banco Central do Brasil, and in Circular Cacex/Finex No. 10 of the Carteira de Comercio Exterior (Cacex) of Banco do Brasil S.A., dated September 21, 1982, as from time to time supplemented or amended or any materially similar successor of such export support program. "GAAP": generally accepted accounting principles as in effect in the United States and applied on a basis consistent with that used in the preparation of the financial statements referred to in section 5.05, except for charges therein with which Borrower's independent public accountants concur that are disclosed in the notes to the relevant financial statements. "Guarantee": the document by that name, executed by Guarantor, in substantially the form of Exhibit I. "Guarantor": ASA Investments, Inc. "herein", "hereof", "hereunder", etc.: in, of, or under, etc. this Agreement (and not merely in, of, under, etc. the section or provision where that reference appears). "including": containing, embracing, or involving the enumerated item(s), but not necessarily limited to such item(s). "Indemnitee": Lender, or any agent (other than Finex Bank), employee, director, successor, or permitted assign of Lender. "Interest Payment Date" for a Note: each 180 day anniversary of the Purchase Date for that Note (determined without counting any Purchase Date or previous Interest Payment Date); except that, for purposes of payment and of determining the beginning and end of each Interest Period (but not for the purpose of determining the following Interest Payment Date), any Interest Payment Date that falls on a day which is not a Business Day shall instead occur on the following Business Day, unless such Business Day falls in another calendar month, in which case such Interest Payment Date shall occur on the preceding Business Day. "Interest Period" for a Note: each period beginning on the day after an Interest Payment Date for 9 -5- that Note (or, in the case of the first Interest Period for that Note, beginning on its Purchase Date) and ending on the following Interest Payment Date for that Note. "Lien": any mortgage, pledge, assignment, encumbrance, lien (statutory or other), or other security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, or any lease in the nature thereof). "Mortgage": the Security Agreement and Chattel Mortgage between Borrower and Lender, substantially in the form of Exhibit C. "Mortgage Supplement": defined in section 3.01. "Note": Borrower's promissory note, in the form of Exhibit A-2, issued in connection with a designated Equipment Portion, or a note issued in exchange or replacement for such a note. "1989 10-K": Borrower's annual report on Form 10-K for the year ended December 31, 1989. "1990 10-Q": Borrower's quarterly report on Form 10-Q for the quarter ended September 30, 1990. "Officer's Certificate": a certificate signed in the name of Borrower (or, with respect to section 6.04(b), of the Successor) by the chairman of the board, the president, a vice president, or the treasurer of Borrower (or the Successor). "or": at least one, but not necessarily only one, of the alternatives enumerated. 10 -6- "Permitted Lessee": defined in the Mortgage. "Permitted Lien": defined in the Mortgage. "Person": any individual, corporation, partnership, joint venture, or other legal or governmental entity. "Purchase Agreement": Purchase Agreement No. 162-COV/88 (including all attachments, exhibits, and letter agreements thereto) dated November 21, 1988, between Vendor and Borrower. "Purchase Agreement Assignment": a document by that name, substantially in the form of Exhibit D, executed and delivered on a Purchase Date with respect to the Aircraft then being delivered. "Purchase Date": a date on which Borrower purchases an Aircraft and, simultaneously, Lender purchases the related Note. "Reuters Screen LIBO Page": the display designated as page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may replace the LIBO Page on that service for the purpose of displaying London interbank offered rates for Dollar deposits). "SEC Filings": the 1989 10-K and the 1990 10-Q. "Spare Parts": the appliances, spare parts, and other items of equipment purchased with Aircraft under the Purchase Agreement. "Successor": defined in section 6.04(b). "Taxes": defined in the last sentence of section 9.02(a). "Taxing Authorities": defined in the first sentence of section 9.02(a). "Vendor": Embraer. SECTION 1.02 -- Use of Defined Terms. Any defined terms used in the plural preceded by "the" encompasses all members of the relevant class. Any defined term used in the singular preceded by "any" indicates any number of the members of the relevant class. Any agreement or instrument referred to in section 1.01 means such 11 -7- agreement or instrument as from time to time supplemented and amended. SECTION 1.03 -- Section and Exhibit References, etc. References to articles, sections, exhibits, and the like refer to those in or attached to this Agreement unless otherwise specified. ARTICLE II PURCHASE AND EXCHANGE OF FINEX NOTES; PAYMENTS SECTION 2.01 -- Purchase and Exchange of Finex Notes. Subject to the satisfaction of the conditions precedent set forth in article VII, and on the terms and conditions set forth in this article II, on the Purchase Date for each Aircraft, Lender shall purchase the related Finex Note from Finex Bank and Borrower will exchange with Lender a Note for such Finex Note. The Financed Amount for each Aircraft shall be the Equipment Cost for the related Equipment Portion less the Downpayment for such Equipment Portion, but in no event shall the combined Financed Amount for both Equipment Portions exceed the Commitment. Each Finex Note shall be purchased for its face amount and each Note exchanged for such Finex Note shall have the same face amount as such Finex Note. Lender's Commitment to purchase the Finex Notes pursuant to this Agreement shall expire at 12:00 noon, New York City time, on the last day of the Commitment Period. SECTION 2.02 -- Procedure for Purchase and Exchange of Finex Notes. The procedure to be followed in the purchase and exchange of Finex Notes is described in Annex A. At Lender's offices at 75 Wall Street, New York, New York 10265 (or such other location as the parties hereto agree upon), not later than 12:00 noon (New York City time) on the appropriate Purchase Date, upon fulfillment of the conditions set forth in article VII and in compliance with the procedures set forth in Annex A, Lender will purchase the related Finex Note from Finex Bank (who will have purchased that Finex Note simultaneously from Vendor), with general corporate funds, in each case for a purchase price equal to its face amount (as set forth in section 2.01). Concurrently therewith, Borrower will exchange with Lender a Note for such Finex Note, such Note to have the same face amount as the related Finex Note. 12 -8- SECTION 2.03 -- Commitment Fee. In partial consideration of the Lender's agreement to purchase and exchange the Finex Notes, Borrower shall pay to Lender a Commitment Fee (""Commitment Fee") for the Commitment Period, payable in arrears on the first day of each quarter or partial quarter (for the prior quarter or partial quarter) after the execution and delivery of this Agreement during the Commitment Period with a final payment on the last day of the Commitment Period, and computed at a rate per annum (calculated on the basis of a 360-day year and actual days elapsed) of 1/8 of 1% of the average daily unused portion of Lender's Commitment. The term "quarter" as used in this Section shall mean the relevant calendar quarter ending on one of the following dates: March 31, June 30, September 30, or December 31. SECTION 2.04 -- Facility Fee. In partial consideration of the Lender's agreement to purchase and exchange the Finex Notes, Borrower shall pay to Lender a Facility Fee ("Facility Fee") on each Purchase Date in the amount of 3/8 of 1% of the Financed Amount relating to such Purchase Date. ARTICLE III SECURITY FOR BORROWER'S OBLIGATIONS SECTION 3.01 -- Security Interest in Collateral. To secure Borrower's obligations to Lender under each Note and the other Basic Documents to which it is or becomes a party, Borrower shall execute and deliver to Lender, on each Purchase Date, a supplement to the Mortgage (a "Mortgage Supplement"), substantially in the form of Schedule A to the Mortgage, granting to Lender a perfected purchase money security interest in the Equipment Portion being purchased from Vendor on such Purchase Date. SECTION 3.02 -- Set-Off Rights. If Borrower becomes insolvent, or any Event of Default occurs, any indebtedness that Lender then owes to Borrower and any other property of Borrower that Lender then holds may be offset and applied toward the payment of any obligation of Borrower to Lender under the Basic Documents, whether or not any such other obligations is then due. 13 -9- ARTICLE IV PAYMENTS UNDER THE NOTES AND OTHER AMOUNTS PAYABLE BY BORROWER SECTION 4.01 -- How Payments Are Made. Borrower shall make its payments and prepayments of principal and interest due on the Notes, all amounts due as Commitment Fees and Facility Fees hereunder, and all other amounts payable by Borrower to Lender under the Basic Documents, to Lender at the Federal Reserve Bank of New York, 1 Liberty Plaza, New York, New York, Account: Barclays Bank PLC (ABA#02-600-2574), Reference: CLAD Account No. 050 01920-4, Attention: Aerospace Industries Unit/Atlantic Southeast Airlines Note No. 1 or 2 [as appropriate] (or at such other place as Lender from time to time notifies Borrower), in immediately available funds and in Dollars, no later than 1:00 p.m. (New York City time) on the date when due. Any payment made by Borrower to Lender after 1:00 p.m. (New York City time) on any day shall be deemed to have been made on the following Business Day. If any payment due under the Basic Documents comes due on a day which is not a Business Day, such payment shall instead be made on the following Business Day, unless such Business Day falls in another calendar month, in which case such payment shall be made on the preceding Business Day, and interest, or Commitment Fees, as the case may be, shall accrue at the applicable rate to the day of payment. SECTION 4.02 -- Right to Prepay. Unless a Default exists, Borrower shall have the right to prepay in full the outstanding principal amount of the Note issued with respect to any designated Equipment Portion, without premium or penalty. Borrower shall give to Lender at least 30 days' prior written notice (which notice shall be irrevocable) of such prepayment. Upon any prepayment of any Note under this section 4.02, Borrower shall pay all accrued and unpaid interest on the principal of such Note to the date of prepayment, together with all other amounts payable under section 10.02 with respect to such prepayment. SECTION 4.03 -- Mandatory Prepayments. Following the occurrence of an Event of Loss with respect to any Aircraft, Borrower shall prepay the Note executed in connection with that Aircraft, in accordance with section 7.01(b) of the Mortgage, and shall pay all other amounts payable under section 10.02 with respect to such prepayment. Upon acceleration of the Notes pursuant to section 8.02, Borrower shall prepay such Notes, and shall pay all other amounts payable under section 10.02 with respect to such prepayment. SECTION 4.04 -- Mandatory Purchase. Upon the occurrence of a Prepayment Event, Lender shall have the 14 -10- right to require Borrower to purchase or cause the purchase of the relevant Note for its then-outstanding principal amount, plus all accrued but unpaid interest on such Note to the date of such purchase, together with all other amounts payable under section 10.02 with respect to such prepayment. The payment described in the preceding sentence shall be due 10 days after a Prepayment Event has occurred (if that Prepayment Event has not been cured by then), and shall be made in the manner prescribed by section 4.01. A "Prepayment Event" shall occur if (a) Borrower fails to keep an Aircraft registered with the FAA; or (b) Borrower fails to obtain an FAA standard airworthiness certificate for an Aircraft within twenty days following the Purchase Date for such Aircraft. SECTION 4.05 -- Amount of Prepayment. A Note shall be deemed satisfied in full upon the prepayment of all principal of such Note, the payment of the interest due on or with respect to such Note on such prepayment date, and the payment of all past-due interest on or with respect to such Note and the payment of all other amounts payable under section 10.02 with respect to such prepayment. SECTION 4.06 -- Interest on Past Due Amounts. Any amounts past due (by acceleration or otherwise) and at any time outstanding under any Note or from Borrower under any other Basic Document shall (to the extent permitted by law) bear interest, payable on demand, from the due date until payment in full, at a rate equal to 2% per annum above Borrower Interest Rate. ARTICLE V BORROWER'S REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: SECTION 5.01 -- Corporate Standing. Borrower is a duly organized corporation existing in good standing under the laws of Georgia, has the corporate power and legal authority to own or lease its properties and to carry on its business as now conducted and as now proposed to be conducted, and is duly qualified to do business in all jurisdictions wherein such qualification is necessary (except in any jurisdictions in which the failure to qualify would have no materially adverse effect on its business or on its ability to carry out its obligations under the Basic Documents to which it is (or is to become) a party). SECTION 5.02 -- Corporate Powers. Borrower's execution, delivery, and performance of the Basic Documents to 15 -11- which it is (or is to become) a party are within Borrower's corporate powers; and the Basic Documents to which it is (or is to become) a party have been duly authorized by all necessary corporate action on Borrower's part, and do not contravene, result in a breach of, or require any consent under any law, judgment, decree, order, or contractual restriction binding on Borrower or any agreement or instrument to which Borrower is a party or to which it or any of its property is subject. SECTION 5.03 -- Binding Effect. The Basic Documents to which Borrower is (or is to become) a party are (or will be when executed and delivered) legal, valid, and binding obligations of Borrower in accordance with their terms, except as may be limited by bankruptcy, insolvency, or other similar laws affecting enforcement of creditors' rights generally. SECTION 5.04 -- Litigation. Except as disclosed in the SEC Filings, there are no pending or (to the best of Borrower's knowledge after due inquiry) threatened actions or proceedings before any court or administrative agency which may be expected to have a materially adverse effect on Borrower's business or financial condition or which seek to question or set aside any of the transactions herein contemplated. SECTION 5.05 -- Financial Statements. The audited balance sheet as of December 31, 1989 and unaudited balance sheet as of September 30, 1990 for Borrower and its consolidated subsidiaries, and the related results of operations for the year and quarter then ended, have been prepared in accordance with GAAP and correctly present Borrower's financial condition as of such dates and results of operations for such periods, and since September 30, 1990, there has been no materially adverse change in Borrower's business, assets, operations, or condition (financial or otherwise). SECTION 5.06 -- Taxes. Borrower has filed all tax returns which it is or was required to file, and has paid all taxes shown to be due and payable on those returns or on any assessment received by it, except such taxes of Borrower, if any, as are being contested diligently in good faith, and by appropriate proceedings, and as to which adequate reserves have been provided in accordance with GAAP. SECTION 5.07 -- Status as United States Citizen and Air Carrier. Borrower is a "citizen of the United States" as that term is used in section 101(16) of the Act, and is a duly certified "air carrier" within the meaning of the Act. SECTION 5.08 -- Location of Offices. Borrower's chief executive office and principal place of business, and the place where Borrower keeps its financial records 16 -12- concerning the Collateral, is located at its address referred to in section 11.02. The Spare Parts shall be located as set forth in Annex A to each Mortgage Supplement, unless otherwise specified pursuant to section 4.05 of the Mortgage. SECTION 5.09 -- Governmental Consents. Neither the execution, delivery, and performance of any of the Basic Documents (other than the Finex Agreement), nor the consummation of any of the transactions contemplated thereby by Borrower or Vendor (including the importation of the Aircraft into the United States from Brazil), requires the consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any federal, state, or foreign governmental authority or agency (including any judicial body) except for (a) the filing and recording of the Mortgage, and of the FAA bill of sale, the FAA application for registration, and the Mortgage Supplement for each Aircraft with the FAA; (b) the filing and recording of UCC-1 financing statements for each Aircraft with the Superior Court Clerk Offices in Bibb, Clayton, and Fulton County, Georgia, and in the appropriate places in Texas and Arkansas; and (c) the registration of each Aircraft with the FAA pursuant to the Act, and except for any necessary action with respect to the Finex Program. SECTION 5.10 -- Condition of Aircraft. On each Purchase Date, the Aircraft to be delivered on such Purchase Date shall be in such condition as is sufficient to enable Borrower to obtain a standard U.S. certificate of airworthiness for such Aircraft and to enable such airworthiness certificate to be maintained in good standing; and, to Borrower's knowledge (which shall be based on acceptance tests by Borrower in accordance with its ususal practices, to the extent permitted under the Purchase Agreement), such Aircraft shall otherwise conform in all material respects to the specifications for such Aircraft set forth in the Purchase Agreement. SECTION 5.11 -- Absence of ERISA Liability. Each employee pension benefit plan (as defined in section 3(2) of the Employee Retirement Income Security Act of 1974, as from time to time amended ("ERISA")) of Borrower is in compliance with the applicable provisions of ERISA and of the Internal Revenue Code of 1986, as from time to time amended, in all respects, except the extent that noncompliance would not be materially adverse to Borrower's business, assets, financial condition, or ability to perform its obligations under the Basic Documents. SECTION 5.12 -- Delta Agreement. The Delta Agreement is (a) the only agreement to which the Borrower is a party relating to joint marketing or code sharing for interconnecting flights, and (b) in full force and effect. There exists no default under the terms of the Delta Agreement and there has not occurred any event that would 17 -13- ripen into a default upon the giving of notice or passage of time. SECTION 5.13 -- Subsidiaries; Stock Ownership. Borrower owns 100% of the outstanding stock of Guarantor and Borrower has no material stock or other equity investment in any other corporation, partnership, or other Person. SECTION 5.14 -- Investment Company Status. The Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Note, or any amount owed by Borrower under any other Basic Document, remains outstanding or unpaid or Lender has any Commitment hereunder; SECTION 6.01 -- Financial Statements. Borrower shall furnish to Lender: (a) within 45 days after the end of each of the first three quarters in each fiscal year, consolidated statements of operations of Borrower and its consolidated subsidiaries for the period from the beginning of the then-current fiscal year to the end of such quarterly period, and balance sheets of Borrower and its consolidated subsidiaries, on a consolidated basis, as of the end of such quarter prepared in accordance with GAAP and setting forth in each case in comparative form figures for the corresponding period in the preceding year, all in reasonable detail and certified by the Chief Financial Officer of Borrower, subject to changes resulting from year-end adjustments, and Borrower's Form 10-Q for such period; (b) within 90 days after the end of each fiscal year, consolidated statements of operations of Borrower and its consolidated subsidiaries, for such year, and the balance sheets of Borrower and its consolidated subsidiaries, on a consolidated basis, as of the end of such year, setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail, and certified to Borrower by its independent certified public accountants and to Lender by Borrower's Chief Financial Officer, as presenting fairly the financial position and results of operations of Borrower and its 18 -14- consolidated subsidiaries and as having been prepared in accordance with GAAP, and Borrower's Form 10-K for such period; (c) within two Business Days after any officer of Borrower obtains knowledge of any Default, an Officer's Certificate specifying its nature, the period of its existence, and what action Borrower proposes to take with respect to it; and (d) promptly upon request, such other data or information (financial or otherwise) regarding Borrower or the Collateral as Lender from time to time reasonably requests. SECTION 6.02 -- Inspection of Collateral and Records. Borrower shall permit any person(s) from time to time designated in writing by Lender, at Lender's expense (or at Borrower's expense if a Default exists at the time), to visit and inspect any of the Collateral and Borrower's (or any Permitted Lessee's) records with respect to the Collateral, at such times as Lender reasonably requests, and to discuss Borrower's affairs, finances, and accounts with Borrower's officers. No such inspection shall unreasonably interfere with Borrower's (or any Permitted Lessee's) operations or maintenance. Lender shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. Upon Lender's request, Borrower shall promptly notify Lender of the maintenance operations then scheduled on the Aircraft for the six-month period following such request. SECTION 6.03 -- Corporate Existence. Except as permitted by section 6.04, Borrower shall maintain its corporate existence in good standing in the state of its incorporation and in all jurisdictions where qualification is necessary (except in any jurisdiction in which the failure to qualify would have no materially adverse effect on its business or on its ability to carry out its obligations under the Basic Documents to which it is (or it to become) a party). Borrower shall preserve and renew its rights (charter and statutory), patents, and franchises, unless Borrower determines in good faith that the preservation thereof is no longer necessary or desirable in the conduct of its business and that the loss thereof will not adversely affect Lender's rights or Borrower's business, assets, operations, condition (financial or otherwise). SECTION 6.04 -- Merger. Borrower shall not consolidate with or merge into any other corporation, or convey, transfer, or lease all or substantially all of its assets as an entirety to any Person, unless: 19 -15- (a) the Borrower is the surviving corporation; or (b) the corporation formed by such consolidation or merger or the Person who acquires by conveyance, transfer, or lease all or substantially all of Borrower's assets as an entirety (the "Successor") (i) is a corporation organized and existing under the laws of the United States of America or any state or the District of Columbia, (ii) is a "citizen of the United States" as defined in section 101(16) of the Act, (iii) is an air carrier (within the meaning of section 101(3) of the Act) certificated under section 604(b) of the Act, (iv) executes and delivers to Lender an agreement, in form and substance satisfactory to Lender, containing an assumption by the Successor of the due and punctual performance and observance of Borrower's obligations under the Basic Documents to which Borrower is then a party, and (v) makes such filings and recordings, including any filing or recording with the FAA pursuant to the Act or any filing under the UCC, as are necessary to evidence such consolidation, merger, conveyance, transfer, or lease with or to the Successor; and (d) Borrower or the Successor delivers to Lender, promptly upon consummation of such transaction, an Officer's Certificate stating that the conditions precedent set forth in clauses (a) and (b) have been complied with and an opinion of counsel to Borrower or the Successor, in form and substance satisfactory to Lender, stating that the agreements entered into to effect such consolidation, merger, conveyance, transfer, or lease and such assumption agreements have been duly authorized, executed, and delivered by the Successor and that they (and the Basic Documents so assumed) constitute legal, valid, and binding obligations of the Successor, enforceable in accordance with their terms (to the same extent as the Basic Documents so assumed were enforceable against Borrower); and that all conditions precedent which are legal in nature provided for in this Agreement and relating to such transactions have been fulfilled. Upon any such consolidation, merger, conveyance, transfer, or lease, the Successor shall succeed to, shall be substituted for, and may exercise every right and power of Borrower under the Basic Documents to which Borrower is a party, with the same effect as if the Successor had been named as Borrower therein. No such conveyance, transfer, or lease of substantially all of Borrower's assets as an entirety shall have the effect of releasing Borrower (or any Successor) from its liability under the Basic Documents to which it is a party. Nothing in this section shall 20 -16- permit any lease, sublease, or other arrangement for the use, operation, or possession of the Aircraft except in compliance with the applicable provisions of this Agreement and the Mortgage. 21 -17- SECTION 6.05 -- Citizenship and Air Carrier Status. Borrower will at all times remain a "citizen of the United States" as defined in section 101(16) of the Act and an "air carrier" within the meaning of the Act. SECTION 6.06 -- Compliance with ERISA. (a) Borrower will, at all times, make prompt payment of contributions that it is required to make to any employee benefit plan to which it is a party as are necessary to meet the minimum funding standards for such an employee benefit plan, as required by ERISA. (b) Within two Business Days after the occurrence of any event or circumstance, including any event which is classified as a "Reportable Event" under ERISA, in connection with any employee benefit plan to which it is a party, that might constitute grounds for termination of an employee benefit plan to which Borrower is a party by the Pension Benefit Guaranty Corporation or might result in the appointment of a trustee by a United States District Court under section 4042 of ERISA to administer such employee benefit plan; Borrower will provide Lender with an Officer's Certificate describing the event or circumstance, stating the reasons for any such action by the Pension Benefit Guaranty Corporation or a United States District Court, and specifying the action Borrower proposes to take with respect thereto. SECTION 6.07 -- Disposition of Assets. Borrower will not dispose of any of its assets, other than in the ordinary course of its business, unless it receives full, fair, and reasonable consideration for such assets; and Borrower will not during any twelve-month period dispose of assets, other than in the ordinary course of its business, which have an aggregate book value in excess of $5,000,000; provided, that Borrower shall have the right to dispose of any aircraft for at least such aircraft's book value and such sale of an aircraft for at least book value will not be included in the calculation of the $5,000,000 of assets sold in a twelve-month period. The book value of an aircraft shall be determined in accordance with GAAP. For avoidance of doubt, the "ordinary course" of Borrower's business generally shall include (x) acquisitions or dispositions of marketable securities (other than acquisitions or dispositions exceeding 5% of any class of "equity security", as defined in the Securities Exchange Act of 1934) and (y) the disposition of parts of discontinued aircraft, engines, or propellers not constituting part of a program to reduce Borrower's fleet in any material respect. Borrower will not dispose of any Aircraft unless the Note issued in connection with such Aircraft has been paid in full. 22 -18- SECTION 6.08 -- Performance of Delta Agreement. Borrower shall faithfully perform all obligations it has under the Delta Agreement. ARTICLE VII CONDITIONS PRECEDENT TO THE PURCHASE AND EXCHANGE OF FINEX NOTES SECTION 7.01 -- Conditions Precedent to the Purchase and Exchange of the Initial Finex Notes. Lender's obligation to purchase the Note on the first Purchase Date is subject to the satisfaction (or Lender's waiver) of the following conditions precedent and Lender's receipt on or before such initial Purchase Date of the following, in form and substance satisfactory to Lender: (a) an executed Finex Agreement, (b) an executed Mortgage, (c) an executed Guarantee, (d) an Officer's Certificate certifying an attached copy of the Purchase Agreement, (e) copies of the SEC Filings, and (f) evidence of authority of the Finex Bank's representatives executing the Finex Agreement, together with their specimen signatures. SECTION 7.02 -- Conditions Precedent to the Purchase and Exchange of All Finex Notes. Lender's obligation to purchase each Note (including the initial Note) is subject to the additional conditions precedent that: (a) Lender shall have received the following, each dated as of the pertinent Purchase Date, in form and substance satisfactory to Lender: (i) the Note for the relevant Equipment Portion, executed by Borrower, along with a copy of the related Finex Note, executed by Borrower and endorsed by Vendor (without recourse) to the order of Finex Bank who in turn has endorsed (without recourse) to the order of Lender, (ii) an executed Mortgage Supplement with respect to the relevant Equipment Portion, 23 -19- (iii) an executed Purchase Agreement Assignment, with the related executed Consent, with respect to the relevant Equipment Portion, (iv) an Officer's Certificate to the effect that: (1) Borrower's representations and warranties in Article V of this Agreement and section 6 of the relevant Purchase Agreement Assignment are true and accurate as though made on the Purchase Date and (2) no Default exists or will result from Lender's purchase of such Note, (v) a certificate of insurance describing the insurance maintained by Borrower with respect to the Equipment Portion being purchased and stating that such policies conform to the requirements of the Mortgage, (vi) an opinion from Borrower's counsel substantially in the form of Exhibit F, (vii) an opinion from Crowe & Dunlevy, special FAA counsel, substantially in the form of Exhibit G, covering the Equipment Portion that is the subject of the Note being purchased, (viii) an opinion of counsel to Embraer, substantially in the form of Exhibit H, (ix) an opinion of special Brazilian counsel, substantially in the form of Annex B to the Finex Agreement, (x) a Full Warranty Bill of Sale from Vendor to Borrower with respect to the relevant Aircraft, (xi) A Certificate of Acceptance and Transfer of Title and Risk of Borrower with respect to the relevant Aircraft, (xii) a certificate of Embraer stating that the relevant Aircraft is fully equipped to operate in commercial passenger service, (xiii) a certificate of an officer of Embraer as to the authority of Embraer's representatives executing the documents required by this Section 7.02, together with specimen signatures, (xiv) a certificate of Borrower's secretary, dated the Purchase Date, certifying attached copies of the Certificate of Incorporation and By-Laws of Borrower, the resolutions of Borrower's board of directors evidencing approval of the transactions contemplated by the Basic Documents to which it is 24 -20- (or is to become) a party, and showing the names and specimen signature(s) (or copies thereof) of Borrower's officer(s) authorized to sign this Agreement and the related documents to which it is (or is to become) a party, (xv) a Power of Attorney to Borrower empowering one or more designated individuals to accept the relevant Aircraft on behalf of Borrower, and (xvi) such additional opinion(s) and document(s) as Lender requests; (b) Lender shall have received copies of the necessary FAA Application for Aircraft Registration, FAA Bill of Sale and Brazilian Export Certificate of Airworthiness pertaining to the Aircraft being purchased; (c) Borrower's representations and warranties in the Basic Documents shall be true and accurate as though made on and as of such Purchase Date; (d) no Default shall exist or shall result from Lender's purchase of such Note; (e) all filings, recordings, and other actions necessary to establish, protect, preserve, and perfect Lender's interests under the Mortgage shall have been duly made or taken; (f) all necessary consents, approvals, licenses, permits, declarations, or registrations then required in connection with the execution, delivery performance, validity, and enforceability of the Basic Documents and the transactions contemplated thereby shall have been obtained; (g) Lender shall have received invoices from Vendor, each countersigned by Borrower, specifying the purchase price of the Equipment Portion, any payments theretofore made and the balance due and owing; (h) a copy of the approval of the application for coverage of the purchase of the Aircraft by the Finex Program; and (i) in Lender's reasonable judgment, since September 30, 1990, there shall have occurred no materially adverse change in the business, financial condition, or operations of Borrower. ARTICLE VIII 25 -21- EVENTS OF DEFAULT; REMEDIES SECTION 8.01 -- Events of Default. Each of the following shall constitute an "Event of Default": (a) Borrower fails to make any payment due from Borrower on any Note or under any other Basic Document (including under section 4.04 hereof) when due; (b) any representation or warranty made by Borrower or Guarantor in the Basic Documents, or in any certificate or other document that borrower or Guarantor furnishes pursuant to the Basic Documents, proves to have been incorrect in any material respect when made; (c) Borrower fails to maintain the insurance required by the terms of the Mortgage; (d) the Delta Agreement is voluntarily terminated, or is amended to the detriment of Borrower; (e) Borrower fails to provide Lender with the Officer's Certificate required by section 6.01(c) or 6.06(b) within 10 days after any of Borrower's officers obtains notice of a Default or the ERISA-related event or circumstance occurs, respectively; (f) Borrower or Guarantor fails to perform any other material covenant or agreement in the Basic Documents, and (if remediable) such failure to perform continues for 30 days after Borrower's or Guarantor's receipt of notice of such default from Lender; (g) either of the Borrower or the Guarantor (1) applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of all or a majority of its property, (2) makes a general assignment for the benefit of its creditors, (3) commences a voluntary case under the federal Bankruptcy Code (as now or hereafter in effect), (4) files a petition seeking to take advantage (as debtor) of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, or (5) fails to controvert in a timely manner, or acquiesces in writing to, any petition filed against it in an involuntary case under the federal Bankruptcy Code; (h) a proceeding or case is commenced, without the application or consent of Borrower or Guarantor, as the case may be, in any court of competent jurisdiction, seeking (1) the liquidation, 26 -22- reorganization, dissolution, or winding-up, or the composition or readjustment of the debts of Borrower or Guarantor, (2) the appointment of a trustee, receiver, custodian, liquidator, or the like of Borrower or Guarantor or of all or a majority of the assets of Borrower or Guarantor, or (3) similar relief in respect of Borrower or Guarantor under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case continues undismissed, or an order, judgment, or decree approving or ordering any of the foregoing is entered and continues unstayed and in effect, for a period of 60 days; or an order for relief against Borrower or Guarantor is entered in an involuntary case under the federal Bankruptcy Code; (i) loan, lease, or deferred purchase obligations of Borrower or Guarantor totalling more than $5 million are in default after the expiration of any applicable grace period, if the effect of such default is to permit such obligations to be accelerated or otherwise declared to be due and payable prior to their stated maturity, or Borrower or Guarantor defaults in the payment when due of more than $5 million of loan, lease, or deferred purchase obligations; (j) one or more judgment(s) is/are rendered by one or more court(s) of competent jurisdiction against Borrower or Guarantor for a total of more than $1 million and is/are not stayed or discharged, or fully bonded against, within 60 days of the date of entry; (k) any "Reportable Event" under ERISA shall have occurred, or any finding or determination shall be made with respect to an employee benefit plan to which Borrower is a party under Section 4041(c) or (e) of ERISA, or any fact or circumstance shall occur with respect to an employee benefit plan to which Borrower is a party, that, in the opinion of Lender, provides grounds for the commencement of any proceeding under Section 4042 of ERISA, or any proceeding shall be commenced under Section 4042 of ERISA with respect to an employee benefit plan to which Borrower is a party; (l) Borrower shall deny any further liability under any Note or under any other Basic Document or Guarantor shall deny any further liability under the Guarantee; or (m) Lender fails or ceases to have a perfected first-priority interest in an Aircraft, or a Lien (other than a Permitted Lien) on an Aircraft exists. 27 -23- SECTION 8.02 -- Remedies. If an Event of Default (other than under Section 8.01(g) or (h)) exists, Lender may declare all Notes to be immediately due and payable, whereupon (i) all Notes shall become and be immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which Borrower hereby waives, and (ii) the Commitment shall terminate. If an Event of Default under section 8.01(g) or (h) occurs, all Notes automatically shall become immediately due and payable and the Commitment automatically shall immediately terminate, without presentment, demand, protest, or notice of any kind, all of which Borrower hereby waives. 28 -24- ARTICLE IX BORROWER'S INDEMNITIES SECTION 9.01 -- General Indemnity. Borrower assumes liability for, and agrees to indemnify each Indemnitee against, and on written demand to pay, or to reimburse each Indemnitee for the payment of, any and all liabilities, obligations, losses, damages, penalties, claims (including claims involving strict liability in tort), suits, actions, costs, expenses, and disbursements, including legal fees and expenses, of whatsoever kind and nature (collectively, "Liabilities") imposed on, incurred by, or asserted against any Indemnitee relating to or arising out of any Basic Document, the enforcement against Borrower of any of the terms of the Basic Documents, or any lease or relinquishment of possession of the Aircraft or any part thereof or any action or inaction of Borrower or of any lessee, assignee, or transferee of Borrower in connection therewith, the purchase of the Aircraft under the Purchase Agreement, the ownership of the Aircraft, the acquisition, delivery, nondelivery, acceptance, nonacceptance, rejection, registration, deregistration, insuring, storage, manufacture, assembly, transportation, importation, exportation, maintenance, condition, modification, testing, repair, fitness for use, merchantability, sale, abandonment, lease, sublease, assignment, transfer, transfer of title, possession, repossession, use, operation, return, or other application or disposition of the Aircraft or any component thereof, the condition upon return thereof after repossession following the occurrence of an Event of Default or following the exercise of remedies under the Mortgage, including latent or other defects, whether or not discoverable, loss of or damage to any property or the environment, death or injury of any person, and any claim for patent, trademark, copyright, or mask work infringement and the violation or infringement by Borrower of any laws, rules, or regulations, or (without limiting any of the foregoing) any breach by Borrower of, noncompliance by Borrower with, or misrepresentation made or deemed made by or on behalf of Borrower in, under, or in connection with the Purchase Agreement or any Purchase Agreement Assignment or any warranty, certificate, or agreement made or delivered in, under, or in connection with the Purchase Agreement or any Purchase Agreement Assignment; provided, that this section shall not require Borrower to pay or indemnify any Indemnitee under this section (i) for any Liability to the extent resulting from its acts of gross negligence or willful misconduct; (ii) for any Liability with respect to Taxes (Borrower's duties in respect of Taxes being set forth in section 9.02) or for any cost or expenses relating to the preparation, execution, delivery, or enforcement of the Basic Documents (Borrower's duties in respect of such costs and expenses being set forth in 29 -25- section 9.02) or for any cost or expenses relating to the preparation, execution, delivery, or enforcement of the Basic Documents (Borrower's duties in respect of such costs and expenses being set forth in section 11.03); (iii) for any Liability that such Indemnitee incurs to the extent resulting from its breach of any of its representations, warranties, or covenants in any Basic Document; (iv) for any Liability to the extent resulting from a claim against such Indemnitee not related to any Aircraft, any action or inaction of Borrower or any lessee, assignee, or transferee of Borrower, or any of the transactions contemplated by the Basic Documents; (v) for any Liability with respect to transfer taxes or other expenses payable with respect to the transfer of any Note, other than a transfer after the occurrence of an Event of Default; or (vi) for any Liability with respect to any violation or purported violation of any law relating to usury or the charging or collecting of excess interest or finance charges. If any Indemnitee obtains knowledge of any claim or liability required to be indemnified against under this section 9.01, such Indemnitee shall promptly notify Borrower, but the failure to do so shall not relieve Borrower from any liability that it otherwise would have to such Indemnitee under this section. Upon an Indemnitee's request, the defense of any Liability for which Borrower would be required to indemnify such Indemnitee hereunder shall be conducted by Borrower, with counsel selected by Borrower and satisfactory to Lender. However, if the defense of any such Liability is conducted by Lender, Lender shall select the counsel to conduct it, but shall consult with Borrower as to such selection; provided, that the decision as to which counsel to select shall be and remain Lender's. Borrower shall be obligated under this section 9.01 irrespective of whether the Indemnitee is also indemnified with respect to the same matter under any other Basic Document or other document by any other Person, and the Indemnitee may proceed directly against Borrower under this section 9.01 without first reporting to any such rights of indemnification. Upon the payment in full of any indemnities due and owing under this section 9.01, Borrower shall be subrogated to any right of the Indemnitee in respect of the matter against which indemnity has been given. Borrower's indemnities in this section shall survive expiration or termination of the Mortgage and payment in full of the Notes. Any payment or indemnity pursuant to this section 9.01 shall include the amount, if any, necessary to hold the Indemnitee harmless on an after-tax basis from all taxes required to be paid by such recipient with respect to such payment or indemnity under laws of any federal, state, or local government or taxing authority in the United States or by any foreign government or any political subdivision or taxing authority thereof. The amount of any payment or indemnity required under this section shall be determined by the Indemnitee reasonably and in good faith, and that determination shall be conclusive. Upon Borrower's request and at Borrower's expense, the 30 -26- Indemnitee will provide Borrower with a summary explanation of the basis for the Indemnitee's computations. SECTION 9.02 -- Taxes. (a) Indemnity. All payments by Borrower under this Agreement and under any Note shall be free of withholdings of any nature whatsoever (and at the time that Borrower is required to make any payment upon which any withholding is required, Borrower shall pay an additional amount such that the net amount actually received by the person entitled to receive such a payment will, after such withholding, equal the full amount of the payment then due) and shall be free of expense to each Indemnitee for collection or other charges. In addition, except as provided in section 9.02(b), Borrower agrees to indemnify each Indemnitee on a net after-tax basis against, and on written demand to pay or reimburse each Indemnitee for the payment of, and shall promptly pay and discharge when due except to the extent duly contested, any and all Taxes imposed upon or asserted against any Indemnitee, any Aircraft or any part thereof or interest therein, any Basic Document, any lease of any Aircraft or any part thereof, or otherwise upon or with respect to or measured by (i) the construction, mortgaging, financing, refinancing by or at the request of Borrower, purchase, acquisition, acceptance, nonacceptance, rejection, delivery, nondelivery, transport, insuring, ownership, registration, deregistration, assembly, possession, repossession, operation, use, condition, maintenance, modification, repair, fitness for use, merchantability, testing, return, abandonment, storage, manufacture, leasing, subleasing, importation, exportation, sale, assignment, transfer, transfer of title, or other application or disposition of, or the imposition of any Lien (other than a Permitted Lien) or the incurrence of any liability to refund or pay over any amount as a result of any Lien other than a Permitted Lien) on any Aircraft or any part thereof or interest therein, (ii) any amount paid or payable by Borrower or Finex Bank under the Basic Documents or the receipts or earnings arising from or received with respect to any Aircraft or any part thereof or interest therein, (iii) any Aircraft or any part thereof or interest therein, (iv) any of the Basic Documents and any other documents contemplated thereby or the execution, sale, delivery, acquisition, or filing of the Basic Documents, (v) any rentals or other payments made or received by Borrower under any lease or sublease of any Aircraft or any part thereof or (vi) otherwise with respect to or in connection with the transactions effected under the Basic Documents. The term "Taxes" shall mean any and all fees, taxes, levies, imposts, duties, charges, assessments, or withholdings of any nature whatsoever, now or hereafter imposed, assessed or asserted by any federal, state, local or foreign government or taxing authority 31 -27- together with any and all penalties, fines, additions to tax, and interest thereon or computed by reference thereto. (b) Exclusions from Indemnity. The provisions of section 9.02(a) shall not apply to: (i) Taxes (other than sales, use or rental taxes imposed as a result of any Indemnitee's interest in any Equipment Portion or the Basic Documents) which are United States federal net income taxes; (ii) Taxes (other than sales, use or rental taxes imposed as a result of any Indemnitee's interest in any Equipment Portion or the Basic Documents) which are net income, capital, net worth, franchise, or similar conduct of business taxes which are imposed on an Indemnitee by the state or local government or taxing authority in which such Indemnitee conducts any business other than the transactions contemplated in the Basic Documents; (iii) Taxes (other than sales, use or rental taxes imposed as a result of any Indemnitee's interest in any Equipment Portion of the Basic Documents) which are imposed by any foreign government or taxing authority upon an Indemnitee if such Indemnitee is otherwise subject to such taxes in such jurisdiction as a result of activities or transactions unrelated to those contemplated by the Basic Documents; (iv) any Tax imposed on the Indemnitee as a result of a transfer or other disposition, by such Indemnitee or any of its predecessors in interest, of any interest in the Aircraft or any Basic Document, unless such transfer or disposition occurs after the occurrence of an Event of Default or at the request of Borrower; (v) Taxes imposed on an Indemnitee as a direct and primary result of such Indemnitee's gross negligence or willful misconduct; (vi) any Tax based on or measured by the value of such Indemnitee's interest in any Basic Document (except for any such Tax (1) imposed without regard to the existence or extent of the Indemnitee's presence or activities, or the presence of a Note, in the jurisdiction imposing such Tax or (2) imposed solely as a result of the Indemnitee's execution of, or enforcement of rights under, the Basic Documents); or (vii) any Tax in the nature of a penalty, an addition to tax, interest, or fine resulting from the negligence or misconduct of the 32 -28- Indemnitee in connection with the preparation or filing of (or failure to prepare or file) tax returns, or the payment of or failure to pay its taxes, but in each case not if an any way attributable to reports and returns for which Borrower is responsible pursuant to section 9.02(e) Borrower's failure to provide to any Indemnitee any information necessary for the preparation or filing of such returns or the conduct of such proceedings or otherwise to perform its duties and responsibilities pursuant to the Basic Documents. (c) Certain Tax Payments. Notwithstanding anything to the contrary in this section 9.02, if an Indemnitee pays or becomes liable for any Tax that Borrower has agreed to pay under this section 9.02, Borrower shall pay to such Indemnitee such amount or from time to time such amounts as, after subtraction of all Taxes required to be paid by such Indemnitee in respect of the receipt of such amounts from Borrower under this Section 9.02 and taking into account any tax benefit or detriment actually realized (or to be realized) by such Indemnitee as a result of such Indemnitee's receipt of such payment, is equal to the sum of such Taxes payable by such Indemnitee from time to time. All Taxes shall be paid when due and payable and all amounts payable as indemnities pursuant to section 9.02(a) shall be payable in accordance with this section 9.02(c), to the extent not theretofore paid, on written demand by the appropriate Indemnitee. The amount of any payment or indemnity required under this section shall be determined by the Indemnitee reasonably and in good faith, and that determination shall be conclusive. Upon Borrower's request and at Borrower's expense, the Indemnitee will provide Borrower with a summary explanation of the basis for the Indemnitee's computations. (d) Refund of Withholding Taxes to Borrower. If, pursuant to the first sentence of section 9.02(a) hereof, Borrower has withheld any amount from any payment in respect of any withholding tax with respect to a Tax not indemnifiable by Borrower pursuant to section 9.02(a) and Borrower has paid over such withheld amount to the proper taxing authority for the account of such Indemnitee, Borrower shall notify such Indemnitee of the amount of such withholding and provide to such Indemnitee a receipt or other documentation evidencing payment of the withheld amount. Upon receipt of the notice described in the preceding sentence, such Indemnitee shall promptly repay to Borrower, the amount withheld together with interest thereon from the date of receipt of the notice to the date of repayment at the then current rate set by the taxing jurisdiction for overpayments of such Tax. (e) Reports. Borrower will, at its own expense, duly prepare and file all required reports and returns 33 -29- respecting all Taxes for which Borrower is responsible pursuant to section 9.02(a) to the extent it is required by law to do so. With regard to any reports and returns required to be filed by any Indemnitee covering any Taxes for which Borrower is responsible pursuant to section 9.02(a), Borrower shall upon request furnish such Indemnitee with such information and records (to the extent Borrower has possession thereof or may obtain possession thereof upon Borrower's exercise of reasonable efforts) relating thereto as is reasonably required by Indemnitee to make such filing and funds in the amount required to be submitted as reflected on such report or return. Borrower shall hold each Indemnitee harmless from and against any liabilities, obligations, losses, damages, penalties, claims, actions, suits and reasonable costs arising out of any insufficiency or inaccuracy contained in any report or return (i) prepared and filed by Borrower (but only to the extent not attributable to the information provided to Borrower by such Indemnitee) or (ii) prepared and filed by any Indemnitee (but only to the extent attributable to information provided to such Indemnitee by Borrower). If, as a result of an audit, an Indemnitee reasonably requests additional information, Borrower shall make available such other information and records as it maintains in the ordinary course of business. ARTICLE X ILLEGALITY AND YIELD PROTECTION SECTION 10.01 -- Illegality and Increased Costs. (a) Illegality. If, after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation, administration or enforcement thereof by any governmental authority, central bank or other comparable authority or compliance by Lender with any request, guideline or directive (whether or not having the force of law) of any governmental authority, central bank or other comparable authority shall, in the reasonable determination of Lender, make it unlawful or impossible for Lender to issue, maintain or fund any Note or to perform any obligation under this Agreement or any other Basic Document, Lender shall so notify Borrower and, subject to the provision of section 10.01(c) hereof, on the next Interest Payment Date (or such earlier date as Lender shall specify in such notice after which it may not lawfully continue to maintain such Note or its obligations under this Agreement), Borrower shall prepay such Note, plus accrued interest thereon and the remaining Commitment, if any, of Lender shall terminate. 34 -30- (b) Increased Cost. If, after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation, administration or enforcement thereof by any governmental authority, central bank or other comparable authority or compliance by Lender with any request, guideline or directive (whether or not having the force of law, but with respect to which Lender customarily complies and which is applied by Lender to all other loans of similar type) of any governmental authority, central bank or other comparable authority shall, in the reasonable determination of Lender: (i) impose, modify or deem applicable any capital adequacy, reserve, special deposit or similar requirement (including, without limitation, a request or requirement which affects the manner in which Lender allocates capital resources to its commitments, including its obligations under this Agreement); or (ii) impose on Lender any other condition or requirement with respect to its issuing, maintaining or funding any Note or its obligations under this Agreement; and the result of any of the foregoing is to: (x) increase the funding cost to Lender of making, maintaining or funding or performing its obligations under this Agreement; or (y) reduce the amount of any payment (whether of principal, interest or otherwise) received or receivable by Lender hereunder; or (z) reduce the rate of return to be earned by Lender with respect to any Note; Borrower shall pay to Lender within 15 days after demand such additional amount or amounts as will compensate Lender for such increased cost or reduction. A certificate of Lender as to any such additional amount or amounts, in the absence of manifest error, shall be final and conclusive. In determining such amount, Lender shall use any reasonable averaging and attribution methods. Lender will promptly notify Borrower after Lender obtains knowledge of the occurrence of an event which would entitle Lender to compensation hereunder. (c) Change of Lending Office, Etc. (a) If an event occurs which makes the provisions of section 10.01(a) or 10.01(b) applicable, Lender will, if requested by Borrower, use reasonable 35 -31- efforts to transfer the affected Notes and its obligations hereunder with respect to such Notes to another branch or office of Lender to which such event would not be applicable, provided that such transfer would not, in the sole judgment of Lender, be disadvantageous to Lender or contrary to Lender's policies. (b) Lender may at any time and from time to time transfer any Note or its obligations under this Agreement with respect to such Note to another branch or office of Lender and shall give notice of any such transfer to Borrower. Except in the case of a transfer made at the request of Borrower, no such trasnfer shall make operable the provisions of section 10.01(a) or entitle Lender to make a claim under section 10.01(b) if the operability of such clause or such claim results solely from such transfer and not from subsequent change of the type referred to therein. SECTION 10.02 -- Funding Losses. Borrower shall pay to Lender, upon request, such amount or amounts as Lender determines are necessary to compensate it for any loss, cost or expense incurred by it as a result of (a) any payment or prepayment of any Note on a date other than the last day of an Interest Period for such Note or (b) a Note for any reason not being purchased on the date therefor determined in accordance with the applicable provisions of this Agreement. Such amount payable by Borrower shall not include any loss, cost or expense attributable to any date more than 180 days after the date of such payment, prepayment or failure to purchase any Note. A certificate of Lender as to the amount of such loss, cost or expense shall be final and conclusive in the absence of manifest error. ARTICLE XI MISCELLANEOUS SECTION 11.01 -- No Waivers; Cumulative Remedies. No failure or delay in exercising any power or right under any Basic Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude other or further exercise thereof or the exercise of any other right or power under any Basic Document. No notice to or demand on any party in any case shall, of itself, entitle such party to any other or further notice or demand in similar or other circumstances. SECTION 11.02 -- Notices. All communications and notices provided for under this Agreement shall be in writing (including telex, telegraph, and telecopy), shall 36 -32- be in English, and shall be mailed by certified mail (return receipt requested) or otherwise delivered to the parties at the addresses set forth by their signatures hereto, or, as to teach party, at such other address as it designates by notice to each other party. Each such notice shall be effective upon delivery. SECTION 11.03 -- Transaction Expenses. Borrower will pay on demand all out-of-pocket expenses in connection with the preparation, execution, delivery administration, and enforcement of the Basic Documents, or in connection with any scheduled closing that is postponed or canceled, including (i) all fees and expenses of, (x) Winthrop, Stimson, Putnam & Roberts, special counsel to Lender, (y) Castro, Barros, Sobral e Xavier, special Brazilian counsel and (z) Crowe & Dunlevy, special FAA counsel; (ii) all FAA and UCC filing and lien search fees; (iii) all fees and expenses (including legal fees and expenses) of Lender in connection with actual or proposed amendments, waivers, or consents to or under this Agreement or the other Basic Documents (except for such amendments, waivers, or consents initiated by Lender); and (iv) all fees and expenses (including legal fees and expenses) of Lender in connection with the actual or proposed enforcement of any Basic Document against Borrower during the existence of any Default. The "legal fees and expenses" of Lender referred to in clauses (iii) and (iv) may include those of Lender's in-house counsel, provided that such legal fees and expenses do not result from efforts which are duplicative of those of special counsel to Lender. SECTION 11.04 -- Amendments. Any provision of the Basic Documents, other than the Purchase Agreement, the Guarantee, or the Finex Agreement, may be amended, terminated, waived, or otherwise modified only in writing by Borrower and Lender. SECTION 11.05 -- Successors and Assigns. This Agreement shall bind and benefit Lender and Borrower and their successors and assigns, except that Borrower may not assign or transfer its rights under this Agreement without Lender's prior written consent. Lender may at any time with the Borrower's consent (which consent shall not be unreasonably withheld) sell, assign, grant participation(s) in, or otherwise transfer any Note, in whole or in part. SECTION 11.06 -- Lender's Representations and Warranties. Lender represents and warrants that: (a) it is an English banking corporation duly organized, validly existing, and in good standing under the laws of England, and has all corporate power, authority, and legal right under the laws of England to execute, deliver, and carry out the terms of each of the Basic Documents to which it is a party; 37 -33- (b) it has duly authorized, executed, and delivered this Agreement and the other Basic Documents to which it is a party; and (c) neither it nor anyone authorized to act on its behalf has directly or indirectly offered any beneficial interest in the Notes for sale to, or solicited any offer to acquire any such interest in the Notes from, any Person in such a manner as to require any of the Notes to be registered under the Securities Act of 1933, as amended, or any state securities law; provided, that the foregoing shall not be deemed to extend to any such offer, sale, or solicitation by or on behalf of Borrower or any other Person. SECTION 11.07 -- Governing Law. THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, EXCLUDING THOSE APPLICABLE TO CHOICE OF LAW BUT INCLUDING THOSE APPLICABLE TO MAXIMUM ALLOWABLE RATES OF INTEREST (INCLUDING, FOR THIS PURPOSE, AS AN "ALLOWABLE" RATE OF INTEREST ONE AS TO WHICH THE BORROWER MAY NOT INTERPOSE THE DEFENSE OF USURY). SECTION 11.08 -- Judicial Proceedings. BORROWER AND LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO WHICH THEY ARE BOTH PARTIES INVOLVING DIRECTLY OR INDIRECTLY, ANY MANNER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT, THE MORTGAGE, THE NOTES OR THE RELATIONSHIP ESTABLISHED HEREUNDER. SECTION 11.09 -- Headings. Article and section headings used in this Agreement are for convenience only and not a substantive part of this Agreement. SECTION 11.10 -- Execution in Counterparts. This Agreement may be executed in separate counterparts. SECTION 11.11 -- Survival of Representations and Warranties. All representations and warranties contained in this Agreement or made in writing in connection with this Agreement shall survive the execution and delivery of this Agreement and the Mortgage. SECTION 11.12 -- Severability. If any part of any provision contained in this Agreement, or any document contemplated hereby, is or becomes invalid or unenforceable under applicable law, that part shall be ineffective to the extent of such invalidity only, without in any way affecting the remaining parts of that provision or the remaining provisions. SECTION 11.13 -- Finex Agreement. So long as no Event of Default exists, all payments, if any, received 38 -34- under the Finex Agreement by Lender as Finex Interest Payments or interest thereon, or as indemnification payments for amounts which Lender has previously been indemnified by Borrower, shall be forwarded by Lender to Borrower at First American Bank of Georgia N.A., 2000 RiverEdge Parkway, Atlanta, Georgia 30328, Account: Atlantic Southeast Airlines, Inc. (account #5100130970). Lender shall use its good faith efforts to forward any such payments to Borrower on the Business Day following their receipt by Lender. At the cost and expense of Borrower, Lender shall use its good faith efforts to take such action with respect to the Finex Agreement as Borrower shall reasonably request, provided that Lender shall not be required to take any action which adversely affects its interests under the Finex Agreement. However, all risks associated with the Finex Program are Borrower's and Lender shall have no responsibility for any Finex Interest Payments not actually received by Lender from Finex Bank. So long as no Event of Default exists, Lender shall not amend the Finex Agreement without the consent of the Borrower, such consent not to be unreasonably withheld. 39 -35- IN WITNESS WHEREOF, Borrower and Lender have executed this Credit Agreement. ATLANTIC SOUTHEAST AIRLINES, INC. 1688 Phoenix Parkway College Park, Georgia 30349 Att: Ronald V. Sapp Vice President-Finance By: /s/ Ronald V. Sapp and Treasurer --------------------------------- Facsimile No.: (404) 991-0366 Name: Ronald V. Sapp Title: Vice President-Finance & Treasurer BARCLAYS BANK PLC 75 Wall Street New York, New York 10265 Att: Aerospace Industry Unit By: /s/ Les Bek Facsimile No.: (212) 412-7580 ---------------------------------- Name: Les Bek Title: Vice President EX-10.J 5 CREDIT AGREEMENT DATED 2/25/91 1 EXHIBIT 10(j) =============================================================================== CREDIT AGREEMENT dated as of February 25, 1991 between ATLANTIC SOUTHEAST AIRLINES, INC., Borrower, and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Lender, Four Embraer Model EMB-120 Brasilia Aircraft =============================================================================== 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS; REFERENCES . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.02 Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 1.03 Section and Exhibit References, etc. . . . . . . . . . . . . . . . . 7 ARTICLE II PURCHASE OF NOTES; PAYMENTS . . . . . . . . . . . . . . . . . . . . . 7 Section 2.01 Purchase of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 2.02 Procedure for Purchase of Notes . . . . . . . . . . . . . . . . . . . 8 Section 2.03 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.04 Financing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III SECURITY FOR BORROWER'S OBLIGATIONS . . . . . . . . . . . . . . . . . 8 Section 3.01 Security Interest in Collateral . . . . . . . . . . . . . . . . . . . 8 Section 3.02 Set-Off Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE IV PAYMENTS UNDER THE NOTES AND OTHER AMOUNTS PAYABLE BY BORROWER . . . . . . . . . . . . . . . . . . . . . 9 Section 4.01 How Payments Are Made . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.02 Right to Prepay . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.03 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 4.04 Mandatory Purchase . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 4.05 Amount of Prepayment . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 4.06 Interest on Past Due Amounts . . . . . . . . . . . . . . . . . . . . 10 Section 4.07 Payment of Accrued Interest Supplements . . . . . . . . . . . . . . . 10 Section 4.08 Reduction in Net Interest Payable . . . . . . . . . . . . . . . . . . 11 ARTICLE V BORROWER'S REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . 11 Section 5.01 Corporate Standing . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5.02 Corporate Powers . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5.03 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 5.04 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.05 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.06 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.07 Status as United States Citizen and Air Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.08 Location of Offices . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.09 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 5.10 Condition of Aircraft . . . . . . . . . . . . . . . . . . . . . . . . 13
i 3 Section 5.11 Absence of ERISA Liability . . . . . . . . . . . . . . . . . . . . . 13 Section 5.12 Delta Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 5.13 Subsidiaries; Stock Ownership . . . . . . . . . . . . . . . . . . . . 13 Section 5.14 Investment Company Status . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE VI AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6.01 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 6.02 Inspection of Collateral and Records . . . . . . . . . . . . . . . . 14 Section 6.03 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.04 Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 6.05 Citizenship and Air Carrier Status . . . . . . . . . . . . . . . . . 16 Section 6.06 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.07 Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 6.08 Performance of Delta Agreement . . . . . . . . . . . . . . . . . . . 17 Section 6.09 Financial Covenant . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE VII CONDITIONS PRECEDENT TO THE PURCHASE OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 7.01 Conditions Precedent to the Purchase of the Initial Note . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 7.02 Conditions Precedent to the Purchase of All Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE VIII EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . . . . . . 21 Section 8.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 8.02 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE IX BORROWER'S INDEMNITIES . . . . . . . . . . . . . . . . . . . . . . . 23 Section 9.01 General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 9.02 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE X YIELD PROTECTION . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 10.01 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 10.02 Breakage Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 11.01 No Waivers; Cumulative Remedies . . . . . . . . . . . . . . . . . . . 28
ii 4 Section 11.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 11.03 Transaction Expenses . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 11.04 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 11.05 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . 29 Section 11.06 Lender's Representations and Warranties . . . . . . . . . . . . . . . 29 Section 11.07 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 11.08 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 11.09 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . 29 Section 11.10 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 11.11 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 11.12 Finex Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Annex A Procedures for Purchasing Aircraft and Notes; Documentation Exhibit A Form of Note Exhibit B Form of Finex Agreement Exhibit C Form of Mortgage Exhibit D Form of Purchase Agreement Assignment Exhibit E Form of Consent Exhibit F Form of opinion of Borrower's counsel Exhibit G Form of opinion of Crowe & Dunlevy (Aircraft) Exhibit H Form of opinion of counsel to Embraer Exhibit I Form of opinion of Castro Barros Sobral e Xavier Exhibit J Form of Guarantee
iii 5 CREDIT AGREEMENT This Credit Agreement is entered into as of February 25, 1991 by and between Atlantic Southeast Airlines, Inc. ("Borrower"), a Georgia corporation, and Bank of America National Trust and Savings Association ("Lender"), a national banking association. Borrower and Lender agree as follows: ARTICLE I DEFINITIONS; REFERENCES SECTION 1.01 -- Definitions. The following terms, when capitalized as below, have the following meanings: "Act": the Federal Aviation Act of 1958, as amended, or its successor. "Agreement": this Credit Agreement. "Alternate LIBO Rate": defined in section 3.02 of the Finex Agreement. "Aircraft": up to four Embraer EMB-120 Brasilia aircraft to be delivered under the Purchase Agreement and in each case designated by Borrower (by notice to Lender at least three Business Days before the Purchase Date therefor, and not revoked by notice to Lender on or before the Purchase Date therefor) as an "Aircraft" to be financed under this Agreement. "Bank LIBOR" for any Interest Period: a rate per annum (calculated on the basis of a 360-day year and the actual number of days elapsed) equal to the consensus rate at which 180-day deposits in Dollars appear on the Reuters Screen LIBO Page at approximately 11:00 a.m. London, England time, on the day that is two Business Days before the first day of that Interest Period. "Basic Documents": this Agreement, the Purchase Agreement, the Finex Agreement(s), the Guarantee, and the Mortgage; and each Note, Purchase Agreement Assignment, Consent, and Mortgage Supplement as executed and delivered. "Book Net Worth": defined in section 6.09. "Borrower Interest Rate": with respect to any Interest Period: an interest rate equal to Bank LIBOR for such Interest Period, plus 0.85% per annum (computed on the basis of a year of 360 days), based on actual days elapsed. "Business Day": any day, other than a Saturday or Sunday, on which commercial banks are open for business in New York, New York, London, England, Seo Paulo, Brazil, and Atlanta, Georgia, and Lender is open for business in Los Angeles, California, and if such day is a Purchase Date or Interest Payment Date or relates to a notice by Borrower with respect to any Purchase Date, which is also a day on which dealings with Dollar deposits are carried out in the London interbank market. 6 "Capitalized Lease": a capitalized lease of any tangible real or personal property, as determined pursuant to GAAP. "Collateral": the "Collateral" under the Mortgage. "Commitment": Lender's commitment to purchase the Notes, for an aggregate amount of up to $22,000,000; Borrower may reduce such amount upon 30 days' prior written notice to Lender. "Commitment Fee": the fee required to be paid by Borrower to Lender pursuant to section 2.03. "Commitment Period": the period from the date of execution of this Agreement to and including the earliest of (w) July 30, 1991, (x) the date upon which the fourth Aircraft is delivered to and accepted by Borrower pursuant to the Purchase Agreement, (y) the date on which the remaining Commitment is terminated pursuant to section 8.02, and (z) a date set by Borrower pursuant to a notice sent to Lender at least 30 days prior to such date. "Consent": a Consent and Agreement, substantially in the form of Exhibit E, relating to a Purchase Agreement Assignment and dated the same date as that Purchase Agreement Assignment. "Default": any event or condition that would become an Event of Default upon the giving of notice or lapse of time or both, or any Event of Default. "Delta Agreement": that certain agreement between Delta Air Lines, Inc. and Borrower dated June 1, 1986 and relating to joint marketing or code sharing for interconnecting flights. "Dollars": and "$": United States dollars. "Downpayment": 15% of Equipment Cost for the first $6,470,588.00 of Equipment Cost, and 100% of Equipment Cost in excess of $6,470,588.00,for an Equipment Portion, minus any amounts that Borrower paid to Vendor before the relevant Purchase Date (including deposits applied to such Equipment Portion), pursuant to the Purchase Agreement, relating to such Equipment Portion. "Embraer": Embraer-Empresa Brasileira de Aeronautica S.A., a Brazilian corporation, and its successors and assigns. "Equipment Cost": the purchase price for an Equipment Portion, as set forth in (and as adjusted pursuant to) the Purchase Agreement. "Equipment Portion": an Aircraft and the Spare Parts purchased with that Aircraft. "ERISA": defined in section 5.11. 2 7 "Event of Default": defined in section 8.01. "Event of Loss": defined in section 1.01 of the Mortgage. "FAA": the Federal Aviation Administration of the United States, or any instrumentality of the United States succeeding to its function. "Financed Amount": the amount determined pursuant to the second sentence of section 2.01. "Financing Fee": defined in section 2.04. "Finex Agreement": an agreement substantially in the form of Exhibit B. "Finex Bank": MultiBanco S.A. (or any other Person selected by Borrower to serve as a Finex bank under a Finex Agreement), in its capacity as Finex bank under the Finex Agreement, and its successors in such capacity. "Finex Interest Payments": the Finex Interest Payments described in section 3.01 of the Finex Agreement. "Finex Interest Rate" for a Note: a fixed interest rate equal to the Finex LIBO Rate for its Purchase Date, minus 2% per annum (computed on the basis of a year of 360 days), based on actual days elapsed, or such other interest rate as Borrower is actually required to pay on such Note under the Finex Program. "Finex LIBOR" or "Finex LIBO Rate" for any Purchase Date or Interest Period: (x) the interest rate for such Purchase Date or Interest Period, published by Banco Central do Brasil two Business Days before that Purchase Date or the beginning of that Interest Period, respectively, as the 180-day interest rate applicable to transactions under the Finex Program, or (y) when applicable, the Alternate LIBO Rate for such Interest Period established pursuant to section 3.02 of the Finex Agreement. "Finex Program": the export support program (Fundo de Financiamento a Exportaceo) of the Federative Republic of Brazil, as established by Resolution No. 509 of January 24, 1979 of Banco Central do Brasil and in Circular Cacex/Finex No. 10 of the Carteira de Comercio Exterior (Cacex) of Banco do Brasil S.A., dated September 21, 1982, as from time to time supplemented or amended. "GAAP": generally accepted accounting principles as in effect in the United States and applied on a basis consistent with that used in the preparation of the financial statements referred to in section 5.05, except for changes therein with which Borrower's independent public accountant concur that are disclosed in the notes to the relevant financial statements. "Guarantee": the document by that name, executed by ASA Investments, Inc., in substantially the form of Exhibit J. 3 8 "herein", "hereof", "hereunder", etc.: in, of, or under, etc. this Agreement (and not merely in, of, under, etc. the section or provision where the reference appears). "including": containing, embracing, or involving the enumerated item(s), but not necessarily limited to such item(s). "Indemnitee": Lender, or any agent (other than Finex Bank), employee, director, successor, or permitted assign of Lender. "Indebtedness": (a) total liabilities (as determined pursuant to GAAP) of Borrower and its subsidiaries on a consolidated basis plus (b) any debt of a Person that is not included in clause (a) above and that is guaranteed by Borrower or one or more of its subsidiaries, plus (c) 70% of all Operating Lease Obligations. "Interest Payment Date" for a Note: each date occurring after the Purchase Date for that Note is a "180-day anniversary" of such Purchase Date; except that, for purposes of payment and of determining the beginning and end of each Interest Period (but not for the purpose of determining the following Interest Payment Date), any Interest Payment Date that falls on a day which is not a Business Day shall instead occur on the following Business Day. For avoidance of doubt, the "180-day anniversary" of a date shall be the 180th day after that date. "Interest Period" for a Note: each period beginning on the day after an Interest Payment Date for that Note (or, in the case of the first Interest Period for that Note, beginning on its Purchase Date) and ending on the following Interest Payment Date for that Note. "Interest Supplement" for a Note during an Interest Period: (a) the amount of principal of that Note outstanding during such Interest Period multiplied by (b) the Borrower Interest Rate for such Interest Period minus the Finex Interest Rate for that Note multiplied by (c) the actual number of days in such Interest Period divided by 360; provided that if the Borrower Interest Rate for such Interest Period is equal to or less than the Finex Interest Rate for that Note, the Interest Supplement for that Interest Period shall be zero. "Liabilities": defined in section 9.01. "Lien": any mortgage, pledge, assignment, encumbrance, lien (statutory or other), or other security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, or any lease in the nature thereof). "Mortgage": the Security Agreement and Chattel Mortgage between Borrower and Lender, substantially in the form of Exhibit C. 4 9 "Mortgage Supplement": defined in section 3.01. "Note": Borrower's promissory note, in the form of Exhibit A, issued in connection with a designated Aircraft, or a note issued in exchange or replacement for such a note. "1988 Purchase Agreement": Purchase Agreement No. 162-COV/88 (including all attachments, exhibits, and letter agreements thereto) dated November 21, 1988, between Vendor and Borrower. "1989 10-K": Borrower's annual report on Form 10-K for the year ended December 31, 1989. "1990 Purchase Agreement": Purchase Agreement No. 154-DOC/AC/90 (including all attachments, exhibits, and letter agreements thereto) dated August 27, 1990, between Vendor and Borrower. "1990 10-Qs": Borrower's quarterly reports on Form 10-Q for the quarters ended March 31, 1990, June 30, 1990, and September 30, 1990. "Officer's Certificate": a certificate signed in the name of Borrower (or, with respect to section 6.04(c), of the Successor) by the chairman of the board, the president, a vice president, or the treasurer of Borrower (or the Successor). "Operating Lease": a lease of tangible real or personal property, other than a Capitalized Lease, involving aggregate payments of $100,000 or more during the fiscal year of the lessee. "Operating Lease Obligations": the amount equal to the aggregate of all scheduled lease payments that will become due under the terms of all Operating Leases. "or": at least one, but not necessarily only one, of the alternatives enumerated. "Permitted Lessee": defined in the Mortgage. "Permitted Lien": defined in the Mortgage. "Person": any individual, corporation, partnership, joint venture, or other legal or governmental entity. "Prepayment Event": defined in section 4.04. "Purchase Agreement": when used in connection with a specific Aircraft or Equipment Portion, either the 1988 Purchase Agreement or the 1990 Purchase Agreement, depending on which agreement the Aircraft or Equipment Portion was purchased under; when otherwise used, the 1988 Purchase Agreement and 1990 Purchase Agreement, collectively. 5 10 "Purchase Agreement Assignment": a document by that name, substantially in the form of Exhibit D, executed and delivered on a Purchase Date with respect to the Aircraft then being delivered. "Purchase Date": a date on which Borrower purchases an Aircraft and, simultaneously, Lender purchases the related Note. "Reference Rate": the rate of interest publicly announced from time to time by Lender in San Francisco, California, as its reference rate. It is a rate that Lender sets based upon various factors, including Lender's costs and desired return, general economic conditions, and other factors, and is used as a reference point for pricing some loans. Interest is payable for the actual number of days elapsed computed on the basis of a 360-day year on the unpaid principal amount. Lender may price loans at, above, or below its reference rate. Any change in the Reference Rate shall take effect on the day specified in the public announcement of such change. "Regulatory Change": any change after the date of this Agreement in federal, state, or foreign law or regulations or the adoption or making after such date of any interpretations or directives applying to a class of banks including Lender of or under any federal, state, or foreign law or mandatory regulations by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reuters Screen LIBO Page": the display designated as page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may replace the LIBO Page on that service for the purpose of displaying London interbank offered rates for Dollar deposits). "SEC Filings": the 1989 10-K and the 1990 10-Qs. "Spare Parts": the appliances, spare parts, and other items of equipment purchased with the Aircraft under the Purchase Agreement. "Successor": defined in section 6.04(a). "Tangible Net Worth": defined in section 6.09. "Taxes": defined in the last sentence of section 9.02(a). "Taxing Authorities": defined in the first sentence of section 9.02(a). "Vendor": Embraer. SECTION 1.02 -- Use of Defined Terms. Any defined term used in the plural preceded by "the" encompasses all members of the relevant class. Any defined term used in the singular 6 11 preceded by "any" indicates any number of the members of the relevant class. Any agreement or instrument referred to in section 1.01 means such agreement or instrument as from time to time supplemented and amended. SECTION 1.03 -- Section and Exhibit References, etc. References to articles, sections, exhibits, and the like refer to those in or attached to this Agreement unless otherwise specified. ARTICLE II PURCHASE OF NOTES; PAYMENTS SECTION 2.01 -- Purchase of Notes. Subject to the satisfaction of the conditions precedent set forth in article VII, and on the terms and conditions set forth in this article II, on the Purchase Date for each Aircraft, Borrower shall issue the related Note to Vendor (who will simultaneously sell that Note to Finex Bank), and Lender shall purchase that Note from Finex Bank. The Financed Amount for each Aircraft shall be 85% of the Equipment Cost for the related Equipment Portion, so that such total Equipment Cost shall be paid 15% by Borrower and 85% by the related Note, provided, that the Financed Amount for an Aircraft shall not exceed 85% of $6,470,588.00 and Borrower shall pay 100% of Equipment Cost in excess of $6,470,588.00 for any Equipment Portion. Each Note shall be purchased by Lender from Finex Bank for its face amount, which shall equal the Financed Amount for the related Aircraft. Lender's Commitment to purchase the Notes pursuant to this Agreement shall expire at 12:00 noon, New York City time, on the last day of the Commitment Period. SECTION 2.02 -- Procedure for Purchase of Notes. The procedure to be followed in the purchase of Notes is described in Annex A. At Lender's offices at 555 South Flower Street, Los Angeles, California 90071 (or such other location as the parties hereto agree upon), not later than 12:00 noon (New York City time) on the appropriate Purchase Date, upon fulfillment of the conditions set forth in article VII and compliance with the procedures set forth in Annex A, Lender will purchase the related Note from Finex Bank (who will have purchased that Note simultaneously from Vendor), with general corporate funds, in each case for a purchase price equal to its face amount (as determined pursuant to section 2.01). SECTION 2.03 -- Commitment Fee. In partial consideration of the Lender's agreement to purchase the Notes, Borrower shall pay to Lender a Commitment Fee ("Commitment Fee" ) during the Commitment Period, payable in arrears on the first day of each quarter or partial quarter (for the prior quarter or partial quarter) after the execution and delivery of this Agreement, with a final payment on the last day of the Commitment Period, and computed at a rate per annum (calculated on the basis of a 360-day year and actual days elapsed) of 0.25% of the average daily unused portion of Lender's Commitment. The term "quarter" as used in this section shall mean the relevant calendar quarter ending on one of 7 12 the following dates: March 31, June 30, September 30, or December 31. SECTION 2.04 -- Financing Fee. In partial consideration of Lender's agreement to finance the Aircraft pursuant to this Agreement, Borrower shall pay Lender a fee ("Financing Fee") of $25,000 on the first Purchase Date and an additional $25,000 on the Purchase Date for the third Aircraft financed under this Agreement. ARTICLE III SECURITY FOR BORROWER'S OBLIGATIONS SECTION 3.01 -- Security Interest in Collateral. To secure Borrower's obligations to Lender under each Note and the other Basic Documents to which Borrower is or becomes a party, Borrower shall execute and deliver to Lender, on each Purchase Date, a supplement to the Mortgage (a "Mortgage Supplement"), substantially in the form of Schedule A to the Mortgage, granting to Lender a perfected purchase money security interest in the Aircraft being purchased from Vendor on such Purchase Date. SECTION 3.02 -- Set-Off Rights. If Borrower becomes insolvent, or any Event of Default occurs, any indebtedness that Lender then owes to Borrower and any other property of Borrower that Lender then holds may be offset and applied toward the payment of any obligation of Borrower to Lender under the Basic Documents, whether or not any such other obligation is then due. ARTICLE IV PAYMENTS UNDER THE NOTES AND OTHER AMOUNTS PAYABLE BY BORROWER SECTION 4.01 -- How Payments Are Made. Borrower shall make its payments and prepayments of principal and interest due on the Notes, all amounts due as Interest Supplements or as Commitment Fees hereunder, and all other amounts payable by Borrower to Lender under the Basic Documents, to Lender (ABA # 121-000-358 S.F.) at 1850 Gateway Blvd., Concord, California 94520, Attention: Dana Henderson for credit to PSO Account Administration #5693, Reference: Atlantic Southeast Airlines Note No. 4, 5, 6, or 7 [as appropriate] (or at such other place as Lender from time to time notifies Borrower), in immediately available funds and in Dollars, no later than 10:00 a.m. (San Francisco time) on the date when due. Borrower agrees to pay to Lender, on each Interest Payment Date, the Interest Supplement for each Note for the Interest Period then ending. Any payment made by Borrower to Lender after 10:00 a.m. (San Francisco time) on any day shall be deemed to have been made on the following Business Day. If any payment due under the Basic Documents comes due on a day which is not a Business Day, such payment shall instead be made on the following Business Day, and interest, Interest Supplements, or Commitment Fees, as the case may be, shall accrue at the applicable rate to the day of payment. 8 13 SECTION 4.02 -- Right to Prepay. Unless a Default exists, Borrower shall have the right to prepay in full the outstanding principal amount of the Note issued with respect to any designated Aircraft, without premium or penalty. Any prepayment under this section 4.02 of the Note issued with respect to a designated Aircraft shall be made only on an Interest Payment Date for such Note, and Borrower shall give to Lender at least 60 days' prior written notice (which notice shall be irrevocable) of such prepayment. Upon any prepayment of any Note under this section 4.02, Borrower shall pay all accrued and unpaid interest on the principal of such Note to the date of prepayment, together with all other amounts payable under section 10.02 with respect to such prepayment. SECTION 4.03 -- Mandatary Prepayments. Following the occurrence of an Event of Loss with respect to any Aircraft, Borrower shall prepay the Note executed in connection with that Aircraft, in accordance with section 7.01 of the Mortgage, and shall pay all other amounts payable under section 10.02 with respect to such prepayment. Upon acceleration of the Notes pursuant to section 8.02, Borrower shall prepay such Notes, and shall pay all other amounts payable under section 10.02 with respect to such prepayment. SECTION 4.04 -- Mandatory Purchase. Upon the occurrence of a Prepayment Event, Lender shall have the right to require Borrower to purchase or cause the purchase of the Note for (a) the Note's then-outstanding principal amount, plus all accrued but unpaid interest on the Note to the date of such purchase, and (b) all amounts payable under section 10.02 with respect to such purchase. The payment described in the preceding sentence shall be due 10 days after Lender notifies Borrower that a Prepayment Event has occurred (if that Prepayment Event has not been cured by then), and shall be made in the manner prescribed by section 4.O1. A "Prepayment Event" shall occur if (a) Borrower fails to keep an Aircraft registered with the FAA, or Lender fails or ceases to have a perfected first-priority interest in an Aircraft, or a Lien (other than a Permitted Lien) on an Aircraft exists; or (b) Borrower fails to obtain an FAA standard airworthiness certificate for an Aircraft within four weeks following the Purchase Date for such Aircraft. SECTION 4.05 -- Amount of Prepayment. A Note shall be deemed satisfied in full upon the prepayment of all principal of such Note, the payment of the interest due on or with respect to such Note on such prepayment date, the payment of all past-due interest on or with respect to such Note, and the payment of all amounts payable under section 10.02 with respect to such prepayment. SECTION 4.06 -- Interest on Past Due Amounts. Any amounts past due (by acceleration or otherwise) and at any time outstanding under any Note or from Borrower under any other Basic Document shall (to the extent permitted by law) bear interest, payable on demand, from the due date until payment in full, at a rate equal to 2% per annum above the Reference Rate. 9 14 SECTION 4.07 -- Payment of Accrued Interest Supplements. Upon the occurrence of the prepayment or mandatory purchase of a Note under section 4.02, 4.03, or 4.04, Borrower shall pay to Lender all past due Interest Supplements, and any accrued portion of an Interest Supplement, relating to such Note, with interest on pastdue Interest Supplements computed in accordance with section 4.06. SECTION 4.08 -- Reduction in Net Interest Payable by Borrower. If the Finex Interest Rate for a Note exceeds the Borrower Interest Rate for an Interest Period for that Note, the amount of interest due from Borrower under that Note for such Interest Period shall be automatically reduced by an amount equal to (a) the amount of principal of that Note outstanding during such Interest Period multiplied by (b) the Finex Interest Rate for that Note minus the Borrower Interest Rate for such Interest Period multiplied by (c) the actual number of days in such Interest Period divided by 360. ARTICLE V BORROWER'S REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: SECTION 5.01 -- Corporate Standing. Borrower is a duly organized corporation existing in good standing under the laws of Georgia, has the corporate power and legal authority to own or lease its properties and to carry on its business as now conducted and as now proposed to be conducted, and is duly qualified to do business in all jurisdictions wherein such qualification is necessary (except in any jurisdictions in which the failure to qualify would have no materially adverse effect on its business or on its ability to carry out its obligations under the Basic Documents to which it is (or is to become) a party). SECTION 5.02 -- Corporate Powers. Borrower's execution, delivery, and performance of the Basic Documents to which it is (or is to become) a party are within Borrower's corporate powers; and the Basic Documents to which it is (or is to become) a party have been duly authorized by all necessary corporate action on Borrower's part, and do not contravene, result in a breach of, or require any consent under any law, judgment, decree, order, or contractual restriction binding on Borrower or any agreement or instrument to which Borrower is a party or to which it or any of its property is subject, except that the legality and validity of each Purchase Agreement Assignment is subject to the execution and delivery of the related Consent. SECTION 5.03 -- Binding Effect. The Basic Documents to which Borrower is (or is to become) a party are (or will be when executed and delivered) legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their 4.02 terms, except as may be limited by bankruptcy, insolvency, or other similar laws affecting enforcement of creditors' rights generally. 10 15 SECTION 5.04 -- Litigation. Except as disclosed n the SEC Filings, there are no pending or (to the best of Borrower's knowledge after due inquiry) threatened actions or proceedings before any court or administrative agency which may be expected to have a materially adverse effect on Borrower's business or financial condition or which seek to question or set aside any of the transactions herein contemplated. SECTION 5.05 -- Financial Statements. The audited balance sheet as of December 31, 1989 and unaudited balance sheet as of September 30, l990 for Borrower and its consolidated subsidiaries, and the related results of operations for the year and quarter then ended, have been prepared in accordance with GAAP and correctly present Borrower's financial condition as of such dates and results of operations for such periods, and since September 30, 1990, there has been no materially adverse change in Borrower's business, assets, operations, or condition (financial or otherwise). SECTION 5.06 -- Taxes. Borrower has filed all tax returns which it is or was required to file, and has paid all taxes shown to be due and payable on those returns or on any assessment received by it, except such taxes of Borrower, if any, as are being contested diligently in good faith, and by appropriate proceedings, and as to which adequate reserves have been provided in accordance with GAAP. SECTION 5.07 -- Status as United States Citizen and Air Carrier. Borrower is a "citizen of the United States" as that term is used in section 101(16) of the Act, and is a duly certified "air carrier" within the meaning of the Act. SECTION 5.08 -- Location of Offices. Borrower's chief executive office and principal place of business, and the place where Borrower keeps its financial records concerning the Collateral, is located at its address referred to in section 11.02. SECTION 5.09 -- Governmental Consents. Neither the execution, delivery, and performance of any of the Basic Documents (other than the Finex Agreement), nor the consummation of any of the transactions contemplated thereby by Borrower or Vendor (including the importation of the Aircraft into the United States from Brazil), requires the consent or approval of, giving of notice to, registration with, or taking of any other action in respect too any federal, state, or foreign governmental authority or agency (including any judicial body) except for (a) the filing and recording of the Mortgage, and of the FAA bill of sale, the FAA application for registration, and the Mortgage Supplement for each Aircraft with the FAA; (b) the filing and recording of UCC-1 financing statements for each Aircraft with the Superior Court Clerk Offices in Bibb, Clayton, and Fulton County, Georgia, and in the appropriate places in Texas and Arkansas; (c) the registration of each Aircraft with the FAA pursuant to the Act; (d) the filing of any necessary documents with customs officials; and (e) any necessary action with respect to the Finex Program. 11 16 SECTION 5.10 -- Condition of Aircraft. On each Purchase Date, the Aircraft to be delivered on such Purchase Date shall be in such condition as is sufficient to enable Borrower to obtain a standard U.S. certificate of airworthiness for such Aircraft and to enable such airworthiness certificate to be maintained in good standing; and, to Borrower's knowledge (which shall be based on acceptance tests by Borrower in accordance with its usual practices, to the extent permitted under the Purchase Agreement), such Aircraft shall otherwise conform in all material respects to the specifications for such Aircraft set forth in the Purchase Agreement. SECTION 5.11 -- Absence of ERISA Liability. Each employee pension benefit plan (as defined in section 3(2) of the Employee Retirement Income Security Act of 1974, as from time to time amended ("ERISA")) of Borrower is in compliance with the applicable provisions of ERISA and of the Internal Revenue Code of 1986, as from time to time amended, in all respects, except to the extent that noncompliance would not be materially adverse to Borrower's business, assets, financial condition, or ability to perform its obligations under the Basic Documents. SECTION 5.12 -- Delta Agreement. The Delta Agreement is (a) the only agreement between Delta Air Lines, Inc. and Borrower relating to joint marketing or code sharing for interconnecting flights, and (b) in full force and effect. There exists no default under the terms of the Delta Agreement and there has not occurred any event that would ripen into a default upon the giving of notice or passage of time. SECTION 5.13 -- Subsidiaries; Stock Ownership. Borrower owns 100% of the outstanding stock of ASA Investments, Inc. and Borrower has no material stock or other equity investment in any other corporation, partnership, or other Person. SECTION 5.14 -- Investment Company Status. The Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Note, or any amount owed by Borrower under any other Basic Document, remains outstanding or unpaid or Lender has any Commitment hereunder: SECTION 6.01 -- Financial Statements. Borrower shall furnish to Lender: (a) within 45 days after the end of each of the first three quarters in each fiscal year, consolidated statements of operations of Borrower and its consolidated subsidiaries for the period from the beginning of the then-current fiscal year to the end of such quarterly period, and balance sheets of Borrower and its consolidated subsidiaries, on a consolidated 12 17 basis, as of the end of such quarter prepared in accordance with GAAP and setting forth in each case in comparative form figures for the corresponding period in the preceding year, all in reasonable detail and certified by the Chief Financial Officer of Borrower, subject to changes resulting from year-end adjustments, and Borrower's Form 10-Q for such period; (b) within 90 days after the end of each fiscal year, consolidated statements of operations of Borrower and its consolidated subsidiaries, for such year, and the balance sheets of Borrower and its consolidated subsidiaries, on a consolidated basis, as of the end of such year, setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail, and certified to Borrower by its independent certified public accountants and to Lender by Borrower's Chief Financial Officer, as presenting fairly the financial position and results of operations of Borrower and its consolidated subsidiaries and as having been prepared in accordance with GAAP, and Borrower's Form 10-K for such period; (c) within two Business Days after any officer of Borrower obtains knowledge of any Default, an Officer's Certificate specifying its nature, the period of its existence, and what action Borrower proposes to take with respect to it; and (d) promptly upon request, such other data or information (financial or otherwise) regarding Borrower or the Collateral as Lender from time to time reasonably requests. SECTION 6.02 -- Inspection of Collateral and Records. Borrower shall permit any person(s) from time to time designated in writing by Lender, at Lender's expense (or at Borrower's expense if a Default exists at the time), to visit and inspect any of the Collateral and Borrower's (or any Permitted Lessee's) records with respect to the Collateral, at such times as Lender reasonably requests, and to discuss Borrower's affairs, finances, and accounts with Borrower's officers. No such inspection shall unreasonably interfere with Borrower's (or any Permitted Lessee's) operations or maintenance. Lender shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. Upon Lender's request, Borrower shall promptly notify Lender of the maintenance operations then scheduled on the Aircraft for the six-month period following such request. SECTION 6.03 -- Corporate Existence. Except as permitted by section 6.04, Borrower shall maintain its corporate existence in good standing in the state of its incorporation and in all jurisdictions where qualification is necessary (except in any jurisdiction in which the failure to qualify would have no materially adverse effect on its business or on its ability to carry out its obligations under the Basic Documents to which it is (or is to become) a party). Borrower shall preserve and renew its rights (charter and statutory), patents, and franchises, unless Borrower determines in good faith that the preservation thereof is 13 18 no longer necessary or desirable in the conduct of its business and that the loss thereof will not adversely affect Lender's rights or Borrower's business, assets, operations, condition (financial or otherwise). SECTION 6.04 -- Merger, etc. Borrower shall not consolidate with or merge into any other corporation, or convey, transfer, or lease all or substantially all of its assets as an entirety to any person, unless: (a) the corporation formed by such consolidation or the Person who acquires by conveyance, transfer, or lease all or Substantially all of Borrower's assets as an entirety (the "Successor") or, in the case of a merger, Borrower (as the surviving corporation), (i) is a corporation organized and existing under the laws of the United States of America or any state or the District of Columbia, (ii) is a "citizen of the United States" as defined in section 101(16) of the Act, and (iii) is an air carrier (within the meaning of section 101(3) of the Act) certificated under section 604(b) of the Act; and, in the case of such a consolidation, conveyance, transfer or lease, the Successor: (iv) executes and delivers to Lender an agreement, in form and substance satisfactory to Lender, containing an assumption by the Successor of the due and punctual performance and observance of Borrower's obligations under the Basic Documents to which Borrower is then a party, and (v) makes such filings and recordings, including any filing or recording with the FAA pursuant to the Act or any filing under the UCC, as are necessary to evidence such consolidation, merger, conveyance, transfer, or lease with or to the Successor; (b) immediately after giving effect to such transaction, (i) no Default exists and (ii) Borrower's or the Successor's, as the case may be, business, assets, operations, condition (financial or otherwise), and financial and other ability to perform its obligations under the Basic Documents will not be adversely affected by such transaction in any material respect; and (c) Borrower or the Successor delivers to Lender, promptly upon consummation of such transaction, an Officer's Certificate stating that the conditions precedent set forth in clause (a) have been complied with and an opinion of counsel for Borrower or for the Successor, in form and substance satisfactory to Lender, stating that the agreements entered into to effect such consolidation, merger, conveyance, transfer, or lease and such assumption agreements have been duly authorized, executed, and delivered by the Successor (or in the case of a merger, by Borrower) and that they (and the Basic Documents so assumed) constitute legal, valid, and binding obligations of the Successor (or in the case of a merger, of Borrower), enforceable in accordance with their terms (to the same extent as the Basic Documents so assumed were enforceable against Borrower immediately prior to such transaction); and that all conditions precedent which are 14 19 legal in nature provided for in this Agreement and relating to such transaction have been fulfilled. Upon any such consolidation, conveyance, transfer, or lease, the Successor shall succeed to, shall be substituted for, and may exercise every right and power of Borrower under the Basic documents to which Borrower is a party, with the same effect as if the Successor had been named as Borrower therein. No such conveyance, transfer, or lease of substantially all Borrower's assets as an entirety shall have the effect of releasing Borrower (or any Successor) from its liability under the Basic Documents to which it is a party. Nothing in this section shall permit any lease, sublease, or other arrangement for the use, operation, or possession of the Aircraft except in compliance with the applicable provisions of this Agreement and the Mortgage. Borrower shall not become a subsidiary of a holding company without Lender's prior written consent. SECTION 6.05 -- Citizenship and Air Carrier Status. Borrower will at all times remain a "citizen of the United States" as defined in section 101(16) of the Act and an "air carrier" within the meaning of the Act. SECTION 6.06 -- Compliance with ERISA. (a) Borrower will, at all times, make prompt payment of contributions that it is required to make to any employee benefit plan to which it is a party as are necessary to meet the minimum funding standards for such an employee benefit plan, as required by ERISA. (b) Within two Business Days after the occurrence of any event or circumstance, including any event which is classified as a "Reportable Event" under ERISA, in connection with any employee benefit plan to which it is a party, that might constitute grounds for termination of an employee benefit plan to which Borrower is a party by the Pension Benefit Guaranty Corporation or might result in the appointment of a trustee by a United States District Court under section 4042 of ERISA to administer such employee benefit plan; Borrower will provide Lender with an Officer's Certificate describing the event or circumstance, stating the reasons for any such action by the Pension Benefit Guaranty Corporation or a United States District Court, and specifying the action Borrower proposes to take with respect thereto. SECTION 6.07 -- Disposition of Assets. Borrower will not dispose of any of its assets, other than in the ordinary course of its business, unless it receives full, fair, and reasonable consideration for such assets; and Borrower will not during any twelve-month period dispose of assets, other than in the ordinary course of its business, which have an aggregate book value in excess of $5,000,000; provided, that Borrower shall have the right to dispose of any aircraft for at least such aircraft's book value and such sale of an aircraft for at least book value will not be 15 20 included in the calculation of the $5,000,000 of assets sold in a twelve-month period. The book value of an aircraft shall be determined in accordance with GAAP. For avoidance of doubt, the "ordinary course" of Borrower's business generally shall include (x) acquisitions or dispositions of marketable securities (other than acquisitions or dispositions exceeding 5% of any class of "equity security", as defined in the Securities Exchange Act of 1934) and (y) the disposition of parts of discontinued aircraft, engines, or propellers not constituting part of a program to reduce Borrower's fleet in any material respect. SECTION 6.08 -- Performance of Delta Agreement. Borrower shall faithfully perform all obligations it has under the Delta Agreement. SECTION 6.09 -- Financial Covenant. Borrower shall not permit at any time on a consolidated basis (consolidating Borrower and its subsidiaries) its ratio of Indebtedness to Tangible Net Worth to exceed 3.25 to 1. "Tangible Net Worth" shall mean Book Net Worth minus (a) the amount, if any, of Borrower's and its subsidiaries' assets which would be treated as intangibles under generally accepted accounting principles; (b) any write-up in the book value of any fixed asset resulting from a revaluation thereof; and (c) the amount, if any, at which shares of stock of Borrower appear on the asset side of the Borrower's balance sheet. "Book Net Worth" shall mean the book value of Borrower's and its subsidiaries' total assets located in the United States of America (exclusive of any indebtedness owed to Borrower or its subsidiaries by any affiliate of Borrower) minus Borrower's and its subsidiaries' total liabilities. For avoidance of doubt, the phrase "total assets located in the United States of America" shall include marketable securities and commercial paper issued by a foreign entity but held in the United States of America by Borrower or any of its subsidiaries. ARTICLE VII CONDITIONS PRECEDENT TO THE PURCHASE OF NOTES SECTION 7.01 -- Conditions Precedent to the Purchase of the Initial Note. Lender's obligation to purchase the initial Note on the first Purchase Date is subject to the satisfaction (or Lender's waiver) of the following conditions precedent and Lender's receipt on or before such initial Purchase Date of the following, in form and substance satisfactory to Lender: (a) a certificate of Borrower's secretary, dated the Purchase Date, certifying attached copies of the resolutions of Borrower's board of directors evidencing approval of the transactions contemplated by the Basic Documents to which it is (or is to become) a party, and showing the names and specimen signature(s) (or copies thereof) of Borrower's officer(s) authorized to sign this Agreement and the related documents to which it is (or is to become) a party, 16 21 (b) an executed Finex Agreement, (c) an executed Mortgage, (d) an executed Guarantee, (e) an Officer's Certificate certifying an attached copy of the 1988 Purchase Agreement, and (f) copies of the SEC Filings, In addition, Borrower's obligation to close on the first Purchase Date is subject to its receipt of an executed letter agreement between Borrower and Lender, in form and substance satisfactory to each, concerning sections 4.02(d)(i) and 6.05 of the Mortgage, and concerning the availability of the Finex Program and potential future changes in the terms of the Finex Agreement. SECTION 7.02 -- Conditions Precedent to the Purchase of All Notes. Lender's obligation to purchase each Note (including the initial Note) is subject to the additional conditions precedent that: (a) Lender shall have received the following, each dated as of the pertinent Purchase Date, in form and substance satisfactory to Lender: (i) the Note for the relevant Aircraft, executed by Borrower and endorsed by Vendor (without recourse) to the order of Finex Bank who in turn has endorsed (without recourse) to the order of Lender, (ii) an executed Mortgage Supplement with respect to the relevant Aircraft, (iii) an executed Purchase Agreement Assignment, with the related executed Consent, with respect to the relevant Aircraft, (iv) an Officer's Certificate to the effect that: (1) Borrower's representations and warranties in Article V of this Agreement and section 6 of the relevant Purchase Agreement Assignment are true and accurate as though made on the Purchase Date, and (2) no Default exists or will result from Lender's purchase of such Note, (v) a certificate of insurance describing the insurance maintained by Borrower with respect to the Aircraft being purchased and stating that such policies conform to the requirements of the Mortgage, (vi) an opinion from Borrower's counsel substantially in the form of Exhibit F, 17 22 (vii) an opinion from Crowe & Dunlevy, special FAA counsel, substantially in the form of Exhibit G, covering the Aircraft that is the subject of the Note being purchased, (viii) an opinion of counsel to Embraer, substantially in the form of Exhibit H, (ix) an opinion of Brazilian counsel substantially in the form of Exhibit I, (x) such additional opinion(s) (including, if requested, from Trotter Smith & Jacobs) and document(s) as Lender requests, and (xi) as to the first Aircraft financed under this Agreement that is purchased pursuant to the 1990 Purchase Agreement, an Officer's Certificate certifying an attached copy of the 1990 Purchase Agreement; (b) Lender shall have received copies of the necessary FAA Application for Aircraft Registration and FAA Bill of Sale pertaining to the Aircraft being purchased; (c) Borrower's representations and warranties in the Basic Documents shall be true and accurate as though made on and as of such Purchase Date; (d) no Default shall exist or shall result from Lender's purchase of such Note; (e) all filings, recordings, and other actions necessary to establish, protect, preserve, and perfect Lender's interests under the Mortgage shall have been duly made or taken; (f) all necessary consents, approvals, licenses, permits, declarations, or registrations then required in connection with the execution, delivery, performance, validity, and enforceability of the Basic Documents and the transactions contemplated thereby shall have been obtained; (g) Lender shall have received a copy of the approval of the application for coverage of the purchase of the Aircraft by the Finex Program; and (h) in Lender's reasonable judgment, since September 30, 1990, there shall have occurred no materially adverse change in the business, financial condition, or operations of Borrower. 18 23 ARTICLE VIII EVENTS OF DEFAULT; REMEDIES SECTION 8.01 -- Events of Default. Each of the following shall constitute an "Event of Default": (a) Borrower fails to make any payment due from Borrower on any Note or under any other Basic Document (including any Interest Supplement and any amount due under section 4.04 hereof) when due; (b) any representation or warranty made by Borrower in the Basic Documents, or in any certificate or other document that it furnishes pursuant to the Basic Documents, proves to have been incorrect in any material respect when made; (c) Borrower fails to maintain the insurance required by the terms of the Mortgage; (d) the Delta Agreement is voluntarily terminated, or is amended to the detriment of Borrower; (e) Borrower fails to provide Lender with the Officer's Certificate required by section 6.01(c) or 6.06(b) within 10 days after any of Borrower's officers obtains notice of a Default or the ERISA-related event or circumstance occurs, respectively; (f) Borrower fails to perform any other material covenant or agreement in the Basic Documents (including section 6.09 hereof), and (if remediable) such failure to perform continues for 30 days after Borrower's receipt of notice of such default from Lender; (g) Borrower (1) applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of all or a majority of its property, (2) makes a general assignment for the benefit of its creditors, (3) commences a voluntary case under the federal Bankruptcy Code (as now or hereafter in effect), (4) files a petition seeking to take advantage (as debtor) of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, or (5) fails to controvert in a timely manner, or acquiesces in writing to, any petition filed against it in an involuntary case under the federal Bankruptcy Code; (h) a proceeding or case is commenced, without Borrower's application or consent, in any court of competent jurisdiction, seeking (l) its liquidation, reorganization, dissolution, or winding-up, or the composition or readjustment of its debts (2) the appointment of a trustee, receiver, custodian, liquidator, or the like of Borrower or of all or a majority of its assets, or (3) similar relief in respect of Borrower under any law relating to bankruptcy, insolvency, 19 24 reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case continues undismissed, or an order, judgment, or decree approving or ordering any of the foregoing is entered and continues unstayed and in effect, for a period of 60 days; or an order for relief against Borrower is entered in an involuntary case under the federal Bankruptcy Code; (i) loan, lease, or deferred purchase obligations of Borrower totaling more than $1 million are in default after the expiration of any applicable grace period, if the effect of such default is to permit such obligations to be accelerated or otherwise declared to be due and payable prior to their stated maturity, or Borrower defaults in the payment when due of more than $l million of loan, lease, or deferred purchase obligations; (j) one or more judgment(s) is/are rendered by one or more court(s) of competent jurisdiction against Borrower for a total of more than $1 million and is/are not stayed or discharged, or fully bonded against, within 60 days of the date or entry; (k) any "Reportable Event" under ERISA shall have occurred, or any finding or determination shall be made with respect to an employee benefit plan to which Borrower is a party under section 4041(c) or (e) of ERISA, or any fact or circumstance shall occur with respect to an employee benefit plan to which Borrower is a party, that, in the opinion of Lender, provides grounds for the commencement of any proceeding under Section 4042 of ERISA, or any proceeding shall be commenced under Section 4042 of ERISA with respect to an employee benefit plan to which Borrower is a party; or (l) Borrower shall deny any further liability under any Note or under any other Basic Document. SECTION 8.02 -- Remedies. If an Event of Default (other than under section 8.01 (g) or (h)) exists, Lender may declare all Notes to be immediately due and payable, whereupon (i) all Notes shall become and be immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which Borrower hereby waives, (ii) the Interest Supplement for any partial Interest Period will become immediately due and payable, and (iii) the Commitment shall terminate. If an Event of Default under section 8.01(g) or (h) occurs, all Notes automatically shall become immediately due and payable and the Commitment automatically shall immediately terminate, without presentment, demand, protest, or notice of any kind, all of which Borrower hereby waives. ARTICLE IX BORROWER'S INDEMNITIES 20 25 SECTION 9.01 -- General Indemnity. Borrower assumes liability for, and agrees to indemnify each Indemnitee against, and on written demand to pay, or to reimburse each Indemnitee for the payment of, any and all liabilities, obligations, losses, damages, penalties, claims (including claims involving strict liability in tort), suits, actions, costs, expenses, and disbursements, including legal fees and expenses, of whatsoever kind and nature (collectively, "Liabilities") imposed on, incurred by, or asserted against any Indemnitee relating to or arising out of any Basic Document, the enforcement against Borrower of any of the terms of the Basic Documents, or any lease or relinquishment of possession of the Aircraft or any part thereof or any action or inaction of Borrower or of any lessee, assignee, or transferee of Borrower in connection therewith, the purchase of the Aircraft under the Purchase Agreement, the ownership of the Aircraft, the acquisition, delivery, nondelivery, acceptance, nonacceptance, rejection, registration, deregistration, insuring, storage, manufacture, assembly, transportation, importation, exportation, maintenance, condition, modification, testing, repair, fitness for use, merchantability, sale, abandonment, lease, sublease, assignment, transfer, transfer of title, possession, repossession, use, operation, return, or other application or disposition of the Aircraft or any component thereof, the condition upon return thereof after repossession following the occurrence of an Event of Default or following the exercise of remedies under the Mortgage, including latent or other defects, whether or not discoverable, loss of or damage to any property or the environment, death or injury of any person, and any claim for patent, trademark, copyright, or mask work infringement and the violation or infringement by Borrower of any laws, rules, or regulations, or (without limiting any of the foregoing) any breach by Borrower of, noncompliance by Borrower with, or misrepresentation made or deemed made by or on behalf of Borrower in, under, or in connection with the Purchase Agreement or any Purchase Agreement Assignment or any warranty, certificate, or agreement made or delivered in, under, or in connection with the Purchase Agreement or any Purchase Agreement Assignment; provided, that this section shall not require Borrower to pay or indemnify any Indemnitee under this section (i) for any Liability to the extent resulting from such Indemnitee's acts of gross negligence or willful misconduct; (ii) for any Taxes (Borrower's duties in respect of Taxes being set forth in section 9.02) or for any cost or expense relating to the preparation, execution, delivery, or enforcement of the Basic Documents (Borrower's duties in respect of such costs and expenses being set forth in section 11.03); (iii) for any Liability that such Indemnitee incurs to the extent resulting from its breach of any of its representations, warranties, or covenants in any Basic Document; (iv) for any Liability to the extent resulting from a claim against such Indemnitee not related to any Aircraft, any action or inaction of Borrower or any lessee, assignee, or transferee of Borrower, or any of the transactions contemplated by the Basic Documents; (v) for any Liability with respect to transfer taxes or other expenses payable with respect to the transfer of any Note, other than a transfer after the occurrence of an Event of Default; or (vi) for any violation or purported violation of any law relating to usury or the charging or collecting of excess interest or finance charges. If any Indemnitee obtains knowledge of 21 26 any claim or liability required to be indemnified against under this section 9.01, such Indemnitee shall promptly notify Borrower, but the failure to do so shall not relieve Borrower from any liability that it otherwise would have to such Indemnitee under this section. Upon an Indemnitee's request, the defense of any Liability for which Borrower would be required to indemnify such Indemnitee hereunder shall be conducted by Borrower, with counsel selected by Borrower and satisfactory to Lender. However, if the defense of any such Liability is conducted by Lender, Lender shall select the counsel to conduct it, but shall consult with Borrower as to such selection; provided, that the decision as to which counsel to select shall be and remain Lender's. Borrower shall be obligated under this section 9.01 irrespective of whether the Indemnitee is also indemnified with respect to the same matter under any other Basic Document or other document by any other Person, and the Indemnitee may proceed directly against Borrower under this section 9.01 without first resorting to any such rights of indemnification. Upon the payment in full of any indemnities due and owing under this section 9.01, Borrower shall be subrogated to any right of the Indemnitee in respect of the matter against which indemnity has been given. Borrower's indemnities in this section shall survive expiration or termination of the Mortgage and payment in full of the Notes. Any payment or indemnity pursuant to this sect on 9.01 shall include the amount, if any, necessary to hold the Indemnitee harmless on an after-tax basis from all taxes required to be paid by such recipient with respect to such payment or indemnity under laws of any federal, state, or local government or taxing authority in the United States or by any foreign government or any political subdivision or taxing authority thereof. The amount of any payment or indemnity required under this section shall be determined by the Indemnitee reasonably and in good faith, and that determination shall be conclusive. Upon Borrower's request and at Borrower's expense, the Indemnitee will provide Borrower with a summary explanation of the basis for the Indemnitee's computations. SECTION 9.02 -- Taxes. (a) Indemnity. Except as provided in section 9.02(b), Borrower agrees to indemnify each Indemnitee against, and on written demand to pay or reimburse each Indemnitee for the payment of, any and all Taxes imposed upon or asserted against any Indemnitee, any Aircraft or any part thereof or interest therein, any Basic Document, any lease of any Aircraft or any part thereof, or the rentals received under such a lease, by any federal, state, or local government or other taxing authority in the United States (including any territory or possession of the United States) or by any foreign government or any political subdivision or taxing authority thereof where any part of an Aircraft is located, used, or registered ( "Taxing Authorities") upon or with respect to (i) the construction, mortgaging, financing, refinancing by or at the request of Borrower, purchase, acquisition, acceptance, nonacceptance, rejection, delivery, nondelivery, transport, insuring, ownership, registration, deregistration, assembly, possession, repossession, operation, use, condition, maintenance, modification, repair, fitness for use, merchantability, testing, 22 27 return, abandonment, storage, manufacture, leasing, subleasing, importation, exportation, sale, assignment, transfer, transfer of title, or other application or disposition of, or the imposition of any Lien (other than a Permitted Lien) or the incurrence of any liability to refund or pay over any amount as a result of any Lien (other than a Permitted Lien) on any Aircraft or any part thereof or interest therein, (ii) any amount paid or payable by Borrower or Finex Bank under the Basic Documents or the receipts or earnings arising from or received with respect to any Aircraft or any part thereof or interest therein, (iii) any Aircraft or any part thereof or interest therein, (iv) any of the Basic Documents and any other documents contemplated thereby or the execution, sale, delivery, acquisition, or filing of the Basic Documents, or (v) otherwise with respect to or in connection with the transactions effected under the Basic Documents. The term "Taxes" shall mean any and all fees, taxes, levies, imposts, duties, charges, assessments, or withholdings of any nature whatsoever, together with any and all penalties, fines, additions to tax, and interest thereon or computed by reference thereto. (b) Exclusions from Indemnity. The provisions of section 9.02(a) shall not apply to: (i) any Tax based on, or measured by, net income, capital, franchise, or net worth (other than sales taxes), including related surcharges and withholding taxes; provided, that the provisions of this clause (b)(i) shall not apply to any Taxes imposed in respect of the receipt or accrual of any indemnity payment made or payable pursuant to this section 9.02; (ii) any Tax based on or measured by the value of such Indemnitee's interest in any Basic Document, except to the extent imposed without regard to the presence of the Indemnitee, or any Note, in the jurisdiction of the Taxing Authority imposing that Tax; (iii) any Tax imposed on the Indemnitee as a result of a transfer or other disposition, by such Indemnitee or any of its predecessors in interest, of any interest in the Aircraft or any Basic Document, unless such transfer or disposition occurs after the occurrence of an Event of Default; or (iv) any Tax in the nature of a penalty, an addition to tax, interest, or fines resulting from the negligence or misconduct of the Indemnitee in connection with the preparation or filing of (or failure to prepare or file) tax returns, or the payment of or failure to pay its taxes, but in each case not if in any way attributable to Borrower's failure to notify such Indemnitee of its obligations to prepare and file its returns in respect of Taxes indemnified pursuant to this section 9.02 or to provide any information necessary for the preparation or filing of such returns or the conduct of such proceedings or otherwise to perform its duties and responsibilities pursuant to the Basic Documents. 23 28 (c) Calculation of General Tax Indemnity Payments. Any payment which Borrower is required to make to or for the account of any Indemnitee with respect to any Tax which is subject to indemnification under this section 9.02 shall be made on a net basis, taking into account offsetting credits or deductions available to such Indemnitee as a result of the payment of such Tax, and shall include the amount necessary to hold such Indemnitee harmless on an after-tax basis from the net amount of all Taxes required to be paid by such Indemnitee as the result of such payment (including any Taxes imposed on such indemnity payment) pursuant to the laws of any Taxing Authority. The amount of any payment or indemnity required under this section shall be determined by the Indemnitee reasonably and in good faith, and that determination shall be conclusive. Upon Borrower's request and at Borrower's expense, the Indemnitee will provide Borrower with a summary explanation of the basis for the Indemnitee's computations. (d) Records. If Borrower shall timely file any report, return, or statement required to be filed with respect to any Tax which is subject to indemnification under this section 9.02, except for any such report, return, or statement which an Indemnitee has notified Borrower that it intends to file. Borrower shall file such report, return, or statement and send a copy to Lender and each Indemnitee affected by such report, return, or statement. Each Indemnitee shall promptly forward to Borrower any notice, bill, or advice received by it concerning any Tax. ARTICLE X YIELD PROTECTION SECTION 10.01 -- Additional Costs. (a) Borrower shall pay directly to Lender from time to time such amounts as are necessary to compensate Lender, on an after-tax basis, for any costs which are attributable to its purchase of or obligation to purchase any Note hereunder, or any reduction in any amount receivable by Lender in respect of such Notes (excluding payments under the Finex Agreement), resulting from any Regulatory Change which imposes or modifies any reserve, special deposit, minimum capital, capital ratio, or similar requirements relating to any extensions of credit or other assets of or any deposits with or other liabilities of Lender, or the manner in which Lender funds (or allocates funds, on its books, for) its investments in any of the Notes. (b) Determinations and allocations for purposes of this section 10.01 of the effect of any Regulatory Change pursuant to section 10.01(a) on Lender's costs or rate of return of maintaining or its obligations to purchase any Note, or on amounts receivable by it in respect of any Note, and of amounts required to compensate Lender under this section 10.01, shall be made by Lender reasonably and in good faith and shall be conclusive. Upon Borrower's request 24 29 and at Borrower's expense, Lender will provide Borrower with a summary explanation of the basis for Lender's computations. SECTION 10.02 -- Breakage Costs. Borrower shall pay to Lender, upon Lender's request, such amount as is sufficient, in Lender's opinion, to compensate it for any loss, cost, or expense which is attributable to: (a) any payment, purchase, or conversion of any Note for any reason (including the acceleration of the maturity of the Notes pursuant to section 8.02 and the mandatory purchase of the Note pursuant to section 4.04) on a date other than an Interest Payment Date; or (b) any failure by Vendor for any reason (including the failure of any of the conditions precedent specified in article VII to be satisfied) to endorse and deliver any Note to Finex Bank on the Purchase Date specified in the relevant notice to Lender given pursuant to section 2.02. Such amount payable by Borrower (x) shall not include losses, costs, or expenses attributable to any date more than 180 days after the date of such payment, purchase, or conversion or such Purchase Date, and (y) shall be determined by Lender reasonably and in good faith, which determination shall be conclusive. Upon Borrower's request and at Borrower's expense, Lender will provide Borrower with a summary explanation of the basis for Lender's computations. ARTICLE XI MISCELLANEOUS SECTION 11.01 -- No Waivers: Cumulative Remedies. No failure or delay in exercising any power or right under any Basic Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude other or further exercise thereto, or the exercise of any other right or power under any Basic Document. No notice to or demand on any party in any case shall, of itself, entitle such party to any other or further notice or demand in similar or other circumstances. SECTION 11.02 -- Notices. All communications and notices provided for under this Agreement shall be in writing (including telex, telegraph, and telecopy), shall be in English, and shall be mailed by certified mail (return receipt requested) or otherwise delivered to the parties at the addresses set forth by their signatures hereto, or, as to each party, at such other address as it designates by notice to each other party. Each such notice shall be effective upon delivery. SECTION 11.03 -- Transaction Expenses. Borrower will pay on demand all out-of-pocket expenses in connection with the preparation, execution, delivery, administration, and enforcement of the Basic Documents, or in connection with any scheduled closing 25 30 that is postponed or cancelled, including (i) all fees and expenses of (x) Trotter Smith & Jacobs, special counsel to Lender, (y) Castro, Barros, Sobral e Xavier, special Brazilian counsel, and (z) Crowe & Dunlevy, special FAA counsel; (ii) all FAA and UCC filing and lien search fees; (iii) all fees and expenses (including legal fees and expenses) of Lender in connection with actual or proposed amendments, waivers, or consents to or under this Agreement or the other Basic Documents (except for such amendments, waivers, or consents initiated by Lender); and (iv) all fees and expenses (including legal fees and expenses) of Lender in connection with the actual or proposed enforcement of any Basic Document against Borrower during the existence of any Default. The "legal fees and expenses" of Lender referred to in clauses (iii) and (iv) may include those of Lender's in-house counsel. SECTION 11.04 -- Amendments. Any provision of the Basic Documents, other than the Purchase Agreement, the Guarantee, or the Finex Agreement, may be amended, terminated, waived, or otherwise modified only in writing by Borrower and Lender. SECTION 11.05 -- Successors and Assigns. This Agreement shall bind and benefit Lender and Borrower and their successors and assigns, except that Borrower may not assign or transfer its rights under this Agreement without Lender's prior written consent. Lender may at any time with the Borrower's consent (which consent shall not be unreasonably withheld) sell, assign, grant participation(s) in, or otherwise transfer any Note and Lender's rights (including the right to receive Interest Supplements) relating to such Note, in whole or in part. SECTION 11.06 -- Lender's Representations and Warranties. Lender represents and warrants that: (a) it is a national banking association duly organized, validly existing, and in good standing under the laws of the United States, and has all corporate power, authority, and legal right under the laws of the United States to execute, deliver, and carry out the terms of each of the Basic Documents to which it is a party; (b) it has duly authorized, executed, and delivered this Agreement and the other Basic Documents to which it is a party; and (c) neither it nor anyone authorized to act on its behalf has directly or indirectly offered any beneficial interest in the Notes for sale to, or solicited any offer to acquire any such interest in the Notes from, any Person in such a manner as to require any of the Notes to be registered under the Securities Act of 1933, as amended, or any state securities law; provided, that the foregoing shall not be deemed to extend any such offer, sale, or solicitation by or on behalf of Borrower or any other Person. SECTION 11.07 -- Governing Law. This Agreement shall be governed by the laws of Georgia. 26 31 SECTION 11.08 -- Headings. Article and section headings used in this Agreement are for convenience only and are not a substantive part of this Agreement. SECTION 11.09 -- Execution in Counterparts. This Agreement may be executed in separate counterparts. SECTION 11.10 -- Survival of Representations and Warranties. All representations and warranties contained in this Agreement or made in writing in connection with this Agreement shall survive the execution and delivery of this Agreement and the Mortgage. SECTION 11.11 -- Severability. If any part of any provision contained in this Agreement, or any document contemplated hereby, is or becomes invalid or unenforceable under applicable law, that part shall be ineffective to the extent of such invalidity only, without in any way affecting the remaining parts of that provision or the remaining provisions. SECTION 11.12 -- Finex Agreement. So long as no Default exists, Lender shall forward any payments that it receives under the Finex Agreement as Finex Interest Payments, or interest thereon, or as indemnification or reimbursement under the Finex Agreement and not relating to any loss or expense suffered by Lender, to Borrower at First American Bank of Georgia N.A., 2000 RiverEdge Parkway, Atlanta, Georgia 30328, Account: Atlantic Southeast Airlines, Inc. (account #5100130970). Lender shall use its good faith efforts to forward any such payments to Borrower on the Business Day following their receipt by Lender. At the cost and expense of Borrower, Lender shall use its good faith efforts to take such action with respect to the Finex Agreement as Borrower shall reasonably request, provided that Lender shall not be required to take any action which adversely affects its interests; provided that a reduction in the amount of Finex Interest Payments resulting from the guarantee of such Finex Interest Payments by Finex Bank shall not be considered an action adversely affecting Lender's interest; provided , further, that any bank having offices in New York City and in Brazil, and authorized to act as a Finex agent bank under the Finex Program, shall be presumed to be acceptable to Lender as to identity. However, all risks associated with the Finex Program are Borrower's, and Lender shall have no responsibility for any Finex Interest Payments not actually received by Lender from Finex Bank. So long as no Default exists, Lender shall not enter into any amendment of the Finex Agreement without Borrower's consent, such consent not to be unreasonably withheld. 27 32 IN WITNESS WHEREOF, Borrower and Lender have executed this Credit Agreement. ATLANTIC SOUTHEAST AIRLINES, INC. 1688 Phoenix Parkway College Park, Georgia 30349 Attn: Ronald V. Sapp Vice President-Finance By: /s/ R.V. Sapp and Treasurer ------------------------------- Facsimile No.: (404) 991-0366 Title: Vice President - Finance -------------------------- BANK OF AMERICA NATIONAL 555 South Flower Street TRUST AND SAVINGS ASSOCIATION Los Angeles, California 90071 Attn: Airline Aerospace #5770 Facsimile No.: (213) 228-2756 By: /s/ Douglas I. Robinson ------------------------------- Title: Vice President ------------------------- with a copy to: 1850 Gateway Blvd. #5693 Concord, California 94520 Attn: Corporate Service Center Facsimile No.: (415) 675-7531 28 EX-10.K 6 CREDIT AGREEMENT DATED 4/19/91 1 EXHIBIT 10(K) =============================================================================== CREDIT AGREEMENT dated as of April 19, 1991 among ATLANTIC SOUTHEAST AIRLINES, INC., Borrower, THE FIRST NATIONAL BANK OF ATLANTA, Agent, and THE FIRST NATIONAL BANK OF ATLANTA and THE BANK OF TOKYO, LTD., ATLANTA AGENCY, Lenders. Up to Four Embraer Model EMB-120 Brasilia Aircraft =============================================================================== 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS; REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.02 Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 1.03 Section and Exhibit References, etc. . . . . . . . . . . . . . . . . . . . . 11 ARTICLE II PURCHASE OF NOTES AND CERTIFICATES; PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2.01 Purchase of Notes and Certificates . . . . . . . . . . . . . . . . . . . . . 11 Section 2.02 Procedure for Purchase of Notes and Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 2.03 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.04 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 2.05 Payments by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE III SECURITY FOR BORROWER'S OBLIGATIONS . . . . . . . . . . . . . . . . . . . . 13 Section 3.01 Security Interest in Collateral . . . . . . . . . . . . . . . . . . . . . . 13 Section 3.02 Set-Off Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE IV PAYMENTS UNDER THE NOTES AND OTHER AMOUNTS PAYABLE BY BORROWER . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 4.01 How Payments Are Made . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 4.02 Right to Prepay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 4.03 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 4.04 Mandatory Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 4.05 Amount of Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 4.06 Interest on Past Due Amounts . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 4.07 Payment of Accrued Interest Supplements . . . . . . . . . . . . . . . . . . 16 Section 4.08 Reduction in Net Interest Payable by Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
i 3 ARTICLE V BORROWER'S REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 17 Section 5.01 Corporate Standings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 5.02 Corporate Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 5.03 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 5.04 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 5.05 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 5.06 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 5.07 Status as United States Citizen and Air Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 5.08 Location of Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 5.09 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Section 5.10 Condition of Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 5.11 Absence of ERISA Liability . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 5.12 Delta Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 5.13 Subsidiaries; Stock Ownership . . . . . . . . . . . . . . . . . . . . . . . 19 Section 5.14 Investment Company Status . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 5.15 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE VI AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 6.01 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 6.02 Inspection of Collateral and Records . . . . . . . . . . . . . . . . . . . . 21 Section 6.03 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 6.04 Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 6.05 Citizenship and Air Carrier Status . . . . . . . . . . . . . . . . . . . . . 23 Section 6.06 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 6.07 Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 6.08 Performance of Delta Agreement . . . . . . . . . . . . . . . . . . . . . . . 24 Section 6.09 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 6.10 Certificate of No Default . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 6.11 Insurance on Fleet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE VII CONDITIONS OF PRECEDENT TO THE PURCHASE OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 7.01 Conditions Precedent to the Purchase of the Initial Note . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 7.02 Conditions Precedent to the Purchase of All Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ii 4 ARTICLE VIII EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 8.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 8.02 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE IX BORROWER'S INDEMNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 9.01 General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 9.02 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 9.03 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE X YIELD PROTECTION; ILLEGALITY . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 10.01 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 10.02 Breakage Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 10.03 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE XI AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 11.01 Appointment; Powers and Indemnities; Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 11.02 Reliance by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.03 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.04 Rights as a Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 11.05 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 11.06 Nonreliance on Agent or Lenders . . . . . . . . . . . . . . . . . . . . . . 39 Section 11.07 Failure to Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 11.08 Resignation of Agent; Successor Agent . . . . . . . . . . . . . . . . . . . 40 Section 11.09 Investment of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 11.10 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . 42 Section 11.11 No Claims Against Agent, etc. . . . . . . . . . . . . . . . . . . . . . . . 43 Section 11.12 Form of Certificates; Issuance, Transfer, and Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 11.13 Action Upon Written Instructions . . . . . . . . . . . . . . . . . . . . . . 45 Section 11.14 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 11.15 Procedures for Disposing of Collateral . . . . . . . . . . . . . . . . . . . 46
iii 5 ARTICLE XII RECEIPT, DISTRIBUTION, AND APPLICATION OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 12.01 Payment by Agent Generally . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 12.02 Application of Payments After Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 12.03 Payments After Event of Default . . . . . . . . . . . . . . . . . . . . . . 47 Section 12.04 Application of Indemnity and Certain Other Payments . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 12.05 Other Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 12.06 Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 12.07 Payments From Proceeds From Borrower . . . . . . . . . . . . . . . . . . . . 50 Section 12.08 Termination of Certificates . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE XIII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 13.01 No Waivers; Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . 50 Section 13.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 13.03 Transaction Expenses; Agent's Fees . . . . . . . . . . . . . . . . . . . . . 50 Section 13.04 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 13.05 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 13.06 First Atlanta's Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 13.07 Bank of Tokyo's Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 13.08 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 13.09 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 13.10 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 13.11 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 13.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 13.13 Finex Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 13.14 Agent Not Acting in Individual Capacity . . . . . . . . . . . . . . . . . . 56 Annex A Procedures for Purchasing Aircraft, Notes, and Certificates; Documentation Exhibit A Form of Note Exhibit B Form of Finex Agreement Exhibit C Form of Mortgage Exhibit D Form of Purchase Agreement Assignment Exhibit E Form of Consent Exhibit F Form of opinion of Borrower's counsel Exhibit G Form of opinion of Crowe & Dunlevy (Aircraft) Exhibit H Form of opinion of counsel to Embraer Exhibit I Form of opinion of Castro Barros Sobral e Xavier Exhibit J Form of Guarantee Exhibit K Forms of Certificates
iv 6 CREDIT AGREEMENT This Credit Agreement is entered into as of April 19, 1991 among (i) Atlantic Southeast Airlines, Inc. ("Borrower"), a Georgia corporation, (ii) The first National Bank of Atlanta, a national banking association, in its individual capacity, and The Bank of Tokyo, Ltd., Atlanta Agency, a Georgia agency of a Japanese banking corporation, as lenders (the "Lenders"), and (iii) The First National Bank of Atlanta, a national banking association, not in its individual capacity (except as otherwise expressly stated) but solely as agent (in such representative capacity "Agent"). Borrower, the Lenders, and Agent agree as follows: Article I DEFINITIONS; REFERENCES Section 1.01 -- Definitions. The following terms, when capitalized as below, have the following meanings: "Act": the Federal Aviation Act of 1958, as amended, or its successor. "Agent": The First National Bank of Atlanta, not in its individual capacity but solely in its capacity as agent for Lenders, or the successor agent pursuant to section 11.08 hereof. "Agreement": this Credit Agreement. "Alternative LIBO Rate": defined in section 3.02 of the Finex Agreement. "Aircraft": up to four Embraer EMB-120 Brasilia aircraft to be delivered under the Purchase Agreement and in each case designated by Borrower (by notice to Agent (which Agent agrees to the Purchase Date therefor, and not revoked by notice to Agent (which Agent agrees to relay promptly to each Lender) on or before the Purchase Date therefor) as an "Aircraft" to be financed under this Agreement. "Bank LIBOR" for any Interest Period: a rate per annum (calculated on the basis of a 360-day year and the actual number of days elapsed) equal to the consensus rate at which 180-day deposits in Dollars appear on the Reuters Screen LIBO Page at approximately 11:00 a.m. London, England time, on the day that is two Business Days before the first day of that Interest Period. 7 "Bank of Tokyo": The Bank of Tokyo, Ltd., Atlanta Agency. "Basic Documents": this Agreement, the Purchase Agreement, the Finex Agreement(s), the Guarantee, and the Mortgage; and each Certificate, Note, Purchase Agreement Assignment, Consent, and Mortgage Supplement as executed and delivered. "Book Net Worth": defined in section 6.09. "Borrower Interest Rate" with respect to any Interest Period: an interest rate equal to Bank LIBOR for such Interest Period, plus (x) 0.60% per annum from the Purchase Date to the fifth Interest Payment Date for the related Note, (6) 0.875% per annum after the fifth Interest Payment Date through the tenth Interest Payment Date for the related Note, and (z) 1.05% for the remainder of the term of the related Note (computed on the basis of a year of 360 days), based on actual days elapsed. "Business Day": any day, other than a Saturday or Sunday, on which commercial banks are open for business in New York, New York, London, England, and Sao Paulo, Brazil, and Agent is open for business in Atlanta, Georgia, and if such day is a Purchase Date or Interest Payment Date or relates to a notice by Borrower with respect to any Purchase Date, which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Capitalized Lease": a capitalized lease of any tangible real or personal property, as determined pursuant to GAAP. "Certificate": a Long-Term Certificate, Medium-Term Certificate, or Short-Term Certificate. "Change in Control": the acquisition by any Person (other than Delta Air Lines, Inc., directly or indirectly) or group (within the meaning of Rule 13d-5 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934), or by two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities and Exchange Act of 1934) of either (i) 33-1/3% or more of the outstanding shares of voting stock of Borrower or (ii) the power to direct or cause the direction of the management and policies of Borrower, whether through the ownership of voting securities, by contract, or otherwise. "Code": the Internal Revenue Code of 1986, as amended from time to time, including effective date and transition rules (whether or not codified). Any reference to a specific section of 2 8 the Code shall be deemed to include a reference to any corresponding provision of future law. "Collateral": the "Collateral" under the Mortgage. "Commitment": Agent's commitment to purchase the Notes, and each Lender's commitment to participate, through the purchase of Certificates, in the Agent's purchase of notes, in the amount set forth opposite each Lender's name in section 2.01, for an aggregate amount of up to $21,250,000; Borrower may reduce such amount upon 30 days' prior written notice to Agent (which Agent agrees to relay promptly to each Lender) and in the event of such reduction in the total commitment, each Lender's commitment will be reduced pro rata based on the relation of each Lender's commitment to the total commitment. "Commitment Fee": the fee required to be paid by Borrower to Agent, for the benefit of the Lenders, pursuant to section 2.03. "Commitment Period": the period from the date of execution of this Agreement to and including the earliest of (w) September 30, 1991, (x) the date upon which the fourth Aircraft is delivered to and accepted by Borrower pursuant to the Purchase Agreement, (y) the date on which the remaining Commitment is terminated pursuant to section 8.02, and (z) a date set by Borrower pursuant to a notice sent to Agent (which Agent agrees to relay promptly to each Lender) at lease 30 days prior to such date. "Consent": a Consent and Agreement, substantially in the form of Exhibit E, relating to a Purchase Agreement Assignment and dated the same date as that Purchase Agreement Assignment. "Current Maturities of Long-Term Debt": the amounts due, within the 12-month period following any fiscal quarter end of Borrower, under long-term debt instruments of Borrower, as determined pursuant to GAAP. "Default": any event or condition that would become an Event of Default upon the giving of notice or lapse so time or both, or any Event of Default. "Delta Agreement": the agreement between Delta Air Lines, Inc. and Borrower, dated June 1, 1986, relating to joint marketing or code sharing for interconnecting flights. "Depreciation and Amortization Expense": the total expenses for depreciation and amortization incurred by Borrower in the 12-month period preceding any fiscal quarter end of Borrower, as determined pursuant to GAAP. "Dollars" and "S": United States dollars. 3 9 "Downpayment": as to the first Aircraft financed under this Agreement, 15% of Equipment Cost for the first $6,400,000 of Equipment Cost, and 100% of Equipment Cost in excess of $6,400,000, for an Equipment Portion and, as to the other Aircraft financed under this Agreement, 15% of the Equipment Cost for the first 6,200,000 of Equipment Cost, and 100% of Equipment Cost in excess of $6,200,000, for an Equipment Portion, minus, in any case, any amounts that Borrower paid to Vendor before the relevant Purchase Date (including deposits applied to such Equipment Portion), pursuant to the Purchase Agreement, relating to such Equipment Portion. "Earnings Before Tax": the total earnings from all sources, excluding extraordinary items, of Borrower in the 24-month period preceding any fiscal quarter end of Borrower, prior to any deduction for federal and state income taxes, as determined pursuant to GAAP, divided by 2. "Embraer": Embraer-Empresa Brasileira de Aeronautica S. A., a Brazilian corporation, and its successors and assigns. "Environmental Complaint": any complaint, proceeding, or order under any federal, state, or local statutes, laws, ordinances, codes, rules, or regulations (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. "Equipment Cost": the purchase price for an Equipment Portion, as set forth in (and as adjusted pursuant to) the Purchase Agreement. "Equipment Portion": as to the first Aircraft financed under this Agreement, the Aircraft and the Spare Parts purchased with that Aircraft and, as to each of the other Aircraft financed under this Agreement, the Aircraft but not the Spare Parts, if any, purchased with that Aircraft. "ERISA": defined in section 5.11. "Event of Default": defined in section 8.01. "Event of Loss": defined in section 1.01 of the Mortgage. "FAA": the Federal Aviation Administration of the United States, or any instrumentality of the United States succeeding to its function. "Facility Fee": defined in section 2.04. 4 10 "Financed Amount": the amount determined pursuant to the second sentence of section 2.01. "Finex Agreement": an agreement substantially in the form of Exhibit B. "Finex Bank": Banco de Credito Nacional S.A., New York Branch (or any other Person selected by Borrower and accepted by Agent in accordance with section 13.13 to serve as a Finex bank under a Finex Agreement), in its capacity as Finex bank under the Finex Agreement, and its successors in such capacity. "Finex Interest Payments": the Finex Interest Payments described in section 3.01 of the Finex Agreement. "Finex Interest Rate" for a Note: a fixed interest rate equal to the Finex LIBO Rate for its Purchase Date, minus 2% per annum (computed on the basis of a year of 360 days), based on actual days elapsed, or such other interest rate as Borrower is actually required to pay on such Note under the Finex Program. "Finex LIBOR" or "Finex LIBO Rate" for any Purchase Date: (x) the interest rate for such Purchase Date, published by Banco Central do Brasil two Business Days before that Purchase Date, as the 180-day interest rate applicable to transactions under the Finex Program, or (y) when applicable, the Alternative LIBO Rate established pursuant to section 3.02 of the Finex Agreement. "Finex Program": the export support program (Fundo de Financiamento a Exportaceo) of the Federative Republic of Brazil, as established by Resolution No. 509 of January 24, 1979 of Banco Central do Brasil and in Circular Cacex/Finex No. 10 of the Carteira de Comercio Exterior (Cacex) of Banco do Brasil S.A., dated September 21, 1982, as from time to time supplemented or amended. "First Atlanta": The First National Bank of Atlanta, in its individual capacity and not as agent. "GAAP": generally accepted accounting principles as in effect in the United States and applied on a basis consistent with that used in the preparation of the financial statements referred to in section 5.05, except for changes therein with which Borrower's independent public accountants concur that are disclosed in the notes to the relevant financial statements. "Guarantee": the document by that name, executed by ASA Investments, Inc., in substantially the form of Exhibit J. 5 11 "Hazardous Substance": (a) any "hazardous substance", as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as in effect from time to time; (b) any "hazardous waste", as defined by the Resource Conservation and Recovery Act, as in effect from time to time; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous, or toxic chemical, material, or substance within the meaning of any other applicable federal, state, or local law, regulation, ordinance, or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic, or dangerous waste, substance, or material, all as amended or hereafter amended. "herein", "hereof", "hereunder", etc.: in, of, or under, etc. this Agreement (and not merely in, of, under, etc. the section or provision where that reference appears) "Illegality Event": defined in section 10.03. "including": containing, embracing, or involving the enumerated items(s), but not necessarily limited to such item(s). "Indemnitee": Agent (individually and in its agency capacity) or a Lender, or any agent (other than Finex Bank), employee, director, successor, or permitted assign of any of the foregoing. "Indebtedness": (a) total liabilities (as determined pursuant to GAAP) of Borrower and its subsidiaries on a consolidated basis plus (b) any debt of a Person that is not included in clause (a) above and that is guaranteed by Borrower or one or more of its subsidiaries, plus (c) 70% of all Operating Lease Obligations. "Interest Expense": amounts paid by or due from Borrower for interest accrued on Borrower's debts during the 12-month period preceding any fiscal quarter end of Borrower, as determined pursuant to GAAP. "Interest Payment Date" for a Note: each date occurring after the Purchase Date for that Note that is a "180-day anniversary" of such Purchase Date; except that, for purposes of payment and of determining the beginning and end of each Interest Period (but not for the purpose of determining the following Interest Payment Date), any Interest Payment Date), any Interest Payment Date that falls on a day which is not a Business Day shall instead occur on the following Business Day, unless payment on such Business Day would cause such payment to be made in the next calendar month, in which case such Interest Payment date shall occur on the preceding 6 12 Business Day. For avoidance of doubt, the "180-day anniversary" of a date shall be the 180th day after that date. "Interest Period" for a Note: each period beginning on the day after an Interest Payment Date for that Note (or, in the case of the first Interest Period for that Note, beginning on its Purchase Date) and ending on the following Interest Payment Date for that Note. "Interest Supplement" for a Note during an Interest Period: (a) the amount of principal of that Note outstanding during such Interest Period multiplied by (b) the Borrower Interest Rate for such Interest Period minus the Finex Interest Rate for that Note multiplied by (c) the actual number of days in such Interest Period divided by 360; provided that if the Borrower Interest Rate for such Interest Period is equal to or less than the Finex Interest Rate for that Note, the Interest Supplement for that Interest Period shall be zero. "Lender": First Atlanta or Bank of Tokyo, or a successor or assign of either. "Liabilities": defined ins section 9-01. "Lien": any mortgage, pledge, assignment, encumbrance, lien (statutory or other), or other security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, or any lease in the nature thereof). "Long-Term Certificate": a Certificate substantially in the form of Exhibit K-1, or any loan certificate issued in exchange or replacement for such Certificate. "Majority Lenders": Lenders who, at the pertinent time, have a 66-2/3% or more interest in the sum of (x) all outstanding Certificates and (4) the unused Commitments outstanding of all Lenders, excluding any Certificates then held by, or in which a participation has been granted to, Borrower or any affiliate of Borrower. "Materially Adverse Change" or "Materially Adverse Effect": any event, act, condition, or occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding) that, singly or in conjunction with any other event(s), act(s), conditions(s), occurrence(s), whether or not related, results in a materially adverse change in, or has a materially adverse effect upon, any of (a) the financial condition, operations, business, 7 13 properties or prospects of Borrower, (b) the rights and remedies of Agent or any Lender under the Basic Documents, or Borrower's ability to perform its obligations under the Basic Documents; or (c) the legality, validity, or enforceability of any Basic Document. "Medium-Term Certificate": a Certificate substantially in the form of Exhibit K-2, or any loan certificate issued in exchange or replacement of such Certificate. "Mortgage": the Security Agreement and Chattel Mortgage between Borrower and Agent, substantially in the form of Exhibit C. "Mortgage Supplement": defined in section 3.01. "Note": Borrower's promissory note, in the form of Exhibit A, issued in connection with a designated Aircraft, or a note issued in exchange or replacement for such a note. "1988 Purchase Agreement": Purchase Agreement No. 162-COV/88 (including all attachments, exhibits, and letter agreements thereto) dated November 21, 1988, between Vendor and Borrower. "1990 Purchase Agreement": Purchase Agreement No. 154-DOC/AC/90 (including all attachments, exhibits, and letter agreements thereto) dated August 27, 1990, between Vendor and Borrower. "1990 10-K": Borrower's annual report on Form 10-K for the year ended December 31, 1990. "1990 10-Q": Borrower's quarterly report on Form 10-Q for the quarter ended September 30, 1990. "Officer's Certificate": a certificate signed in the name of Borrower (or, with respect to section 6.04(c), of the Successor) by the chairman of the board, the president, a vice president, or the treasurer of Borrower (or the Successor). "Operating Lease": a lease of tangible real or personal property, other than a Capitalized Lease, requiring aggregate payments of $100,000 or more during the fiscal year of the lessee. "Operating Lease Obligations": the amount equal to the aggregate of all scheduled lease payments (that will become due after any fiscal quarter end of Borrower for purposes of the term "Indebtedness" as used in section 6.09(a), but that were due during the 12-month period preceding any fiscal quarter end of Borrower 8 14 for purposes of section 6.09(b)) under the terms of all of Borrower's Operating Leases. "or": at lease one, but not necessarily only one, of the alternatives enumerated. "Participation Percentage": a particular Lender's Commitment as a percentage of the total Commitment of Lenders, as set forth opposite such Lender's name in section 2.01. "Permitted Lessee": defined in the Mortgage. "Permitted Lien": defined in the Mortgage. "Person": any individual, corporation, partnership, joint venture, or other legal or governmental entity. "Prepayment Event": the occurrence of any of the following events (with respect to the specific Aircraft involved in the case of clauses (a), (b), (c), or (d) below): (a) Borrower fails to keep each Aircraft registered with the FAA; (b) Agent fails or cease to have a perfected first-priority security interest in each Aircraft, except when the Note relating to such Aircraft has been fully paid; (c) a Lien, other than a Permitted Lien, on an Aircraft exits; (d) Borrower fails to obtain an FAA standard airworthiness certificate for an Aircraft within four weeks following the Purchase Date for such Aircraft; (e) the expiration of 120 days after a Change in Control, provided that (subject to confidentiality requirements under the securities laws) Borrower shall notify Agent as soon as it becomes aware of an actual or impending Change in Control event, and Agent, acting in good faith, will notify Borrower promptly after Agent reaches a tentative conclusion that it will exercise its rights under section 4.04 (and this Prepayment Event shall be separate and distinct from and does not affect the affirmative covenant regarding merger described in section 6.04 hereof); 9 15 (f) the expiration of 120 days after both (i) the Delta Agreement is fundamentally amended or terminated (other than a termination that is an Event of Default under section 8.01(d)) and (ii) Delta Air Lines, Inc. and its affiliates transfer all or substantially all of their beneficial ownership of the Borrower to a Person not affiliated with Delta Air Lines, Inc., provided, that Borrower shall notify Agent as soon as it becomes aware of any of the events described in (i) or (ii), and Agent, acting in good faith, will notify Borrower promptly after Agent reaches a tentative conclusion that it will exercise its rights under section 4.04; or (g) Borrower ceases to be an "air carrier" within the meaning of the Act. "Prime Rate": the interest rate so denominated and set by First Atlanta from time to time as an interest rate basis for borrowings. The Prime Rate is one of several interest rate bases used by First Atlanta. First Atlanta lends at interest rates above and below the Prime Rate. "Purchase Agreement": when used in connection with a specific Aircraft or Equipment Portion, either the 1988 Purchase Agreement or the 1990 Purchase Agreement, depending on which agreement the Aircraft or Equipment Portion was purchased under; when otherwise used, the 1988 Purchase Agreement and 1990 Purchase Agreement, collectively. "Purchase Agreement Assignment": a document by that name, substantially in the form of Exhibit D, executed and delivered on a Purchase Date with respect to the Aircraft then being delivered. "Purchase Date": a date on which Borrower purchases an Aircraft and, simultaneously, the Lenders purchase the related Certificates and Agent purchases the related Note. "Regulatory Change": any change after the date of this Agreement in federal, state, or Japanese law or regulations or the adoption or making after such date of any interpretations or directives applying to a class of banks including any Lender of or under any federal, state, or Japanese law or mandatory regulations by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reuters Screen LIBO Page": the display designated as page "LIBO" on the Reuter Monitor Money Rates Service (or such other 10 16 page as may replace the LIBO Page on that service for the purpose of displaying London interbank offered rates for Dollar deposits). "SEC Filings": the 1990 10-K and the 1990 10-Q. "Secured Obligations": defined in section 1.01 of the Mortgage. "Series of Certificates": the Certificates issued in connection with an Aircraft, or (if the context so requires) two or more Aircraft. "Short-Term Certificate": a Certificate substantially in the form of Exhibit K-3, or any loan certificate issued in exchange or replacement for such Certificate. "Spare Parts": the appliances, spare parts, and other items of equipment purchased with the Aircraft under the Purchase Agreement. "Successor": defined in section 6.04(a). "Tangible Net Worth": defined in section 6.09. "Taxes": defined in the last sentence of section 9.02(a). "Taxing Authorities": defined in the first sentence of section 9.02(a). "Vendor": Embraer. Section 1.02 -- Use of Defined Terms. Any defined term used in the plural preceded by "the" encompasses all members of the relevant class. Any defined term used in the singular preceded by "any" indicates any number of the members of the relevant class. Any agreement or instrument referred to in section 1.01 means such agreement or instrument as from time to time supplemented and amended. A definition in singular form applies to the plural form of the term, and vice versa. Section 1.03 -- Section and Exhibit References, etc. References to Articles, sections, exhibits, and the like refer to those in or attached to this Agreement unless otherwise specified. Article II PURCHASE OF NOTES AND CERTIFICATES; PAYMENTS 11 17 Section 2.01 -- Purchase of Notes and Certificates. Subject to the satisfaction of the conditions precedent set forth in Article VII, and on the terms and conditions set forth in this Article II, on the Purchase Date for each Aircraft, (i) Borrower shall issue the related Note to Vendor (who will simultaneously sell that Note to Finex Bank), (ii) Agent shall purchase that Note from Finex Bank, (iii) First Atlanta will purchase from Agent a Long-Term Certificate, equal in face amount to 50% of the related Note, Term Certificate, equal in face amount to 50% of the related Note, and (iv) Bank of Tokyo will purchase from Agent a Medium-Term Certificate and a Short-Term Certificate, each equal in face amount to 25% of the related Note. The Financed Amount for each Aircraft shall be 85% of the Equipment Cost for the related Equipment Portion, so that the total Equipment Cost for such Aircraft shall be paid 15% by Borrower and 85% by the related Note, provided, that the Financed Amount for the first Aircraft financed under this Agreement shall not exceed 85% of $6,400,000 (and Borrower shall pay 100% of Equipment Cost in excess of $6,400,000) and that the 100% of Equipment Cost in excess of $6,400,000) and that the Financed Amount for the other Aircraft shall not exceed 85% of $6,200,000 (and Borrower shall pay 100% of Equipment Cost for any such Aircraft in excess of $6,200,000). Each Note and each Series of Certificates shall be purchased for its face amount, and the total face amount of each Series of Certificates, and the face amount of each Note, each shall equal the Financed Amount for the related Aircraft. Each Lender's Commitment, pro rata share of such Financed Amount in accordance with its Participation Percentage, and pro rata share of Equipment Cost (x) for the first Aircraft financed under this Agreement shall be as set forth below:
Commitment for Participation Percentage of Name of Lender First Aircraft Percentage Equipment Cost - - ------------- -------------- ---------- -------------- Bank of Tokyo $2,720,000.00 50% 42.5% First Atlanta $2,720,000.00 50% 42.5%
and, (y) for each other Aircraft shall be as set forth below:
Commitment Participation Percentage of Name of Lender Per Aircraft Percentage Equipment Cost - - ------------- -------------- ------------- -------------- Bank of Tokyo $2,635,000.00 50% 42.5 First Atlanta $2,635,000.00 50% 42.5%
Agent's and each Lender's Commitment shall expire at 3:00 p.m., Atlanta, Georgia time, on the last day of the Commitment Period. 12 18 Section 2.02 -- Procedure for Purchase of Notes and Certificates. The procedure to be followed in the purchase of Notes and Certificates is described in Annex A. Neither Agent nor any Lender shall have any duty to pay the pro rata share of the Financed Amount on any Purchase Date for any Lender who fails to provide its pro rata share of such Financed Amount. At Agent's offices at 2 Peachtree Street, N.W., Atlanta, Georgia 30383 (or such other location as Agent shall designate in writing), not later than 2:00 p.m. (Atlanta, Georgia time) on the appropriate Purchase Date, upon fulfillment of the conditions set forth in Article VII and compliance with the procedures set forth in Annex A, Agent will purchase from Finex Bank (who will have purchased such Note simultaneously from Vendor) the Note related to the Aircraft that Borrower purchased on that date, and each Lender will purchase from Agent the appropriate related Certificate(s), in each case for a purchase price equal to the face amount thereof (as set forth in section 2.01). Section 2.03 -- Commitment Fee. In partial consideration of the Lenders' agreement to fund Agent's purchase of the Notes, Borrower shall pay to Agent, for the benefit of the Lenders, a Commitment Fee ("Commitment Fee") during the Commitment Period, payable in arrears on the first day of each quarter or partial quarter (for the prior quarter or partial quarter) after the execution and delivery of this Agreement, with a final payment on the last day of the Commitment Period, and computed at a rate per annum (calculated on the basis of a 360-day year and actual days elapsed) of 0.25% of the average daily unused portion of the Lenders' Commitment. The term "quarter" as used in this section shall mean the relevant calendar quarter ending on one of the following dates: March 31, June 30, September 30, or December 31. Section 2.04 -- Facility Fee. In partial consideration of the Lenders' agreement to finance the Aircraft pursuant to this Agreement, Borrower shall pay to Agent, for the benefit of the Lenders, a fee ("Facility Fee") of $13,281.25 (.0625% of the Commitment) within three days after the date of the execution of this Agreement. Section 2.05 -- Payments by Agent. Agent shall hold and disburse all amounts that it receives under the Basic Documents in accordance with the terms of this Agreement, including Article XII. Article III SECURITY FOR BORROWER'S OBLIGATIONS 13 19 Section 3.01 -- Security Interest in Collateral. To secure Borrower's obligations to Agent (in its individual and agency capacities) and the Lenders under each Note and the other Basic Documents to which Borrower is or becomes a party, Borrower shall execute and deliver to Agent, on each Purchase Date, a supplement to the Mortgage (a "Mortgage Supplement"), substantially in the form of Schedule A to the Mortgage, granting to Agent, for the benefit of Agent (in its individual and agency capacities) and the Lenders, a perfected purchase money security interest in the Aircraft being purchased from Vendor on such Purchase Date. Section 3.02 -- Set-Off Rights. If Borrower becomes insolvent, or any Event of Default occurs, any indebtedness that any Lender then owes to Borrower and any other property of Borrower that any Lender then holds may be offset and applied toward the payment of any principal of or interest on any Note to the extent of such Lender's beneficial interest therein represented by Certificate(s), or any obligation of Borrower to such Lender under the Basic Documents, whether or not any such other obligation is then due. Any Lender exercising its rights under this section shall promptly notify Borrower and Agent thereof, provided, that such Lender's failure to give such notice shall not affect the validity thereof. Each Lender agrees that if it shall obtain payment, pursuant to the exercise of its rights under this section, of a proportion of Borrower's aggregate indebtedness to it hereunder and under the Notes beneficially owned by such Lender which is greater than such Lender's proportion of the aggregate indebtedness hereunder and under the Notes beneficially owned by it, (a) it shall simultaneously purchase from any other Lender for cash an interest in such indebtedness beneficially held by such other Lender so that the aggregate unpaid amount of such indebtedness and interest thereon beneficially held by each such Lender shall be proportionate to the aggregate unpaid amount of such indebtedness and interest thereon beneficially held by each such Lender shall be proportionate to the aggregate unpaid indebtedness beneficially owing to it by Borrower immediately before such payment and (b) such other adjustments shall be made from time to time as shall be equitable to ensure that each Lender shares such payment pro rata in accordance with the principal outstanding under the Certificates which it has purchased hereunder; provided, that if all or any portion of such payment is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchasing Lender restored to the extent of such recovery, but without interest; provided further, that nothing in this section shall in any way affect the right of any Lender to obtain payment of indebtedness other than indebtedness hereunder or under the Notes or Certificates. Borrower consents to the foregoing arrangements and participation in Borrower's 14 20 indebtedness may, to the extent permitted by applicable law, exercise any and all rights of set-off as fully as if such holder were a beneficial holder of such indebtedness in the amount of such interest or other participation. If, under any bankruptcy, insolvency, or other similar law, any Lender receives a secured claim in lieu of a set-off to which this section 3.02 applies, such Lender shall, to the extent practicable, exercise its rights in respect to such secured claim in a manner consistent with the rights of the Lenders entitled under this section 3.02 to share in the benefits of any recovery on such secured claim. Article IV PAYMENTS UNDER THE NOTES AND OTHER AMOUNTS PAYABLE BY BORROWER Section 4.01 -- How Payments Are Made. Borrower shall make its payments and prepayments of principal and interest due on the Notes, all amounts due as Interest Supplements or as Commitment Fees or a Facility Fee hereunder, and all other amounts payable by Borrower to Agent or any Lender under the Basic Documents, to Agent, (ABA # 0610-0001-0) at 2 Peachtree Street, N.W., Atlanta, Georgia 30382, for credit to account no. 17069749, Reference: Atlantic Southeast Airlines/Georgia Corporate Division (or at such other place or account as Agent from time to time notifies Borrower), in immediately available funds and in Dollars, no later than 12:00 noon (Atlanta, Georgia time) on the date when due. In addition to the payments that Borrower is obligated to make under each Note, Borrower agrees to pay to Agent, on each Interest Payment Date, the Interest Supplement for each Note for the Interest Period then ending. Any payment made by Borrower to Agent after 12:00 noon (Atlanta, Georgia time) on any day shall be deemed to have been made on the following Business Day. If any payment due under the Basic Documents comes due on a day which is not a Business Day, such payment shall instead be made on the following Business Day, and interest, Interest Supplements, or Commitment Fees, as the case may be, shall accrue at the applicable rate to the day of payment. As between Borrower and the Lenders, any payment made to Agent shall be deemed to be payment to the Lenders. Agent will distribute to each Lender its distributable share of each such payment in accordance with Article XII hereof. Section 4.02 -- Right to Prepay. Unless a Default exists, Borrower shall have the right to prepay in full (but not in part) the outstanding principal amount of the Note issued with respect to any designated Aircraft, without premium or penalty, and upon such prepayment pursuant to this section, Agent shall prepay in full the 15 21 Certificates issued with respect to such Aircraft in the manner set forth in Article XII hereof. Any prepayment under this section 4.02 of the Note issued with respect to a designated Aircraft shall be made only on an Interest Payment Date for such Note, and Borrower shall give to Agent (which Agent agrees to relay promptly to each Lender) at least 15 days' prior written notice (which notice shall be irrevocable) of such prepayment. Upon any prepayment of any Note under this section 4.02, Borrower shall pay all accrued and unpaid interest on the principal of such Note to the date of prepayment, together with all other amounts payable under section 10.02 with respect to such prepayment. Section 4.03 -- Mandatory Prepayments. Following the occurrence of an Event of Loss with respect to any Aircraft, Borrower shall prepay the Note executed in connection with that Aircraft, in accordance with section 7.01 of the Mortgage, and shall pay all other amounts payable under section 10.02 with respect to such prepayment. Upon acceleration of the Notes pursuant to section 8.02, Borrower shall prepay such Notes, and shall pay all other amounts payable under section 10.02 with respect to such prepayment. Section 4.04 -- Mandatory Purchase. Upon the occurrence of a Prepayment Event, Agent shall have the right to require Borrower to purchase or cause the purchase of (x) in the case of a Prepayment Event described in clauses (a) through (d) of the definition of such term in section 1.01, the Series of Certificates related to the Aircraft to which such Prepayment Event relates and (y) in the case of any other Prepayment Event, all outstanding Certificates, in either case, for a purchase price equal to (a) the cumulative then-outstanding principal amount of such Series of Certificates, plus all accrued but unpaid interest on such Series of Certificates to the date of such purchase, plus (b) all amounts payable under section 10.02 with respect to such purchase. The payment described in the preceding sentence and the payment described in section 4.07 shall be due 10 days after Agent notifies Borrower that a Prepayment Event has occurred (if that Prepayment Event has not been cured by then), and shall be made in the manner prescribed by section 4.01. Upon such a purchase of a Series of Certificates, Agent shall endorse the related Note in favor of the purchaser and deliver it to such purchaser. 16 22 Section 4.05 -- Amount of Prepayment. Subject to section 4.07, a Note shall be deemed satisfied in full upon the prepayment of all principal of such Note, the payment of the interest due on or with respect to such Note on such prepayment date, the payment pf all past-due interest on or with respect to such Note, and the payment of all amounts payable under section 10.02 with respect to such prepayment. Section 4.06 -- Interest on Past Due Amounts. Any amounts past due (by acceleration or otherwise) and at any time outstanding under any Note or from Borrower under any other Basic Document shall (to the extent permitted by law) bear interest, payable on demand, from the due date until payment in full, at a rate equal to 2% per annum above the Prime Rate. Section 4.07 -- Payment of Accrued Interest Supplements. Upon the occurrence of the prepayment or mandatory purchase of a Note under section 4.02, 4.03, or 4.04, Borrower shall pay to Agent, for the benefit of the Lenders, all past due Interest Supplements, and any accrued portion of an Interest Supplement, relating to such Note, with interest on past-due Interest Supplements computed in accordance with section 4.06. Section 4.08 -- Reduction in Net Interest Payable by Borrower. If the Finex Interest Rate for a Note exceeds the Borrower Interest Rate for an Interest Period for that Note, the amount of interest due from Borrower under that Note for such Interest Period shall be automatically reduced by an amount equal to (a) the amount of principal of that Note outstanding during such Interest Period multiplied by (b) the Finex Interest Rate for that Note minus the Borrower Interest Rate for such Interest Period multiplied by (c) the actual number of days in such Interest Period divided by 360. Article V BORROWER'S REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: Section 5.01 -- Corporate Standing. Borrower is a duly organized corporation existing in good standing under the laws of Georgia, has the corporate power and legal authority to own or lease its properties and to carry on its business as now conducted and as now proposed to be conducted, and is duly qualified to do business in all jurisdictions wherein such qualification is necessary (except in any jurisdictions in which the failure to qualify would have no materially adverse effect on its business or 17 23 on its ability to carry out its obligations under the Basic Documents to which it is (or is to become) a party). Section 5.02 -- Corporate Powers. Borrower's execution, delivery, and performance of the Basic Documents to which it is (or is to become) a party are within Borrower's corporate powers; and the Basic Documents to which it is (or is to become) a party have been duly authorized by all necessary corporate action on Borrower's part, and do not contravene, result in a breach of, or require any consent under any law, judgment, decree, order, or contractual restriction binding on Borrower or any agreement or instrument to which Borrower is a party or to which it or any of its property is subject, except that the legality and validity of each Purchase Agreement Assignment is subject to the execution and delivery of the related Consent. Section 5.03 -- Binding Effect. The Basic Documents to which Borrower is (or is to become) a party are (or will be when executed and delivered) legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their terms, except as may be limited by bankruptcy, insolvency, or other similar laws affecting enforcement of creditors' rights generally. Section 5.04 -- Litigation. Except as disclosed in the SEC Filings, there are no pending or (to the best of Borrower's knowledge after due inquiry) threatened actions or proceedings before any court or administrative agency which may be expected to have a Materially Adverse Effect or which seek to question or set aside any of the transactions herein contemplated. Section 5.05 -- Financial Statements. The audited balance sheet as of December 31, 1990 and unaudited balance sheet as of September 30, 1990 for Borrower and its consolidated subsidiaries, and the related results of operations for the year and quarter then ended, have been prepared in accordance with GAAP and correctly present Borrower's financial condition as of such dates and results of operations for such periods, and since December 31, 1990, there has been no Materially Adverse Change. Section 5.06 -- Taxes. Borrower has filed all tax returns which it is or was required to file, and has paid all taxes shown to be due and payable on those returns or on any assessment received by it, except such taxes of Borrower, if any, as are being contested diligently in good faith, and by appropriate proceedings, and as to which adequate reserves have been provided in accordance with GAAP. Section 5.07 -- Status as United States Citizen and Air Carrier. Borrower is a "citizen of the United States" as that term is used in section 1010(16) of the Act, and is a duly certified "air carrier" within the meaning of the Act. 18 24 Section 5.08 -- Location of Offices. Borrower's chief executive office and principal place of business, and the place where Borrower keeps its financial records concerning the Collateral, is located at its address referred to in section 13.02. Section 5.09 -- Governmental Consents. Neither the execution, delivery, and performance of any of the Basic Documents (other than the Finex Agreement), nor the consummation of any of the transactions contemplated thereby by Borrower or Vendor (including the importation of the Aircraft into the United States from Brazil), requires the consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any federal, state, or foreign governmental authority or agency (including any judicial body) except for (a) the filing and recording of the Mortgage, and of the FAA bill of sale, the FAA application for registration, and the Mortgage Supplement for each Aircraft with the FAA: (b) the filing and recording of UCC-1 financing statements for each Aircraft with the Superior Court Clerk Offices in Bibb, Clayton, and Fulton County, Georgia, and in the appropriate places in Texas and Arkansas; (c) the registration of each Aircraft with the FAA pursuant to the Act; (d) the filing of any necessary documents with customs officials; and (e) any necessary action with respect to the Finex Program. Section 5.10 -- Condition of Aircraft. On each Purchase Date, the Aircraft to be delivered on such Purchase Date shall be in such condition as is sufficient to enable Borrower to obtain a standard U.S. certificate of airworthiness for such Aircraft and to enable such airworthiness certificate to be maintained in good standing; and, to Borrower's knowledge (which shall be based on acceptance tests by Borrower in accordance with it usual practices, to the extent permitted under the Purchase Agreement), such Aircraft shall otherwise conform in all material respects to the specifications for such Aircraft set forth in the Purchase Agreement. Section 5.11 -- Absence of ERISA Liability. Each employee pension benefit plan (as defined in section 3(2) of the Employee Retirement Income Security Act of 1974, as from time to time amended ("ERISA")) of Borrower is in compliance with the applicable provisions of ERISA and of the Internal Revenue Code of 1986, as from time to time amended, in all respects, except to the extent that noncompliance would not be materially adverse to Borrower's business, assets, financial condition, or ability to perform its obligations under the Basic Documents. Section 5.12 -- Delta Agreement. The Delta Agreement is (a) the only agreement between Delta Air Lines, Inc. and Borrower relating to joint marketing or code sharing for interconnecting 19 25 flights, and (b) in full force and effect. There exists no default under the terms of the Delta Agreement and there has not occurred any event that would ripen into a default upon the giving of notice or passage of time. Section 5.13 -- Subsidiaries; Stock Ownership. Borrower owns 100% of the outstanding stock of ASA Investments, Inc. and Borrower has no material stock or other equity investment in any other corporation, partnership, or other Person. Section 5.14 -- Investment Company Status. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 5.15 -- Solvency. Borrower (i) has sufficient capital to carry on all businesses and transactions in which it engages or is about to engage, (ii) owns property having a value both at fair valuation and at present fair salable value greater than the amount required to pay Borrower's debts, (iii) is solvent, (iv) will continue to be solvent after the creation of the security interests in the Collateral by the Basic Documents, and after assuming all obligations related to the Basic Documents, and (v) is able to pay its debts as they mature. Article VI AFFIRMATIVE COVENANTS So long as any Note, or any amount owed by Borrower under any other Basic Document, remains outstanding or unpaid or Agent or any Lender has any Commitment hereunder: Section 6.01 -- Financial Statements. Borrower shall furnish to Agent and each Lender: (a) within 45 days after the end of each of the first three quarters in each fiscal year, consolidated statements of operations of Borrower and its consolidated subsidiaries for the period from the beginning of the then-current fiscal year to the end of such quarterly period, and balance sheets of Borrower and its consolidated subsidiaries, on a consolidated basis, as of the end of such quarter prepared in accordance with GAAP and setting forth in each case in comparative form figures for the corresponding period in the preceding year, all in reasonable detail and certified by the Chief Financial Officer of Borrower, subject to changes resulting from year-end adjustments, and Borrower's Form 10-Q for such period; 20 26 (b) within 90 days after the end of each fiscal year, consolidated statements of operations of Borrower and its consolidated subsidiaries, for such year, and the balance sheets of Borrower and its consolidated subsidiaries, on a consolidated basis, as of the end of such year, setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail, and certified to Borrower by its independent certified public accountants and to each Lender by Borrower's Chief Financial Officer, as presenting fairly the financial position and results of operations of Borrower and its consolidated subsidiaries and as having been prepared in accordance with GAAP, and Borrower's Form 10-K for such period; (c) within two Business Days after any officer of Borrower obtains knowledge of any Default, an Officer's Certificate specifying its nature, the period of its existence, and what action Borrower proposes to take with respect to it; and (d) promptly upon request, such other data or information (financial or otherwise) regarding Borrower or the Collateral as Agent from time to time reasonably requests. Section 6.02 -- Inspection of Collateral and Records. Borrower shall permit any person(s) from time to time designated in writing by Agent, at the Lenders' expense (or at Borrower's expense if a Default exists at the time), to visit and inspect any of the Collateral and Borrower's (or any Permitted Lessee's) records with respect to the Collateral, at such times as Agent reasonably requests, and to discuss Borrower's affairs, finances, and accounts with Borrower's officers. No such inspection shall unreasonably interfere with Borrower's (or any Permitted Lessee's) operations or maintenance. The Lenders and Agent shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. Upon Agent's request, Borrower shall promptly notify Agent of the maintenance operations then scheduled on the Aircraft for the six-month period following such request. Section 6.03 -- Corporate Existence. Except as permitted by section 6.04, Borrower shall maintain its corporate existence in good standing in the state of its incorporation and in all jurisdictions where qualification is then necessary (except in any jurisdiction in which the failure to qualify would have no materially adverse effect on its business or on its ability to carry out its obligations under the Basic Documents to which it is (or is to become) a party). Borrower shall preserve and renew its 21 27 rights (charter and statutory), patents, and franchises, unless Borrower determines in good faith that the preservation thereof is no longer necessary or desirable in the conduct of its business and that the loss thereof will not adversely affect Agent's or the Lenders' rights or Borrower's business, assets, operations, condition (financial or otherwise). Section 6.04 -- Merger, etc. Without limiting the requirements regarding mandatory purchase of Certificates contained in Section 4.04 hereof, Borrower shall not consolidate with or merge into any other corporation, or convey, transfer, or lease all or substantially all of its assets as an entirety to any Person, unless: (a) the corporation formed by such consolidation or the Person who acquires by conveyance, transfer, or lease all or substantially all of Borrower's assets as an entirety (the "Successor") or, in the case of a merger, Borrower (as the surviving corporation), (i) is a corporation organized and existing under the laws of the United States of America or any state or the District of Columbia, (ii) is a "citizen of the United States" as defined in section 101(16) of the Act, and (iii) is an air carrier (within the meaning of section 101(3) of the Act) certificated under section 604(b) of the Act; and, in the case of such a consolidation, conveyance, transfer, or lease, the Successor, (x) executes and delivers to Agent and the Lenders an agreement, in form and substance satisfactory to Majority Lenders containing an assumption by the Successor of the due and punctual performance and observance of Borrower's obligations under the Basic Documents to which Borrower is then a party, and (y) makes such filings and recordings, including any filing or recording with the FAA pursuant to the Act or any filing under the UCC, as are necessary to evidence such consolidation, merger, conveyance, transfer, or lease with or to the Successor; (b) immediately after giving effect to such transaction, (i) no Default exists and (ii) Borrower's or the Successor's, as the case may be, business, assets, operations, condition (financial or otherwise), and financial and other ability to perform its obligations under the Basic Documents will not be adversely affected by such transaction in any material respect; and (c) Borrower or the Successor delivers to Agent and each Lender, promptly upon consummation of such transaction, an Officer's Certificate stating that the conditions precedent set forth in clause (a) have been complied with and an opinion 22 28 of counsel for Borrower or for the Successor, in form and substance satisfactory to Majority Lenders, stating that the agreements entered into to effect such consolidation, merger, conveyance, transfer, or lease and such assumption agreements have been duly authorized, executed, and delivered by the Successor (or in the case of a merger, by Borrower) and that they (and the Basic Documents so assumed) constitute legal, valid an binding obligations of the Successor (or in the case of a merger, of Borrower), enforceable in accordance with their terms (to the same extent as the Basic Documents so assumed were enforceable against Borrower immediately prior to such transaction); and that all conditions precedent which are legal in nature provided for in this Agreement and relating to such transaction have been fulfilled. Upon any such consolidation, conveyance, transfer, or lease, the Successor shall succeed to, shall be substituted for, and may exercise every right and power of Borrower under the Basic Documents to which Borrower is a party, with the same effect as if the successor had been named as Borrower therein. No such conveyance, transfer, or lease of substantially all Borrower's assets as an entirety shall have the effect of releasing Borrower (or any Successor) from its liability under the Basic Document to which it is a party. Nothing in this section shall permit any lease, sublease, or other arrangement for the use, operation, or possession of the Aircraft except in compliance with the applicable provisions of this Agreement and the Mortgage. Section 6.05 -- Citizenship and Air Carrier Status. Borrower will at all times remain a "citizen of the United States" as defined in section 101(16) of the Act and an "air carrier" within the meaning of the Act. Section 6.06 -- Compliance with ERISA. (a) Borrower will, at all times, make prompt payment of contributions that it is required to make to any employee benefit plan to which it is a party as are necessary to meet the minimum funding standards for such an employee benefit plan, as required by ERISA. (b) Within two Business Days after the occurrence of any event or circumstance, including any event which is classified as a "Reportable Event" under ERISA, in connection with any employee benefit plan to which it is a party, that might constitute grounds for termination of an employee benefit plan to which Borrower is a party by the Pension Benefit Guaranty Corporation or might result in the appointment of a trustee by a United States District Court under section 4042 of ERISA to administer such employee benefit plan, Borrower will provide Agent and each Lender with an Officer's Certificate describing the event or circumstance, stating the reasons for any such action by the Pension Benefit Guaranty Corporation or a United States District Court, and specifying the action Borrower proposes to take with respect thereto. 23 29 Section 6.07 -- Disposition of Assets. Borrower will not dispose of any of its assets, other than in the ordinary course of its business, unless it receives full, fair, and reasonable consideration for such assets; and Borrower will not during any twelve-month period dispose of assets, other than in the ordinary course of its business, which have an aggregate book value in excess of $5,000,000; provided, that Borrower shall have the right to dispose of any aircraft for at least such aircraft's book value and such sale of an aircraft for at least book value will not be included in the calculation of the $5,000,000 of assets sold in a twelve-month period. The book value of an aircraft shall be determined in accordance with GAAP. For avoidance of doubt, the "ordinary course" of Borrower's business generally shall include (x) acquisitions or dispositions of marketable securities (other than acquisitions or dispositions exceeding 5% of any class of "equity security", as defined in the Securities Exchange Act of 1934) and (y) the disposition of parts of discontinued aircraft, engines, or propellers not constituting part of a program to reduce Borrower's fleet in any material respect. Section 6.08 -- Performance of Delta Agreement. Borrower shall faithfully perform all obligations it has under the Delta Agreement. Section 6.09 -- Financial Covenants. (a) Borrower shall not permit at any fiscal quarter end of Borrower on a consolidated basis (consolidating Borrower and its subsidiaries) its ratio of Indebtedness to Tangible Net Worth to exceed 3.25 to 1. "Tangible Net Worth" shall mean Book Net Worth minus (a) the amount, if any, of Borrower's and its subsidiaries' assets which would be treated as intangibles under generally accepted accounting principles, (b) any write-up in the book value of any fixed asset resulting from a revaluation thereof, and (c) the amount, if any, at which shares of stock of Borrower appear on the asset side of the Borrower's balance sheet. "Book Net Worth" shall mean the book value of Borrower's and its subsidiaries' total assets located in the United States of America (exclusive) of an indebtedness owed to Borrower or its subsidiaries by any affiliate of Borrower) minus Borrower's and its subsidiaries' total liabilities. For avoidance of doubt, the phrase "total assets located in the United States of America" shall include marketable securities and commercial paper issued by a foreign entity but held in the United States of America by Borrower or any of its subsidiaries. 24 30 (b) Borrower shall not permit at any fiscal quarter end of Borrower, on a consolidated basis (consolidating Borrower and its consolidated subsidiaries), its ratio of (i) Earnings Before Tax plus Interest Expense plus Depreciation and Amortization Expense plus Operating Lease Obligations to (ii) Interest Expense plus Current Maturities of Long-Term Debt plus Operating Lease Obligations, to be less than 1.55 to 1. Section 6.10 -- Certificate of No Default. Along with Borrower's delivery of the quarterly financial statements and annual financial statements required by sections 6.01(a) and 6.01(b), Borrower shall furnish to each Lender a certificate of Borrower's Chief Financial Officer certifying that to the best of his or her knowledge no Default exists (or, if a Default does exist, a statement as to its nature and the action that Borrower proposes to take with respect to it. Section 6.11 -- Insurance on Fleet. Borrower will at all times maintain, with insurers of recognized responsibility, insurance on each aircraft in its fleet substantially similar (as to type, amounts, and risks covered) to the insurance Borrower is required to maintain on the Aircraft under the terms of sections 6.01 and 6.05 of the Mortgage, provided, that Borrower shall not be required to carry hull insurance for any aircraft (other than an Aircraft) that has a fair market value of less than $1,000,000. Article VII CONDITIONS PRECEDENT TO THE PURCHASE OF NOTES Section 7.01 -- Conditions Precedent to the Purchase of the Initial Note. Each Lender's obligation and Agent's obligation to purchase the initial Series of Certificates and the initial Note on the first Purchase Date are subject to the satisfaction of the following conditions precedent and Agent's receipt on or before such initial Purchase Date of the following, in form and substance satisfactory to Agent: (a) a certificate of Borrower's secretary, dated the Purchase Date, certifying attached copies of the resolutions of Borrower's board of directors evidencing approval of the transactions contemplated by the Basic Documents to which it is (or is to become) a party, and showing the names and specimen signature(s) (or copies thereof) of Borrower's officer(s) authorized to sign this Agreement and the related documents to which it is (or is to become) a party. 25 31 (b) an executed Finex Agreement, (c) an executed Mortgage, (d) an executed Guarantee, (e) an Officer's Certificate certifying attached copies of the 1990 Purchase Agreement and the 1990 Purchase Agreement, and (f) copies of the SEC Filings, In addition, Borrower's obligation to close on the first Purchase Date is subject to its receipt of an executed letter agreement among Borrower, the Lenders, and Agent, in form and substance satisfactory to each, concerning sections 4.02(d)(i) and 6.05 of the Mortgage, and concerning the availability of the Finex Program and potential future changes in the terms of the Finex Agreement. Section 7.02 -- Conditions Precedent to the Purchase of All Notes. Each Lender's obligation and Agent's obligation to purchase each Series of Certificates and each related Note (including the initial Series of Certificates and the initial Note) is subject to the additional conditions precedent that: (a) Agent shall have received the following, each dated as of the pertinent Purchase Date, in form and substance satisfactory to Agent: (i) the Note for the relevant Aircraft, executed by Borrower and endorsed by Vendor (without recourse) to the order of Finex Bank who in turn has endorsed (without recourse) to the order of Agent, (ii) an executed Mortgage Supplement with respect to the relevant Aircraft, (iii) an executed Purchase Agreement Assignment, with the related executed Consent, with respect to the relevant Aircraft, (iv) an Officer's Certificate to the effect that: (1) Borrower's representations and warranties in Article V of this Agreement and section 6 of the relevant Purchase Agreement Assignment are true and accurate as though made on the Purchase Date, and (2) no Default exists or will result from Agent's purchase of such Note, 26 32 (v) a certificate of insurance describing the insurance describing the insurance maintained by Borrower with respect to the Aircraft being purchased and stating that such policies conform to the requirements of the Mortgage, (vi) an opinion from Borrower's counsel substantially in the form of Exhibit F, (vii) an opinion from Crowe & Dunlevy, special FAA counsel, substantially in the form of Exhibit G, covering the Aircraft that is the subject of the Note being purchased, (viii) an opinion of counsel to Embraer, substantially in the form of Exhibit H, (ix) an opinion of Brazilian counsel substantially in the form of Exhibit I, and (x) such additional opinion(s) (including, if requested, from Trotter Smith & Jacobs) and document(s) as Agent requests. (b) Agent shall have received copies of the necessary FAA Application for Aircraft Registration and FAA Bill of Sale pertaining to the Aircraft being purchased; (c) Borrower's representations and warranties in the Basic Documents shall be true and accurate as though made on and as of such Purchase Date; (d) no Default shall exist or shall result from Agent's purchase of such Note; (e) all filings, recordings, and other actions necessary to establish, protect, preserve, and perfect Agent's and the Lenders' interests under the Mortgage shall have been duly made or taken; (f) all necessary consents, approvals, licenses, permits, declarations, or registrations then required in connection with the execution, delivery, performance, validity, and enforceability of the Basic Documents and the transactions contemplated thereby shall have been obtained; 27 33 (g) Agent shall have received a copy of the approval of the application for coverage of the purchase of the Aircraft by the Finex Program; (h) in Agent's reasonable judgment, since December 31, 1990, no Materially Adverse Change shall have occurred; (i) each Lender shall have made available the amount of its Participations Percentage of the Financed Amount for the relevant Aircraft in accordance with Article II hereof; and (j) each Lender shall have received (c/o Trotter Smith & Jacobs) the following, each dated as of the pertinent Purchase Date, in form and substance reasonably satisfactory to each Lender; (i) the Certificate(s) issuable to it with respect to the relevant Aircraft, duly executed by Agent, and (ii) an executed copy of each document referred to in section 7.02(a)(ii) through (x). Article VIII EVENTS OF DEFAULT; REMEDIES Section 8.01 -- Events of Default. Each of the following shall constitute an "Event of Default": (a) Borrower fails to make any payment due from Borrower on any Note or under any other Basic Document (including any Interest Supplement and any amount due under section 4.04 hereof) when due; (b) any representation or warranty made by Borrower in the Basic Documents, or in any certificate or other document that it furnishes pursuant to the Basic Documents, proves to have been incorrect in any material respect when made; (c) Borrower fails to maintain the insurance required by the terms of the Mortgage; (d) the Delta Agreement is voluntarily terminated by Borrower, or is amended to the detriment of Borrower (this Event of Default being separate and distinct from and not affect the Prepayment Event relating to the Delta Agreement 28 34 described in clause (f) of the definition of "Prepayment Event"); (e) Borrower fails to provide Agent and each Lender with the Officer's Certificate required by section 6.01(c) or 6.06(b) within 10 days after any of Borrower's officers obtains notice of a Default or the ERISA-related event or circumstance occurs, respectively; (f) Borrower fails in any material respect to perform any other covenant or agreement in the Basic Documents (including section 6.09 hereof), and (if remediable) such failure to perform continues for 30 days after Borrower's receipt of notice of such default from Agent or any Lender; (g) Borrower (1) applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of all or a majority of its property, (2) makes a general assignment for the benefit of its creditors, (3) commences a voluntary case under the federal Bankruptcy Code (as now or hereafter in effect), (4) files a petition seeking to take advantage (as debtor) of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, or (5) fails to controvert in a timely manner, or acquiesces in writing to, any petition filed against it in an involuntary case under the federal Bankruptcy Code; (h) a proceeding or case is commenced, without Borrower's application or consent, in any court of competent jurisdiction, seeking (1) its liquidation, reorganization, dissolution, or winding-up, or the composition or readjustment of its debts, (2) the appointment of a trustee, receiver, custodian, liquidator, or the like of Borrower or of all or a majority of all its assets, or (3) similar relief in respect of Borrower under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case continues undismissed, or an order, judgment, or decree approving or ordering any of the foregoing is entered and continues unstayed and in effect, for a period of 60 days; or an order for relief against Borrower is entered in an involuntary case under the federal Bankruptcy Code; (i) loan, lease, or deferred purchase obligations of Borrower totalling more than $1 million are in default after the expiration of any applicable grace period, if the effect of such default is to permit such obligations to be 29 35 accelerated or otherwise declared to be due and payable prior to their stated maturity, or Borrower defaults in the payment when due of more than $1 million of loan, lease, or deferred purchase obligations, or Borrower defaults in the payment of any amount when due under the terms of any financing with any Lender, provided such financing was, at any time, for an amount in excess of $1 million; (j) one or more judgment(s) is/are rendered by one or more court(s) of competent jurisdiction against Borrower for a total of more than $1 million and is/are not stayed or discharged, or fully bonded against, within 60 days of the date of entry; (k) any "Reportable Event" under ERISA shall have occurred, or any finding or determination shall be made with respect to an employee benefit plan to which Borrower is a party under section 4041(c) or (e) of ERISA, or any fact or circumstance shall occur with respect to an employee benefit plan to which Borrower is a party, that, in the opinion of Majority Lenders, provides grounds for the commencement of any proceeding under section 4042 of ERISA, or any proceeding shall be commenced under section 4042 of ERISA with respect to an employee benefit plan to which Borrower is a party; or (l) Borrower shall deny any further liability under any Note or under any other Basic Document. Section 8.02 -- Remedies. If an Event of Default (other than under section 8.01 (g) or (h) exists, Agent may (and upon its receipt of written request by Majority Lenders shall) declare all Notes to be immediately due and payable, whereupon (i) all Notes shall become and be immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which Borrower hereby waives, (ii) the Interest Supplement for any partial Interest Period will become immediately due and payable, and (iii) the Commitment shall terminate. If an Event of Default under section 8.01(g) or (h) occurs, all Notes automatically shall become immediately due and payable and the Commitment automatically shall immediately terminate, without presentment, demand, protest, or notice of any kind, all of which Borrower hereby waives. Upon the occurrence of any Event of Default, Agent may (and upon its receipt of written request by Majority Lenders shall) exercise any of its rights and remedies under the Basic Documents, including the Mortgage. 30 36 Article IX BORROWER'S INDEMNITIES Section 9.01 -- General Indemnity. Borrower assumes liability for, and agrees to indemnify each Indemnitee against, and on written demand to pay, or to reimburse each Indemnitee for the payment of, any and all liabilities. "Liabilities" means any and all liabilities, obligations, losses, damages, penalties, claims (including claims involving strict liability in tort), suits, actions, costs, expenses, and disbursements, including legal fees and expenses, of whatsoever kind and nature imposed on, incurred by, or asserted against any Indemnitee relating to or arising out of any Basic Document, the enforcement against Borrower of any of the terms of the Basic Documents, or any lease or relinquishment of possession of the Aircraft or any part thereof or any action or inaction of Borrower or of any lessee, assignee, or transferee of Borrower in connection therewith, the purchase of the Aircraft and the Spare Parts under the Purchase Agreement, the ownership of the Aircraft, the acquisition, delivery, nondelivery, acceptance, nonacceptance, rejection, registration, deregistration, insuring, storage, manufacture, assembly, transportation, importation, exportation, maintenance, condition, modification, testing, repair, fitness for use, merchantability, sale, abandonment, lease, sublease, assignment, transfer, transfer of title, possession, repossession, use, operation, return or other application or disposition of the Aircraft and the Spare Parts or any component thereof, the condition upon return thereof after repossession following the occurrence of an Event of Default or following the exercise of remedies under the Mortgage, including latent or other defects, whether or not discoverable, loss of or damage to any property or the environment, death or injury of any person, and any claim for patent, trademark, copyright, or mask work infringement and the violation or infringement by Borrower of any laws, rules, or regulations, or (without limiting any of the foregoing) any breach by Borrower of, noncompliance by Borrower with, or misrepresentation made or deemed made by or on behalf of Borrower in, under, or in connection with the Purchase Agreement or an Purchase Agreement Assignment or any warranty, certificate, or agreement made or delivered in, under, or in connection with the Purchase Agreement or any Purchase Agreement Assignment without limiting the generality of the foregoing, "Liabilities" shall in any event include any and all losses, damages (including all foreseeable and unforeseeable consequential damages), costs, claims, liabilities, penalties, fees, injuries, or expenses of whatever kind or nature (including reasonable counsel fees and 31 37 costs) that an Indemnitee sustains or incurs in connection with: any Environmental Complaint, any Hazardous Substance release, disposal, recycling, storage, handling, treatment or exposure, or response action) in connection with or relating to (i) any property that Borrower or any of its affiliates now or in the past or future shall own, operate or use, or (ii) any operations of Borrower or any of its affiliates, whether such operations took place before or after the date of this Agreement. However, this section 9.01 shall not require Borrower to pay or indemnify any Indemnitee under this section (i) for any Liability to the extent resulting from such Indemnitee's acts of gross negligence or willful misconduct; (ii) for any Taxes (Borrower's duties in respect of Taxes being set forth in section 9.02) or for any cost or expense relating to the preparation, execution, delivery, or enforcement of the Basic Documents (Borrower's duties in respect of such costs and expenses being set forth in section 13.03); (iii) for any Liability that such Indemnitee incurs to the extent resulting from its breach of any of its representations, warranties, or covenants in any Basic Document; (iv) for any Liability to the extent resulting from a claim against such Indemnitee not related to (x) any Equipment Portion; (y) any action or inaction of Borrower or any lessee, assignee, or transferee of Borrower, or (z) any of the transactions contemplated by the Basic Document; (v) for any Liability with respect to transfer taxes or other expenses payable with respect to the transfer of any Note or any Certificate, other than a transfer after the occurrence of an Event of Default; or (vi) for any violation or purported violation of any law relating to usury or the charging or collecting of excess interest or finance charges. If any Indemnitee obtains knowledge of any claim or liability required to be indemnified against under this section 9.01, such Indemnitee shall promptly notify Borrower, but the failure to do so shall not relieve Borrower from any liability that it otherwise would have to such Indemnitee under this section. Upon an Indemnitee's request, the defense of any Liability for which Borrower would be required to indemnify such Indemnitee hereunder shall be conducted by Borrower, with counsel selected by Borrower and satisfactory to Lender. However, if the defense of any such Liability is conducted by Agent or any Lender, Agent or such Lender shall select the counsel to conduct it, but shall consult with Borrower as to such selection; provided, that the decision as to which counsel to select shall be and remain Agent or such Lender's. Borrower shall be obligated under this section 9.01 irrespective of whether the Indemnitee is also indemnified with 32 38 respect to the same matter under any other Basic Document or other document by any other Person, and the Indemnitee may proceed directly against Borrower under this section 9.01 without first resorting to any such rights of indemnification. Upon the payment in full of any indemnities due and owing under this section 9.01, Borrower shall be subrogated to any right of the Indemnitee in respect of the matter against which indemnity has been given. Borrower's indemnities in this section shall survive expiration or termination of the Mortgage and payment in full of the Notes. Any payment or indemnity pursuant to this section 9.01 shall include the amount, if any, necessary to hold the Indemnitee harmless on an after-tax basis from all taxes required to be paid by such recipient with respect to such payment or indemnity under laws of any federal, state, or local government or taxing authority in the United States or by any foreign government or any political subdivision or taxing authority thereof. The amount of any payment or indemnity required under this section shall be determined by the Indemnitee reasonably and in good faith, and that determination shall be conclusive. Upon Borrower's request and at Borrower's expense, the Indemnitee will provide Borrower with a summary explanation of the basis for the Indemnitee's computations. Section 9.02 -- Taxes. (a) Indemnity. Except as provided in section 9.02(b), Borrower agrees to indemnify each Indemnitee against, and on written demand to pay or reimburse each Indemnitee for the payment of, any and all Taxes imposed upon or asserted against any Indemnitee, any equipment Portion or any part thereof or interest therein, any Basic Document, any lease of any Aircraft or any part thereof, or the rentals received under such a lease, by any federal, state, or local government or other taxing authority in the United States (including any territory or possession of the United States)or by any foreign government or any political subdivision or taxing authority thereof where any part of an Equipment Portion is located, used, or registered ("Taxing Authorities") upon or with respect to (i) the construction, mortgaging, financing, refinancing by or at the request of Borrower, purchase, acquisition, acceptance, nonacceptance, rejection, delivery, nondelivery, transport, insuring, ownership, registration, deregistration, assembly, possession, repossession, operation, use, condition, maintenance, modification, repair, fitness for use, merchantability, testing, return, abandonment, storage, manufacture, leasing, subleasing, importation, exportation, sale, assignment, transfer, transfer of title, or other application or disposition of, or the imposition of any Lien 33 39 (other than a Permitted Lien) or the incurrence of any liability to refund or pay over any amount as a result of any Lien (other than a Permitted Lien) on any Equipment Portion or any part thereof or interest therein, (ii) any amount paid or payable by Borrower or Finex Bank under the Basic Documents or the receipts for earnings arising from or received with respect to any Equipment Portion or any part thereof or interest therein, (iii) any Equipment Portion or any part thereof or interest therein, (iv) any of the Basic Documents and any other documents contemplated thereby or the execution, sale, delivery, acquisition, or filing of the Basic Documents, or (v) otherwise with respect to or in connection with the transactions effective under the Basic Documents. The term "Taxes" shall mean any and all fees, taxes, levies, imposts, duties, charges, assessments, or withholdings of any nature whatsoever, together with any and all penalties, fines, additions to tax, and interest thereon or computed by reference thereto. (b) Exclusions from Indemnity. The provisions of section 9.02(a) shall not apply to: (i) any Tax based on, or measured by, net income, capital, franchise, or net worth (other than sales taxes), including related surcharges and withholding taxes, or any withholding taxes on an Indemnitee's gross income, to the extent that such withholding taxes are imposed solely because that Indemnitee has a place of business outside the United States or holds its Certificate(s) outside the United States; provided, that the provisions of this clause (b)(i) shall not apply to any Taxes imposed in respect of the receipt or accrual of any indemnity payment made or payable pursuant to this Section 9.02; (ii) any Tax based on or measured by the value of such Indemnitee's interest in any Basic Document, except to the extent imposed without regard to the presence of the Indemnitee, or any Note, in the jurisdiction of the Taxing Authority imposing that Tax; (iii) any Tax imposed on the Indemnitee as a result of a transfer or other disposition, by such Indemnitee or any of its predecessors in interest, of any interest in the Aircraft or any Basic Document, unless such transfer or disposition occurs after the occurrence of an Event of Default; or (iv) any Tax in the nature of a penalty, an addition to tax, interest, or fines resulting from the negligence or misconduct of the Indemnitee in connection with the preparation or filing of (or failure to prepare or file) tax returns, or the payment of or failure to pay its taxes, but in each case not if in any way attributable to Borrower's failure to notify 34 40 such Indemnitee of its obligations to prepare and file its returns in respect of Taxes indemnified pursuant to this section 9.02 or to provide any information necessary for the preparation or filing of such returns or the conduct of such proceedings or otherwise to perform its duties and responsibilities pursuant to the Basic Documents. (c) Calculation of General Tax Indemnity Payments. Any payment which Borrower is required to make to or for the account of any Indemnitee with respect to any Tax which is subject to indemnification under this section 9.02 shall be made on a net basis, taking into account offsetting credits or deductions available to such Indemnitee as a result of the payment of such Tax, and shall include the amount necessary to hold such Indemnitee harmless on an after-tax basis from the net amount of all Taxes required to be paid by such Indemnitee as the result of such payment (including any Taxes imposed on such indemnity payment) pursuant to the laws of any Taxing Authority. The amount of any payment or indemnity required under this section shall be determined by the Indemnitee reasonably and in good faith, and that determination shall be conclusive. Upon Borrower's request and at Borrower's expense, the Indemnitee will provide Borrower with a summary explanation of the basis for the Indemnitee's computations. (d) Reports. If Borrower shall timely file any report, return, or statement required to be filed with respect to any Tax which is subject to indemnification under this section 9.02, except for any such report, return, or statement which an Indemnitee has notified Borrower that it intends to file. Borrower shall file such report, return, or statement and send a copy to Agent and each Indemnitee affected by such report, return, or statement. Each Indemnitee shall promptly forward to Borrower any notice, bill, or advice received by it concerning any Tax. Section 9.03 -- Survival. The requirements in this Article IX shall survive termination of this Agreement and the other Basic Documents and the payment of the Notes and the Certificates. Article X YIELD PROTECTION; ILLEGALITY Section 10.01 -- Additional Costs. (a) Borrower shall pay directly to each Lender from time to time such amounts as are necessary to compensate such Lender, on an after-tax basis, for any costs which are attributable to its 35 41 purchase of or obligation to purchase any Certificates hereunder, or any reduction in any amount receivable by such Lender in respect of any of such Certificates or such obligation (excluding payments under the Finex Agreement), resulting from any Regulatory Change which imposes or modifies any reserve, special deposit, minimum capital, capital ratio, or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender, or the manner in which such Lender funds (or allocates funds, on its books, for) its investments in any of the Certificates. (b) Determinations and allocations by any Lender for purposes of this section 10.01 of the effect of any Regulatory Change pursuant to section 10.01(a) on such Lender's costs or rate of return of maintaining or its obligations to purchase any Certificate, or on amounts receivable by it in respect of any Certificate, and of amounts required to compensate such Lender under this section 10.01, shall be made by such Lender reasonably and in good faith and shall be conclusive. Upon Borrower's request and at Borrower's expense, such Lender will provide Borrower with a summary explanation of the basis for such Lender's computations. Section 10.02 -- Breakage Costs. Borrower shall pay to each Lender, upon such Lender's request, such amount as is sufficient, in such Lender's opinion, to compensate it for any loss, cost, or expense which is attributable to: (a) any payment, purchase, or conversion of any Note or Certificate in which such Lender has any interest for any reason (including the acceleration of the maturity of the Notes pursuant to section 8.02 and the mandatory purchase of Certificates pursuant to section 4.04 or 10.03, but excluding any other transfer of a Certificate by any Lender) on a date other than an Interest Payment Date; or (b) any failure by Vendor for any reason (including the failure of any of the conditions precedent specified in Article VII to be satisfied) to endorse and deliver any Note to Finex Bank on the Purchase Date specified in the relevant notice to Agent given pursuant to section 2.02. Such amount payable by Borrower (x) shall not include losses, costs, or expenses attributable to any date more than 180 days after the date of such payment, purchase, or conversion or such Purchase Date, and (y) shall be determined by the affected Lender reasonably and in good faith, which determination shall be conclusive. Upon Borrower's request and at Borrower's expense, such affected Lender 36 42 will provide Borrower with a summary explanation of the basis for such Lender's computations. Section 10.03 -- Illegality. If at any time, any change in any applicable state, federal or Japanese law or in any interpretation or administration thereof by any governmental authority, central bank, or comparable agency in the United States or Japan charged with the interpretation or administration thereof, or any reversal by any such entity of an interpretation thereof by any Lender or any compliance by any Lender with any official request or directive in respect of or constituting such a change (whether or not having the force of law) of any such entity, shall make it unlawful or contrary to such interpretation or administration for any Lender to make, fund, maintain or hold its Certificate(s) in the method described herein or to give effect to all or any part of its obligations with respect thereto under this Agreement or any of the other Basic Documents (each such event being an "Illegality Event"), then such Lender shall promptly notify Borrower thereof in writing, and Borrower shall purchase or cause a Person to purchase such Lender's Certificates for an amount determined in accordance with section 4.04, on or prior to the earlier of (i) the Business Day immediately prior to the last day such Lender is allowed to take corrective action with respect to such Illegality Event, or (ii) the first Interest Payment Date to occur at least 60 days after the date of notice of the Illegality Event has been sent to the Borrower by such Lender. Article XI AGENT Section 11.01 -- Appointment; Powers and Indemnities; Compensation (a) Each Lender hereby irrevocably appoints and authorizes Agent to act as agent hereunder and in respect of the other Basic Documents, with the power to execute and deliver this Agreement and the other Basic Documents to which it is a party, including the Certificates, and any other agreements, instruments, or documents (including UCC-1 financing statements) in which Agent is shown as a party in the forms delivered from time to time by the Lenders to Agent for execution and delivery and, subject to the terms of this Agreement, to exercise its rights and perform its duties under such documents in accordance with their terms, and with such other powers as are reasonably incidental thereto. Except with respect to any representation, warranty, or covenant expressly made by Agent in any Basic Document, Agent shall have not duties or responsibilities except those expressly set forth in this Agreement, and shall not, 37 43 by reason of this Agreement or any other Basic Document, be a trustee for any Lender. Agent shall not be responsible to any Lender (or to any other party) for any recitals, statements, representations, or warranties contained in this Agreement or any other Basic Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Basic Document, or for the value, validity, effectiveness, genuineness, enforceability, or sufficiency of this Agreement or any other Basic Document, or any other document referred to or provided for herein or therein or for any failure by Borrower or any third party to perform any of its obligations hereunder or thereunder. Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither Agent nor any of its directors, officers, employees, or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or under any other Basic Document, or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. (b) Agent shall not be obligated to take any action or refrain from taking any action under any Basic Document that might in its reasonable judgment involve it in any expense or liability unless it is indemnified, in form and substance satisfactory to Agent, which indemnity may be furnished by any Lender. (c) Agent shall not have any duty or obligation to manage, control, use, operate, store, lease, sell, dispose of, or otherwise deal with the Aircraft or any part of the Collateral, or otherwise to take or refrain from taking any action under, or in connection with, any Basic Document to which Agent is a party, except as expressly provided by the terms hereof or any other Basic Document, or as specified in written instructions from Majority Lenders. Section 11.02 -- Reliance by Agent. Agent may rely upon, and shall not be bound or obligated to make any investigation into the facts or matters stated in, any certificate, notice, or other communication (including any thereof by telephone, telex, telegram, or cable) believed by it to be genuine and correct and to have been made, signed, or sent by or on behalf of the proper Person or Persons, and upon advice and statements of outside legal counsel, independent accountants, and other experts selected by Agent, (and Agent shall not be liable for anything that it does, suffers, or omits in good faith in accordance with the advise or opinion of any such counsel, accountants, or experts within such Person's or Persons' particular area of competence, provided that Agent has exercised due care in selecting such counsel, accountants, or other experts). As to any matters not expressly provided for by this 38 44 Agreement, Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by Majority Lenders and such instructions of Majority Lenders and any action taken or failure to act pursuant thereto shall be binding on all Lenders. Section 11.03 -- Defaults. Agent shall not be deemed to have knowledge of the occurrence of a Default unless Agent has received actual written notice from a Lender or from Borrower, specifying such Default and stating that such notice is a "Notice of Default". If Agent receives actual notice of the occurrence of a Default, Agent shall give prompt notice thereof to each Lender and to Borrower. Agent shall (subject to section 11.07) take action with respect to such Default as directed by Majority Lenders; provided, that, unless and until Agent receives such directions, Agent may take such action, or refrain from taking such action, with respect to such Default as it deems advisable in the best interest of the Lenders. Section 11.04 -- Rights as a Lender. With respect to its Commitment and the loans made by it, First Atlanta, in its capacity as a Lender hereunder, shall have the same rights, powers, and obligations hereunder as any other Lender and may exercise the same as though it were not acting as Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise requires, include First Atlanta in its individual capacity. First Atlanta and its affiliates may (without having to account therefor to any Lender) accept deposits from, lend money (on a secured or unsecured basis) to, and generally engage in any kind of banking, trust, or other business with Borrower, and any of Borrower's affiliates, as if First Atlanta were not acting as agent hereunder, and First Atlanta may accept fees and other consideration from Borrower or any of its affiliates for services in connection with other loan agreements or otherwise without having to account for same to any Lender. Section 11.05 -- Indemnification. Each Lender shall indemnify Agent (to the extent not reimbursed under Article IX hereof but without limiting the obligations under Article IX), ratably in accordance with the aggregate principal amount of the Certificates held by such Lender, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind and nature whatsoever that may be imposed on, incurred by, or asserted against Agent in any way relating to or arising out of this Agreement or any other document contemplated by or referred to herein or the transactions contemplated hereby or the enforcement of any of the terms hereof or of any such other documents; provided, that no Lender shall be 39 45 liable for any of the foregoing to the extent they arise from Agent's gross negligence or willful misconduct. Section 11.06 -- Nonreliance on Agents or Lenders. Each Lender agrees that it has, independently and without reliance on Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis of Borrower and its own decision to become a lender under the Basic Documents and that such Lender will, independently and without reliance upon Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking action under this Agreement and the Basic Documents to which it is a party. Agent shall not be required to keep itself informed as to the performance or observance by Borrower of any other document referred to (directly or indirectly) or provided for herein or therein or to inspect the properties or books of any such entity. Except for notices, reports, and other documents and information expressly required to be furnished to the Lenders by Agent hereunder, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition, or business of Borrower or any of its affiliates that may come into the possession of Agent or any of its affiliates. Except as otherwise specifically required herein, Agent shall not be required to forward to the Lenders any notices, reports, or other documents and information otherwise required to be forwarded to the Lenders by any other party to the Basic Documents. Section 11.07 -- Failure to Act. Except for action expressly required of Agent hereunder, Agent shall in all cases by fully justified in failing or refusing to act unless it is indemnified to its satisfaction by the Lenders against any and all liability and expenses which may be incurred by it by reason of taking or continuing to take any such action. Section 11.08 -- Resignation of Agent; Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving notice thereof to the Lenders and Borrower, provided, that Agent shall not, at the time of such resignation, take any actions to impair the rights or obligations of any party to the Finex Agreement. Upon any such resignation, Majority Lenders shall have the right to appoint a successor Agent, who shall be either an affiliate of First Atlanta or a Person reasonably acceptable to Borrower, and who shall be a bank having a combined capital, surplus, and undivided profits of not less than $100,000,000 and having its principal office in the United States of America. If, within 30 calendar days after the retiring Agent's giving of notice of resignation, a successor Agent 40 46 is not so appointed or does not accept such appointment, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, who shall be either an affiliate of First Atlanta or a Person reasonably acceptable to Borrower and who shall be a bank having combined capital, surplus, and undivided profits of not less than $100,000,000 and having its principal office in the United States of America. Upon the acceptance of any appointment as agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges, and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder. If no Person meeting the foregoing qualifications is willing to accept such appointment, any Lender or Agent may apply to a court of competent jurisdiction to appoint such a successor or to relieve Agent of its duties as agent hereunder. Section 11.09 -- Investment of Funds. (a) Except as otherwise provided in section 7.03 of the Mortgage, any money held by Agent hereunder as part of the Collateral shall, until paid out by Agent as herein provided, be held by Agent in a collateral account for the purposes for which held, and Agent shall not have any liability for interest upon any such money, and such money need not be invested or reinvested except as provided in section 11.09(b) below. (b) Any amounts held by Agent pursuant to this section 11.09 shall be invested by Agent from time to time (unless the costs of the investment would exceed the gains reasonably anticipated therefrom) in obligations of, or fully secured by, the United States government maturing in not more than 30 calendar days; provided, that if Majority Lenders so request of Agent in writing and no Default exists, Agent shall invest such amounts in (i) marketable direct obligations of the United States of America or marketable obligations directly guaranteed by the United States of America maturing, in each case, not later than 30 days from the date of acquisition thereof, (ii) repurchase obligations maturing not later than 30 days from the date of acquisition thereof, collateralized by obligations of the nature referred to in clause (i) of this paragraph issued by any Lender, or any other commercial bank organized and existing under the laws of the United States of America or any state thereof, in either case having combined capital, surplus, and undivided profits of not less than $100,000,000, if Agent holds such obligations, or has written evidence from the holder of such obligations, that such obligations are held by a Federal Reserve bank or a commercial bank with combined capital, surplus, and undivided profits of no less than $100,000,000 and a perfected security interest under the Uniform 41 47 Commercial Code, or book entry procedures prescribed at 31 C.F.R. 306.1 et seq. or 31 C.F.R. 305.0 et seq. in such obligations, is created for the benefit of Agent; (iii) certificates of deposit and bankers' acceptances issued by any Lender, or by any commercial bank organized and existing under the laws of the United States of America or any state thereof, in either case having combined capital, surplus, and undivided profits of not less than $100,000,000, or commercial paper (other than any issued by Borrower, any Lender, or an affiliate of either) rated A-1 by Standard & Poor's Corporation, Inc. and P-1 by Moody's Investors Service, Inc., if (in any such case specified above in this proviso) Agent receives a written agreement of Majority Lenders satisfactory to Agent that Majority Lenders will be liable for and will pay to Agent on demand an amount equal to any expense or loss (including any loss on such investment after taking into account any gain) incurred in connection with any investment of funds pursuant to this proviso; and provided, further, that so long as a Default exists, Agent may invest such amounts only in investments described in clause (i) of this section on 11.09. Agent shall have no liability for any loss resulting from any such investment. Agent may sell any such investment (without regard to maturity date) whenever necessary to make any distribution required by any provisions of Article XII. Except as otherwise provided in section 7.03 of the Mortgage, Agent shall hold and apply any income realized as a result of any investment pursuant to this section 11.09 in the same manner as the payments held by Agent pursuant to Article XII. Section 11.10 -- Representations and Warranties. (a) Neither any Lender nor Agent makes any representations or warranty as to the sufficiency, validity, legality, or enforceability of any Basic Document, or as to the correctness of any statement contained in any thereof, except as expressly set forth in this Agreement. Neither any Lender nor Agent makes any representation as to the value or condition of the Collateral or any part thereof, or as to the title thereto or as to the security afforded thereby or hereby, or as to the validity or genuineness of any security at any time pledged and deposited with Agent hereunder. (b) Neither Agent nor anyone authorized to act on its behalf has directly or indirectly offered any beneficial interest or security interest relating to any Aircraft or any interest in any Note or Certificate for sale to, or solicited any offer to acquire any such interest or security from, any Persons other than the Lenders in such a manner as to require any of the Notes, Certificates, or documents signifying security interests to be registered under the Securities Act of 1933, as amended, or any state securities law; provided, that the foregoing shall not be deemed to impose responsibility with respect to any such offer, sale, or solicitation by any other Person. 42 48 (c) Agent is a national banking association duly organized, validly existing, and in good standing under the laws of the United States, and has all corporate power, authority, and legal right under the laws of the United States to execute, deliver, and carry out the terms of each of the Basic Documents to which it is a party. (d) Agent has duly authorized, executed, and delivered this Agreement and the other Basic Documents to which it is a party in its capacity as Agent. (e) First Atlanta is a "citizen of the United States" within the meaning of section 101(16) of the Act and will, subject to the provisions of this Agreement, resign as agent hereunder promptly after an officer having direct responsibility for administering this Agreement obtains actual knowledge that Agent has ceased to be such a citizen. (f) The execution and delivery by Agent, in its capacity as agent, of this Agreement and each other Basic Document to which it is a party will not result in any violation of, or be in conflict with, or constitute a default under, any of the provisions of its charter or by-laws, or of any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, lease, note or bond purchase agreement, license, bank loan, credit agreement, or other agreement to which it is a party or by which it is bound, or any law, judgment, governmental rule, regulation, or order of any federal government or governmental authority or agency governing the banking or trust powers of Agent. (g) Neither the execution and delivery by Agent, in its capacity as agent, of this Agreement or the Basic Documents to which it is a party, nor the consummation of any of the transactions contemplated thereby, requires the consent or approval of, giving of notice to, or registration with any federal governmental authority or agency pursuant to any federal governmental law governing the banking or trust powers of Agent. Section 11.11 -- No Claims Against Agent, etc. Nothing contained in this Agreement shall constitute any consent or request by Agent or any Lender, express or implied, for the performance of any labor or services or the furnishing of any materials or other property, nor be deemed to give Borrower any right, power, or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Agent or the Lenders in respect thereof or any claim that any Lien (other than any Permitted Lien that is not a Lien resulting from an action of Agent or a Lender for which neither Agent nor any Lender is 43 49 entitled to be indemnified under any Basic Document) based on the performance of any such labor or services or the furnishing of any such materials or other property is prior to the Lien of the Mortgage, except as expressly permitted in the Basic Documents; provided, that if any such claim is made against Agent or any Lender, Borrower shall obtain the release of such claim within 30 calendar days after the claim is made. Section 11.12 -- Form of Certificates; Issuance, Transfer, and Exchange of Certificates. (a) Authorization. The Lenders hereby authorize and direct Agent to do the following, and Agent agrees for the benefit of the Lenders that Agent will do the following, on the Purchase Date for each Aircraft, subject to due compliance with the terms of paragraph (b) below: (i) to the extent received by Agent from the Lenders, transfer the Financed Amount for such Aircraft to Vendor on Borrower's behalf; (ii) upon receipt of each Lender's Commitment for such Aircraft, issue to First Atlanta the Long-Term Certificate in the full amount of First Atlanta's Commitment for such Aircraft and issue to Bank of Tokyo the Medium-Term and Short-Term Certificates each in one-half of the full amount of Bank of Tokyo's Commitment for such Aircraft; and (iii) execute and deliver all such other instruments, documents, or certificates, and take all such other actions in accordance with the directions of Majority Lenders, as Majority Lenders deem necessary or advisable in connection with the transactions contemplated hereby, such execution and delivery or the taking of any such action by Agent in the presence of Majority Lenders to evidence, conclusively, the direction of Majority Lenders. (b) Conditions Precedent. Agent's right and obligation to take the actions required by paragraph (a) on the Purchase Date shall be subject to each Lender's having made the full amount of its Commitment available to Agent in immediately available funds in accordance with sections 2.01 and 2.02 and Annex A of this Agreement, and to the satisfaction or waiver of the conditions set forth or referred to in section 2.02 and Annex A of this Agreement. (c) Form of Certificates. The Long-Term Certificate shall be substantially in the form of Exhibit K-1 and the Medium-Term and Short-Term Certificates shall be substantially in the form of 44 50 Exhibits K-2 and K-3, respectively. Interest and principal on each Certificate shall be payable by Agent, upon receipt of the corresponding amounts from Borrower, as set forth in such Certificates. (d) Terms of the Certificates. In connection with each Aircraft, (a) Agent shall issue to First Atlanta a Long-Term Certificate in a principal amount equal to its Commitment for that Aircraft, bearing interest at the rate stated in such Long-Term Certificate, designated as having been issued in connection with that Aircraft, and otherwise in the form of Exhibit K-1; and (b) Agent shall issue to Bank of Tokyo a Medium-Term Certificate and a Short-Term Certificate each in a principal amount equal to one-half of its Commitment for that Aircraft, bearing interest at the rates stated on each such Certificate, designated as having been issued in connection with that Aircraft, and otherwise in the forms of Exhibits K-2 and K-3, respectively. (e) Lost or Damaged Certificates. If any Certificate becomes mutilated, defaced, lost, stolen, or destroyed, then on the terms set forth in this section (and not otherwise), and upon the written request of the holder thereof, Agent shall execute and deliver a new Certificate of the same series, principal amount, and terms as the mutilated, defaced, lost, stolen, or destroyed Certificate, in exchange and substitution for and upon cancellation of the mutilated or defaced Certificate, or in lieu of and in substitution for the lost, stolen, or destroyed Certificate. The applicant for a new Certificate shall furnish to Agent evidence to Agent's reasonable satisfaction of the loss, theft, or destruction of such Certificate alleged to have been lost, stolen, or destroyed, and of the ownership and authenticity of such mutilated, defaced, lost, stolen, or destroyed Certificate, and also such security and indemnity as Agent reasonably requires (provided, that the written undertaking of one of the original Lenders, or any other institutional holder of a Certificate having a net worth (or in the case of a bank, having combined capital, surplus, and undivided profits) of at least $50,000,000 shall be sufficient security and indemnity), and shall pay all expenses and charges of such substitution or exchange. All Certificates shall be issued, held, and owned upon the express condition that the foregoing provisions are exclusive in respect of the replacement of mutilated, defaced, lost, stolen, or destroyed Certificates and shall preclude (to the extent lawful) any and all other rights and remedies, any present or future law or statute to the contrary notwithstanding. SECTION 11.13 -- Action Upon Written Instructions. Subject to the terms of sections 11.03, 11.14, and 11.15, upon the written instructions at any time and from time to time of Majority Lenders, 45 51 Agent will take such actions as are specified in such instructions, including the following actions: (1) give such notice or direction or exercise such right, remedy, or power hereunder or under any of the Basic Documents to which Agent is a party, or in respect of all or any part of the Collateral, or take such other action as is specified in such instructions; (ii) take such action to preserve or protect the Collateral (including the discharge of any Liens) as is specified in such instructions; and (iii) approve as satisfactory to it all matters required by the terms of the Basic Documents to be satisfactory to Agent, it being understood that, except as otherwise provided in Section 11.03 or in the last sentence of this section 11.13, without written instructions of Majority Lenders, Agent shall not approve any such matter as satisfactory to it. Upon the written instructions of Majority Lenders, Agent will execute and file any financing statement (and any continuation statement with respect to any such financing statement) or similar document relating to the security interests and assignments created by the Basic Documents as is specified in such instructions and accompanies such instructions (and Agent shall have no duty to execute or file any financing statement, continuation statement, or any other documents of the type referred to in this sentence unless it receives such written instructions and an execution form of such statement or document). If Agent is unsure of the application of any provision of this Agreement or any other agreement relating to the transactions contemplated hereby, Agent may request and rely upon instructions of Majority Lenders, but if Agent does not receive instructions from Majority Lenders within 20 days after the date of such request, until instructed otherwise Agent may, but shall be under no duty to, take or refrain from taking such action as it deems advisable in the best interests of Majority Lenders. SECTION 11.14 -- Expenses. (a) Expenses After Default. While an Event of Default exists, Agent shall not be under any obligation to take any action under any of the Basic Documents (including action under section 11.15) if Agent reasonably determines, or is advised by independent counsel, that such action is contrary to the terms of the Basic Documents to which Agent is a party, or is otherwise contrary to law, unless and until requested in writing to do so by Majority Lenders and furnished, from time to time as it may require, with reasonable security and indemnity, satisfactory to Agent, from such Majority Lenders against the costs, expenses, and liabilities which it might incur in compliance with such requests or direction. (b) Expenses for Actions Upon Written Instructions. Agent shall not be required to take any action under sections 11.03 or 11.13 unless Agent shall have been furnished, from time to time as 46 52 it may require, with reasonable security and indemnity, satisfactory to Agent, from Majority Lenders directing Agent to take or refrain from taking action under section 11.03 or 11.13, against the costs, expenses, and liabilities which it might incur in complying with sections 11.03 or 11.13. SECTION 11.15 -- Procedures for Disposing of Collateral. (a) If an Event of Default exists, Agent shall, upon written instructions from Majority Lenders, declare all the Secured Obligations due and payable as provided in section 9.02 of the Mortgage. Thereafter, Majority Lenders shall have the sole responsibility for directing Agent in the enforcement of rights and remedies, pursuant to the Basic Documents, including the time and manner of repossessing and remarketing of the Collateral. (b) If Agent obtains an offer from a third party for the purchase of the Collateral for a purchase price that is less than the amount necessary to pay in full (i) the aggregate principal amount of the Certificates, (ii) accrued but unpaid interest on such unpaid principal amount to the date of distribution, (iii) interest on overdue principal and, to the extent permitted by applicable law, overdue interest, and (iv) all other sums due and owing to Agent or any Lender pursuant to any Basic Document, then before accepting any such offer, Agent shall notify the Lenders and shall sell such Collateral for such price only after obtaining the written consent of Majority Lenders. (c) Any assignment, sale, transfer, or other conveyance of the Collateral by Agent made pursuant to the terms hereof or of the other Basic Documents to which it is a party shall bind the Lenders and shall be effective to assign, sell, transfer, or convey all right, title and interest of Agent and the Lenders that it purports to assign, sell, transfer, or otherwise convey in and to the Collateral. No purchaser or other grantee shall be required to inquire as to the authorization, necessity, expediency, or regularity of such assignment, sale, transfer, or conveyance or as to the application of any sale or other process with respect thereto by Agent. Article XII RECEIPT, DISTRIBUTION, AND APPLICATION OF INCOME Section 12.01 -- Payment by Agent Generally. Subject to sections 12.02, 12.03, 12.04, and 12.05 hereof, all payments (including prepayments under section 4.02 and the first sentence of 4.03 of this Agreement) of principal of and interest on any Note, 47 53 and of Interest Supplements, received by Agent shall be paid to the holders of the Certificates related to such Note pro rata in accordance with the principal and interest then due on such Certificates; the payment of the Facility Fee received by Agent shall be paid one-half to each Lender; and all payments of the Commitment Fee received by Agent shall be paid to the Lenders pro rata in accordance with the outstanding Commitment of each. Section 12.02 -- Application of Payments After Default. During the continuance of a Default that is not an Event of Default, any amounts that, but for this section 12.02, would be payable under section 12.01 by Agent to the Lenders shall be held by Agent until the occurrence of one of the following events: (i) all Defaults shall have been cured, in which event such amounts shall, to the extent not theretofore applied as provided herein, be applied as provided in section 12.01 hereof, (ii) an Event of Default shall have occurred and be continuing, in which event such amounts shall be applied as provided in section 12.03 hereof, or (iii) such amounts shall have been continuously held for a period in excess of 90 days (during which period Agent or the Lenders shall not have been stayed or otherwise precluded by operation of law from taking action to accelerate the Notes or to declare this Agreement in default or to exercise any remedies hereunder or under the Mortgage), in which event such amounts shall, to the extent not theretofore applied as provided herein, be distributed as provided in section 12.01 hereof. Section 12.03 -- Payments After Event of Default. During the continuance of any Event of Default, all payments received by Agent and all amounts then held by Agent on behalf of Lenders shall be applied in the following order of priority: First, to pay all proper fees, charges, expenses, or advances made or incurred by Agent in the collection or distribution of such payment or otherwise in accordance with the provisions of this Agreement or the Mortgage, and of any and all other sums then owing to Agent by Borrower under the Basic Documents (including any amount payable by or for the account of Agent under section 9.04(b) of the Mortgage); Second, to pay to the then-existing and prior holders of the Certificates all proper fees, charges, expenses (including expenses under Section 13.03 hereof, and all amounts payable under Article IX hereof), and advances made or incurred by such then-existing and prior holders of Certificates and for which Borrower is responsible pursuant to the Basic Documents (to the extent not previously reimbursed), without priority of one such then-existing or prior holder of Certificates over any other, 48 54 in the proportion of the aggregate amount of such fees, charges, expenses and advances made or incurred by each such then-existing or prior holder of Certificates bears to the aggregate amount of such fees, charges, expenses, and advances made or incurred by all such then-existing and prior holders of Certificates; Third, to pay in full the unpaid interest on the Certificates due to the date of distribution (as well as interest on overdue principal and, to the extent permitted by applicable law, overdue interest at the rate set forth in section 4.06 hereof), and the then-outstanding principal of the Certificates, without priority of one Lender over any other, in the proportion that the outstanding principal of each Lender's Certificate(s) on such date of application bears to the outstanding principal of all the Certificates outstanding on such date of application; Fourth, to pay all other amounts then due by Borrower to the Lenders under the Basic Documents; Fifth, the balance, if any, of such payments remaining thereafter shall be distributed to Borrower. Section 12.04 -- Application of Indemnity and Certain Other Payments. (a) Any indemnity payment under Article IX hereof received by Agent shall, if owed to Agent, be applied to any such indemnity amounts owing to it, but if owed to another Indemnitee, be paid to the appropriate Indemnitee. (b) Except as otherwise provided in this Article XII, any payment received by Agent for which provision as to the application thereof is made in this Credit Agreement or the Mortgage, other than in this Article XII, shall be forthwith applied as provided in such other provision of this Credit Agreement or the Mortgage. (c) If a Default exists when Agent receives any payment referred to in section 12.04(b) or (d), Agent may hold such payment as part of the Collateral, and Agent shall cease to hold such payment and shall apply and distribute it as provided in such section if and when no Default exists. (d) If an Indemnitee receives a refund of any amount that Borrower indemnified such Indemnitee for, that Indemnitee shall pay to Borrower an amount equal to that refund; provided, that any 49 55 subsequent loss of that refund by the Indemnitee shall be treated as a loss subject to indemnification by Borrower. Section 12.05 -- Other Payments. (a) Provided no Default exists, any money that Agent receives with respect to any right or obligation contained in the Basic Documents, and that the Basic Documents do not specify how to apply, shall be applied to any Secured Obligations then due, and the balance shall be distributed to Borrower. (b) Any payments received and amounts realized by Agent with respect to the Aircraft or otherwise to the extent received or realized, or remaining, at any time after payment in full of the Secured Obligations, as well as any other amounts remaining as part of the Collateral after payment in full of the Secured Obligations, shall be distributed to Borrower. Section 12.06 -- Method of Payment. Agent shall make distributions or cause distributions to be made to the Lenders and Borrower by wire transfer of immediately available funds, to the respective bank accounts specified in writing to Agent by such Persons, not later than 2:00 p.m. (Atlanta, Georgia time) on the date they are received by Agent (if received by 12:00 noon (Atlanta, Georgia time), or, if received later, as soon as practicable but not later than 11:00 a.m. (Atlanta, Georgia time) on the next Business Day), or with commercially reasonably promptness after receipt in the case of payments to bank accounts located outside the United States. Section 12.07 -- Payments From Proceeds from Borrower. All payment to be made by Agent under the Certificates and this Agreement shall be made only from the proceeds received by Agent under the Basic Documents. Each holder of a Certificate, by its acceptance of such Certificate, agrees that it will look solely to the proceeds received by Agent under the Basic Documents to the extent available for distribution to such holder as herein provided, and that Agent is not personally liable to the holder of any Certificate under such Certificate or this Agreement. Section 12.08 -- Termination of Certificates. A holder of a Certificate shall have no further interest in, or other right with respect to, the proceeds received by Agent under the Basic Documents when and if all Secured Obligations payable to such holder have been paid in full. 50 56 Article XIII MISCELLANEOUS Section 13.01 -- No Waivers; Cumulative Remedies. No failure or delay in exercising any power or right under any Basic Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude other or further exercise thereof or the exercise of any other right or power under any Basic Document. No notice to or demand on any party in any case shall, of itself, entitle such party to any other or further notice or demand in similar or other circumstances. Section 13.02 -- Notices. All communications and notices provided for under this Agreement shall be in writing (including telex, telegraph, and telecopy), shall be in English, and shall be mailed by certified mail (return receipt requested) or otherwise delivered to the parties at the addresses set forth by their signatures hereto, or, as to each party, at such other address as it designates by notice to each other party. Each such notice shall be effective upon delivery. 51 57 Section 13.03 -- Transaction Expenses; Agent's Fees. (a) Borrower will pay on demand all out-of-pocket expenses in connection with the preparation, execution, delivery, administration, and enforcement of the Basic Documents, or in connection with any scheduled closing that is postponed or cancelled, including (i) all fees and expenses of (x) Trotter Smith & Jacobs, special counsel to the Lenders, (y) Castro, Barros, Sobral e Xavier, special Brazilian counsel, and (z) Crowe & Dunlevy, special FAA counsel; (ii) all FAA and UCC filing and lien search fees; (iii) all fees and expenses (including legal fees and expenses)of each Lender and Agent in connection with actual or proposed amendments, waivers, or consents to or under this Agreement or the other Basic Documents (except for such amendments, waivers, or consents initiated by any Lender or Agent; provided that any such amendment, waiver, or consent initiated by Agent or the Lenders in connection with a matter relating to the Finex Program, Finex Agent, or Finex Interest Payments that is initiated for the benefit of Borrower or at the request of Borrower shall not be included in this exception); and (iv) all fees and expenses (including legal fees and expenses) of each Lender and Agent in connection with the actual or proposed enforcement of any Basic Document against Borrower during the existence of any Default. The "legal fees and expenses" of the Lenders and Agent referred to in clauses (iii) and (iv) may not include those of a Lender's or Agent's in-house counsel. (b) Agent shall be entitled to receive reimbursement, within five Business Days after its request, for all reasonable expenses incurred or made by it in accordance with this Agreement or any other Basic Document. Under section 2.01 of the Mortgage, Agent is granted, and such obligations are secured by, a Lien on the Collateral entitling Agent to priority as to payment thereof (by virtue of section 12.03 of this Agreement) over payment to any other Person under this Agreement. Borrower shall pay to Agent, in its individual capacity, the amounts to which Agent is entitled under this section 13.03(b). Section 13.04 -- Amendments. Any provision of the Basic Documents, other than the Purchase Agreement, the Guarantee, or the Finex Agreement, may be amended, terminated, waived, or otherwise modified only in writing by Borrower and Majority Lenders, and any such amendment, termination, waiver, or other modification shall bind all of the Lenders to the same extent and with the same effect as if each Lender had joined therein; provided, that no provision of the Finex Agreement shall be amended, modified, or waived except as permitted therein; provided, further, that the written consent of Agent in its individual capacity shall be required to effect any amendment, termination, waiver, or other modification of the Basic 52 58 Documents that affects the rights or duties of Agent (as agent or in its individual capacity (but not in its capacity as Lender)). Notwithstanding the foregoing, no amendment, modification, or waiver of the Basic Documents shall, unless in writing and signed by each Lender, be effective to (a) increase such Lender's Commitment or subject such Lender to any additional obligation, (b) reduce the principal of or interest on the Notes or such Lender's Certificates, or any fees or other amounts payable to such Lender hereunder (whether under Article IX or otherwise), or change the ratable distribution of funds received by Agent for account of the Lenders hereunder (including under Article IV hereof), (c) postpone any date fixed for any payment of the principal of, or interest on, the Notes or such Lender's Certificates or any fees or other amounts payable to such Lender hereunder, (d) change the definition of "Majority Lenders" as set for in section 1.01, or amend, modify, or waive this section 13.04, (e) change section 11.13 of this Agreement, (f) increase the Financed Amount to be secured by the Collateral under the Mortgage, (g) alter the right of any Lender to transfer any Certificate or add or alter restrictions upon such transfer, or (h) the release of any Lien with respect to the Collateral other than in accordance with the Basic Documents. Section 13.05 -- Successors and Assigns. (a) Binding Effect; Consent to Assignment. This Agreement shall bind and benefit each Lender, Agent, and Borrower and their successors and assigns, except that Borrower may not assign or transfer its rights under this Agreement without Agent's prior written consent. (b) Limitations on Transfers. No Lender shall assign, convey, or otherwise transfer any of its interest in the Basic Documents, or offer to do any of the foregoing, (i) in any manner that would result in a violation of the Act, the Securities Act of 1933, ERISA, or any other law, or (ii) if, as a result of such assignment, conveyance, or other transfer, more than two Persons other than Bank of Tokyo and affiliates of First Atlanta would have Certificates issued with respect to any particular Aircraft. (c) Transfer. Agent shall maintain at its office a register for the purpose of registering transfers and exchanges of registered Certificates and in which shall be entered the names and addresses of the owners of such registered Certificates and particulars of the registered Certificates owned by them. The holder of any registered Certificate wishing to transfer such Certificate shall, in person or by a duly authorized attorney, surrender to Agent at its office such Certificate, duly endorsed by the registered holder or such attorney, or accompanied by a written instrument of transfer duly 53 59 executed by the registered holder or by such attorney, in form reasonably satisfactory to Agent. Upon presentation to Agent of any Certificate for transfer, Agent will execute and deliver to the transferee thereof in exchange therefor a new Certificate or Certificates of the same series and in the same aggregate principal amount and with the same terms as the Certificate so surrendered, in registered form and in any domination of $100,000 or more (or the aggregate principal amount of all Certificates of such series held by such transferee, whichever is less) as is specified in such instrument of transfer. Nothing in this paragraph shall be interpreted as (i) giving Bank of Tokyo the right or power to transfer one or more of its Certificates or to transfer any right or interest in such Certificates to another Person, other than First Atlanta or Borrower, without the prior written consent of First Atlanta and Borrower (which shall not be unreasonably withheld) or (ii) giving First Atlanta the right or power to transfer one or more of its Certificates or to transfer any right or interest in such Certificates to any Person other than an affiliate of First Atlanta, without the prior written consent of Borrower (which shall not be unreasonably withheld). (d) Exchange. The holder of one or more Certificates may at any time surrender such Certificate or Certificates for exchange at Agent's office and shall be entitled to receive in exchange therefor a new Certificate or Certificates, of the same series and in the same aggregate principal amount with the same terms as the Certificate or Certificates surrendered, in registered form and in any denomination of $100,000 or more (or the aggregate principal amount of all such Certificates of the same series held by such holder, whichever is less). (e) Effect of Transfer or Exchange. All Certificates issued upon any transfer or exchange of Certificates shall be the valid obligations of Agent evidencing the same respective obligations, and entitled to the same security and benefits under this Agreement, as the Certificates surrendered upon such transfer or exchange. Agent shall make a notation on each new Certificate of the date to which interest on the replaced Certificate(s) has been paid. (f) Evidence of Ownership. Agent and Borrower shall deem and treat the Person in whose name any registered Certificate is registered as the absolute owner and holder of such Certificate for the purpose of mailing payment of all amounts payable by Agent or Borrower with respect to such Certificate and for all other purposes, and Agent and Borrower shall not be affected by any notice to the contrary. 54 60 (g) Expenses, Taxes, etc. The transferring or exchanging Lender shall pay all expenses incurred in connection with the transfer or exchange of a Certificate, including Agent's expenses (including legal fees), stamp taxes, transfer taxes, sales taxes, governmental fees and charges, broker's fees and commissions, any other fees and charges of the same or similar type as any of the foregoing, and other fees and expenses associated with amendments, supplements, waivers, or consents required as a result of any transfer or sale of a Certificate after the Purchase Date. In addition, for any transfer or exchange of a Certificate, Agent may require the transferor to pay a sum sufficient to cover any stamp tax or other governmental charge connected therewith. (h) No Transfer Within Three Days Before Payment Date. Agent shall not be required to transfer or exchange any Certificate during the three-day period preceding the due date of any payment on such Certificate. Section 13.06 -- First Atlanta's Representations and Warranties. First Atlanta represents and warrants that: (a) it is a national banking association duly organized, validly existing, and in good standing under the laws of the United States, and has all corporate power, authority, and legal right under the laws of the United States to execute, deliver, and carry out the terms of each of the Basic Documents to which it is a party either individually or as Agent; (b) it has duly authorized, executed, and delivered this Agreement and the other Basic Documents to which it is a party either individually or as Agent; (c) neither it nor anyone authorized to act on its behalf has directly or indirectly offered any beneficial interest in the Notes or the Certificates for sale to, or solicited any offer to acquire any such interest in the Notes or the Certificates from, any Person in such a manner as to require any of the Notes or the Certificates to be registered under the Securities Act of 1933, as amended, or any state securities law; provided, that the foregoing shall not be deemed to extend any such offer, sale, or solicitation by or on behalf of Borrower or any other Person; and (d) no part of the funds used by it to purchase its Certificates hereunder constitutes the assets of any "employee benefit plan" within the meaning of ERISA or any "plan" as such a term is defined in Section 406 of ERISA or Section 4975 of the Code. Section 13.07 -- Bank of Tokyo's Representations and Warranties. (a) it is an agency licensed under Georgia law of a Japanese banking corporation and in good standing under the laws of Georgia, and has all corporate power, authority, and legal right under the laws of the United States to execute, deliver, and carry out the terms of each of the Basic Documents to which it is a party; (b) it has duly authorized, executed, and delivered this Agreement and the other Basic Documents to which it is a party; 55 61 (c) neither it nor anyone authorized to act on its behalf has directly or indirectly offered any beneficial interest in the Notes or the Certificates for sale to, or solicited any offer to acquire any such interest in the Notes or the Certificates from, any Person in such a manner as to require any of the Notes or the Certificates to be registered under the Securities Act of 1933, as amended, or any state securities law; provided, that the foregoing shall not be deemed to extend any such offer, sale, or solicitation by or on behalf of Borrower or any other Person; and (d) no part of the funds used by it to purchase its Certificates hereunder constitutes the assets of any "employee benefit plan" within the meaning of ERISA or any "plan" as such a term is defined in Section 406 of ERISA or Section 4975 of the Code. Section 13.08 -- Governing Law. This Agreement shall be governed by the laws of Georgia. Section 13.09 -- Headings. Article and section headings used in this Agreement are for convenience only and are not a substantive part of this Agreement. Section 13.10 -- Execution in Counterparts. This Agreement may be executed in separate counterparts. Section 13.11 -- Survival of Representations and Warranties. All representations and warranties contained in this Agreement or made in writing in connection with this Agreement shall survive the execution and delivery of this Agreement and the Mortgage. Section 13.12 -- Severability. If any part of any provision contained in this Agreement, or any document contemplated hereby, is or becomes invalid or unenforceable under applicable law, that part shall be ineffective to the extent of such invalidity only, without in any way affecting the remaining parts of that provision of the remaining provisions. Section 13.13 -- Finex Agreement. So long as no Default exists, Agent shall forward any payments that it receives under the Finex Agreement as Finex Interest Payments, or interest thereon, or as indemnification or reimbursement under the Finex Agreement, and not relating to any loss or expense suffered by Agent or any Lender, to Borrower at First American Bank of Georgia, N.A., 2000 Riveredge Airlines, Inc. (account #5100130970). Agent shall use its good faith efforts to forward any such payments to Borrower on the Business Day following their receipt by Agent. At the cost and expense of Borrower, Agent or any Lender shall use its 56 62 good faith efforts to take such action with respect to the Finex Agreement as Borrower shall reasonably request, provided that Agent and the Lenders shall not be required to independently solicit offers from any bank to guarantee Finex Interest Payments or to take any action which adversely affects the interests of any of them; provided that a reduction in the amount of Finex Interest Payments resulting from the guarantee of such Finex Interest Payments by Finex Bank shall not be considered an action adversely affecting Agent's or any Lender's interest; provided, further, that the replacement of the Finex Bank with another bank shall not be considered an action adversely affecting Agent's or any Lender's interest if (a) the Agent consents in writing to such replacement bank acting as the Finex bank under the Finex Agreement or (b) such replacement bank meets the following qualifications; (i) it is a bank having offices in New York City and Brazil; (ii) it is authorized to act as a Finex agent under the Finex Program; and (iii) it is a bank with which Agent has the capability to transact business in the ordinary course through Agent's then-existing correspondent banking relationships. However, all risks associated with the Finex Program are Borrower's, and Agent and the Lenders shall have not responsibility for any Finex Interest Payments not actually received by Agent or any Lender from Finex Bank. So long as no Default exists, Agent and Lenders shall not enter into any amendment of the Finex Agreement without Borrower's consent, such consent not to be unreasonably withheld. Section 13.14 -- Agent Not Acting in Individual Capacity. In acting hereunder, unless otherwise expressly provided, The First National Bank of Atlanta, when referred to as "Agent", acts solely as agent and not in its individual capacity; and, except as otherwise provided herein or in any other Basic Document to which The First National Bank of Atlanta, as "Agent", is a party, all Persons having any claim against The First National Bank of Atlanta, as "Agent", by reason of the transactions contemplated hereby shall look only to the Collateral for payment or satisfaction thereof. 57 63 IN WITNESS WHEREOF, Agent, Borrower, and Lenders have executed this Credit Agreement. "BORROWER" ATLANTIC SOUTHEAST AIRLINES, INC. 1688 Phoenix Parkway College Park, Georgia 30349 Attn: Ronald V. Sapp Vice President-Finance By: /s/ Ronald V. Sapp and Treasurer ----------------------------------------- Facsimile No.: (404) 991-0366 Title: Vice President - Finance & Treasurer -------------------------------------- "AGENT" THE FIRST NATIONAL BANK OF ATLANTA, not in its individual capacity but solely as agent 2 Peachtree St., N.W. Atlanta, Georgia 30383 Attn: Georgia Corporate Division Reference: Atlantic Southeast By: /s/ (illegible) Airlines, Inc. ---------------------------------------- Facsimile No.: (404) 332-5016 Title: Vice President ------------------------------------- "LENDERS" THE FIRST NATIONAL BANK OF ATLANTA, in its individual capacity 2 Peachtree St., N.W. By: /s/ (illegible) Atlanta, Georgia 30383 ---------------------------------------- Attn: Georgia Corporate Division Title: Vice President Reference: Atlantic Southeast ------------------------------------- Airlines, Inc. Facsimile No.: (404) 332-5016 THE BANK OF TOKYO, LTD., ATLANTA AGENCY 5050 Georgia Pacific Center 133 Peachtree Street, N.E. Atlanta, Georgia 30303 By: /s/ Gary L. England Attn: David L. Mason ---------------------------------------- Facsimile No.: (404) 577-1155 Title: Vice President and Manager ------------------------------------- 58 EX-10.L 7 CREDIT AGREEMENT DATED 6/1/92 1 EXHIBIT 10(l) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- CREDIT AGREEMENT dated as of June 1, 1992 among ATLANTIC SOUTHEAST AIRLINES, INC., Borrower, HOVIA BANK OF GEORGIA, N.A. Agent, and WACHOVIA BANK OF GEORGIA, N.A., and THE BANK OF TOKYO, LTD., ATLANTA AGENCY, Lenders. Eight Embraer EMB-120 Brasilia Aircraft - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2
TABLE OF CONTENTS Page Article I DEFINITIONS; REFERENCES........................................................ 1 Section 1.01-- Definitions.................................................................. 1 Section 1.02-- Use of Defined Terms......................................................... 10 Section 1.03-- Section and Exhibit References, etc.......................................... 10 Articel II PURCHASE OF NOTES AND CERTIFICATES; PAYMENTS; REPLACEMENT NOTES........................................................................... 10 Section 2.01-- Purchase of Notes and Certificates........................................... 10 Section 2.02 -- Procedures for Purchase of Notes and Certificates................................................................... 11 Section 2.03-- Commitment Fee............................................................... 11 Section 2.04-- Facility Fee................................................................. 11 Section 2.05-- Replacement Notes............................................................ 12 Article III SECURITY FOR BORROWER'S OBLIGATIONS............................................ 12 Section 3.01-- Security Interest in Collateral.............................................. 12 Section 3.02-- Set-Off Rights............................................................... 12 Article IV PAYMENTS UNDER THE NOTES AND CERTIFICATES AND OTHER AMOUNTS PAYABLE BY BORROWER AND AGNET......................................... 13 Section 4.01-- How Payments Are Made........................................................ 13 Section 4.02-- Right to Prepay.............................................................. 14 Section 4.03-- Mandatory Prepayments........................................................ 14 Section 4.04-- Mandatory Purchase........................................................... 14 Section 4.05-- Amount of Prepayment......................................................... 14 Section 4.06-- Interest on Past Due Amounts................................................. 15 Section 4.07-- Limit on Interest Payable.................................................... 15 Section 4.08-- Lender's Call Rights......................................................... 15 Section 4.09 - Payments by Agent............................................................ 16 Section 4.10-- Interest Rate Notices........................................................ 16 Article V BORROWER'S REPRESENTATIONS AND WARRANTIES...................................... 16 Section 5.01-- Corporate Standing........................................................... 16 Section 5.02-- Corporate Powers............................................................. 16 Section 5.03-- Binding Effect............................................................... 16 Section 5.04-- Litigation................................................................... 16 Section 5.05-- Financial Statements......................................................... 17 Section 5.06-- Taxes........................................................................ 17 Section 5.07 -- Status as United States Citizen and Air Carrier.................................................................... 17 Section 5.08-- Location of Offices.......................................................... 17 Section 5.09-- Governmental Consents........................................................ 17 Section 5.10-- Condition of Aircraft........................................................ 17 Section 5.11-- Absence of ERISA Liability................................................... 18 Section 5.12-- Delta Agreement.............................................................. 18 Section 5.13-- Subsidiaries; Stock Ownership................................................ 18 Section 5.14-- Investment Company Status.................................................... 18
i 3 Section 5.15-- Solvency..................................................................... 18 Article VI AFFIRMATIVE COVENANTS.......................................................... 19 Section 6.01-- Financial Statements......................................................... 19 Section 6.02-- Inspection of Collateral and Records......................................... 20 Section 6.03-- Corporate Existence.......................................................... 20 Section 6.04-- Merger, etc.................................................................. 20 Section 6.05-- Citizenship and Air Carrier Status........................................... 21 Section 6.06-- Compliance with ERISA........................................................ 22 Section 6.07-- Disposition of Assets........................................................ 22 Section 6.08-- Performance of Delta Agreement............................................... 22 Section 6.09-- Financial Covenants.......................................................... 22 Section 6.10-- Certificate of No Default.................................................... 23 Section 6.11-- Insurance on Fleet........................................................... 23 Article VII CONDITIONS PRECEDENT TO THE PURCAHSE OF NOTES 24 Section 7.01 -- Conditions Precedent to the Purchase of the Initial Note............................................................ 24 Section 7.02-- Conditions Precedent to the Purchase of All Notes................................................................... 24 Article VIII EVENTS OF DEFAULT; REMEDIES............................................................. 26 Section 8.01-- Events of Default............................................................ 26 Section 8.02-- Remedies..................................................................... 28 Article IX BORROWER'S INDEMNITIES......................................................... 29 Section 9.01-- General Indemnity............................................................ 29 Section 9.02-- Taxes........................................................................ 31 Section 9.03-- Survival..................................................................... 33 Article X YIELD PROTECTION; ILLEGALITY................................................... 33 Section 10.01-- Additional Costs............................................................ 33 Section 10.02-- Breakage Costs.............................................................. 34 Section 10.03-- Illegality.................................................................. 34 Article XI AGENT.......................................................................... 35 Section 11.01-- Appointment; Powers and Indemnities; Compensation................................................................... 35 Section 11.02-- Reliance by Agent........................................................... 36 Section 11.03-- Defaults.................................................................... 36 Section 11.04-- Rights as a Lender.......................................................... 36 Section 11.05-- Indemnification............................................................. 37 Section 11.06-- Nonreliance on Agent or Lenders............................................. 37 Section 11.07-- Failure to Act.............................................................. 37 Section 11.08-- Resignation of Agent; Successor Agent 38 Section 11.09-- Investment of Funds......................................................... 38 Section 11.10-- Representations and Warrantes............................................... 39 Section 11.11-- No Claims Against Agent, etc................................................ 41 Section 11.12 -- Form of Certificates; Issuance, Transfer, and Exchange of Certificates......................................... 41
ii 4 Section 11.13-- Action Upon Written Instructions............................................ 42 Section 11.14-- Expenses.................................................................... 43 Section 11.15-- Procedures for Disposing of Collateral 43 Article XII RECEIPT, DISTRIBUTION, AND APPLICATION OF INCOME ............................................................................... 44 Section 12.01-- Payment by Agent Generally.................................................. 44 Section 12.02-- Application of Payments After Default 44 Section 12.03-- Payments After Event of Default............................................. 45 Section 12.04-- Application of Indemnity and Certain Other Payments................................................................. 46 Section 12.05-- Other Payments.............................................................. 46 Section 12.06-- Method of Payment........................................................... 46 Section 12.07-- Payments From Proceeds from Borrower........................................ 47 Section 12.08-- Termination of Certificates................................................. 47 Article XII MISCELLANEOUS.................................................................. 47 Section 13.01-- No Waivers; Cumulative Remedies............................................. 47 Section 13.02-- Notices..................................................................... 47 Section 13.03-- Transaction Expenses; Agent's Fees.......................................... 47 Section 13.04-- Amendments.................................................................. 48 Section 13.05-- Successors and Assigns...................................................... 49 Section 13.06-- Wachovia's Representations and Warranties..................................................................... 51 Section 13.08-- Governing Law............................................................... 52 Section 13.09-- Headings.................................................................... 52 Section 13.10-- Execution in Counterparts................................................... 52 Section 13.11-- Survival of Representations and Warranties..................................................................... 52 Section 13.12-- Severability................................................................ 52 Section 13.13-- Proex Agreement............................................................. 52 Section 13.14-- Agent Not Acting in Individual Capacity....................................................................... 53 Annex A Procedures for Purchasing Aircraft, Notes, and Certificates; Documentation Exhibit A Form of Note Exhibit B Form of Proex Agreement Exhibit C Form of Mortgage Exhibit D Form of Purchase Agreement Assignment Exhibit E Form of Consent Exhibit F Form of opinion of Borrower's counsel Exhibit G Form of opinion of Crowe & Dunlevy Exhibit H Form of opinion of counsel to Embraer Exhibit I Form of opinion of Castro Barros Sobral e Xavier Exhibit J Form of Guarantee Exhibit K Form of Certificate
iii 5 CREDIT AGREEMENT This Credit Agreement is entered into as of June 1, 1992 among (i) Atlantic Southeast Airlines, Inc. ("Borrower"), a Georgia corporation, (ii) Wachovia Bank of Georgia, N.A., a national banking association, in its individual capacity, and The Bank of Tokyo, Ltd., Atlanta Agency, a Georgia agency of a Japanese banking corporation, as lenders (the "Lenders"), and (iii) Wachovia Bank of Georgia, N.A., a national banking association, not in its individual capacity (except as otherwise expressly stated) but solely as agent (in such representative capacity ("Agent"). Borrower, the Lenders, and Agent agree as follows: Article I DEFINITIONS; REFERENCES Section 1.01 -- Definitions. The following terms, when capitalized as below, have the following meanings: "Act": the Federal Aviation Act of 1958, as amended, or its successor. "Agent": Wachovia Bank of Georgia, N.A., not in its individual capacity but solely in its capacity as agent for Lenders, or the successor agent pursuant to section 11.08 hereof. "Agreement": This Credit Agreement. "Aircraft": up to eight Embraer EMB-120 Brasilia aircraft to be delivered under the Purchase Agreement and in each case designated by Borrower as an "Aircraft" to be financed under this Agreement. Borrower shall make each such designation by giving notice to Agent (which Agent agrees to relay promptly to each Lender) at least three Business Days before the Purchase Date therefor, which notice is not revoked by notice to Agent (which Agent agrees to relay promptly to each Lender) on or before the Purchase Date therefor. "Bank LIBOR": for any Interest Period: a rate per annum (calculated on the basis of a 360-day year and the actual number of days elapsed) equal to the consensus rate at which 180-day deposits in Dollars appear on the Reuters Screen LIBO Page at approximately 11:00 a.m. London, England time, on the day that is two Business Days before the first day of that Interest Period. Agent shall establish and maintain procedures designed to remind each Lender of 6 the interest reset three Business Days before the first day of each Interest Period and to notify each Lender of the reset rate two Business Days before the first day of each Interest Period. "Bank of Tokyo": The Bank of Tokyo, Ltd., Atlanta Agency. "Basic Documents": this Agreement, the Purchase Agreement, the Proex Agreement, the Guarantee, and the Mortgage; and each Certificate, Note, Purchase Agreement Assignment, Consent, Proex Supplement, and Mortgage Supplement as executed and delivered. "Book Net Worth": defined in section 6.09. "Borrower Interest Rate" with respect to any Interest Period: an interest rate equal to Bank LIBOR for such Interest Period, plus 0.625% per annum (computed on the basis of a year of 360 days), based on actual days elapsed. "Business Day": any day, other than a Saturday or Sunday, on which commercial banks are open for business in New York, New York, London, England, and Sao Paulo, Brazil, and Agent is open for business in Atlanta, Georgia, and if such day is a Purchase Date or Interest Payment Date or relates to a notice by Borrower with respect to any Purchase Date, which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Call Dates": June 30, 1996, December 31, 1998, and June 30, 2001. "Capitalized Lease": a capitalized lease of any tangible real or personal property, as determined pursuant to GAAP. "Certificate": a loan certificate substantially in the form of Exhibit K, or a loan certificate issued in exchange or replacement for such a certificate. "Change in Control": the acquisition by any Person (other than Delta Air Lines, Inc., directly or indirectly) or group (within the meaning of Rule 13d-5 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934), or by two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities and Exchange Act of 1934) of either (i) 33-1/3% or more of the outstanding shares of voting stock of Borrower or (ii) the power to direct or cause the direction of the management and policies of Borrower, whether through the ownership of voting securities, by contract, or 2 7 otherwise. A reorganization of Borrower into a holding company structure, in which Borrower's shareholders' beneficial ownership (as so defined) of Borrower and its Affiliates immediately after the reorganization is identical to such beneficial ownership immediately before the reorganization, shall not by itself be a "Change in Control". "Closing Date": June 1, 1992 (the execution date for this Agreement). "Code": the Internal Revenue Code of 1986, as amended from time to time, including effective date and transition rules (whether or not codified). Any reference to a specific section of the Code shall be deemed to include a reference to any corresponding provision of future law. "Collateral": the "Collateral" under the Mortgage. "Commitment": Agent's commitment to purchase the Notes, and each Lender's commitment to participate, through the purchase of Certificates, in the Agent's purchase of Notes, in the amount set forth opposite each Lender's name in section 2.01, for an aggregate amount of up to $43,000,000; Borrower may reduce such amount upon 30 days' prior written notice to Agent (which Agent agrees to relay promptly to each Lender) and in the event of such reduction in the total commitment, each Lender's commitment will be reduced pro rata based on the relation of each Lender's commitment to the total commitment. "Commitment Fee": the fee required to be paid by Borrower to Agent, for the benefit of the Lenders, pursuant to section 2.03. "Commitment Period": the period from the Closing Date through the earliest of (w) March 31, 1993, (x) the date upon which the eighth Aircraft is delivered to and accepted by Borrower pursuant to the Purchase Agreement, (y) the date on which the remaining Commitment is terminated pursuant to section 8.02, and (z) a date set by Borrower pursuant to a notice sent to Agent (which Agent agrees to relay promptly to each Lender) at least 30 days prior to such date. "Consent": a Consent and Agreement, substantially in the form of Exhibit E, relating to a Purchase Agreement Assignment and dated the same date as that Purchase Agreement Assignment. "Current Maturities of Long-Term Debt": the amounts due, within the 12-month period following any fiscal quarter end of 3 8 Borrower, under long-term debt instruments of Borrower, as determined pursuant to GAAP. "Default": any event or condition that would become an Event for Default upon the giving of notice or lapse of time or both, or any Event of Default. "Delta Agreement": the agreement between Delta Air Lines, Inc. and Borrower, dated June 1, 1986, relating to joint marketing or code sharing for interconnecting flights. "Depreciation and Amortization Expense": the total expenses of depreciation and amortization incurred by Borrower in the 12-month period preceding any fiscal quarter end of Borrower, as determined pursuant to GAAP. "Dollars" and "$": United States dollars. "Downpayment": 15% of Equipment Cost for the first $6,500,000 of Equipment Cost, and 100% of Equipment Cost in excess of $6,500,000, for an Equipment Portion, minus any amounts that Borrower paid to Vendor before the relevant Purchase Date (including deposits or letter-of-credit proceeds applied to such Equipment Portion), pursuant to the Purchase Agreement, relating to such Equipment Portion. "Earnings Before Tax": the total earnings from all sources, excluding extraordinary items, of Borrower in the 12-month period preceding any fiscal quarter end of Borrower, prior to any deduction for federal and state income taxes, as determined pursuant to GAAP. "Embraer": Embraer-Empresa Brasileira de Aeronautica S.A., a Brazilian corporation, and its successors and assigns. "Environmental Complaint": any complaint, proceeding, or order under any federal, state, or local statutes, laws, ordinances, codes, rules, or regulations (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. "Equipment Cost": the purchase price for an Equipment Portion, as set forth in (and as adjusted pursuant to) the Purchase Agreement. "Equipment Portion": an Aircraft and any Spare Parts purchased with that Aircraft. 4 9 "ERISA": defined in section 5.11. "Event of Default": defined in section 8.01. "Event of Loss": defined in the Mortgage. "FAA": the Federal Aviation Administration of the United States, or any instrumentality of the United States succeeding to its function. "Facility Fee": defined in section 2.04. "Financed Amount": the amount determined pursuant to the second sentence of section 2.01. "GAAP": generally accepted accounting principles as in effect in the United States and applied on a basis consistent with that used in the preparation of the financial statements referred to in section 5.05, except for changes therein with which Borrower's independent public accountants concur that are disclosed in the notes to the relevant financial statements. "Guarantee": the document by that name, executed by ASA Investments, Inc., in substantially the form of Exhibit J. "Hazardous Substance": (a) any "hazardous substance", as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as in effect form time to time; (b) any "hazardous waste", as defined by the Resource Conservation and Recovery Act, as in effect from time to time; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous, or toxic chemical, material, or substance within the meaning of any other applicable federal, state, or local law, regulation, ordinance, or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic, or dangerous waste, substance, or material, all as amended or hereafter amended. "herein", "hereof", "hereunder", etc.: in, of, or under, etc. this Agreement (and not merely in, of, under, etc. the section or provision where that reference appears). "Illegality Event": defined in section 10.03. "including": containing, embracing, or involving the enumerated item(s), but not necessarily limited to such item(s). 5 10 "Indemnitee": Agent (individually and in its agency capacity) or a Lender, or any agent (other than Proex Bank), employee, director, successor, or permitted assign of any of the foregoing. "Indebtedness": (a) total liabilities (as determined pursuant to GAAP) of Borrower and its subsidiaries on a consolidated basis plus (b) any debt of a Person that is not included in clause (a) above and that is guaranteed by Borrower or one or more of its subsidiaries, plus (c) 70% of all Operating Lease Obligations. "Interest Expense": amounts paid by or due from Borrower for interest accrued on Borrower's debts during the 12-month period preceding any fiscal quarter end of Borrower, as determined pursuant to GAAP. "Interest Payment Date": for a Note: each June 30 and December 31 after the Purchase Date for that Note, through December 31, 2002; except that any Interest Payment Date that falls on a day which is not a Business Day shall instead occur on the following Business Day. "Interest Period": for a Note: each period beginning on an Interest Payment Date for that Note (or, in the case of the first Interest Period for that Note, beginning on its Purchase Date) and ending on (but excluding, for purposes of computing interest) the following Interest Payment Date for that Note. "Lender": Wachovia or Bank of Tokyo, or a successor or assign of either. "Liabilities": defined in section 9.01. "Lien": any mortgage, pledge, assignment, encumbrance, lien (statutory or other), or other security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, or any lease in the nature thereof). "Majority Lenders": Lenders who, at the pertinent time, have a 66-2/3% or more interest in the sum of (x) all outstanding Certificates and (y) the unused Commitments outstanding of all Lenders, excluding any Certificates then held by, or in which a participation has been granted to, Borrower or any affiliate of Borrower. "Materially Adverse Change" or "Materially Adverse Effect": any event, act, condition, or occurrence of whatever 6 11 nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding) that, singly or in conjunction with any other event(s), act(s), condition(s), occurrence(s), whether or not related, results in a materially adverse change in, or has a materially adverse effect upon, any of (a) the financial condition, operations, business, properties, or prospects of Borrower, (b) the rights and remedies of Agent or any Lender under the Basic Documents, or Borrower's ability to perform its obligations under the Basic Documents, or (c) the legality, validity, or enforceability of any Basic Document, giving due consideration to any insurance coverage available to Borrower for such event, act, condition, or occurrence. "Mortgage": the Security Agreement and Chattel Mortgage between Borrower and Agent, substantially in the form of Exhibit C. "Mortgage Supplement": defined in section 3.01. "Note": Borrower's promissory note, in the form of Exhibit A, issued in connection with a designated Aircraft, or a note issued in exchange or replacement for such a note. "1991 10-K": Borrower's annual report on Form 10-K for the year ended December 31, 1991. "Officer's Certificate": a certificate signed in the name of Borrower (or, with respect to section 6.04(c), of the Successor) by the chairman of the board, the president, a vice president, or the treasurer of Borrower (or the Successor). "Operating Lease": a lease of tangible real or personal property, other than a Capitalized Lease, requiring aggregate payments of $100,000 or more during the fiscal year of the lessee. "Operating Lease Obligations": the amount equal to the aggregate of all scheduled lease payments (that will become due after any fiscal quarter end of Borrower for purposes of the term "Indebtedness" as used in section 6.09(a), but that were due during the 12-month period preceding any fiscal quarter end of Borrower for purposes of section 6.09(b)) under the terms of all of Borrower's Operating Leases. "or": at least one, but not necessarily only one, of the alternatives enumerated. 7 12 "Participation Percentage": a particular Lender's Commitment as a percentage of the total Commitment of Lenders, as set forth opposite such Lender's name in section 2.01. "Permitted Lessee": defined in the Mortgage "Permitted Lien": defined in the Mortgage. "Person": any individual, corporation, partnership, joint venture, or other legal or governmental entity. "Prepayment Event": the occurrence of any of the following events (with respect to the specific Aircraft involved in the case of clauses (a), (b), (c), or (d) below): (a) Borrower fails to keep each Aircraft registered with the FAA; (b) Agent fails or ceases to have a perfected first-priority security interest in each Aircraft, except when the Note relating to such Aircraft has been fully paid; (c) a Lien (other than a Permitted Lien) on an Aircraft exists (and, if such Lien is subordinate in priority to Agent's security interest in the Aircraft, has existed for at least six months after a financial officer of Borrower becomes aware of its existence). (d) Borrower fails to obtain an FAA standard airworthiness certificate for an Aircraft within four weeks following the Purchase Date for such Aircraft; (e) the expiration of 120 days after a Change in Control, provided that (subject to confidentiality requirements under the securities laws) Borrower shall notify Agent as soon as it becomes aware of an actual or impending Change in Control event, and Agent, acting in good faith, will notify Borrower promptly after Agent reaches a tentative conclusion that it will exercise its rights under section 4.04 (and this Prepayment Event shall be separate and distinct from and does not affect the affirmative covenant regarding merger described in section 6.04 hereof); (f) the expiration of 120 days after both (i) the Delta Agreement is fundamentally amended or terminated (other than a termination that is an Event of Default under section 8.01(d)) and (ii) Delta Air Lines, Inc. and its 8 13 affiliates transfer all or substantially all of their beneficial ownership of the Borrower to a Person not affiliated with Delta Air Lines, Inc., provided, that Borrower shall notify Agent as soon as it becomes aware of any of the events described in (i) or (ii), and Agent, acting in good faith, will notify Borrower promptly after Agent reaches a tentative conclusion that it will exercise its rights under section 4.04; or (g) Borrower ceases to be an "air carrier" within the meaning of the Act. "Prime Rate": the interest rate so denominated and set by Wachovia from time to time as an interest rate basis for borrowings. The Prime Rate is one of several interest rate bases used by Wachovia. Wachovia lends at interest rates above and below the Prime Rate. "Proex Agreement": an agreement substantially in the form of Exhibit B, or a substantially similar agreement entered into between Agent and a Proex Bank. "Proex Bank": Banco de Credito Nacional S.A., New York Branch (or any other Person selected by Borrower and accepted by Agent in accordance with section 13.13 to serve as a Proex bank under a Proex Agreement), in its capacity as Proex bank under the Proex Agreement, and its successors in such capacity. "Proex Interest Payments": the Proex Interest Payments described in section 3.01 of the Proex Agreement. "Proex Program": the export support program (Programa de Financiamento as Exportacoes - Proex) of the Federative Republic of Brazil, as established by Law no. 8.187 of June 1, 1991, Resolution 1.845 of July 31, 1991, as amended by Resolution 1.905 of February 18, 1992, of the Central Bank of Brazil, Ordinance nos. 745 of August 1, 1991, and 133 of February 18, 1992, of the Minister of Economy, Treasury, and Planning, and Ordinance no. 18 of September 27, 1991, of the Department of Foreign Trade - Decex, and Circular DIRIN/PROEX No. 1 of November 8, 1991, of Banco do Brasil, S.A., as from time to time supplemented or amended. "Proex Supplement": a document by that name, substantially in the form of Schedule A to the Proex Agreement, executed and delivered on a Purchase Date with respect to the Equipment Portion then being delivered. 9 14 "Purchase Agreement": Purchase Agreement No. 154-DCO/AC/90 (including all attachments, exhibits, and letter agreements thereto) dated August 27, 1990, between Vendor and Borrower. "Purchase Agreement Assignment": a document by that name, substantially in the form of Exhibit D, executed and delivered on a Purchase Date with respect to the Aircraft then being delivered. "Purchase Date": a date on which Borrower purchases an Aircraft and, simultaneously, the Lenders purchase the related Certificates and Agent purchases the related Note. "Regulatory Change": any change after the date of this Agreement in federal, state, or Japanese law or regulations or the adoption or making after such date of any interpretations or directives applying to a class of banks including any Lender of or under any federal, state, or Japanese law or mandatory regulations by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reuters Screen LIBO Page": the display designated as page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may replace the LIBO Page on that service for the purpose of displaying London interbank offered rates for Dollar deposits). "SEC Filings": the 1991 10-K. "Secured Obligations": defined in section 1.01 of the Mortgage. "Series of Certificates": the Certificates issued in connection with an Aircraft, or (if the context so requires) two or more Aircraft. "Spare Parts": the appliances, spare parts, and other items of equipment purchased with the Aircraft under the Purchase Agreement. "Successor": defined in section 6.04(a). "Tangible Net Worth": defined in section 6.09. "Taxes": defined in the last sentence of section 9.02(a). "Taxing Authorities": defined in the first sentence of section 9.02(a). 10 15 "Vendor": Embraer. "Wachovia": Wachovia Bank of Georgia, N.A., in its individual capacity and not as agent. Section 1.02 -- Use of Defined Terms. Any defined term used in the plural preceded by the "the" encompasses all members of the relevant class. Any defined term used in the singular preceded by "any" indicates any number of the members of the relevant class. Any agreement or instrument as from time to time supplemented and amended. A definition in singular form applies to the plural form of the term, and vice versa. Section 1.03 -- Section and Exhibit References, etc. References to Articles, sections, exhibits, and the like refer to those in or attached to this Agreement unless otherwise specified. Article II PURCHASE OF NOTES AND CERTIFICATES; PAYMENTS; REPLACEMENT NOTES Section 2.01 -- Purchase of Notes and Certificates. Subject to the satisfaction of the conditions precedent set forth in Article VII, and on the terms and conditions set forth in this Article II, on the Purchase Date for each Aircraft, (i) Borrower shall issue the related Note to Agent, and Agent shall purchase that Note from Borrower, and (ii) Wachovia and Bank of Tokyo each will purchase from Agent a Certificate, equal in face amount to 62.5% and 37.5%, respectively, of the related Note. The Financed Amount for each Aircraft shall be 85% of the Equipment Cost for the related Equipment Portion, so that the total Equipment Cost for such Aircraft shall be paid 15% by Borrower and 85% by the Related Note, provided, that the Financed Amount for any Aircraft financed under this Agreement shall not exceed 85% of $6,500,000 (and Borrower shall pay 100% of Equipment Cost for any such Aircraft in excess of $6,500,000) and the Financed Amount for all Aircraft financed under this Agreement shall not exceed $47,000,000. Each Note and each Series of Certificates shall be purchased for its face amount, and the total face amount of each Series of Certificates, and the face amount of each Note, each shall equal the Financed Amount for the related Aircraft. The term, interest rate, and amortization schedule for each Note shall be as set forth in the form of Note in Exhibit A, with the first Interest Payment Date thereon being the first Interest Payment Date after the date of that Note, and principal amortization being in 20 equal payments (with cents being rounded). Each Lender's 11 16 Commitment, pro rata share of such Financed Amount in accordance with its Participation Percentage, and pro rata share of Equipment Cost for each Aircraft financed under this Agreement shall be as follows: Commitment Participation Percentage of Name of Lender Per Aircraft Percentage Equipment Cost - - -------------- ------------ ------------- -------------- Bank of Tokyo $2,071,875.00 37.5% 31.875% Wachovia $3,453,125.00 62.5% 53.125% Agent's and each Lender's Commitment shall expire at 3:00 p.m., Atlanta, Georgia time, on the last day of the Commitment Period. Section 2.02 -- Procedure for Purchase of Notes and Certificates. The procedure to be followed in the purchase of Notes and Certificates is described in Annex A. Neither Agent nor any Lender shall have any duty to pay the pro rata share of the Financed Amount on any Purchase Date for any Lender who fails to provide its pro rata share of such Financed Amount. At Agent's offices at 191 Peachtree Street, N.E., Atlanta, Georgia 30303 (or such other location as Agent shall designate in writing), not later than 2:00 p.m. (Atlanta, Georgia time) on the appropriate Purchase Date, upon fulfillment of the conditions set forth in Annex A, Agent will purchase from Borrower the Note related to the Aircraft that Borrower purchased on that date, and each Lender will purchase from Agent the appropriate related Certificate, in each case for a purchase price equal to the face amount thereof (as set forth in section 2.01). Section 2.03 -- Commitment Fee. In partial consideration of the Lenders' agreement to fund Agent's purchase of the Notes, Borrower shall pay to Agent, for the benefit of the Lenders, a Commitment Fee ("Commitment Fee") during the Commitment Period, payable in arrears on the first day of each quarter or partial quarter (for the prior quarter or partial quarter) after the Closing Date, with a final payment on the last day of the Commitment Period, and computed at a rate per annum (calculated on the basis of a 360-day year and actual days elapsed) of 0.125% of the average daily unused portion of the Lenders' Commitment. The term "quarter" as used in this section shall mean the relevant calendar quarter ending on one of the following dates: March 31, June 30, September 30, or December 31. Section 2.04 -- Facility Fee. In partial consideration of the Lenders' agreement to finance the Aircraft pursuant to this Agreement, Borrower shall pay to Agent, for the benefit of the 12 17 Lenders, a fee ("Facility Fee") of $26,875 (.0625% of the Commitment) within three days after the Closing Date. Section 2.05 -- Replacement Notes. If (a) any Note becomes mutilated, defaced, lost, stolen, or destroyed, (b) a successor Agent is appointed under section 11.08, (c) a Lender's Certificate(s) is/are purchased under section 4.08, or (d) Borrower, Agent, or a Lender otherwise reasonably requests, then, upon the request of Borrower, Agent, or any Lender, (x) Borrower shall promptly execute and deliver to Lender a replacement Note for each such Note as to which such a request is made, and (y) Agent shall surrender to Borrower, in exchange for such replacement Note, the Note being replaced (if not lost, stolen, or destroyed). Each replacement Note shall have terms as the Note that it replaces, except for such changes as Borrower, Agent, and the Lenders agree upon (such agreement not to be unreasonably withheld) following a request by any of them for such a change. Article III SECURITY FOR BORROWER'S OBLIGATIONS Section 3.01 -- Security Interest in Collateral. To secure Borrower's obligations to Agent (in its individual and agency capacities) and the Lenders under each Note and the other Basic Documents to which Borrower is or becomes a party, Borrower shall execute and deliver to Agent, on each Purchase Date, a supplement to the Mortgage (a "Mortgage Supplement"), substantially in the form of Schedule A to the Mortgage, granting to Agent, for the benefit of Agent (in its individual and agency capacities) and the Lenders, a perfected purchase money security interest in the Aircraft being purchased from Vendor on such Purchase Date. Section 3.02 -- Set-Off Rights. If Borrower becomes insolvent, or any Event of Default occurs, any indebtedness that any Lender then owes to Borrower and any other property of Borrower that any Lender then holds may be offset and applied toward the payment of any principal of or interest on any Note to the extent of such Lender's beneficial interest therein represented by Certificate(s), or any obligation of Borrower to such Lender under the Basic Documents, whether or not any such other obligation is then due. Any Lender exercising its rights under this section shall promptly notify Borrower and Agent thereof, provided, that such Lender's failure to give such notice shall not affect the validity thereof. Each Lender agrees that if it shall obtain payment, pursuant to the exercise of its rights and under this 13 18 section, of a proportion of Borrower's aggregate indebtedness to it hereunder and under the Notes beneficially owned by such Lender which is greater than such Lender's proportion of the aggregate indebtedness hereunder and under the Notes beneficially owned by it, (a) it shall simultaneously purchase from any other Lender for cash an interest in such indebtedness beneficially held by such other Lender so that the aggregate unpaid amount of such indebtedness and interest thereon beneficially held by each Lender shall be proportionate to the aggregate unpaid indebtedness beneficially owing to it by Borrower immediately before such payment and (b) such other adjustments shall be made from time to time as shall be equitable to ensure that each Lender shares such payment pro rata in accordance with the principal outstanding under the Certificates which it has purchased hereunder; provided, that if all or any portion of such payment is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchasing Lender restored to the extent of such recovery, but without interest; provided further, that nothing in this section shall in any way affect the right of any Lender to obtain payment of indebtedness other than indebtedness hereunder or under the Notes or Certificates. Borrower consents to the foregoing arrangements and agrees that any beneficial holder of any such interest or other participation in Borrower's indebtedness may, to the extent permitted by applicable law, exercise any and all rights of set-off as fully as if such holder were a beneficial holder of such indebtedness in the amount of such interest or other participation. If, under any bankruptcy, insolvency, or other similar law, any Lender receives a secured claim in lieu of a set-off to which this section 3.02 applies, such Lender shall, to the extent practicable, exercise it rights in respect to such secured claim in a manner consistent with the rights of the Lenders entitled under this section 3.02 to share in the benefits of any recovery on such secured claim. Article IV PAYMENTS UNDER THE NOTES AND CERTIFICATES AND OTHER AMOUNTS PAYABLE BY BORROWER AND AGENT Section 4.01 -- How Payments Are Made. Borrower shall make its payments and prepayments of principal and interest due on the Notes, all amounts due as Commitment Fees or a Facility Fee hereunder, and all other amounts payable by Borrower to Agent or any Lender under the Basic Documents, to Agent (ABA # 0610-0001-0) at 191 Peachtree Street, N.E., Atlanta, Georgia 30303, for credit to account no. 17069749, Reference: Atlantic Southeast Airlines 14 19 (1992 Financings)/Georgia Corporate Division, Attention: Gay Winters, ext. 4055 (or at such other place or account as Agent from time to time notifies Borrower), in immediately available funds and in Dollars, no later than 12:00 noon (Atlanta, Georgia time) on the date when due. Any payment made by Borrower to Agent after 12:00 noon (Atlanta, Georgia time) on any day shall be deemed to have been made on the following Business Day. If any payment due under the Basic Documents comes due on a day which is not a Business Day, such payment shall instead be made on the following Business Day, and interest or Commitment Fees, as the case may be, shall accrue at the applicable rate to the day of payment. As between Borrower and the Lenders, any payment made to Agent shall be deemed to be payment to the Lenders. Agent will distribute to each Lender its distributable share of each such payment in accordance with Article XII hereof. Section 4.02 -- Right to Prepay. Unless a Default exists, after the first anniversary of the Closing Date, Borrower shall have the right to prepay in full (but not in part) the outstanding principal amount of the Note issued with respect to any designated Aircraft, without premium or penalty, and upon such prepayment pursuant to this section, Agent shall prepay in full the Certificates issued with respect to such Aircraft in the manner set forth in Article XII hereof. Borrower shall give to Agent at least 15 days prior written notice (which notice shall be irrevocable) of such prepayment, and Agent shall relay that notice promptly to each Lender. Upon any prepayment of any Note under this section 4.02, Borrower shall pay all accrued and unpaid interest on the principal of such Note to the date of prepayment, together with all amounts payable under section 10.02 with respect to such prepayment. Section 4.03 -- Mandatory Prepayments. Following the occurrence of an Event of Loss with respect to any Aircraft, Borrower shall prepay the Note executed in connection with that Aircraft, in accordance with section 7.01 of the Mortgage, and shall pay all amounts payable under section 10.02 with respect to such prepayment. Upon acceleration of the Notes pursuant to section 8.02, Borrower shall prepay such Notes, and shall pay all amounts payable under section 10.02 with respect to such prepayment. Section 4.04 -- Mandatory Purchase. Upon the occurrence of a Prepayment Event, Agent shall have the right to require Borrower to purchase or cause the purchase of (x) in the case of a Prepayment Event described in clauses (a) through (d) of the definition of such term in section 1.01, the Series of Certificates related to the Aircraft to which such Prepayment Event relates and 15 20 (y) in the case of any other Prepayment Event, all outstanding Certificates, in either case, for a purchase price equal to (a) the cumulative then-outstanding principal amount of such Series of Certificates, plus all accrued but unpaid interest on such Series of Certificates to the date of such purchase, plus (b) all amounts payable under section 10.02 with respect to such purchase. The payment described in the preceding sentence shall be due 10 days after Agent notifies Borrower that a Prepayment Event has occurred (if that Prepayment Event has not been cured by then), and shall be made in the manner prescribed by section 4.01. Upon such a purchase of a Series of Certificates, Agent shall endorse the related Note in favor of the purchaser and deliver it to such purchaser. Section 4.05 -- Amount of Prepayment. Subject to section 4.07, a Note shall be deemed satisfied in full upon the prepayment of all principal of such Note, the payment of the interest due on or with respect to such Note on such prepayment date, the payment of all past-due interest on or with respect to such Note, and the payment of all amounts payable under section 10.02 with respect to such prepayment. Section 4.06 -- Interest on Past Due Amounts. Any amounts past due (by acceleration or otherwise) and at any time outstanding under any Note or from Borrower under any other Basic Document shall (to the extent permitted by law) bear interest, payable on demand, from the due date until payment in full, at a rate equal to 2% per annum above the Prime Rate. Section 4.07 -- Limit on Interest Payable. The amount of interest due or payable under this Agreement, any Note, or any Certificate shall not in any event exceed the maximum allowable by applicable law, and this sentence shall override any contrary provision in this Agreement, any Note, or any Certificate. Section 4.08 -- Lenders' Call Rights. Each Lender shall have the right, in its sole discretion, to require Borrower to purchase or cause the purchase of such Lender's Certificates on any Call Date, for a purchase price equal to the then-outstanding principal amount of such Certificates, plus all accrued but unpaid interest on such Certificates to the date of such purchase. The purchase price shall be paid in the manner prescribed by section 4.01. To exercise this right, a Lender must so notify Borrower (a "Call Notice") at least 18 months before the Call Date involved. After receiving a Lender's Call Notice, Borrower may purchase or cause the purchase of such Lender's Certificates on any Business Day before the Call Date, if it so notifies such Lender at least 10 Business Days before such purchase date (which such notice must 16 21 specify), for the purchase price specified in the first sentence of this section. After a Lender gives a Call Notice, the interest rate on such Lender's Certificates shall be increased to Bank LIBOR plus 3% per 360-day period starting one year before the Call Date, and Borrower shall pay to Agent, on each Interest Payment Date, for distribution on such Lender's Certificates, an amount equal to such additional interest accrued through such Interest Payment Date. Any purchaser of Certificates under this section (other than Borrower) must be approved by Agent (such approval not to be unreasonable withheld), except for any purchaser of Certificates from Wachovia. A Lender's Call Notice may include (or be accompanied with) such Lender's proposal for changed terms or conditions (including a change in interest rate) for the financing described in the Basic Documents, which, if accepted by Borrower and consented to by Agent and the other Lender(s), would result in such Lender's revoking its Call Notice. In connection with any purchase of Certificates under this section, Agent and the Lenders shall co-operate, at Borrower's expense, with Borrower's reasonable instructions designed to preserve (or attempt to preserve) the Proex Interest Payments with respect to the Note and Equipment Portion that relate to such Certificates. Section 4.09 -- Payments by Agent. Agent shall hold and disburse all amounts that it receives under the Basic Documents in accordance with the terms of this Agreement, including Article XII. Section 4.10 -- Interest Rate Notices. Agent shall notify Borrower of the actual Bank LIBOR for each Interest Period promptly after determining it. Agent's failure to do so shall not affect Borrower's obligations under the Basic Documents unless Agent fails to do so after receives notice of that failure from Borrower, and Borrower is thereafter damaged by such failure. ARTICLE V BORROWER'S REPRESENTATION AND WARRANTIES Borrower represents and warrants as follows: Section 5.01 -- Corporate Standing. Borrower is a duly organized corporation existing in good standing under the laws of Georgia, has the corporate power and legal authority to own or lease its properties and to carry on its business as now conducted and as now proposed to be conducted, and is duly qualified to do business in all jurisdictions wherein such qualification is necessary (except in any jurisdictions in which the failure to 17 22 qualify would have no materially adverse effect on its business or on its ability to carry out its obligations under the Basic Documents to which it is (or is to become) a party. Section 5.02 -- Corporate Powers. Borrower's execution, delivery, and performance of the Basic Documents to which it is (or is to become) a party are within Borrower's corporate powers; and the Basic Documents to which it is (or is to become) a party have been duly authorized by all necessary corporate action on Borrower's part, and do not contravene, result in a breach of, or require any consent under any law, judgment, decree, order, or contractual restriction binding on Borrower or any agreement or instrument to which Borrower is a party or to which it or any of its property is subject, except that the legality and validity of each Purchase Agreement Assignment is subject to the execution and delivery of the related Consent. Section 5.03 -- Binding Effect. The Basic Documents to which Borrower is (or is to become) a party are (or will be when executed and delivered) legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their terms, except as may be limited by bankruptcy, insolvency, or other similar laws affecting enforcement or creditors' rights generally. Section 5.04 -- Litigation. Except as disclosed in the SEC Filings, there are no pending or (to the best of Borrower's knowledge after due inquiry) threatened actions or proceedings before any court or administrative agency which may be expected to have a Materially Adverse Effect or which seek to question or set aside any of the transactions herein contemplated. Section 5.05 -- Financial Statements. The audited balance sheet as of December 31, 1991 for Borrower and its consolidated subsidiaries, and the related results of operations for the year then ended, have been prepared in accordance with GAAP and correctly present Borrower's financial condition as of such date and results of operations for such period, and since December 31, 1991, there has been no Materially Adverse Change. Section 5.06 -- Taxes. Borrower has filed all tax returns which it is or was required to file, and has paid all taxes shown to be due and payable on those returns or on any assessment received by it, except such taxes of Borrower, if any, as are being contested diligently in good faith, and by appropriate proceedings, and as to which adequate reserves have been provided in accordance with GAAP. 18 23 Section 5.07 -- Status as United States Citizen and Air Carrier. Borrower is a "citizen of the United States" as that term is used in section 101(16) of the Act, and is a duly certified "air carrier" within the meaning of the Act. Section 5.08 -- Location of Offices. Borrower's chief executive office and principal place of business, and the place where Borrower keeps it financial records concerning the Collateral, is located at its address referred to in section 13.02. Section 5.09 -- Governmental Consents. Neither the execution, delivery, and performance of any of the Basic Documents (other than the Proex Agreement), nor the consummation of any of the transactions contemplated thereby by Borrower or Vendor (including the importation of the Aircraft into the United States from Brazil), requires the consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any federal, state, or foreign governmental authority or agency (including any judicial body) except for (a) the filing and recording of the Mortgage, and of the FAA bill of sale, the FAA application for registration, and the Mortgage Supplement for each Aircraft with the FAA; (b) the filing and recording of UCC-1 financing statements for each Aircraft with the Superior Court Clerk Offices in Bibb, Clayton, and Fulton County, Georgia, and in the appropriate places in Texas and Arkansas; (c) the registration of each Aircraft with the FAA pursuant to the Act; (d) the filing of any necessary documents with customs officials; and (e) any necessary action with respect to the Proex Program. Section 5.10 -- Condition of Aircraft. On each Purchase Date, the Aircraft to be delivered on such Purchase Date shall be in such condition as is sufficient to enable Borrower to obtain a standard U.S. certificate of airworthiness for such Aircraft and to enable such airworthiness certificate to be maintained in good standing; and, to Borrower's knowledge (which shall be based on acceptance tests by Borrower in accordance with its usual practices, to the extent permitted under the Purchase Agreement), such Aircraft shall otherwise conform in all material respects to the specifications for such Aircraft set forth in the Purchase Agreement. Section 5.11 - Absence of ERISA Liability. Each employee pension benefit plan (as defined in section 3(2) of the Employee Retirement Income Security Act of 1974, as from time to time amended ("ERISA")) of Borrower is in compliance with the applicable provisions of ERISA and of the Internal Revenue Code of 1986, as from time to time amended, in all respects, except to the extent 19 24 that noncompliance would not be materially adverse to Borrower's business, assets, financial condition, or ability to perform its obligations under the Basic Documents. Section 5.12 -- Delta Agreement. The Delta Agreement is (a) the only agreement between Delta Air Lines, Inc. and Borrower relating to joint marketing or code sharing for interconnecting flights, and (b) in full force and effect. There exists no default under the terms of the Delta Agreement and there has not occurred any event that would ripen into a default upon the giving of notice or passage of time. Section 5.13 -- Subsidiaries; Stock Ownership. Borrower owns 100% of the outstanding stock of ASA Investments, Inc. and Borrower has no material stock or other equity investment in any other corporation, partnership, or other Person. Section 5.14 -- Investment Company Status. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 5.15 -- Solvency. Borrower (i) has sufficient capital to carry on all businesses and transactions in which it engages or is about to engage, (ii) owns property having a value both at fair valuation and at present fair salable value greater than the amount required to pay Borrower's debts (iii) is solvent, (iv) will continue to be solvent after the creation of the security interests in the Collateral by the Basic Documents, and after assuming all obligations related to the Basic Documents, and (v) is able to pay its debts as they mature. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Note, or any amount owed by Borrower under any other Basic Document, remains outstanding or unpaid or Agent or any Lender has any Commitment hereunder: Section 6.01 -- Financial Statements. Borrower shall furnish to Agent and each Lender: (a) within 45 days after the end of each of the first three quarters in each fiscal year, consolidated statements of operations of Borrower and its consolidated subsidiaries for 20 25 the period from the beginning of the then-current fiscal year to the end of such quarterly period, and balance sheets of Borrower and its consolidated subsidiaries, on a consolidated basis, as of the end of such quarter prepared in accordance with GAAP and setting forth in each case in comparative form figures for the corresponding period in the preceding year, all in reasonable detail and certified by the Chief Financial Officer of Borrower, subject to changes resulting from year-end adjustments, and Form 10-Q for Borrower (or, if Borrower is not a SEC-reporting company because of having been reorganized into a subsidiary of a holding company, then for such holding company) for such period; (b) within 90 days after the end of each fiscal year, consolidated statements of operations of Borrower and its consolidated subsidiaries, for such year, and the balance sheets of Borrower and its consolidated subsidiaries, on a consolidated basis, as of the end of such year, setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail, and certified to Borrower by its independent certified public accountants and to each Lender by Borrower's Chief Financial Officer, as presenting fairly the financial position and results of operations of Borrower and its consolidated subsidiaries and as having been prepared in accordance with GAAP, and Form 10-K for Borrower (or, if Borrower is not a SEC-reporting company because of having been reorganized into a subsidiary of a holding company, then for such holding company) for such period; (c) within two Business Days after any officer of Borrower obtains knowledge of any Default, an Officer's Certificate specifying its nature, the period of its existence, and what action Borrower proposes to take with respect to it; and (d) promptly upon request, such other data or information (financial or otherwise) regarding Borrower or the Collateral as Agent from time to time reasonably requests. Section 6.02 -- Inspection of Collateral and Records. Borrower shall permit any person(s) from time to time designated in writing by Agent, at the Lenders' expense (or at Borrower's expense if a Default exists at the time), to visit and inspect any of the Collateral and Borrower's (or any Permitted Lessee's) records with respect to the Collateral, at such times as Agent reasonably requests, and to discuss Borrower's affairs, finances, and accounts with Borrower's officers. No such inspection shall unreasonably 21 26 interfere with Borrower's (or any Permitted Lessee's) operations or maintenance. Neither the Lenders nor Agent shall have any duty to make any such inspection, and the Lenders and Agent shall not incur any liability or obligation by reason of not making any such inspection. Upon Agent's request, Borrower shall promptly notify Agent of the maintenance operations then scheduled on the Aircraft for the six-month period following such request. Section 6.03 -- Corporate Existence. Except as permitted by section 6.04, Borrower shall maintain its corporate existence in good standing in the state of its incorporation and in all jurisdictions where qualification is then necessary (except in any jurisdiction in which the failure to qualify would have no materially adverse affect on its business or on its ability to carry out its obligations under the Basic Documents to which it is (or is to become) a party). Borrower shall preserve and renew its rights (charter and statutory), patents, and franchises, unless Borrower determines in good faith that the preservation thereof is no longer necessary or desirable in the conduct of its business and that the loss thereof will not adversely affect Agent's or the Lenders' rights or Borrower's business, assets, operations, condition (financial or otherwise). Section 6.04 -- Merger, etc. Without limiting the requirements regarding mandatory purchase of Certificates contained in section 4.04 hereof, Borrower shall not consolidate with or merge into any other corporation, or convey, transfer, or lease all or substantially all of its assets as an entirety to any Person, unless: (a) the corporation formed by such consolidation or the Person who acquires by conveyance, transfer, or lease all or substantially all of Borrower's assets as an entirety (the "Successor") (i) is a corporation organized and existing under the laws of the United States of America or any state or the District of Columbia, (ii) is a "citizen of the United States" as defined in section 101(16) of the Act, and (iii) is an air carrier (within the meaning of section 101(3) of the Act) certificated under section 604(b) of the Act; and, in the case of such a consolidation, conveyance, transfer or lease, the Successor, (x) executes and delivers to Agent and the Lenders an agreement, in form and substance satisfactory to Majority Lenders, containing an assumption by the Successor of the due and punctual performance and observance of Borrower's obligations under the Basic Documents to which Borrower is then a party, and (y) makes such filings and recordings, 22 27 including any filing or recording with the FAA pursuant to the Act or any filing under the UCC, as are necessary to evidence such consolidation, merger, conveyance, transfer, or lease with or to the Successor; (b) immediately after giving effect to such transaction,(i) no Default exists and (ii) Borrower's or the Successor's, as the case may be, business, assets, operations, condition (financial or otherwise), and financial and other ability to perform its obligations under the Basic Documents will not be adversely affected by such transaction in any material respect; and (c) Borrower or the Successor delivers to Agent and each Lender, promptly upon consummation of such transaction, an Officer's Certificate stating that the conditions precedent set forth in clause (a) have been compiled with an opinion of counsel for Borrower or for the Successor, in form and substance satisfactory to Majority Lenders, stating that the agreements entered into to effect such consolidation, merger, conveyance, transfer, or lease and such assumption agreements have been duly authorized, executed, and delivered by the Successor (or in the case of a merger, by Borrower) and that they (and the Basic Documents so assumed) constitute legal, valid, and binding obligations of the Successor (or in the case of a merger, or Borrower), enforceable in accordance with their terms (to the same extent as the Basic Documents so assumed were enforceable against Borrower immediately prior to such transaction); and that all conditions precedent which are legal in nature provided for in this Agreement and relating to such transaction have been fulfilled. Upon any such consolidation, conveyance, transfer, or lease, the Successor shall succeed to, shall be substituted for, and may exercise every right and power of Borrower under the Basic Documents to which Borrower is a party, with the same effect as if the Successor had been named as Borrower therein. No such conveyance, transfer, or lease of substantially all Borrower's assets as an entirety shall have the effect of releasing Borrower (or any Successor) from its liability under the Basic Documents to which it is a party. Nothing in this section shall permit any lease, sublease, or other arrangement for the use, operation, or possession of the Aircraft except in compliance with the applicable provisions of this Agreement and the Mortgage. Section 6.05 -- Citizenship and Air Carrier Status. Borrower will at all times remain a "citizen of the United States" 23 28 as defined in section 101(6) of the Act and an "air carrier" within the meaning of the Act. Section 6.06 -- Compliance with ERISA. (a) Borrower will, at all times, make prompt payment of contributions that it is required to make to any employee benefit plan to which it is a party as are necessary to meet the minimum funding standards for such an employee benefit plan, as required by ERISA. (b) Within two Business Day after the occurrence of any event or circumstance, including any event which is classified as a "Reportable Event" under ERISA, in connection with any employee benefit plan to which it is a party, that might constitute grounds for termination of an employee benefit plan to which Borrower is a party by the Pension Benefit Guaranty Corporation or might result in the appointment of a trustee by a United States District Court under section 4042 of ERISA to administer such employee benefit plan, Borrower will provide Agent and each Lender with an Officer's Certificate describing the event or circumstance, stating the reasons for any such action by the Pension Benefit Guaranty Corporation or a United States District Court, and specifying the action Borrower proposes to take with respect thereto. Section 6.07 -- Disposition of Assets. Borrower will not dispose of any its assets, other than in the ordinary course of its business, unless it receives full, fair, and reasonable consideration for such assets; and Borrower will not during any twelve-month period dispose of assets, other than in the ordinary course of its business, which have an aggregate book value in excess of $5,000,000; provided, that Borrower shall have the right to dispose of any aircraft for at least such aircraft's book value and such sale of an aircraft for at least book value will not be included in the calculation of the $5,000,000 of assets sold in a twelve-month period. The book value of an aircraft shall be determined in accordance with GAAP. For avoidance of doubt, the "ordinary course" of Borrower's business generally shall include (x) acquisitions or dispositions of marketable securities (other than acquisitions or dispositions exceeding 5% of any class of "equity security", as defined in the Securities Exchange Act of 1934) and (y) the disposition of parts of discontinued aircraft, engines, or propellers not constituting part of a program to reduce Borrower's fleet in any material respect. 24 29 Section 6.08 -- Performance of Delta Agreement. Borrower shall faithfully perform all obligations it has under the Delta Agreement. Section 6.09 -- Financial Covenants. Borrower shall not permit at any fiscal quarter end of Borrower on a consolidated basis (consolidating Borrower and its subsidiaries) for any reason (including a Lender's exercise of its rights under section 4.08): (a) Debt to TNW. its ratio of Indebtedness to Tangible Net Worth to exceed 3.5 to 1. "Tangible Net Worth" shall mean Book Net Worth minus (x) the amount, if any, of Borrower's and its subsidiaries' assets which would be treated as intangibles under generally accepted accounting principles, (y) any writeup in the book value of any fixed asset resulting from a revelation thereof, and (z) the amount, if any, at which shares of stock of Borrower appear on the asset side of the Borrower's balance sheet. "Book Net Worth" shall mean the book value of Borrower's and its subsidiaries' total assets located in the United States of America (exclusive of any indebtedness owed to Borrower or its subsidiaries by an affiliate of Borrower) minus Borrower's and its subsidiaries' total liabilities. For avoidance of doubt, the phrase "total assets located in the United States of America" shall include marketable securities and commercial paper issued by a foreign entity but held in the United States of America by Borrower or any of its subsidiaries. (b) Fixed Charge Coverage. its ratio of (i) Earnings Before Tax plus Interest Expense plus Depreciation and Amortization Expense plus Operating Lease Obligations to (ii) Interest Expense plus Current Maturities of Long-Term Debt plus Operating Lease Obligations, to be less than 1.4 to 1. (c) Minimum TNW. its Tangible Net Worth to be less than (i) $75 million for any fiscal quarter ending in 1992, (ii) $80 million for any fiscal quarter ending in 1993, (iii) $85 million for any fiscal quarter ending in 1994, and (iv) $90 million for any fiscal quarter ending in 1995 or after. (d) Current Ratio. its ratio of (i) current assets (determined in accordance with GAAP), other than amounts due from affiliates, to (ii) current liabilities (determined in accordance with GAAP), to be less than 1 to 1. Section 6.10 -- Certificate of No Default. Along with Borrower's delivery of the quarterly financial statements and 25 30 annual financial statements required by sections 6.01(a) and 6.01(b), Borrower shall furnish to each Lender a certificate of Borrower's Chief Financial Officer certifying that to the best of his or her knowledge no Default exists (or, if a Default does exist, a statement as to its nature and the action that Borrower proposes to take with respect to it). Section 6.11 -- Insurance on Fleet. Borrower will at all times maintain, with insurers of recognized responsibility, insurance on each aircraft in its fleet substantially similar (as to type, amounts, and risks covered) to the insurance Borrower is required to maintain on the Aircraft under the terms of sections 6.01 and 6.05 of the Mortgage, provided, that Borrower shall not be required to carry hull insurance for any aircraft (other than an Aircraft) that has a fair market value of less than $1,000,000. ARTICLE VII CONDITIONS PRECEDENT TO THE PURCHASE OF NOTES Section 7.01 -- Conditions Precedent to the Purchase of the Initial Note. Each Lender's obligation and Agent's obligation to purchase a Certificate or Note on the first Purchase Date are subject to the satisfaction of the following conditions precedent and Agent's receipt on or before such initial Purchase Date of the following, in form and substance satisfactory to Agent: (a) a certificate of Borrower's secretary, dated the Purchase Date, certifying attached copies of the resolutions of Borrower's board of directors evidencing approval of the transactions contemplated by the Basic Documents to which it is (or is to become) a party, and showing the names and specimen signature(s) (or copies thereof) of Borrower's officer(s) authorized to sign this Agreement and the related documents to which it is (or is to become) a party, (b) an executed Proex Agreement, (c) an executed Mortgage, (d) an executed Guarantee, (e) an Officer's Certificate certifying an attached copy of the Purchase Agreement, and (f) copies of the SEC Filings. 26 31 In addition, Borrower's obligation to close on the first Purchase Date is subject to its receipt of an executed letter agreement among Borrower, the Lenders, and Agent, in form and substance satisfactory to each, concerning sections 4.02(d)(i) and 6.05 of the Mortgage. Section 7.02 -- Conditions Precedent to the Purchase of All Notes. Each Lender's obligation and Agent's obligation to purchase each Certificate and Note (including each initial Certificate and the Initial Note) is subject to the additional conditions precedent that: (a) Agent shall have received the following, each dated as of the pertinent Purchase Date, in form and substance satisfactory to Agent: (1) the Note for the relevant Aircraft, executed by Borrower, (2) an executed Mortgage Supplement with respect to the relevant Aircraft, (3) an executed Purchase Agreement Assignment, with the related executed Consent, with respect to the relevant Aircraft, (4) an executed Proex Supplement with respect to the relevant Aircraft, (5) an Officer's Certificate to the effect that: (x) Borrower's representations and warranties in Article V of this Agreement and section 6 of the relevant Purchase Agreement Assignment are true and accurate as though made on the Purchase Date, and (y) no Default exists or will result from Agent's purchase of such Note, (6) a certificate of insurance describing the insurance maintained by Borrower with respect to the Aircraft being purchased, and stating that such insurance conforms to the requirements of the Mortgage, (7) an opinion from Borrower's counsel, substantially in the form of Exhibit F, (8) an opinion from Crowe & Dunlevy, special FAA counsel, substantially in the form of Exhibit G, covering 27 32 the Aircraft that is the subject of the Note being purchased, (9) an opinion of counsel to Embraer, substantially in the form of Exhibit H, (10) an opinion of Brazilian counsel, substantially in the form of Exhibit I, and (11) such additional opinion(s) (including, if requested, from Troutman, Sanders, Lockerman & Ashmore) and document(s) as Agent requests; (b) Agent shall have received copies of the necessary FAA Application for Aircraft Registration and FAA Bill of Sale pertaining to the Aircraft being purchased; (c) Borrower's representations and warranties in the Basic Documents shall be true and accurate as though made on and as of such Purchase Date, (d) no Default shall exist or shall result from Agent's purchase of such Note; (e) all filings, recordings, and other actions necessary to establish, protect, preserve, and perfect Agent's and the Lenders' interests under the Mortgage shall have been duly made or taken; (f) all necessary consents, approvals, licenses, permits, declarations, or registrations then required in connection with the execution, delivery, performance, validity, and enforceability of the Basic Documents and the transactions contemplated thereby shall have been obtained; (g) Agent shall have received a copy of the approval of the application for coverage of the Purchase of the Aircraft by the Proex Program; (h)in Agent's reasonable judgment, since December 31, 1991, no Materially Adverse Change shall have occurred; (i) each Lender shall have made available the amount of its Participation Percentage of the Financed Amount for the relevant Aircraft in accordance with Article II hereof; and 28 33 (j) each Lender shall have received (c/o Troutman, Sanders, Lockerman & Ashmore) the following, each dated as of the pertinent Purchase Date, in form and substance reasonably satisfactory to each Lender: (1) the Certificate issuable to it with respect to the relevant Aircraft, duly executed by Agent, and (2) an executed copy of each document referred to in section 7.02(a)(2) through (10). ARTICLE VIII EVENTS OF DEFAULT; REMEDIES Section 8.01 -- Events of Default. Each of the following shall constitute an "Event of Default": (a) Borrower fails to make any payment due from Borrower on any Note or under any other Basic Document (including any on any Note or under any other Basic Document (including any amount due under section 4.04 hereof) when due, and such failure continues for five Business Days after Borrower's receipt of notice of such failure from Agent or any Lender; (b) any representation or warranty made by Borrower in the Basic Documents, or in any certificate or other document that is furnishes pursuant to the Basic Documents, proves to have been incorrect in any material respect when made; (c) Borrower fails to maintain the insurance required by the terms of the Mortgage; (d) the Delta Agreement is voluntarily terminated by Borrower, or is amended so as to have a Materially Adverse Effect on Borrower (this Event of Default being separate and distinct from and not affecting the Prepayment Event relating to the Delta Agreement described in clause (f) of the definition of "Prepayment Event"); (e) Borrower fails to provide Agent and each Lender with the Officer's Certificate required by section 6.01(c) or 6.06(b) within 10 days after any of Borrower's officers obtains notice of a Default or the ERISA-related event or circumstance occurs, respectively; 29 34 (f) Borrower fails in any material respect to perform any other covenant or agreement in the Basic Documents (including section 6.09 hereof), and (if remediable) such failure to perform continues for 30 days after Borrower's receipt of notice of such default from Agent or any Lender; (g) Borrower (1) applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of all or a majority of its property, (2) makes a general assignment for the benefit of its creditors, (3) commences a voluntary case under the federal Bankruptcy Code (as now or hereafter in effect), (4) files a petition seeking to take advantage (as debtor) of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, or (5) fails to controvert in a timely manner, or acquiesces in writing to, any petition filed against it in an involuntary case under the federal Bankruptcy Code; (h) a proceeding or case is commenced, without Borrower's application or consent, in any court of competent jurisdiction, seeking (1) its liquidation, reorganization, dissolution, or winding-up, or the composition or readjustment of its debts, (2) the appointment of a trustee, receiver, custodian, liquidator, or the like of Borrower or of all or a majority of its assets, or (3) similar relief in respect of Borrower under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case continues undismissed, or an order, judgment, or decree approving or ordering any of the foregoing is entered and continues unstayed and in effect, for a period of 60 days; or an order for relief against Borrower is entered in an involuntary case under the federal Bankruptcy Code; (i) loan, lease, or deferred purchase obligations of Borrower totalling more than $1 million are in default after the expiration of any applicable grace period, if the effect of such default is to permit such obligations to be accelerated or otherwise declared to be due and payable prior to their stated maturity, or Borrower defaults in the payment when due of more than $1 million of loan, lease, or deferred purchase obligations, or Borrower defaults in the payment of any amount when due under the terms of any financing with any Lender, provided such financing was, at any time, for an amount in excess of $1 million; 30 35 (j) one or more judgment(s) is/are rendered by one or more court(s) of competent jurisdiction against Borrower for a total of more than $1 million and is/are not stayed or discharged, or fully bonded against, within 60 days of the date of entry; (k) any "Reportable Event" under ERISA shall have occurred, or any finding or determination shall be made with respect to an employee benefit plan to which Borrower is a party under section 4041(c) or (e) of ERISA, or any fact or circumstance shall occur with respect to an employee benefit plan to which Borrower is a party, that, in the opinion of Majority Lenders, provides grounds for the commencement of any proceeding under section 4042 of ERISA, or any proceeding shall be commenced under section 4042 of ERISA with respect to an employee benefit plan to which Borrower is a party; or (l) Borrower shall deny any further liability under any Note or under any other Basic Document. Section 8.02 -- Remedies. If an Event of Default (other than under section 8.01 (g) or (h)) exists, Agent may (and upon its receipt of written request by Majority Lenders shall) declare all Notes to be immediately due and payable, whereupon all Notes shall become and be immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which Borrower hereby waives, and all Commitments shall terminate. If an Event of Default under section 8.01(g) or (h) occurs, all Notes automatically shall become immediately due and payable and all Commitments automatically shall immediately terminate, without presentment, demand, protest, or notice of any kind, all of which Borrower hereby waives. Upon the occurrence of any Event of Default, Agent may (and upon its receipt of written request by Majority Lenders shall) exercise any of its rights and remedies under the Basic Documents, including the Mortgage. ARTICLE IX BORROWER'S INDEMNITIES Section 9.01 -- General Indemnity. Borrower assumes liability for, and agrees to indemnify each Indemnitee against, and on written demand to pay, or to reimburse each Indemnitee for the payment of, any and all Liabilities. "Liabilities" means any and all liabilities, obligations, losses, damages, penalties, claims (including claims involving 31 36 strict liability in tort), suits, actions, costs, expenses, and disbursements, including legal fees and expenses, of whatsoever kind and nature imposed on, incurred by, or asserted against any Indemnitee relating to or arising out of any Basic Document, the enforcement against Borrower of any of the terms of the Basic Documents, or any lease or relinquishment of possession of the Aircraft or any part thereof or any action or inaction of Borrower or of any lessee, assignee, or transferee of Borrower in connection therewith, the purchase of the Aircraft and the Spare Parts under the Purchase Agreement, the ownership of the Aircraft, the acquisition, delivery, nondelivery, acceptance, nonacceptance, rejection, registration, deregistration, insuring, storage, manufacture, assembly, transportation, importation, exportation, maintenance, condition, modification, testing, repair, fitness for use, merchantability, sale, abandonment, lease, sublease, assignment, transfer, transfer of title, possession, repossession, use, operation, return, or other application or disposition of the Aircraft and the Spare Parts or any component thereof, the condition upon return thereof after repossession following the occurrence of an Event of Default or following the exercise of remedies under the Mortgage, including latent or other defects, whether or not discoverable, loss of or damage to any property or the environment, death or injury of any person, and any claim for patent, trademark, copyright, or mask work infringement and the violation or infringement by Borrower of any laws, rules, or regulations, or (without limiting any of the foregoing) any breach by Borrower of, noncompliance by Borrower with, or misrepresentation made or deemed made by or on behalf of Borrower in, under, or in connection with the Purchase Agreement or any Purchase Agreement Assignment or any warranty, certificate, or agreement made or delivered in, under, or in connection with the Purchase Agreement or any Purchase Agreement Assignment. Without limiting the generality of the foregoing, "Liabilities" shall in any event include any and all losses, damages (including all foreseeable and unforeseeable consequential damages), costs, claims, liabilities, penalties, fees, injuries, or expenses of whatever kind or nature (including reasonable counsel fees and costs) that an Indemnitee sustains or incurs in connection with: any Environmental Complaint, any Hazardous Substance release, disposal, recycling, storage, handling, treatment or exposure, or any environmental clean-up (including any remedial, removal, or response action) in connection with or relating to (i) any property that Borrower or any of its affiliates now or in the past or future shall own, operate or use, or (ii) any operations of Borrower or 32 37 any of its affiliates, whether such operations took place before or after the date of this Agreement. However, this section 9.01 shall not require Borrower to pay or indemnify any Indemnitee under this section (i) for any Liability to the extent resulting from such Indemnitee's acts of gross negligence or willful misconduct; (ii) for any Taxes (Borrower's duties in respect of Taxes being set forth in section 9.02) or for any cost or expense relating to the preparation, execution, delivery, or enforcement of the Basic Documents (Borrower's duties in respect of such costs and expenses being set forth in section 13.03); (iii) for any Liability that such Indemnitee incurs to the extent resulting from its breach of any of its representations, warranties, or covenants in any Basic Document; (iv) for any Liability to the extent resulting from a claim against such Indemnitee not related to (x) any Equipment Portion, (y) any action or inaction of Borrower or any lessee, assignee, or transferee of Borrower, or (z) any of the transactions contemplated by the Basic Documents; (v) for any Liability with respect to transfer taxes or other expenses payable with respect to the transfer of any Note or any Certificate, other than a transfer after the occurrence of an Event of Default; or (vi) for any violation or purported violation of any law relating to usury or the charging or collecting of excess interest or finance charges. If any Indemnitee obtains knowledge of any claim or liability required to be indemnified against under this section 9.01, such Indemnitee shall promptly notify Borrower, but the failure to do so shall not relieve Borrower from any liability that it otherwise would have to such Indemnitee under this section. Upon an Indemnitee's request, the defense of any Liability for which Borrower would be required to indemnify such Indemnitee hereunder shall be conducted by Borrower, with counsel selected by Borrower and satisfactory to Lender. However, if the defense of any such Liability is conducted by Agent or any Lender, Agent or such Lender shall select the counsel to conduct it, but shall consult with Borrower as to such selection; provided, that the decision as to which counsel to select shall be and remain Agent or such Lender's. Borrower shall be obligated under this section 9.01 irrespective of whether the Indemnitee is also indemnified with respect to the same matter under any other Basic Document or other document by any other Person, and the Indemnitee may proceed directly against Borrower under this section 9.01 without first resorting to any such rights of indemnification. Upon the payment in full of any indemnities due and owing under this section 9.01, Borrower shall be subrogated to any right of the Indemnitee in respect of the matter against which indemnity has been given. 33 38 Borrower's indemnities in this section shall survive expiration or termination of the Mortgage and payment in full of the Notes. Any payment or indemnity pursuant to this section 9.01 shall include the amount, if any, necessary to hold the Indemnitee harmless on an after-tax basis from all taxes required to be paid by such recipient with respect to such payment or indemnity under laws of any federal, state, or local government or taxing authority in the United States or by any foreign government or any political subdivision or taxing authority thereof. The amount of any payment or indemnity required under this section shall be determined by the Indemnitee reasonably and in good faith, and that determination shall be conclusive. Upon Borrower's request and at Borrower's expense, the Indemnitee will provide Borrower with a summary explanation of the basis for the Indemnitee's computations. Section 9.02 -- Taxes. (a) Indemnity. Except as provided in section 9.02(b), Borrower agrees to indemnify each Indemnitee against, and on written demand to pay or reimburse each Indemnitee for the payment of, any and all Taxes imposed upon or asserted against any Indemnitee, any Equipment Portion or any part thereof or interest therein, any Basic Document, any lease of any Aircraft or any part thereof, or the rentals received under such a lease, by any federal, state, or local government or other taxing authority in the United States (including any territory or possession of the United States) or by any foreign government or any political subdivision or taxing authority thereof where any part of an Equipment Portion is located, used, or registered ("Taxing Authorities") upon or with respect to (1) the construction, mortgaging, financing, refinancing by or at the request of Borrower, purchase, acquisition, acceptance, nonacceptance, rejection, delivery, nondelivery, transport, insuring, ownership, registration, deregistration, assembly, possession, repossession, operation, use, condition, maintenance, modification, repair, fitness for use, merchantability, testing, return, abandonment, storage, manufacture, leasing, subleasing, importation, exportation, sale, assignment, transfer, transfer of title, or other application or disposition of, or the imposition of any Lien (other than a Permitted Lien) or the incurrence of any liability to refund or pay over any amount as a result of any Lien (other than a Permitted Lien) on any Equipment Portion or any part thereof or interest therein, (2) any amount paid or payable by Borrower or Proex Bank under the Basic Documents or the receipts or earnings arising from or received with respect to any Equipment Portion or any part thereof or interest therein, (3) any Equipment Portion or any part thereof or interest therein, (4) any of the Basic 34 39 Documents and any other documents contemplated thereby or the execution, sale, delivery, acquisition, or filing of the Basic Documents, or (5) otherwise with respect to or in connection with the transactions effected under the Basic Documents. The term "Taxes" shall mean any and all fees, taxes, levies, imposts, duties, charges, assessments, or withholdings of any nature whatsoever, together with any and all penalties, fines, additions to tax, and interest thereon or computed by reference thereto. (b) Exclusions from Indemnity. The provisions of section 9.02(a) shall not apply to: (1) any Tax based on, or measured by, net income, capital, franchise, or net worth (other than sales taxes), including related surcharges and withholding taxes, or any withholding taxes on an Indemnitee's gross income, to the extent that such withholding taxes are imposed solely because that Indemnitee has a place of business outside the United States or holds its Certificates(s) outside the United States; provided, that the provisions of this clause (b)(1) shall not apply to any Taxes imposed in respect of the receipt or accrual of any indemnity payment made or payable pursuant to this section 9.02; (2) any tax based on or measured by the value of such Indemnitee's interest in any Basic Document, except to the extent imposed without regard to the presence of the Indemnitee, or any Note, in the jurisdiction of the Taxing Authority imposing that Tax; (3) any Tax imposed on the Indemnitee as a result of a transfer or other disposition, by such Indemnitee or any of its predecessors in interest, of any interest in the Aircraft or any Basic Document, unless such transfer or disposition occurs after the occurrence of an Event of Default; or (4) any Tax in the nature of a penalty, an addition to tax, interest, or fines resulting from the negligence or misconduct of the Indemnitee in connection with the preparation or filing of (or failure to prepare or file) tax returns, or the payment of or the failure to pay its taxes, but in each case not if in any way attributable to Borrower's failure to notify such Indemnitee of its obligations to prepare and file its returns in respect of Taxes indemnified pursuant to this section 9.02 or to provide any information necessary for the preparation or filing of such returns or the 35 40 conduct of such proceedings or otherwise to perform its duties and responsibilities pursuant to the Basic Documents. (c) Calculation of General Tax Indemnity Payments. Any payment which Borrower is required to make to or for the account of any Indemnitee with respect to any Tax which is subject to indemnification under this section 9.02 shall be made on a net basis, taking into account offsetting credits or deductions available to such Indemnitee as a result of the payment of such Tax, and shall include the amount necessary to hold such Indemnitee harmless on an after-tax basis from the net amount of all Taxes required to be paid by such Indemnitee as the result of such payment (including any Taxes imposed on such indemnity payment) pursuant to the laws of any Taxing Authority. The amount of any payment or indemnity required under this section shall be determined by the Indemnitee reasonably and in good faith, and that determination shall be conclusive. Upon Borrower's request and at Borrower's expense, the Indemnitee will provide Borrower with a summary explanation of the basis for the Indemnitee's computations. (d) Reports. Borrower shall timely file any report, return, or statement required to be filed with respect to any Tax which is subject to indemnification under this section 9.02, except for any such report, return, or statement which an Indemnitee has notified Borrower that it intends to file. Borrower shall file such report, return, or statement and send a copy to Agent and each Indemnitee affected by such report, return, or statement. Each Indemnitee shall promptly forward to Borrower any notice, bill, or advice received by it concerning any Tax. Section 9.03 -- Survival. The requirements in this Article IX shall survive termination of this Agreement and the other Basic Documents and the payment of the Notes and the Certificates. Article X YIELD PROTECTION; ILLEGALITY Section 10.01 -- Additional Costs. (a) Borrower shall pay directly to each Lender from time to time such amounts as are necessary to compensate such Lender, on an after-tax basis, for any costs which are attributable to its purchase of or obligation to purchase any Certificates hereunder, 36 41 or any reduction in any amount receivable by such Lender in respect of any of such Certificates or such obligation (excluding payments under the Proex Agreement), resulting from any Regulatory Change which imposes or modifies any reserve, special deposit, minimum capital, capital ratio, or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender, or the manner in which such Lender funds (or allocates funds, on its books, for) its investments in any of the Certificates. (b) Determinations and allocations by any Lender for purposes of this section 10.01 of the effect of any Regulatory Change pursuant to section 10.01(a) on such Lender's costs or rate of return of maintaining or its obligations to purchase any Certificate, or on amounts receivable by it in respect of any Certificate, and of amounts required to compensate such Lender under this section 10.01, shall be made by such Lender reasonably and in good faith and shall be conclusive. Upon Borrower's request and at Borrower's expense, such Lender will provide Borrower with a summary explanation of the basis for such Lender's computations. Section 10.02 -- Breakage Costs. Borrower shall pay to each Lender, upon such Lender's request, such amount as is sufficient, in such Lender's opinion, to compensate it for any loss, cost, or expense which is attributable to: (a) any payment, purchase, or conversion of any Note or Certificate in which such Lender has any interest for any reason (including the acceleration of the maturity of the Notes pursuant to section 8.02, the prepayment of a Note pursuant to section 4.03, and the mandatory purchase of Certificates pursuant to section 4.04 or 10.03, but excluding any other transfer of a Certificate by any Lender) on a date other than an Interest Payment Date; or (b) any failure by Agent (because of a nonsatisfaction of any of the conditions precedent specified n Article VII) to purchase a Note on a putative Purchase Date specified by Borrower to Agent; or (c) any failure by Borrower to purchase or cause the purchase of any Lender's Certificates that Borrower is required to purchase or cause the purchase of under section 4.08, whether such purchase is scheduled for a Call Date or for another date. Such amount payable by Borrower (x) shall not include losses, costs, or expenses attributable to any date more than 180 days after the date of such payment, purchase, or conversion or such Purchase Date, and (y) shall be determined by the affected Lender 37 42 reasonably and in good faith, which determination shall be conclusive. Upon Borrower's request and at Borrower's expense, such affected Lender will provide Borrower with a summary explanation of the basis for such Lender's computations. Section 10.03 -- Illegality. If at any time, any change in any applicable state, federal or Japanese law or in any interpretation or administration thereof by any governmental authority, central bank, or comparable agency in the United States or Japan charged with the interpretation or administration thereof, or any reversal by any such entity of an interpretation thereof by any Lender or any compliance by any Lender with any official request or directive in respect of or constituting such a change (whether or not having the force of law) of any such entity, shall make it unlawful or contrary to such interpretation or administration for any Lender to make, fund, maintain or hold its Certificate(s) in the method described herein or to give effect to all or any part of its obligations with respect thereto under this Agreement or any of the other Basic Documents (each such event being an "Illegality Event"), then such Lender shall promptly notify Borrower thereof in writing, and Borrower shall purchase or cause a Person to purchase such Lender's Certificates for an amount determined in accordance with section 4.04, on or prior to the earlier of (i) the Business Day immediately prior to the last day such Lender is allowed to take corrective action with respect to such Illegality Event, or (ii) the first Interest Payment Date to occur at least 60 days after the date of notice of the Illegality Event has been sent to the Borrower by such Lender. Article XI AGENT Section 11.01 -- Appointment; Powers and Indemnities; Compensation. (a) Each Lender hereby irrevocably appoints and authorizes Agent to act as agent hereunder and in respect of the other Basic Documents, with the power to execute and deliver this Agreement and the other Basic Documents to which it is to be a party, including the Certificates, and any other agreements, instruments, or documents (including UCC-1 financing statements) in which Agent is shown as a party in the forms delivered from time to time by the Lenders to Agent for execution and delivery and, subject to the terms of this Agreement, to exercise its rights and perform its duties under such documents in accordance with their terms, and with such other powers as are reasonably incidental thereto. 38 43 Except with respect to any representation, warranty, or covenant expressly made by Agent in any Basic Document, Agent shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not, by reason of this Agreement or any other Basic Document, be a trustee for any Lender. Agent shall not be responsible to any Lender (or to any other party) for any recitals, statements, representations, or warranties contained in this Agreement or any other Basic Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Basic Document, or for the value, validity, effectiveness, genuineness, enforceability, or sufficiency of this Agreement or any other Basic Document, or any other document referred to or provided for herein or therein or for any failure by Borrower or any third party to perform any of its obligations hereunder or thereunder. Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither Agent nor any of its directors, officers, employees, or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or under any other Basic Document, or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. (b) Agent shall not be obligated to take any action or refrain from taking any action under any Basic Document that might in its reasonable judgment involve it in any expense or liability unless it is indemnified, in form and substance satisfactory to Agent, which indemnity may be furnished by any Lender. (c) Agent shall not have any duty or obligation to manage, control, use, operate, store, lease, sell, dispose of, or otherwise deal with the Aircraft or part of the Collateral, or otherwise to take or refrain from taking any action under, or in connection with, any Basic Document to which Agent is a party, except as expressly provided by the terms hereof or any other Basic Document, or as specified in written instructions from Majority Lenders. Section 11.02 -- Reliance by Agent. Agent may rely upon, and shall not be bound or obligated to make any investigation into the facts or matters stated in, any certificate, notice, or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been made, signed, or sent by or on behalf of the proper Person or 39 44 Persons, and upon advice and statements of outside legal counsel, independent accountants, and other experts selected by Agent, (and Agent shall not be liable for anything that it does, offers, or omits in good faith in accordance with the advice or opinion of any such counsel, accountants, or experts within such Person's or Persons' particular area of competence, provided that Agent has exercised due care in selecting such counsel, accountants, or other experts). As to any matters not expressly provided for by this Agreement, Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by Majority Lenders and such instructions of Majority Lenders and any action taken or failure to act pursuant thereto shall be binding on all Lenders. Section 11.03 -- Defaults. Agent shall not be deemed to have knowledge of the occurrence of a Default unless Agent has received actual written notice from a Lender or from Borrower, specifying such Default and stating that such notice is a "Notice of Default". If Agent receives actual notice of the occurrence of a Default, Agent shall give prompt notice thereof to each Lender and to Borrower. Agent shall (subject to section 11.07) take action with respect to such Default as directed by Majority Lenders; provided, that, unless and until Agent receives such directions, Agent may take such action, or refrain from taking such action, with respect to such Default as it deems advisable in the best interest of the Lenders. Section 11.04 -- Rights as a Lender. With respect to its Commitment and the loans made by it, Wachovia, in its capacity as a Lender hereunder, shall have the same rights, powers, and obligations hereunder as any other Lender and may exercise the same as though it were not acting as Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise requires, include Wachovia in its individual capacity. Wachovia and its affiliates may (without having to account therefor to any Lender) accept deposits from, lend money (on a secured or unsecured basis) to, and generally engage in any kind of banking, trust, or other business with Borrower, and any of Borrower's affiliates, as if Wachovia were not acting as agent hereunder, and Wachovia may accept fees and other consideration from Borrower or any of its affiliates for services in connection with other loan agreements or otherwise without having to account for same to any Lender. Section 11.05 -- Indemnification. Each Lender shall indemnify Agent (to the extent not reimbursed under Article IX hereof but without limiting the obligations under Article IX), ratably in accordance with the aggregate principal amount of the 40 45 Certificates held by such Lender, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind and nature whatsoever that may be imposed on, incurred by, or asserted against Agent in any way relating to or arising out of this Agreement or any other document contemplated by or referred to herein or the transactions contemplated hereby or the enforcement of any of the terms hereof or of any such other documents; provided, that no Lender shall be liable for any of the foregoing to the extent they arise from Agent's gross negligence or willful misconduct. Section 11.06 -- Nonreliance on Agent or Lenders. Each Lender agrees that it has, independently and without reliance on Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis of Borrower and its own decision to become a lender under the Basic Documents and that such Lender will, independently and without reliance upon Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking action under this Agreement and the Basic Documents to which it is a party. Agent shall not be required to keep itself informed as to the performance or observance by Borrower of any other document referred to (directly or indirectly) or provided for herein or therein or to inspect the properties or books of any such entity. Except for notices, reports, and other documents and information expressly required to be furnished to the Lenders by Agent hereunder, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition, or business of Borrower or any of its affiliates that may come into the possession of Agent or any of its affiliates. Except as otherwise specifically required herein, Agent shall not be required to forward to the Lenders any notices, reports, or other documents and information otherwise required to be forwarded to the Lenders by any other party to the Basic Documents. Section 11.07 -- Failure to Act. Except for action expressly required of Agent hereunder, Agent shall in all cases be fully justified in failing or refusing to act unless it is indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Section 11.08 -- Resignation of Agent; Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time (and, if Wachovia is acting as Agent at a time when Wachovia has disposed of all its 41 46 Certificates, shall promptly resign) by giving notice thereof to the Lenders and Borrowers, provided, that Agent shall not, at the time of such resignation, take any actions to impair the rights or obligations of any party to the Proex Agreement. Upon any such resignation, Majority Lenders shall have the right to appoint a successor Agent, who shall be either an affiliate of Wachovia or a Person reasonably acceptable to Borrower, and who shall be a bank having a combined capital, surplus, and undivided profits of not less than $100,000,000 and having its principal office in the United States of America. If, within 30 calendar days after the retiring Agent's giving of notice of resignation, a successor Agent is not so appointed or does not accept such appointment, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, who shall be either an affiliate of Wachovia or a Person reasonably acceptable to Borrower and who shall be a bank having combined capital, surplus, and undivided profits of not less than $100,000,000 and having its principal office in the United States of America. Upon the acceptance of any appointment as agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges, and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder. If no Person meeting the foregoing qualifications is willing to accept such appointment, any Lender or Agent may apply to a court of competent jurisdiction to appoint such a successor or to relieve Agent of its duties as agent hereunder. Section 11.09 -- Investment of Funds. (a) Except as otherwise provided in section 7.03 of the Mortgage, any money held by Agent hereunder as part of the Collateral shall, until paid out by Agent as herein provided, be held by Agent in a collateral account for the purposes for which held, and Agent shall not have any liability for interest upon any such money, and such money need not be invested or reinvested except as provided in section 11.09(b) below. (b) Any amounts held by Agent pursuant to this section 11.09 shall be invested by Agent from time to time (unless the costs of the investment would exceed the gains reasonably anticipated therefrom) in obligations of, or fully secured by, the United States government maturing in not more than 30 calendar days; provided, that if Majority Lenders so request of Agent in writing and no Default exists, Agent shall invest such amounts in (i) marketable direct obligations of the United States of America or marketable obligations directly guaranteed by the United States of America maturing, in each case, not later than 30 days from the 42 47 date of acquisition thereof, (ii) repurchase obligations maturing not later than 30 days from the date of acquisition thereof, collateralized by obligations of the nature referred to in clause (i) of this paragraph issued by any Lender, or any other commercial bank organized and existing under the laws of the United States of America or any state thereof, in either case having combined capital, surplus, and undivided profits of not less than $100,000,000, if Agent holds such obligations, or has written evidence from the holder of such obligations, that such obligations are held by a Federal Reserve bank or a commercial bank with combined capital, surplus, and undivided profits of no less than $100,000,000 and a perfected security interest under the Uniform Commercial Code, or book entry procedures prescribed at 31 C.F.R. 306.1 et seq. or 31 C.F.R. 305.0 et seq. in such obligations, is created for the benefit of Agent; (iii) certificates of deposit and bankers' acceptances issued by any Lender, or by any commercial bank organized and existing under the laws of the United States of America or any state thereof, in either case having combined capital, surplus, and undivided profits of not less than $100,000,000, or commercial paper (other than any issued by Borrower, any Lender, or an affiliate of either) rated A-1 by Standard & Poor's Corporation, Inc. and P-1 by Moody's Investors Services, Inc., if (in any such case specified above in this proviso) Agent receives a written agreement of Majority Lenders satisfactory to Agent that Majority Lenders will be liable for and will pay to Agent on demand an amount equal to any expense or loss (including any loss on such investment after taking into account any gain) incurred in connection with any investment of funds pursuant to this proviso; and provided, further, that so long as a Default exists, Agent may invest such amounts only in investments described in clause (i) of this section 11.09. Agent shall have no liability for any loss resulting from any such investment. Agent may sell any such investment (without regard to maturity date) whenever necessary to make any distribution required by any provisions of Article XII. Except as otherwise provided in section 7.03 of the Mortgage, Agent shall hold and apply any income realized as a result of any investment pursuant to this section 11.09 in the same manner as the payments held by Agent pursuant to Article XII. Section 11.10 -- Representations and Warranties. (a) Neither any Lender nor Agent makes any representation or warranty as to the sufficiency, validity, legality, or enforceability of any Basic Document, or as to the correctness of any statement contained in any thereof, except as expressly set forth in this Agreement. Neither any Lender nor Agent makes any representation as to the value or condition of the Collateral or 43 48 any part thereof, or as to the title thereto or as to the security afforded thereby or hereby, or as to the validity or genuineness of any security at any time pledged and deposited with Agent hereunder. (b) Wachovia represents and warrants that: (1) neither Agent nor anyone authorized to act on its behalf has directly or indirectly offered any beneficial interest or security interest relating to any Aircraft or any interest in any Note or Certificate for sale to, or solicited any offer to acquire any such interest or security from, any Persons other than the Lenders in such a manner as to require any of the Notes, Certificates, or documents signifying security interests to be registered under the Securities Act of 1933, as amended, or any state securities law; provided, that the foregoing shall not be deemed to impose responsibility with respect to any such offer, sale, or solicitation by any other Person; (2) it is a national banking association duly organized, validly existing, and in good standing under the laws of the United States, and has all corporate power, authority, and legal right under the laws of the United States to execute, deliver, and carry out the terms of each of the Basic Documents to which Agent is a party; (3) Agent has duly authorized, executed, and delivered this Agreement and the other Basic Documents to which it is a party; (4) it is a "citizen of the United States" within the meaning of section 101(16) of the Act and will, subject to the provisions of this Agreement, resign as agent hereunder promptly after an officer having direct responsibility for administering this Agreement obtains actual knowledge that it has ceased to be such a citizen; (5) Agent's execution and delivery, of this Agreement and each other Basic Document to which it is a party will not result in any violation of, or be in conflict with, or constitute a default under, any of the provisions of its charter or by-laws, or of any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, lease, note or bond purchase agreement, license, bank loan, credit agreement, or other agreement to which it is a party or by which it is bound, or any law, judgment, governmental rule, regulation, or order of any federal government or governmental authority or agency governing the banking or trust powers of Agent; and 44 49 (6) neither Agent's execution and delivery of this Agreement or the Basic Documents to which it is a party, nor Agent's consummation of any of the transactions contemplated thereby, requires the consent or approval of, giving of notice to, or registration with any federal governmental authority or agency pursuant to any federal governmental law governing the banking of trust powers of Agent. Section 11.11 - No Claims Against Agent, etc. Nothing contained in this Agreement shall constitute any consent or request by Agent or any Lender, express or implied, for the performance of any labor or services or the furnishing of any materials or other property, nor be deemed to give Borrower any right, power, or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Agent or the Lenders in respect thereof or any claim that any Lien (other than any Permitted Lien that is not a Lien resulting from an action of Agent or a Lender for which neither Agent nor any Lender is entitled to be indemnified under any Basic Document) based on the performance of any such labor or services or the furnishing of any such materials or other property is prior to the Lien of the Mortgage, except as expressly permitted in the Basic Document; provided, that if any such claim is made against Agent or any Lender, Borrower shall obtain the release of such claim within 30 calendar days after the claim is made. Section 11.12 -- Form of Certificates; Issuance, Transfer, and Exchange of Certificates. (a) Authorization. The Lenders hereby authorize and direct Agent to do the following, and Agent agrees for the benefit of the Lenders that Agent will do the following, on the Purchase Date for each Aircraft, subject to due compliance with the terms of paragraph (b) below: (1) to the extent received by Agent from the Lenders, transfer the Financed Amount for such Aircraft to Proex Bank for it to retransfer to Vendor on Borrower's behalf; (2) upon receipt of each Lender's Commitment for such Aircraft, issue to Wachovia a Certificate in the full amount of Wachovia's Commitment for such Aircraft and issue to Bank of Tokyo a Certificate in the full amount of Bank of Tokyo's Commitment for such Aircraft; and 45 50 (3) execute and deliver all such other instruments, documents, or certificates, and take all such other actions in accordance with the directions of Majority Lenders, as Majority Lenders deem necessary or advisable in connection with the transactions contemplated hereby, such execution and delivery or the taking of any such action by Agent in the presence of Majority Lenders to evidence, conclusively, the direction of Majority Lenders. (b) Conditions Precedent. Agent's right and obligation to take the actions required by paragraph (a) on the Purchase Date shall be subject to each Lender's having made the full amount of its Commitment available to Agent in immediately available funds in accordance with sections 2.01 and 2.02 and Annex A of this Agreement, and to the satisfaction or waiver of the conditions set forth or referred to in section 2.02 and Annex A of this Agreement. (c) Form of Certificates. Each Certificate shall be substantially in the form of Exhibit K. Interest and principal on each Certificate shall be payable by Agent, upon receipt of the corresponding amounts from Borrower, as set forth in such Certificates. (d) Terms of the Certificates. In connection with each Aircraft, Agent shall issue to each Lender a Certificate in a principal amount equal to its Commitment for that Aircraft, bearing interest at the Borrower Interest Rate, designated as having been issued in connection with that Aircraft, and otherwise in the form of Exhibit K. (e) Lost or Damaged Certificate. If any Certificate becomes mutilated, defaced, lost, stolen, or destroyed, then on the terms set forth in this section (and not otherwise), and upon the written request of the holder thereof, Agent shall execute and deliver a new Certificate of the same series, principal amount, and terms as the mutilated, defaced, lost, stolen, or destroyed Certificate, in exchange and substitution for and upon cancellation of the mutilated or defaced Certificate, or in lieu of and in substitution for the lost, stolen, or destroyed Certificate. The applicant for a new Certificate shall furnish to Agent evidence to Agent's reasonable satisfaction of the loss, theft, or destruction of such Certificate alleged to have been lost, stolen, or destroyed, and of the ownership and authenticity of such mutilated, defaced, lost, stolen, or destroyed Certificate, and also such security and indemnity as Agent reasonably requires (provided, that the written undertaking of one of the original Lenders, or any other institutional holder of a Certificate having a net worth (or in the 46 51 case of a bank, having combined capital, surplus, and undivided profits) of at least $50,000,000 shall be sufficient security and indemnity), and shall pay all expenses and charges of such substitution or exchange. All Certificates shall be issued, held, and owned upon the express condition that the foregoing provisions are exclusive in respect of the replacement of mutilated, defaced, lost, stolen, or destroyed Certificates and shall preclude (to the extent lawful) any and all other rights and remedies, any present or future law or statute to the contrary notwithstanding. Section 11.13 -- Action Upon Written Instructions. Subject to the terms of sections 11.03, 11.14, and 11.15, upon the written instructions at any time and from time to time of Majority Lenders, Agent will take such actions as are specified in such instructions, including the following actions: (1) give such notice or direction or exercise such right, remedy, or power hereunder or under any of the Basic Documents to which Agent is a party, or in respect of all or any part of the Collateral, or take such other action as is specified in such instructions; (ii) take such action to preserve or protect the Collateral (including the discharge of any Liens) as is specified in such instructions; and (iii) approve as satisfactory to it all matters required by the terms of the Basic Documents to be satisfactory to Agent, it being understood that, except as otherwise provided in section 11.03 or in the last sentence of this section 11.13, without written instructions of Majority Lenders, Agent shall not approve any such matter as satisfactory to it. Upon the written instructions of Majority Lenders, Agent will execute and file any financing statement (and any continuation statement with respect to any such financing statement) or similar document relating to the security interests and assignments created by the Basic Documents as is specified in such instructions and accompanies such instructions (and Agent shall have no duty to execute or file any financing statement, continuation statement, or any other documents of the type referred to in this sentence unless it receives such written instructions and an execution form of such statement or document). If Agent is unsure of the application of any provision of this Agreement or any other agreement relating to the transactions contemplated hereby, Agent may request and rely upon instructions of Majority Lenders within 20 days after the date of such request, until instructed otherwise Agent may, but shall be under no duty to, take or refrain from taking such action as it deems advisable in the best interests of Majority Lenders. Section 11.14 -- Expenses. 47 52 (a) Expenses After Default. While an Event of Default exists, Agent shall not be under any obligation to take any action under any of the Basic Documents (including action under section 11.15) if Agent reasonably determines, or is advised by independent counsel, that such action is contrary to the terms of the Basic Documents to which Agent is a party, or is otherwise contrary to law, unless and until requested in writing to do so by Majority Lenders and furnished, from time to time as it may require, with reasonable security and indemnity, satisfactory to Agent, from such Majority Lenders against the costs, expenses, and liabilities which it might incur in compliance with such requests or direction. (b) Expenses for Actions Upon Written Instructions. Agent shall not be required to take any action under sections 11.03 or 11.13 unless Agent shall have been furnished, from time to time as it may require, with reasonable security and indemnity, satisfactory to Agent, from Majority Lenders directing Agent to take or refrain from taking action under section 11.03 or 11.13, against the costs, expenses, and liabilities which it might incur in complying with sections 11.03 or 11.13. Section 11.15 -- Procedures for Disposing of Collateral. (a) If an Event of Default exists, Agent shall, upon written instruction from Majority Lenders, declare all the Secured Obligations due and payable as provided in section 9.02 of the Mortgage. Thereafter, Majority Lenders shall have the sole responsibility for directing Agent in the enforcement of rights and remedies, pursuant to the Basic Documents, including the time and manner of repossessing and remarketing of the Collateral. (b) If Agent obtains an offer from a third party for the purchase of the Collateral for a purchase price that is less than the amount necessary to pay in full (i) the aggregate principal amount of the Certificates, (ii) accrued but unpaid interest on such unpaid principal amount to the date of distribution, (iii) interest on overdue principal and, to the extent permitted by applicable law, overdue interest, and (iv) all other sums due and owing to Agent or any Lender pursuant to any Basic Document, then before accepting any such offer, Agent shall notify the Lenders and shall sell such Collateral for such price only after obtaining the written consent of Majority Lenders. (c) Assignment, sale, transfer, or other conveyance of the Collateral by Agent made pursuant to the terms hereof or of the other Basic Documents to which it is a party shall bind the Lenders and shall be effective to assign, sell, transfer, or convey all 48 53 right, title and interest of Agent and the Lenders that it purports to assign, sell, transfer, or otherwise convey in and to the Collateral. No purchaser or other grantee shall be required to inquire as to the authorization, necessity, expediency, or regularity of such assignment, sale, transfer, or conveyance or as to the application of any sale or other proceeds with respect thereto by Agent. Article XII RECEIPT, DISTRIBUTION, AND APPLICATION OF INCOME Section 12.01 -- Payment by Agent Generally. Subject to sections 12.02, 12.03, 12.04, and 12.05 hereof, all payments (including prepayments under section 4.02 and the first sentence of 4.03 of this Agreement) of principal of and interest on any Note received by Agent shall be paid to the holders of the Certificates related to such Note pro rata in accordance with the principal and interest then due on such Certificates; the payment of the Facility Fee received by Agent shall be paid one-half to each Lender; and all payments of the Commitment Fee received by Agent shall be paid to the Lenders pro rata in accordance with the outstanding Commitment of each. Section 12.02 -- Application of Payments After Default. During the continuance of a Default that is not an Event of Default, any amounts that, but for this section 12.02, would be payable under section 12.01 by Agent to the Lenders shall be held by Agent until: (i) all Defaults shall have been cured, in which event such amounts shall, to the extent not theretofore applied as provided herein, be applied as provided in section 12.01 hereof, (ii) an Event of Default shall exist, in which event such amounts shall be applied as provided in section 12.03 hereof, or (iii) such amounts shall have been continuously held for a period in excess of 90 days (during which period Agent or the Lenders shall not have been stayed or otherwise precluded by operation of law from taking action to accelerate the Notes or to declare this Agreement in default or to exercise any remedies hereunder or under the Mortgage), in which event such amounts shall, to the extent not theretofore applied as provided herein, be distributed as provided in section 12.01 hereof. Section 12.03 -- Payments After Event of Default. During the continuance of any Event of Default, all payments received by Agent and all amounts then held by Agent on behalf of Lenders shall be applied in the following order of priority: 49 54 First, to pay all proper fees, charges, expenses, or advances made or incurred by Agent in the collection or distribution of such payment or otherwise in accordance with the provisions of this Agreement or the Mortgage, and of any and all other sums then owing to Agent by Borrower under the Basic Documents (including any amount payable by or for the account of Agent under section 9.04(b) of the Mortgage); Second, to pay to the then-existing and prior holders of the Certificates all proper fees, charges, expenses (including expenses under Section 13.03 hereof, and all amounts payable under Article IX hereof), and advances made or incurred by such then-existing and prior holders of Certificates and for which Borrower is responsible pursuant to the Basic Documents (to the extent not previously reimbursed), without priority of one such then-existing or prior holder of Certificates over any other, in the proportion of the aggregate amount of such fees, charges, expenses, and advances made or incurred by each such then-existing or prior holder of Certificates bears to the aggregate amount of such fees, charges, expenses, and advances made or incurred by all such then-existing and prior holders of Certificates; Third, to pay in full the unpaid interest on the Certificates due to the date of distribution (as well as interest on overdue principal and, to the extent permitted by applicable law, overdue interest at the rate set forth in section 4.06 hereof), and the then-outstanding principal of the Certificates, without priority of one Lender over any other, in the proportion that the outstanding principal of each Lender's Certificate(s) on such date of application bears to the outstanding principal of all the Certificates outstanding on such date of application; Fourth, to pay all other amounts then due by Borrower to the Lenders under the Basic Documents; Fifth, the balance, if any, of such payments remaining thereafter shall be distributed to Borrower. Section 12.04 -- Application of Indemnity and Certain Other Payments. (a) Any indemnity payment under Article IX hereof received by Agent shall, if owed to Agent, be applied to any such indemnity amounts owing to it, but if owed to another Indemnitee, be paid to the appropriate Indemnitee. 50 55 (b) Except as otherwise provided in this Article XII, any payment received by Agent for which provision as to the application thereof is made in this Credit Agreement or the Mortgage, other than in this Article XII, shall be forthwith applied as provided in such other provision of this Credit Agreement or the Mortgage. (c) If a Default exists when Agent receives any payment referred to in section 12.04(b) or (d), Agent may hold such payment as part of the Collateral, and Agent shall cease to hold such payment and shall apply and distribute it as provided in such section if and when no Default exists. (d) If an Indemnitee receives a refund of any amount that Borrower indemnified such Indemnitee for, that Indemnitee shall pay to Borrower an amount equal to that refund; provided, that any subsequent loss of that refund by the Indemnitee shall be treated as a loss subject to indemnification by Borrower. (e) The additional interest (2.375% per 360-day period) payable under section 4.08 for the year before a Call Date shall be paid to the Lender(s) to whose Note(s) it relates. Section 12.05 -- Other Payments. (a) Provided no Default exists, any money that Agent receives with respect to any right or obligation contained in the Basic Documents, and that the Basic Documents do not specify how to apply, shall be applied to any Secured Obligations then due, and the balance shall be distributed to Borrower. (b) Any payments received and amounts realized by Agent with respect to the Aircraft or otherwise to the extent received or realized, or remaining, at any time after payment in full of the Secured Obligations, as well as any other amounts remaining as part of the Collateral after payment in full or the Secured Obligations, shall be distributed to Borrower. Section 12.06 -- Method of Payment. Agent shall make distributions or cause distributions to be made to the Lenders and Borrower by wire transfer of immediately available funds, to the respective bank accounts specified in writing to Agent by such Persons, not later than 2:00 p.m. (Atlanta, Georgia time) on the date they are received by Agent (if received by 12:00 noon (Atlanta, Georgia time), or, if received later, as soon as practicable but not later than 11:00 a.m. (Atlanta, Georgia time) on the next Business Day), or the commercially reasonably 51 56 promptness after receipt in the case of payments to bank accounts located outside the United States. Section 12.07 -- Payments From Proceeds from Borrower. All payments to be made by Agent under the Certificates and this Agreement shall be made only from the proceeds received by Agent under the Basic Documents. Each holder of a Certificate, by its acceptance of such Certificate, agrees that it will look solely to the proceeds received by Agent under the Basic Documents to the extent available for distribution to such holder as herein provided, and that Agent is not personally liable to the holder of any Certificate under such Certificate or this Agreement. Section 12.08 -- Termination of Certificates. A holder of a Certificate shall have no further interest in, or other right with respect to, the proceeds received by Agent under the Basic Documents when and if all Secured Obligations payable to such holder have been paid in full. Article XIII MISCELLANEOUS Section 13.01 -- No Waivers; Cumulative Remedies. No failure or delay in exercising any power or right under any Basic Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude other or further exercise thereof or the exercise of any other right or power under any Basic Document. No notice to or demand on any party in any case shall, of itself, entitle such party to any other or further notice or demand in similar or other circumstances. Section 13.02 -- Notices. All communications and notices provided for under this Agreement shall be in writing (including telex, telegraph, and telecopy), shall be in English, and shall be mailed by certified mail (return receipt requested) or otherwise delivered to the parties at the addresses set forth by their signatures hereto, or, as to each party, at such other address as it designates by notice to each other party. Each such notice shall be effective upon delivery. Section 13.03 -- Transaction Expenses; Agent's Fees. (a) Borrower will pay on demand all out-of-pocket expenses in connection with the preparation, execution, delivery, administration, and enforcement of the Basic Documents, or in 52 57 connection with any scheduled closing that is postponed or cancelled, including (i) all fees and expenses of (x) Troutman, Sanders, Lockerman & Ashmore, special counsel to Agent and the Lenders, (y) Castro, Barros, Sobral e Xavier, special Brazilian counsel, and (z) Crowe & Dunlevy, special FAA counsel (ii) all FAA and UCC filing and lien search fees; (iii) all fees and expenses (including legal fees and expenses) of each Lender and Agent in connection with actual or proposed amendments, waivers, or consents to or under this Agreement or the other Basic Documents (except for such amendments, waivers, or consents initiated by any Lender or Agent; provided that any such amendment, waiver, or consent initiated by Agent or the Lenders in connection with a matter relating to the Proex Program, Proex Bank, or Proex Interest Payments that is initiated for the benefit of Borrower or at the request of Borrower shall not be included in this exception); and (iv) all fees and expenses (including legal fees and expenses) of each Lender and Agent in connection with the actual or proposed enforcement of any Basic Document against Borrower during the existence of any Default. The "legal fees and expenses" of the Lenders and Agent referred to in clauses (iii) and (iv) may not include those of a Lender's or Agent's in-house counsel. (b) Agent shall be entitled to receive reimbursement, within five Business Days after its request, for all reasonable expenses incurred or made by it in accordance with this Agreement or any other Basic Document. Under section 2.01 of the Mortgage, Agent is granted, and such obligations are secured by, a Lien on the Collateral entitling Agent to priority as to payment thereof (by virtue of section 12.03 of this Agreement) over payment to any other Person under this Agreement. Borrower shall pay to Agent, in its individual capacity, the amounts to which Agent is entitled under this section 13.03(b). Section 13.04 -- Amendments. Any provision of the Basic Documents, other than the Purchase Agreement, the Guarantee, or the Proex Agreement, may be amended, terminated, waived, or otherwise modified only in writing by Borrower and Majority Lenders, and any such amendment, termination, waiver, or other modification shall bind all of the Lenders to the same extent and with the same effect as if each Lender had joined therein; provided, that no provision of the Proex Agreement shall be amended, modified, or waived except as permitted therein; provided, further, that the written consent of Agent in its individual capacity shall be required to effect any amendment, termination, waiver, or other modification of the Basic Documents that affects the rights or duties of Agent (as agent or in its individual capacity (but not in its capacity as Lender)). Notwithstanding the foregoing, no amendment, modification, or waiver of the Basic Documents shall, unless in writing and signed 53 58 by each Lender, be effective to (a) increase such Lender's Commitment or subject such Lender to any additional obligation, (b) reduce the principal of or interest on the Notes or such Lender's Certificates, or any fees or other amounts payable to such Lender hereunder (whether under Article IX or otherwise), or change the ratable distribution of funds received by Agent for account of the Lenders hereunder (including under Article IV hereof), (c) postpone any date fixed for any payment of the principal of, or interest on, the Notes or such Lender's Certificates or any fees or other amounts payable to such Lender hereunder, (d) change the definition of "Majority Lenders" as set for in section 1.01, or amend, modify, or waive this section 13.04, (e) change section 11.13 of this Agreement, (f) increase the Financed Amount to be secured by the Collateral under the Mortgage, (g) alter the right of any Lender to transfer any Certificate or add or alter restrictions upon such transfer, or (h) the release of any Lien with respect to the Collateral other than in accordance with the Basic Documents. Section 13.05 -- Successors and Assigns. (a) Binding Effect; Consent to Assignment. This Agreement shall bind and benefit each Lender, Agent, and Borrower and their successors and assigns, except that Borrower may not assign or transfer its rights under this Agreement without Agent's prior written consent. (b) Limitations on Transfers. No Lender shall assign, convey, or otherwise transfer any of its interest in the Basic Documents, or offer to do any of the foregoing, (i) in any manner that would result in a violation of the Act, the Securities Act of 1933, ERISA, or any other law, or (ii) if, as a result of such assignment, conveyance, or other transfer, more than two Persons other than Bank of Tokyo and affiliates of Wachovia would have Certificates issued with respect to any particular Aircraft. (c) Transfer. Agent shall maintain at its office a register for the purpose of registering transfers and exchanges of registered Certificates and in which shall be entered the names and addresses of the owners of such registered Certificates and particulars of the registered Certificates owned by them. The holder of any registered Certificate wishing to transfer such Certificate shall, in person or by a duly authorized attorney, surrender to Agent at its office such Certificate, duly endorsed by the registered holder or such attorney, or accompanied by a written instrument of transfer duly executed by the registered holder or by such attorney, in form reasonably satisfactory to Agent. Upon representation to Agent of any Certificate for transfer, Agent will 54 59 execute and deliver to the transferee thereof in exchange therefor a new Certificate or Certificates of the same series and in the same aggregate principal amount and with the same terms as the Certificate so surrendered, in registered form and in any denomination of $100,000 or more (or the aggregate principal amount of all Certificates of such series held by such transferee, whichever is less) as is specified in such instrument of transfer. Nothing in this paragraph shall be interpreted as (i) giving Bank of Tokyo the right or power to transfer one or more of its Certificates or to transfer any right or interest in such Certificates to another Person, other than Wachovia or Borrower, without the prior written consent of Wachovia and Borrower (which shall not be unreasonably withheld) or (ii) giving Wachovia the right or power to transfer one or more of its Certificates or to transfer any right or interest in such Certificates to any Person other than an affiliate of Wachovia, without the prior written consent of Borrower (which shall not be unreasonably withheld). (d) Exchange. The holder of one or more Certificates may at any time surrender such Certificate or Certificates for exchange at Agent's office and shall be entitled to receive in exchange therefor a new Certificate or Certificates, of the same series and in the same aggregate principal amount with the same terms as the Certificate or Certificates surrendered, in registered form and in any denomination of $100,000 or more (or the aggregate principal amount of all such Certificates of the same series held by such holder, whichever is less). (e) Effect of Transfer or Exchange. All Certificates issued upon any transfer or exchange of Certificates shall be the valid obligations of Agent evidencing the same respective obligations, and entitled to the same security and benefits under this Agreement, as the Certificates surrendered upon such transfer or exchange. Agent shall make a notation on each new Certificate of the date to which interest on the replaced Certificate(s) has been paid. (f) Evidence of Ownership. Agent and Borrower shall deem and treat the Person in whose name any registered Certificate is registered as the absolute owner and holder of such Certificate for the purpose of mailing payment of all amounts payable by Agent or Borrower with respect to such Certificate and for all amounts payable by Agent or Borrower with respect to such Certificate and for all other purposes, and Agent and Borrower shall not be affected by any notice to the contrary. (g) Expenses, Taxes, etc. The transferring or exchanging Lender shall pay all expenses incurred in connection with the 55 60 transfer or exchange of a Certificate, including Agent's expenses (including legal fees), stamp taxes, transfer taxes, sales taxes, governmental fees and charges, broker's fees and commissions, any other fees and charges of the same or similar type as any of the foregoing, and other fees and expenses associated with amendments, supplements, waivers, or consents required as a result of any transfer or sale of a Certificate after the Purchase Date. In addition, for any transfer or exchange of a Certificate, Agent may require the transferor to pay a sum sufficient to cover any stamp tax or other governmental charge connected therewith. (h) No Transfer Within Three Days Before Payment Date. Agent shall not be required to transfer or exchange any Certificate during the three-day period preceding the due date of any payment on such Certificate. Section 13.06 -- Wachovia's Representations and Warranties. Wachovia represents and warrants that: (a) it is a national banking association duly organized, validly existing, and in good standing under the laws of the United States, and has all corporate power, authority, and legal right under the laws of the United States to execute, deliver, and carry out the terms of each of the Basic Documents to which it is a party as Lender; (b) it has duly authorized, executed, and delivered this Agreement and the other Basic Documents to which it is a party as Lender; (c) neither it nor anyone authorized to act on its behalf has directly or indirectly offered any beneficial interest in the Notes or the Certificates for sale to, or solicited any offer to acquire any such interest in the Notes or the Certificates from, any Person in such a manner as to require any of the Notes or the Certificates to be registered under the Securities Act of 1933, as amended, or any state securities law; provided, that the foregoing shall not be deemed to extend any such offer, sale, or solicitation by or on behalf of Borrower or any other Person; and (d) no part of the funds used by it to purchase its Certificates hereunder shall constitute the assets of any "employee benefit plan" within the meaning of ERISA or any "plan" as such a term is defined in section 406 of ERISA or section 4975 of the Code. Section 13.07 -- Bank of Tokyo's Representations and Warranties. Bank of Tokyo represents and warrants that: 56 61 (a) it is an agency licensed under Georgia law of a Japanese banking corporation and in good standing under the laws of Georgia, and has all corporate power, authority, and legal right under the laws of the United States to execute, deliver, and carry out the terms of each of the Basic Documents to which it is a party; (b) it has duly authorized, executed, and delivered this Agreement and the other Basic Documents to which it is a party; (c) neither it nor anyone authorized to act on its behalf has directly or indirectly offered any beneficial interest in the Notes or the Certificates for sale to, or solicited any offer to acquire any such interest n the Notes or the Certificates from, any Person in such a manner as to require any of the Notes or the Certificates to be registered under the Securities Act of 1933, as amended, or any state securities law; provided, that the foregoing shall not be deemed to extend any such offer, sale, or solicitation by or on behalf of Borrower or any other Person; and (d) no part of the funds used by it to purchase its Certificates hereunder shall constitute the assets of any "employee benefit plan" within the meaning of ERISA or any "plan" as such a term is defined in section 406 of ERISA or section 4975 of the Code. Section 13.08 -- Governing Law. This Agreement shall be governed by the laws of Georgia (excluding any conflict-of-laws rule that would apply the laws of any other jurisdiction). Section 13.09 -- Headings. Article and section headings used in this Agreement are for convenience only and are not a substantive part of this Agreement. Section 13.10 -- Execution in Counterparts. This Agreement may be executed in separate counterparts. Section 13.11 -- Survival of Representations and Warranties. All representations and warranties contained in this Agreement or made in writing in connection with this Agreement shall survive the execution and delivery of this Agreement and the Mortgage. Section 13.12 -- Severability. If any part of any provision contained in this Agreement, or any document contemplated hereby, is or becomes invalid or unenforceable under applicable law, that part shall be ineffective to the extent of such 57 62 invalidity only, without in any way affecting the remaining parts of that provision or the remaining provisions. Section 13.13 -- Proex Agreement. So long as no Default exists, Agent shall forward any payments that it receives under the Proex Agreement as Proex Interest Payments, or interest thereon, or as indemnification or reimbursement under the Proex Agreement and not relating to any loss or expense suffered by Agent or any Lender, to Borrower at Wachovia Bank of Georgia, N.A., 191 Peachtree Street, N.E., Atlanta, Georgia 30303 (ABA # 0610-0001-0), Account: Atlantic Southeast Airlines, Inc. (account # 18645444). Agent shall use its good faith efforts to forward any such payments to Borrower on the Business Day following their receipt by Agent. At Borrower's cost and expense, Agent or any Lender shall use its good faith efforts to take such action with respect to the Proex Agreement as Borrower shall reasonably request, provided that Agent and the Lenders shall not be required to solicit offers independently from any bank to guarantee Proex Interest Payments or to take any action which adversely affects the interests of any of them; provided that a reduction in the amount of Proex Interest Payments resulting from the guarantee of such Proex Interest Payments by Proex Bank shall not be considered an action adversely affecting Agent's or any Lender's interest; provided, further, that the replacement of the bank acting as Proex Bank with another bank shall not be considered an action adversely affecting Agent's or any Lender's interest if (a) Agent consents in writing to such replacement bank's acting as the Proex bank under the Proex Agreement or (b) such replacement bank meets the following qualifications: (i) it is a bank having offices in New York City and Brazil, (ii) it is authorized to act as a Proex agent under the Proex Program; and (iii) it is a bank with which Agent has the capability to transact business in the ordinary course through Agent's then-existing correspondent banking relationships. However, all risks associated with the Proex Program are Borrower's, and Agent and the Lenders shall have no responsibility for an Proex Interest Payments not actually received by Agent or any Lender from Proex Bank. So long as no Default exists, Agent and Lenders shall not enter into any amendment of the Proex Agreement without Borrower's consent, such consent not to be unreasonably withheld. Section 13.14 -- Agent Not Acting in Individual Capacity. In acting hereunder, unless otherwise expressly provided, Wachovia Bank of Georgia, N.A., when referred to as "Agent", acts solely as agent and not in its individual capacity; and, except as otherwise provided herein or in any other Basic Document to which Wachovia Bank of Georgia, N.A., as "Agent", is a party, all Persons having any claim against Wachovia Bank of Georgia, N.A., as "Agent", by reason of the transactions contemplated hereby shall look only to the Collateral for payment or satisfaction thereof. 58 63 IN WITNESS WHEREOF, Agent, Borrower, and Lenders have executed this Credit Agreement.
ATLANTIC SOUTHEAST AIRLINES, INC. 100 Hartsfield Centre Parkway Atlanta, Georgia 30354-1356 Attn: Ronald V. Sapp Vice President - Finance By: /s/ Ronald V. Sapp and Treasurer -------------------------------------- Facsimile No.: (404) 209-0162 Title: Vice President - Finance & Treasurer ------------------------------------------- WACHOVIA BANK OF GEORGIA, N.A., not in its individual capacity but solely as agent 191 Peachtree St., N.E. Atlanta, Georgia 30303 Attn: Georgia Corporate Division By: /s/ Mark Bole Reference: Atlantic Southeast ------------------------------------- Airlines (1992 Financings) Title: Commercial Officer Facsimile No.: (404) 332-5016 ---------------------------------- WACHOVIA BANK OF GEORGIA, N.A., in its individual capacity 191 Peachtree St., N.E. Atlanta, Georgia 30303 Attn: Georgia Corporate Division By: /s/ Mark Bole Reference: Atlantic Southeast ------------------------------------- Airlines (1992 Financings) Title: Commercial Officer Facsimile No.: (404) 332-5016 --------------------------------- THE BANK OF TOKYO, LTD., ATLANTA AGENCY 5050 Georgia-Pacific Center 133 Peachtree Street, N.E. Atlanta, Georgia 30303 By: /s/ Gary L. England Attn: Gary L. England ------------------------------------ Facsimile No.: (404) 577-1155 Title: Vice President and Manager ---------------------------------
59 EX-11 8 PER SHARE EARNINGS 1 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 1994 ----------- ----------- ------------ Net Income $56,612,720 $51,137,417 $52,655,748 =========== =========== ============ Earnings per share $1.83 $1.55 $1.54 =========== =========== ============ Weighted average number of shares outstanding 30,990,599 32,964,138 34,187,833 =========== =========== ============
EX-21 9 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Atlantic Southeast Airlines, Inc., a Georgia corporation, is 100% owned by ASA Holdings, Inc. ASA Investments, Inc., a Delaware corporation, is 100% owned by ASA Holdings, Inc. EX-23 10 CONSENT 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 2-94852-99) pertaining to the Atlantic Southeast Airlines, Inc. Investment Savings Plan, and the Registration Statement (Form S-8 No. 33-37304-99) pertaining to the Company's Stock Appreciation Rights Plan, of our report dated January 31, 1997, with respect to the consolidated financial statements and schedules of ASA Holdings, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Atlanta, Georgia March 27, 1997 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF ASA HOLDINGS, INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 DEC-31-1996 137,469 52,653 6,757 (204) 8,145 207,724 472,461 203,181 486,237 60,005 94,618 0 0 2,999 257,217 486,237 0 375,300 0 290,148 0 (25) 5,863 91,107 34,494 56,613 0 0 0 56,613 1.83 1.83
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