-----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, ETaXUuv3m16trXQSO/LDQcq94yf3hiozvYnDOe7x/yPhKeIlY4mpc6DYU6ZgNnCh LyQlDYNNJifdxKxvDEwglw== 0000898904-03-000013.txt : 20030331 0000898904-03-000013.hdr.sgml : 20030331 20030331161104 ACCESSION NUMBER: 0000898904-03-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATA HOLDINGS CORP CENTRAL INDEX KEY: 0000898904 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, NONSCHEDULED [4522] IRS NUMBER: 351617970 STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21642 FILM NUMBER: 03630889 BUSINESS ADDRESS: STREET 1: 7337 W WASHINGTON ST CITY: INDIANAPOLIS STATE: IN ZIP: 46231 BUSINESS PHONE: 3172474000 FORMER COMPANY: FORMER CONFORMED NAME: AMTRAN INC DATE OF NAME CHANGE: 19930318 10-K 1 ataholdingscorp200210k.txt ATA HOLDINGS CORP. - 10K United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2002. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period From ____ to ____ . Commission file number 000-21642 ATA Holdings Corp. (Exact name of registrant as specified in its charter) Indiana 35-1617970 ---------------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7337 West Washington Street Indianapolis, Indiana 46231 - ---------------------------------------- ------------------------------ (Address of principal executive offices) (Zip Code) (317) 247-4000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock, No Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by 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. [ X ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [ X ] The aggregate market value of shares of the registrant's Common Stock held by non-affiliates of the registrant (based on closing price of shares of Common Stock on the NASDAQ National Market on June 30, 2002) was approximately $23.4 million. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practical date. Common Stock, Without Par Value - 11,764,753 shares outstanding as of February 28, 2003. List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. Portions of the ATA Holdings Corp. Proxy Statement to be filed within 120 days after the close of the last fiscal year are incorporated by reference into Part III. TABLE OF CONTENTS FORM 10-K ANNUAL REPORT - 2002 ATA HOLDINGS CORP. AND SUBSIDIARIES Page # PART I Item 1. Business........................................................3 Item 2. Properties......................................................9 Item 3. Legal Proceedings..............................................10 Item 4. Submission of Matters to a Vote of Security Holders............11 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters.................................................12 Item 6. Selected Consolidated Financial Data.. ......................13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................14 Item 7a. Quantitative and Qualitative Disclosures About Market Risk.....45 Item 8. Financial Statements and Supplementary Data....................47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................76 PART III Item 10. Directors and Officers of the Registrant.......................77 Item 11. Executive Compensation.........................................77 Item 12. Security Ownership of Certain Beneficial Owners and Management.77 Item 13. Certain Relationships and Related Transactions.................77 Item 14. Controls and Procedures........................................77 PART IV Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.78 Item 15d. Valuation and Qualifying Accounts..............................80 2 PART I Item 1. Business Company Overview ATA Holdings Corp., formerly Amtran, Inc. (the "Company") owns ATA Airlines, Inc., formerly American Trans Air, Inc. ("ATA"), the tenth largest passenger airline in the United States, based upon 2002 capacity and traffic. The Company is a leading provider of low-cost scheduled airline services, the largest commercial charter airline in the United States based upon revenues for the twelve months ended June 30, 2002, and is one of the largest providers of passenger airline services to the U.S. military, based upon 2002 revenue. The Company was incorporated in Indiana in 1984. The following table summarizes the Company's revenue sources for the periods indicated:
Year Ended December 31, 2002 2001 2000 1999 1998 ---------------------------------------------------------------------- (Dollars in millions) Scheduled Service $ 886.6 $ 820.7 $ 753.3 $ 624.6 $ 511.3 ----------- ----------- ----------- ----------- ---------- Commercial Charter 131.3 192.2 246.7 263.8 222.6 Military Charter 177.9 167.5 188.6 126.2 121.9 ----------- ----------- ----------- ----------- ---------- Total Charter Service 309.2 359.7 435.3 390.0 344.5 ----------- ----------- ----------- ----------- ---------- Other 81.6 95.1 103.0 107.8 63.6 ----------- ----------- ----------- ----------- ---------- Total $ 1,277.4 $ 1,275.5 $ 1,291.6 $ 1,122.4 $ 919.4 =========== =========== =========== =========== ========== Percentage of Consolidated Revenues: Scheduled Service 69.4% 64.3% 58.3% 55.7% 55.6% Commercial Charter 10.3% 15.1% 19.1% 23.5% 24.2% Military Charter 13.9% 13.1% 14.6% 11.2% 13.3%
Scheduled Service The Company provides scheduled airline services on selected routes where it believes that it can be a leading carrier in those markets, focusing primarily on low-cost, nonstop or direct flights. The Company currently provides scheduled service primarily from its gateway cities of Chicago-Midway and Indianapolis to popular vacation and business destinations such as Phoenix, Las Vegas, Florida, California, Mexico and the Caribbean, as well as to New York's LaGuardia Airport, Philadelphia, Denver, Dallas-Ft. Worth, Washington, D.C., Boston, Seattle, Minneapolis-St. Paul, Newark and Charlotte. The Company also provides transpacific service between the Western United States and Hawaii. The Company owns all of the issued and outstanding stock of Chicago Express Airlines, Inc. ("Chicago Express"), which currently operates a fleet of 17 SAAB 340B 34-seat propeller aircraft and provides commuter passenger scheduled service between Chicago-Midway and the cities of Indianapolis, Cedar Rapids, Dayton, Des Moines, Flint, Grand Rapids, Lexington, Madison, Milwaukee, Moline, Toledo, South Bend, and Springfield. Included in the Company's jet scheduled service are bulk-seat sales agreements with tour operators. Under these arrangements, a tour operator purchases a large portion of the seats on an aircraft and assumes responsibility for distribution of those seats. The Company sells the remaining seats through its own scheduled service distribution network. Under bulk-seat sales arrangements, the Company is 3 obligated to provide transportation to the tour operators' customers even in the event of non-payment to the Company by tour operators. To reduce its credit exposure under these arrangements, the Company requires a letter of credit or prepayment of a portion of the contract price. Commercial Charter Service The Company provides commercial passenger charter airline services, primarily through U.S. tour operators. The most significant portion of commercial charter revenue is derived from contracts with tour operators for repetitive, leisure-oriented round-trip patterns, operating over varying periods of time. Under such contracts, the tour operator pays a fixed price for use of the aircraft and assumes responsibility and risk for the actual sale of the available aircraft seats. Under most of its contracts with tour operators, the Company passes through increases in fuel costs from a contracted price. The Company is required to absorb increases in fuel costs that occur within 14 days of flight time. In 2002, commercial charter revenue declined significantly, primarily due to the retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that were historically used in commercial charter flying. The Company's replacement fleets of new Boeing 737-800 and 757-300 aircraft are economically disadvantaged when used in the lower-utilization charter business, due to their higher fixed ownership cost. Consequently, the Company expects future commercial charter revenue to continue to represent a declining percentage of total revenue. Military/Government Charter Service The Company has provided passenger airline services to the U.S. military since 1983 and is currently one of the largest commercial airline providers of these services. The Company believes that because these operations are generally less seasonal than scheduled service, and because the military contract provides full reimbursement for actual fuel expenses, they have a stabilizing impact on the Company's operating margins. The U.S. Government awards one year contracts for its military charter business and pre-negotiates contract prices for each type of aircraft that a carrier makes available. Each contract year extends from October 1 through September 30. The Company primarily uses its fleet of four Lockheed L-1011-500 aircraft and certain Lockheed L-1011-50 and 100 aircraft to support this military business, since these aircraft have a range and seating configuration preferred by the military. The Company is subject to biennial inspections by the U.S. Department of Defense as a condition of retaining its eligibility to perform military charter flights. The last such inspection was successfully completed in November 2001. Industry Overview The terrorist attacks of September 11, 2001 and generally weak economic conditions have adversely affected the Company and the airline industry. The industry as a whole, and the Company, suffered very significant financial losses in 2001 and 2002. During 2002, two major air carriers, US Airways Group and UAL Corporation, filed for reorganization under Chapter 11 of the United States Bankruptcy Code. Historically, air carriers involved in reorganizations have substantially reduced their fares, which could reduce airline yields further from current levels. Certain air carriers are seeking to recover, at least partially, by reducing their seat capacity. As this is accomplished by eliminating aircraft from operating fleets, the fair value of aircraft may be adversely affected. The Company has recorded substantial charges to earnings resulting from fleet retirements and impairments over the past two years. However, during this period the Company has substantially replaced its fleet of aging aircraft with new fuel-efficient Boeing aircraft. The industry and the Company have also been adversely impacted by substantially higher insurance costs, and higher passenger security costs. 4 The Company has benefited from some of the U.S. Government's initiatives for assisting the airline industry. Most significant to the Company was the Air Transportation Safety and System Stabilization Act ("Act") passed in 2001, which provided for, among other things, up to $5.0 billion in compensation to U.S. airlines and air cargo carriers for direct and incremental losses resulting from the September 11, 2001 terrorist attacks and the availability of up to $10.0 billion in U.S. Government guarantees of certain loans made to air carriers, which are administered by the newly-established Air Transportation Stabilization Board ("ATSB"). The Company received $50.1 million is U.S. Government grant compensation. The Company also obtained a $168.0 million secured term loan, of which $148.5 million is guaranteed by the ATSB. While it is expected that adverse industry conditions are likely to continue throughout 2003, the Company's management believes it has a viable plan to ensure sufficient cash to fund operations during the next 12 months. In addition to the assistance the Company has already received in the form of U.S. Government grant compensation and the secured term loan, the plan calls for focusing marketing efforts on those routes where the Company believes it can be a leading provider and implementing a number of cost-saving initiatives the Company believes will enhance its low-cost advantage. Although the Company believes the assumptions underlying its 2003 financial projections are reasonable, there are significant risks which could cause the Company's 2003 financial performance to be different than projected. These risks relate primarily to further declines in demand for air travel, further increases in fuel prices, the uncertain outcome of the two major airline bankruptcies filed in 2002, the possibility of other airline bankruptcy filings, and the uncertain outcome and geopolitical impact of the conflict in the Middle East. Company Strategy The Company intends to combat the adverse industry conditions by enhancing its position as a leading provider of passenger airline services in selected markets where it can capitalize on its competitive strengths. The key components of this strategy are: Participate in Markets Where It Can Be a Leader The Company generally focuses on markets where it can be a leading provider of airline services. In scheduled service, the Company concentrates on routes where it can be the number one or number two carrier. The Company achieves this result principally through nonstop schedules, value-oriented pricing, focused marketing efforts and certain airport and aircraft advantages. The Company is a leading provider of commercial and military charter services in large part because of its variety of aircraft types, superior operational performance and its worldwide service capability. The Company intends to expand its operations selectively in areas where it believes it can achieve attractive financial returns. Maintain Low-Cost Position and Maximize Aircraft Utilization For 2002, 2001 and 2000, the Company's consolidated operating cost per available seat mile ("CASM") of 8.17(cent), 8.45(cent) and 7.86(cent), respectively, was one of the lowest among large U.S. passenger airlines. The Company believes that its lower costs provide a significant competitive advantage. Supplementing the Company's cost control initiatives is the enhancement of aircraft utilization, or the average number of hours flown per aircraft per day. This strategy has become increasingly important with the delivery of many new aircraft in the last several years. 5 Competition The Company's products and services encounter varying degrees of competition in the markets it serves. Competition for Scheduled Services In scheduled service, the Company competes both against the large U.S. scheduled service airlines and against smaller regional or start-up airlines. Competition is generally on the basis of price, schedule and frequency, quality of service and convenience. The Company believes that it has significant competitive advantages in each of its primary markets. o Chicago-Midway, the Company's largest and fastest growing gateway, represented approximately 71.2% of the Company's total scheduled service capacity in 2002. The Company is the number one carrier in terms of market share, based upon second quarter 2002 origin and destination revenue passengers, on 19 of the 21 nonstop jet routes it serves from Chicago-Midway. The Company believes its service at this gateway would be difficult to replicate because of limited airport capacity. This competitive position is enhanced by the customer convenience of Chicago-Midway's proximity to downtown Chicago. The Company also enjoys a strong competitive position relative to the entire Chicago metropolitan area. o Hawaii represented approximately 13.7% of the Company's total scheduled service capacity in 2002. A majority of the Company's capacity in the Hawaiian market is contracted to the nation's largest independent Hawaiian tour operator, which assumes capacity, yield and most fuel-price risk. The Company believes it is the lowest-cost provider of scheduled service between the western United States and Hawaii, which is critical in this price-sensitive, predominantly leisure market. o Indianapolis represented approximately 10.5% of the Company's total scheduled service capacity in 2002. The Company believes that it benefits from being perceived as the hometown airline. The Company is the number one provider in terms of market share, based upon second quarter 2002 origin and destination revenue passengers, in seven of its nine jet routes from Indianapolis. In Indianapolis, the Company operates Ambassadair Travel Club, Inc. ("Ambassadair"), the nation's largest travel club, with approximately 32,000 individual or family memberships, providing the Company with another local marketing advantage. Competition for Commercial Charter Services In the commercial charter market, the Company competes both against the major U.S. scheduled airlines and against small U.S. charter airlines. The scheduled carriers compete with the Company's commercial charter operations by wholesaling discounted seats on scheduled flights to tour operators, promoting packaged tours to travel agents for sale to retail customers and selling discounted, airfare-only products to the public. Competition for Military/Government Charter Services The Company competes for military and other government charters primarily with smaller U.S. airlines. The allocation of U.S. military air transportation contracts is based upon the number and type of aircraft a carrier makes available for use to the military, among other factors. 6 Flight Operations and Aircraft Maintenance Worldwide flight operations are planned and controlled by the Company's Flight Operations group based in Indianapolis, Indiana, which is staffed on a 24-hour basis, seven days a week. Logistical support necessary for extended operations away from the Company's fixed bases is coordinated through its global communications network. The Company has the ability to dispatch maintenance and operational personnel and equipment as necessary to support temporary operations around the world. The Company's Maintenance and Engineering Center is located at Indianapolis International Airport. This facility is an FAA-certificated repair station and has the capability to perform routine and non-routine maintenance on the Company's aircraft. The Company also has a maintenance facility at the Chicago-Midway Airport, which is used to provide line maintenance for the Boeing 757-200, Boeing 757-300 and Boeing 737-800 fleets. The Company has approximately 1,150 employees supporting its aircraft maintenance operations, and currently maintains 19 permanent maintenance facilities, including its Indianapolis and Chicago facilities. Fuel Price Risk Management The Company has fuel reimbursement clauses and guarantees which applied to approximately 29.4%, 32.0%, and 33.5% respectively, of consolidated revenues in 2002, 2001 and 2000. The Company occasionally enters into fuel-hedging contracts to reduce volatility of fuel prices for a portion of its scheduled service fuel needs. As of December 31, 2002, the Company had no outstanding fuel hedge contracts. Insurance The Company carries types and amounts of insurance customary in the airline industry, including coverage for public liability, passenger liability, property damage, aircraft loss or damage, baggage and cargo liability and workers' compensation. Under the Company's current insurance policies, it will not be covered by such insurance were it to fly, without the consent of its insurance provider, to certain high-risk countries. The Company will support certain U.S. Government operations in areas where its insurance policy does not provide coverage when the U.S. Government provides replacement insurance coverage. Immediately following the September 11, 2001 terrorist attacks, the Company's aviation insurers, and other air carriers' aviation insurers, reduced the maximum amount of liability insurance coverage for losses related to persons other than passengers and employees, resulting from acts of terrorism, war, hijacking or other similar perils (war-risk coverage) and significantly increased their premiums for this reduced coverage. Pursuant to the Air Transportation Safety and System Stabilization Act ("Act") and other enabling legislation, the U.S. Government has issued supplemental war-risk coverage to U.S. air carriers, including the Company, which is expected to continue through 2003. It is anticipated that after this date, a commercial product for war-risk coverage will become available, but the Company expects that it may incur significant additional costs for this coverage. Employees As of December 31, 2002, the Company had approximately 7,200 full and part-time employees, approximately 2,600 of whom were represented under collective bargaining agreements. The Company's flight attendants are represented by the Association of Flight Attendants ("AFA"). The current collective bargaining agreement with the AFA will become subject to amendment, but will not expire, in 7 October 2004. The Company's cockpit crews are represented by the Air Line Pilots Association ("ALPA"). The current collective bargaining agreement with ALPA will become subject to amendment, but will not expire, in June 2006. The Company's flight dispatchers are represented by the Transport Workers Union ("TWU"). The current collective agreement with the TWU will become subject to amendment, but will not expire, in August 2004. The Company's ramp service agents elected to be represented by the International Association of Machinists ("IAM") in February 2001. The Company began negotiations with the IAM in May 2001, but no collective bargaining agreement has been finalized. In February 2002, the Company's aircraft mechanics elected to be represented by the Aircraft Mechanics Fraternal Association ("AMFA"). The Company began negotiations with the AMFA in October 2002, but no collective bargaining agreement has been finalized. While the Company believes that relations with its employees are good, any prolonged dispute with employees, whether or not represented by a union, could have an adverse impact on the Company's operations. Regulation The Company is subject to a wide range of governmental regulation, including that of the Department of Transportation ("DOT") and the Federal Aviation Administration ("FAA"). The DOT principally regulates economic matters affecting air service, including air carrier certification and fitness; insurance; leasing arrangements; allocation of route rights and authorization of proposed scheduled and charter operations; allocation of landing slots and departing slots; consumer protection; and competitive practices. The FAA primarily regulates flight operations, especially matters affecting air safety, including airworthiness requirements for each type of aircraft and crew certification. The FAA requires each carrier to obtain an operating certificate and operations specifications authorizing the carrier to fly to specific airports using specified equipment. In 2001, the Aviation and Transportation Security Act ("Aviation Security Act") was signed into law, creating the Transportation Security Administration ("TSA") within the DOT and requiring substantially all aspects of civil aviation passenger security and screening to be placed under federal control in 2002. The cost of the provisions set forth in the Aviation Security Act are partially funded by a security fee of $2.50 per passenger enplanement, limited to $5 per one-way trip and $10 per round trip. Air carriers, including the Company, began collecting the new fee on ticket sales beginning in February 2002. The Aviation Security Act is also funded by a separate security infrastructure fee assessed to each air carrier beginning in the second quarter of 2002. The amount of the air carrier assessment is payable monthly and is equal to the amount each air carrier spent on aviation security in 2000. Several aspects of airline operations are subject to regulation or oversight by federal agencies other than the DOT and FAA. The United States Postal Service has jurisdiction over certain aspects of the transportation of mail and related services provided by the Company through ATA Cargo, Inc. ("ATA Cargo".) Labor relations in the air transportation industry are generally regulated under the Railway Labor Act, which vests in the National Mediation Board certain regulatory powers with respect to disputes between airlines and labor unions arising under collective bargaining agreements. The Company is subject to the jurisdiction of the Federal Communications Commission regarding the utilization of its radio facilities. In addition, the Immigration and Naturalization Service, the U.S. Customs Service, and the Animal and Plant Health Inspection Service of the Department of Agriculture have jurisdiction over inspection of the Company's aircraft, passengers and cargo to ensure the Company's compliance with U.S. immigration, customs and import laws. Also, while the Company's 8 aircraft are in foreign countries,they must comply with the requirements of similar authorities in those countries. The Commerce Department also regulates the export and re-export of the Company's U.S.-manufactured aircraft and equipment. In addition to various federal regulations, local governments and authorities in certain markets have adopted regulations governing various aspects of aircraft operations, including noise abatement, curfews and use of airport facilities. Many U.S. airports have adopted a Passenger Facility Charge of up to $4.50 collected from each passenger departing from the airport and remitted by the Company to the applicable airport authority. Based upon bilateral aviation agreements between the U.S. and other nations, and, in the absence of such agreements, comity and reciprocity principles, the Company, as a charter carrier, is generally not restricted as to the frequency of its flights to and from most foreign destinations. However, these agreements generally restrict the Company to the carriage of passengers and cargo on flights which either originate in the U.S. and terminate in a single foreign nation, or which originate in a single foreign nation and terminate in the U.S. The civil aeronautics authorities in the relevant countries must generally specifically approve proposals for any additional charter service. Approval of such requests is typically based on considerations of comity and reciprocity and cannot be guaranteed. The Company believes it is in compliance with all requirements necessary to maintain in good standing its operating authority granted by the DOT and its air carrier-operating certificate issued by the FAA. A modification, suspension or revocation of any of the Company's DOT or FAA authorizations or certificates could have a material adverse effect upon the Company. Environmental Matters Under the Airport Noise and Capacity Act of 1990 and related FAA regulations, the Company's aircraft must comply with certain Stage 3 noise restrictions by certain specified deadlines. In general, the Company is prohibited from operating any Stage 2 aircraft after December 31, 1999. As of December 31, 2002, the Company's entire fleet met Stage 3 requirements. In addition to the aircraft noise regulations administered by the FAA, the Environmental Protection Agency regulates operations, including air carrier operations, which affect the quality of air in the United States. The Company believes it has made all necessary modifications to its operating fleet to meet fuel-venting requirements and smoke-emissions standards. At the Company's aircraft maintenance facilities, materials are used that are regulated as hazardous under federal, state or local laws. The Company is required to maintain programs to protect the safety of the employees who use these materials and to manage and dispose of any waste generated by the use of these materials in compliance with these laws. More generally, the Company is also subject at these facilities to federal, state and local regulations relating to protection of the environment and to discharge of material into the environment. The Company does not expect that the costs associated with ongoing compliance with any of these regulations will have a material impact on the Company's capital expenditures, earnings or competitive position. 9 Item 2. Properties Aircraft Fleet At December 31, 2002, ATA and Chicago Express were certified to operate a fleet of 83 aircraft. The following table summarizes the ownership characteristics of each aircraft type as of the end of 2002.
Owned (Encumbered- Operating-Lease Operating-Lease Pledged on Debt) (Fixed Buy-out) (No Buy-out) Total Lockheed L-1011-50 and 100 5 - 1 6 Lockheed L-1011-500 4 - - 4 Boeing 737-800 - 18 12 30 Boeing 757-200 - 14 2 16 Boeing 757-300 - 10 - 10 SAAB 340B 2 15 - 17 -------------------------------------------------------------- TOTAL 11 57 15 83 ==============================================================
Lockheed L-1011 Aircraft The Company's Lockheed L-1011 aircraft are wide-body aircraft, and have a low ownership cost relative to other wide-body aircraft types. Of the six Lockheed L-1011-50 and 100 aircraft, three have a range of 2,971 nautical miles and three have a range of 3,425 nautical miles. The four Lockheed L-1011-500 aircraft have a range of 5,577 nautical miles. The combined fleet has an average age of approximately 25 years. Boeing 737-800 Aircraft The Company's 30 Boeing 737-800 aircraft are narrow-body aircraft and have a range of 2,500 nautical miles. These aircraft have higher ownership costs than the Company's Lockheed L-1011 fleet, but lower operational costs resulting from reduced fuel consumption, lower maintenance and cockpit crew costs, and improved operating reliability. The fleet has an average age of approximately 1 year, and the leases on these aircraft have initial terms that expire between June 2016 and December 2022. Boeing 757-200 Aircraft The Company's 16 Boeing 757-200 aircraft are narrow-body aircraft, all of which have a range of 3,679 nautical miles. These aircraft also have higher ownership costs than the Company's Lockheed L-1011 aircraft, but lower operational costs. In addition, the Company's Boeing 757-200s have the capacity to operate on extended flights over water. The fleet has an average age of approximately 5 years, and the leases on these aircraft have initial terms that expire between January 2003 and May 2022. 10 Boeing 757-300 Aircraft The Company's 10 Boeing 757-300 aircraft are narrow-body aircraft and have a range of 2,700 nautical miles. These aircraft also have higher ownership costs than the Company's Lockheed L-1011 aircraft, but lower operational costs. The fleet has an average age of approximately 1 year, and the leases on these aircraft have initial terms that expire on various dates between August 2021 and September 2022. SAAB 340B Aircraft The Company's 17 SAAB 340B aircraft are commuter aircraft with twin turboprop engines. These 34-seat aircraft have an average age of approximately 11.5 years and the leases on 15 of these aircraft have initial lease terms that expire between September 2009 and March 2012. Ground Properties The Company leases three adjacent office buildings in Indianapolis consisting of approximately 136,000 square feet. These buildings are located approximately one mile from the Indianapolis International Airport terminal and are used as principal business offices and for the Indianapolis reservations center. The Company's Maintenance and Operations Center is also located at Indianapolis International Airport. This 150,000-square-foot facility was designed to meet the base maintenance needs of the Company's operations, as well as to provide support services for other maintenance locations. In addition, the Company utilizes a 120,000 square-foot office building immediately adjacent to the Company's Indianapolis Maintenance and Engineering Center which is occupied by its Maintenance and Engineering office staff along with the Company's flight operations center. The Company leases Hangar No. 2 at Chicago's Midway Airport for an initial lease term of ten years, subject to two five-year renewal options. This property is used to perform line maintenance on the Company's narrow-body fleets. The Company also leases an 18,700-square-foot reservation facility located near Chicago's O'Hare Airport. The Company routinely leases various properties at airports for use by passenger service, flight operations and maintenance staffs. Item 3. Legal Proceedings Various claims, contractual disputes and lawsuits against the Company arise periodically involving complaints which are routine and incidental to the Company's business. The majority of these lawsuits are covered by insurance. To the knowledge of management, none of these claims involve damages in excess of 10 percent of the assets of the Company, nor are any a material proceeding under federal or state environmental laws, nor are any an environmental proceeding brought by a governmental authority involving potential monetary sanctions in excess of $100,000. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during the quarter ended December 31, 2002. 11 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters The Company's common stock is quoted on the Nasdaq National Market under the symbol "ATAH." The Company had 280 and 262 registered shareholders, respectively, at December 31, 2002 and 2001.
Market Prices of Common Stock Year Ended December 31, 2002 (Amounts in dollars) First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- High 16.30 14.95 7.49 7.17 Low 11.75 6.01 2.72 3.15 Close 14.00 6.86 3.40 4.57
Market Prices of Common Stock Year Ended December 31, 2001 (Amounts in dollars) First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- High 14.75 22.20 22.75 15.20 Low 9.44 9.00 7.60 5.50 Close 9.63 21.89 8.60 14.95
No dividends have been paid on the Company's common stock since becoming publicly held. In the last half of 2000, the Company issued and sold 300 shares of Series B convertible redeemable preferred stock, without par value ("Series B Preferred"), at a price and liquidation amount of $100,000 per share. The Series B Preferred is convertible into shares of the Company's common stock at a conversion rate of 6,381.62 shares of common stock per share of Series B Preferred at a conversion price of $15.67 per share of common stock, subject to antidilution adjustments. The Series B Preferred is optionally redeemable by the Company under certain conditions, but the Company must redeem the Series B Preferred no later than September 20, 2015. Optional redemption by the Company may occur at 103.6% of the liquidation amount beginning September 20, 2003, decreasing 0.3% of the liquidation amount per year to 100.0% of the liquidation amount at the mandatory redemption date of September 20, 2015. Also, in the last half of 2000, the Company issued and sold 500 shares of Series A redeemable preferred stock, without par value ("Series A Preferred"), at a price and liquidation amount of $100,000 per share. The Series A Preferred is optionally redeemable by the Company under certain conditions, but the Company must redeem the Series A Preferred in equal semiannual payments beginning December 28, 2010, and ending December 28, 2015. Optional redemption by the Company may occur at a redemption premium of 50.0% of the dividend rate beginning December 28, 2003, decreasing 10.0% per year to 20.0% of the dividend rate commencing December 28, 2006, and to 0.0% after the seventh year from issuance. Prior to the third anniversary of issuance, the Company may redeem the Series A Preferred with the net proceeds of a public offering of the Company's common stock. The issuance and sale of the Series A and Series B Preferred was exempt from registration requirements under Section 4(2) of the Securities Act of 1933, which applies to private offerings of securities. The proceeds of the issuances of the Series A and Series B Preferred were used to finance aircraft pre-delivery deposits on Boeing 757-300 and Boeing 737-800 aircraft ordered by the Company and for other corporate purposes. See "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 10 - Redeemable Preferred Stock." 12 Item 6. Selected Consolidated Financial Data - (Unaudited) The unaudited selected consolidated financial data in this table have been derived from the consolidated financial statements of the Company for the respective periods presented. The data should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere herein.
ATA HOLDINGS CORP. Five-Year Summary Year Ended December 31, (Dollars in thousands, except per share data and ratios) 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Statement of Operations Data: Operating revenues $1,277,370 $1,275,484 $1,291,553 $1,122,366 $919,369 Operating expenses 1,437,407 1,367,354 1,288,983 1,032,339 843,996 Operating income (loss) (1) (160,037) (91,870) 2,570 90,027 75,373 Income (loss) before taxes (194,214) (116,067) (19,931) 77,797 67,210 Net income (loss) available to common shareholders (2) (174,984) (81,885) (15,699) 47,342 40,081 Net income (loss) per share - basic (14.94) (7.14) (1.31) 3.86 3.41 Net income (loss) per share - diluted (14.94) (7.14) (1.31) 3.51 3.07 Balance Sheet Data (at end of period): Property and equipment, net $ 265,627 $ 314,943 $ 522,119 $ 511,832 $329,332 Total assets 848,136 1,002,962 1,032,430 815,281 594,549 Total debt 509,428 497,592 457,949 347,871 246,671 Redeemable preferred stock 82,485 80,000 80,000 - - Shareholders' equity (deficit) (120,009) 44,132 124,654 151,376 102,751 Selected Consolidated Operating Statistics: (3) Revenue passengers carried (thousands) 10,046.7 8,635.2 8,006.1 7,044.6 6,168.3 Revenue passenger miles (millions) 12,384.2 11,675.7 11,816.8 10,949.0 9,758.1 Available seat miles (millions) 17,600.0 16,187.7 16,390.1 15,082.6 13,851.7 Passenger load factor 70.4% 72.1% 72.1% 72.6% 70.5%
(1) Operating results for the years ended December 31, 2002 and 2001 include several non-recurring or unusual charges. See "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - State of the Industry and the Company," "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 15 - Fleet Impairment" and "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 16- Goodwill and Other Intangible Assets." (2) Preferred stock dividends of $5.7 million, $5.6 million, and $0.4 million were recorded in 2002, 2001 and 2000, respectively. No common stock dividends were paid in any periods presented. (3) Operating statistics pertain only to ATA and Chicago Express and do not include information for other operating subsidiaries of the Company. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company is a leading provider of low-cost scheduled airline services and charter airline services to value-oriented travelers, and to the U.S. military. The Company, through its principal subsidiary, ATA, has been operating for 30 years and is the tenth largest U.S. airline in terms of 2002 capacity and traffic. The Company recorded an operating loss of $160.0 million, and a loss available to common shareholders of $175.0 million, for the year ended December 31, 2002. Results of operations in 2002 were significantly impacted by non-cash aircraft and goodwill impairment charges, and an adjustment to reduce a receivable for U.S. Government grant compensation; such charges totaled $89.9 million. Consolidated revenues were approximately unchanged in 2002 from 2001, although consolidated available seat miles ("ASMs") increased 8.7% between years, resulting in a decline in revenue per available seat mile ("RASM".) This reflects a very weak pricing environment experienced by the Company and the entire airline industry in 2002. Declining unit revenues are a result of excess industry capacity in the scheduled service business, which began as a direct result of the terrorist attacks of September 11, 2001, but has continued with the weakened economy. The Company also believes that consumer confidence continues to be affected by both the unsettled economic climate in the United States, and by conflict in the Middle East and other geopolitical uncertainties. The Company expects continued weakness in unit revenue throughout 2003. The Company's unit costs remained among the lowest of the major airlines in 2002. The Company is continuing its efforts to further reduce operating costs, and expects to continue to realize additional cost savings from the ongoing deliveries of its new fleet of Boeing 737-800 and Boeing 757-300 aircraft. The Company also expects, however, that fuel costs will remain very high as compared to long-term average energy prices, and that these prices will adversely affect the Company's results of operations in 2003. Due to the lack of available credit, the Company does not have in place any fuel price hedge contracts for expected 2003 consumption of jet fuel. For the 2003 fiscal year, the Company currently expects that it may break even or earn a small operating profit. However, significant uncertainties continue to exist with respect to unit revenues and fuel prices, both of which may be adversely affected by geopolitical and economic events, including the uncertain outcome of the two major airline bankruptcies filed in 2002 and the unknown impact of the conflict in the Middle East, which are not within the Company's direct control. Therefore, the Company can provide no assurance that it will break even or return to profitability in 2003. Critical Accounting Policies "Management's Discussion and Analysis of Financial Condition and Results of Operations" discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these financial statements requires management to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Certain significant accounting policies applied in the preparation of the financial statements require management to make difficult, subjective or complex judgments, and are considered critical accounting policies by the Company. The Company has identified the following areas as critical accounting policies. 14 Revenue Recognition. Passenger ticket sales are initially recorded as a component of air traffic liability. Revenue derived from ticket sales is recognized at the time service is provided. Tickets that are sold but not flown on the scheduled travel date can be exchanged and reused for another flight, up to a year from the date of sale, or can be refunded if the ticket is sold under a refundable tariff. A small percentage of tickets (or partially-used tickets) expire unused. The majority of the Company's tickets sold are nonrefundable in cash, which is the primary source of forfeited tickets. The Company records estimates of earned revenue in the period tickets are originally sold, for a percentage of those sales which are expected to expire unused over the period of ticket validity. These estimates are based upon historical experience over many years, with particular emphasis given to expiration experience in more recent years. The Company has consistently applied this accounting method to estimate revenue from future unused and expired tickets. Revenue accruals for expired and unused tickets are routinely compared to actual expired and unused ticket experience to validate the accuracy of the Company's estimates with respect to forfeited tickets, and accrual adjustments resulting from these comparisons have not been material to the Company's results of operations. If, however, customer behavior changes from historical patterns in the manner in which tickets are purchased and used, it is possible that the Company's revenue accruals for unused and expired tickets may require material future adjustments in order to account for those changes in customer behavior. Impairments of Long-Lived Assets. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 ("FAS 144") , Accounting for the Impairment or Disposal of Long-Lived Assets, which superseded FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. The Company continues to account for aircraft and related assets that were impaired prior to January 1, 2002 and classified as held for sale under the provisions of FAS 121, which is required by FAS 144. Both FAS 144 and FAS 121 require that whenever events and circumstances indicate that the Company may not be able to recover the net book value of its productive assets, that the undiscounted estimated future cash flows must be compared to the net book value of these productive assets to determine if impairment is indicated. FAS 144 and FAS 121 require that assets deemed impaired be written down to their estimated fair value through a charge to earnings. FAS 144 and FAS 121 state that fair values may be estimated using discounted cash flow analysis or quoted market prices, together with other available information. The Company had been performing impairment reviews in accordance with FAS 121 on the Lockheed L-1011-50 and 100 and the Boeing 727-200 fleets since the end of 2000, and both fleets initially became impaired under FAS 121 subsequent to the terrorist attacks of September 11, 2001. The Company primarily used discounted cash flow analysis to estimate the fair value of the Lockheed L-1011-50 and 100 fleet, and used quoted market prices to estimate the fair value of the Boeing 727-200 fleet. In 2002, the Company decided to retire one of its five Lockheed L-1011-500 aircraft earlier than originally planned. This event caused the Company to consider whether the remaining four aircraft and related assets in this fleet were impaired. The Company performed an impairment analysis on the Lockheed L-1011-500 fleet and related assets in accordance with FAS 144, and determined that this fleet was not impaired. The Company primarily used discounted cash flow analysis to estimate the fair value of the Lockheed L-1011-500 fleet. The application of FAS 144 and FAS 121 required the exercise of significant judgment and the preparation of numerous significant estimates. Although the Company believes that its estimates, with regards to future cash flows, were reasonable and based upon all available information, they required substantial judgments and were based upon material assumptions about future events. Such 15 estimates were significant in determining the amount of the impairment charge to be recorded, which could have been materially different under different sets of assumptions and estimates. Goodwill Accounting. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142 ("FAS 142"), Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001, under which goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to annual impairment reviews. A FAS 142 impairment review involves a two-step process. Step one compares the fair value of a reporting unit (determined through market quotes or the present value of estimated future cash flows) with its carrying amount (assets less liabilities, including goodwill.) If the estimated fair value exceeds the carrying amount, goodwill of the reporting unit is considered not impaired, and step two of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is then performed, which compares the implied fair value of the reporting unit's goodwill (determined in accordance with purchase accounting), with the carrying amount of the reporting unit's goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that excess. If an impairment loss is recognized, the adjusted carrying amount of the goodwill becomes the new accounting basis for future impairment tests. FAS 142 required companies to complete by June 30, 2002, a transitional goodwill impairment review as of the date of adoption of the statement, which was January 1, 2002. The Company's recorded goodwill as of January 1, 2002 was related to its ATA Leisure Corp., ("ATALC"), ATA Cargo and Chicago Express subsidiaries acquired in 1999. During the transitional impairment review, the Company identified ATALC, ATA Cargo and Chicago Express as the reporting units as defined by FAS 142. The fair values of all of the Company's reporting units were estimated using discounted future cash flows, since market quotes were not readily available. In all transitional reviews, the estimated fair value was higher than the carrying amount of each reporting unit, and thus no impairment was indicated. In addition to the transitional goodwill impairment review, FAS 142 required companies to perform the first of their annual goodwill impairment reviews during 2002. The Company performed its first annual impairment test in the fourth quarter of 2002. By this time, the Company had outsourced the management of two of its ATALC brands to the Mark Travel Corporation ("MTC"). The Company continued in 2002 to manage the other ATALC brands, including the Key Tours Canadian Rail programs, Key Tours Las Vegas ground operations, and the Kodiak Call Center (collectively "KTI brands"). See further discussion in "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 13 - Segment Disclosures." Based upon guidance provided in FAS 142, the Company determined that the reporting unit previously identified as ATALC during the transition test, was more appropriately defined as two reporting units, after giving effect to the operational changes resulting from the outsourcing agreement completed in the middle of 2002. In its first annual goodwill impairment review, the Company determined that the goodwill related to Chicago Express, ATA Cargo and the MTC brands was unimpaired. However, the estimated fair value of the KTI brands was determined to be lower than the carrying amount, and an impairment loss of $6.9 million was therefore recorded in the fourth quarter of 2002. All of the Company's fair value estimates involved highly subjective judgments on the part of management, including the amounts of cash flows to be received, their estimated duration, and perceived risk as reflected in selected discount rates. In some cases, cash flows were estimated without the benefit of historical data, although historical data was used where available. Although the Company believes its estimates and judgments to be reasonable, different assumptions and judgments might have resulted in additional impairment charges. 16 Results of Operations in Cents Per ASM The following table sets forth, for the periods indicated, operating revenues and expenses expressed as cents per available seat mile ("ASM").
Cents per ASM Year Ended December 31, ---------------------------------------- 2002 2001 2000 ---- ---- ---- Consolidated operating revenues 7.26 7.88 7.88 Consolidated operating expenses: Salaries, wages and benefits 2.02 2.01 1.81 Fuel and oil 1.17 1.55 1.68 Aircraft rentals 1.08 0.61 0.44 Handling, landing and navigation fees 0.63 0.55 0.59 Depreciation and amortization 0.44 0.75 0.76 Crew and other employee travel 0.31 0.37 0.40 Aircraft maintenance, materials and repairs 0.30 0.38 0.43 Other selling expenses 0.25 0.26 0.22 Advertising 0.23 0.16 0.13 Passenger service 0.22 0.27 0.28 Insurance 0.19 0.07 0.05 Ground package cost 0.16 0.26 0.31 Commissions 0.13 0.21 0.24 Facilities and other rentals 0.13 0.13 0.10 Special charges 0.00 0.14 0.00 Aircraft impairments and retirements 0.38 0.73 0.00 Goodwill impairment 0.04 0.00 0.00 U.S. Government grant 0.09 (0.41) 0.00 Other 0.40 0.41 0.42 ---- ---- ---- Total consolidated operating expenses 8.17 8.45 7.86 ---- ---- ---- Consolidated operating income (loss) (0.91) (0.57) 0.02 ====== ====== ==== ASMs (in thousands) 17,599,968 16,187,687 16,390,101
17 Year Ended December 31, 2002, Versus Year Ended December 31, 2001 Consolidated Flight Operations and Flight Data The following table sets forth, for the periods indicated, certain key operating and financial data for the consolidated flight operations of the Company. Data shown for "Jet" operations include the consolidated operations of Lockheed L-1011, Boeing 727-200, Boeing 737-800, Boeing 757-200, and Boeing 757-300 aircraft in all of the Company's business units. Data shown for "SAAB" operations include the operations of SAAB 340B propeller aircraft by Chicago Express as the ATA Connection.
Twelve Months Ended December 31, ------------------------------------------------------ 2002 2001 Inc (Dec) % Inc (Dec) ------------------------------------------------------ Departures Jet 66,903 56,962 9,941 17.45 Departures SAAB 42,105 26,836 15,269 56.90 ------------------------------------------------------ Total Departures 109,008 83,798 25,210 30.08 ------------------------------------------------------ Block Hours Jet 199,290 172,207 27,083 15.73 Block Hours SAAB 40,008 24,836 15,172 61.09 ------------------------------------------------------ Total Block Hours 239,298 197,043 42,255 21.44 ------------------------------------------------------ RPMs Jet (000s) 12,231,661 11,581,733 649,928 5.61 RPMs SAAB (000s) 152,576 94,009 58,567 62.30 ------------------------------------------------------ Total RPMs (000s) (a) 12,384,237 11,675,742 708,495 6.07 ------------------------------------------------------ ASMs Jet (000s) 17,362,835 16,041,928 1,320,907 8.23 ASMs SAAB (000s) 237,133 145,759 91,374 62.69 ------------------------------------------------------ Total ASMs (000s) (b) 17,599,968 16,187,687 1,412,281 8.72 ------------------------------------------------------ Load Factor Jet 70.45 72.20 (1.75) (2.42) Load Factor SAAB 64.34 64.50 (0.16) (0.25) ------------------------------------------------------ Total Load Factor (c) 70.37 72.13 (1.76) (2.44) ------------------------------------------------------ Passengers Enplaned Jet 9,139,770 8,058,886 1,080,884 13.41 Passengers Enplaned SAAB 906,909 576,339 330,570 57.36 ------------------------------------------------------ Total Passengers Enplaned (d) 10,046,679 8,635,225 1,411,454 16.35 ------------------------------------------------------ Revenue $ (000s) 1,277,370 1,275,484 1,886 0.15 RASM in cents (e) 7.26 7.88 (0.62) (7.87) CASM in cents (f) 8.17 8.45 (0.28) (3.31) Yield in cents (g) 10.31 10.92 (0.61) (5.59)
See footnotes (c) through (g) on page 19. (a) Revenue passenger miles (RPMs) represent the number of seats occupied by revenue passengers multiplied by the number of miles those seats are flown. RPMs are an industry measure of the total seat capacity actually sold by the Company. (b) Available seat miles (ASMs) represent the number of seats available for sale to revenue passengers multiplied by the number of miles those seats are flown. ASMs are an industry measure of the total seat capacity offered for sale by the Company, whether sold or not. 18 (c) Passenger load factor is the percentage derived by dividing RPMs by ASMs. Passenger load factor is relevant to the evaluation of scheduled service because incremental passengers normally provide incremental revenue and profitability when seats are sold individually. In the case of commercial charter and military/government charter, load factor is less relevant because an entire aircraft is sold by the Company instead of individual seats. Since both costs and revenues are largely fixed for these types of charter flights, changes in load factor have less impact on business unit profitability. Consolidated load factors and scheduled service load factors for the Company are shown in the appropriate tables for industry comparability, but load factors for individual charter businesses are omitted from applicable tables. (d) Passengers enplaned are the number of revenue passengers who occupied seats on the Company's flights. This measure is also referred to as "passengers boarded." (e) Revenue per ASM (expressed in cents) is total operating revenue divided by total ASMs. This measure is also referred to as "RASM." RASM measures the Company's unit revenue using total available seat capacity. In the case of scheduled service, RASM is a measure of the combined impact of load factor and yield (see (g) for the definition of yield). (f) Cost per ASM (expressed in cents) is total operating expense divided by total ASMs. This measure is also referred to as "CASM." CASM measures the Company's unit cost using total available seat capacity. (g) Revenue per RPM (expressed in cents) is total operating revenue divided by total RPMs. This measure is also referred to as "yield." Yield is relevant to the evaluation of scheduled service because yield is a measure of the average price paid by customers purchasing individual seats. Yield is less relevant to the commercial charter and military/government charter businesses because the entire aircraft is sold at one time for one price. Consolidated yields and scheduled service yields are shown in the appropriate tables for industry comparability, but yields for individual charter businesses are omitted from applicable tables. Operating Revenues Total operating revenues in 2002 increased 0.2% to $1.277 billion, as compared to $1.275 billion in 2001. This increase was due to a $65.9 million increase in scheduled service revenue, a $10.4 million increase in military/government charter revenues and a $3.0 million increase in other revenues, partially offset by a $60.9 million decrease in commercial charter revenues and a $16.5 million decrease in ground package revenues. 19 The following table sets forth, for the periods indicated, certain key operating and financial data for the scheduled service, commercial charter and military/government charter operations of the Company.
Twelve Months Ended December 31, ------------------------------------------------------------------------ 2002 2001 Inc (Dec) % Inc (Dec) ------------------------------------------------------------------------ Scheduled Service Departures 98,877 72,787 26,090 35.84 Block Hours 201,077 156,331 44,746 28.62 RPMs (000's) (a) 9,911,884 8,694,323 1,217,561 14.00 ASMs (000's) (b) 13,608,326 11,443,304 2,165,022 18.92 Load Factor (c) 72.84 75.98 (3.14) (4.13) RASM in cents (e) 6.51 7.17 (0.66) (9.21) Yield in cents (g) 8.94 9.44 (0.50) (5.30) Revenue per segment $ (h) 100.08 112.74 (12.66) (11.23) Commercial Charter Departures 6,459 7,293 (834) (11.44) Block Hours 22,159 24,495 (2,336) (9.54) ASMs (000's) (b) 1,875,885 2,588,780 (712,895) (27.54) RASM in cents (e) 7.00 7.43 (0.43) (5.79) RASM excluding fuel escalation (i) 6.89 7.13 (0.24) (3.37) Military Charter Departures 3,650 3,702 (52) (1.40) Block Hours 15,975 16,159 (184) (1.14) ASMs (000's) (b) 2,103,874 2,147,248 (43,374) (2.02) RASM in cents (e) 8.46 7.80 0.66 8.46 RASM excluding fuel escalation (j) 8.48 7.58 0.90 11.87
See footnotes (a) through (g) on pages 18 and 19. (h) Revenue per segment flown is determined by dividing total scheduled service revenues by the number of passengers boarded. Revenue per segment is a broad measure of the average price obtained for all flight segments flown by passengers in the Company's scheduled service route network. (i) Commercial charter contracts generally provide that the tour operator will reimburse the Company for certain fuel cost increases, which, when earned, are accounted for as additional revenue. A RASM calculation, excluding the impact of fuel reimbursements, is provided as a separate measure of unit revenue changes. (j) Military/government reimbursements to the Company are calculated based upon a "cost plus" formula, including an assumed average fuel price for each contract year. If actual fuel prices differ from the contract rate, revenues are adjusted up or down to neutralize the impact of the change to the Company. A separate RASM calculation is provided, excluding the impact of the fuel price adjustments. 20 Scheduled Service Revenues. Scheduled service revenues increased 8.0% in 2002 to $886.6 million from $820.7 million in 2001. Scheduled service revenues comprised 69.4% of consolidated revenues in 2002, as compared to 64.3% in 2001. While total scheduled service revenues and ASMs increased, scheduled service RASM declined 9.2% from 7.17 cents in 2001 to 6.51 cents in 2002. The declining unit revenues experienced by the Company were a result of continuing overcapacity in the airline industry. Customer demand declined abruptly immediately after the terrorist attacks of September 11, 2001, and demand has also been lowered by the slowing pace of economic activity in the United States. The Company does not expect any significant recovery in demand for its services until after the uncertainty of the conflict in the Middle East has been resolved, and economic growth returns. Scheduled service departures grew 35.8% in 2002, compared to the ASM growth of 18.9%. This reflects the growth of the Chicago Express SAAB 340B fleet from 11 aircraft as of December 31, 2001 to 17 aircraft as of December 31, 2002. The additional SAAB aircraft generated significantly more departures, but because the aircraft seats only 34 passengers and operates on short stage length flights, the increase in ASMs was not as great as departures. Approximately 71.2% of the Company's scheduled service capacity was generated by the Chicago-Midway market in 2002, as compared to 66.8% in 2001. The Hawaiian market generated approximately 13.7% of total scheduled service capacity in 2002, as compared to 18.6% in 2001. Another 10.5% of total scheduled service capacity was generated in the Indianapolis market in 2002, as compared to 9.2% in 2001. The Company anticipates that its Chicago-Midway operation will continue to represent a substantial proportion of its scheduled service business in the future. The Company also anticipates further growth at Chicago-Midway, which will be accomplished in conjunction with the completion of new terminal and gate facilities at the Chicago-Midway Airport. Once all construction is complete in 2004, the Company expects to occupy at least 14 jet gates and one commuter aircraft gate at the new airport concourses. A Federal Inspection Service ("FIS") facility was completed at Chicago-Midway in the first quarter of 2002, which allowed the Company to begin nonstop international services from Chicago-Midway. Also contributing to the growth at Chicago-Midway is Chicago Express, which has been performing well as a feeder of passengers to ATA's jet system. The Company operated 152 peak daily jet and commuter departures from Chicago-Midway and served 41 destinations on a nonstop basis in 2002, as compared to 109 peak daily jet and commuter departures and 28 nonstop destinations in 2001. The Company's declining capacity in the Hawaiian market was primarily attributable to the transition to the smaller 247-seat Boeing 757-300 aircraft from the wide-body Lockheed L-1011 aircraft for certain West Coast-Hawaii routes beginning in mid-2002. The Company provided nonstop services in both years from Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with connecting service between Honolulu and Maui. From June to September 2002, the Company operated seasonal service to Lihue from Los Angeles and San Francisco. The Company's growth in the Indianapolis market is primarily attributable to the addition of limited jet service between Indianapolis and Chicago-Midway in the second quarter of 2002, and the addition of nonstop service to New York LaGuardia and Phoenix beginning in the third quarter of 2002. Commercial Charter Revenues. Commercial charter revenues decreased 31.7% to $131.3 million in 2002 from $192.2 million in 2001. Commercial charter revenues accounted for 10.3% of consolidated revenues in 2002, as compared to 15.1% in 2001. 21 The majority of the decline in commercial charter revenues was due to the retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that the Company has traditionally used in commercial charter flying. Since aircraft utilization (number of productive hours of flying per aircraft each month) is typically much lower for commercial charter, as compared to scheduled service flying, the Company's replacement fleets of new Boeing 737-800 and Boeing 757-300 aircraft are economically disadvantaged when used in the charter business, because of their higher fixed-ownership cost. Consequently, the Company expects its commercial charter revenues to continue to decline as the fleet supporting this business continues to shrink through aircraft retirements. The decrease in commercial charter RASM in 2002, as compared to 2001, was due to the same economic and geopolitical factors which have reduced scheduled service unit revenues between years. The Company currently expects that commercial charter will represent a less significant source of future revenues, especially after the end of 2003 when a contract with a major customer expires. Military/Government Charter Revenues. Military/government charter revenue increased 6.2% to $177.9 million in 2002 from $167.5 million in 2001. Military/government charter revenue accounted for 13.9% of consolidated revenues in 2002, as compared to 13.1% in 2001. The increase in revenue and RASM for military/government charter revenues in 2002 was due primarily to rate increases awarded for the contract year ended September 30, 2002, based upon cost data submitted to the U.S. military by the Company and other air carriers providing these services. The Company earned $175.6 million in the contract year ended September 30, 2002, a 10.2% increase as compared to $159.3 million earned in the preceding contract year ended September 30, 2001. The Company renewed its U.S. military contract for the fiscal year beginning October 1, 2002, although the reimbursement rate was nearly unchanged as compared to the prior contract year. Ground Package Revenues. The Company earns ground package revenues through the sale of hotel, car rental and cruise accommodations in conjunction with the Company's air transportation product. The Company markets these ground packages through its Ambassadair and ATALC subsidiaries. Ambassadair Travel Club offers tour-guide-accompanied vacation packages to its approximately 32,000 individual and family members. ATALC offers numerous ground accommodations to the general public, which are marketed through travel agents, as well as directly by the Company. In 2002, ground package revenues decreased 31.6% to $35.7 million, as compared to $52.2 million in 2001. This decline in ground package sales (and related ground package costs) is primarily due to the Company's July 1, 2002 outsourcing of the management and marketing of its ATA Vacations and Travel Charter International brands to MTC. Under that outsourcing agreement, MTC directly sells ground arrangements to customers who also purchase charter or scheduled service air transportation from the Company. Therefore, ground package sales (and related ground package costs) are no longer recorded by the Company for ATA Vacations and Travel Charter International. Other Revenues. Other revenues are comprised of the consolidated revenues of certain affiliated companies, together with miscellaneous categories of revenue associated with operations of the Company, such as cancellation and miscellaneous service fees, Ambassadair Travel Club membership dues and cargo revenue. Other revenues increased 7.0% to $45.9 million in 2002, as compared to $42.9 million in 2001, primarily due to an increase in cancellation and administrative fee revenues. 22 Operating Expenses Salaries, Wages and Benefits. Salaries, wages and benefits include the cost of salaries and wages paid to the Company's employees, together with the Company's cost of employee benefits and payroll-related local, state and federal taxes. Salaries, wages and benefits expense in 2002 increased 9.2% to $355.2 million, as compared to $325.2 million in 2001. The increase in salaries, wages and benefits primarily reflects the impact of the Company's amended collective bargaining agreement with the Company's cockpit crewmembers, who are represented by ALPA. The Company recorded $9.9 million in 2002 for a signing bonus as provided by the amended contract. Cockpit crewmember contract rate increases became effective July 1, 2002. The Company also incurred increasing costs in 2002 for employee medical and workers' compensation benefits. The Company expects future salaries, wages and benefits costs to be significantly increased by the amended cockpit crewmember contract. The amended contract is expected to increase cockpit crewmembers' average salaries by approximately 80% over the four-year contract period. Additionally, the amended contract provides for expanded retirement benefits for cockpit crewmembers. Fuel and Oil. Fuel and oil expense decreased 17.8% to $206.6 million in 2002, as compared to $251.3 million in 2001. Although total jet block hours increased 15.7% in 2002, as compared to 2001, the Company consumed 8.9% fewer gallons of jet fuel for flying operations. This decrease was primarily due to the addition of Boeing 737-800 and Boeing 757-300 aircraft to the Company's fleet beginning in May 2001. These aircraft replaced certain less-fuel-efficient Boeing 727-200 and Lockheed L-1011 aircraft, which were retired from revenue service. The decrease in fuel burn, due to the new aircraft, resulted in a decrease in fuel and oil expense of approximately $25.0 million. Also contributing to the decline in fuel expense was the decrease in the Company's average cost per gallon of jet fuel consumed of 7.9%, resulting in an additional savings in fuel and oil expense of approximately $18.1 million. Periodically, the Company has entered into fuel price hedge contracts to reduce the risk of fuel price fluctuations. During 2002, the Company recorded gains of $0.5 million on these hedge contacts, as compared to losses of $2.6 million in 2001. As of December 31, 2002, the Company had no outstanding fuel hedge agreements. Since December 31, 2002, the cost per gallon of jet fuel has increased approximately 21% based on March 20, 2003 market prices. Continued increases in the cost of fuel will adversely affect the Company in 2003. Aircraft Rentals. The Company's operating leases require periodic cash payments that vary in amount and frequency. The Company accounts for aircraft rentals expense in equal monthly amounts over the life of each operating lease. As of December 31, 2002 and December 31, 2001, the Company had recorded $68.8 million and $49.2 million, respectively, of prepaid aircraft rent under its operating leases. Aircraft rentals expense in 2002 increased 92.0% to $190.1 million from $99.0 million in 2001. The increase was mainly attributable to the delivery of 30 leased Boeing 737-800 and 10 leased Boeing 757-300 aircraft between May 2001 and December 2002. Handling, Landing and Navigation Fees. Handling and landing fees include the costs incurred by the Company at airports to land and service its aircraft and to handle passenger check-in, security, cargo and baggage where the Company elects to use third-party contract services in lieu of its own employees. Where the Company uses its own employees to perform ground handling functions, the resulting cost appears within salaries, wages and benefits. Air navigation fees are incurred when the Company's aircraft fly over certain foreign airspace. 23 Handling, landing and navigation fees increased by 24.6% to $110.5 million in 2002, as compared to $88.7 million in 2001. The increase in handling, landing and navigation fees between years was primarily due to a 17.5% increase in system-wide jet departures. The Company also incurred approximately $5.7 million in additional airport security costs associated with increased security requirements implemented after the terrorist attacks on September 11, 2001. Depreciation and Amortization. Depreciation reflects the periodic expensing of the recorded cost of owned airframes and engines, leasehold improvements and rotable parts for all fleet types, together with other property and equipment owned by the Company. Depreciation and amortization expense decreased 36.8% to $76.7 million in 2002, as compared to $121.3 million in the 2001. In 2001 and 2002, the Company retired eight Lockheed L-1011-50 aircraft from revenue service. During the fourth quarter of 2001, the Company also determined that the remaining fleet of Lockheed L-1011-50 and 100 aircraft, rotable parts and inventory was impaired. These assets were classified as held for use in accordance with FAS 121, requiring them to be recorded on the balance sheet at their estimated fair value at the time of impairment, which is the new asset basis to be depreciated over their estimated remaining useful lives. The Company recorded a further reduction in the carrying value of these assets in 2002. Due to the reduced cost basis of these assets, the Company recorded $17.6 million less depreciation and amortization expense for this fleet in 2002, as compared to 2001. In 2001, the Company decided to retire its Boeing 727-200 fleet earlier than originally planned, and these aircraft were determined to be impaired under FAS 121. Boeing 727-200 aircraft not already transferred to BATA Leasing LLC ("BATA"), a 50/50 joint venture with Boeing Capital Corporation ("BCC"), have been classified in the accompanying balance sheets as assets held for sale. In accordance with FAS 121, depreciation expense was not recorded after the fleet was deemed impaired and held for sale. As a result, depreciation expense on the Boeing 727-200 fleet decreased by $28.9 million in 2002, as compared to 2001. Partially offsetting these decreases were increased amortization of capitalized engine and airframe overhauls on the Lockheed L-1011-500 fleet and increases in depreciation and amortization expense associated with other fleet rotable parts, owned engines and the provision for inventory obsolescence, along with fluctuations in expenses related to furniture and fixtures, computer hardware and software, and debt issue costs between periods, none of which was individually significant. Crew and Other Employee Travel. Crew and other employee travel is primarily the cost of air transportation, hotels and per diem reimbursements to cockpit and cabin crewmembers incurred to position crews away from their bases to operate Company flights throughout the world. The cost of crew and other employee travel decreased 7.6% to $54.8 million in 2002, as compared to $59.3 million in 2001. This decrease was mainly due to the decrease in military and charter flights between years, which often operate to and from points remote from the Company's crew bases including international destinations, thus requiring significant positioning expenditures for crewmembers on other airlines and higher hotel costs. The decrease also reflects a decline in non-crew employee travel in 2002, as compared to 2001, due to the Company's cost-cutting initiatives. Aircraft Maintenance, Materials and Repairs. This expense includes the cost of expendable aircraft spare parts, repairs to repairable and rotable aircraft components, contract labor for maintenance activities, and other non-capitalized direct costs related to fleet maintenance, including spare engine leases, parts loan and exchange fees, and related shipping costs. It also includes the costs incurred under hourly engine maintenance agreements the Company has entered into on its Boeing 737-800, Boeing 757-200/300 and Saab 340B power plants. These 24 agreements provide for the Company to pay monthly fees based on a specified rate per engine flight hour, in exchange for major engine overhauls and maintenance. Aircraft maintenance, materials and repairs expense decreased 14.8% to $52.3 million in 2002, as compared to $61.4 million in 2001. The decline in maintenance, materials and repairs expense in 2002, as compared to 2001, was primarily attributable to a decrease in materials consumed and components repaired related to maintenance on the Company's aging fleets of Lockheed L-1011-50 and 100 and Boeing 727-200 aircraft. During 2001 and 2002, the Company placed 23 Boeing 727-200 aircraft into BATA, and retired eight Lockheed L-1011-50 aircraft prior to the due dates of heavy maintenance visits. Maintenance, materials and repairs expense associated with these two fleets decreased $20.1 million in 2002, as compared to 2001. This decline in maintenance, materials and repairs was partially offset by an increase in the cost of the hourly engine maintenance agreement for the Company's growing fleet of Saab 340B propeller aircraft operated by Chicago Express. In addition, the Company entered into an hourly engine maintenance agreement for the Boeing 757-200 fleet in 2002, which resulted in an increase in maintenance, materials and repair expense between years. Other Selling Expenses. Other selling expenses are comprised primarily of booking fees paid to computer reservation systems ("CRS"), credit card discount expenses incurred when selling to customers using credit cards for payment, and toll-free telephone services provided to single-seat and vacation package customers who contact the Company directly to book reservations. Other selling expenses increased 5.5% to $43.9 million in 2002, as compared to $41.6 million in 2001. This increase is primarily the result of a greater portion of the Company's sales being made on credit cards, and higher CRS fees. Advertising. Advertising expense increased 51.5% to $40.0 million in 2002, as compared to $26.4 million in 2001. The Company incurs advertising costs primarily to support single-seat scheduled service sales. The increase in advertising was primarily attributable to the promotion of the new scheduled service destinations added in 2002 and the promotion of low fares in a market that had less demand for air service. The Company also increased advertising in an effort to increase consumer preference for the Company's enhanced product, especially in its important Chicago-Midway hub, which included a new advertising campaign identifying the Company as "An Honestly Different Airline." Passenger Service. Passenger service expense includes the onboard costs of meal and non-alcoholic beverage catering, the cost of alcoholic beverages and the cost of onboard entertainment programs, together with certain costs incurred for mishandled baggage and passengers inconvenienced due to flight delays or cancellations. For 2002 and 2001, catering represented 82.1% and 74.4%, respectively, of total passenger service expense. The total cost of passenger service decreased 12.8% to $38.3 million in 2002, as compared to $43.9 million in 2001. Approximately $7.4 million of the decrease is attributable to catering expense, primarily because in 2002 the Company boarded a higher ratio of scheduled service passengers to charter passengers than in 2001. Scheduled service passengers are provided a significantly less expensive catering service than is provided to commercial charter and military passengers. In addition, in 2002 the Company introduced round-trip catering for flights originating in Chicago-Midway to reduce catering service charges. In 2002, as compared to 2001, the Company also incurred approximately $4.8 million less expense for mishandled baggage and passenger inconvenience, due to significantly fewer flight delays and cancellations in 2002. 25 Insurance. Insurance expense represents the Company's cost of hull and liability insurance and the costs of general insurance policies held by the Company, including workers' compensation insurance premiums. The total cost of insurance increased 217.8% to $34.0 million in 2002, as compared to $10.7 million in 2001. Liability insurance increased $14.8 million in 2002, as compared to 2001. Immediately following the September 11, 2001 terrorist attacks, the Company's insurer reduced the maximum amount of insurance coverage they would underwrite for liability to persons other than employees or passengers resulting from acts of terrorism, war, hijacking, or other similar perils (war-risk coverage) and significantly increased their premiums for this reduced coverage. Pursuant to the Air Transportation Safety and System Stabilization Act and other enabling legislation, the U.S. Government has issued supplemental war-risk coverage to U.S. air carriers, including the Company, which is expected to continue through 2003. It is anticipated that after this date a commercial product for war-risk coverage will become available, but the Company may continue to incur significant additional costs for this coverage. Hull insurance increased $5.1 million in 2002, as compared to 2001. The increase is mainly attributable to the increase in the Company's hull value between periods due to the addition of the new Boeing 737-800 and Boeing 757-300 aircraft. The increase is also attributable to an increase in premium rates following the September 11, 2001 terrorist attacks. Expenses related to the Company's general insurance policies increased $3.4 million in 2002, as compared to 2001, due primarily to an increase in workers' compensation premiums and claims handling fees between periods, and general increases in other miscellaneous policies between years. Ground Package Cost. Ground package cost is incurred by the Company with hotels, car rental companies, cruise lines and similar vendors who provide ground and cruise accommodations to Ambassadair and ATALC customers. Ground package cost decreased 33.9% to $27.9 million in 2002, as compared to $42.2 million in 2001, approximately proportional to the decrease in ground package revenues. See the "Ground Package Revenues" section above for an explanation of the decline in both ground package sales and related costs. Commissions. The Company incurs commissions expense in association with the sale by travel agents of single seats on scheduled service. In addition, the Company incurs commissions to secure some commercial and military/government charter business. Commissions expense decreased 33.0% to $23.3 million in 2002, as compared to $34.8 million in 2001. The Company experienced a decrease in commissions of $3.8 million in 2002, as compared to 2001, attributable to commissions paid to travel agents by ATALC, which is consistent with the decrease in related revenue. In addition, scheduled service commissions decreased $9.0 million in 2002 due to the elimination of standard travel agency commissions for sales made after March 21, 2002. The Company continues to pay special travel agency commissions targeted to specific markets and periods of the year. Facilities and Other Rentals. Facilities and other rentals include the cost of all ground facilities that are leased by the Company such as airport space, regional sales offices and general offices. The cost of facilities and other rentals increased 11.9% to $22.6 million in 2002, as compared to $20.2 million in 2001. Growth in facilities costs between periods was primarily attributable to facilities at airport locations required to support new scheduled service destinations added in late 2001 and 2002, and expanded services at existing destinations. 26 Special Charges. Special charges represent direct expenses which, due to the events of September 11, 2001, were considered unusual in nature under the provisions of APB Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and the Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30"). Special charges in 2001 were $21.5 million, while no expenses were classified as special charges in 2002. The 2001 special charges were comprised primarily of costs associated with the early removal from service of the Company's Boeing 727-200 fleet, some of which were leased, a decision made immediately after September 11, 2001; costs associated with the Company's proposed transaction in which ATA Holdings Corp. would have been taken private, which was substantially complete by September 11, 2001, when the Company lost financing as a result of the September 11, 2001 attacks; and expenses directly associated with the FAA's temporarily-mandated suspension of commercial flights on September 11, 2001 and for several days thereafter. Also classified as special charges were increased hull and liability insurance costs; additional advertising expense incurred as a direct result of September 11, 2001; interest expense related to debt incurred under the Company's credit facility to provide operating cash after September 11, 2001; and other expenses not individually significant. Aircraft Impairments and Retirements. Aircraft impairment and retirement costs decreased 43.8% to $66.8 million in 2002, as compared to $118.9 million in 2001. In 2001, the Company decided to retire its Boeing 727-200 fleet earlier than originally planned, determined the aircraft and related rotable parts and inventory were impaired under FAS 121 and recorded an impairment charge. In accordance with FAS 121, the Company continues to re-evaluate current fair values of previously impaired assets, making further adjustments as deemed appropriate. In 2002, the Company recorded asset impairment charges of $35.9 million, as compared to $44.5 million in 2001, related to its remaining net book value of Boeing 727-200 aircraft, including those recorded as an investment in BATA. In 2001, the Company also determined that the Lockheed L-1011-50 and 100 fleet and related rotable parts and inventory were impaired under FAS 121 and recorded an impairment charge. In accordance with FAS 144, the Company continues to re-evaluate the current fair values of these impaired assets, making further adjustments as deemed appropriate. In 2002, the Company recorded asset impairment charges of $7.6 million, as compared to $67.8 million in 2001, related to its remaining net book value of Lockheed L-1011-50 and 100 aircraft and related parts. In 2002, the Company retired three Lockheed L-1011-50 aircraft, resulting in a charge of $9.0 million, and retired one Lockheed L-1011-500 aircraft, resulting in a charge of $14.2 million. In 2001, the Company retired three Lockheed L-1011-50 aircraft resulting in a charge of $6.6 million. These charges were included as part of aircraft impairments and retirements. Goodwill Impairment. The Company began annual goodwill impairment reviews under FAS 142 in 2002. In accordance with FAS 142, the Company determined that the fair value of the KTI brands was lower than the carrying amount and a goodwill impairment loss of $6.9 million was recorded in the fourth quarter of 2002. U.S Government Grant. After the terrorist attacks of September 11, 2001, the Air Transportation Safety and System Stabilization Act ("Act") was passed, which provided for, among other things, up to $5.0 billion in compensation to U.S. air carriers for direct and incremental losses resulting from the September 11, 2001 terrorist attacks, and the availability of up to $10.0 billion in U.S. Government guarantees of certain loans made to air carriers, which are administered by the newly established Air Transportation Stabilization Board ("ATSB"). 27 The Company had recorded $66.3 million in U. S. Government grant compensation as of December 31, 2001. This estimate was based on guidance available from the DOT at the time for identifying those expenses it deemed reimbursable. Throughout 2002, the Company discussed the calculation with the DOT, and as of December 31, 2002 had reversed approximately $16.2 million of the accrued government reimbursement and revised its estimate of total U.S. Government grant compensation to $50.1 million. In early 2003, the Company received the last cash installment of grant reimbursement from the U.S. Government, consistent with that estimate. Other Operating Expenses. Other operating expenses decreased 5.6% to $71.2 million in 2002, as compared to $67.4 million in 2001. No expenses comprising this line item changed significantly between these periods. Interest Income and Expense. Interest expense in 2002 increased to $35.7 million, as compared to $30.1 million in 2001. The Company incurred $1.7 million in 2002 in interest expense relating to the $168.0 million guaranteed loan funded in November 2002. No such financing was in place in 2001. The Company also capitalized $3.4 million less interest in 2002, as compared to 2001, associated with new aircraft pre-delivery deposit requirements. The Company invested excess cash balances in short-term government securities and commercial paper and thereby earned $2.8 million in 2002, as compared to $5.3 million in 2001. The decrease in interest income between years is primarily due to a decline in the average interest rate earned. Income Tax Expense. In 2002, the Company recorded an income tax credit of $25.0 million applicable to $194.2 million in pre-tax loss, while in 2001 the Company recorded an income tax credit of $39.8 million applicable to $116.1 million in pre-tax loss. The effective tax rate applicable to 2002 was 12.8%, as compared to 34.2% in 2001. As of December 31, 2002, the Company had incurred a three-year cumulative loss. Because of this cumulative loss and the presumption under accounting principles generally accepted in the United States that net deferred tax assets should be fully reserved if it is more likely than not that they will not be realized through carrybacks or other tax strategies, the Company has recorded a full valuation allowance against its net deferred asset of $43.3 million. This allowance adjustment, included in income tax expense, resulted in an effective tax rate of 12.8% for a tax credit applicable to the loss incurred in 2002. As of December 31, 2002, the Company had recorded an income tax refund receivable of $15.8 million using a five-year carryback of alternative minimum tax operating losses from 1997 to 2001. Payment for this refund was received in March 2003. 28 Year Ended December 31, 2001, Versus Year Ended December 31, 2000 Consolidated Flight Operations and Financial Data The following table sets forth, for the periods indicated, certain key operating and financial data for the consolidated flight operations of the Company. Data shown for "Jet" operations include the consolidated operations of Lockheed L-1011, Boeing 727-200, Boeing 737-800, Boeing 757-200 and Boeing 757-300 aircraft in all of the Company's business units. Data shown for "J31/SAAB" operations include the operations of Jetstream 31 and SAAB 340B propeller aircraft by Chicago Express as the ATA Connection.
Twelve Months Ended December 31, ------------------------------------------------------------- 2001 2000 Inc (Dec) % Inc (Dec) ------------------------------------------------------------- Departures Jet 56,962 55,714 1,248 2.24 Departures J31/SAAB (k) 26,836 18,985 7,851 41.35 ------------------------------------------------------------- Total Departures 83,798 74,699 9,099 12.18 ------------------------------------------------------------- Block Hours Jet 172,207 172,824 (617) (0.36) Block Hours J31/SAAB 24,836 18,708 6,128 32.76 ------------------------------------------------------------- Total Block Hours 197,043 191,532 5,511 2.88 -------------------------------------------------------------- RPMs Jet (000s) 11,581,733 11,760,135 (178,402) (1.52) RPMs J31/SAAB (000s) 94,009 56,669 37,340 65.89 ------------------------------------------------------------- Total RPMs (000s) (a) 11,675,742 11,816,804 (141,062) (1.19) -------------------------------------------------------------- ASMs Jet (000s) 16,041,928 16,295,730 (253,802) (1.56) ASMs J31/SAAB (000s) 145,759 94,371 51,388 54.45 ------------------------------------------------------------- Total ASMs (000s) (b) 16,187,687 16,390,101 (202,414) (1.23) -------------------------------------------------------------- Load Factor Jet 72.20 72.17 0.03 0.04 Load Factor J31/SAAB 64.50 60.05 4.45 7.41 ------------------------------------------------------------- Total Load Factor (c) 72.13 72.10 0.03 0.04 -------------------------------------------------------------- Passengers Enplaned Jet 8,058,886 7,686,077 372,809 4.85 Passengers Enplaned J31/SAAB 576,339 320,062 256,277 80.07 ------------------------------------------------------------- Total Passengers Enplaned (d) 8,635,225 8,006,139 629,086 7.86 -------------------------------------------------------------- Revenue $ (000s) 1,275,484 1,291,553 (16,069) ( 1.24) RASM in cents (e) 7.88 7.88 - - CASM in cents (f) 8.45 7.86 0.59 7.51 Yield in cents (g) 10.92 10.93 (0.01) (0.09)
See footnotes (a) through (g) on pages 18 and 19. (k) During the first three quarters of 2000, Chicago Express operated certain 19-seat Jetstream ("J31") aircraft as it phased in the SAAB fleet. 29 Operating Revenues Total operating revenues in 2001 decreased 1.3% to $1.275 billion, as compared to $1.292 billion in 2000. This decrease was due to a $54.5 million decrease in commercial charter revenues, a $21.1 million decrease in military/government charter revenues, a $7.6 million decrease in ground package revenues, and a $0.3 million decrease in other revenues, partially offset by a $67.4 million increase in scheduled service revenues. Scheduled Service Revenues. The following table sets forth, for the periods indicated, certain key operating and financial data for the scheduled service operations of the Company. Data shown for "Jet" operations include the combined operations of Lockheed L-1011, Boeing 727-200, Boeing 757-200, Boeing 757-300 and Boeing 737-800 aircraft in scheduled service. Data shown for "J31/SAAB" operations include the operations of Jetstream 31 and SAAB 340B propeller aircraft by Chicago Express as the ATA Connection.
Twelve Months Ended December 31, ------------------------------------------------------------- 2001 2000 Inc (Dec) % Inc (Dec) ------------------------------------------------------------- Departures Jet 45,951 40,892 5,059 12.37 Departures J31/SAAB (k) 26,836 18,985 7,851 41.35 ------------------------------------------------------------- Total Departures 72,787 59,877 12,910 21.56 ------------------------------------------------------------- Block Hours Jet 131,495 118,473 13,022 10.99 Block Hours J31/SAAB 24,836 18,708 6,128 32.76 ------------------------------------------------------------- Total Block Hours 156,331 137,181 19,150 13.96 ------------------------------------------------------------- RPMs Jet (000s) 8,600,314 7,700,639 899,675 11.68 RPMs J31/SAAB (000s) 94,009 56,669 37,340 65.89 ------------------------------------------------------------- Total RPMs (000s) (a) 8,694,323 7,757,308 937,015 12.08 ------------------------------------------------------------- ASMs Jet (000s) 11,297,545 10,025,603 1,271,942 12.69 ASMs J31/SAAB (000s) 145,759 94,371 51,388 54.45 ------------------------------------------------------------- Total ASMs (000s) (b) 11,443,304 10,119,974 1,323,330 13.08 ------------------------------------------------------------- Load Factor Jet 76.13 76.81 (0.68) (0.89) Load Factor J31/SAAB 64.50 60.05 4.45 7.41 ------------------------------------------------------------- Total Load Factor (c) 75.98 76.65 (0.67) (0.87) ------------------------------------------------------------- Passengers Enplaned Jet 6,703,150 5,873,598 829,552 14.12 Passengers Enplaned J31/SAAB 576,339 320,062 256,277 80.07 ------------------------------------------------------------- Total Passengers Enplaned (d) 7,279,489 6,193,660 1,085,829 17.53 ------------------------------------------------------------- Revenue $ (000s) 820,666 753,301 67,365 8.94 RASM in cents (e) 7.17 7.44 (0.27) (3.63) Yield in cents (g) 9.44 9.71 (0.27) (2.78) Revenue per segment $ (h) 112.74 121.62 (8.88) (7.30)
See footnotes (a) through (k) on pages 18 - 20 and 29. 30 Scheduled service revenues in 2001 increased 8.9% to $820.7 million from $753.3 million in 2000. Scheduled service revenues were 64.3% of consolidated revenues in 2001, as compared to 58.3% of consolidated revenues in 2000. The Company's scheduled service operations in 2001 were adversely affected by the terrorist attacks of September 11. The Company estimates that it lost approximately $80.0 million in scheduled service revenues between September 11 and December 31, 2001, as a result of flights which were canceled, and as a result of flights operated with lower load factors and yields. In the eight months ended August 31, 2001, the Company's scheduled service RASM was virtually unchanged at 7.72 cents, as compared to 7.71 cents in the comparable period of 2000. However, due to the decrease in scheduled service demand after the terrorist attacks, resulting in lower load factors and yields, the Company's scheduled service RASM in the last four months of 2001 was 5.92 cents, a decrease of 14.3%, as compared to 6.91 cents in the last four months of 2000. The Company's scheduled service at Chicago-Midway accounted for approximately 66.8% of scheduled service ASMs and 86.6% of scheduled service departures in 2001, as compared to 63.5% and 83.5%, respectively, during 2000. During the third and fourth quarters of 2001, the Company began operating nonstop flights to Newark and Miami. During the second and third quarters of 2000, the Company beganoperating nonstop flights to Ronald Reagan Washington National Airport, Boston, Seattle and Minneapolis-St. Paul. In addition to this new service, the Company served the following existing jet markets in both years: Dallas-Ft. Worth, Denver, Ft. Lauderdale, Ft. Myers, Las Vegas, Los Angeles, New York's LaGuardia Airport, Orlando, Philadelphia, Phoenix, St. Petersburg, San Francisco, San Juan and Sarasota. The Company operated 109 peak daily jet and commuter departures from Chicago-Midway in 2001, as compared to 94 in 2000, and served 28 destinations on a nonstop basis in 2001, as compared to 25 nonstop destinations served in 2000. The Company's Hawaii service accounted for 18.6% of scheduled service ASMs and 3.9% of scheduled service departures in 2001, as compared to 17.0% and 4.3%, respectively, in 2000. The Company provided nonstop service in both years from Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with connecting service between Honolulu and Maui. The Company's Indianapolis service accounted for 9.2% of scheduled service ASMs and 6.5% of scheduled service departures in 2001, as compared to 12.2% and 8.8%, respectively, in 2000. In both years, the Company operated nonstop to Cancun, Ft. Lauderdale, Ft. Myers, Las Vegas, Orlando, St. Petersburg and Sarasota. The Company has served Indianapolis for 29 years through the Ambassadair Travel Club and through scheduled service since 1986. Commercial Charter Revenues. Commercial charter revenues accounted for 15.1% of consolidated revenues in 2001 as compared to 19.1% in 2000. The impact of the September 11, 2001 terrorist attacks was less significant on the commercial charter business than on scheduled service. The Company estimates that it lost approximately $1.4 million in commercial charter revenues as a result of flight cancellations during the FAA-mandated air system shutdown from September 11 until September 13, and decreased demand for commercial charter flights following September 11. The majority of the decline in commercial charter revenues in 2001, as compared to 2000, was principally due to the retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that the Company has traditionally used in commercial charter flying. 31 The following table sets forth, for the periods indicated, certain key operating and financial data for the commercial charter operations of the Company.
Twelve Months Ended December 31, --------------------------------------------------------------- 2001 2000 Inc (Dec) % Inc (Dec) --------------------------------------------------------------- Departures 7,293 9,722 (2,429) (24.98) Block Hours 24,495 34,356 (9,861) (28.70) RPMs (000s) (a) 2,010,477 2,687,051 (676,574) (25.18) ASMs (000s) (b) 2,588,780 3,610,413 (1,021,633) (28.30) Passengers Enplaned (d) 1,128,660 1,472,340 (343,680) (23.34) Revenue $ (000s) 192,246 246,705 (54,459) (22.07) RASM in cents (e) 7.43 6.83 0.60 8.78 RASM excluding fuel escalation (i) 7.13 6.47 0.66 10.20
See footnotes (a) through (i) on pages 18-20. Military/Government Charter Revenues. The following table sets forth, for the periods indicated, certain key operating and financial data for the military/government charter operations of the Company.
Twelve Months Ended December 31, --------------------------------------------------------------- 2001 2000 Inc (Dec) % Inc (Dec) --------------------------------------------------------------- Departures 3,702 4,961 (1,259) (25.38) Block Hours 16,159 19,443 (3,284) (16.89) RPMs (000s) (a) 965,740 1,339,545 (373,805) (27.91) ASMs (000s) (b) 2,147,248 2,605,791 (458,543) (17.60) Passengers Enplaned (d) 225,641 329,200 (103,559) (31.46) Revenue $ (000s) 167,524 188,557 (21,033) (11.15) RASM in cents (e) 7.80 7.24 0.56 7.73 RASM excluding fuel escalation (j) 7.58 6.88 0.70 10.17
See footnotes (a) through (j) on pages 18-20. The Company estimates that it lost approximately $1.0 million in military revenues, net of cancellation fees, due to the FAA-mandated shut down of the air traffic system from September 11 until September 13. After having resumed flight operations late in the day on September 13, 2001, the Company's military flight schedule quickly returned to normal. Although current military flight operations of the Company have not been significantly affected by the terrorist attacks of September 11, future operations may be significantly affected by changes in the transportation needs of the U.S. military, possibly in association with military operations in the United States and abroad. The decline in military revenues in 2001, as compared to 2000, was primarily due to changes in teaming arrangements used both by the Company and some of the Company's competitors in the military/government charter business. Such changes reduced the fixed-award flying allocated to the Company for the contract year ending September 30, 2001. The Company earned $159.3 million in military/government charter revenues in the contract year ended September 30, 2001, a 6.0% reduction as compared to $169.5 million earned in the preceding contract year ended September 30, 2000. 32 The increase in RASM for military/charter revenues in 2001, as compared to 2000, was due to rate increases awarded for the current contract year, based upon cost data submitted to the U.S. military by the Company and other air carriers providing these services. Operating Expenses Salaries, Wages and Benefits. Salaries, wages and benefits expense in 2001 increased 9.5% to $325.2 million from $297.0 million in 2000. The Company increased its average equivalent employees by approximately 4.7% between 2001 and 2000. This annual growth rate combines employment growth in conjunction with a growing flight schedule prior to the terrorist attacks on September 11, offset by the employee furloughs under the Company's cost-cutting initiatives implemented shortly after the attacks. By the middle of October 2001, the Company had furloughed approximately 1,100 employees as a result of a 20% flight capacity reduction implemented after the September 11 attacks. As of December 31, 2001, the Company had recalled approximately half of those employees furloughed during the fourth quarter of 2001. Additionally, in May 2000, the Company replaced its contracted ground handler at its busiest airport, Chicago-Midway, with its own ramp employees. Although this contributed to a year-over-year increase in salaries, wages and benefits, the Company experienced a corresponding reduction in handling, landing and navigation fees, where third-party handling expenses are classified. Also contributing to the increase in salaries, wages and benefits, is an increase of approximately $7.8 million in benefits expenses to $34.3 million in 2001 as compared to $26.5 million in 2000. This increase is primarily due to increases in medical insurance claims and workers' compensation costs between years. Fuel and Oil. Fuel and oil expense decreased 8.6% to $251.3 million in 2001, as compared to $274.8 million in 2000. The Company consumed 5.8% fewer gallons of jet fuel for flying operations in 2001, as compared to 2000, which resulted in a decrease in fuel expense of approximately $13.7 million between periods. Fuel consumption varies with changes in jet block hours flown, and with changes in the composition of the aircraft fleet. The Company flew 172,207 jet block hours in 2001, as compared to 172,824 jet block hours in 2000, a decrease of 0.4% between years. Fuel consumption in 2001 was more significantly affected by the delivery of 14 Boeing 737-800 aircraft and five Boeing 757-300 aircraft, replacing certain less fuel-efficient Boeing 727-200 and Lockheed L-1011 aircraft subsequently retired from service. The Company estimates that approximately $9.4 million of the variance attributable to lower fuel consumption resulted from flying approximately 18,000 of these block hours using the 19 new aircraft, as compared to flying those block hours with the less-fuel-efficient fleets. During 2001, the Company's average cost per gallon of jet fuel consumed decreased by 6.0% as compared to 2000, resulting in a decrease in fuel and oil expense of approximately $12.6 million between periods. During 2001 and 2000, the Company entered into several fuel price hedge contracts under which the Company sought to reduce the risk of fuel price fluctuations. The Company recorded losses of $2.6 million on these hedge contracts in 2001 as compared to gains of $0.1 million in 2000. As of December 31, 2001, the Company had entered into swap agreements for approximately 6.3 million gallons of heating oil for future delivery between January 2002 and June 2002, which represented approximately 2.6% of total expected fuel consumption in 2002. 33 Aircraft Rentals. Aircraft rentals expense for 2001 increased 37.3% to $99.0 million, as compared to $72.1 million in 2000. The Company took delivery of two Boeing 757-200 aircraft in June 2000 and two Boeing 757-200 aircraft in November 2000, all of which were financed under operating leases. These four aircraft added $10.3 million to aircraft rentals expense in 2001, as compared to 2000. Aircraft rent also increased $17.6 million for 2001, as compared to 2000, as a result of the delivery of 14 leased Boeing 737-800 and five leased Boeing 757-300 aircraft between May and December of 2001. Also during 2001, the Company terminated leases on five Boeing 727-200s which were transferred to BATA. The Company also transferred seven owned Boeing 727-200 aircraft to BATA. Subsequently, the Company leased certain of those aircraft from BATA under short-term operating leases. These transactions resulted in a net decrease in aircraft rent of approximately $2.9 million in 2001. Additional Chicago Express aircraft and spare engine leases generated an increase in aircraft rent expense of approximately $1.9 million in 2001, as compared to 2000. Handling, Landing and Navigation Fees. Handling, landing and navigation fees decreased by 8.9% to $88.7 million in 2001 as compared to $97.4 million in 2000, although the total number of system-wide jet departures between 2001 and 2000 increased by 2.2% to 56,962 from 55,714. The decrease in handling, landing and navigation fees is primarily due to the reduction in commercial and military/government charter flying between years (much of which is operated to and from international airports), since international handling and landing fees are generally more expensive than at domestic U.S. airports, and air navigation fees apply only to international flying. In 2001, international departures were 6,469, a reduction of 16.7% as compared to international departures of 7,763 in 2000. The Company also recorded $2.9 million less in de-icing expense in 2001 due to relatively milder weather as compared to 2000. Depreciation and Amortization. Depreciation and amortization expense decreased 3.0% to $121.3 million in 2001, as compared to $125.0 million in 2000. During the first nine months of 2001, the Company was depreciating the L-1011-50 and 100 fleet assuming a common retirement date of 2004. However, during 2001, the Company decided to retire several of these aircraft as of their next scheduled heavy maintenance check. During the first nine months of 2001, the Company retired three L-1011-50 aircraft from revenue service in this manner, recording a loss on disposal of $6.6 million for these aircraft in aircraft impairments and retirements. During the fourth quarter of 2001, the Company determined that the remaining 10 L-1011-50 and 100 aircraft, together with related rotable parts and inventory, were impaired in accordance with FAS 121. Because the Company continues to utilize these assets, they are classified as held for use under FAS 121, and are recorded on the balance sheet at their estimated fair value at the time of impairment, which is the new asset basis to be depreciated over the assets' estimated remaining useful lives. Due primarily to the reduced cost basis of the remaining 10 aircraft, and the retirement of three aircraft, the Company recorded $5.0 million less engine and airframe overhaul amortization expense for the L-1011-50 and 100 fleet in 2001 than in 2000. In March 2001, the Company entered into an agreement to transfer its entire fleet of 24 Boeing 727-200 aircraft to BATA by May 2002. As a result, in the first quarter of 2001, the Company implemented a change in accounting estimate to adjust the estimated useful lives and salvage value of these aircraft to the terms of the BATA agreement. This change in accounting estimate resulted in an increase of depreciation expense of $2.5 million in 2001, as compared to 2000. 34 Immediately following the terrorist attacks of September 11, 2001, the Company decided to retire its Boeing 727-200 fleet from revenue service, although some aircraft were used for charter service through the first half of 2002. These aircraft were determined to be impaired under FAS 121. Boeing 727-200 aircraft not already transferred to BATA have been classified in the accompanying balance sheets as assets held for sale. In accordance with FAS 121, depreciation expense was not recorded after the fleet was deemed impaired and will not be recorded in future accounting periods. As a result, the Company did not record any depreciation expense on the Boeing 727-200 fleet in the last four months of 2001, which resulted in a $13.3 million decrease in depreciation expense in 2001, as compared to 2000. Amortization of capitalized engine and airframe overhauls on the Boeing 757-200 and Lockheed L-1011-500 fleets increased $9.0 million in 2001, as compared to 2000, after including amortization of related manufacturers' credits. This increase is primarily due to amortization of engine overhauls on the Lockheed L-1011-500 and Boeing 757-200 aircraft. Both fleets are relatively new to the Company and neither required overhauls until late 2000. Crew and Other Employee Travel. The cost of crew and other employee travel decreased 9.9% to $59.3 million in 2001 as compared to $65.8 million in 2000. The decrease in crew and employee travel in 2001, as compared in 2000, was mainly due to a significant decrease in crew positioning expense. The average cost of crew positioning per full-time-equivalent crew member deceased 20.9% in 2001, as compared to 2000. The decrease was primarily due to the decrease in military and charter flights. For those positioning events which did occur, the Company was also able to obtain lower prices from other air carriers through specifically negotiated agreements, as well as benefiting from lower airfares which became generally available in the second half of 2001. Crew and other employee travel also declined due to a decrease in hotel expenses, also resulting primarily from the decline in international flying. Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs expense decreased 12.8% to $61.4 million in 2001, as compared to $70.4 million in 2000. The 2001 decline in maintenance, materials and repairs expense was primarily attributable to a decrease in materials consumed and components repaired related to maintenance on the Company's aging fleets of Lockheed L-1011 and Boeing 727-200 aircraft. During 2001, the Company placed 12 Boeing 727-200 aircraft into BATA and retired three Lockheed L-1011 aircraft from service before related heavy airframe maintenance checks were due to be performed. The Company also recorded a decrease of $3.0 million in maintenance, materials and repairs in 2001, as compared to 2000, due to a negotiated elimination of return condition requirements on one leased Lockheed L-1011 aircraft and the recognition of a return condition receivable on one leased Boeing 757-200 aircraft. The Company accrues estimated costs and credits associated with maintenance return conditions for aircraft on leases as a component of maintenance, materials and repairs expense. The Company recognized an increase in aircraft maintenance, materials and repairs of $3.0 million in 2001, as compared to 2000, relating to the 11 SAAB 340B aircraft operated by Chicago Express. Other Selling Expenses. Other selling expenses increased 13.4% to $41.6 million in 2001, as compared to $36.7 million in 2000. Approximately $3.7 million of this increase in 2001 resulted from an increase in CRS fees. This increase resulted partially from the growth in single-seat sales volumes between periods and partially because of increases in rates charged by CRS systems for improved booking functionality. Credit card discount expense increased $1.5 million as compared to 2000, primarily due to higher volumes of scheduled service tickets sold using credit cards as form of payment. 35 Advertising. Advertising expense increased 20.0% to $26.4 million in 2001, as compared to $22.0 million in 2000. In 2001, the Company increased its advertising (introducing a new marketing campaign) primarily in Chicago in connection with the arrival of the new Boeing 737-800 and 757-300 aircraft, the opening of new ticketing and baggage claim facilities at Chicago-Midway Airport, the announcement of new scheduled service destinations, and the promotion of low fares as compared to the competition. The Company also incurred $6.3 million of incremental advertising costs in 2001 associated with rebuilding customer demand after the September 11 terrorist attacks, but due to their unusual nature, these expenses were included as special charges on the income statement. Passenger Service. For 2001 and 2000, catering represented 74.4% and 78.8%, respectively, of total passenger service expense. The total cost of passenger service decreased 3.7% to $43.9 million in 2001, as compared to $45.6 million in 2000. The Company experienced a decrease of approximately 14.2% in the average unit cost of catering each passenger between 2001 and 2000, primarily because in 2001 there were fewer military and commercial charter passengers in the Company's business mix, which are provided a more expensive catering product due to the longer stage length of these flights. This resulted in a price-and-business-mix decrease of $5.4 million in catering expense in 2001, as compared to 2000. Total jet passengers boarded increased 4.9% between years, resulting in approximately $2.1 million in higher volume-related catering expenses between the same sets of comparative periods. In 2001, as compared to 2000, the Company incurred approximately $1.8 million in higher expenses for mishandled baggage and passenger inconvenience due to flight delays and cancellations. Insurance Expense. The total cost of insurance increased 39.0% to $10.7 million in 2001, as compared to $7.7 million in 2000. The Company experienced increases in liability insurance and hull insurance between years, mainly due to the increase in scheduled service traffic and the addition of the new Boeing 737-800 and Boeing 757-300 fleets beginning in May 2001. The Company also experienced increases in miscellanous general insurance policies between years. Ground Package Cost. Ground package cost decreased 17.1% to $42.2 million in 2001, as compared to $50.9 million in 2000. Ground package costs vary based on the mix of vacation destinations served, the quality and types of ground accommodations offered, and general competitive conditions in the Company's markets, all of which factors can change from period to period. This decline was more significant than the decline in ground package revenue in 2001 as compared to 2000, because the Company received discounted hotel pricing in the last half of the year due to the weakening economy and the reduction in travel demand after the September 11 attacks. Commissions. Commissions expense decreased 11.0% to $34.8 million in 2001, as compared to $39.1 million in 2000. Approximately $3.8 million of the decrease in commissions in 2001, as compared to 2000, was attributable to lower military commissions, which is consistent 36 with the decrease in military revenue between the same time periods. The Company also experienced a decrease of $2.5 million between 2001 and 2000 in commissions paid to travel agents by ATALC, which is consistent with the decrease in related revenues for that affiliate. These decreases were partially offset by increases in scheduled service commissions of $2.2 million between 2001 and 2000 due to an increase in scheduled service sales made by travel agents. Facilities and Other Rentals. The cost of facilities and other rentals increased 27.8% to $20.2 million in 2001, as compared to $15.8 million in 2000. Growth in facilities costs between periods was primarily attributable to the need to provide maintenance, flight crew and passenger service facilities at airport locations to support new scheduled service destinations and higher frequencies to existing destinations. The Company also began occupancy of significantly expanded and improved passenger check-in and baggage claim facilities at Chicago-Midway Airport beginning in March 2001. Aircraft Impairments and Retirements. Following the events of September 11, 2001, the Company decided to retire its Boeing 727-200 fleet earlier than originally planned. Most of the aircraft were retired from revenue service in the fourth quarter of 2001, although some continued to be used for charter service through the first half of 2002. In accordance with FAS 121, the Company determined that the estimated future undiscounted cash flows expected to be generated by the Boeing 727-200s was less than the net book value of these aircraft and the related rotable parts and inventory. Therefore, these assets were impaired under FAS 121. In 2001, the Company recorded an asset impairment charge on these assets of $44.5 million. Also, in the fourth quarter of 2001, the Company determined that, in accordance with FAS 121, the estimated future undiscounted cash flows expected to be generated by the Lockheed L-1011-50 and 100 fleet was less than the current net book value of these aircraft and the related rotable parts and inventory. Therefore, the assets were impaired under FAS 121. The Company recorded an asset impairment charge on these assets of $67.8 million in 2001. U.S. Government Grant. As a result of the approval of its initial applications by the DOT, the Company received cash payments of $32.6 million in the third quarter of 2001, and $11.9 million in the fourth quarter of 2001. The Company recorded total U.S. Government grant revenues of $66.3 million in the second half of 2001 relating to its estimates of direct and incremental losses it incurred during that time period, recording a current receivable of $21.8 million for the balance of cash expected to be paid in 2002. Other Operating Expenses. Other operating expenses increased 10.9% to $84.6 million in 2001, as compared to $76.3 million in 2000. The purchase by ATALC of charter air services from airlines other than the Company was $4.0 million higher in 2001 than in 2000. Flight simulator rentals increased $3.3 million between years due to the crew training required to introduce the new aircraft. These increases were partially offset by net decreases in other expenses included in this category, none of which was individually significant. Interest Income and Expense. Interest expense in 2001 decreased 4.4% to $30.1 million, as compared to $31.5 million in 2000. The Company capitalized additional interest totaling $10.8 million in 2001, as compared to 2000, on aircraft pre-delivery deposits. Additional interest expense of $7.4 million, all of which was capitalized, was incurred in 2001, as compared to 2000, for incremental borrowings made to fund a portion of aircraft pre-delivery deposits. The Company also incurred approximately $2.0 million in interest expense in 2001, relating to three Boeing 757-300 aircraft which were temporarily financed with bridge debt immediately after the September 11, 2001 terrorist attacks. These aircraft were refinanced with operating leases at the end of 2001. 37 The Company invested excess cash balances primarily in commercial paper and money market funds and thereby earned $5.3 million in interest income in 2001, as compared to $8.4 million in 2000. The decrease in interest income between periods is mainly due to a decline in the average interest rate earned between periods on these investments. Income Tax Expense. In 2001, the Company recorded $39.8 million in income tax credits applicable to $116.1 million of pre-tax loss for that period, while in 2000 the Company recorded $4.6 million in income tax credits applicable to $19.9 million of pre-tax loss. The effective tax rate applicable to credits in 2001 was 34.2%, as compared to an effective tax rate of 23.1% in 2000. Income tax credits in both periods were affected by the permanent non-deductibility for federal income tax purposes of 40% of certain amounts paid for crew per diem. The value of these permanent differences was not significantly different in 2001 as compared to 2000, so they impacted 2000 taxable loss more significantly. Liquidity and Capital Resources Cash Flows. In 2002, net cash used in operating activities was $59.0 million, as compared to net cash provided by operating activities in 2001 and 2000 of $144.4 million and $111.7 million, respectively. The change in cash provided by or used in operating activities between 2002 and 2001 primarily resulted from a decrease in earnings, a decrease in the non-cash impact of impairment losses recognized on the Boeing 727-200 and Lockheed L-1011-50 and 100 fleets, and lower depreciation and amortization expense due to those retirements and impairments. The change was also impacted by changes in operating assets and liabilities, most significantly an increase in a credit card holdback receivable implemented in late 2001, and a decrease in accrued expenses resulting primarily from the decrease in the deferred payment of certain federal and state taxes authorized in the wake of the 2001 terrorist attacks, and the reduction of deferred interest payable on pre-delivery deposits in conjunction with the significant number of aircraft deliveries in 2002. These changes were partially offset by a decrease in the U.S. Government grant receivable. Net cash provided by investing activities was $88.9 million in 2002, while net cash used in investing activities was $129.8 million and $290.8 million, respectively, in the years ended December 31, 2001 and 2000. In 2002, $149.5 million in aircraft pre-delivery deposits were returned to the Company, net of additional deposits made, in conjunction with aircraft deliveries, while in 2001 and 2000, $30.8 million and $117.0 million, respectively of expenditures were made for pre-delivery deposits on future deliveries of new aircraft, net of returned deposits on delivered aircraft. Changes in cash provided by or used in investing activities were also impacted by capital expenditures. Capital expenditures totaling $59.3 million, $119.8 million and $146.5 million, respectively, were made in 2002, 2001 and 2000 primarily for aircraft purchases, engine and airframe overhauls, airframe improvements, and the purchase of rotable parts. The declining trend in capital expenditures is due primarily to the replacement of older aircraft with newer fleets, in which all the aircraft are being leased under operating leases. The Company's maintenance cost per hour agreements, whereby payments are charged to maintenance expense as flight hours are incurred, have and are expected to continue to reduce capital spending on related engine overhauls. 38 Net cash used in financing activities was $14.2 million in 2002, while net cash provided by financing activities was $40.7 million and $188.1 million for the years ended December 31, 2001 and 2000, respectively. In all years, cash used in or provided by financing activities relates primarily to proceeds from and repayments of short-term and long-term debt. In 2002, the Company repaid $109.9 million in pre-delivery deposit financings upon delivery of aircraft, net of new borrowings used to fund new deposits. Also in 2002, the Company borrowed and repaid $192.5 million in temporary financing related to the purchase of certain Boeing 737-800 and Boeing 757-300 aircraft, which were subsequently financed through operating leases. In addition, in 2002, the Company obtained a federally guaranteed loan for $168.0 million, of which $10.0 million in proceeds were used to fully repay remaining borrowings under its revolving credit facility. In 2001, the Company obtained $28.4 million in proceeds related to the financing of pre-delivery deposits on aircraft, borrowed $35.0 million under the its bank credit facility, and repaid $17.0 million in special facility revenue bonds. Also in 2001, the Company borrowed and repaid $153.4 million in temporary debt related to the purchase of certain Boeing 757-300 aircraft, which were subsequently financed with operating leases in late 2001. In 2000, net proceeds from short-term and long-term debt primarily consisted of $89.9 million from the financing of pre-delivery deposits on aircraft and proceeds of $23.0 million in notes collateralized by two L-1011-500 aircraft. The Company presently expects that cash on hand at December 31, 2002, together with cash generated by future operations and the return of pre-delivery cash deposits held by the manufacturers on future aircraft and engine deliveries, will be sufficient to fund the Company's obligations during 2003. The adverse impact of current airline industry conditions on the Company, and the ongoing sufficiency of its financial resources to absorb that impact, will depend upon a number of factors, including but not limited to: (1) the Company's ability to continue to reduce its operating costs and conserve its financial resources; (2) the pace and extent of seat capacity reductions in the industry, if any, as these may affect competitive pricing for the Company's services; (3) the resolution of the current war in the Middle East; (4) changes in, if any, the Company's current credit card holdback levels; (5) the number of crew members who may be called for duty in the United States armed forces, and the resulting impact on the Company's ability to operate as planned; (6) any further declines in the values of the aircraft in the Company's fleet, and any aircraft or other asset impairment charges; (7) the increasing price of jet fuel consumed by the Company; and (8) the Company's ability to retain its management and other employees in light of current industry conditions. Debt and Operating Lease Cash Payment Obligations. The Company is required to make cash payments in the future on debt obligations and operating leases. Although the Company is obligated on a number of long-term operating leases which are not recorded on the balance sheet under GAAP, the Company has no off-balance sheet debt and, with the exception of insignificant amounts not requiring disclosure under GAAP, does not guarantee the debt of any other party. The following table summarizes the Company's contractual debt and operating lease obligations at December 31, 2002, and the effect such obligations are expected to have on its liquidity and cash flows in future periods. 39
Total 2004 2006 After As of 12/31/02 2003 -2005 -2007 2007 -------------- ---- ----- ----- ---- (in thousands) Current and long-term debt (1) $ 516,828 $ 22,575 $ 371,219 $ 60,477 $ 62,557 Lease obligations (2) 3,634,623 293,119 548,597 517,890 2,275,017 Expected future lease obligations (3) 816,810 5,155 90,156 116,719 604,780 ---------- -------- ---------- -------- ---------- Total contractual cash obligations $4,968,261 $320,849 $1,009,972 $695,086 $2,942,354 ========== ======== ========== ======== ==========
(1) See discussion of debt obligations in "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5 - Debt." (2) See discussion of operating leases in "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6 - Lease Commitments." (3) Represents estimated payments on 11 new Boeing 757-300 and Boeing 737-800 aircraft the Company is committed to taking delivery of in 2003 and 2004, as well as four spare engines the Company is committed to taking delivery of in 2003 through 2006. The Company intends to finance these aircraft and engines with operating leases. However, no such leases are in place as the Company has not received the aircraft. Payments for expected future lease obligations were derived using leases for comparable aircraft currently in place. For further discussion, see "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 12 - Commitments and Contingencies." Aircraft and Fleet Transactions. In 2000, the Company entered into a purchase agreement with the Boeing Company to purchase directly from Boeing 10 new Boeing 757-300s and 20 new Boeing 737-800s. The Boeing 737-800 aircraft are powered by General Electric CFM56-7B27 engines, and the Boeing 757-300 aircraft are powered by Rolls-Royce RB211-535 E4C engines. The Company also received purchase rights for an additional 50 aircraft. The manufacturer's list price is $73.6 million for each 757-300 and $52.4 million for each 737-800, subject to escalation. The Company's purchase price for each aircraft is subject to various discounts. To fulfill its purchase obligations, the Company has arranged for each of these aircraft, including the engines, to be purchased by third parties that will, in turn, enter into long-term operating leases with the Company. As of December 31, 2002, the Company had taken delivery of 13 Boeing 737-800s and 10 Boeing 757-300s obtained directly from Boeing. All remaining aircraft to be purchased directly from Boeing are scheduled for delivery between July 2004 and December 2004. Aircraft pre-delivery deposits are required for these purchases, and the Company has funded these deposits using operating cash and primarily short-term deposit finance facilities. As of December 31, 2002, the Company had $21.2 million in pre-delivery deposits outstanding for these aircraft, of which $8.4 million was provided by a deposit finance facility with Rolls-Royce. Upon delivery of the aircraft, pre-delivery deposits funded with operating cash will be returned to the Company, and those funded with a deposit facility will be used to repay that facility. In December 2001, the Company entered into an agreement to exercise purchase rights on two Boeing 757-300 aircraft to be delivered in May and June 2003. The Company currently has purchase rights remaining for eight Boeing 757-300 aircraft and 40 Boeing 737-800 aircraft. The Company had operating lease agreements in place to lease 14 new Boeing 40 737-800s from ILFC. As of December 31, 2002, the Company had taken delivery of 12 Boeing 737-800s that are being leased from ILFC. The remaining aircraft under these operating lease agreements are currently scheduled for delivery in June 2003 and November 2003. The Company had an agreement to acquire five additional new Boeing 737-800s to be financed by operating leases with GE Capital Aviation Services ("GECAS"). The Company took delivery of the fifth Boeing 737-800 aircraft being leased from GECAS in the third quarter of 2002. Although the Company typically finances aircraft with long-term operating leases, it has a bridge financing facility which provides for maximum borrowings of $200.0 million to finance new Boeing 737-800 aircraft and new Boeing 757-300 aircraft. Borrowings under the facility bear interest, at the option of ATA, at LIBOR plus a margin, which depends on the percentage of the purchase price borrowed and whether the borrowing matures 18 or 24 months after the aircraft delivery date. During the first four months of 2002, the Company borrowed $192.5 million, under this bridge facility, for the purchase of certain Boeing 737-800 and Boeing 757-300 aircraft. As of June 30, 2002, these borrowings were repaid in full, while the related aircraft were financed under long-term operating leases. The Company has an agreement with General Electric to purchase four spare engines, which are scheduled for delivery between 2003 and 2006. The Company has acquired two spare Rolls Royce engines, one of which was delivered in 2001, and the other in June 2002. In May 2002, the Company entered into an agreement with AMR Leasing Corporation to lease six SAAB 340B aircraft, with options to lease up to 10 additional aircraft. As of September 30, 2002, the Company had taken delivery of all six SAAB 340B aircraft under this agreement. In March 2001, the Company entered into a limited liability company agreement with BCC to form BATA, a 50/50 joint venture. Because the Company does not control BATA, the Company's investment is being accounted for under the equity method of accounting. BATA is expected to remarket the Company's fleet of Boeing 727-200 aircraft in either passenger or cargo configurations. In exchange for supplying the aircraft and certain operating services to BATA, the Company has and will continue to receive both cash and equity in the income or loss of BATA. As of December 31, 2002, the Company has transferred 23 of its original fleet of 24 Boeing 727-200 aircraft to BATA. Significant Financings. On November 20, 2002, the Company obtained a $168.0 million secured term loan, of which $148.5 million was guaranteed by the Air Transportation Stabilization Board. The net proceeds of the secured term loan were approximately $164.8 million, after deducting issuance costs. The Company used a portion of the net proceeds to repay borrowings on its existing bank credit facility and to collateralize new letters of credit, previously secured under the bank facility. The remaining funds will be used for general corporate purposes. Interest is payable monthly at LIBOR plus a margin. Guarantee fees of 5.5% of the outstanding guaranteed principal balance in 2003, with escalation to 9.5% on the outstanding guaranteed principal balance in 2004 through 2008, are payable quarterly. The secured term loan is subject to certain restrictive covenants and is collateralized primarily by certain receivables, certain aircraft, spare engines, and rotables. The receivables had a carrying amount of approximately $44.2 million as of December 31, 2002. The aircraft, spare engines and parts consist of three Lockheed L-1011-500 aircraft, nine Lockheed L-1011-50 and 100 aircraft, two Saab 340B aircraft, 24 Rolls Royce RB211 spare engines and Boeing 757-200, Boeing 757-300 and Boeing 737-800 rotables, which held a combined carrying amount of approximately $95.6 million as of December 31, 2002. 41 In conjunction with obtaining the secured term loan, the Company issued a warrant to the Federal Government to purchase up to 1.5 million shares of its common stock, and additional warrants to purchase up to 0.2 million shares of its common stock to other loan participants, in each case at an exercise price of $3.53 per share for a term of ten years. The Company has recorded $7.4 million as the total fair value of warrants issued, which is also recorded as unamortized discount on the secured term loan as of December 31, 2002. Prior to obtaining the secured term loan, the Company had a secured revolving bank credit facility which provided for maximum borrowings of $60.0 million, including up to $50.0 million for stand-by letters of credit. Borrowings under the facility were subject to an interest rate, at the option of the Company, at either LIBOR plus a margin or the agent bank's prime rate. The facility was subject to certain restrictive covenants and was collateralized by certain aircraft, receivables, and engines. Upon repayment of the borrowings and letters of credit, the revolving bank credit facility was terminated, and all assets previously pledged as collateral were released. Card Agreement. The Company accepts charges to most major credit and debit cards ("cards") as payment from its customers. Approximately 90% of scheduled service sales are purchased using these cards. More than half of these card sales are made using MasterCard or Visa cards. The Company maintains an agreement with a bank for the processing and collection of charges to these cards. Under this agreement a sale is normally charged to the purchaser's card account and is paid to the Company in cash within a few days of the date of purchase, although the Company may provide the purchased services days, weeks or months later. In 2002, the Company processed approximately $633.0 million in MasterCard and Visa charges under its merchant processing agreement. On September 21, 2001, the bank notified the Company that it had determined that the terrorist attacks of September 11, 2001, the ensuing grounding of commercial flights by the FAA, and the significant uncertainty about the level of future air travel entitled the bank to retain cash collected by it on processed card charges as a deposit, up to 100% of the full dollar amount of purchased services to be provided at a future date. If the Company fails to perform pre-paid services which are purchased by a charge to a card, the purchaser may be entitled to obtain a refund which, if not paid by the Company, is the obligation of the bank. The deposit secures this potential obligation of the bank to make such refunds. The bank exercised its right to withhold distributions beginning shortly after its notice to the Company. As of December 31, 2002, the bank had withheld $30.0 million in cash. As of December 31, 2001, the bank had withheld $23.1 million, $20.0 million of which was funded by a letter of credit. The deposits as of December 31, 2002 and December 31, 2001 constituted approximately 60% of the Company's total future obligations to provide services purchased by charges to card accounts as of those dates. The bank has subsequently agreed to require an ongoing 60% deposit, with that percentage being subject to increase up to either 75% or 100%, in the event that certain restrictive covenants are not met. A deposit of 100% of this obligation would have resulted in the additional retention of $20.0 million by the bank at December 31, 2002, and $15.4 million at December 31, 2001. The bank's right to maintain a 60% deposit does not terminate unless, in its reasonable judgment and at its sole discretion, it determines that a deposit is no longer required. The Company has the right to terminate its agreement with the bank upon providing appropriate notice, as does the bank. In the event of such termination, the bank may retain a deposit equal to the amount of purchased services not yet performed, for up to 24 months from the date of termination. 42 Although the Company continues to process significant dollar amounts of ticket sales using credit cards other than Mastercard and Visa, as of December 31, 2002 no cash deposit requirements had been implemented by the issuers or processors of those cards. Surety Bonds. The Company has historically provided surety bonds to airport authorities and selected other parties, to secure the Company's obligation to these parties. The DOT also requires the Company to provide a surety bond or to escrow customer deposits to secure potential refund claims of charter customers who have made prepayments to the Company for future transportation. One issuer currently provides all surety bonds issued on behalf of the Company. Prior to the terrorist attacks of September 11, 2001 the Company had provided a letter of credit of $1.5 million as security to the issuer for its total estimated surety bond obligations, which were $20.9 million at August 31, 2001. Effective October 5, 2001, the issuer required the Company to increase its letter of credit to 50% of its estimated surety bond liability. Effective January 16, 2002, the issuer implemented a requirement for the Company's letter of credit to secure 100% of estimated surety bond obligations, which totaled $19.8 million. The Company's letter of credit was adjusted accordingly, and the Company is subject to future adjustments of its letter of credit based upon further revisions to the estimated liability for total surety bonds outstanding. As of December 31, 2002, the letter of credit requirement had decreased to $15.2 million, reflecting an actual decline in outstanding charter deposit obligations of the Company. The Company has the right to replace the issuer with one or more alternative issuers of surety bonds, although the Company can provide no assurance that it will be able to secure more favorable terms from other issuers. Future Accounting Changes In April of 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("FAS 145"). FAS 145 rescinds both FASB Statements of Financial Accounting Standards No. 4, Reporting Gains and Losses from Extinguishment of Debt, ("FAS 4"), and an amendment to FAS 4, FASB Statements of Financial Accounting Standards No. 64, Extinguishments of Debt Made to Satisfy Sinking Fund Requirements ("FAS 64"). FAS 4 required that all gains and losses from the extinguishment of debt be aggregated and, if material, be classified as an extraordinary item, net of the related income tax effect. Upon the adoption of FAS 145, all gains and losses on the extinguishment of debt for periods presented in the financial statements will be classified as extraordinary items only if they meet the criteria of APB Opinion 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB 30"). The provisions of FAS 145 related to the rescission of FAS 4 and FAS 64 shall be applied for fiscal years beginning after May 15, 2002. In June of 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("FAS 146"). FAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). FAS 146 generally requires companies to recognize costs associated with exit activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan, and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of 43 Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also expands the disclosure required to be made by a guarantor about its obligations under certain guarantees that it has issued. Initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified. The disclosure requirements are effective immediately. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires that companies that control another entity through interests other than voting interests should consolidate the controlled entity. FIN 46 applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest in after that date. The related disclosure requirements are effective immediately. See "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 18 - Recently Issued Accounting Pronouncements." Forward-Looking Information and Risk Factors Information contained within "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking information which can be identified by forward-looking terminology such as "believes," "expects," "may," "will," "should," "anticipates," or the negative thereof, or other variations in comparable terminology. Such forward-looking information is based upon management's current knowledge of factors affecting the Company's business. The differences between expected outcomes and actual results may be material, depending upon the circumstances. Where the Company expresses an expectation or belief as to future results in any forward-looking information, such expectation or belief is expressed in good faith and is believed to have a reasonable basis. The Company can provide no assurance that the statement of expectation or belief will result or will be achieved or accomplished. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those expected. Such factors include, but are not limited to, the following: o economic conditions; o labor costs; o aviation fuel costs; o competitive pressures on pricing; o weather conditions; o governmental legislation and regulation; o consumer perceptions of the Company's products; o demand for air transportation overall, considering the impact of September 11, 2001, and specifically in markets in which the Company operates; o higher costs associated with new security directives; o higher costs for insurance and the continued availability of such insurance; o the Company's ability to raise additional financing, and to refinance existing borrowings upon maturity; o declines in the value of the Company's aircraft, as these may result in lower collateral value and additional impairment charges; and o other risks and uncertainties listed from time to time in reports the Company periodically files with the Securities and Exchange Commission. The Company does not undertake to update its forward-looking statements to reflect future events or circumstances. 44 Item 7a. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to certain market risks, including commodity price risk resulting from aircraft fuel price fluctuations and interest rate risk. The adverse effects of potential changes in these market risks are discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions management might take to mitigate the adverse impact of such changes on the Company. See the notes to consolidated financial statements for a description of the Company's accounting policies and other information related to these financial instruments. Aircraft Fuel Prices. The Company's results of operations are significantly impacted by changes in the price of aircraft fuel. During 2002, aircraft fuel accounted for approximately 14.4% of the Company's operating expenses, compared to 18.4% in 2001. In addition to purchasing fuel-hedging contracts, the Company obtains fuel price fluctuation protection from escalation clauses in certain commercial charter, military charter, bulk scheduled service and mail contracts. During 2002 and 2001, the Company entered into fuel hedge contracts to reduce the volatility of fuel prices, using heating oil swaps. As of December 31, 2002, the Company had no outstanding fuel hedge agreements. Market risk is estimated as a hypothetical 10% increase in the December 31, 2002 cost per gallon of fuel. Based on projected 2003 fuel usage, excluding anticipated protection from escalation clauses, such a change would result in an increase in aircraft fuel expense of approximately $19.4 million. As of December 31, 2001, that risk was $16.5 million. Interest Rates. The Company's results of operations are affected by fluctuations in market interest rates. As of December 31, 2002, the majority of the Company's variable-rate debt was comprised of approximately $168.0 million and $8.4 million, respectively, of variable-rate debt through the secured term loan, and debt funding aircraft pre-delivery deposits. As of December 31, 2001, the majority of the Company's variable-rate debt was comprised of approximately $35.0 million and $118.2 million, respectively, of variable-rate debt through a revolving credit facility, and debt funding aircraft pre-delivery deposits. If interest rates average 100 basis points more on variable-rate debt in 2003, as compared to 2002 average rates, the Company's interest expense would increase by approximately $1.8 million. In comparison, if interest rates averaged 100 basis points more on variable-rate debt in 2002, as compared to 2001 average rates, the Company's interest expense would have increased by approximately $1.5 million. As of December 31, 2002 and 2001, the majority of the Company's fixed-rate debt was comprised of unsecured debt with a carrying value of $300.0 million. Based upon a calculation of discounted future cash flows using current incremental borrowing rates as of the end of the year for similar types of instruments, the fair value as of December 31, 2002 of this fixed-rate debt is estimated to be approximately $262.2 million. Market risk, estimated as the potential increase in fair value resulting from a hypothetical 100 basis point decrease in market interest rates, was approximately $32.5 million as of December 31, 2002. As of December 31, 2001, that risk was approximately $17.2 million. 45 If 2003 average short-term interest rates decreased by 100 basis points as compared to 2002 average rates, the Company's projected interest income from short-term investments would decrease by approximately $2.0 million. In comparison, the Company estimated that if 2002 average short-term interest rates decreased by 100 basis points as compared to 2001 average rates, the Company's interest income from short-term investments would have decreased by approximately $1.8 million as of December 31, 2001. All estimated changes in interest income and expense are determined by considering the impact of hypothetical changes in interest rates on the Company's debt and cash balances at December 31, 2002 and 2001. 46 Item 8. Financial Statements and Supplementary Data REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors ATA Holdings Corp. and Subsidiaries We have audited the accompanying consolidated balance sheets of ATA Holdings Corp. and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in redeemable preferred stock, common stock and other shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 ATA Holdings Corp. and Subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein. As discussed in Note 16 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets". ERNST & YOUNG LLP Indianapolis, Indiana January 24, 2003 47
ATA HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) December 31, December 31, 2002 2001 ------------------- ---------------------- ASSETS Current assets: Cash and cash equivalents $ 200,160 $ 184,439 Aircraft pre-delivery deposits 16,768 166,574 Receivables, net of allowance for doubtful accounts (2002 - $2,375; 2001 - $1,526) 86,377 75,046 Inventories, net 51,233 47,648 Assets held for sale - 18,600 Prepaid expenses and other current assets 39,214 19,471 ------------------- ---------------------- Total current assets 393,752 511,778 Property and equipment: Flight equipment 312,652 327,541 Facilities and ground equipment 134,355 119,975 ------------------- ---------------------- 447,007 447,516 Accumulated depreciation (181,380) (132,573) ------------------- ---------------------- 265,627 314,943 Restricted cash 30,360 - Goodwill 14,887 21,780 Assets held for sale 5,090 33,159 Prepaid aircraft rent 68,828 49,159 Investment in BATA, LLC 22,968 30,284 Deposits and other assets 46,624 41,859 ------------------- ---------------------- Total assets $ 848,136 $ 1,002,962 =================== ====================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term debt $ 14,191 $ 5,820 Short-term debt 8,384 118,239 Accounts payable 23,688 26,948 Air traffic liabilities 94,693 100,958 Accrued expenses 160,924 177,102 ------------------- ---------------------- Total current liabilities 301,880 429,067 Long-term debt, less current maturities 486,853 373,533 Deferred income taxes - 13,655 Deferred gains from sale and leaseback of aircraft 54,889 45,815 Other deferred items 42,038 16,760 ------------------- ---------------------- Total liabilities 885,660 878,830 Commitments and contingencies Redeemable preferred stock; authorized and issued 800 shares 82,485 80,000 Shareholders' equity (deficit): Preferred stock; authorized 9,999,200 shares; none issued - - Common stock, without par value; authorized 30,000,000 shares; issued 13,476,193 - 2002; 13,266,642 - 2001 65,290 61,964 Treasury stock; 1,711,440 shares - 2002; 1,710,658 shares - 2001 (24,778) (24,768) Additional paid-in capital 18,374 11,534 Other comprehensive loss - (687) Retained deficit (178,895) (3,911) ------------------- ---------------------- Total shareholders' equity (deficit) (120,009) 44,132 ------------------- ---------------------- Total liabilities and shareholders' equity (deficit) $ 848,136 $ 1,002,962 =================== ====================== See accompanying notes.
48
ATA HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) Year Ended December 31, 2002 2001 2000 -------------------------------------------------- Operating revenues: Scheduled service $ 886,579 $ 820,666 $ 753,301 Charter 309,242 359,770 435,262 Ground package 35,687 52,182 59,848 Other 45,862 42,866 43,142 ----------- ------------- ----------- Total operating revenues 1,277,370 1,275,484 1,291,553 ----------- ------------- ----------- Operating expenses: Salaries, wages and benefits 355,201 325,153 297,012 Fuel and oil 206,574 251,333 274,820 Aircraft rentals 190,148 98,988 72,145 Handling, landing and navigation fees 110,528 88,653 97,414 Depreciation and amortization 76,727 121,327 125,041 Crew and other employee travel 54,774 59,278 65,758 Aircraft maintenance, materials and repairs 52,254 61,394 70,432 Other selling expenses 43,934 41,601 36,650 Advertising 40,028 26,421 22,016 Passenger service 38,345 43,856 45,571 Insurance 33,981 10,675 7,733 Ground package cost 27,882 42,160 50,903 Commissions 23,326 34,789 39,065 Facilities and other rentals 22,624 20,241 15,817 Special charges - 21,525 - Aircraft impairments and retirements 66,787 118,868 - Goodwill impairment 6,893 - - U.S. Government grant 16,221 (66,318) - Other 71,180 67,410 68,606 ----------- ------------- ----------- Total operating expenses 1,437,407 1,367,354 1,288,983 ----------- ------------- ----------- Operating income (loss) (160,037) (91,870) 2,570 Other income (expense): Interest income 2,829 5,331 8,389 Interest expense (35,746) (30,082) (31,452) Other (1,260) 554 562 ----------- ------------- ----------- Other expenses (34,177) (24,197) (22,501) ----------- ------------- ----------- Loss before income taxes (194,214) (116,067) (19,931) Income tax credit (24,950) (39,750) (4,607) ----------- ------------- ----------- Net loss (169,264) (76,317) (15,324) Preferred stock dividends (5,720) (5,568) (375) ----------- ------------- ----------- Loss available to common shareholders $ (174,984) $ (81,885) $ (15,699) =========== ============= =========== Basic earnings per common share: Average shares outstanding 11,711,906 11,464,125 11,956,532 Net loss per common share $ (14.94) $ (7.14) $ (1.31) =========== ============= =========== Diluted earnings per common share: Average shares outstanding 11,711,906 11,464,125 11,956,532 Net loss per common share $ (14.94) $ (7.14) $ (1.31) =========== ============= =========== See accompanying notes.
49
ATA HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK, COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (DEFICIT) (Dollars in thousands) Redeemable Additional Deferred Other Retained Total Preferred Common Treasury Paid-in Comprehensive Comprehensive Earnings Shareholders' Stock Stock Stock Capital ESOP Income (Deficit) Equity(Deficit) ------ ------- -------- ------- ----- ----- ---------- -------------- Balance, December 31, 1999 $ - $55,826 $(10,500) $12,910 $(533) $ - $ 93,673 $ 151,376 ------ ------- -------- ------- ----- ------ ---------- --------- Net loss - - - - - - (15,324) (15,324) Issuance of redeemable preferred stock 80,000 - - - - - - - Issuance of common stock for ESOP - - - 276 533 - - 809 Preferred dividends - - - - - - (375) (375) Restricted stock grants - 67 (14) 17 - - - 70 Stock options exercised - 2,937 - (1,356) - - - 1,581 Purchase of treasury stock - - (14,050) - - - - (14,050) Disqualifying disposition of stock - - - 411 - - - 411 Acquistions of businesses - 182 - (26) - - - 156 ------ ------- -------- ------- ----- ----- ---------- --------- Balance as of December 31, 2000 80,000 59,012 (24,564) 12,232 - - 77,974 124,654 ======= ======= ======== ========= ===== ===== ========= ========= Net loss - - - - - - (76,317) (76,317) Net loss on derivative instruments, net of tax - - - - - (687) - (687) ---- ------- ------ Total comprehensive loss - - - - - (687) (76,317) (77,004) ---- ------- ------ Preferred dividends - - - - - - (5,568) (5,568) Restricted stock grants - 40 (8) 10 - - - 42 Stock options exercised - 2,912 - (1,242) - - - 1,670 Purchase of treasury stock - - (196) - - - - (196) Disqualifying disposition of stock - - - 534 - - - 534 ------ ------- -------- ------- ----- ----- ---------- --------- Balance as of December 31, 2001 80,000 61,964 (24,768) 11,534 - (687) (3,911) 44,132 ======= ======= ======== ========= ====== ===== ========= ========= Net loss - - - - - - (169,264) (169,264) Net gain on derivative instruments, net of tax - - - - - 687 - 687 ---- ------- ------ Total comprehensive loss - - - - - 687 (169,264) (168,577) ---- ------- ------ Preferred dividends - - - - - - (5,720) (5,720) Restricted stock grants - 13 (10) 4 - - - 7 Payment of liability with stock - 2,445 - (295) - - - 2,150 Stock options exercised - 868 - (419) - - - 449 Warrants issued with ATSB loan - - - 7,424 - - - 7,424 Disqualifying disposition of stock - - - 126 - - - 126 Accrued preferred stock dividends 2,485 - - - - - - - ------ ------- -------- ------- ----- ------ ---------- --------- Balance as of December 31, 2002 $82,485 $65,290 $(24,778) $ 18,374 $ - $ - $(178,895) $(120,009) ======= ======= ======== ========= ====== ======= ========= ========= See accompanying notes.
50
ATA HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Year Ended December 31, 2002 2001 2000 ------------------------------------------------- Operating activities: Net loss $(169,264) $ (76,317) $ (15,324) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 76,727 121,327 125,041 Aircraft impairments and retirements 66,787 118,868 - Goodwill impairments 6,893 Deferred income tax credit (8,697) (40,848) (3,990) Other non-cash items 39,817 1,843 4,324 Changes in operating assets and liabilities: U.S. Government grant receivable 16,221 (21,861) - Other receivables (27,552) 3,420 (4,506) Inventories (7,411) (11,586) (15,191) Prepaid expenses and other current assets (24,701) 5,940 (2,466) Accounts payable (3,260) 16,882 (10,168) Air traffic liabilities (6,265) (6,092) 13,543 Accrued expenses (18,309) 32,848 20,429 --------- --------- --------- Net cash provided by (used in) operating activities (59,014) 144,424 111,692 --------- --------- --------- Investing activities: Aircraft pre-delivery deposits 149,510 (30,781) (116,978) Capital expenditures (59,346) (119,798) (146,523) Noncurrent prepaid aircraft rent (12,304) (17,180) (16,811) Investment in BATA 18,632 27,343 - (Additions) reductions to other assets (7,985) 10,474 (10,593) Proceeds from sales of property and equipment 424 151 68 --------- --------- --------- Net cash provided by (used in) investing activities 88,931 (129,791) (290,837) --------- --------- --------- Financing activities: Preferred stock dividends (3,235) (5,568) (375) Proceeds from sale/leaseback transactions 2,253 5,229 10,791 Proceeds from short-term debt 56,858 71,537 90,825 Payments on short-term debt (167,839) (44,123) - Proceeds from long-term debt 363,040 219,422 33,117 Payments on long-term debt (235,352) (207,294) (13,998) Increase in restricted cash (30,360) - - Proceeds from stock option exercises 449 1,670 1,822 Proceeds from redeemable preferred stock - - 80,000 Purchase of treasury stock (10) (204) (14,064) --------- --------- --------- Net cash provided by (used in) financing activities (14,196) 40,669 188,118 --------- --------- --------- Increase in cash and cash equivalents 15,721 55,302 8,973 Cash and cash equivalents, beginning of period 184,439 129,137 120,164 --------- --------- --------- Cash and cash equivalents, end of period $ 200,160 $ 184,439 $ 129,137 ========= ========= ========= Supplemental disclosures: Cash payments for: Interest $ 42,102 $ 44,839 $ 31,628 Income taxes (refunds) $ 1,572 $ (9,721) $ 579 Financing and investing activities not affecting cash: Capital lease $ - $ - $ 117 Accrued capital interest $ (10,487) $ 7,465 $ 7,890 Notes payable $ 2,427 $ - $ - Issuance of warrants $ 7,424 $ - $ - See accompanying notes.
51 Notes to Consolidated Financial Statements 1. Significant Accounting Policies Basis of Presentation and Business Description The consolidated financial statements include the accounts of ATA Holdings Corp., formerly Amtran Inc. (the "Company") and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company operates principally in one business segment through ATA Airlines, Inc. , formerly American Trans Air, Inc. ("ATA"), its principal subsidiary, which accounts for approximately 90% of the Company's operating revenues. ATA is a U.S.-certificated air carrier providing domestic and international charter and scheduled passenger air services. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents Cash equivalents are carried at cost, which approximates market, and are primarily comprised of money market funds and investments in U.S. Treasury repurchase agreements. (See "Note 3 - Cash and Cash Equivalents.") Inventories Inventories consist primarily of expendable aircraft spare parts, fuel and other supplies. Aircraft parts inventories are stated at cost and are reduced by an allowance for obsolescence. The obsolescence allowance is provided by amortizing the cost of the aircraft parts inventory, net of an estimated residual value, over the related fleet's estimated useful service life. The obsolescence allowance at December 31, 2002 and 2001 was $14.7 million and $10.9 million, respectively. Inventories are charged to expense when consumed. Investment in BATA, LLC The Company has a limited liability company agreement with Boeing Capital Corporation ("BCC") forming BATA Leasing LLC ("BATA"), a 50/50 joint venture. Because the Company does not control BATA, the Company's investment is accounted for under the equity method of accounting. BATA is expected to remarket the Company's fleet of Boeing 727-200 aircraft in either passenger or cargo configurations. In exchange for supplying the aircraft and certain operating services to BATA, the Company has and will continue to receive both cash and its share of the income or loss of BATA. As of December 31, 2002, the Company has transferred 23 of its original fleet of 24 Boeing 727-200 aircraft to BATA. 52 Revenue Recognition Revenues are recognized when air transportation or other services are provided. Customer flight deposits and unused passenger tickets sold are included in air traffic liability. As is customary within the industry, the Company performs periodic evaluations of this estimated liability, and any resulting adjustments, which can be significant, are included in the results of operations for the periods in which the evaluations are completed. Passenger Traffic Commissions Passenger traffic commissions are recognized as expense when the transportation is provided and the related revenue is recognized. The amount of passenger traffic commissions paid in advance and not yet recognized as expense are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Reclassifications Certain 2001 balance sheet amounts have been reclassified to conform to the 2002 presentation. Property and Equipment Property and equipment are recorded at cost and are depreciated to residual values over their estimated useful service lives using the straight-line method. The estimated useful service lives for the principal depreciable asset classifications are as follows: 53 Asset Estimated Useful Service Life - ----- ----------------------------- Aircraft and related equipment Lockheed L-1011 (Series 50 and 100) Depreciating to individual aircraft retirement date (2003-2004) (See "Note 15 - Fleet Impairment.") Lockheed L-1011 (Series 500) Depreciating to common retirement date of December 2010 Boeing 737-800 All aircraft are subject to operating leases Boeing 757-200 All aircraft are subject to operating leases Boeing 757-300 All aircraft are subject to operating leases SAAB 340B 15 years Major rotable parts, avionics and Life of equipment to which assemblies applicable(generally ranging from 5-18 years) Improvements to leased flight equipment Period of benefit or term of lease Other property and equipment 3-7 years Aircraft Lease Return Conditions The Company finances a significant number of aircraft through operating leases. Many of these leases require that the airframes and engines be in a specified maintenance condition upon their return to the lessor at the end of the lease. If these return conditions are not met by the Company, the leases generally require financial compensation to the lessor. When an operating lease is within five years of its initial termination date, the Company accrues ratably over that five years, if estimable, the total estimated return condition obligation or the total estimated costs that will be incurred by the Company to render the aircraft in a suitable return condition per the contract. Airframe and Engine Overhauls The Company has entered into engine manufacturers' maintenance agreements for engines which power the Boeing 737-800, Boeing 757-200, Boeing 757-300 and SAAB 340B fleets, which provide for the Company to pay a monthly fee per engine flight hour in exchange for major overhaul and maintenance of those engines. The Company expenses the cost per flight hour under these agreements as incurred. The cost of engine overhauls for remaining fleet types, and the cost of airframe overhauls for all fleet types other than the SAAB 340B, are capitalized when performed and amortized over estimated useful lives based upon usage, or to earlier fleet or aircraft retirement dates, for both owned and leased aircraft. This accounting treatment was also applied to Boeing 757-200 engine overhauls completed prior to October 2001, the effective date of the engine manufacturers' maintenance agreement for this fleet. Airframe overhauls for SAAB 340B aircraft are expensed as incurred. 54 Aircraft Pre-delivery Deposits Advance payments for future aircraft deliveries scheduled within the next 12 months are classified as current aircraft pre-delivery deposits in the accompanying consolidated balance sheets, as the aircraft will be acquired and paid for by third parties who will lease them to the Company. Advance payments for future aircraft deliveries not scheduled within the next 12 months are classified as deposits and other assets. As of December 31, 2002 and 2001, deposits and other assets included advanced payments for future aircraft and engine deliveries totaling $4.4 million and $4.1 million, respectively. Restricted Cash Restricted cash consists of deposits held to secure outstanding stand-by letters of credit currently provided by the Company. While the existing letters of credit mature within the next 12 months, management believes it is likely that the letters of credit will be renewed and has classified the restricted cash as a long-term asset on the balance sheet as of December 31, 2002. Intangible Assets Goodwill, which represents the excess of cost over fair value of net assets acquired, was amortized on a straight-line basis over 20 years, until January 1, 2002, when the Company adopted FASB Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). The Company now annually tests goodwill and other intangible assets deemed to have indefinite lives for impairment. The Company's policy is to record an impairment charge when it is determined that an asset's carrying value may not be recoverable. Financial Instruments The carrying amounts of cash equivalents, receivables and variable-rate debt approximate fair value. (See "Note 5 - Debt.") The fair value of fixed-rate debt, including current maturities, is estimated using discounted cash flow analysis based on the Company's current incremental rates for similar types of borrowing arrangements. The carrying value of the Company's unsecured senior notes of $300 million had an aggregate estimated fair value of $124.5 million and $226.4 million based upon dealer-quoted prices at December 31, 2002, and December 31, 2001, respectively. Advertising The Company expenses advertising costs in the period incurred. Stock Based Compensation During 1996, the Company adopted the disclosure provisions of FASB Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123") with respect to its stock options. As permitted by FAS 123, the Company has elected to continue to account for employee stock options following the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations. Under APB 25, because the exercise price of the Company's employee stock options 55 equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. There were no options granted by the Company in 2002. The weighted-average fair value of options granted during 2001 and 2000 is estimated at $5.44 and $6.02 per share, respectively, on the grant date. These estimates were made using the Black-Scholes option pricing model with the following weighted-average assumptions for 2001 and 2000: risk-free interest rate of 3.59% and 5.06%; expected market price volatility of 0.62 and 0.51; weighted-average expected option life of 1.04 years and 0.94 years; estimated forfeitures of 10.8% and 6.0%; and no dividends. 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 use highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employees' stock options. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period (1 to 3 years). The Company's pro forma information follows:
2002 2001 2000 ------------------------------------------------- (In thousands, except per share data) Net loss available to common shareholders as reported $ (174,984) $ (81,885) $ (15,699) Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects (140) (1,188) (3,182) -------- ------- ------- Net loss available to common shareholders pro forma (175,124) (83,073) (18,881) ======== ======= ======= Basic and Diluted loss per share as reported (14.94) (7.14) (1.31) ======== ======= ======= Basic and Diluted loss per share pro forma (14.95) (7.25) (1.58) ======== ======= =======
2. State of the Industry and the Company On September 11, 2001, four commercial aircraft operated by two other U.S. airlines were hijacked and destroyed in terrorist attacks on the United States. These attacks resulted in significant loss of life and property damage in New York City, Washington, D.C. and western Pennsylvania. In response to these attacks, on September 11, 2001 the FAA temporarily suspended all commercial flights to, from and within the United States until September 13, 2001. The Company resumed limited flight operations on September 13, 2001, with the exception of flights to and from Chicago-Midway Airport, which commenced partial operations on September 14, 2001. From September 11, 2001 to September 14, 2001, the Company canceled over 800 scheduled flights. 56 The terrorist attacks of September 11, 2001 and generally weak economic conditions have adversely affected the Company and the airline industry. The industry as a whole, and the Company, suffered very significant financial losses in 2001 and 2002. During 2002, two major air carriers, US Airways Group and UAL Corporation, filed for reorganization under Chapter 11 of the United States Bankruptcy Code. Historically, air carriers involved in reorganizations have substantially reduced their fares, which could reduce airline yields further from current levels. Certain air carriers are seeking to recover, at least partially, by reducing their seat capacity. As this is accomplished by eliminating aircraft from operating fleets, the fair value of aircraft may be adversely affected. The Company has recorded substantial charges to earnings resulting from fleet retirements and impairments over the past two years. However, during the period the Company has substantially replaced its fleet of aging aircraft with new fuel-efficient Boeing aircraft. These new Boeing aircraft are all leased and have higher fixed ownership costs than the older fleets. The Company made large operating lease payments on these aircraft in early 2003, which caused a substantial decrease in the Company's cash balance since December 31, 2002. In addition, since all of these aircraft are leased, the Company has pledged receivables and other assets to secure debt, leaving the Company with few unencumbered assets. The industry and the Company have also been adversely impacted by substantially higher insurance costs, and higher passenger security costs. The Company has benefited from some of the U.S. Government's initiatives for assisting the airline industry. Most significant to the Company was the Air Transportation Safety and System Stabilization Act ("Act") passed in 2001, which provided for, among other things, up to $5.0 billion in compensation to U.S. airlines and air cargo carriers for direct and incremental losses resulting from the September 11, 2001 terrorist attacks and the availability of up to $10.0 billion in U.S. Government guarantees of certain loans made to air carriers, which are administered by the newly-established Air Transportation Stabilization Board ("ATSB"). The Company had recorded $66.3 million in U.S. Government grant compensation as of December 31, 2001. This estimate was based on guidance available from the DOT at the time for identifying those expenses it deemed reimbursable. Throughout 2002, the Company discussed the calculation with the DOT, and as of December 31, 2002 had reversed approximately $16.2 million ($15.2 million in the second quarter and $1.0 million in the fourth quarter) of that revenue and revised its estimate of total U.S. Government grant compensation to $50.1 million. In early 2003, the Company received the last cash installment of grant reimbursement from the U.S. Government, consistent with that estimate. In November 2002, the Company also obtained a $168.0 million secured term loan, of which $148.5 million was guaranteed by the ATSB. The net proceeds of the term loan were approximately $164.8 million, after deducting issuance costs. The Company used a portion of the net proceeds to repay borrowings on its existing revolving bank credit facility and to collateralize new letters of credit, previously secured by the bank facility. The remainder of the proceeds of approximately $104.7 million will be used for general corporate purposes. In conjunction with obtaining the secured term loan, the Company issued a warrant to the Federal Government to purchase up to 1.5 million shares of its common stock, and additional warrants to other loan participants to purchase up to 0.2 million shares of its common stock, in each case at an exercise price of $3.53 per share over a term of ten years. (See "Note 5 - Debt" and "Note 9 - Shareholders' Equity (Deficit)" for additional information about the loan.) While the Company believes that adverse industry conditions are likely to continue throughout 2003, the Company's management believes it has a viable plan to ensure sufficient cash to fund operations during the next 12 months. In addition to the assistance the Company has already received in the form of U.S. Government grant compensation and the secured term loan, the plan calls for focusing marketing efforts on those routes where the Company believes it can be a leading provider and implementing a number of cost-saving initiatives the 57 Company believes will enhance its low-cost advantage. Although the Company believes the assumptions underlying its 2003 financial projections are reasonable, there are significant risks which could cause the Company's 2003 financial performance to be different than projected. These risks relate primarily to further declines in demand for air travel, further increases in fuel prices, the uncertain outcome of the two major airline bankruptcies filed in 2002, the possibility of other airline bankruptcy filings, and the uncertain outcome and geopolitical impact of the conflict in the Middle East. 3. Cash and Cash Equivalents Cash and cash equivalents consist of the following: December 31, 2002 2001 ---------------------------------- (in thousands) Cash and money market funds $ 176,404 $ 180,388 U.S. Treasury repurchase agreements 23,756 4,051 ---------------------------------- $ 200,160 $ 184,439 ================================== 4. Property and Equipment The Company's property and equipment consist of the following:
December 31, 2002 2001 ----------------------------- (in thousands) Flight equipment, including airframes, engines and other $ 312,652 $ 327,541 Less accumulated depreciation 94,173 58,396 ------------- ------------- 218,479 269,145 ------------- ------------- Facilities and ground equipment 134,355 119,975 Less accumulated depreciation 87,207 74,177 ------------- ------------- 47,148 45,798 ------------- ------------- $ 265,627 $ 314,943 ============= =============
Depreciation and amortization expense related to property and equipment was $68.9 million, $113.3 million and $118.5 million for 2002, 2001 and 2000, respectively. 58 5. Debt Debt consists of the following:
December 31, 2002 2001 -------- -------- (in thousands) Partially guaranteed term loan, variable rate of LIBOR plus a margin, $168,000 $ - averaging 2.8% in 2002, payable in varying installments from November 2003 through November 2008 Unamortized discount on partially guaranteed term loan (7,400) - Unsecured Senior Notes, fixed rate of 10.5%, payable in August 2004 175,000 175,000 Unsecured Senior Notes, fixed rate of 9.625%, payable in December 2005 125,000 125,000 Aircraft pre-delivery deposit finance facilities, variable rates of LIBOR plus 3.0% to 3.25%, averaging 4.1% in 2002 and 6.2% in 2001, payable upon delivery of aircraft 8,384 118,239 Secured note payable to institutional lender, variable rate of LIBOR plus 2.0%, averaging 5.0% in 2002 and 6.7% in 2001, payable in varying installments through October 2005 7,675 9,375 Secured note payable to institutional lender, variable rate of LIBOR plus 2.0%, averaging 5.0% in 2002 and 6.7% in 2001, payable in varying installments through March 2005 6,683 8,383 Mortgage note payable to institutional lender, fixed rate of 8.75%, payable in varying installments through June 2014 9,080 9,538 Mortgage note payable to institutional lender, fixed rate of 8.30%, payable in varying installments through June 2014 6,915 7,280 City of Chicago variable rate (averaging 1.5% in 2002 and 2.7% in 2001) special facility revenue bonds, payable in December 2020 6,000 6,000 Borrowings against secured revolving bank credit facility - 35,000 Other 4,091 3,777 -------- -------- 509,428 497,592 Less current maturities and short-term debt 22,575 124,059 -------- -------- $486,853 $373,533 ======== ========
59 On November 20, 2002, the Company obtained a $168.0 million secured term loan, of which $148.5 million is guaranteed by the Air Transportation Stabilization Board. Interest is payable monthly at LIBOR plus a margin. Guarantee fees of 5.5% of the outstanding guaranteed principal balance in 2003 with escalation to 9.5% on the outstanding guaranteed principal balance in 2004 through 2008 are payable quarterly. The net proceeds of the term loan were approximately $164.8 million, after deducting issuance costs. The Company used a portion of the net proceeds to repay borrowings on its existing revolving bank credit facility and to collateralize new letters of credit, previously secured by the bank facility. Upon repayment of the borrowings and letters of credit, the revolving bank credit facility terminated, and any assets previously held as collateral were released. The additional secured term loan proceeds of approximately $104.7 million will be used for general corporate purposes. The secured term loan is subject to certain restrictive covenants and is collateralized primarily by certain receivables, certain aircraft, spare engines, and rotable parts. The receivables had a carrying amount of approximately $44.2 million as of December 31, 2002. The aircraft, spare engines and parts consist of three Lockheed L-1011-500 aircraft, nine Lockheed L-1011-50 and 100 aircraft, two Saab 340B aircraft, 24 Rolls Royce RB211 spare engines and Boeing 757-200, Boeing 757-300 and Boeing 737-800 rotable parts, which have a combined carrying amount of approximately $95.6 million as of December 31, 2002. In conjunction with obtaining the secured term loan, the Company issued a warrant to the Federal Government to purchase up to 1.5 million shares of its common stock, and additional warrants to other loan participants to purchase up to 0.2 million shares of its common stock, in each case at an exercise price of $3.53 per share over a term of ten years. The Company has allocated $7.4 million as the total value of warrants issued. (See "Note 9 - Shareholders' Equity (Deficit).") The effective rate on the secured term loan, due to the issuance of the warrants, was 3.2% as of December 31, 2002. In July 1997, the Company sold $100.0 million principal amount of 10.5% unsecured senior notes. The Company sold an additional $75.0 million principal amount of these notes in December 1999. Interest on these notes is payable on February 1 and August 1 of each year. Effective August 1, 2002, the Company may redeem the notes, in whole or in part, initially at 105.25% of their principal amount plus accrued interest, declining ratably to 100.0% of their principal amount plus accrued interest at maturity. In December 1998, the Company sold $125.0 million principal amount of 9.625% unsecured senior notes. Interest on these notes is payable on June 15 and December 15 of each year. The Company may redeem the notes, in whole or in part, at any time on or after June 15, 2003, initially at 104.81% of their principal amount plus accrued interest, declining to 102.41% of their principal amount plus accrued interest on June 15, 2004, then to 100.0% of their principal amount plus accrued interest at maturity. In June 1999, the Company obtained an $8.0 million loan at 8.30% secured by a 15-year mortgage on the new Maintenance and Operations Center. This building has a carrying amount of $7.8 million as of December 31, 2002. In March and October 2000, the Company issued two $11.5 million variable rate five-year notes, each collateralized by one Lockheed L-1011-500 aircraft. The related aircraft have a combined carrying amount of $22.6 million as of December 31, 2002. In September 2000, the Company obtained a $10.0 million, 14-year loan at 8.75%, secured by a mortgage on its maintenance facility at the Indianapolis International Airport. The building has a carrying amount of $8.2 million as of December 31, 2002. In December 2000, the Company entered into three finance facilities to fund pre-delivery deposits on the new Boeing 757-300 and Boeing 737-800 aircraft. The 60 Company obtained the first facility from Banca Commerciale Italiana which provided up to $75.0 million in pre-delivery deposit funding that matured on December 31, 2002. The Company obtained a second facility from GE Capital Aviation Services, Inc. which provided for up to approximately $58.2 million in pre-delivery deposit funding that matured on December 31, 2002. The third facility, obtained from Rolls-Royce Plc., provides up to $40.0 million in pre-delivery deposits and matures on August 31, 2003. As of December 31, 2002 and 2001, the Company had borrowed $8.4 and $118.2 million on these facilities. This debt has been classified as current in the accompanying balance sheets, because it will be repaid through the return of related pre-delivery deposits on aircraft scheduled for delivery within 12 months of each balance sheet date, as the aircraft will be acquired and paid for by third parties who will lease them to the Company. Interest on these facilities is payable monthly. Although the Company typically finances aircraft with long-term operating leases, it has a bridge financing facility which provides for maximum borrowings of $200.0 million to finance new Boeing 737-800 aircraft and new Boeing 757-300 aircraft. Borrowings under the facility bear interest, at the option of ATA, at LIBOR plus a margin, which depends on the percentage of the purchase price borrowed and whether the borrowing matures 18 or 24 months after the aircraft delivery date. During 2001, the Company borrowed against this facility to temporarily finance three 757-300 aircraft. These aircraft were permanently financed with long-term operating leases in the fourth quarter of 2001. During 2002, the Company borrowed against this facility to temporarily finance one 737-800 aircraft and three 757-300 aircraft. These aircraft were permanently financed with long-term operating leases in the first and second quarters of 2002. The company had no borrowings against this bridge financing facility as of December 31, 2002 and 2001. The unsecured senior notes, guaranteed term loan, and other loans secured by certain collateral are subject to restrictive covenants, including, among other things, limitations on the incurrence of additional indebtedness; the payment of dividends; certain transactions with shareholders and affiliates; and the creation of liens on or other transactions involving certain assets. In addition, certain covenants require specified financial ratios to be maintained. The guaranteed term loan and certain other loans contain cross-default provisions. Future maturities of long-term debt are as follows:
December 31, 2002 ----------------- (in thousands) 2003 $ 22,575 2004 208,545 2005 162,674 2006 30,451 2007 30,026 Thereafter 62,557 -------- Total cash payments 516,828 Less amount representing discount 7,400 -------- Total balance outstanding at December 31, 2002 $509,428 ========
61 Interest capitalized in connection with long-term asset purchase agreements and construction projects was $7.8 million, $29.0 million and $15.3 million in 2002, 2001, and 2000, respectively. The capitalized interest includes $1.4 million, $14.7 million and $7.9 million in 2002, 2001 and 2000, respectively, of interest to be paid to Boeing upon delivery of certain Boeing 737-800 and Boeing 757-300 aircraft in lieu of the Company making additional pre-delivery deposits, as allowed by the purchase agreement. 6. Lease Commitments At December 31, 2002, the Company had the following operating aircraft leases:
Total Leased Initial Lease Expirations Initial Lease Terms ------------ ------------------------- ------------------- Lockheed L-1011-100 1 2003 60 months Boeing 727-200 (1) 1 2003 72 months Boeing 757-200 16 Between 2003 and 2022 1 to 22 years Boeing 757-300 10 2021 and 2022 20 years Boeing 737-800 30 Between 2016 and 2022 15 to 20 years SAAB 340B 15 2009 and 2012 9.5 years Engines - Lockheed L-1011-500 6 2006 and 2007 7 years Engines - Boeing 757-200 5 Between 2008 and 2011 9 to 15 years Engines - Boeing 757-300 2 2024 22.5 years Engines - Boeing 737-800 2 2021 20 years
(1) As of December 31, 2002, this aircraft has been retired from revenue service, but the Company remains obligated on the lease. The Company is responsible for all maintenance costs on these aircraft and engines, and it must meet specified airframe and engine return conditions upon lease expiration. As of December 31, 2002, the Company had other long-term leases related to certain ground facilities, including terminal space and maintenance facilities and certain ground equipment, with lease terms that vary from 2 to 45 years and expire at various dates through 2040. The lease agreements relating to the ground facilities, which are primarily owned by governmental units or authorities, generally do not provide for transfer of ownership, nor do they contain options to purchase. The Company leases its headquarters facility from the Indianapolis Airport Authority under an operating lease agreement, which expired in December 2002. The Company exercised an option to extend the lease another five years. The Company is responsible for maintenance, taxes, insurance and other expenses incidental to the operation of the facilities. 62 Future minimum lease payments at December 31, 2002, for noncancelable operating leases with initial terms of more than one year are as follows:
Facilities Flight and Ground Equipment Equipment Total ---------------------------------------------- (in thousands) 2003 $ 279,554 $ 13,565 $ 293,119 2004 266,809 12,987 279,796 2005 258,172 10,629 268,801 2006 247,723 9,589 257,312 2007 251,292 9,286 260,578 Thereafter 2,245,812 29,205 2,275,017 ----------- --------- ------------ $ 3,549,362 $ 85,261 $ 3,634,623 =========== ========= ============
Rental expense for all operating leases in 2002, 2001 and 2000 was $212.8 million, $119.2 million and $88.0 million, respectively. 7. Income Taxes The provision for income tax credit consisted of the following:
December 31, 2002 2001 2000 ------------------------------------------- (In thousands) Federal: Current $ (15,743) $ 4,070 $ - Deferred (6,888) (40,546) (4,278) ---------- ---------- --------- (22,631) (36,476) (4,278) State: Current 306 510 328 Deferred (2,625) (3,784) (657) ---------- ---------- --------- (2,319) (3,274) (329) ---------- ---------- --------- Income tax credit $ (24,950) $ (39,750) $ (4,607) ========== ========== =========
63 The income tax credit differed from the amount obtained by applying the statutory federal income tax rate to loss before income taxes as follows:
December 31, 2002 2001 2000 ---------------------------------------------------- (In thousands) Federal income tax credit at statutory rate $ (67,975) $ (40,626) $ (6,841) State income tax credit net of federal benefit (4,108) (2,328) (143) Non-deductible expenses 2,393 2,041 1,872 Valuation allowance 43,324 - - Other, net 1,416 1,163 505 ---------- ---------- ---------- Income tax credit $ (24,950) $ (39,750) $ (4,607) ========== ========== ==========
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax liability and asset components are as follows:
December 31, 2002 2001 (In thousands) Deferred tax liabilities: Property and equipment $ 15,353 $ 35,031 Other taxable temporary differences - 342 --------- -------- Deferred tax liabilities 15,353 35,373 --------- -------- Deferred tax assets: Tax benefit of net operating loss carryforwards 40,766 383 Alternative minimum tax and other tax credit carryforwards 1,261 19,528 Vacation pay accrual 6,526 4,723 Deferred rent expense 3,985 - Other deductible temporary differences 6,139 2,042 --------- -------- Deferred tax assets 58,677 26,676 --------- -------- Valuation allowance (43,324) - --------- -------- Net deferred tax liability $ - $ 8,697 ========= ======== Deferred taxes classified as: Current asset $ - $ 4,958 Non-current liability $ - $ 13,655
64 As of December 31, 2002, the Company had incurred a three-year cumulative loss. Because of this cumulative loss and the presumption under accounting principles generally accepted in the United States that net deferred tax assets should be fully reserved if it is more likely than not that they will not be realized through carrybacks or other tax strategies, the Company has recorded a full valuation allowance against its net deferred asset of $43.3 million. Also as of December 31, 2002, the Company has a income tax refund receivable of $15.8 million. Payment for this refund was received in March 2003. Approximately $108.6 million of net operating loss carryover remains as of December 31, 2002. Its use is limited to future taxable income of the Company. The carryover will expire starting in 2020. 8. Retirement Plan The Company has a defined contribution 401(k) savings plan which provides for participation by substantially all the Company's employees immediately upon hire. The Company has elected to contribute an amount equal to 60.0% in 2002, 55.0% in 2001 and 50.0% in 2000, of the amount contributed by each participant up to the first six percent of eligible compensation. Company matching contributions expensed in 2002, 2001 and 2000 were $5.2 million, $4.7 million and $3.9 million, respectively. Effective January 1, 2003, the Company will have a defined contribution pension plan for cockpit crewmember employees that will be fully funded by the Company. In the 2003 plan year, the Company will contribute between 4.0% and 6.5% of a cockpit crewmember's eligible earnings, depending on years of service with the Company. The contribution percentages increase in future plan years. New cockpit crewmembers will be eligible for the plan immediately upon hire, but contributions vest after five years of service. The Company estimates that contribution expense for this plan in 2003 will be approximately $5.2 million. 9. Shareholders' Equity (Deficit) Since 1994, the Company's Board of Directors has approved the repurchase of up to 1,900,000 shares of the Company's common stock. As of December 31, 2002, the Company had repurchased 1,711,440 common shares at a cost of $24.8 million. The Company's 1993 Incentive Stock Plan for Key Employees (1993 Plan) authorizes the grant of options for up to 900,000 shares of the Company's common stock. The Company's 1996 Incentive Stock Plan for Key Employees (1996 Plan) authorizes the grant of options for up to 3,000,000 shares of the Company's common stock. The Company's 2000 Incentive Stock Plan for Key Employees (2000 Plan) authorizes the grant of options for up to 3,000,000 shares of the Company's common stock. Options granted have five to 10-year terms and generally vest and become fully exercisable over specified periods of up to three years of continued employment. 65 A summary of common stock option changes follows:
Number Weighted-Average of Shares Exercise Price --------- ----------------- Outstanding at December 31, 1999 2,493,160 $ 13.41 --------- ----------------- Granted 638,550 15.69 Exercised (183,906) 8.61 Canceled (37,331) 17.88 --------- ----------------- Outstanding at December 31, 2000 2,910,473 14.19 --------- ----------------- Granted 106,600 12.21 Exercised (181,949) 9.18 Canceled (121,075) 21.60 --------- ----------------- Outstanding at December 31, 2001 2,714,049 14.14 --------- ----------------- Granted - - Exercised (54,261) 8.27 Canceled (272,013) 19.13 Outstanding at December 31, 2002 2,387,775 $ 13.71 ========= ================ Options exercisable at December 31, 2000 1,741,092 $ 11.51 ========= ================ Options exercisable at December 31, 2001 2,528,633 $ 13.80 ========= ================ Options exercisable at December 31, 2002 2,329,076 $ 13.69 ========= ================
Options outstanding at December 31, 2002 expire from January 2003 to November 2011. A total of 3,112,671 shares are reserved for future grants as of December 31, 2002, under the 1993, 1996 and 2000 Plans. The following table summarizes information concerning outstanding and exercisable options at December 31, 2002:
Range of Exercise Prices $6 - 8 $9 - 14 $15 - 19 $20 - 27 - ------------------------ ------ ------- -------- -------- Options outstanding: Weighted-Average Remaining Contractual Life 5.1 years 4.6 years 5.6 years 6.0 years Weighted-Average Exercise Price $ 7.97 $ 9.47 $ 15.80 $ 26.04 Number 196,000 1,207,925 575,700 408,150 Options exercisable: Weighted-Average Exercise Price $ 7.97 $ 9.44 $ 15.82 $ 26.07 Number 196,000 1,190,592 536,334 406,150
In November 2002, in connection with the guaranteed term loan agreement (See "Note 5 - Debt"), the Company issued 1,478,059 warrants to the Air Traffic Stabilization Board and 194,089 warrants to other loan participants. The 66 warrants provide for the purchase of shares of the Company's common stock at an exercise price of $3.53 per share and a term of ten years. Upon valid exercise, the holders of the warrants are entitled to the representative shares assigned to the warrants which expire in November 2012. For accounting purposes, the warrants were valued at $7.4 million, or $4.44 per share. This estimate was made using the Black-Scholes warrant pricing model with the following weighted-average assumptions for 2002: risk-free interest rate of 3.32%; expected market price volatility of 0.68; weighted-average expected warrant life of 10 years; and no dividends. The Black-Scholes warrant valuation model was developed for use in estimating the fair value of traded warrants which have no vesting restrictions and are fully transferable. In addition, warrant valuation models use highly subjective assumptions, including the expected stock price volatility. Because the Company's warrants have characteristics significantly different from those of traded warrants, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its warrants. As of December 31, 2002, the Company has 6,699,305 common stock shares reserved for issuance in relation to its outstanding stock options, warrants, and convertible redeemable preferred stock. (See "Note 10 - Redeemable Preferred Stock.") 10. Redeemable Preferred Stock In the last half of 2000, the Company issued and sold 300 shares of Series B convertible redeemable preferred stock, without par value ("Series B Preferred"), at a price of $100,000 per share. The purchaser of the Series B Preferred is entitled to cumulative quarterly dividends at an annual rate of 5.0% on the liquidation amount ($100,000 per share) of the Series B Preferred. The Series B Preferred is convertible into shares of the Company's common stock at a conversion rate of 6,381.62 shares of common stock per share of Series B Preferred, at a conversion price of $15.67 per share of common stock, subject to antidilution adjustments. The Series B Preferred is optionally redeemable by the Company under certain conditions, but the Company must redeem the Series B Preferred no later than September 20, 2015. Optional redemption by the Company may occur at 103.6% of the liquidation amount beginning September 20, 2003, decreasing 0.3% of the liquidation amount per year to 100.0% of the liquidation amount plus cumulative unpaid dividends, if any, at the mandatory redemption date of September 20, 2015. Shares of Series B Preferred have the right to vote on or consent to only the following matters (in addition to any voting rights otherwise required by law): (1) amendments to the Company's Articles of Incorporation which are adverse to the holders of Series B Preferred; (2) if six quarterly dividends go unpaid, the owner of Series B Preferred, together with the owner of Series A Preferred (as defined below) and the owners of any other preferred stock ranking equal to Series B Preferred, will be entitled to elect at the next annual shareholders meeting 25% of the Company's Board of Directors, but no less than two directors; and (3) increases in the number of authorized shares of Series B Preferred and authorizations of preferred stock ranking senior to Series B Preferred. Votes will be allocated among holders of preferred stock based on the percentage owned by each holder of the total liquidation amount of all series of preferred stock. Also, in the last half of 2000, the Company issued and sold 500 shares of Series A redeemable preferred stock, without par value ("Series A Preferred"), at a price of $100,000 per share. The purchaser of the Series A Preferred is entitled to cumulative semiannual dividends at an annual rate of 8.44% on the liquidation amount ($100,000 per share) of the Series A Preferred. The Series A Preferred is optionally redeemable by the Company under certain conditions, but the Company must redeem the Series A Preferred in equal semiannual payments beginning December 28, 2010, and ending December 28, 2015. Optional redemption by the Company may occur at a redemption premium of 50.0% of the dividend rate beginning December 28, 2003, decreasing 10.0% per year to 20.0% of the dividend 67 rate commencing December 28, 2006, and to 0.0% after the seventh year after issuance plus cumulative unpaid dividends, if any. Prior to the third anniversary of issuance, the Company may redeem the Series A Preferred with net proceeds of a public offering of the Company's common stock. Shares of Series A Preferred have the right to vote on or consent to only the following matters (in addition to any voting rights otherwise required by law): (1) amendments to the Company's Articles of Incorporation which are adverse to the holders of Series A Preferred; (2) if three semiannual dividends go unpaid, the owner of Series A Preferred, together with the owner of Series B Preferred and the owners of any other preferred stock ranking equal to Series A Preferred, will be entitled to elect at the next annual shareholders' meeting, 25% of the Company's Board of Directors, but no less than three directors; (3) approval of (a) an acquisition by the Company or one of its subsidiaries of assets and liabilities from a third party the net asset value of which equals 10% of the Company's net consolidated assets in its most recent publicly available balance sheet, or (b) a merger by the Company or one of its subsidiaries with a third party involving an acquisition or disposition of more than 10% of the Company's consolidated net assets in its most recent publicly available balance sheet (other than a disposition of all the Company's L-1011 or Boeing 727 aircraft) that, in either case, results in a downgrade of the Company's credit rating by Moody's to "C1" or by Standard & Poor's to "C+," unless the Company offers to redeem the Series A Preferred prior to that transaction at a price equal to the liquidation amount plus accrued and unpaid dividends to the redemption date; and (4) increases in the number of authorized shares of Series A Preferred and authorizations of preferred stock ranking senior to Series A Preferred. Votes will be allocated among holders of preferred stock based on the percentage owned by each holder of the total liquidation amount of all series of preferred stock. The Company has the right on any date on which dividends are payable to exchange in whole but not in part subordinated notes for shares of Series A Preferred; the principal amount of any exchanged subordinated notes will equal the liquidation amount of the shares of Series A Preferred, plus any accrued and unpaid dividends. The Company's unsecured senior notes contain certain financial covenants which limit the Company's ability to pay preferred stock dividends. As of December 31, 2002, the Company was restricted from paying preferred stock dividends under the covenant. Therefore, accrued preferred dividends of $2.485 million as of December 31, 2002 have been combined with the preferred stock in the accompanying balance sheets. 68 11. Earnings per Share The following table sets forth the computation of basic and diluted earnings per share:
2002 2001 2000 -------------------------------------------------------------- Numerator: Net loss $ (169,264,000) $ (76,317,000) $ (15,324,000) Preferred stock dividends (5,720,000) (5,568,000) (375,000) ----------------- ---------------- ---------------- Loss available to common shareholders - numerator for basic and diluted earnings per share $ (174,984,000) $ (81,885,000) $ ( 15,699,000) ================= ================ ===== ========== Denominator: Denominator for basic and diluted earnings per share - adjusted weighted average shares 11,711,906 11,464,125 11,956,532 ================= ================ ================ Basic loss per share $ (14.94) $ (7.14) $ (1.31) ================= ================ ================ Diluted loss per share $ (14.94) $ (7.14) $ (1.31) ================= ================ ================
In accordance with FASB Statement of Financial Accounting Standards No. 128, "Earnings Per Share," 1,914,486, 1,914,486, and 533,545 common stock equivalent shares upon conversion of convertible redeemable preferred stock in 2002, 2001, and 2000, respectively, have been excluded from the computation of diluted earnings per share because their effect would be antidilutive. In addition, the impact of 59,400, 553,025, and 626,521 employee stock options in 2002, 2001, and 2000, respectively, was not included in the computation of diluted earnings per share because their effect would be antidilutive. In 2002 the impact of the 1,672,148 incremental shares from the assumed exercise of warrants issued in conjunction with the guaranteed term loan were not included in the computation of diluted earnings per share because their effect would be antidilutive. 12. Commitments and Contingencies In 2000, the Company entered into a purchase agreement with the Boeing Company to purchase directly from Boeing 10 new Boeing 757-300s and 20 new Boeing 737-800s. The Boeing 737-800 aircraft are powered by General Electric CFM56-7B27 engines, and the Boeing 757-300 aircraft are powered by Rolls-Royce RB211-535 E4C engines. The Company also received purchase rights for an additional 50 aircraft. The manufacturer's list price is $73.6 million for each 757-300 and $52.4 million for each 737-800, subject to escalation. The Company's purchase price for each aircraft is subject to various discounts. To fulfill its purchase obligations, the Company has arranged for each of these aircraft, including the engines, to be purchased by third parties that will, in turn, enter into long-term operating leases with the Company. As of December 31, 2002, the Company had taken delivery of 13 Boeing 737-800s and 10 Boeing 757-300s obtained directly from Boeing. All remaining aircraft to be purchased directly from Boeing are scheduled for delivery between July 2004 and December 2004. Aircraft pre-delivery deposits are required for these purchases, and the Company has funded these deposits using operating cash and primarily short-term deposit finance facilities. As of December 31, 2002, the Company had $21.2 million in pre-delivery deposits outstanding for these aircraft, of which $8.4 million was provided by deposit finance facilities. Upon delivery of the aircraft, pre-delivery deposits funded with operating cash will be returned to the Company, and those funded with deposit facilities will be used to repay those facilities. 69 In 2001, the Company entered into an agreement to exercise purchase rights on two Boeing 757-300 aircraft to be delivered in May and June 2003. The Company has purchase rights remaining for eight Boeing 757-300 aircraft and 40 Boeing 737-800 aircraft. The Company has operating lease agreements in place to lease 14 new Boeing 737-800s from International Lease Finance Corporation ("ILFC"). As of December 31, 2002, the Company had taken delivery of 12 Boeing 737-800s that are being leased from ILFC. The remaining aircraft under these operating lease agreements are currently scheduled for delivery in June 2003 and November 2003. The Company has an agreement with General Electric to purchase four spare engines, which are scheduled for delivery between 2003 and 2006. The Company intends to finance all of these future aircraft and engine deliveries with operating leases. However, no such leases are in place as the Company has not received the aircraft or engines. The Company derived payments for these expected future lease obligations using leases for comparable aircraft currently in place. These estimated future payments follow:
Expected Future Lease Obligations ----------- (in thousands) 2003 $ 5,155 2004 33,716 2005 56,440 2006 60,708 2007 56,011 Thereafter 604,780 --------- $ 816,810 =========
In 2001, the Company entered into short-term operating leases with BATA to lease back nine Boeing 727-200 aircraft, all of which have terminated. The Company is subject to lease return conditions on these nine operating leases upon delivery of any related aircraft to a third-party by BATA. On January 31, 2003, BATA entered into a lease agreement with a third party lessee on one of the nine aircraft. The return conditions set forth in the short-term operating lease were satisfied by the completion of a cargo configuration on the aircraft. Management believes it is reasonably possible that a lessee or buyer will be identified for the remaining eight aircraft. The Company estimates that it could incur approximately $6.0 million of expense to meet the return conditions, if all eight of the aircraft were leased by BATA to third parties. If the aircraft are leased as cargo carriers, it is likely the lease return conditions will be satisfied by completing the cargo configuration on the aircraft. No liability 70 was recorded for these return conditions as of December 31, 2002 as it is not probable that it will be paid. In the Company's aircraft financing agreements, the Company typically indemnifies the financing parties, trustees acting on their behalf and other related parties against liabilities that arise from the manufacture, design, ownership, financing, use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out of or relate to the negligence of these indemnified parties, except for their gross negligence or willful misconduct. The Company expects that it would be covered by insurance (subject to deductibles) for most tort liabilities and related indemnities under these aircraft leases. Various claims, contractual disputes and lawsuits against the Company arise periodically involving complaints which are normal and reasonably foreseeable in light of the nature of the Company's business. The majority of these suits are covered by insurance. In the opinion of management, the resolution of these claims will not have a material adverse effect on the business, operating results or financial condition of the Company. 13. Segment Disclosures The Company identifies its segments on the basis of similar products and services. Through the first half of 2002, the Company identified two reportable segments. The airline segment derived its revenues primarily from the sale of scheduled service or charter air transportation and the ATALC segment derived its revenues from the sale of vacation packages, including air transportation, hotels and other ground arrangements. On July 1, 2002, the Company outsourced the management operations of two of its ATALC brands, ATA Vacations and Travel Charter International ("TCI"), to Milwaukee-based The Mark Travel Corporation ("MTC"). MTC creates, advertises, takes reservations and delivers the services of ATA Vacations and TCI. MTC receives revenue from the package sales, and the Company receives a royalty fee from MTC. As a result of the outsourcing arrangement, this segment has a less material effect on the consolidated financial statements, and is no longer considered a reportable segment as of December 31, 2002. The Company's revenues are derived principally from customers domiciled in the United States. The most significant component of the Company's property and equipment is aircraft and related improvements and parts. All aircraft are registered in the United States. The Company therefore considers all property and equipment to be domestic. The U.S. Government is the only customer that accounted for more than 10.0% of consolidated revenues. U.S. Government revenues accounted for 13.9%, 13.1% and 14.6% of consolidated revenues for 2002, 2001 and 2000, respectively. 14. Fuel Price Risk Management During 2002, 2001, and 2000, the Company entered into fuel hedge contracts to minimize the risk of fuel price fluctuation. During these years, the Company hedged fuel using heating oil swap agreements, which establish specific swap prices for designated periods. 71 Effective January 1, 2001, the Company adopted FASB Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended ("FAS 133"). FAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value must be immediately recognized in earnings. In accordance with FAS 133, the Company accounted for its heating oil swap agreements as cash flow hedges. Upon the adoption of FAS 133, the fair value of the Company's fuel hedging contracts representing the amount the Company would pay if the agreements were terminated was $0.6 million. The Company recorded this amount, net of income taxes of $0.2 million, in other assets and other current liabilities, respectively, with a corresponding entry of the net fair value in accumulated other comprehensive income on the consolidated balance sheet. All changes in fair value of the heating oil swap agreements during 2002 and 2001 were effective for purposes of FAS 133, so these valuation changes were recognized throughout these years in other comprehensive loss and were included in earnings as a component of fuel expense only upon settlement of each agreement. During 2002, the Company recognized hedging gains of $0.5 million on settled contracts in fuel expense. During 2001, the Company recognized losses on settled contracts in fuel expense of $2.6 million. 15. Fleet Impairment Effective January 1, 2002, the Company adopted FASB Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"), which superseded FASB Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of ("FAS 121"). However, the Company continues to account for the fleet and related assets that were impaired prior to January 1, 2002 and classified as held for sale under FAS 121, as required by FAS 144. In 2001, the Company decided to retire its Boeing 727-200 fleet earlier than originally planned, and all of these aircraft were removed from revenue service by the middle of 2002. In 2001, the Company performed an impairment review and determined that this fleet and related rotable parts and inventory were impaired. In 2001, the Company recorded an asset impairment charge of $44.5 million ($35.2 million in the third quarter and $9.3 million in the fourth quarter) to reduce the carrying amount of the Boeing 727-200 aircraft and related assets to their estimated fair value, including those aircraft underlying the investment in BATA. During 2002, the Company recorded an additional impairment charge of $35.9 million ($14.8 million in the second quarter, $18.8 million in the third quarter, and $2.3 million in the fourth quarter) to further reduce the carrying amount of these assets. The current estimate of this fleet's fair value is based on quoted market prices. The carrying amount of one Boeing 727-200 aircraft not yet transferred to BATA and related assets are classified as long-term assets held for sale in the accompanying balance sheet in accordance with FAS 121. In 2001, the Company also determined that the Lockheed L-1011-50 and 100 fleet and related rotable parts and inventory were impaired under FAS 121, and recorded an impairment charge of $67.8 million in the fourth quarter of 2001. In the fourth quarter of 2002, the Company recorded an additional impairment charge of $7.6 million in accordance with FAS 144 to further reduce the carrying amount of the Lockheed L-1011-50 and 100 aircraft and related assets. The Company estimated this fleet's fair value using discounted cash flow analysis. The carrying amount of these assets is classified as assets held for use and appears 72 in the property and equipment section of the accompanying consolidated balance sheets. The assets are being depreciated in conjunction with the planned fleet retirement schedule. 16. Goodwill and Other Intangible Assets The Company has no material intangible assets other than goodwill. The Company's goodwill is related to its ATALC, ATA Cargo and Chicago Express subsidiaries acquired in 1999. Prior to the adoption of FAS 142 by the Company in the first quarter of 2002, the Company amortized goodwill on a straight-line basis over 20 years in accordance with APB 17. The Company recorded no goodwill amortization expense in 2002 and $1.3 million in both 2001 and 2000. As required by FAS 142, the Company performed its first annual goodwill impairment test in the fourth quarter of 2002. By this time, the Company had outsourced the management of two of its ATALC brands to MTC. The Company continues to manage the other ATALC brands including the Key Tours Canadian Rail programs, Key Tours Las Vegas ground operations and the Kodiak Call Center (collectively "KTI brands"). (See further discussion in Note 13, "Segment Disclosures.") Based on guidance provided in FAS 142, the Company identified two FAS 142 reporting units. In the goodwill impairment review, the Company determined that the goodwill related to Chicago Express, ATA Cargo and the MTC reporting unit was not impaired. However, the estimated fair value of the KTI reporting unit was lower than the carrying amount and an impairment loss of $6.9 million was recorded in the fourth quarter of 2002. The fair values of all of the Company's reporting units were estimated using discounted future cash flows, since market quotes were not readily available. 17. Related Party Transactions J. George Mikelsons, the Company's Chairman and Chief Executive Officer, is the sole owner of Betaco, Inc., a Delaware corporation ("Betaco"). Betaco currently owns two airplanes, a Cessna Citation II and a Lear Jet, and three helicopters, a Bell 206B Jet Ranger III, an Aerospatiale 355F2 Twin Star and a Bell 206L-3 LongRanger. The two airplanes and the Twin Star helicopter are leased or subleased to ATA. The Jet Ranger III and LongRanger helicopters are leased to American Trans Air ExecuJet, Inc. ("ExecuJet"). Execujet used the Jet Ranger III for third-party charter flying and subleases the LongRanger to an Indianapolis television station. The lease for the Cessna Citation currently requires a monthly payment of $37,500 for a term beginning July 25, 1999, and ending on July 24, 2004. The lease for the Lear Jet requires a monthly payment of $33,600 for a term beginning December 24, 2001, and ending December 23, 2003. The lease for the JetRanger III currently requires a monthly payment of $3,500 for a term beginning June 15, 1993, and ending November 1, 2005. The lease for the LongRanger requires a monthly payment of $7,350 for a term beginning December 11, 2001, and ending October 31, 2005. The Company believes that the current terms of the leases and subleases with Betaco for this equipment are no less favorable to the Company than those that could be obtained from third parties. The lease for the Aerospatiale 355F2 Twin Star requires a monthly payment of $9,000 for a term beginning January 1, 2002, and ending October 31, 2005. Lease payments under this lease were suspended on February 13, 2003, and will be reinstated only upon the Twin Star being certificated for commercial use with an operational plan that demonstrates significant operational revenue for the Company. Since 1996, the Company and Mr. Mikelsons have had an arrangement pursuant to which the Company provides certain domestic employees of Mr. Mikelsons with salary, health insurance and other non-cash benefits. Every quarter, the Company invoices Mr. Mikelsons for the full amount of such benefits. Historically, the timing of payments from Mr. Mikelsons to the Company has been inconsistent. Beginning in 2003, Mr. Mikelsons reimburses the Company prior to the pay date for these employees. 73 The Company pays approximately $269,000 in annual compensation, plus associated non-cash benefits, to five employees who serve as the crew for two boats owned by Betaco and another company owned by Mr. Mikelsons. Under an agreement dated as of July 1, 2002, the Company agreed to pay for these employees in exchange for its use of the boats for business purposes (e.g., the entertainment of clients, customers and vendors of the Company). To the extent that, for any fiscal year, the crew's compensation, plus associated non-cash benefits, exceeds 75% of the amount that would have been charged by an outside third party under a fair market rental contract for the Company's actual use of the boats, Mr. Mikelsons shall be responsible for paying the difference. As of December 31, 2002, Mr. Mikelsons owes $685,451 to the Company pursuant to the arrangements relating to the domestic employees and the crew for the two boats. In 2002, the Company has also paid Mr. Mikelsons a total of $120,000 in connection with the use of the boats by ATA prior to the July 1, 2002, agreement. While there have been other business uses by the Company, Mr. Mikelsons has determined not to seek reimbursement for them. 18. Recently Issued Accounting Pronouncements In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections ("FAS 145"). FAS 145 rescinds both FASB Statements of Financial Accounting Standards No. 4, Reporting Gains and Losses from Extinguishment of Debt, ("FAS 4"), and an amendment to FAS 4, FASB Statement of Financial Accounting Standards No. 64, Extinguishments of Debt Made to Satisfy Sinking Fund Requirements ("FAS 64"). FAS 4 required that all gains and losses from the extinguishment of debt be aggregated and, if material, be classified as an extraordinary item, net of the related income tax effect. Upon the adoption of FAS 145, all gains and losses on the extinguishment of debt for periods presented in the financial statements will be classified as extraordinary items only if they meet the criteria of APB Opinion 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB 30"). The provisions of FAS 145 related to the rescission of FAS 4 and FAS 64 shall be applied for fiscal years beginning after May 15, 2002. Upon adoption in January 2003, the Company expects it will be required to classify any material gains or losses on debt extinguishment as a separate line item before income from continuing operations for all periods presented. The provisions of FAS 145 also relate to the rescission of FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers, ("FAS 44"), the amendment of FASB Statement No. 13, Accounting for Leases, ("FAS 13"), and Technical Corrections, which became effective as of May 15, 2002 and are not expected to have a material impact on the Company. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, ("FAS 146"). FAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). FAS 146 generally requires companies to recognize costs associated with exit activities when they are incurred rather than at the date of a commitment to an exit or disposal plan and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect this standard to have a material impact on the Company. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of 74 Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also expands the disclosure required to be made by a guarantor about its obligations under certain guarantees that it has issued. Initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified. The disclosure requirements are effective immediately. The Company does not expect this interpretation to have a material impact on the Company. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires that companies that control another entity through interests other than voting interests should consolidate the controlled entity. FIN 46 applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The related disclosure requirements are effective immediately. The Company does not expect this interpretation to have a material impact on the Company. 19. Selected Supplemental Quarterly Data (Unaudited)
Financial Statements and Supplementary Data ATA Holdings Corp. and Subsidiaries 2002 Quarterly Financial Summary (Unaudited) - ------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 3/31 6/30 (1) 9/30 (1) 12/31 (1) - ------------------------------------------------------------------------------------------------------- Operating revenues $ 330,570 $ 318,541 $ 317,289 $ 310,970 Operating expenses 320,512 377,834 376,933 362,128 Operating income (loss) 10,058 (59,293) (59,644) (51,158) Other expenses (7,416) (9,690) (7,723) (9,348) Income (loss) before income taxes 2,642 (68,983) (67,367) (60,506) Income taxes (credits) 762 (13,585) (6,746) (5,381) Preferred stock dividends 375 2,485 375 2,485 Income (loss) available to common shareholders $ 1,505 $ (57,883) $ (60,996) $ (57,610) Net income (loss) per common share - basic $ 0.13 $ (4.92) $ (5.18) $ (4.90) Net income (loss) per common share - diluted $ 0.12 $ (4.92) $ (5.18) $ (4.90)
75
Financial Statements and Supplementary Data ATA Holdings Corp. and Subsidiaries 2001 Quarterly Financial Summary (Unaudited) - ------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 3/31 6/30 9/30 (1) 12/31 (1) - ------------------------------------------------------------------------------------------------------- Operating revenues $ 347,485 $ 358,895 $ 321,469 $ 247,635 Operating expenses 349,719 342,336 317,017 358,282 Operating income (loss) (2,234) 16,559 4,452 (110,647) Other expenses (5,459) (5,828) (4,048) (8,862) Income (loss) before income taxes (7,693) 10,731 404 (119,509) Income taxes (credits) (3,309) 4,200 16 (40,657) Preferred stock dividends 375 2,333 375 2,485 Income (loss) available to common shareholders $ (4,759) $ 4,198 $ 13 $ (81,337) Net income (loss) per common share - basic $ (0.42) $ 0.37 $ 0.00 $ (7.05) Net income (loss) per common share - diluted $ (0.42) $ 0.33 $ 0.00 $ (7.05)
(1) Operating results for the years ended December 31, 2002 and 2001 include several non-recurring or unusual charges. See "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - State of the Industry and the Company;" "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 15 - Fleet Impairment;" and "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 16 - Goodwill and Other Intangible Assets." Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No change of auditors or disagreements on accounting methods have occurred which would require disclosure hereunder. 76 PART III Item 10. Directors and Officers of the Registrant Incorporated herein by reference to the Company's proxy statement for the annual meeting of stockholders to be held on May 12, 2003. Item 11. Executive Compensation Incorporated herein by reference to the Company's proxy statement for the annual meeting of stockholders to be held on May 12, 2003. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated herein by reference to the Company's proxy statement for the annual meeting of stockholders to be held on May 12, 2003. Item 13. Certain Relationships and Related Transactions Incorporated herein by reference to the Company's proxy statement for the annual meeting of stockholders to be held on May 12, 2003. Item 14. Controls and Procedures On March 21, 2003, the Company conducted an evaluation (under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer), pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the controls and procedures were effective. Since March 21, 2003, there have not been any significant changes in the internal controls or in other factors that could significantly affect the internal controls. 77 PART IV Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a) (1) Financial Statements The following consolidated financial statements of the Company and its subsidiaries are included in Item 8: o Consolidated Balance Sheets for the years ended December 31, 2002 and 2001 o Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 o Consolidated Statements of Changes in Redeemable Preferred Stock, Common Stock and Other Shareholders' Equity (Deficit)for the years ended December 31, 2002, 2001 and 2000 o Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 o Notes to Consolidated Financial Statements (2) Financial Statement Schedule The following consolidated financial information for the years 2002, 2001 and 2000 is included in Item 15d: o Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) Exhibits Exhibits are filed as a separate section of this report as set forth in the Index to Exhibits attached to this report. (b) Reports on Form 8-K filed during the quarter ending December 31, 2002: Report filed on October 29, 2002, furnishing items under Item 9. Regulation FD Disclosure. Report filed on November 14, 2002, furnishing items under Item 7. Financial Statements and Exhibits and Item 9. Regulation FD Disclosure. Report filed on November 18, 2002, furnishing items under Item 5. Other Events and Item 7. Financial Statements and Exhibits. 78 Report filed on November 20, 2002, furnishing items under Item 5. Other Events, Item 7. Financial Statements and Exhibits and Item 9. Regulation FD Disclosure. (c) Exhibits See the Index to Exhibits attached to this report. (d) Financial Statement Schedule See Schedule II - Valuation and Qualifying Accounts. 79
Item 15d. Valuation and Qualifying Accounts Schedule II (Dollars in thousands) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------------- -------- -------- -------- -------- Additions --------- Charged to Balance at Charged to Other Beginning of Costs and Accounts - Deductions - Balance at Description Period Expenses Describe Describe End of Period - -------------------------------------- -------- -------- -------- -------- ------------- Year ended December 31, 2000: Deducted from asset accounts: Allowance for doubtful accounts 1,511 2,431 - 2,751 (1) 1,191 Allowance for obsolescence - Inventory 10,291 3,466 - 645 (2) 13,112 -------- -------- ----- -------- -------- Totals $ 11,802 $ 5,897 $ - $ 3,396 $ 14,303 ======== ======== ===== ======== ======== Year ended December 31, 2001: Deducted from asset accounts: Allowance for doubtful accounts 1,191 2,213 - 1,878 (1) 1,526 Allowance for obsolescence - Inventory 13,112 3,481 - 5,688 (2) 10,905 -------- -------- ----- -------- -------- Totals $ 14,303 $ 5,694 $ - $ 7,566 $ 12,431 ======== ======== ===== ======== ======== Year ended December 31, 2002: Deducted from asset accounts: Allowance for doubtful accounts 1,526 2,605 - 1,756 (1) 2,375 Allowance for obsolescence - Inventory 10,905 4,258 - 433 (2) 14,730 Valuation allowance for deferred tax asset - 43,324 - - 43,324 -------- -------- ----- -------- -------- Totals $ 12,431 $ 50,187 $ - $ 2,189 $ 60,429 ======== ======== ===== ======== ======== (1) Uncollectible accounts written off, net of recoveries. (2) Reduction of obsolescence allowance in 2001 of $5.4 million resulted from the FAS 121 impairment write down of Lockheed L-1011-50 and 100 inventory and Boeing 727-200 inventory. The reduction in 2002 and 2000, and the remainder of the 2001 reduction in obsolescence allowance, related to inventory items transferred to flight equipment or sold.
80 Signatures Pursuant to the requirements 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. ATA Holdings Corp. (Registrant) Date: March 31, 2003 /s/ J. George Mikelsons J. George Mikelsons Chairman and Chief Executive Officer On behalf of the Registrant and as Director Date: March 31, 2003 /s/ James W. Hlavacek James W. Hlavacek Executive Vice President and Chief Operating Officer Director Date: March 31, 2003 /s/ David M. Wing David M. Wing Executive Vice President and Chief Financial Officer Director Date: March 31, 2003 /s/ Robert A. Abel Robert A. Abel Director Date: March 31, 2003 /s/ Claude E. Willis Claude E.Willis Director Date: March 31, 2003 /s/ Andrejs P. Stipnieks Andrejs P. Stipnieks Director Index to Exhibits Exhibit No. 2.1 Agreement and Plan of Merger between INDUS Acquisition Company and Amtran, Inc. (incorporated by reference to Annex A to the Preliminary Proxy Statement on Schedule 14A filed by Amtran, Inc. on June 29, 2001). 3.(i)(a) Restated Articles of Incorporation of Amtran, Inc. (incorporated by reference to Exhibit 3(a) to Amtran, Inc.'s Registration Statement on S-1 dated March 16, 1993, File No. 33-59630). 3.(i)(b) Articles of Amendment to the Restated Articles of Incorporation adopted as of September 19, 2000. (incorporated by reference to Exhibit 3.(i)(b) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 3.(i)(c) Articles of Amendment to the Restated Articles of Incorporation adopted as of December 28, 2000. (incorporated by reference to Exhibit 3.(i)(c) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 3(ii)Bylaws of Amtran, Inc., as amended, (incorporated by reference to Exhibit 3(b) to Amtran, Inc.'s Registration Statement on S-1 dated March 16, 1993, File No. 33-59630). 4.1 Indenture dated as of July 24, 1997, by and among Amtran, Inc., as issuer, American Trans Air, Inc., Ambassadair Travel Club, Inc., ATA Vacations, Inc., Amber Travel, Inc., American Trans Air Training Corporation, American Trans Air ExecuJet, Inc. and Amber Air Freight Corporation, as guarantors, and First Security Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Amtran, Inc.'s Registration Statement on S-4 dated October 6, 1997, File No. 333-37283). 4.2 Indenture dated as of December 11, 1998, by and among Amtran, Inc., as issuer, American Trans Air, Inc., Ambassadair Travel Club, Inc., ATA Vacations, Inc., Amber Travel, Inc., American Trans Air Training Corporation, American Trans Air ExecuJet, Inc. and Amber Air Freight Corporation, as guarantors, and First Security Bank, N.A., as trustee (incorporated by reference to Exhibit 4.4 to Amtran, Inc.'s Registration Statement on S-3 dated August 26, 1998, File No. 333-52655). 4.3 First Supplemental Indenture dated as of December 11, 1998, by and among Amtran, Inc., as issuer, American Trans Air, Inc., Ambassadair Travel Club, Inc., ATA Vacations, Inc., Amber Travel, Inc., American Trans Air Training Corporation, American Trans Air ExecuJet, Inc. and Amber Air Freight Corporation, as guarantors, and First Security Bank, N.A., as trustee, to the Indenture dated as of December 11, 1998 (incorporated by reference to Exhibit 4.4 to Amtran, Inc.'s Registration Statement on S-3 dated August 26, 1998, File No. 333-52655). 4.4 First Supplemental Indenture dated as of December 21, 1999, by and among Amtran, Inc., as issuer, American Trans Air, Inc., Ambassadair Travel Club, Inc., ATA Vacations, Inc., Amber Travel, Inc., American Trans Air Training Corporation, American Trans Air ExecuJet, Inc. and Amber Air Freight Corporation, Chicago Express Airlines, Inc., as guarantors, and First Security Bank, N.A., as trustee, to the Indenture dated as of July 24, 1997 (incorporated by reference to Exhibit 4.1 to Amtran, Inc.'s Registration Statement on S-4 dated January 25, 2000, File No. 333-95371). 4.5 Pass Through Trust Agreement, dated as of March 28, 2002, among Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 2002-1A Pass Through Trust and the issuance of 8.328% Initial American Trans Air 2002-1A Pass Through Certificates and 8.328% Exchange American Trans Air 2002-1A Pass Through Certificates (incorporated by reference to Exhibit 4.5 to ATA Holdings Corp.'s Registration Statement on Form S-4 dated November 22, 2002, File No. 333-101423). 4.6 Pass Through Trust Agreement, dated as of March 28, 2002, among Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 2002-1B Pass Through Trust and the issuance 10.699% Initial American Trans Air 2002-1 B Pass Through Certificates and 10.699% Exchange American Trans Air 2002-1B Pass Through Certificates (incorporated by reference to Exhibit 4.6 to ATA Holdings Corp.'s Registration Statement on Form S-4 dated November 22, 2002, File No. 333-101423). 4.7 Pass Through Trust Agreement, dated as of February 15, 2000, between American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 2000-1G-O Pass Through Trust and the issuance of 8.039% Initial American Trans Air 2000-1G-O Pass Through Trust Certificates and 8.039% Exchange American Trans Air 2000-1G-O Pass Through Certificates (incorporated by reference to Exhibit 4.5 to Amtran, Inc.'s Registration Statement on S-4 dated August 11, 2000, File No. 333-43606). 4.8 Pass Through Trust Agreement, dated as of February 15, 2000, between American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 2000-1G-S Pass Through Trust and the issuance of 8.039% Initial American Trans Air 2000-1G-S Pass Through Certificates and 8.039% Exchange American Trans Air 2000-1G-S Pass Through Certificates (incorporated by reference to Exhibit 4.6 to Amtran, Inc.'s Registration Statement on S-4 dated August 11, 2000, File No. 333-43606). 4.9 Pass Through Trust Agreement, dated as of February 15, 2000, between American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 2000-1C-O Pass Through Trust and the issuance of 9.644% Initial American Trans Air 2000-1C-O Pass Through Certificates and 9.644% Exchange American Trans Air 2000-1C-O Pass Through Certificates (incorporated by reference to Exhibit 4.7 to Amtran, Inc.'s Registration Statement on S-4 dated August 11, 2000, File No. 333-43606). 4.10 Pass Through Trust Agreement, dated as of February 15, 2000, between American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 2000-1C-S Pass Through Trust and the issuance of 9.644% Initial American Trans Air 2000-1C-S Pass Through Certificates and 9.644% Exchange American Trans Air 2000-1C-S Pass Through Certificates (incorporated by reference to Exhibit 4.8 to Amtran, Inc.'s Registration Statement on S-4 dated August 11, 2000, File No. 333-43606). 4.11 Purchase and Investor Rights Agreement dated as of December 13, 2000, between Amtran, Inc. and Boeing Capital Corporation. (incorporated by reference to Exhibit 4.9 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.12 Purchase and Investor Rights Agreement dated as of September 19, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 4.10 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.13 Pass Through Trust Agreement, dated as of December 16, 1996, among Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 1996-1A Pass Through Trust and the issuance of 7.37% American Trans Air 1996-1A Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.11 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.14 Pass Through Trust Agreement, dated as of December 16, 1996, among Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 1996-1B Pass Through Trust and the issuance of 7.64% American Trans Air 1996-1B Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.12 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.15 Pass Through Trust Agreement, dated as of December 16, 1996, among Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 1996-1C Pass Through Trust and the issuance of 7.82% American Trans Air 1996-1C Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.13 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.16 Pass Through Trust Agreement, dated as of December 23, 1997, between Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 1997-1A-O Pass Through Trust and the issuance of 6.99% American Trans Air 1997-1A-O Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.14 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.17 Pass Through Trust Agreement, dated as of December 23, 1997, between Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 1997-1A-S Pass Through Trust and the issuance of 6.99% American Trans Air 1997-1A-S Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.15 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.18 Pass Through Trust Agreement, dated as of December 23, 1997, between Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 1997-1B-O Pass Through Trust and the issuance of 7.19% American Trans Air 1997-1B-O Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.16 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.19 Pass Through Trust Agreement, dated as of December 23, 1997, between Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 1997-1B-S Pass Through Trust and the issuance of 7.19% American Trans Air 1997-1B-S Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.17 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.20 Pass Through Trust Agreement, dated as of December 23, 1997, between Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 1997-1C-O Pass Through Trust and the issuance of 7.46% American Trans Air 1997-1C-O Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.18 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.21 Pass Through Trust Agreement, dated as of December 23, 1997, between Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made with respect to the formation of American Trans Air 1997-1C-S Pass Through Trust and the issuance of 7.46% American Trans Air 1997-1C-S Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.19 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.22 Form of Common Stock Certificate of Amtran, Inc. (incorporated by reference to Exhibit 4 to Amtran, Inc.'s Registration Statement on S-1 dated March 16, 1993, File No. 33-59630). 4.23 Form of Series A1 Preferred Stock Certificate of Amtran, Inc. (incorporated by reference to Exhibit 4.21 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.24 Form of Series B Preferred Stock Certificate of Amtran, Inc. (incorporated by reference to Exhibit 4.22 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). 4.25 Form of 1996 Class A American Trans Air, Inc. Pass Through Certificates (included in Exhibit 4.11). 4.26 Form of 1996 Class B American Trans Air, Inc. Pass Through Certificates (included in Exhibit 4.12). 4.27 Form of 1996 Class C American Trans Air, Inc. Pass Through Certificates (included in Exhibit 4.13). 4.28 Form of 1997 Class A American Trans Air, Inc. Pass Through Certificates (included in Exhibit 4.14). 4.29 Form of 1997 Class B American Trans Air, Inc. Pass Through Certificates (included in Exhibit 4.16). 4.30 Form of 1997 Class C American Trans Air, Inc. Pass Through Certificates (included in Exhibit 4.18). 4.31 Form of 2000 Class G American Trans Air, Inc. Pass Through Certificates (included in Exhibit 4.5). 4.32 Form of 2000 Class C American Trans Air, Inc. Pass Through Certificates (included in Exhibit 4.7). 4.33 Amtran, Inc. hereby agrees to furnish to the Commission, upon request, copies of certain additional instruments relating to long-term debt of the kind described in Item 601(b)(4)(iii)(A) of Regulation S-K. 10.1 1993 Incentive Stock Plan for Key Employees of Amtran, Inc. and its Subsidiaries (incorporated by reference to Exhibit 10(r)(r) to Amtran, Inc.'s Registration Statement on S-1 dated March 16, 1993, File No. 33-59630). 10.2 1996 Incentive Stock Plan for Key Employees of Amtran, Inc. and its Subsidiaries (incorporated by reference to Amtran, Inc.'s Registration Statement on S-8 dated June 20, 1997, File No. 333-29715). 10.3 2000 Incentive Stock Plan for Key Employees of Amtran, Inc. and its Subsidiaries (incorporated by reference to Exhibit A to Amtran, Inc.'s Proxy Statement dated April 5, 2000). 10.4 Stock Option Plan for Non-Employee Directors (incorporated by reference to Appendix A to Amtran, Inc.'s Proxy Statement dated April 15, 1994). 10.5 Aircraft General Terms Agreement dated as of June 30, 2000, between The Boeing Company ("Boeing") and American Trans Air, Inc.; Purchase Agreement Number 2285 dated as of June 30, 2000, between Boeing and American Trans Air, Inc.; Purchase Agreement Number 2262 dated as of June 30, 2000, between Boeing and American Trans Air, Inc. (incorporated by reference to Exhibit 10.5 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(a) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(a) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(b) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(b) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(c) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(c) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(d) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(d) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(e) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(e) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(f) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(f) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(g) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(g) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(h) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(h) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(i) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(i) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(j) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(j) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(k) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(k) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(l) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(l) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(m) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(m) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.6(n) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran, Inc. and International Lease Finance Corporation. (incorporated by reference to Exhibit 10.6(n) to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.7 Aircraft Financing Agreement dated as of December 6, 2000, between Amtran, Inc. and General Electric Capital Corporation. (incorporated by reference to Exhibit 10.7 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No. 000-21642). * 10.8 Limited Liability Company Agreement dated as of March 13, 2001, between Amtran, Inc. and Boeing Capital Corporation to form BATA Leasing LLC. (incorporated by reference to Exhibit 10.1.1 to Amtran, Inc.'s Quarterly Annual Report on 10-Q dated May 15, 2001, File No. 000-21642). * 10.9 Purchase and Voting Agreement dated as of May 16, 2001 between Amtran, Inc., and ILFC (incorporated by reference to Exhibit 99.2 to the 8-K dated May 16, 2001). 10.10Commitment Letter dated June 18, 2001, from Salomon Smith Barney Inc., and Citicorp USA, Inc. to Amtran, Inc. (incorporated by reference to Exhibit 2 to the Schedule 13D filed by Amtran, Inc., J. George Mikelsons and INDUS Acquisition Company on June 21, 2001). 10.11$168,000,000 Loan Agreement dated as of November 30, 2002 among American Trans Air, Inc., as Borrower, ATA Holdings Corp., as Parent, GOVCO Incorporated, as Primary Tranche A Lender, Citibank, N.A., as Alternate Tranche A Lender, Citicorp North America, Inc., as GOVCO Administrative Agent, Citibank, N.A., as Tranche B Lender, BearingPoint, Inc, as Loan Administrator, Citibank, N.A., as Collateral Agent, Citibank, N.A., as Agent, and the Air Transportation Stabilization Board. * 10.12Mortgage and Security Agreement dated as of November 20, 2002 made by American Trans Air, Inc. in favor of Citibank, N.A., as the Collateral Agent. 21 Subsidiaries of Amtran, Inc. 23 Consent of Independent Auditors. 99.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 99.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 99.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *Portions of these exhibits have been omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission. Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-52655) of ATA Holdings Corp. and Subsidiaries and in the related Prospectus, in the Registration Statement (Form S-8 No. 33-65708) pertaining to the 1993 Incentive Stock Plan for Key Employees of ATA Holdings Corp. and Subsidiaries and in the Registration Statement (Form S-3 No. 333-86791) of ATA Holdings Corp. and Subsidiaries and in the related Prospectus of our report dated January 24, 2003, with respect to the consolidated financial statements and schedule of ATA Holdings Corp. and Subsidiaries, included in the Annual Report (Form 10-K) for the year ended December 31, 2002. ERNST & YOUNG LLP Indianapolis, Indiana March 25, 2003 EX-10 3 atah2002exhibit1011.txt ATA HOLDINGS CORP. - EXHIBIT 10.11 Exhibit 10.11 ***Text Omitted and Filed Separately Confidential Treatment Requested Under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 240.24b-2 EXECUTION $168,000,000 LOAN AGREEMENT Dated as of November 20, 2002 among AMERICAN TRANS AIR, INC., as Borrower, ATA HOLDINGS CORP., as Parent, GOVCO INCORPORATED, as Primary Tranche A Lender, CITIBANK, N.A., as Alternate Tranche A Lender, CITICORP NORTH AMERICA, INC., as Govco Administrative Agent, CITIBANK, N.A., as Tranche B Lender, BEARINGPOINT, INC. (formerly KPMG Consulting, Inc.), as Loan Administrator, CITIBANK, N.A., as Collateral Agent, CITIBANK, N.A., as Agent, and AIR TRANSPORTATION STABILIZATION BOARD TABLE OF CONTENTS Page Article I Definitions, Interpretation And Accounting Terms.....................1 Section 1.1. Defined Terms..........................................1 Section 1.2. Computation of Time Periods...........................26 Section 1.3. Accounting Terms and Principles.......................26 Section 1.4. Certain Terms.........................................27 Article II THE LOAN...........................................................27 Section 2.1. The Loan..............................................27 Section 2.2. Borrowing Procedures..................................28 Section 2.3. Scheduled Repayment of the Loan.......................29 Section 2.4. Evidence of Debt; Use of Proceeds.....................29 Section 2.5. Optional Prepayments..................................31 Section 2.6. Mandatory Prepayments.................................32 Section 2.7. Interest..............................................33 Section 2.8. Fees..................................................34 Section 2.9. Payments and Computations.............................36 Section 2.10. Certain Provisions Governing the Notes................38 Section 2.11. Capital Adequacy......................................41 Section 2.12. Taxes.................................................41 Article III Conditions To Loan................................................44 Section 3.1. Conditions Precedent to the Loan......................44 Article IV Representations and Warranties.....................................49 Section 4.1. Organization, Powers, Qualification, Good Standing, Business, Subsidiaries, the Act and the Regulations ..........................................49 Section 4.2. Authorization of Borrowing, Etc.......................51 Section 4.3. Financial Condition...................................51 Section 4.4. No Material Adverse Change; No Restricted Payments or Defaults..............................................53 Section 4.5. Title To Properties; Liens............................53 Section 4.6. Perfected Security Interest...........................53 Section 4.7. Litigation; Adverse Facts.............................53 Section 4.8. Payment of Taxes......................................54 Section 4.9. Performance of Agreements; Materially Adverse Agreements............................................54 Section 4.10. Governmental Regulation...............................55 Section 4.11. Securities Activities.................................55 Section 4.12. Employee Benefit Plans................................55 Section 4.13. Environmental Protection..............................56 Section 4.14. Solvency..............................................56 Section 4.15. Disclosure............................................56 Section 4.16. Compliance With Laws..................................57 Section 4.17. Indebtedness; Off Balance Sheet Transactions..........57 Section 4.18. Insurance.............................................57 Section 4.19. Section 1110..........................................57 Section 4.20. Absence of Labor Disputes.............................57 Section 4.21. Gates and Slots.......................................58 Section 4.22. Non-Guarantor Subsidiaries............................58 Article V Covenants...........................................................58 Section 5.1. Financial Statements and Other Reports................58 Section 5.2. Corporate Existence...................................65 Section 5.3. Payment of Taxes and Claims; Tax Consolidation........65 Section 5.4. Maintenance of Properties; Insurance..................66 Section 5.5. Inspection............................................66 Section 5.6. Compliance With Laws, Etc.............................67 Section 5.7. Hazardous Materials...................................67 Section 5.8. Contractual Obligations...............................68 Section 5.9. Employee Benefit Plans................................68 Section 5.10. FAA Matters; Citizenship..............................68 Section 5.11. Board Guarantee.......................................68 Section 5.12. Lower-Tier Covered Transaction........................69 Section 5.13. Comptroller General Audits and Reviews................69 Section 5.14. Appraisal Reports; Additional Collateral..............69 Section 5.15. Additional Subsidiaries...............................71 Section 5.16. Chief Executive Officer...............................71 Section 5.17. Further Assurances....................................71 Article VI NEGATIVE COVENANTS.................................................72 Section 6.1. Liens and Related Matters.............................72 Section 6.2. Investments...........................................73 Section 6.3. Restricted Payments...................................74 Section 6.4. Financial Covenants...................................74 Section 6.5. Restriction on Acquisitions; New Subsidiaries.........76 Section 6.6. Sales and Lease-Backs.................................77 Section 6.7. Transactions with Affiliates..........................78 Section 6.8. Conduct of Business...................................78 Section 6.9. Merger or Consolidation...............................79 Section 6.10. Limitation on Asset Sales.............................79 Section 6.11. Limitations with Respect to Subsidiaries..............80 Section 6.12. Partnerships and Joint Ventures; Speculative Transactions..........................................80 Section 6.13. Limitations on Amendments.............................80 Section 6.14. Going Private Transactions............................81 Section 6.15. No Further Negative Pledges...........................81 Section 6.16. Incentive Equity Plan and Other Incentive Compensation..........................................82 Article VII Events of Default.................................................82 Section 7.1. Events of Default.....................................82 Section 7.2. Remedies..............................................86 Article VIII THE LOAN ADMINISTRATOR...........................................86 Section 8.1. Acceptance of Appointment and Services................86 Section 8.2. Loan Administrator's Reliance.........................89 Section 8.3. Indemnification.......................................91 Section 8.4. Successor Loan Administrator..........................91 Section 8.5. Conflict of Interest..................................92 Section 8.6. Representations, Warranties and Covenants of the Loan Administrator.........................................92 Article IX THE FACILITY AGENTS................................................93 Section 9.1. Authorization and Action..............................93 Section 9.2. Facility Agents' Reliance, Etc........................94 Section 9.3. Facility Agents and Affiliates........................95 Section 9.4. Representations of the Lenders and of the Board.......95 Section 9.5. Events of Default; Termination of Board Guarantee.....96 Section 9.6. Facility Agents' Right to Indemnity...................96 Section 9.7. Indemnification of Facility Agents....................97 Section 9.8. Successor Facility Agents.............................97 Section 9.9. Collateral Agent's Further Protections................98 Article X MISCELLANEOUS......................................................101 Section 10.1. Amendments, Waivers, Etc.............................101 Section 10.2. Assignments and Participations.......................103 Section 10.3. Costs and Expenses...................................105 Section 10.4. Indemnities..........................................106 Section 10.5. Right of Set-off.....................................107 Section 10.6. Sharing of Payments, Etc.............................107 Section 10.7. Notices, Etc.........................................108 Section 10.8. No Waiver; Remedies..................................108 Section 10.9. Independence of Representations, Warranties and Covenants............................................108 Section 10.10. Governing Law........................................109 Section 10.11. Submission to Jurisdiction; Service of Process.......109 Section 10.12. Waiver of Jury Trial.................................109 Section 10.13. Marshaling; Payments Set Aside.......................109 Section 10.14. Section Titles.......................................110 Section 10.15. Execution in Counterparts............................110 Section 10.16. Third Party Beneficiary..............................110 Section 10.17. Severability.........................................110 Section 10.18. Confidentiality......................................110 Section 10.19. No Proceedings.......................................111 Section 10.20. Govco Administrative Agent...........................111 Section 10.21. Acknowledgement Regarding Federal Authority..........112 Section 10.22. Cumulative Rights and Remedies.......................113 Annexes Annex A - Notice Addresses Annex B - Lending Office Schedules Schedule 2.8(g) Loan Administrator Hourly Fee Rate Schedule Schedule 4.1 Subsidiaries Schedule 4.2 Consents and Approvals Schedule 4.8 Tax Sharing Agreements Schedule 4.9(c) Material Agreements Schedule 4.9(d) Concessions Schedule 4.17 Indebtedness Schedule 4.22 Non-Guarantor Subsidiaries Schedule 6.1 Liens and Payment Restrictions Schedule 6.2 Investments Schedule 6.6 Sale-Leasebacks Schedule 6.7 Transactions with Affiliates Exhibits Exhibit A - Form of Assignment and Acceptance Exhibit B1 - Form of Tranche A Note Exhibit B2 - Form of Tranche B Note Exhibit C - Form of Notice of Borrowing Exhibit D - Form of Board Guarantee Exhibit E - Form of Participation Agreement Exhibit F - Form of Warrant Agreement Exhibit G - Form of Security Agreement Exhibit H - Form of Collateral Value Certificate Exhibit I - Form of Subsidiary Guarantee Exhibit J - Form of Parent Guarantee Exhibit K - Certain Economic Terms LOAN AGREEMENT, dated as of November 20, 2002, among AMERICAN TRANS AIR, INC., an Indiana corporation (the "Borrower"); ATA HOLDINGS CORP., an Indiana corporation (the "Parent"); GOVCO INCORPORATED, a Delaware corporation (the "Primary Tranche A Lender"); CITIBANK, N.A., in its capacity as an alternate lender to the Primary Tranche A Lender (in such capacity, together with its successors and permitted assigns, the "Alternate Tranche A Lender" and collectively, together with the Primary Tranche A Lender and its successors and permitted assigns, the "Tranche A Lenders"); CITICORP NORTH AMERICA, INC., a Delaware corporation, as administrative agent for the Primary Tranche A Lender and the commercial paper holders of the Primary Tranche A Lender (together with its successors and permitted assigns, the "Govco Administrative Agent"); CITIBANK, N.A., in its capacity as a lender in respect of Tranche B (as defined herein) (in such capacity, together with its successors and permitted assigns, the "Tranche B Lender"); BEARINGPOINT, INC. (formerly KPMG Consulting, Inc.), in its capacity as loan administrator hereunder (together with its successors and permitted assigns, the "Loan Administrator"); CITIBANK, N.A., in its capacity as collateral agent hereunder (together with its successors and permitted assigns, the "Collateral Agent"); CITIBANK, N.A., as agent for the Lenders (in such capacity, together with its successors and permitted assigns, the "Agent"); and AIR TRANSPORTATION STABILIZATION BOARD, created pursuant to Section 102 of the Act referred to below (the "Board"). W i t n e s s e t h: WHEREAS, the Borrower has requested that the Lenders make available to the Borrower a Loan for such general corporate purposes as are permissible under the Air Transportation Safety and System Stabilization Act, P.L. 107-42, as the same may be amended from time to time (the "Act") and the regulations for Air Carrier Guarantee Loan Program issued pursuant to the Act, 14 C.F.R. Part 1300, as the same may be amended from time to time (the "Regulations"); and WHEREAS, the Primary Tranche A Lender (or if the Primary Tranche A Lender chooses not to make its portion of the Loan available, the Alternate Tranche A Lender) and the Tranche B Lender are willing severally to make available to the Borrower the Loan upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, the parties hereto hereby agree as follows: Article I Definitions, Interpretation And Accounting Terms Section 1.1. Defined Terms. As used in this Agreement, the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Act" has the meaning specified in the first recital to this Agreement. "Affiliate" means, with respect to any Person, any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person. For the purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Affiliate Transaction" has the meaning specified in Section 6.7(a). "Agent" has the meaning specified in the preamble to this Agreement. "Aggregate Amounts Due" has the meaning specified in Section 10.6 "Agreement" means this Loan Agreement. "Aircraft Related Equipment" means aircraft (including aircraft engines installed thereon) in the fleet of the Borrower (or other Wholly-Owned Subsidiary of the Parent), spare aircraft engines, aircraft parts, simulators and passenger loading bridges or other flight or ground equipment. "Alliance Agreements" means business alliance agreements entered into by the Borrower from time to time that include, but are not limited to, code-sharing, frequent flyer, ground handling and marketing agreements that are entered into in the ordinary course of business. "Alternate Tranche A Lender" has the meaning specified in the preamble to this Agreement. "Applicable Tranche A Interest Rate" means, for any Interest Period, the sum of (1) the Primary Tranche A Lender's weighted average cost (as defined below) for such Interest Period related to the issuance of commercial paper notes and other short-term borrowings or the sale of participation interests (collectively, "Commercial Paper"), which in each case have been allocated by the Primary Tranche A Lender to Tranche A, which rate includes related issuance costs incurred by the Primary Tranche A Lender and (2) 0.35% per annum, as calculated by the Govco Administrative Agent for such Interest Period and specified in a notice sent to the Borrower, with a copy to the Loan Administrator and the Agent, at least five Business Days prior to each Interest Payment Date on which the interest so calculated is payable. For purposes of the foregoing, the Primary Tranche A Lender's "weighted average cost" of Commercial Paper shall consist of (i) the actual interest rate paid to purchasers of Commercial Paper, (ii) the costs associated with the issuance of the Commercial Paper and (iii) other borrowings the Primary Tranche A Lender may incur, including the amount to fund small or odd dollar amounts that are not easily accommodated in the commercial paper market. Notwithstanding the forgoing, if Tranche A is funded by or assigned to any other entity pursuant to the provisions of this Agreement (including without limitation, to the Alternate Tranche A Lender), "Applicable Tranche A Interest Rate" means, for any 2 Interest Period, a rate per annum equal to LIBOR for such Interest Period plus 0.40% per annum. "Applicable Tranche B Interest Rate" means, for any Interest Period, a rate per annum equal to the greater of (i) LIBOR for such Interest Period plus 5.75% and (ii) the Applicable Tranche A Interest Rate for such Interest Period plus the Guarantee Fee percentage applicable to such Interest Period set forth in Section 2.6 of the Board Guarantee. "Application" means the Application of the Borrower to the Board for the issuance of a federal credit instrument under the Act and the Regulations dated June 28, 2002, as supplemented to the Closing Date. "Appraisal Report" means a desktop appraisal (or, if applicable, pursuant to Section 5.14, an inspection report) in form and substance satisfactory to the Board (or if the Board Guarantee is no longer in effect, the Requisite Lenders) and prepared by an Appraiser, which certifies, at the time of determination, the market value of the applicable appraised property and the value of such property that can be obtained in a sale conducted as part of an orderly liquidation. "Appraised Collateral" means all Collateral that is Aircraft Related Equipment, which shall include all Collateral (other than Pledged Accounts (as defined in the Security Agreement)) of the type the value of which is reflected on the Collateral Value Certificate delivered pursuant to Section 3.1(a)(ix). "Appraised Value" means, in the case of any Appraised Collateral, the liquidation value of such Collateral as reflected in the most recent Appraisal Report in respect of such Collateral. "Appraiser" means Aviation Specialists Group, Inc. or any other firm of nationally recognized, independent appraisers as may be agreed by the Borrower, the Board and the Lenders. "ASM" means the "available seat miles" of the Borrower. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation, exchange of assets or sale-leaseback transactions), in one transaction or a series of related transactions, by either Obligor or any of its Subsidiaries to any Person of (i) all or any of the Capital Stock of any Subsidiary of either Obligor, (ii) all or substantially all of the property and assets of an operating unit or business of either Obligor or any of its Subsidiaries or (iii) any other property and assets of either Obligor or any of its Subsidiaries outside of the ordinary course of business of such Obligor or such Subsidiary; provided, that no (i) sales of Aircraft Related Equipment as part of a sale-leaseback transaction in connection with the acquisition of such Aircraft Related Equipment by the Borrower or another Wholly-Owned Subsidiary of the Parent and entered into within eighteen months after such acquisition or (ii) other sale-leasebacks described on Schedule 6.6 shall be included 3 within the meaning of "Asset Sale" (except that if a sale described in clause (i) of this proviso is consummated while there is a Value Differential, such sale shall be included within the meaning of "Asset Sale"). "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Lender, consented to by the Board and accepted by the Agent (unless consummated pursuant to Section 10.2(d)), in substantially the form of Exhibit A. "Bankruptcy Code" means Title 11 of the United States Code as now and hereafter in effect, or any successor statute. "BATA Joint Venture" means the joint venture pursuant to the limited liability company agreement of BATA Leasing, LLC, dated as of March 13, 2001, between MDFC Equipment Leasing Corporation, American Trans Air, Inc. and the other parties from time to time a party thereto, and documents executed in connection therewith. [...***...] "Board" has the meaning specified in the preamble to this Agreement. "Board Guarantee" means the Guarantee Agreement dated as of the date hereof and executed by the Board, the Tranche A Lenders and the Agent, in substantially the form of Exhibit D. "Borrower" has the meaning specified in the preamble to this Agreement. "Borrowing" means the borrowing of the Loan. "Business Day" means a day of the year on which banks are not required or authorized to close in New York, New York or Indianapolis, Indiana and, if the applicable Business Day relates to notices, determinations, fundings and payments in connection with LIBOR, a day on which dealings in Dollar deposits are also carried on in the London interbank market. "Capital Lease," as applied to any Person, means any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is required to be accounted for as a capital lease on the balance sheet of that Person, and the amount of Indebtedness represented by such lease shall be the capitalized amount of the obligations evidenced thereby determined in accordance with GAAP. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's capital stock, whether now outstanding or issued after the date of this Agreement, including, without limitation, all Common Stock. ***Confidential Treatment Requested 4 "Cash" means money, currency or a credit balance. "Cash Equivalents" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency or instrumentality of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, the highest rating obtainable from either S&P or Moody's; (iii) commercial paper not issued by either Obligor or any of its Subsidiaries maturing no more than one year after such date and having, at the time of the acquisition thereof, a rating of at least A-2 from S&P or at least P-2 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; and (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's. "Cash Proceeds" means, with respect to any Asset Sale, the proceeds of such Asset Sale in the form of Cash and Cash Equivalents, including payments of deferred payment obligations when received in the form of Cash or Cash Equivalents and proceeds from the conversion of other property received when converted to Cash or Cash Equivalents. "Change in Control" means (i) the acquisition at any time by any Person or two or more Persons acting in concert (other than the Parent or the Existing Stockholder) of "beneficial ownership" (within the meaning of Section 13(d) under the Exchange Act and the rules and regulations promulgated thereunder) in excess of 35% of the total voting power of the Voting Stock of the Borrower or the Parent, and the Parent or the Existing Stockholder shall fail to own at least 51% of such Voting Stock; (ii) the sale, lease, transfer or other disposition, of all or substantially all of the assets of the Borrower or the Parent to any Person or two or more Persons acting in concert as an entirety or substantially as an entirety in one transaction or a series of related transactions; (iii) the merger or consolidation of the Borrower or the Parent, with or into another corporation, or the merger of another corporation into the Borrower or the Parent, or any other transaction, with the effect that a Person (other than the Parent or the Existing Stockholder) or two or more Persons acting in concert (other than the Parent and the Existing Stockholder) has "beneficial ownership" (within the meaning of Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) in excess of 35% of the Voting Stock of the Borrower or the Parent, or (if the Borrower or the Parent is not the surviving corporation in such transaction) such other corporation (including, in any such case, indirect ownership through another Person), and the Parent or the Existing Stockholder shall fail to own at least 51% of such Voting Stock; (iv) the liquidation or dissolution of the Borrower or the Parent; or (v) if a majority of the board of directors of the Borrower or the Parent shall no longer be composed of individuals (a) who were 5 members of said board on the date hereof, (b) whose election or nomination to said board was approved by individuals referred to in clause (a) above constituting at the time of such election or nomination at least a majority of said board or (c) whose election or nomination to said board was approved by individuals referred to in clauses (a) and (b) above constituting at the time of such election or nomination at least a majority of said board. For purposes of this definition, the term Person includes a "person" or "group" within the meaning of Rule 13d-3 under the Exchange Act. "Closing Date" means the date on which the Loan is made. "Collateral" has the meaning set forth in the Security Agreement. "Collateral Agent" has the meaning set forth in the preamble to this Agreement. "Collateral Value" means, as of any date of determination, the aggregate value of the following Collateral, determined by taking the sum of: (a) the Appraised Value of all Appraised Collateral, as stated in the then most current Appraisal Report(s) therefor (except that with respect to the Collateral Value Certificate delivered pursuant to Section 3.1(a)(ix), the Collateral Value of the Appraised Collateral shall be determined as set forth therein), and (b) eighty-five percent (85%) of the Eligible Accounts as of such date; provided, that none of the following Ineligible Assets shall be included in the computation of Collateral Value (collectively, the "Ineligible Assets"): (A) property or assets not subject to a first priority perfected Lien in favor of the Collateral Agent under the Security Agreement, including any property or assets that may no longer be owned by an Obligor as a result of an Asset Sale or otherwise; and (B) property or assets subject to any event of loss, damage or other casualty that has materially and adversely affected the value of such Collateral, whether insured or not, and in the event that any Ineligible Assets are excluded from the computation of the Collateral Value based on this proviso, the Collateral Value computed in accordance with the foregoing method shall be adjusted to exclude such Ineligible Assets. "Collateral Value Certificate" means a certificate executed by a Responsible Officer of Borrower in substantially the form of Exhibit H annexed hereto. "Commitment" has the meaning specified in Section 2.1(a). "Commodity Agreement" means any agreement or arrangement the value of which fluctuates based on the value of a commodity. "Common Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of this Agreement, including, without limitation, all series and classes of such common stock. 6 "Concessions" means the concessionary agreements and arrangements referred to in the Application and which are listed on Schedule 4.9(d) hereto. "Consolidated EBITDAR" means, with respect to any Person, for any period, the sum of (i) the consolidated operating income of such Person for such period, (ii) consolidated aircraft operating rental expenses of such Person for such period, (iii) amortization, depreciation, non-cash stock compensation expenses and non-cash extraordinary charges that were deducted in arriving at the amount of such consolidated operating income for such period, (iv) non-cash impairment charges, (v) consolidated rental expenses of such Person for such period under each synthetic lease that would appear on the balance sheet of such Person if such lease were treated as a Capital Lease, and (vi) interest income of such Person during such period, all as determined on a consolidated basis in accordance with GAAP. "Consolidated Fixed Charges" means, with respect to any Person, for any period, the sum of (a) aggregate gross interest expense of such Person for such period (calculated without regard to any limitations on the payment thereof), including that portion of Capital Lease obligations of such Person representing the interest factor for such period, and (b) the actual amount of rental expenses of such Person for such period under any Operating Lease of real or personal property, all determined on a consolidated basis. "Contractual Obligation" as applied to any Person, means any provision of any equity security issued by that Person or of any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "Currency Agreement" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement. "Current Credit Facility" means the Credit Agreement dated as of January 28, 1999, as amended, among the Borrower, the Parent, the lenders from time to time party thereto and Bank One, N.A. "Default" means any condition or event which with the passing of time or the giving of notice or both would become an Event of Default. "Dollars" and the sign "$" each mean the lawful money of the United Statesof America. "Eligible Accounts" as of any date of determination means accounts receivable shown on the consolidated balance sheet of the Borrower as of the end of the then most recently ended fiscal quarter, net of, without duplication, all reserves against such accounts receivables and any account: (i) either with respect to which more than 90 days have elapsed since the date of the original invoice therefor or which is more than 60 days past due; 7 (ii) with respect to which, in whole or in part, a check, promissory note, draft, trade acceptance or other instrument for the payment of money has been received, presented for payment and returned uncollected for any reason; (iii) which represents an invoice for goods sold or leased or services rendered under a contract or agreement pursuant to which the account debtor's obligation to pay such invoice is conditioned upon the Borrower's completion of any further performance under the contract or agreement or as to which the goods or services giving rise thereto have not been delivered or performed, and if applicable, accepted by the account debtor, or the account debtor revokes its acceptance; (iv) as to which any one or more of the following events is known to the Borrower to have occurred with respect to the account debtor on such account: death or judicial declaration of incompetency of an account debtor who is an individual; the filing of a case by, or an involuntary case shall be commenced against, an account debtor under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law; or a decree or order of a court for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over such account debtor, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of such account debtor for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of such account debtor; the institution by or against the account debtor of any other type of insolvency proceeding (under the Bankruptcy Code or otherwise) or of any formal or informal proceeding for the dissolution or liquidation of, settlement of claims against, or winding up of affairs of, the account debtor; the sale, assignment, or transfer of all or substantially all of the assets of the account debtor; the account debtor shall fail generally, or shall admit in writing its inability to pay its debts as such debts become due; or the cessation of the business of the account debtor as a going concern; (v) if fifty percent (50%) or more of the aggregate dollar amount of outstanding accounts owed at such time by the account debtor thereon is classified as ineligible under the other criteria set forth herein; (vi) which is owed by an account debtor and is in an amount greater than $25,000 to which the Borrower is indebted in any way, or which is subject to any right of setoff or recoupment by the account debtor, unless the account debtor has entered into an agreement to waive setoff rights; or if the account debtor thereon has disputed liability or made any claim with respect to any other account due from such account debtor; but in each such case only to the extent of such indebtedness, setoff, recoupment, dispute, or claim; 8 (vii) which represents a sale on a bill-and-hold, guaranteed sale, sale and return, sale on approval, consignment, or other repurchase or return basis; (viii) with respect to which the account debtor is located in any jurisdiction requiring the filing of a notice of business activities report or similar report in order to permit the Borrower to seek judicial enforcement in such jurisdiction of payment of such account, unless the Borrower has qualified to do business in such jurisdiction or has filed a notice of business activities report or equivalent report for the then current year; (ix) which is owed by an account debtor which is an Affiliate of the Borrower; (x) which is owed by the Government of the United States of America, or any department, agency, public corporation or other instrumentality thereof, unless the Assignment of Claims Act of 1940, as amended (31 U.S.C. Sec. 3727 et seq.) has been complied with; or (xi) which is not subject to a first priority perfected security interest in favor of the Collateral Agent under the Security Agreement. "Eligible Affiliate" means with respect to any Lender, an Affiliate of such Lender which is an Eligible Lender. "Eligible Collateral" means property of the same nature and type pledged as of the Closing Date pursuant to the Security Agreement. "Eligible Lender" means any "lender" under and as defined in the Act and the Regulations. "Eligible Participant" means any entity that qualifies as a participant under Section 1300.23(b) of the Regulations and meets all of the other requirements applicable to it as a participant as set forth in the Act, the Regulations and any supplemental requirements issued by the Board. "Employee Compensation Agreement" has the meaning specified in Section 3.1(d). "Environmental Claim" means any investigation, written request for information, notice, claim, suit, proceeding, demand or order, by any Governmental Authority or any Person arising in connection with any 9 alleged or actual violation of Environmental Laws or with any liability related to Hazardous Materials Activity, or any actual or alleged property damage or harm to human health, safety or the environment. "Environmental Laws" means any and all applicable statutes, ordinances, orders, rules, regulations, guidance documents (to the extent compliance therewith is required by any Governmental Authority), judgments, Governmental Authorizations, or any other requirement of any Governmental Authority relating to (a) the prevention or control of pollution or protection of the environment, (b) the presence, generation, handling, treatment, storage, disposal, discharge, Release, emission or transportation of Hazardous Materials, or (c) exposure to Hazardous Materials. "Environmental Laws" shall include, but not be limited to, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. 9601 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. 6901 et seq.), the National Environmental Policy Act (42 U.S.C. 4321 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. 1801 et seq.), the Toxic Substances Control Act (49 U.S.C. 2601 et seq.), the Clean Air Act (42 U.S.C. 7401 et seq.), the Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.), the Safe Drinking Water Act (42 U.S.C. 3007 et seq.), the Emergency Planning and Community Right-to-Know Act (42 U.S.C. 11001 et seq.), the Occupational Safety and Health Act (29 U.S.C. 641 et seq.), and the equivalent statutes in effect in the State of Indiana. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "ERISA Affiliate" means, as applied to either Obligor, (i) any corporation which is, or was at any time, a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which such Obligor is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which such Obligor is a member; and (iii) solely for purposes of Section 302 of ERISA and Section 412 of the Internal Revenue Code any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which such Obligor, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Internal Revenue Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Internal Revenue Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by either Obligor or any ERISA Affiliate of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the incurrence by either Obligor or any ERISA Affiliate of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; (f) the receipt by either Obligor or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; or (g) the receipt by either Obligor or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from either Obligor or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. 10 "Event of Default" has the meaning specified in Section 7.1. "Excess Cash Flow" means, with respect to any Person, for any period, (i) Consolidated EBITDAR of such Person for such period, minus (ii) the sum of the following, all determined on a consolidated basis: (A) any change (positive or negative) in Working Capital of such Person from the first day of such period to the last day of such period, (B) payments of principal and interest with respect to the consolidated Indebtedness for borrowed money of such Person during such period, to the extent such payments are not prohibited under this Agreement, (C) income taxes paid by such Person during such period, (D) aircraft rentals paid by such Person during such period under Operating Leases, (E) subject to compliance with the second proviso of Section 5.14(b), cash used during such period to purchase Aircraft Related Equipment, and (F) $10,000,000. "Excess Proceeds" has the meaning specified in Section 2.6(b). "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "Existing Letters of Credit" means the letters of credit existing on the date hereof pursuant to the Current Credit Facility. "Existing Stockholder" means J. George Mikelsons, his spouse and his heirs, and his estate and any trust established for him, his spouse or his heirs. "Existing Stockholder Undertaking" has the meaning specified in Section 3.1(d)(ii). "Facilities" means any and all real property now, hereafter or heretofore owned, leased or operated by either Obligor or any of its Subsidiaries and any of their respective predecessors. "Facility Agent" has the meaning specified in Section 9.1. "Fair Market Value" of any asset, as used in the definition of Indebtedness or with respect to any asset subject to an Asset Sale, means the price that could be obtained for such asset by a seller at the time of determination in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer, as determined in good faith by the board of directors of the Obligor or the Subsidiary thereof making such determination, taking into consideration market conditions at the time of determination. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System, or any successor thereto. "Fiscal Year" means the fiscal year of the Obligors referenced in the financial statements to be delivered by them pursuant to Section 5.1. 11 "Fitch" means Fitch, Inc., and any successor thereto that is a nationally recognized rating agency. "Future Issuance" means each (i) borrowing by the Parent or the Borrower or any of their Subsidiaries from any source (other than Trade Payables and accrued expenses arising in the ordinary course of business or borrowings from the Parent or any of its Subsidiaries), including in the debt capital markets or from commercial bank lenders after the date of this Agreement, and (ii) issuance of any Capital Stock or any warrants, options or other rights that are convertible into or exercisable for Capital Stock by the Parent, the Borrower or any of their respective Subsidiaries after the date of this Agreement, except for issuances of Capital Stock of the Parent in connection with the exercise of stock options or similar rights issued as compensation by existing or former officers, directors or employees of the Parent, the Borrower or any of their Subsidiaries. "GAAP" means, subject to the limitations on the application thereof set forth in Section 1.3, generally accepted accounting principles set forth in opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession or as may be mandated by applicable law. [...***...] "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Governmental Authorization" means any permit, license, certificate, authorization, plan, directive, consent order or consent decree issued, promulgated or entered into by or with any Governmental Authority pursuant to any Environmental Law. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such first Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise); (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of ***Confidential Treatment Requested 12 the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); or (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of such other Person so as to enable such Person to pay such Indebtedness. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantee Fee" has the meaning specified in Section 2.06 of the Board Guarantee. "Hazardous Materials" means (y) any petroleum or petroleum products (including, without limitation, gasoline, crude oil, or any fraction thereof), radioactive materials or wastes, radon, asbestos in any form, urea formaldehyde foam insulation and polychlorinated biphenyls and (z) any other chemical, material, substance or waste that in relevant form or concentration is prohibited, limited or regulated, or is defined, listed or classified as a hazardous or toxic substance, under any Environmental Law. "Hazardous Materials Activity" means any past or current use, storage, Release, threatened Release, generation, treatment, remediation, proposed remediation or transportation of any Hazardous Material caused by, or undertaken by or on behalf of, either Obligor, any of its Subsidiaries or any of their respective predecessors or Affiliates. [...***...] "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money; (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (iii) all obligations of such Person in respect of letters of credit (except, with respect to determining compliance with the provisions in Section 6.4(b), to the extent such letters of credit are cash collateralized by the Parent or the Borrower) or other similar instruments (including reimbursement obligations with respect thereto); (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services; (v) all Capital Lease obligations of such Person (the amount of the Indebtedness in respect of Capital Lease obligations to be determined as provided in the definition of Capital Lease in this Section 1.1); (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided, that the amount of such Indebtedness shall be the lesser of (A) the Fair Market Value of such asset at such date of determination and (B) the stated principal amount of such Indebtedness; (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person, including Indebtedness described in the preceding clause (vi) which is recourse to such guarantor; (viii) to the extent not otherwise included in this definition and to the extent treated as a liability under GAAP, obligations under Currency Agreements, Interest Rate Agreements and Commodity Agreements; (ix) the capitalized amount of remaining lease payments ***Confidential Treatment Requested 13 owing by such Person under synthetic leases that would appear on the balance sheet of such Person if such lease were treated as a Capital Lease; (x) the aggregate amount of uncollected accounts receivable of such Person subject at such time to a sale of receivables (or similar transaction) to the extent such transaction is effected with recourse to such Person (whether or not such transaction would be reflected on the balance sheet of such Person in accordance with GAAP); (xi) solely for purposes of determining compliance with Section 6.4(b), all Operating Lease obligations of such Person with respect to Aircraft Related Equipment (the amount of Indebtedness in respect of Operating Lease obligations to be determined as provided in the definition of Operating Lease in this Section 1.1); and (xii) the Indebtedness of any partnership or unincorporated joint venture in which such Person is a general partner or a joint venturer to the extent such Indebtedness is recourse to such Person; provided that the term "Indebtedness" shall not include (A) Trade Payables and accrued expenses arising in the ordinary course of business, (B) solely for purposes of determining compliance with Section 6.4(b), obligations incurred to finance purchase deposits on Aircraft Related Equipment in an outstanding amount no greater than $50,000,000 at any time or (C) agreements providing for indemnification, purchase price adjustments or similar obligations incurred or assumed in connection with the acquisition or disposition of assets or Capital Stock. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP. "Indemnified Liabilities" has the meaning specified in Section 10.4. "Indemnified Taxes" has the meaning specified in Section 2.12(a). "Indemnitees" has the meaning specified in Section 10.4. "Ineligible Assets" has the meaning specified in the definition of Collateral Value. "Insured Amount" means the amount specified therefor on Exhibit K. "Interest Payment Date" means each February 25, May 25, August 25 and November 25; provided, however, that: (i) the Loan Maturity Date shall be an Interest Payment Date; (ii) if any Interest Payment Date would otherwise fall on a day which is not a Business Day, such Interest Payment Date shall fall on the next succeeding Business Day, unless such next succeeding Business Day shall fall in another calendar month, in which event such Interest Payment Date shall fall on the immediately preceding Business Day; and 14 (iii) following a Default or an Event of Default, each "Interest Payment Date" shall be the last day of each Interest Period occurring during such period in which such Default or Event of Default exists. "Interest Period" means (a) initially, the period commencing on the Closing Date and ending on but excluding the next succeeding Interest Payment Date and (b) thereafter, each successive period commencing on and including the immediately preceding Interest Payment Date and ending on but excluding the next succeeding Interest Payment Date; provided, that following a Default or Event of Default, each Interest Period shall be for such duration of one month or less as shall be selected by the Agent by notice to the Borrower, each Lender, each Participant, the Loan Administrator and the Board on or prior to restart of such Interest Period (and in the absence of any such notice or selection, the applicable Interest Period shall be determined as provided above without regard to this proviso). Notwithstanding the foregoing, if Tranche A of the Loan is assigned by the Primary Tranche A Lender to any other Person (including, but not limited to, the Alternate Tranche A Lender) pursuant to Section 10.2, the relevant Interest Period for Tranche A of the Loan during which such assignment occurs shall be divided into two Interest Periods, with the first of such periods ending on the date on which such assignment occurs, and the second of such periods commencing on the date on which such assignment occurs. "Interest Rate Agreement" means any interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter. "Investment" means with respect to any Person, any direct or indirect advance, loan (other than advances to customers in the ordinary course of business consistent with past practices that are recorded as accounts receivable on the balance sheet of such Person or its Subsidiaries) or other extension of credit or capital contribution or other equity investment by such Person to any other Person, including by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others or any purchase or acquisition by such Person of Capital Stock (or warrants, options or any other rights convertible into or exercisable for Capital Stock), bonds, notes, debentures or other similar instruments issued by any other Person. "IRS" means the Internal Revenue Service of the United States or any successor thereto. "Lender" means the Primary Tranche A Lender, the Alternate Tranche A Lender and/or the Tranche B Lender (including their respective successors and permitted assigns), as the context may require, and the term "Lenders" means the Primary Tranche A Lender, the Alternate 15 Tranche A Lender and the Tranche B Lender (including their respective successors and permitted assigns) collectively; provided, that (x) the terms "Lender" and "Lenders" shall include the Board if it acquires any interest in Tranche A of the Loan as contemplated by Section 2.9(f) and the Board Guarantee, and (y) if the Primary Tranche A Lender assigns its rights under this Agreement to the Alternate Tranche A Lender, the term "Lender" shall no longer include the Primary Tranche A Lender. "Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Lending Office" opposite its name on Annex B or on the Assignment and Acceptance by which it became a Lender or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "LIBOR" means, with respect to any Interest Period, the offered rate in the London interbank market for deposits in United States dollars of amounts equal or comparable to the unpaid principal amount of the applicable Tranche of the Loan offered for a term comparable to such Interest Period, as currently shown on the Bridge/Telerate page 3750 as of 11:00 a.m., London time, two Business Days prior to the first day of such Interest Period; provided, however, that (A) if more than one offered rate as described above appears on such Bridge/Telerate page, the rate used to determine LIBOR will be the arithmetic average (rounded upward, if necessary, to the next higher 1/100 of 1%) of such offered rates, (B) if no such offered rates appear, the rate used for such Interest Period will be the arithmetic average (rounded upward, if necessary, to the next higher 1/100 of 1%) of rates quoted by the Reference Banks at approximately 10:00 a.m., New York time, two Business Days prior to the first day of such Interest Period for deposits in United States dollars offered to leading European banks for a period comparable to such Interest Period in an amount comparable to the unpaid principal amount of the applicable Tranche of the Loan and (C) in the case of an Interest Period commencing after an assignment of Tranche A of the Loan from the Primary Tranche A Lender to the Alternate Tranche A Lender, all determinations of LIBOR shall be made on the first day of such Interest Period (rather than two Business Days prior to the first day of such Interest Period). If the Agent ceases generally to use such Bridge/Telerate page for determining interest rates based on eurodollar deposit rates, a comparable internationally recognized interest rate reporting service shall be used to determine such offered rates. "LIBOR Lenders" means Lenders holding Notes that bear interest at a rate determined by reference to LIBOR. "Lien" means any lien, mortgage, pledge, assignment, security interest, charge, hypothecation, preference, priority, privilege, lease or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, any easement, right-of-way or other encumbrance on title to real property, and any agreement to give any security interest). "Liquidation Period" has the meaning specified in Section 2.10(e). "Liquidity Certificate" has the meaning specified in Section 5.1(b)(x). 16 "Loan" has the meaning specified in Section 2.1. "Loan Administrator" has the meaning specified in the preamble to this Agreement. "Loan Administrator Relationship" has the meaning specified in Section 8.5. "Loan Documents" means, collectively, this Agreement, the Notes, the Warrants, the Employee Compensation Agreement, the Parent Guarantee, the Subsidiary Guarantee, the Participation Agreements, the Security Documents, the Existing Stockholder Undertaking and each other certificate, agreement or document executed by either Obligor or any of its Subsidiaries and delivered to the Agent, the Collateral Agent, the Lenders or the Board in connection with or pursuant to this Agreement. "Loan Maturity Date" means November 25, 2008, except that if such date is not a Business Day, then the Loan Maturity Date shall be the immediately succeeding Business Day. "Loss Payee Amount" means the amount specified therefor on Exhibit K. "Margin Stock" has the meaning assigned to that term in Regulation T, U or X of the Board of Governors of the Federal Reserve System as in effect from time to time. "Material Adverse Effect" means (a) a material adverse effect on (i) the business condition (financial or otherwise), operations, performance, prospects, assets or properties of the Obligors and their Subsidiaries, taken as a whole or (ii) the legality, validity, binding effect or enforceability against any Obligor or its Subsidiaries of any Loan Document, the rights and remedies of the Agent, the Collateral Agent, the Board or any Lender under any Loan Document, or (b) any material adverse effect on or material impairment of (i) the ability of either Obligor or its Subsidiaries to perform its payment or other obligations under the Loan Documents or (ii) the value of, or the validity and priority of the Liens on, the Collateral. "Minimum Liability Insurance Amount" means the amount specified therefor on Exhibit K. "Moody's" means Moody's Investors Service, Inc., and any successor thereto that is a nationally recognized rating agency. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NASDAQ" means The Nasdaq Stock Market, an electronic securities market operated by The Nasdaq Stock Market, Inc., a wholly owned subsidiary of the National Association of Securities Dealers, Inc. 17 "Net Cash Proceeds" means, with respect to any Asset Sale, the Cash Proceeds of such Asset Sale, net of (i) reasonable and customary brokerage commissions and other reasonable and customary fees and expenses (including reasonable fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale taking into account the consolidated results of operations of the Parent and its Subsidiaries, taken as a whole (as estimated in good faith by the Chief Financial Officer of the Parent), (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that (A) is secured by a Lien on the property or assets sold and (B) is required by its terms to be paid as a result of such Asset Sale, and (iv) appropriate amounts to be provided by the Parent or any of its Subsidiaries as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP, but limited to the period of the required reserve. "Net Condemnation Proceeds" means an amount equal to: (i) any cash payments or proceeds received by either Obligor or any of its Subsidiaries as a result of any condemnation or other taking or temporary or permanent requisition of any property, any interest therein or right appurtenant thereto, or any change of grade affecting any property, as the result of the exercise of any right of condemnation or eminent domain by a Governmental Authority (including a transfer to a Governmental Authority in lieu or anticipation of a condemnation), minus (ii) (a) any actual and reasonable costs incurred by either Obligor or any of its Subsidiaries in connection with any such condemnation or taking, (b) any taxes payable in connection therewith, taking into account the consolidated results of operations of the Parent and its Subsidiaries, taken as a whole (as estimated in good faith by the Chief Financial Officer or the Chief Accounting Officer of the Parent), (c) the amount of any Indebtedness secured by a Lien on any property subject to such condemnation or taking and any related expenses of third parties, in each case required by the documentation related to such Lien to be discharged or paid from the proceeds thereof and (d) any amounts required to be paid to any Person (other than an Obligor or any of the Obligors' Subsidiaries) owning a beneficial interest in the property subject to such condemnation or taking. "Net Insurance Proceeds" means an amount equal to: (i) any Cash payments or proceeds received by the Parent or any of its Subsidiaries under any casualty insurance policy in respect of a covered loss thereunder with respect to tangible, real or personal property, minus (ii) (a) any actual and reasonable costs incurred by the Parent or any of its Subsidiaries in connection with the adjustment or settlement of any claims in respect thereof, (b) any taxes payable in connection therewith, taking into account the consolidated results of operations of the Parent and its Subsidiaries, taken as a whole (as estimated in good faith by the Chief Financial Officer of the Parent), (c) the amount of any Indebtedness secured by a Lien on any property subject to such covered loss and required to be discharged from the proceeds thereof and (d) any amounts required to be paid to any Person (other than the Parent or any of its Subsidiaries) owning a beneficial interest in the property subject to such loss. 18 "9 5/8% Senior Notes" means the 9 5/8% senior notes due 2005 of the Parent. "9 5/8% Senior Notes Indenture" means the indenture relating to the 9 5/8% Senior Notes, as supplemented or amended. "Non-Guarantor Subsidiary" means any Subsidiary of the Parent that is not a "Guarantor" as defined in and pursuant to the 10 1/2% Senior Notes Indenture or 9 5/8% Senior Notes Indenture. "Non-U.S. Person" means a Person that is not a United States person as defined in section 7701(a)(30) of the Internal Revenue Code. "Notes" has the meaning specified in Section 2.4(d). "Notice of Borrowing" has the meaning specified in Section 2.2(a). "Obligations" means all payment and performance obligations of every nature of the Borrower and the Parent from time to time owed to the Agent, the Collateral Agent, the Govco Administrative Agent, the Lenders, the Loan Administrator, the Participants or the Board or any of their respective Affiliates, officers, directors, employees, agents and advisors in, under or in respect of this Agreement or any Note, whether for principal, interest, fees, expenses, indemnification or otherwise. "Obligor" means each of the Parent and/or the Borrower, together with their respective successors and permitted assigns. "Obsolete Parts Cap" means the amount specified therefor on Exhibit K. "Officer" means, as applied to any corporation, each Responsible Officer, the Chairman of the Board (if an officer), President, Controller, Assistant Treasurer, Secretary or Assistant Secretary. "Officer's Certificate" means, as applied to any corporation, a certificate executed on behalf of such corporation by its chairman of the board (if an officer), president, one of its vice presidents, chief financial officer, controller, treasurer or assistant treasurer or an assistant secretary; provided, that every Officer's Certificate shall include (i) a statement that the officer acting in such capacity making or giving such Officer's Certificate has read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that, in the opinion of the signer, s/he has made or has caused to be made such examination or investigation as is necessary to enable her/him to express an informed opinion as to whether or not such condition has been complied with, and (iii) a statement as to whether, in the opinion of the signer, such condition has been complied with. "Operating Lease" means, as applied to any Person, any lease (including, without limitation, leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) 19 under which such Person is lessee, that is not a Capital Lease. For purposes of determining compliance with Section 6.4(b), the amount of Indebtedness in respect of any Operating Lease at the end of any fiscal quarter shall be an amount equal to the product of (x) six (6) and (y) the total amount of all lease payments in respect of such Operating Lease for the four most recently ended fiscal quarters. "Other Taxes" has the meaning specified in Section 2.12(b). "Overdue Rate" means the rate specified therefor on Exhibit K. "Parent" has the meaning specified in the preamble to this Agreement. "Parent Guarantee" means the Parent Guarantee Agreement dated as of the date hereof and made by the Parent, in substantially the form of Exhibit J. [...***...] "Participations" means the participations purchased by the Participants on the date hereof pursuant to the Participation Agreements. [...***...] "Payment Restriction" means, with respect to a Subsidiary of any Person, any encumbrance, restriction or limitation, whether by operation of the terms of its charter or by reason of any agreement or instrument, on the ability of (i) such Subsidiary to (a) pay dividends or make other distributions on its Capital Stock or make payments on any obligation, liability or Indebtedness owed to such Person or any other Subsidiary of such Person, (b) make loans or advances to such Person or any other Subsidiary of such Person, or (c) transfer any of its property or assets to such Person or any other Subsidiary of such Person, or (ii) such Person or any other Subsidiary of such Person to receive or retain any such (a) dividend, distributions or payments, (b) loans or advances, or (c) property or assets. "Permitted Encumbrances" means the following types of Liens (other than any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA) as applied to property: (i) Liens for taxes, assessments or governmental charges or claims the payment of which is either (a) not delinquent for a period of more than 30 days or (b) being contested in good faith by appropriate proceedings, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor; ***Confidential Treatment Requested 20 (ii) statutory Liens of landlords and Liens of carriers, vendors, warehousemen, repairmen, mechanics and materialmen and other Liens imposed by law incurred in the ordinary course of business for sums either (a) not delinquent for a period of more than 30 days or (b) being contested in good faith by appropriate proceedings, if such reserve or other appropriate provision, if any, as required by GAAP shall have been made therefor; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds (other than bonds related to judgments and litigations), reimbursement obligations and chargeback rights of Persons performing services for either Obligor or any of its Subsidiaries and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) easements, rights-of-way, restrictions, minor defects, encroachments or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of either Obligor or any of its Subsidiaries; (v) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods in the ordinary course of business; (vi) any interest or title of a lessor in property leased by an Obligor under any Capital Lease obligation or Operating Lease which, in each case, is not prohibited under this Agreement (disregarding for this purpose Section 6.1); (vii) Liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of either Obligor or any of its Subsidiaries on deposit with or in possession of such bank; (viii) any renewal of or substitution for any Lien permitted by any of the preceding clauses; provided that the debt secured is not increased nor the Lien extended to any additional assets; and (ix) Liens of creditors of any Person to whom the assets of either Obligor or any of its Subsidiaries are consigned for sale in the ordinary course of business. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, estate, trust, limited liability company, unincorporated association, joint venture or other entity, or a Governmental Authority. "Plan" means any "employee pension benefit plan" as defined in section 3(2) of ERISA in respect of which either Obligor or any ERISA 21 Affiliate is (or if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA, other than a Multiemployer Plan. "Primary Tranche A Lender" has the meaning specified in the preamble to this Agreement. "Proceedings" has the meaning specified in Section 5.1(b)(vi). "Pro Forma Basis" means, with respect to compliance with any covenant hereunder, compliance with such covenant after giving effect to any proposed incurrence of Indebtedness by either Obligor or any of its Subsidiaries and the application of the proceeds thereof, the acquisition (whether by purchase, merger or otherwise) or disposition (whether by sale, merger or otherwise) of any company, entity or business or any asset by either Obligor or any of its Subsidiaries or any other action which requires compliance on a Pro Forma Basis. In making any determination of compliance on a Pro Forma Basis, such determination shall be performed after good faith consultation with the Agent using the consolidated financial statements of such Obligor or such Subsidiary which shall be reformulated as if any such incurrence of Indebtedness and the application of proceeds, acquisition, disposition or other action had been consummated at the beginning of the period specified in the covenant with respect to which Pro Forma Basis compliance is required. "Redeemable Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise (i) is required to be redeemed prior to the Loan Maturity Date, (ii) may be required to be redeemed at the option of the holder of such class or series of Capital Stock at any time prior to the Loan Maturity Date, or (iii) is convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Loan Maturity Date; provided that any Capital Stock that would constitute Redeemable Stock solely because of provisions offering holders thereof the right to require the issuer thereof to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" occurring prior to the Loan Maturity Date shall not constitute Redeemable Stock if the asset sale provisions contained in such Capital Stock specifically provide that in respect of any particular asset sale proceeds, the issuer thereof will not repurchase or redeem any such Capital Stock pursuant to such provisions prior to the Borrower's permanent reduction of the aggregate outstanding principal amount of the Loan by an amount at least equal to the Net Cash Proceeds from such asset sale. "Reference Banks" means Citibank, N.A., JPMorgan Chase Bank and Bank of America, N.A., and each of their respective successors. "Register" has the meaning specified in Section 2.4(e). "Regulations" has the meaning specified in the first recital to this Agreement. 22 "Release" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including, without limitation, the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), including the movement of any Hazardous Material through the air, soil, surface water, groundwater or property. "Requesting Party" has the meaning specified in Section 8.1(b). "Requisite Lenders" means, collectively, Lenders holding in excess of fifty percent (50%) of the principal amount of the Loan then outstanding or, prior to the making of the Loan, the Alternate Tranche A Lender and the Tranche B Lender. "Requisite LIBOR Lenders" means, collectively, Lenders holding in excess of fifty percent (50%) of the principal amount of the portion of the Loan bearing interest at a rate determined by reference to LIBOR or, prior to the making of the Loan, the Alternate Tranche A Lender and the Tranche B Lender. "Responsible Officer" means, with respect to any Person, any of the Chief Executive Officer, Executive Vice Presidents and Chief Financial Officer of such Person, but in any event, with respect to financial matters, the Chief Financial Officer, Treasurer or Controller of such Person. "Restricted Payment" means with respect to any Person (i) any declaration or payment of dividends on or making of any distributions in respect of the Capital Stock of such Person (other than dividends or distributions payable solely in shares of Capital Stock (other than Redeemable Stock) or in options, warrants, or other rights to purchase Capital Stock (other than Redeemable Stock)) to holders of Capital Stock of such Person, (ii) any purchase, redemption or other acquisition or retirement for value by such Person (other than through the issuance solely of Capital Stock (other than Redeemable Stock) or options, warrants or other rights to purchase Capital Stock (other than Redeemable Stock)) of any Capital Stock or warrants, rights (other than exchangeable or convertible Indebtedness of such Person not prohibited under clause (iii) below) or options to acquire Capital Stock of such Person, (iii) any redemption, repurchase, defeasance (including, but not limited to, in substance or legal defeasance), or other acquisition or retirement for value by such Person (other than through the issuance solely of Capital Stock (other than Redeemable Stock) or warrants, rights or options to acquire Capital Stock (other than Redeemable Stock)) (collectively, a "prepayment"), directly or indirectly (including by way of setoff or of amendment of the terms of any Indebtedness in connection with any retirement or acquisition of such Indebtedness), other than at any scheduled maturity thereof or by any scheduled repayment or scheduled sinking fund payment, of any Indebtedness of such Person or any Subsidiary of such Person (other than (a) repayment of the Loan, (b) repayment of Indebtedness incurred to finance the acquisition of Aircraft Related Equipment with the proceeds from a sale of such Aircraft Related Equipment as part of a sale-leaseback transaction of the type excepted from the definition of Asset Sales in this Agreement, (c) prepayments of the Current Credit Facility as contemplated by Section 2.4(f) and (d) repayments of 23 Indebtedness by any Non-Guarantor Subsidiaries to the Parent or any of its Subsidiaries that are Restricted Subsidiaries as of the date hereof) and (iv) any advances, loans or other Investments by the Borrower or any of its Subsidiaries to or in the Parent. "Restricted Subsidiary" has the meaning set forth in the 9 5/8% Senior Notes Indenture and the 10 1/2% Senior Notes Indenture. "SEC" means the Securities and Exchange Commission of the United States of America. "Security Agreement" means the Mortgage and Security Agreement, dated as of the date hereof made by the Borrower in favor of the Collateral Agent, as the same may be amended, supplemented or otherwise modified from time to time, including by any Security Agreement Supplement. "Security Agreement Supplement" means a supplement to the Security Agreement that subjects additional Collateral to the Lien of the Security Agreement. "Security Documents" means the Security Agreement and each certificate, agreement or document executed by either Obligor or any of its Subsidiaries pursuant to the Security Agreement. "Solvent" means, with respect to any Person, that as of the date of determination both (A) (i) the then fair saleable value of the property of such Person is (y) greater than the total amount of liabilities (including contingent liabilities) of such Person and (z) not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person; (ii) such Person's capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (iii) such Person does not intend to incur, or believes that it will not incur, debts beyond its ability to pay such debts as they become due; and (B) such Person is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Standard & Poor's" or "S&P" means Standard & Poor's Group, a division of The McGraw Hill Companies, Inc., and any successor thereto that is a nationally recognized rating agency. "Subsidiary" means, with respect to any Person, any corporation, partnership, association, limited liability company, trust or estate, joint venture or other business entity of which more than 50% of the issued and outstanding shares of Voting Stock at the time of 24 determination are owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof. "Subsidiary Guarantee" means the Subsidiary Guarantee Agreement, dated as of the date hereof made by Amber Travel, Inc., ATA Cargo, Inc., American Trans Air Training Corporation, Ambassadair Travel Club, Inc., ATA Leisure Corp., American Trans Air ExecuJet, Inc., Chicago Express Airlines, Inc., Washington Street Aviation, LLC and West 63rd Street Land Holding, LLC, in substantially the form of Exhibit I. "Substitute Basis" has the meaning specified in Section 2.10(b). "Taxes" means any and all present or future taxes, levies, fees, duties, imposts, deductions, charges or withholdings of any nature, and all interest, penalties and other liabilities thereon or computed by reference thereto imposed by any Governmental Authority. "10 1/2% Senior Notes" means the 10 1/2% senior notes due 2004 of the Parent. "10 1/2% Senior Notes Indenture" means the indenture relating to the 10 1/2% Senior Notes as supplemented or amended. "Title 49" means Title 49 of the United States Code, as amended and in effect from time to time, and the regulations promulgated pursuant thereto. "Trade Payables" means, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries and arising in the ordinary course of business in connection with the acquisition of goods or services but limited to current liabilities in accordance with GAAP. "Tranche" has the meaning specified in Section 2.1(a)(ii). "Tranche A" has the meaning specified in Section 2.1(a)(i). "Tranche A Lender" has the meaning specified in the preamble to this Agreement; provided that the term "Tranche A Lender" shall include the Board if it acquires any interest in Tranche A of the Loan as contemplated by Section 2.9(f) and the Board Guarantee. "Tranche A Note" has the meaning specified in Section 2.4(d)(i). "Tranche B" has the meaning specified in Section 2.1(a)(ii). "Tranche B Lender" has the meaning specified in the preamble to this Agreement. "Tranche B Note" has the meaning specified in Section 2.4(d)(ii). "United States Citizen" has the meaning specified in Section 4.1(b). 25 "Value Differential" has the meaning specified in Section 5.14(b). "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to vote for the election of directors, managers or trustees of any Person (or Persons performing similar functions) irrespective of whether or not at the time stock of any such class or classes will have or might have such voting power by the reason of the happening of any contingency. "Warrants" means collectively (i) the Warrant to purchase shares of the Parent's Common Stock issued by the Parent to the Board, (ii) the Warrant to purchase shares of the Parent's Common Stock issued by the Parent to the [...***...], (iii) the Warrant to purchase shares of the Parent's Common Stock issued by the Parent to the [...***...], (iv) the Warrant to purchase shares of the Parent's Common Stock issued by the Parent to the [...***...], and (v) the Warrant to purchase shares of the Parent's Common Stock issued by the Parent to the Tranche B Lender, in each case substantially in the form of Exhibit F. "Wholly-Owned" denotes a Subsidiary all of the Voting Stock of which (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) is owned directly or indirectly by a single holder. "Working Capital" means, with respect to any Person, as of any date, (i) the current assets (excluding cash and Cash Equivalents) of such Person minus (ii) the current liabilities of such Person (other than the current portion of long-term debt), in each case, determined on a consolidated basis and otherwise in accordance with GAAP as of such date. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. Section 1.2. Computation of Time Periods. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding" and the word "through" means "to and including." Section 1.3. Accounting Terms and Principles. (a) All accounting terms not specifically defined herein shall be construed in conformity with GAAP and all accounting determinations required to be made pursuant hereto shall, unless expressly otherwise provided herein, be made in conformity with GAAP. (b) If any change in accounting principles used in the preparation of the most recent financial statements referred to in Section 5.1 is hereafter required or permitted by the rules, regulations, pronouncements and opinions of the Financial ***Confidential Treatment Requested 26 Accounting Standards Board or the Accounting Principles Board of the American Institute of Certified Public Accountants (or any successor thereto) and such change is adopted by an Obligor with the agreement of its independent public accountants and results in a change in any of the calculations required by Article VI had such accounting change not occurred, the parties hereto agree to enter into negotiations in order to amend such provisions so as to equitably reflect such change with the desired result that the criteria for evaluating compliance with such covenants by such Obligor shall be the same after such change as if such change had not been made; provided, however, that no change in GAAP that would affect a calculation that measures compliance with any covenant contained in Article VI shall be given effect until such provisions are amended to reflect such changes in GAAP. (c) Financial statements and other information required to be delivered by the Obligors to the Agent, the Lenders, the Participants, the Board or the Loan Administrator pursuant to Section 5.1 shall be prepared in accordance with GAAP in effect at the time of such preparation. Section 1.4. Certain Terms. (a) The words "herein," "hereof" and "hereunder" and similar words refer to this Agreement as a whole, and not to any particular Article, Section, subsection or clause in this Agreement. (b) References in this Agreement to an Exhibit, Annex, Schedule, Article, Section, subsection or clause refer to the appropriate Exhibit, Annex, or Schedule to, or Article, Section, subsection or clause in this Agreement. (c) Each agreement defined in this Article I shall include all appendices, annexes, exhibits and schedules thereto. If the prior written consent of any Person is required hereunder for an amendment, restatement, supplement or other modification to any such agreement and the consent of each such Person is obtained, references in this Agreement to such agreement shall be to such agreement as so amended, restated, supplemented or modified. (d) References in this Agreement to any statute shall be to such statute as amended or modified and in effect at the time any such reference is operative. (e) The term "including" when used in any Loan Document means "including without limitation" except when used in the computation of time periods. Article II THE LOAN Section 2.1. The Loan. (a) On the terms and subject to the conditions contained in this Agreement and in reliance upon the representations and warranties of the Obligors set forth herein, the Lenders severally agree to make on or before November 20, 2002 a single term loan (the "Loan") to the Borrower in a single Borrowing not to 27 exceed the principal amount of $168,000,000 as follows: (i) the Primary Tranche A Lender, subject to clause (b) below, agrees to participate in the making of the Loan in an amount not to exceed $148,500,000 (such portion of the Loan being herein referred to as "Tranche A" of the Loan); and (ii) the Tranche B Lender agrees to participate in the making of the Loan in an amount not to exceed $19,500,000 (such portion of the Loan being herein referred to as "Tranche B" of the Loan, and collectively, together with Tranche A, the "Tranches" and each a "Tranche"). Any amount of the Loan repaid or prepaid may not be reborrowed. The obligation of each Lender to participate in the making of the Loan up to its respective amount specified above on the terms and conditions hereof is hereinafter called its "Commitment". (b) The Primary Tranche A Lender intends but is not obligated to fund Tranche A of the Loan through the issuance and sale of commercial paper. The Primary Tranche A Lender may, at its option, elect at any time not to fund Tranche A of the Loan, in which case the Alternate Tranche A Lender will, subject to the terms and conditions provided herein, be obligated to fund Tranche A of the Loan (it being understood and agreed that Tranche A of the Loan shall be funded by either the Primary Tranche A Lender or the Alternate Tranche A Lender, as the case may be, but not both). In the event that more than one Alternate Tranche A Lender is party hereto, in accordance with Section 10.2, the rights and obligations of each such Alternate Tranche A Lender hereunder are several. Section 2.2. Borrowing Procedures. (a) The Borrowing shall be made on notice given by the Borrower to the Agent not later than 9:00 a.m. (New York City time) on the proposed Closing Date. Such notice shall be in substantially the form of Exhibit C (a "Notice of Borrowing"), specifying (A) the Closing Date and (B) the aggregate amount of the proposed Borrowing. The Notice of Borrowing shall be irrevocable, and duly executed and delivered on behalf of the Borrower by its Chief Financial Officer or President/Chief Executive Officer. (b) Each of the Lenders shall, before 11:00 a.m. (New York City time) on the date of the proposed Borrowing, make available [...***...], in immediately available funds, an amount equal to its Commitment. After the Agent's receipt of such ***Confidential Treatment Requested 28 funds and upon fulfillment or waiver of the applicable conditions set forth in Section 3.1, the Agent will make such funds available to the Borrower. Section 2.3. Scheduled Repayment of the Loan. The Borrower shall repay the Loan on the dates and in the principal amounts set forth below (along with accrued and unpaid interest thereon pursuant to Section 2.7(c)); provided that, the Borrower shall repay the entire unpaid principal amount of the Loan together with accrued and unpaid interest thereon and all other amounts owing hereunder in respect thereof on the Loan Maturity Date: - -------------------------------------------------------------------------------- Interest Payment Date falling on or about: Principal Amount - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- November 25, 2003 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- February 25, 2004 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- May 25, 2004 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- August 25, 2004 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- November 25, 2004 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- February 25, 2005 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- May 25, 2005 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- August 25, 2005 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- November 25, 2005 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- February 25, 2006 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- May 25, 2006 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- August 25, 2006 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- November 25, 2006 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- February 25, 2007 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- May 25, 2007 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- August 25, 2007 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- November 25, 2007 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- February 25, 2008 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- May 25, 2008 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- August 25, 2008 $7,000,000 - ------------------------------------------- --------------------------------- - ------------------------------------------- --------------------------------- November 25, 2008 $28,000,000 - ------------------------------------------- ---------------------------------- Section 2.4. Evidence of Debt; Use of Proceeds. (a) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing such Lender's portion of the Loan outstanding from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (b) The Agent shall establish and maintain a register for recording with respect to the Loan (i) the date and amount of each payment on the Loan made by or on behalf of, or collected from, the Borrower, (ii) the amount of each such payment applied in accordance with each clause of Section 2.9(d) and (e) or other applicable terms hereof to scheduled principal of or interest on the Loan and to each of the fees identified in clauses (c), (d), (e), (g) and (h) of Section 2.8 hereof, and (iii) the date and amount of each payment made by the Board under the Board Guarantee. 29 (c) The entries made in the accounts maintained pursuant to clauses (a) and (b) of this Section 2.4 shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations recorded therein; provided, however, that the failure of any Lender or the Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrower to repay the Loan in accordance with its terms. (d) The Borrower shall execute and deliver to the Agent on the Closing Date (i) a promissory note substantially in the form of Exhibit B1 in the principal amount of Tranche A of the Loan, dated the Closing Date and otherwise appropriately completed (such note, including any replacement note therefor issued in accordance with the provisions of this Section 2.4(d), the "Tranche A Note") and (ii) a promissory note substantially in the form of Exhibit B2 in the principal amount of Tranche B of the Loan, dated the Closing Date and otherwise appropriately completed (such note, including any replacement note therefor issued in accordance with the provisions of this Section 2.4(d), the "Tranche B Note" and, collectively, together with the Tranche A Note, the "Notes"). The Notes shall be made payable to the Agent at the office of the Agent. If any Note is mutilated, lost, stolen or destroyed, the Borrower shall issue a new Note in the same principal amount and having the same interest rate, date and maturity as the Note so mutilated, lost, stolen or destroyed endorsed to indicate all payments thereon. In the case of any lost, stolen or destroyed Note, there shall first be furnished to the Borrower and the Board an instrument of indemnity from the Agent and evidence of such loss, theft or destruction reasonably satisfactory to each of them, together with an officer's certificate of the Borrower certifying and warranting as to the due authorization, execution and delivery of the new Note. (e) This Agreement and the Notes are registered instruments. A manually signed copy of this Agreement and the original of a Note shall be evidence of (i) the rights of each Lender under this Agreement and such Note and (ii) the rights of the Agent under this Agreement. Neither this Agreement nor any Note is a bearer instrument. The Agent will establish and maintain a record of ownership (the "Register") in which the Agent agrees to register by book entry the Agent's and each Lender's interest in the Loan, the Notes and this Agreement, and in the right to receive any payments hereunder or thereunder and any assignment of any such interest or rights. In connection with any assignment pursuant to Section 10.2, the Agent shall maintain a copy of each Assignment and Acceptance delivered to and accepted by it and shall record the names and addresses of the Lenders and principal amount of each Tranche of the Loan owing to each Lender from time to time. The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Board, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender for all purposes of this Agreement. The Register shall be available for inspection by the Borrower, the Agent, the Collateral Agent, the Board, the Loan Administrator or any Lender or Participant at any reasonable time and from time to time upon reasonable prior notice. (f) The Borrower may use the proceeds from the Loan for such general corporate purposes as are permissible under the Act and Regulations but not for 30 the prepayment or refinancing of any Indebtedness of the Borrower for borrowed money nor for the acquisition of the stock, or of all or any substantial part of the assets, of any Person; provided, however, that the Borrower may use up to $60,000,000 of the proceeds from the Loan for the prepayment of the Current Credit Facility and for the cash collateralization of the Existing Letters of Credit. No portion of the proceeds from the Borrowing shall be used by the Borrower or any of its Subsidiaries in any manner that might cause the borrowing or the application of such proceeds to violate Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board of Governors or to violate Section 7(c) of the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds. Section 2.5. Optional Prepayments. (a) The Borrower may, upon at least fifteen days' prior revocable written notice to the Board, the Loan Administrator and the Agent stating the proposed date and aggregate principal amount of the prepayment, elect to prepay the outstanding principal amount of the Loan, ratably as to each Tranche, in whole or in part (but not less than a minimum amount of the lesser of $5,000,000 and five percent of the then outstanding principal amount of the Loan), together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that if any prepayment of all or a portion of the Loan is made by the Borrower other than on an Interest Payment Date or if the Borrower revokes such notice at any time within such fifteen days, the Borrower shall also pay any amounts owing pursuant to Section 2.10(e) and (f). The Borrower shall establish to the satisfaction of the Board and the Agent three Business Days in advance of any prepayment of the Loan its ability to pay the amount to be prepaid. (b) Upon the giving of any notice of prepayment under clause (a) of this Section 2.5, the principal amount of the Loan specified to be prepaid together with accrued and unpaid interest thereon shall become due and payable on the date specified for such prepayment; provided, however, that any failure to make any such prepayment in full on such date shall be deemed to be an automatic revocation of the notice of prepayment given under Section 2.5(a) and such failure shall not constitute a Default or an Event of Default hereunder; provided, further, however, that the Borrower shall be obligated to pay on such date any amounts owing under Section 2.10(e) and (f) due to such failure to prepay. (c) Any such prepayment shall be paid to the Agent for application as provided in Section 2.9, and any partial prepayment of the Loan resulting from such application shall be applied to the then remaining installments of the outstanding principal amount of the Loan (ratably as to each Tranche) in the inverse order of maturity thereof. The Borrower shall have no right to optionally prepay the principal amount of the Loan other than as provided in this Section 2.5, Section 2.10(b) or Section 2.10(d). 31 Section 2.6. Mandatory Prepayments. (a) Future Issuances. The Borrower shall give the Agent, the Lenders, the Participants, the Loan Administrator and the Board not less than eight Business Days' prior written notice of any anticipated Future Issuance and upon receipt by either Obligor or any of its Subsidiaries of the proceeds of such Future Issuance, the Borrower shall prepay the Loan in the manner provided below in an amount equal to 100% of the amount of such proceeds in excess of $25,000,000 during any Fiscal Year, net of any reasonable and customary brokers' and advisors' fees, any underwriting discounts and commissions and other costs incurred in connection with such transaction (provided that evidence of such fees, discounts, commissions and costs is provided to the Board and the Agent); provided, that, the Borrower shall not be obligated to so prepay the Loan (and such amounts shall not be included in the calculation of the $25,000,000 threshold) if and to the extent that (x) the Borrower applies such proceeds (i) from an issue or incurrence of Indebtedness to finance Aircraft Related Equipment in a transaction of the type excepted from the definition of Asset Sale in this Agreement, (ii) to purchase Aircraft Related Equipment or (iii) to refinance Indebtedness upon maturity of the refinanced Indebtedness or (y) such Future Issuance consists of borrowings used to refinance Indebtedness existing on the date hereof on terms, in the reasonable judgment of the Board, that are no less favorable (including with respect to the repayment schedule or maturity and the interest rate and other fees) to the Borrower, the Board, the Lenders and (solely in respect of their interest in the transactions contemplated by this Agreement and their respective Participations) the Participants than the Indebtedness so refinanced; provided, however, to the extent the Borrower receives any proceeds in connection with the refinancing of any existing Indebtedness in excess of the amount required to refinance such existing Indebtedness plus reasonable expenses incurred in connection with such refinancing, such excess proceeds shall constitute proceeds of a Future Issuance and the Borrower shall prepay the Loan in the manner contemplated above. Any such prepayment of the Loan shall be made on the date of receipt of the proceeds of the applicable Future Issuance. (b) Asset Sales. (i) In the event and to the extent that on any date after the Closing Date either Obligor or any of its Subsidiaries shall receive Net Cash Proceeds from one or more Asset Sales (other than Asset Sales by the Parent or any Wholly-Owned Subsidiary of the Parent to the Parent or another Wholly-Owned Subsidiary of the Parent) in excess of $2,500,000 during any Fiscal Year, then the Parent or the Borrower, as the case may be, shall, or shall cause such Subsidiary to, promptly apply such excess amount as required by Section 2.6(b)(ii) below. The amount of such Net Cash Proceeds required to be applied (or to be committed to be applied) during such Fiscal Year as set forth in the preceding sentence shall constitute "Excess Proceeds". (ii) No later than six Business Days following the date on which any Excess Proceeds are received as contemplated in Section 2.6(b)(i) above, the Borrower shall prepay the Loan in an aggregate amount equal to such Excess Proceeds. 32 (c) Insurance/Condemnation Proceeds. The Borrower shall prepay the Loan in an amount equal to the amount by which the aggregate amount of all Net Insurance Proceeds and Net Condemnation Proceeds received by either of the Obligors or any of their Subsidiaries in any Fiscal Year exceeds $2,500,000; provided, that, the Borrower shall not be obligated to so prepay the Loan if and to the extent that the Borrower certifies to the Board that the recipient intends to repair, restore or replace the assets from which such Net Insurance Proceeds or Net Condemnation Proceeds derived, and does so (or enters into a definitive agreement committing to do so) within 6 months after receipt of such Net Insurance Proceeds or Net Condemnation Proceeds (or in the case of proceeds derived from Collateral, the Borrower repairs, restores or replaces the assets from which such proceeds derived in accordance with the applicable provisions of the Security Agreement). Any prepayment pursuant to this Section 2.6(c) shall be made no later than six Business Days following the date of receipt of the Net Insurance Proceeds or Net Condemnation Proceeds by either Obligor or any of their Subsidiaries, or if later, the six-month period referenced above (or such later date as it is determined that the proceeds will not be applied in accordance with an agreement entered into within such six-month period), or in the case of proceeds derived from Collateral and for which the timing of prepayment is otherwise provided for in Section 3.01 of the Security Agreement, at such time as determined in accordance with the applicable provisions thereof. (d) Change in Control. Upon the occurrence of a Change in Control with respect to either the Parent or the Borrower, the Borrower shall promptly give the Agent, the Lenders, the Loan Administrator and the Board written notice thereof, and the Board shall have the right, by written notice to the Borrower (with a copy to the Agent, each Participant and each Lender) delivered not more than 30 days following delivery of the notice of the Change in Control, to require the Borrower to prepay the Loan in full, together with accrued and unpaid interest thereon to the date of such prepayment, on the date specified in such notice (which date shall be a Business Day not less than ten nor more than twenty Business Days' after the date of such notice), and upon the specified payment date, the Borrower shall so prepay the then outstanding principal amount of the Loan together with such accrued and unpaid interest thereon. (e) Application. If any such prepayment is made by the Borrower other than on an Interest Payment Date, the Borrower shall also pay any amounts owing pursuant to Section 2.10(e) and (f). Any such prepayment of the Loan shall be paid to the Agent for application as provided in Section 2.9, and any partial prepayment of the Loan resulting from such application shall be applied to the then remaining installments of the outstanding principal balance of the Loan (ratably as to each Tranche) in the inverse order of maturity thereof. Section 2.7. Interest. (a) Tranche A Rate of Interest. Except as otherwise provided in Section 2.7(d) and Section 2.10, Tranche A of the Loan shall bear interest on the unpaid principal amount thereof from the Closing Date until paid in full at the Applicable Tranche A Interest Rate. 33 (b) Tranche B Rate of Interest. Except as otherwise provided in Section 2.7(e) and Section 2.10, Tranche B of the Loan shall bear interest on the unpaid principal amount thereof from the Closing Date until paid in full at the Applicable Tranche B Interest Rate. (c) Interest Payments. Interest accrued on each Tranche of the Loan and each Note shall be payable in arrears on each Interest Payment Date commencing February 25, 2003, upon the payment or prepayment thereof in whole or in part, and, if not previously paid in full, at maturity (whether by acceleration or otherwise). Interest on each Tranche of the Loan shall be calculated on the basis of a year of 360 days and actual number of days elapsed. (d) Tranche A Default Interest. Notwithstanding the rate of interest specified in Section 2.7(a) or elsewhere herein, if any principal of or interest on Tranche A of the Loan is not paid when due, whether at stated maturity, upon acceleration, by mandatory prepayment or otherwise (but other than any voluntary prepayment), such overdue amount shall bear interest at a rate which is two percent per annum in excess of the Applicable Tranche A Interest Rate as in effect from time to time. (e) Default Interest on Tranche B; Interest on Fees and Other Amounts. Notwithstanding the rate of interest specified in Section 2.7(b) or elsewhere herein, if any principal of or interest on Tranche B of the Loan or any fee or other amount payable by the Borrower hereunder (except for any amounts payable under Section 2.7(d)) is not paid when due, whether at stated maturity, upon acceleration, by mandatory prepayment or otherwise (but other than any voluntary prepayment), such overdue amount shall bear interest at a rate which is two percent per annum in excess of the Applicable Tranche B Interest Rate as in effect from time to time. Section 2.8. Fees. (a) Closing Fee. The Borrower agrees to pay to the Agent, for the account of the Agent, on the Closing Date a closing fee in the amount of [...***...] (b) Facility Fee. The Borrower agrees to pay to the Agent, for the account of the Agent, on the Closing Date a facility fee in an amount equal to the greater of [...***...] (c) Agency Fee. The Borrower agrees to pay to the Agent, for the account of the Agent, on the Closing Date and annually thereafter an agency fee in an amount equal to [...***...] per annum for so long as the Loan shall remain outstanding. (d) Tranche B Fee. The Borrower agrees to pay [...***...] to the Agent, for the account of the Agent, on the Closing Date and [...***...] annually thereafter for so long as the Loan shall remain outstanding. ***Confidential Treatment Requested 34 (e) Collateral Agent Fee. The Borrower agrees to pay to the Agent, for the account of the Collateral Agent, a fee in the amount of [...***...] on the Closing Date and [...***...] annually in advance thereafter (or [...***...] annually in advance during the continuance of an Event of Default) for so long as the Loan shall remain outstanding. In addition, each time the Borrower requests the consent of the Collateral Agent in connection with a reregistration of an Aircraft pursuant to Section 2.01(a)(iii) of the Security Agreement, the Borrower agrees to pay to the Agent, for the account of the Collateral Agent, a fee in the amount of [...***...] incurred in connection with such reregistration. (f) [Reserved]. (g) Loan Administrator Fee. (i) Basic Fee. The Borrower agrees to pay to the Loan Administrator a fixed annual fee of [...***...] for the standard services described in Sections 8.1(b)(i) through 8.1(b)(vi) and 8.1(b)(x) through 8.1(b)(xiii) for so long as the Loan shall remain outstanding. On the Closing Date and on each subsequent Interest Payment Date, the Borrower agrees to pay to the Loan Administrator one quarter of the annual fee amount. (ii) Fee for Additional Services. In the event that a Requesting Party requests that the Loan Administrator provide any of the services described in Sections 8.1(b)(vii) through (ix), 8.1(b)(xiv) and (xv), the Loan Administrator's fee for each of such services shall be equal to the product of (A) the total number of hours actually worked performing such services, as set forth in a statement to be delivered by the Loan Administrator to the party at whose expense such service was performed, and (B) the agreed upon hourly rate charged for such services in accordance with the rate schedule attached as Schedule 2.8(g) (increased annually effective on each anniversary of the Closing Date by 4.0 percent). (h) Guarantee Fees. The Borrower agrees to pay to the Agent for the account of the Board on the Closing Date and quarterly in advance thereafter for so long as the Board Guarantee shall remain in effect the Guarantee Fee set forth in Section 2.06 of the Board Guarantee. (i) Liquidity Fee. The Borrower agrees that if (i) at any time after the Closing Date the Regulations are amended, modified or supplemented such that the Board's consent shall be necessary in order for any Lender to sell a participation in its portion of the Loan to any Person the sale of a participation to which would not require the Board's consent if the Regulations were then as in effect on the Closing Date and (ii) any such Lender seeks the Board's consent to sell such a participation and such consent is not granted, then such Lender shall so notify the Borrower and the Agent and the Borrower shall thereafter (until such consent may be granted) pay to the Agent for the ***Confidential Treatment Requested 35 account of such Lender a liquidity fee equal to [...***...] of the principal amount of the Loan outstanding from time to time held by such Lender, such liquidity fee to accrue from the date of such notice from such Lender and to be payable on each Interest Payment Date. (j) Distribution of Fees. On the Closing Date, and upon its receipt thereof, the Agent shall distribute to the Person entitled thereto each of the fees referred to in this Section 2.8 payable on such date. Thereafter, the Agent will distribute any and all fees payable under this Section 2.8 in accordance with Section 2.9(d) or (e) hereof, as applicable. (k) Fees Non-Refundable. All fees payable under this Section 2.8 shall be non-refundable. Section 2.9. Payments and Computations. (a) The Borrower shall make each payment hereunder (including fees and expenses) not later than 12:00 noon (New York City time) on the day when due, in Dollars, to the Agent at [...***...]. All payments in respect of any Obligations shall at all times be made to the Agent, whether or not a demand shall have been made or paid under the Board Guarantee. The Agent will promptly cause all such payments received by it to be distributed to the Person entitled thereto in accordance with the priorities of payment set forth below in clause (d) or (e) of this Section 2.9 or both, as applicable. Payments received by the Agent after 12:00 noon (New York City time) shall be deemed to be received on the next Business Day. (b) Each determination by the Agent or the Govco Administrative Agent, as applicable, of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (c) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, except as may be required otherwise pursuant to clause (ii) of the definition of Interest Payment Date, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be. (d) So long as no Event of Default under any of Sections 7.1(a) (including any failure to pay all amounts hereunder upon acceleration as a result of any other Event of Default), (f) and (g) has occurred and is continuing or would result therefrom, the Agent shall apply all payments in respect of any Obligations in the following order: (i) first, to pay any fees then due and payable under Section 2.8(c), (d), (e) and (g) hereof to the Agent, the Collateral Agent and the Loan Administrator, as the case may be, on a pro rata basis; ***Confidential Treatment Requested 36 (ii) second, to pay interest then due and payable in respect of the Loan to the Lenders, on a pro rata basis; (iii) third, to pay principal then due and payable on the Loan to the Lenders, on a pro rata basis; (iv) fourth, to pay any fees then due and payable under Section 2.8(h) and (i) hereof to the Board and the Lenders, as the case may be, on a pro rata basis; and (v) fifth, to pay any other Obligations then due and payable to the Agent, the Collateral Agent, the Loan Administrator, the Board, the Lenders, the Participants and the Govco Administrative Agent, on a pro rata basis. Notwithstanding the foregoing, to the extent that any amount received by the Agent constitutes interest accrued on any overdue principal of or interest on Tranche A of the Loan in excess of the interest that would have accrued thereon at the Applicable Tranche A Interest Rate, so much of such amount, if any, as exceeds the interest that would have so accrued at the Applicable Tranche A Interest Rate shall be distributed to the Board under clause (ii) above as if it were a Lender and the balance shall be distributed to the Tranche A Lenders under clause (ii) above. (e) After the occurrence and during the continuance of an Event of Default under any of Sections 7.1(a) (including any failure to pay all amounts hereunder upon acceleration as a result of any other Event of Default), (f) and (g), the Agent shall apply all payments in respect of any Obligations in the following order: (i) first, to pay Obligations in respect of any expenses, fees (other than any fees payable under clause (v) below), indemnities or other sums owing hereunder not referred to in clauses (ii) through (iv) below then due to the Agent, the Collateral Agent, the Lenders or the Board (to the extent of any out-of-pocket costs and expenses incurred pursuant to Section 9.7(b)) and the Loan Administrator, on a pro rata basis; (ii) second, to pay Obligations in respect of any expenses, fees (other than any fees payable under clause (v) below), indemnities or other sums owing hereunder not referred to in clauses (iii) and (iv) below then due to the Board, the Lenders, the Participants and the Govco Administrative Agent, on a pro rata basis; (iii) third, to pay on a pro rata basis, (A) interest then due and payable in respect of the Loan to the Lenders, on a pro rata basis, and (B) in the event that any fees payable to the Board under Section 2.8(h) were not paid when due under Section 2.8(h), the portion of such unpaid fees which is equal to the amount which the Board would have been entitled to receive through such date if the fee payable under Section 2.8(h) were payable daily in arrears (instead of quarterly in advance); 37 (iv) fourth, to pay or prepay principal payments on the Loan to the Lenders, on a pro rata basis; and (v) fifth, to pay any additional fees payable under Section 2.8(h) and (i) hereof to the Board and the Lenders, respectively, on a pro rata basis. Notwithstanding the foregoing, to the extent that any amount received by the Agent constitutes interest accrued on any overdue principal of or interest on Tranche A of the Loan in excess of the interest that would have accrued thereon at the Applicable Tranche A Interest Rate, so much of such amount, if any, as exceeds the interest that would have so accrued at the Applicable Tranche A Interest Rate shall be distributed to the Board under clause (iii) above as if it were a Lender and the balance shall be distributed to the Tranche A Lenders under clause (iii) above. (f) Upon the assignment to the Board of any Tranche A Lender's right, title and interest in and to its pro rata portion of the principal of and interest on Tranche A of the Loan in accordance with the Board Guarantee, the Board shall have the rights and privileges of a Lender with respect to such payment (to the extent of the interests in Tranche A of the Loan so assigned to the Board). Any statute or judicial decision to the contrary notwithstanding, no payment by the Board to the Agent or any Tranche A Lender under the Board Guarantee, shall reduce, discharge, satisfy, modify or terminate the corresponding payment or any other obligation of Borrower under this Agreement or Tranche A Note, which shall remain in full force and effect. Section 2.10. Certain Provisions Governing the Notes. (a) Determination of Interest Rate. The Applicable Tranche A Interest Rate and Applicable Tranche B Interest Rate for each Interest Period of the Loan shall be determined by the Govco Administrative Agent and/or the Agent pursuant to the procedures set forth in the definition of "Applicable Tranche A Interest Rate", "Applicable Tranche B Interest Rate" and "LIBOR", as applicable, and shall promptly thereafter be notified to the Borrower, the Board, each Lender and each Participant. (b) Interest Rate Unascertainable, Inadequate or Unfair. In the event that: (i) the Agent determines that adequate and fair means do not exist for ascertaining the applicable interest rates by reference to which the LIBOR then being determined is to be fixed; or (ii) the Requisite LIBOR Lenders notify the Agent that the LIBOR for any Interest Period will not adequately reflect the cost to the LIBOR Lenders of making or maintaining the Loan for such Interest Period, the Agent shall forthwith so notify the Borrower, the Board, the Participants and the Lenders, whereupon during the 30 days following the date of any such notice the LIBOR Lenders, the Agent, the Participants and the Borrower shall negotiate in good faith (subject to the consent of the Board) in order to arrive at a mutually acceptable alternative basis for determining the interest rate from time to time applicable to the relevant Tranche or Tranches of the Loan (the "Substitute Basis"). If within the 20 days following the date of any such notice from the Agent, the LIBOR Lenders, the Participants, the Agent and 38 the Borrower shall agree upon, and the Board shall consent to, a Substitute Basis, such Substitute Basis shall be retroactive to and effective from the first day of the then current Interest Period until and including the last day of such Interest Period. If after 20 days from the date of such notice, the LIBOR Lenders, the Participants, the Agent and the Borrower shall have failed to agree upon, or the Board shall have failed to consent to, a Substitute Basis, then the Agent (upon instructions from the Requisite LIBOR Lenders) shall certify in writing to the Borrower (such certification to be conclusive and binding on all LIBOR Lenders and all other parties hereto absent manifest error) the interest rate at which the LIBOR Lenders are prepared to maintain their portion of the Loan for such Interest Period, it being understood that such Lenders' interest rate shall be at a rate per annum equal to a rate which adequately and fairly reflects the cost to such Lenders and the Participants of obtaining the funds necessary to maintain their portion of the Loan for such Interest Period. If no Substitute Basis is established, upon receipt of notice of the interest rates at which the Requisite LIBOR Lenders are prepared to maintain their respective portion of the Loan, the Borrower shall have the right exercisable upon ten Business Days' prior notice to the Lenders, the Participants and the Board through the Agent (i) to continue to borrow the Loan at the interest rate so advised by the Agent (as such rate may be modified, from time to time, at the outset of each subsequent Interest Period) or (ii) to prepay in full the Loan together with accrued but unpaid interest thereon at the interest rate certified in writing by the Requisite LIBOR Lenders as provided above and all other amounts due under the Loan Documents, whereupon the Loan shall become due and payable on the date specified by the Borrower in such notice. (c) Increased Costs. If at any time any Lender or Participant shall determine that as a result of the introduction of or any change in or in the interpretation by any Governmental Authority of any law, treaty or governmental rule, regulation or order after the date hereof or the compliance by such Lender or Participant, with any guideline, request or directive after the date hereof from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Lender or Participant of agreeing to make or making, funding or maintaining any portion of the Loan or its Participation (except in respect of Taxes, payments with respect to which are addressed in Section 2.12), then the Borrower shall from time to time, upon demand (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail) by such Lender or Participant, as the case may be (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender or Participant, as the case may be, additional amounts sufficient to compensate such Lender or Participant, as the case may be, for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower and the Agent by such Lender or Participant, as the case may be, shall be conclusive and binding for all purposes, absent manifest error. (d) Illegality. Notwithstanding any other provision of this Agreement, if any Lender or Participant determines that the introduction of or any change in or in the interpretation by any Governmental Authority of any law, treaty or governmental rule, regulation or order after the date of this Agreement shall make it unlawful, or any central bank or other Governmental Authority shall assert that it is unlawful, for such Lender or Participant to continue to fund or maintain its portion of the Loan or Participation, as applicable, then, on 39 notice thereof by such Lender or Participant, to the Borrower through the Agent, the obligation of such Lender or Participant to continue to fund or maintain its portion of the Loan or Participation, as applicable, shall be terminated and the Borrower shall prepay such affected portion of the Loan to such Lender, or in the case of a Participant, to the Tranche B Lender, together with accrued but unpaid interest thereon and all other sums payable hereunder with respect thereto on the last day of the then current Interest Period or earlier if necessary to avoid such illegality. Any such prepayment of the Loan shall be paid to the Agent for application as provided in Section 2.9, and any such partial prepayment resulting from such application shall be applied ratably to the then unpaid installments thereof in accordance with the amount of each such unpaid installment. (e) Prepayment Compensation. In connection with all prepayments under Section 2.5, 2.6, 2.10(b) or 2.10(d), if the Primary Tranche A Lender is the Tranche A Lender, the Borrower shall pay to such Primary Tranche A Lender an amount equal to (A) the amount of yield that the Primary Tranche A Lender is required to pay to holders of its Commercial Paper during the Liquidation Period on an amount of Commercial Paper having an aggregate issue price equal to the amount of the Borrower's prepayment less (B) the amount of the estimated investment earnings, as reasonably determined by the Govco Administrative Agent, on the prepayment amount during the Liquidation Period. "Liquidation Period" means the period from the date on which a prepayment is made to the earliest date on which the Primary Tranche A Lender's total amount of Commercial Paper related to the funding of Tranche A of the Loan can be reduced (without prepayment thereof) by an amount equal to the amount of the Borrower's prepayment. (f) Breakage Costs. In addition to all amounts required to be paid by the Borrower pursuant to Section 2.7 but without duplication of any amounts payable under Section 2.10(e), the Borrower shall compensate each Lender and each Participant, upon demand, for all losses, expenses and liabilities (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender or Participant or the termination of any other financial arrangement it may have entered into to fund or maintain or support such Lender's portion of the Loan or Participant's Participation, as applicable, but excluding Taxes, payments with respect to which are addressed in Section 2.12) which that Lender or Participant, as the case may be, may sustain (i) if for any reason the proposed Borrowing does not occur on a date specified therefor in the Notice of Borrowing given by a Borrower, (ii) if for any reason any portion of the Loan is prepaid (including mandatorily pursuant to Section 2.6 or this Section 2.10) or as a result of such a prepayment, payment is made with respect to a Participation on a date which is not the last day of the applicable Interest Period, or (iii) as a consequence of any failure by a Borrower to repay any portion of the Loan or make payment with respect to a Participation when required by the terms hereof. The Lender or Participant making demand for such compensation shall deliver to the Borrower (with a copy to the Agent) concurrently with such demand a written statement as 40 to such losses, expenses and liabilities, and this statement shall be conclusive as to the amount of compensation due to that Lender or Participant, as the case may be, absent manifest error, and such compensation shall be paid to the Agent for the account of such Lender or Participant, as the case may be. Section 2.11. Capital Adequacy. If at any time any Lender or Participant determines that (a) the adoption of or any change in or in the interpretation by any Governmental Authority of any law, treaty or governmental rule, regulation or order after the date of this Agreement regarding capital adequacy, (b) compliance with any such law, treaty, rule, regulation, or order, or (c) compliance with any guideline or request or directive from any central bank or other Governmental Authority (whether or not having the force of law) shall have the effect of reducing the rate of return on such Lender's or Participant's (or any corporation controlling such Lender's or Participant's) capital as a consequence of its obligations hereunder (other than as a result of changes in Taxes, payments with respect to which are addressed in Section 2.12) to a level below that which such Lender or Participant, as the case may be, or such corporation could have achieved but for such adoption, change, compliance or interpretation, then, upon demand from time to time by such Lender or Participant, as the case may be (with a copy of such demand to the Agent), the Borrower shall pay to the Agent for the account of such Lender or Participant, as the case may be, from time to time as specified by such Lender or Participant, as the case may be, additional amounts sufficient to compensate such Lender or Participant for such reduction. A certificate as to such amounts submitted to the Borrower and the Agent by such Lender or Participant, as the case may be, shall be conclusive and binding for all purposes absent manifest error. Section 2.12. Taxes. (a) Except as otherwise provided in Section 10.2, any and all payments by the Borrower under each Loan Document (including payments made under a Participation Agreement to a Participant, but excluding such payments made to participants other than Participants, except as expressly provided in Section 2.12(j)) shall be made free and clear of and without deduction for any and all Taxes, excluding (i) in the case of each Lender, the Loan Administrator and the Agent, taxes measured by its net income or net profits (or branch profits), and franchise taxes imposed on it, by the United States of America (or any political subdivision thereof) or by any jurisdiction under the laws of which such Lender, the Loan Administrator or the Agent (as the case may be) is organized, (ii) in the case of each Lender, taxes measured by its net income or net profits (or branch profits), and franchise taxes imposed on it, by the jurisdiction in which such Lender's Lending Office is located, (iii) in the case of each Lender, the Loan Administrator and the Agent, Taxes imposed as a result of such Person failing to comply with its obligations under Section 2.12(g) or 2.12(h) and (iv) in the case of each Lender, the Loan Administrator, and the Agent that is a party hereto, as the case may be, any withholding taxes imposed by the United States of America (or any political subdivision thereof) unless imposed as a result of a change in applicable law, including income tax conventions, after the latest of (x) the Closing Date, (y) the date on which it becomes a Lender, the Loan Administrator or the Agent, as the case may be, and (z) in the case of a Lender, the date on which it designates a new Lending Office, unless such designation is pursuant to Section 2.12(h) (all such non-excluded Taxes being 41 hereinafter referred to as "Indemnified Taxes"). If any Indemnified Taxes shall be required by law to be deducted from or in respect of any sum payable under any Loan Document to any Lender, the Loan Administrator, or the Agent (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.12) such Lender, the Loan Administrator or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, and (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies of the United States or any political subdivision thereof or any applicable foreign jurisdiction, and all liabilities with respect thereto, which arise from any payment made under any Loan Document or Participation or from the execution, delivery or registration of, or otherwise with respect to, any Loan Document (collectively, "Other Taxes") to the Agent for the account of the affected party. (c) The Borrower will indemnify each Lender, the Agent and the Loan Administrator for the full amount of Indemnified Taxes or Other Taxes (including any Taxes imposed by any jurisdiction on amounts payable under this Section 2.12) paid by such Lender, the Loan Administrator or the Agent (as the case may be) and any liability (including for penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made to the Agent for account of the relevant Lender, the Loan Administrator or the Agent, as the case may be, within 30 days from the date such Lender, the Loan Administrator or the Agent (as the case may be) makes written demand therefor (with a copy to the Agent if made by a Lender or the Loan Administrator and accompanied by a statement setting forth the basis for such taxation and the calculation of the amount thereof in reasonable detail). (d) Within 30 days after the date of any payment of Indemnified Taxes or Other Taxes, the Borrower will furnish to the Agent the original or a certified copy of a receipt evidencing payment thereof or other documentation reasonably satisfactory to the Agent. (e) If a Lender, the Loan Administrator or the Agent receives a refund in respect of any Indemnified Taxes or Other Taxes as to which it has been indemnified by the Borrower pursuant to this Section 2.12, it shall within 30 days from the date of such receipt pay over such refund to the Borrower hereunder, net of any additional Taxes incurred due to such refund or out-of-pocket expenses of such Lender, the Loan Administrator or the Agent as a result of such refund or payment hereunder and without interest (other than interest paid by the relevant Governmental Authority with respect to such refund); provided, that no Default or Event of Default is continuing, and provided further, that the Borrower hereunder, upon the request of such Lender or the Agent, agrees to repay the amount paid over to the Borrower (plus penalties, interest or other charges) to such Lender or the Agent in the event such Lender or the Agent is required to repay such refund to such Governmental Authority. 42 (f) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the parties contained in this Section 2.12 shall survive the payment in full of the Obligations; provided, however, that no such agreements or obligations shall survive the statute of limitations applicable to the relevant Taxes unless a claim was properly made prior to the expiration of such statute. (g) Each of the Lenders, the Loan Administrator and the Agent that is a Non-U.S. Person and that is entitled at such time to an exemption from United States withholding tax, or that is subject to such tax at a reduced rate under an applicable tax treaty, shall, on or prior to the Closing Date or on or prior to the date of the Assignment and Acceptance pursuant to which it becomes a Lender or on or prior to the date it becomes the Loan Administrator or the Agent, as applicable, and from time to time thereafter if requested by the Agent or the Borrower or if necessary to keep the provided forms from lapsing, provide the Agent and the Borrower, and, in the case of each of the Lenders and the Agent, provide each Participant, with two completed copies of either IRS Form W-8BEN or W-8ECI or other applicable form, certificate or document prescribed by the IRS certifying as to such Non-U.S. Person's entitlement to such exemption from United States withholding tax or reduced rate with respect to all payments to be made to such Non-U.S. Person under the Loan Documents. In addition, each of the Lenders, each Participant, the Loan Administrator and the Agent that is a Non-U.S. Person, as the case may be, shall deliver to the Borrower and the Agent, and, in the case of each of the Lenders, each Participant and the Agent, deliver to each Participant, notice of any event (other than a change in applicable law, including income tax conventions) requiring a change in the most recent form previously delivered by such Person to the Borrower and the Agent or the Participants, as the case may be. Unless the Agent and the Borrower have received forms or other documents satisfactory to them indicating that payments under the Loan Documents or Participation to or for a Non-U.S. Person are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Agent or the Borrower shall, notwithstanding the provisions of Section 2.12(a), (b) and (d) and without impairing any obligation of the Borrower under this Section 2.12 with respect to such tax, withhold such United States withholding taxes from such payments at the appropriate rate. (h) Any Lender claiming any additional amounts payable pursuant to this Section 2.12 shall use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which would be payable or may thereafter accrue and would not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender. (i) Each participant in the Loan will be entitled to the benefits and subject to the requirements of this Section 2.12 to the same extent as if such Person were a Lender; provided, however, that a participant (including all Participants) shall not be entitled to indemnification or payment of additional amounts under this Section 2.12 with respect to any Taxes which are in effect and would apply to amounts payable to such participant on the date such participant acquires its participation (except that such date shall be deemed to 43 be the Closing Date in the case of [...***...] (j) Each direct subparticipant of a Participant who becomes a subparticipant pursuant to Section 10.2(f) will be entitled to the benefits and subject to the requirements of this Section 2.12 to the same extent as if such Person were a Participant and as if the subparticipation agreement entered into by such subparticipant were a Participation Agreement; provided, however, that whenever both such a subparticipant and its applicable Participant would otherwise be entitled to payment of additional amounts or to an indemnity under this Section 2.12, the Borrower shall only be obliged to pay such additional amounts or make such an indemnity with respect to no more than one of such subparticipant and such applicable Participant, whichever would require the greater payment of such additional amount and provision of such indemnity by the Borrower. Except as provided in the foregoing sentence, no subparticipants of any participant or subparticipant shall be entitled to any payment of additional amounts or indemnification under this Section 2.12. Article III Conditions To Loan Section 3.1. Conditions Precedent to the Loan. The obligation of the Lenders to make the Loan (or, in the case of the Primary Tranche A Lender, to agree to participate in the making of the Loan subject to Section 2.1(b)) requested to be made by the Lenders on the Closing Date is subject to the satisfaction (in the judgment of the Agent, the Board, each Participant and the Lenders (except as otherwise provided below in this Section 3.1)) of all of the following conditions precedent before or concurrently with such Borrowing: (a) Certain Documents. The Agent, the Lenders, each Participant (except as to clauses (iv), (x)(G) through (L), (xiii) and (xiv), for opinions of counsel to and documents relating to the other Participants) and the Board shall have received on the Closing Date each of the following, each dated as of the Closing Date, in form and substance satisfactory to the Agent, the Board, the Lenders and each Participant (except as otherwise provided below in this Section 3.1(a)): (i) this Agreement, duly executed and delivered by the parties hereto; (ii) the Notes duly executed by the Borrower and conforming to the requirements set forth in Section 2.4(d) hereof; ***Confidential Treatment Requested 44 (iii) the Security Agreement, duly executed and delivered by the parties thereto; (iv) the Board Guarantee, duly executed and delivered by the parties thereto; (v) the Parent Guarantee, duly executed and delivered by the parties thereto; (vi) the Subsidiary Guarantee, duly executed and delivered by the parties thereto; (vii) each Participation Agreement, duly executed and delivered by the parties thereto; (viii) the Warrants (which need to be in form and substance satisfactory only to the holders thereof), duly executed and delivered by the Parent; (ix) a Collateral Value Certificate with respect to the Collateral, setting forth the Collateral Value as of the Closing Date, together with insurance certificates and insurance brokers' reports as are required under the Security Agreement; (x) the favorable opinions of (A) Cravath, Swaine & Moore, special New York counsel to the Borrower and the Parent, (B) Baker & Daniels, special Indiana counsel to the Borrower and the Parent, (C) Brian Hunt, Vice President and General Counsel to the Borrower and the Parent, (D) James R. Levine, Legal Counsel to the Board (which need be addressed and delivered only to the Agent and the Tranche A Lenders), (E) Curtis, Mallet-Prevost, Colt & Mosle LLP, special New York counsel to the Board (which need be addressed and delivered only to the Agent and the Tranche A Lenders), (F) Domingo Maradiegue, Esq., Associate General Counsel of the Loan Administrator, [...***...](M) Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to the Lenders and the Agent (which need be addressed and delivered only to the Lenders and the Agent); (xi) a copy of the articles or certificate of incorporation of each of the Borrower, the Parent and each of their Subsidiaries, certified as of a recent date by the Secretary of State of the state of organization of such Person, together with a "long-form" certificate of such official attesting to the good standing of such Person; (xii) a certificate of each of the Borrower, the Parent and each of their Subsidiaries signed on behalf of such Person by its Secretary or an Assistant Secretary certifying (A) the names and true signatures of each officer of such ***Confidential Treatment Requested 45 Person who has been authorized to execute and deliver each Loan Document required to be executed and delivered by or on behalf of such Person hereunder or thereunder, (B) the by-laws of such Person as in effect on the date of such certification, (C) the resolutions of such Person's board of directors approving and authorizing the execution, delivery and performance of each Loan Document to which it is a party and (D) that there have been no changes in the certificate of incorporation of such Person from the certificate of incorporation delivered pursuant to the immediately preceding clause; (xiii) a copy of the articles or certificate of organization or comparable document of each of the [...***...]certified, if available, as of a recent date by an appropriate official of the jurisdiction of organization of each such Person, together with, if available, a certificate or comparable document of such official attesting to the good standing of such Person; (xiv) a certificate of each of the [...***...]on behalf of such Person by an authorized official of such Person certifying (A) the names and true signatures of each officer of such Person who has been authorized to execute and deliver the applicable Participation Agreement, (B) the by-laws of such Person as in effect on the date of such certification, (C) the resolutions of such Person's board of directors approving and authorizing the execution, delivery and performance of the applicable Participation Agreement, and (D) that there have been no changes in the certificate of organization of such Person from the certificate of organization delivered pursuant to the immediately preceding clause; (xv) a certificate of each of the Borrower and the Parent signed by such Person's Chief Financial Officer, stating that such Person is Solvent after giving effect to the Loan, the application of the proceeds thereof in accordance with Section 2.4(f) and the payment of all estimated legal, accounting and other fees related hereto and thereto; (xvi) a certificate of each of the Borrower and the Parent signed by a duly authorized officer of such Person certifying (A) that all representations, warranties and certifications made by it in the Loan Agreement, the other Loan Documents, the Application and any other document, certificate or written statement delivered in connection therewith are true and correct on and as of the Closing Date, before and after giving effect to the Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, and (B) that no Event of Default or event which, with the giving of notice or passage of time or both, would be an Event of Default, has occurred and is continuing, or would result from the Borrowing; (xvii) a true and correct copy of the Borrower's Application, as approved by the Board, together with a certificate signed by a duly authorized officer certifying that there are no written materials amending, varying, supplementing or ***Confidential Treatment Requested 46 otherwise modifying any of the terms of the Application other than as set forth in such certificate; (xviii) a certificate of each of the Borrower and the Parent signed by a duly authorized officer of such Person certifying that since June 28, 2002, there has been no material adverse change (A) in the business, condition (financial or otherwise), operations, performance prospects, assets or properties of such Person and its Subsidiaries taken as a whole or in the Borrower's ability to repay the Loan or (B) with respect to any of the matters covered by the representations and warranties of the Borrower in its Application to the Board; provided, however, that with respect to clause (A) of this Section 3.1(a)(xviii), no event or circumstance disclosed in the Parent's quarterly reports on Form 10-Q filed with the SEC between June 28, 2002 and the Closing Date shall be considered a material adverse change; (xix) a certificate of the Borrower signed by a duly authorized officer certifying that (i) it will use the proceeds from the Borrowing in compliance with Section 2.4(f) of this Agreement, (ii) the Borrower qualifies as an "eligible borrower" under the Act and the Regulations, and (iii) the Borrower does not have any outstanding delinquent Federal debt (including tax liabilities); (xx) the most recent publicly available financial statements of the Parent; and (xxi) such other certificates, documents, agreements and information from the Borrower, the Parent and their Subsidiaries as the Agent, the Lenders, any Participant or the Board may reasonably request. (b) Collateral. (i) Evidence of the completion of all notices, recordings and filings of or with respect to the Security Agreement and the Collateral covered thereby, that are necessary or desirable in order to perfect and protect the security interest created by the Security Agreement or that arrangements therefor satisfactory to the Collateral Agent have been made, including, without limitation, the filing of the Security Agreement and any other required instruments and documents with the Federal Aviation Administration, the filing of Uniform Commercial Code financing statements in all applicable jurisdictions, the delivery of favorable legal opinions from counsel in Indianapolis, Indiana and Oklahoma City, Oklahoma with respect to such filings and the delivery of required notices and other documents and instruments to applicable contracting officers or other government officials in connection with the pledge of military or other government contracts or rights or interests therein; and (ii) completion by the Borrower of all other actions necessary or desirable to perfect and protect the security interest in the Collateral or that satisfactory arrangements therefor have been made. 47 (c) Purchase of Participations. The Tranche B Lender shall have received payment in full of the Purchase Price (as defined in the applicable Participation Agreement) from each of the Participants. (d) Other Agreements. The Agent, the Board, each Lender and each Participant shall have received evidence reasonably satisfactory to each of them that (i) the Borrower has agreed on terms satisfactory to the Board regarding certain employee compensation matters as required by Section 104(a) of the Act (the "Employee Compensation Agreement"); and (ii) the Existing Stockholder and the Obligors have agreed on terms satisfactory to the Board regarding certain restrictions relating to ownership by the Existing Stockholder of Capital Stock of the Obligors and certain other matters (the "Existing Stockholder Undertaking"). (e) Fees and Expenses Paid. The Borrower shall have paid all fees due and payable on the Closing Date (including, without limitation, the fees referenced in Section 2.8 hereof), and all expenses of the Agent, the Collateral Agent, the Lenders, the Loan Administrator and each Participant due and payable on or before the Closing Date. (f) Consents, Etc. The Borrower, the Parent and each of their Subsidiaries shall have received all consents and authorizations required pursuant to any Contractual Obligation with any other Person and shall have obtained all consents, waivers and authorizations of, and effected all notices to and filings with, the Nasdaq, the SEC or any other Governmental Authority, in each case, as may be necessary to allow each of the Borrower, the Parent and each of their Subsidiaries lawfully to execute, deliver and perform, in all material respects, its obligations under the Loan Documents to which it is, or shall be, a party and each other agreement or instrument to be executed and delivered by it, pursuant thereto or in connection therewith. (g) No Illegality. No law or regulation shall be applicable in the judgment of any Lender or the Board that restrains, prevents or imposes materially adverse conditions upon the transactions contemplated hereby. (h) Representations and Warranties of Borrower. All representations and warranties of the Borrower and the Parent set forth herein are true and correct on and as of the Closing Date, before and after giving effect to the Borrowing and to the application of the proceeds therefrom, as though made on and as of such date. (i) Representation and Warranties of Participants. All representations and warranties of each of [...***...]in the Participation Agreement to which it is a party, are true and correct on and as of the Closing Date, before and after giving effect to the Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, in the judgment of the Tranche B Lender and the Board. (j) No Event of Default. No Event of Default or Default has occurred and is continuing, or would result from the Borrowing after giving effect to the Borrowing and to the application of the proceeds therefrom. (k) Corporate and other proceedings. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the ***Confidential Treatment Requested 48 transactions contemplated hereby shall be satisfactory in form and substance to the Agent, the Board, each Lender and each Participant. (l) Projections. The Lenders and the Board shall have received satisfactory projections and pro forma financial information for the fiscal years 2002 through and including 2008, which projections shall be certified by the Chief Executive Officer or the Chief Financial Officer of each of the Parent and the Borrower, as being based on assumptions stated therein and that such assumptions are believed by the Obligors to be reasonable as of the Closing Date. (m) No Material Adverse Change. Since June 28, 2002, no material adverse change shall have occurred (i) in the business, condition (financial or otherwise), operations, performance, prospects, assets or properties of the Obligors and their Subsidiaries taken as a whole or in the Borrower's ability to repay the Loan or (ii) with respect to any of the matters covered by the representations and warranties made in the Application; provided, however, that with respect to clause (i) of this Section 3.1(m), no event or circumstance disclosed in the Parent's quarterly reports on Form 10-Q filed with the SEC between June 28, 2002 and the Closing Date shall be considered a material adverse change. (n) Repayment of Current Credit Facility. The Current Credit Facility shall be fully repaid in cash, and terminated, and all actions necessary to release all collateral pledged to secure the Current Credit Facility shall have been taken. (o) Filing Memoranda; Post Recordation Opinions. The Borrower shall have submitted to the Federal Aviation Administration the Security Agreement and all other instruments or documents that are required to be recorded by the Federal Aviation Administration in order to perfect the Lien on the Collateral in favor of the Collateral Agent, and promptly upon the recordation of such documents with the Federal Aviation Administration, the Borrower will cause Crowe & Dunlevy to deliver to the Collateral Agent a favorable legal opinion with respect to the perfection of the security interest in the Collateral covered by such recordation. Article IV Representations and Warranties To induce the other parties to enter into this Agreement, to induce the Board to enter into the Board Guarantee and to induce the Participants to enter into their respective Participations, each Obligor represents and warrants to each other party hereto and to each Participant that, on and as of the Closing Date: 49 Section 4.1. Organization, Powers, Qualification, Good Standing, Business, Subsidiaries, the Act and the Regulations. (a) Each Obligor is a corporation duly organized, validly existing and in good standing under the laws of the State of Indiana. Each Obligor has all requisite corporate and other power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Loan Documents to which it is a party and to carry out the transactions contemplated hereby and thereby. (b) Each Obligor and each of their Subsidiaries is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing could not reasonably be expected to have a Material Adverse Effect. The Borrower is an "air carrier" within the meaning of the Act and holds a certificate under Sections 41102(a)(1) and 41103 of Title 49. Each of the Borrower and each other Subsidiary of the Parent engaged in operations as an "air carrier" is a "citizen of the United States" as defined in Section 40102(a)(15) of Title 49 (a "United States Citizen") and holds an air carrier operating certificate issued pursuant to Chapter 447 of Title 49 for aircraft capable of carrying 10 or more individuals or 6,000 pounds or more of cargo. Each Obligor and each of their Subsidiaries possesses all necessary certificates, franchises, licenses, permits, rights and concessions and consents which are material to the operation of the routes flown by it and the conduct of its business and operations as currently conducted. (c) All of the Subsidiaries of the Obligors as of the Closing Date are identified on Schedule 4.1, as said Schedule 4.1 may be supplemented from time to time pursuant to the provisions of Section 5.15. Each of the Subsidiaries identified in Schedule 4.1 annexed hereto (as so supplemented) is duly organized, validly existing and in good standing under the laws of its respective jurisdiction of formation set forth therein, has all requisite corporate, partnership or limited liability power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, in each case except where failure to be so qualified or in good standing or a lack of such corporate, partnership or limited liability power and authority could not reasonably be expected to have a Material Adverse Effect. Schedule 4.1 (as so supplemented) correctly sets forth the ownership interest of the Obligors and each of their Subsidiaries in each of the Subsidiaries identified therein. There are no limitations on the right of any Obligor to vote the Capital Stock it owns of any Subsidiary of such Obligor. (d) The Borrower is an "eligible borrower" within the meaning of the Act and the Regulations, it does not have any outstanding delinquent Federal debt (including tax liabilities), and the Application (together with any written materials set forth in the certificate referred to in Section 3.1(a)(xvii)), the Loan, the Participations and the transactions contemplated hereby (assuming each Lender is an Eligible Lender and each Participant qualifies as a participant 50 under Section 1300.23(b) of the Regulations) comply with the requirements of the Act and the Regulations. Section 4.2. Authorization of Borrowing, Etc. (a) Each Obligor and its Subsidiaries has duly authorized by all necessary corporate action the execution, delivery and performance of the Loan Documents to which it is a party. (b) The execution, delivery and performance by each Obligor and each of its Subsidiaries of the Loan Documents to which it is a party and the consummation of the transactions contemplated by the Loan Documents to which it is a party do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to either Obligor or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of either Obligor or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on either Obligor or any of either Obligor's Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default or require any payment under any material Contractual Obligation (including the Concessions) of either Obligor or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of either Obligor or any of either Obligor's Subsidiaries (other than pursuant to the Loan Documents), or (iv) require any approval of stockholders or any approval or consent of any Person under any material Contractual Obligation of either Obligor or any of either Obligor's Subsidiaries, except for such approvals or consents which will have been obtained on or before the Closing Date. (c) The execution, delivery and performance by each Obligor and each of its Subsidiaries of the Loan Documents to which it is a party and the consummation of the transactions contemplated by the Loan Documents to which it is a party do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other Governmental Authority or regulatory body or any other Person, except as set forth on Schedule 4.2, and each of the actions listed on Schedule 4.2 which is required to be obtained or made on or prior to the Closing Date has previously been obtained or made. (d) Each Obligor and each of its Subsidiaries has duly executed and delivered each of the Loan Documents to which it is party and each such Loan Document is the legally valid and binding obligation of such Obligor or such Subsidiary, as applicable, enforceable against such Obligor or such Subsidiary in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws relating to or affecting the enforcement of creditors' rights generally, and by general principles of equity (regardless of whether considered in a proceeding in equity or at law). 51 Section 4.3. Financial Condition. (a) The Obligors have heretofore delivered to the Agent, the Board, the Loan Administrator, the Lenders and the Participants the following financial statements and information: (i) the audited consolidated balance sheets of the Parent as at December 31, 2001, and the related consolidated statements of income, stockholders' equity and cash flows of such Obligor for the Fiscal Year then ended and (ii) the unaudited consolidated balance sheet of each Obligor as at September 30, 2002 and the related unaudited statements of income, stockholders' equity and cash flows of such Obligor for the nine months then ended. All such consolidated statements and any other financial statements delivered pursuant to Section 3.1(a)(xx) were prepared in conformity with GAAP consistently applied and fairly present the consolidated financial position of such Obligor as at the respective dates thereof and the consolidated results of operations and cash flows of such Obligor for each of the periods then ended subject, in the case of the unaudited consolidated statements, to year-end audit and adjustments. Except as disclosed in writing to the Agent and the Board prior to the date of this Agreement, neither Obligor nor any of their Subsidiaries has any material contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not reflected in the foregoing consolidated financial statements or in the most recently delivered consolidated financial statements delivered pursuant to Section 5.1(i)(a) or (ii) or the notes thereto and which in any such case is material in relation to the business, operations, properties, assets or condition (financial or otherwise) of such Obligor or, with respect to the initial borrowing hereunder only, the prospects of such Obligor. (b) Any projections and pro forma financial information contained in the Application and the projections and pro forma financial information delivered to the Lenders and the Board pursuant to Section 3.1(l) are based upon assumptions stated therein, which assumptions were believed by the Obligors to be reasonable at the time made (or as of the Closing Date in the case of the projections and pro forma financial information delivered pursuant to Section 3.1(l)), it being recognized by the Board and the Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. (c) The Obligors and their Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (d) After giving effect to the transactions contemplated by this Agreement, including the pledge of the Collateral under the Security Agreement, the book value of the assets of the Parent not subject to any Lien (as defined in the 9 5/8% Senior Notes Indenture, and subject to the exceptions contained in Section 10.05(a) of the First Supplemental Indenture dated December 11, 1998 to such 52 Indenture and the 10 1/2% Senior Notes Indenture and subject to the exceptions contained therein) is not less than $125 million. Section 4.4. No Material Adverse Change; No Restricted Payments or Defaults. (a) Since June 28, 2002, no material adverse change has occurred (i) in the business, condition (financial or otherwise), operations, performance, prospects, assets or properties of the Obligors and their Subsidiaries taken as a whole or in the Borrower's ability to repay the Loan or (ii) with respect to any of the matters covered by the representations and warranties made in the Application; provided, however, that with respect to clause (i) of this Section 4.4(a), no event or circumstance disclosed in the Parent's quarterly reports on Form 10-Q filed with the SEC between June 28, 2002 and the Closing Date shall be considered a material adverse change. (b) Since June 28, 2002, neither Obligor nor any of their Subsidiaries has directly or indirectly declared, ordered, paid or made, or set apart any sum of property for any Restricted Payment or agreed to do so except as would have been permitted by Section 6.3, as if such Section were in effect at all times since such date (but without regard to whether or not any Default or Event of Default would have existed during such time). (c) No event has occurred and no conditions exist which would on or after the Closing Date constitute a Default or Event of Default, and no such event or condition will result from the Borrowing. Section 4.5. Title To Properties; Liens. Each Obligor and its Subsidiaries has (i) good record, legal and marketable title to (in the case of fee interests in real property), (ii) valid leasehold interests in (in the case of leasehold interests in real or personal property) or other valid and enforceable rights to use property owned by others, or (iii) good and marketable title to (in the case of all other personal property), all properties and assets necessary to or used in the conduct of its business including: (x) all Collateral and other properties and assets reflected in the financial statements referred to in Section 4.3 or in the most recent financial statements delivered pursuant to Section 5.1 (other than assets disposed of since the date of such financial statements in the ordinary course of business), and (y) all additional Collateral reflected in the Collateral Value Certificate delivered on the Closing Date. Except as otherwise permitted by this Agreement, all such properties and assets are free and clear of Liens. Section 4.6. Perfected Security Interest. The Collateral Agent, on behalf of the Lenders and the Board, has a first-priority perfected security interest in the Collateral. Section 4.7. Litigation; Adverse Facts. There are no actions, suits, proceedings, arbitrations or governmental investigations (whether or not purportedly on behalf of either Obligor or any of its Subsidiaries) at law or in equity or before or by any Governmental Authority pending or, to the knowledge 53 of either Obligor, threatened against or affecting either Obligor or any of its Subsidiaries or any property of either Obligor or any of its Subsidiaries that, individually or in the aggregate, if adversely determined, could reasonably be expected to have a Material Adverse Effect or which challenges the legality, validity or binding effect of, or restricts any Obligor from entering into or performing under, any Loan Document including, without limitation, this Agreement and the Security Agreement nor does either Obligor have knowledge of any basis for any Person to institute any such action, suit, proceeding, arbitration or investigation. Neither Obligor nor any of its Subsidiaries is subject to or in default with respect to any final judgments, writs, injunctions, decrees of any court or any Governmental Authority. Section 4.8. Payment of Taxes. All federal income tax returns and other material tax returns and reports of each Obligor and its Subsidiaries required to be filed by any of them have been timely filed (or timely extensions have been obtained with respect thereto). All federal income taxes and material Taxes imposed upon each Obligor and its Subsidiaries and upon their respective properties, assets, income, businesses and franchises which are due and payable have been paid before any penalty, fine or interest accrues thereon, or are being contested in good faith through appropriate proceedings and an adequate reserve has been established by the Obligors and their Subsidiaries to the extent required by GAAP. Except as disclosed in Schedule 4.8, there are no closing, settlement or similar agreements with respect to Taxes between any Obligor or any of its Subsidiaries and any taxing agency or authority. Except as set forth on Schedule 4.8, neither Obligor nor any of its Subsidiaries is party to any tax sharing agreements with any Person other than another Obligor or any of its Subsidiaries. Section 4.9. Performance of Agreements; Material Agreements. (a) Neither Obligor nor any of its Subsidiaries is in default in the performance, observance or fulfillment of (i) any of the material obligations, covenants or conditions contained in any of its material Contractual Obligations, or (ii) of any other obligation, covenant or condition thereof which could reasonably be expected to have a Material Adverse Effect, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default after giving effect to the Borrowing and the application of the proceeds therefrom. (b) Neither Obligor nor any of its Subsidiaries is a party to or is otherwise subject to any agreements or instruments or any charter or other internal restrictions which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (c) Except as set forth on Schedule 4.9(c), neither Obligor nor any of its Subsidiaries is a party to or is otherwise subject to any material agreement or arrangement, including, but not limited to, agreements relating to Indebtedness, lease agreements or Guarantees, that provide for early payment, additional collateral support, changes in terms or acceleration of maturity, or the creation of an additional financial obligation, as a result of any of (i) an 54 adverse change in the credit rating of either Obligor or any of its Subsidiaries, (ii) an adverse change in the financial ratios, earnings, cash flow or stock price of either Obligor or any of its Subsidiaries, or (iii) changes in the value of underlying, linked or indexed assets. (d) The Concessions listed on Schedule 4.9(d) hereto are all of the concessionary agreements or arrangements referred to in the Application and are reasonably expected by Borrower and the Parent to result in the cost-savings described in the Application. The Borrower has heretofore delivered to the Board and the Agent true and correct copies or descriptions of the Concessions which Concessions have not been amended, supplemented or otherwise modified prior to the date hereof or the Closing Date. After giving effect to the Loan and application of the proceeds therefrom, the Concessions are in full force and effect and constitute the legal, valid and binding obligations of the Obligors, their Subsidiaries and the counter-parties thereto (as applicable), enforceable against each in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws relating to or affecting the enforcement of creditors' rights generally, and by general principles of equity (regardless of whether considered in a proceeding in equity or at law). Section 4.10. Governmental Regulation. Neither Obligor nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable. Section 4.11. Securities Activities. Neither Obligor nor any of its Subsidiaries owns or is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock, nor shall any proceeds of the Loan be used to purchase or carry Margin Stock or to extend credit to any Person for the purpose of purchasing or carrying any Margin Stock in a manner that violates or causes a violation of Regulations T, U or X of the Board of Governors of the Federal Reserve System or any other regulation of such Board. Section 4.12. Employee Benefit Plans. Each Plan has been operated and administered in compliance with all applicable requirements of ERISA, and, if intended to qualify under Section 401(a) or 403(a) of the Internal Revenue Code, in compliance with all applicable requirements of such provisions, except where the failure to do so could not reasonably be expected to have, taking all instances in the aggregate, a Material Adverse Effect. Neither Obligor nor any ERISA Affiliate has any contingent liability with respect to any post-retirement benefits under a welfare benefit plan as defined in ERISA other than a liability for continuation coverage described in Part 6 of Title I of ERISA, except where such liability could not reasonably be expected to have, taking all instances in the aggregate, a Material Adverse Effect. Neither Obligor nor any ERISA Affiliate has maintained, contributed to or been obligated to maintain or contribute to, or has any actual or contingent liability under any Multiemployer Plan or any Plan that is subject to Title IV of ERISA. 55 Section 4.13. Environmental Protection. (a) All Facilities and operations of each Obligor and its Subsidiaries are, and have been to the Obligors' knowledge, in compliance with all Environmental Laws except for any noncompliance which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. (b) There is no, and has been no, condition, occurrence, or Hazardous Materials Activity arising (a) at any Facilities or, to the knowledge of either Obligor, at any other location or (b) in connection with the operations of either Obligor or its Subsidiaries (including the transportation of Hazardous Materials in accordance with applicable regulations), which condition, occurrence or Hazardous Materials Activity could reasonably be expected to form the basis of an Environmental Claim against either Obligor or any of its Subsidiaries and which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (c) There are no pending or, to either Obligor's knowledge, threatened Environmental Claims against either Obligor or its Subsidiaries, and neither Obligor nor its Subsidiaries have received any written notices, inquiries, or requests for information with respect to any Environmental Claims which if adversely determined could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (d) Except as disclosed to the Agent, the Board, the Participants and the Lenders in writing on or prior to the Closing Date, neither Obligor nor any of its Subsidiaries is currently operating or required to be operating under any compliance order, schedule, decree or agreement, any consent decree, order or agreement, and/or any corrective action decree, order or agreement issued or entered into under any Environmental Law, the failure to comply with which could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 4.14. Solvency. After giving effect to the Borrowing and to the application of the proceeds therefrom, each Obligor is and, upon the incurrence of any Obligations by the Borrower on any date on which this representation is made or deemed made, will be, Solvent. Section 4.15. Disclosure. No representation or warranty of any Obligor contained in this Agreement, any other Loan Document, the Application or in any other document, certificate or written statement, or any other written information, furnished to the Board, the Agent, the Lenders or the Participants by or on behalf of either Obligor or any of its Subsidiaries for use in connection with the negotiation and closing of the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits any information necessary to make the statements therein not materially misleading, in each case, as and when made or furnished, or in the case of any such representations and warranties, as any of them may be made from time to time in accordance with this Agreement and the other Loan Documents. There are no facts known to any Responsible Officer of either Obligor (other than matters of a general economic nature) that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 56 Section 4.16. Compliance With Laws. Each Obligor and each of its Subsidiaries is in compliance with all laws, statutes, rules, regulations and orders binding on or applicable to such Obligor, its Subsidiaries and all of their respective properties, except to the extent failure so to comply could not (either individually or in the aggregate) reasonably be expected to have a Material Adverse Effect. Section 4.17. Indebtedness; Off Balance Sheet Transactions. (a) Schedule 4.17 correctly sets forth the consolidated Indebtedness of the Obligors and their Subsidiaries as of September 30, 2002. (b) Other than as disclosed in the Parent's or Borrower's filings with the SEC with reasonable sufficiency and specificity (as contemplated in SEC Release No. 33-8056 (January 22, 2002)), there are no transactions, arrangements or other relationships between and/or among the Parent or any of its Affiliates (as such term is described in Rule 405 under the Securities Act of 1933, as amended) and any unconsolidated entity, including but not limited to, any structured finance, special purpose or limited purpose entity, of the type contemplated in SEC Release No. 33-8056. Section 4.18. Insurance. The properties, business and operations of the Obligors and their Subsidiaries are insured with reputable insurance companies reasonably believed to be financially sound (none of which are Affiliates of either Obligor) or by the United States of America in such amounts, with such deductibles and covering such risks as are insured against (including, but not limited to, war risk and third party liability) and carried in accordance with applicable law and prudent industry practice by major U.S. commercial air carriers similarly situated with the Obligors and owning or operating similar properties, aircraft and engines. Section 4.19. Section 1110. The Collateral Agent shall be entitled to the benefits of Section 1110 of the Bankruptcy Code with respect to the right to repossess the Aircraft, Spare Engines and Pledged Spare Parts (as such terms are defined in the Security Agreement), in each case to the extent first placed into service after October 22, 1994, and to enforce its other rights and remedies with respect thereto under the Security Documents in the event of a case under Chapter 11 of the Bankruptcy Code in which the Borrower is debtor. Section 4.20.Absence of Labor Disputes. No strikes, boycotts, work stoppages or labor disputes with employees of any of the Obligors or their Subsidiaries exist or, to the knowledge of the Officers of any Obligor, are imminent or would reasonably be expected to occur that would reasonably be expected to have a Material Adverse Effect. 57 Section 4.21. Gates and Slots. (a) Each Obligor and each of its Subsidiaries is in compliance with all leases, licenses or other agreements necessary in connection with such Person's use, operation or occupancy of gates at airport terminals. (b) Each Obligor and each of its Subsidiaries having any operational authority granted under 49 U.S.C. ss. 40103 and 14 C.F.R. Sec. ss.ss. 93.211-93.227 to conduct aircraft landing or take-off operations (such operational authority, "Slots") maintains a system for monitoring and utilizing such Slots in compliance with the regulations governing Slot use and loss set forth in 14 C.F.R. ss. 93.227, as amended from time to time. Section 4.22. Non-Guarantor Subsidiaries. Except as otherwise described on Schedule 4.22, the Subsidiaries listed on Schedule 4.22 hereto have no assets or liabilities and have undertaken no operations except in connection with their organization. Article V Covenants To induce the other parties to enter into this Agreement and to induce the Participants to enter into their respective Participations, the Obligors agree with each other party hereto that, so long as any of the Obligations remain outstanding: Section 5.1. Financial Statements and Other Reports (a) Each of the Obligors will establish and maintain, and will cause each of its Subsidiaries to establish and maintain, in accordance with sound business practices and applicable law and rules and regulations issued by any Governmental Authority (i) a system of accounting, which shall include maintenance of proper books and records, to permit preparation of financial statements in conformity with GAAP and to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; and (ii) disclosure controls and procedures designed to ensure that material information relating to such Obligor and its Subsidiaries is made known to Responsible Officers of such Obligor in a timely manner. (b) The Obligors will deliver to the Agent, the Lenders, the Participants, the Board, the Loan Administrator and the Collateral Agent (but only to the 58 extent information is to be delivered pursuant to clauses (v), (xii) and, in the case of information requested by the Collateral Agent, (xx) below): (i) (A) Quarterly Financials: as soon as available and in any event within two (2) days after the date on which such company is required to file its Form 10-Q under the Exchange Act (or would be so required if it were subject to the periodic reporting obligations of Section 13 or 15 of the Exchange Act), (x) the consolidated balance sheets of each of the Borrower and Parent as at the end of each fiscal quarter and the related consolidated statements of income and stockholders' equity of each such company for such fiscal quarter and consolidated cash flows of each such company for the period from the beginning of the then current Fiscal Year to the end of such fiscal quarter, setting forth in each case in comparative form the corresponding figures from the corresponding periods of the previous Fiscal Year and, in the case of the Parent, the corresponding figures from the quarterly projections delivered pursuant to clause (viii)(B) of this Section 5.1(b) for such quarter, all prepared in accordance with GAAP and in reasonable detail and certified by the Chief Financial Officer or the Chief Executive Officer of such company that they fairly present the consolidated financial condition of such company as at the dates indicated and the results of its operations and its cash flows for the periods indicated, and (y) a narrative report describing the operations of each such company in the form prepared for presentation to senior management for such fiscal quarter and for the period from the beginning of then current Fiscal Year to the end of such fiscal quarter; provided that delivery of the Form 10-Q filed by the Parent with the SEC for such fiscal quarter, if any, shall be deemed to satisfy all of the requirements of this Section 5.1(b)(i)(A)with respect to the Parent; (B) Monthly Reporting: as soon as available and in any event within 30 days after the end of each calendar month, the consolidated balance sheets of each Obligor as at the end of such month and the related consolidated statements of income and consolidated cash flows of such Obligor for such calendar month and for the period from the beginning of the then current Fiscal Year to the end of such month, setting forth in each case with respect to the year-to-date period, in comparative form, the corresponding figures from the corresponding periods of the previous Fiscal Year, together with, in the case of the Parent, a unit-basis income statement (with per-ASM revenues and expenses (line by line)), variances from the monthly operating plan delivered pursuant to clause (viii)(B) of this Section 5.1(b) for such month for each income statement line item; all such financial statements to be in the form prepared for the management of the Obligors and certified by the Chief Financial Officer or Chief Executive Officer of such company as fairly presenting, in all material respects, the consolidated financial condition of such Obligor as at the dates indicated and the results of its operations and its cash flows for the periods indicated (subject to normal year-end audit adjustments); (ii) Year-End Financials: as soon as available and in any event within two (2) days after the date on which such company is required to file its Form 10-K 59 under the Exchange Act (or would be so required if it were subject to the periodic reporting obligations of Section 13 or 15 of the Exchange Act), (A) the consolidated balance sheets of each of the Borrower and the Parent as at the end of each Fiscal Year and the related consolidated statements of income and stockholders' equity of each such company for such Fiscal Year and consolidated cash flows of each such company for such Fiscal Year, setting forth in each case in comparative form the corresponding figures for the previous Fiscal Year and, in the case of the Parent, the corresponding figures from the annual financial plan delivered pursuant to Section 5.1(b)(viii) for the Fiscal Year covered by such financial statements of the Parent, all in reasonable detail and certified by the Chief Financial Officer or the Chief Executive Officer of such Obligor that they fairly present the consolidated financial condition of such Obligor as at the date indicated and the results of its operations and its cash flows for the periods indicated, (B) a narrative report describing the operations of such company in the form prepared for presentation to senior management for such Fiscal Year, and (C) an accountant's report on the financial statements of the Parent of Ernst & Young LLP or other independent certified public accountants of recognized national standing selected by such company, which report (1) shall express no doubts about the ability of such company to continue as a going concern and shall be otherwise unqualified in all respects, (2) shall state that in making its examination no knowledge of any Default or Event of Default was obtained or, if any such Default or Event of Default exists, shall state the nature and status of such Default or Event of Default (to the extent such statement is not prohibited by, or inconsistent with, applicable accounting literature), and (3) shall state that such consolidated financial statements fairly present in all material respects the consolidated financial position of such company as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; provided, that (x) references in such report to changes in GAAP, changes in accounting standards, highlighting contents of footnotes, limitations in the scope of the audit or exclusions from the audit information not required by GAAP that are, in each case, customary in industry practice and not prejudicial to the opinion stated therein shall not be deemed to be "qualifications" for the purpose of clause (C) of this subsection 5.1(b)(ii), and (y) delivery of the Form 10-K filed by the Parent with the SEC for such Fiscal Year, if any, and which satisfies the requirements of clauses (C)(1) and (3) above shall be deemed to satisfy the requirements of such clauses of this subsection 5.1(b)(ii) with respect to the Parent; (iii) Officer's Certificates: together with each delivery of financial statements of each Obligor pursuant to subsections 5.1(b)(i) and (ii) above after the Closing Date, (A) an Officer's Certificate from a Responsible Officer of such Obligor (1) stating the signer has reviewed the terms of this Agreement and has made, or caused to be made under his or her supervision, a review in reasonable detail of the transactions and condition of such Obligor during the 60 accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signer does not have knowledge of the existence as at the date of such Officer's Certificate, of any condition or event that constitutes an Event of Default or Default, or, if any such condition or event so existed or exists, specifying the nature and period of existence thereof and what action such Obligor has taken, is taking and proposes to take with respect thereto, (2) demonstrating in reasonable detail compliance (or noncompliance) with the restrictions contained in Section 6.4(c) for the period specified in such Section that ends on the last day of, and with the restrictions contained in Sections 6.3, 6.4(a) and 6.4(b) as of the end of, the applicable quarterly and annual accounting periods specified in such Sections and (3) stating whether any change in GAAP or in the application thereof has occurred since the date of delivery of the most recent financial statements under subsections 5.1(b)(i) and (ii), and (B) with respect to the financial statements delivered pursuant to clauses (i)(A) and (ii) above of this Section 5.1(b), an Officer's Certificate from a Responsible Officer of such Obligor stating that there are no significant deficiencies in the design or operation of internal controls of such Obligor and its Subsidiaries which could adversely affect such Obligor's ability to record, process, summarize and report financial data, or, if any such deficiencies exist, describing them and what action such Obligor has taken, is taking or proposes to take with respect thereto; (iv) SEC Filings and Press Releases: promptly upon their becoming available, copies of (A) all financial statements, reports, notices and proxy statements sent or made available generally by the Borrower or the Parent to its security holders, (B) all regular and periodic reports and all registration statements and prospectuses, if any, filed by the Parent, the Borrower or any of their Subsidiaries with any securities exchange or with the SEC or any Governmental Authority or private regulatory authority, and (C) all material press releases and other statements made available generally by the Parent, the Borrower or any of their Subsidiaries, to the public concerning material developments in the business of the Obligors or any of their Subsidiaries; (v) Events of Default, etc.: promptly upon any Officer of either Obligor obtaining knowledge (A) of any condition or event that constitutes an Event of Default or Default, (B) that any creditor has given any notice to either Obligor or any its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in Section 7.1(b), (C) of any condition or event that would be required to be disclosed in a current report filed by the Borrower or the Parent with the SEC on Form 8-K if such Person were required to file such reports under the Exchange Act, (D) of the occurrence of any event or change that has had, or would reasonably be expected to have, a Material Adverse Effect, or (E) of any condition or event that constitutes a default or an event of default (or any condition with which the passing of time or the giving of notice or both would, unless cured or waived, become a default or event of default) under any Concession or any other material Contractual Obligation, an Officer's Certificate specifying the nature and period of existence of such Default, Event of Default, condition, event or 61 change (including with respect to notices under clause (A) of this Section 5.1(b)(v), specific references to all provisions of the Loan Documents under which the Default or Event of Default has occurred) or specifying the notice given or action taken by any such Person and the nature of such claimed Event of Default, Default, default, event or condition, and what action the Borrower has taken, is taking and proposes to take with respect thereto; (vi) Litigation or Other Proceedings: to the extent not otherwise disclosed pursuant to this Section 5.1(b), (A) promptly upon any Officer of either Obligor or any of its Subsidiaries obtaining knowledge of (x) the institution of, or threat of, any action, suit, proceeding (whether administrative, judicial or otherwise), arbitration, governmental or other public agency or quasi-governmental investigation against or affecting either Obligor or any of its Subsidiaries or any property of either Obligor or any of its Subsidiaries (collectively, "Proceedings"), or (y) any material development in any Proceeding that, in any case: (1) if adversely determined could reasonably be expected to have a Material Adverse Effect; (2) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of the transactions contemplated hereby; (3) relates to financial or other operational condition or results of Borrower or the Parent; or (4) could cause any of the property comprising the Collateral to be subject to any restriction on ownership, occupancy, use or transferability; written notice thereof together with such other information as may be reasonably available to the Obligors to enable each Lender, each Participant, the Agent, the Loan Administrator and the Board, and their respective counsel to evaluate such matters, and (B) no later than the date the annual financial statements are delivered under Section 5.1(b)(ii) for each Fiscal Year, a schedule of all Proceedings involving an alleged liability of, or claims against or affecting, either Obligor or any of its Subsidiaries the uninsured portion of which (treating as uninsured deductibles and any amounts which are insured by Affiliates or covered by self-insurance) is equal to or greater than $500,000 and promptly after request by the Agent, the Loan Administrator or the Board such other information as may be reasonably requested by the Agent, the Loan Administrator or the Board to enable the Agent, the Loan Administrator or the Board and their respective counsel to evaluate any of such Proceedings; 62 (vii) ERISA Reports: promptly after the receipt by the Borrower of a request therefor by the Agent, the Loan Administrator, the Board, any Lender or any Participant, the Borrower shall provide the Agent, the Loan Administrator, the Board, such Lender and such Participant copies of any annual and other reports (including Schedule B thereto) with respect to a Plan filed by either Obligor or any ERISA Affiliate with the United States Department of Labor, the IRS or the Pension Benefit Guaranty Corporation; (viii) Financial Plans and Projections: (A) annually, as soon as practicable after preparation thereof by the Parent in the ordinary course of business but in no event later than March 1 of each year, the Parent shall provide the Agent, the Loan Administrator, the Board, each Lender and each Participant copies of the Parent's annual financial and operating plan and projections for such year, and (B) as soon as available but in any event at least ten (10) days prior to the beginning of each fiscal quarter of each Fiscal Year, the Parent shall provide the Agent, the Loan Administrator, the Board, each Lender and each Participant copies of the Parent's financial and operating plan and projections for such quarter, and for each month in such quarter, all of which plans and projections shall be in sufficient detail to facilitate a determination of the Borrower's budgeted contribution to such plans and projections; (ix) Environmental Audits and Reports: as soon as practicable following receipt thereof, the Borrower shall provide the Agent, the Loan Administrator, the Board, each Lender and each Participant copies of all environmental audits and reports, whether prepared by personnel of an Obligor or any of its Subsidiaries or by independent consultants, with respect to significant environmental matters at any Facility or which relate to an Environmental Claim which could be expected to have a Material Adverse Effect; (x) Ratings Change; Liquidity Certificates: (A) within one Business Day after any public release by S&P or Moody's raising, lowering, suspending or placing under review for possible downgrade or suspension its credit rating or changing its outlook on any debt obligations of either Obligor or any of its Subsidiaries, and (B) at such additional times as the Borrower may elect, the Borrower shall provide the Agent, the Board, each Lender and each Participant a certificate setting forth the credit ratings on the debt obligations of the Obligors and their Subsidiaries (each, a "Liquidity Certificate"); (xi) Reserved: (xii) Insurance/Condemnation Proceeds: in addition to any similar reporting obligations under the Security Documents but without the duplication of any such obligation, promptly notify the Agent, the Collateral Agent, each Lender, each Participant, the Loan Administrator and the Board upon an Officer of either Obligor or any of its Subsidiaries obtaining actual knowledge of (A) the occurrence of an event of loss or material damage to, or any taking, condemnation or requisition by any Governmental Authority of, any property of either Obligor or any of its Subsidiaries having fair market value or a 63 replacement value in excess of $2,500,000 whether or not such loss or damage is expected to result in receipt of insurance or condemnation proceeds or of any other event of loss or damage that the Borrower reasonably expects to result in proceeds reasonably estimated by the Borrower to exceed $2,500,000 and (B) the receipt of insurance proceeds or condemnation proceeds from an event of loss or material damage to, or any taking, condemnation or requisition by any Governmental Authority of, any property of either Obligor or any of its Subsidiaries; (xiii) Future Issuance and Asset Sales: as soon as reasonably practicable but in no event less than five (5) days prior to the Borrower, the Parent or any of their Subsidiaries consummating any Future Issuance or Asset Sale, the Borrower shall (A) notify the Agent, each Lender, each Participant, the Loan Administrator and the Board of such event and what action the Borrower, the Parent or such Subsidiary has taken, is taking and proposes to take with respect thereto, including the use of proceeds, and (B) in connection with each such Asset Sale, deliver to the Agent, each Lender, each Participant, the Loan Administrator and the Board an Officer's Certificate from a Responsible Officer of the Borrower and the Parent certifying that the provisions of Section 6.10 will be satisfied; (xiv) Plan Audits and Liabilities: promptly after either Obligor or any ERISA Affiliate (A) contacts the IRS for the purpose of participating in a closing agreement or any voluntary resolution program with respect to a Plan which could reasonably be expected to have a Material Adverse Effect, or (B) knows or has reason to know that any event with respect to any Plan occurred that could reasonably be expected to have a Material Adverse Effect, notice of such contact or occurrence of such event; (xv) Funding Changes and New Plan Benefits: promptly after a change, a notification of any material increases in the benefits, or material change in funding method, with respect to which either Obligor or any of its Subsidiaries may have any liability, or the establishment of any material new Plan with respect to which either Obligor or any of its Subsidiaries may have any liability or the commencement of contributions to any Plan to which either Obligor or any ERISA Affiliate was not previously contributing, except to the extent that such an event would not reasonably be expected to have a Material Adverse Effect; (xvi) Claims and Proceedings: promptly after receipt of written notice of commencement thereof, notification of all (A) claims made by participants or beneficiaries with respect to any Plan, and (B) actions, suits, proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting either Obligor or any ERISA Affiliate with respect to any Plan, except those which, in the aggregate, if adversely determined, could not reasonably be expected to have a Material Adverse Effect; 64 (xvii) ERISA Events: promptly after the occurrence of any ERISA Event that would reasonably be expected to have a Material Adverse Effect, notice thereof; (xviii) Labor Disputes: promptly upon any Officer of either Obligor or any of its Subsidiaries obtaining knowledge of the institution or threat of any strike, boycott, work stoppage or labor dispute relating to an Obligor or any of its Subsidiaries that would reasonably be expected to have a Material Adverse Effect, notice thereof; (xix) Collateral Value Certificates: (A) no later than the date upon which the annual financial statements are delivered under clause (ii) of this Section 5.1(b) for the Fiscal Year ended December 31, 2002, a Collateral Value Certificate certifying the Collateral Value as of September 30, 2002 based on the Appraisal Report delivered under Section 5.14(a)(i)(A) and reflecting a value for the Eligible Receivables that is no less than the value reflected on the Collateral Value Certificate delivered pursuant to Section 3.1(a)(ix) and (B) no later than the date upon which the quarterly financial statements are delivered under clause (i)(A) of this Section 5.1(b) for each fiscal quarter of each Fiscal Year and the date upon which the annual financial statements are delivered under clause (ii) of this Section 5.1(b) for each Fiscal Year beginning December 31, 2003, a Collateral Value Certificate certifying the Collateral Value, in each case as of a date no earlier than the end of the fiscal quarter or the Fiscal Year with respect to which the corresponding financial statements referenced above in this clause (xix) are being delivered; and (xx) Other Information: with reasonable promptness, such other information and data with respect to the Obligors or any of their Subsidiaries as from time to time may be reasonably requested by the Agent, the Collateral Agent, any Lender, any Participant, the Board or the Loan Administrator. Section 5.2. Corporate Existence. Except as permitted under Sections 6.5(a)(i) and 6.9, each Obligor will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each Subsidiary of such Obligor and the permits, licenses, rights, (charter and statutory) and franchises of such Obligor and its Subsidiaries; provided, that the Obligors shall not be required to preserve any right, franchise, or the existence of any Subsidiary if the maintenance or preservation thereof is no longer desirable in the conduct of the business of such Obligor and its Subsidiaries taken as a whole and the non-preservation thereof could not reasonably be expected to have a Material Adverse Effect. Section 5.3. Payment of Taxes and Claims; Tax Consolidation. (a) The Obligors will, and will cause their Subsidiaries to, pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon the Obligors or any of their Subsidiaries or upon the income, 65 profits or property of the Obligors or any of their Subsidiaries, and (ii) all lawful claims for labor, materials and supplies that, if unpaid, might by law become a Lien on the property of either Obligor or any of their Subsidiaries; provided, however, that no such Person shall be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and with respect to which an adequate reserve has been established by it to the extent required by GAAP. (b) The Obligors will not, and will not permit any of their Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person (other than the Borrower, the Parent and any Subsidiary of the Borrower or the Parent). Section 5.4. Maintenance of Properties; Insurance. (a) The Obligors will, and will cause each of their Subsidiaries to, maintain all properties used or useful in the conduct of their business in good condition, repair and working order and supply such properties with all necessary equipment and make all necessary repairs, renewals, replacements, betterments and improvements thereto, all as in the judgment of the Obligors may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Borrower or any of their Subsidiaries from discontinuing the operation and maintenance of any such properties if such discontinuance is, in the good faith judgment of the Obligors, desirable in the conduct of their business and could not reasonably be expected to have a Material Adverse Effect, but subject in each case to all applicable provisions of the Security Documents. (b) The Obligors will insure and keep insured, and will cause each of their Subsidiaries to insure and keep insured, with reputable insurance companies reasonably believed to be financially sound that are not Affiliates of the Borrower, the Parent or any of their Subsidiaries, their properties, business and operations, in such amounts, with such deductibles and covering such risks as are insured against (including, but not limited to, war risk and third party liability) and carried in accordance with applicable law and prudent industry practice by major U.S. commercial air carriers similarly situated with the Obligors and owning or operating similar properties, aircraft and engines, including such insurance coverage as is required to be maintained under the Security Documents, and providing for not less than thirty (30) days' prior notice to the Agent, the Board and the Collateral Agent of termination, lapse or cancellation of such insurance. Section 5.5. Inspection. The Obligors will, and will cause their Subsidiaries to, permit any authorized representatives designated by the Agent, any Lender, any Participant, the Loan Administrator or the Board to visit and inspect any of the properties of the Obligors or any of their Subsidiaries, including their financial and accounting records, and to make copies and take extracts therefrom, and to discuss their affairs, finances and accounts with its and their officers and independent public accountants, at the Borrower's expense, during normal business hours and as often as may be reasonably requested; provided, that so long as no Default or Event of Default shall have 66 occurred and be continuing, such inspection shall be upon reasonable notice and at reasonable times, and shall not be disruptive to the business of the Obligors and their Subsidiaries, as reasonably determined by the Borrower. Section 5.6. Compliance With Laws, Etc. The Obligors will, and will cause each of their Subsidiaries to, comply in all material respects with all applicable material statutes, rules, regulations, orders, restrictions and Governmental Authorizations of any applicable Governmental Authority, or of any department, commission, board, regulatory authority, bureau, agency and instrumentality of the foregoing, in respect of the conduct of their respective businesses and the ownership of their respective properties, except such as are being contested in good faith by appropriate proceedings. The Borrower shall not conduct any Hazardous Materials Activity at any Facility or at any other location in a manner that does not materially comply with Environmental Laws. The Obligors and their Subsidiaries shall use reasonable best efforts to cause all other Persons operating or occupying any of their properties to comply with Environmental Laws. Section 5.7. Hazardous Materials. (a) To the extent the following are required by Environmental Laws, each of the Borrower and the Parent will conduct any and all investigations, studies, sampling and testing and will take, and will cause each of its Subsidiaries to take, any and all necessary remedial action in connection with the presence, storage, use, disposal, transportation or Release of any Hazardous Materials for 67 which the Borrower is, or could be, liable. The foregoing shall not apply if, and only to the extent that (i) the Borrower's, the Parent's or such Subsidiary's liability for such presence, storage, use, disposal, transportation or Release of any Hazardous Materials is being contested in good faith and by appropriate proceedings diligently conducted by the Borrower, the Parent or such Subsidiary, (ii) such remedial action is taken by other Persons responsible for such remedial action through an indemnification of the Borrower or the Parent or (iii) such non-compliance would not in any case or in the aggregate reasonably be expected to have a Material Adverse Effect. In the event the Borrower, the Parent or any of their Subsidiaries undertakes any such investigation, study, sampling, testing or remedial action with respect to any Hazardous Materials, the Borrower, the Parent or such Subsidiary will conduct and complete such action in compliance with all applicable Environmental Laws, and in accordance with the policies, orders and directives of all federal, state and local Governmental Authorities except for such non-compliance as would not in any case or in the aggregate reasonably be expected to have a Material Adverse Effect. (b) At the request of the Requisite Lenders or the Board from time to time, the Borrower will provide to the Lenders within sixty (60) days after such request, at the expense of the Borrower, an environmental site assessment report for any of its, the Parent's or their Subsidiaries' properties described in such request, prepared by an environmental consulting firm reasonably acceptable to the Agent, indicating the presence or absence of Hazardous Materials and the estimated cost of any compliance, removal or remedial action in connection with any Hazardous Materials on such properties; without limiting the generality of the foregoing, if the Agent determines at any time that a material risk exists that any such report will not be provided in the time referred to above, the Agent may retain an environmental consulting firm to prepare such report at the expense of the Borrower, and each of the Obligors hereby grants and agrees to cause any Subsidiary that owns property described in such a request to grant at the time of such request to the Agent, the Lenders, the Board, such firm and any agents or representatives thereof an irrevocable non-exclusive license, subject to the rights of tenants, to enter into their respective properties to undertake such an assessment. Section 5.8. Contractual Obligations. The Borrower, the Parent and their Subsidiaries will perform, observe or fulfill all material obligations, covenants and conditions contained in their material Contractual Obligations (including, but not limited to, the Concessions). The Obligors shall use their best efforts to cause the "Vendor Concessions" described on Schedule 4.9(d) to be documented in written agreements promptly and in any event within thirty (30) days following the Closing Date, and shall deliver copies of such written agreements to the Board. Section 5.9. Employee Benefit Plans. The Obligors and their Subsidiaries shall take such actions as are reasonably practicable to ensure that the Plans with respect to which they may have any liability are operated in compliance with all applicable laws except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. Neither Obligor nor any of their Subsidiaries shall amend, adopt or terminate any Plan unless such action would not reasonably be expected to have a Material Adverse Effect. Section 5.10. FAA Matters; Citizenship. The Borrower will at all times hereunder be an "air carrier" within the meaning of the Act and hold a certificate under 49 U.S.C. Section 41102(a)(1) as currently in effect or as may be amended or recodified from time to time. The Borrower and each Subsidiary of either Obligor engaged in operations as an "air carrier" will at all times hereunder be a United States Citizen holding an air carrier operating certificate issued pursuant to Chapter 447 of Title 49 for aircraft capable of carrying 10 or more individuals or 6,000 pounds or more of cargo. Each Obligor and each of their Subsidiaries will possess and maintain all necessary consents, franchises, licenses, permits, rights and concessions and consents which are material to the operation of the routes flown by it and the conduct of its business and operations from time to time. Section 5.11. Board Guarantee. Each Obligor and each of their Subsidiaries shall comply with all of the terms, requirements and conditions applicable to it under the Act and the Regulations, or as may otherwise be imposed by, or agreed with, the Board in connection with the issuance of the Board Guarantee, and shall promptly furnish to the Board, the Loan Administrator and the Agent all such information as may be requested by the Board, the Loan Administrator or the Agent in connection with the Board Guarantee. Each Obligor and each of their Subsidiaries shall execute such documents and take such actions in furtherance of its obligations under the Act and the Regulations as the Board, the Loan Administrator or the Agent may request. 68 Section 5.12. Lower-Tier Covered Transaction. The Borrower agrees that in the event that it enters into any "lower-tier covered transaction" (as such term is defined in 31 C.F.R. Section 19.110, as amended or modified from time to time and not excepted therefrom by 31 C.F.R. Section 19.200(c)) in respect of the transactions contemplated hereunder, it will include the clause entitled "Certificate Regarding Debarment, Suspension, Ineligibility and Voluntary Exclusion - Lower Tier Covered Transactions" as set forth in Appendix B to Part 19 of title 31 of the C.F.R. in such "lower-tier covered transaction", and that it will obtain a certification from the other Person or Persons party to such "lower-tier covered transaction" to the effect that each such other Person (and each "principal" thereof, as such term is defined in 31 C.F.R. Section 19.105, as amended or modified from time to time) is not presently debarred, suspended, proposed for debarment, declared ineligible, or voluntarily excluded from participation in such transaction by any Federal department or agency, or an explanation why such Person is unable to so certify. Further, the Borrower agrees that it will not enter into a "lower-tier covered transaction" with a Person who has been proposed for debarment under 48 C.F.R. Section 9.4, debarred or suspended unless granted an exception for such "lower-tier covered transaction" pursuant to 31 C.F.R. Section 19.215. Section 5.13. Comptroller General Audits and Reviews. Each of the Obligors agrees to permit, and to cooperate in the conduct of, such audits and reviews during the period the Loan is outstanding and for three years thereafter, as the Board may deem appropriate, by an independent auditor acceptable to the Board or the United States Comptroller General. To the extent requested by the Board or the Loan Administrator, the Obligors shall provide access to the officers and employees, books, records, accounts, documents, correspondence, and other information of the Obligors, their Subsidiaries, Affiliates, financial advisors, consultants and independent certified accountants that the Board or the United States Comptroller General considers necessary. Section 5.14. Appraisal Reports; Additional Collateral. (a) The Borrower shall obtain one or more Appraisal Reports establishing the value of the Appraised Collateral as of (i)(A) September 30, 2002 and (B) the last day of each Fiscal Year beginning December 31, 2003, (ii) the date upon which any additional property or assets that constitutes Appraised Collateral is pledged as Collateral to the Collateral Agent to secure the Obligations, but only with respect to such additional Collateral and (iii) a date which is no later than 60 days after the Board (or if the Board Guarantee shall have terminated, the Requisite Lenders) has requested that the Borrowers obtain an Appraisal Report; provided, however, that the Borrower shall not be required to obtain an Appraisal Report, other than (x) pursuant to subsections (i) and (ii) hereof, or (y) if requested by the Board under clause (iii) hereof following delivery of a Collateral Value Certificate that discloses that the value of the Collateral has or may have been, or may be materially and adversely affected, more than once per Fiscal Year (it being understood that the obligation herein of the Borrower to periodically obtain Appraisal Reports shall be in addition to any rights or obligations under the Security Agreement). Such Appraisal Reports may be based on desktop appraisals unless the Board (or if the Board Guarantee shall have terminated, the Requisite Lenders) shall have requested that an Appraisal Report be based on physical inspection. 69 (b) The Borrower shall maintain the value of the Collateral. In furtherance thereof, if at any time after December 31, 2002 (x) the then aggregate Collateral Value shall be less than (y) an amount equal to (i) the aggregate Collateral Value as of September 30, 2002 (as reflected in the Collateral Value Certificate delivered pursuant to Section 5.1(b)(xix)(A)), less (ii) an aggregate amount equal to the amounts previously prepaid from Excess Cash Flow pursuant to this paragraph and amounts prepaid pursuant to Section 2.6(c), including with respect to assets constituting Collateral (any difference under clause (A) and/or the difference between (x) and (y), the "Value Differential"), the Obligors shall promptly do one of the following to the extent (but only to the extent) necessary to eliminate such Value Differential: (i) prepay the Loan from the Parent's Excess Cash Flow for the fiscal quarter during which or as of the end of which the Value Differential is established, in accordance with the provisions of Section 2.5 hereof, (ii) pledge pursuant to a Security Agreement Supplement delivered to the Collateral Agent, and subject to the terms and conditions of the Security Agreement, additional Eligible Collateral available to be pledged to the Collateral Agent, or (iii) prepay the Loan as provided in clause (i) above and pledge pursuant to a Security Agreement Supplement delivered to the Collateral Agent, and subject to the terms and conditions of the Security Agreement, additional Eligible Collateral; provided, that if the Parent's Excess Cash Flow for such fiscal quarter, together with all Eligible Collateral that is available to be pledged to the Collateral Agent is not sufficient to eliminate such Value Differential, the Obligors shall continue to prepay the Loan from the Parent's Excess Cash Flow for each subsequent fiscal quarter and pledge all additional Eligible Collateral as it becomes available until the Value Differential no longer exists (it being understood that assets subject to a Lien permitted under Section 6.1 other than a Permitted Encumbrance are not available to be pledged to the Collateral Agent), and provided, further, that if any cash which is used to purchase Aircraft Related Equipment is deducted from Consolidated EBITDAR in computing the amount of Excess Cash Flow for any fiscal quarter during the existence of a Value Differential, the Aircraft Related Equipment purchased with such cash shall be pledged to the Collateral Agent pursuant to clause (ii) above. (c) If additional Eligible Collateral is being pledged in accordance with Section 5.14(b), such additional Eligible Collateral shall be free and clear of any Liens and the Borrower shall execute and deliver to the Collateral Agent the applicable Security Agreement Supplements and take all other action necessary or desirable to cause the Liens created thereby to be perfected first priority Liens protected under applicable law, shall furnish favorable legal opinions to the Collateral Agent with respect to such additional Eligible Collateral, including the perfection and priority of the Collateral Agent's Lien thereon and evidence of applicable filings to the Loan Administrator, and shall otherwise comply with the provisions of the Security Agreement that apply to a pledge of such Collateral. (d) In connection with each prepayment or pledge of additional Eligible Collateral pursuant to Section 5.14(b) above, the Borrower shall deliver to the Collateral Agent, the Loan Administrator and the Board either (i) a Collateral Value Certificate which establishes that the applicable Value Differential no longer exists, or (ii) a certificate from a Responsible Officer of the Borrower that certifies (A) the amount of Excess Cash Flow for the most recently ended 70 fiscal quarter, and (B) that the Borrower has pledged pursuant to Section 5.14(b) all available Eligible Collateral. Section 5.15. Additional Subsidiaries. With reasonable promptness and in any event within 30 days following the formation or acquisition of a Subsidiary by either Obligor or upon the commencement of operations by any Subsidiary listed on Schedule 4.22 (other than Washington Assurance Limited), as applicable, the Obligors (a) shall provide the Agent, the Loan Administrator, the Board and each Lender the name, corporate structure and allocation of Voting Stock of such Subsidiary and shall supplement Schedule 4.1 with all relevant information with respect to any such new Subsidiary, and (b) shall (i) (A) in the case of any such Subsidiary (other than any Subsidiary to which clause (B) below applies), cause such Subsidiary to execute and deliver to the Agent and the Board a Subsidiary Guarantee in the form of Exhibit I dated no later than 30 days following such formation or acquisition or upon such commencement of operations, as applicable, or (B) in the case of any foreign Subsidiary that is a controlled foreign corporation, if compliance with clause (A) above could increase its current or future investment in United States property under Section 956 of the Internal Revenue Code and the regulations thereunder, deliver to the Agent and the Board a pledge of 65% of such Subsidiary's stock to secure payment of the Obligations dated no later than 30 days following such formation or acquisition or upon such commencement of operations, as applicable, and (ii) deliver to the Agent and the Board (A) documents of the types referred to in Section 3.1(a)(xi) with respect to such Subsidiary and (B) a certificate signed by the Secretary or Assistant Secretary of such Subsidiary of the type referred to in Section 3.1(a)(xii). Section 5.16. Chief Executive Officer. Subject to compliance with the fiduciary duties of the directors of the Parent and the Borrower, the Parent and the Borrower shall take all reasonable action to cause J. George Mikelsons to remain their chief executive officer for at least three years following the Closing Date. Section 5.17. Further Assurances. At any time or from time to time upon the request of the Board, any Lender, any Participant (with respect to Obligations owing directly to it hereunder), the Loan Administrator, the Collateral Agent or the Agent, the Obligors will, and will cause their Subsidiaries to, at the Borrower's expense, promptly execute, acknowledge and deliver such further documents and do such other acts and things as the Board, such Lender, such Participant, the Loan Administrator, the Collateral Agent or the Agent may reasonably request in order to correct material defects or errors in the Loan Documents or the execution, acknowledgement, filing or recordation thereof, to maintain and ensure the validity, effectiveness, priority and perfection of the Collateral Agent's Liens intended to be created pursuant to the Security Agreement, to provide for payment of the Obligations in accordance with the terms of this Agreement, the Notes and the other Loan Documents and otherwise to effect fully the purposes of the Loan Documents. 71 Article VI NEGATIVE COVENANTS To induce the other parties to enter into this Agreement and to induce the Participants to enter into their respective Participations, the Obligors agree with each other party hereto, as long as any of the Commitments remain in existence or the Obligations remain outstanding: Section 6.1. Liens and Related Matters. (a) Prohibition on Liens. The Obligors shall not, and shall not permit any of their Subsidiaries to, directly or indirectly create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any kind (including any document or instrument in respect of goods or accounts receivable or the Collateral) of the Obligors or any of their Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, or file or permit the filing of, or permit to remain in effect, any financing statement or other similar notice of any Lien with respect to any such property, asset, income or profits under the Uniform Commercial Code of any state or under any similar recording or notice statute, except: (i) Permitted Encumbrances; (ii) purchase money Liens securing Indebtedness used to acquire Aircraft Related Equipment or liens created or incurred in connection with refinancing of any Aircraft Related Equipment acquired by the Borrower or another Wholly-Owned Subsidiary of the Parent which refinancing occurs within eighteen months after the date of such acquisition; (iii) other Liens securing or relating to Indebtedness permitted pursuant to this Agreement and other liabilities and obligations permitted pursuant to this Agreement in an aggregate amount not to exceed $10,000,000 at any time outstanding; (iv) Liens securing Indebtedness used to refinance the Loan; (v) Liens described in Schedule 6.1 annexed hereto; (vi) judgment and attachment Liens not giving rise to an Event of Default or relating to an action or judgment that is a Default or Event of Default; (vii) Liens on the assets of any entity or on any asset existing at the time such entity or asset is acquired by an Obligor or any Subsidiary of an Obligor, whether by merger, consolidation, purchase of assets or otherwise; provided, that such Liens (i) are not created, incurred or assumed by such entity in contemplation of or in connection with the financing of such entity's being acquired by such Obligor or such Subsidiary; (ii) do not extend to any other assets of such Obligor or such Subsidiary; and (iii) the Indebtedness secured by such Lien is permitted pursuant to this Agreement; 72 (viii) leases or subleases granted to others not interfering in any material respect with the ordinary conduct of business of either Obligor or any of its Subsidiaries; and (ix) Liens on the Borrower's membership interests in the BATA Joint Venture to secure the obligations in respect of loans made to the Borrower by the other members thereof (or any Affiliate of such member) in order to fund the Borrower's obligation to make investments of Cash or otherwise to make Cash available to the BATA Joint Venture pursuant to the terms thereof as such terms exist on the Closing Date. (b) No Restrictions on Subsidiary Distributions to Borrower or Other Subsidiaries. Except (i) as provided herein and in the other Loan Documents or (ii) as described on Schedule 6.1 annexed hereto, the Obligors will not, and will not permit any of their Subsidiaries to, create or otherwise cause or suffer to exist or become effective any Payment Restriction. Section 6.2. Investments. Neither Obligor shall, nor shall it permit any of its Subsidiaries to make any Investment other than (a) Investments consisting of Cash Equivalents; (b) accounts receivable if credited or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (c) payroll advances and advances for business and travel expenses in the ordinary course of business; (d) Investments by the Borrower in its Wholly-Owned Subsidiaries in the ordinary course of business and Investments by the Parent in its Wholly-Owned Subsidiaries in the ordinary course of business; (e) (i) Investments by any Subsidiary of the Parent in the Borrower or in any other Wholly-Owned Subsidiary of the Borrower and (ii) Investments by any Subsidiary of the Parent (but with respect to the Borrower and its Subsidiaries, only to the extent such Investment is otherwise permitted under this Section 6.2 or Section 6.3) in the Parent or in any other Wholly-Owned Subsidiary of the Parent, in each case, in the ordinary course of business or as otherwise permitted under Section 6.3; (f) Investments made by way of any endorsement of negotiable instruments received by the Parent, the Borrower or any of their Subsidiaries in the ordinary course of its business and presented by it to any bank for collection or deposit; (g) stock, obligations or securities received in settlement of debts created in the ordinary course of business owing to the Parent, the Borrower or any Subsidiary; (h) in addition to any other permitted investments, any other Investments by the Parent or the Borrower in an aggregate outstanding amount not exceeding $10,000,000 at any time; (i) Investments by any Non-Guarantor Subsidiary in the Parent or any Subsidiary of the Parent that is a Restricted Subsidiary as of the date hereof; (j) Investments existing on the Closing Date and reflected on Schedule 6.2; (k) Investments in the BATA Joint Venture pursuant to the terms thereof as they exist on the Closing Date; and (l) 73 Investments in travel or airline related businesses made in connection with marketing and promotion agreements, Alliance Agreements, distribution agreements, agreements relating to flight training and other similar agreements under which a portion of the consideration to the Parent, the Borrower or one or more of their Subsidiaries includes an opportunity for Investment in the Capital Stock of other Persons, which Investments under this clause (l) shall not exceed $20,000,000 in the aggregate. Section 6.3. Restricted Payments. Neither the Parent nor the Borrower shall, and neither of them shall permit any of their Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Payment (which shall include payments by the Borrower in satisfaction of obligations under the 9 5/8% Senior Notes Indenture or the 10 1/2% Senior Notes Indenture or any note issued under either of them, pursuant to the Borrower's guarantee of such obligations or otherwise, at any time when the Borrower would be prohibited from making a Restricted Payment to the Parent to fund such obligations); provided, however, that (a) so long as no Default or Event of Default shall have occurred and be continuing, (i) the Parent may (A) make required dividend payments in respect of the Series A preferred stock of the Parent outstanding on the date hereof, (B) make required dividend payments in respect of the Series B preferred stock of the Parent outstanding on the date hereof, (C) pay cash in lieu of fractional shares or scrip upon conversion of the Series B preferred stock of the Parent to common shares of the Parent or upon exercise of the Warrants, and (D) repurchase its common stock in any fiscal year in an aggregate amount not to exceed $500,000; and (ii) the Borrower may make Restricted Payments to the Parent (A) to enable the Parent to make the payments permitted under clause (i) above, (B) to fund scheduled payments of principal, interest and fees on the 9 5/8% Senior Notes and the 10 1/2% Senior Notes and to fund scheduled payments of principal, interest and fees on other Indebtedness not otherwise prohibited by this Agreement or any other Loan Document, and (C) to enable the Parent or any of its Subsidiaries to enter into transactions outside of the ordinary course of business and which are not otherwise prohibited by this Agreement or any of the other Loan Documents; (b) the Borrower may make Restricted Payments to the Parent to (i) pay or reimburse the Borrower's share of the Parent's business expenses and overhead or otherwise in the ordinary course of business consistent with past practice, (ii) to pay or reimburse the Parent for Capital Stock (including options on any such Capital Stock or related stock appreciation rights or similar securities) purchases or redemptions from officers, directors or employees of the Borrower or the Parent (or their estates or beneficiaries under their estates) upon death, disability, retirement, termination of employment or pursuant to the terms of any plan or any other agreement under which such Capital Stock or related rights were issued, in an amount not to exceed $5,000,000 per Fiscal Year and (iii) to pay or reimburse the Parent for withholding taxes arising from cashless exercises of options or warrants by officers, directors or employees for the Parent's Capital Stock; and (c) any Wholly-Owned Subsidiary of the Parent (but in the case of the Borrower, only to the extent otherwise permitted under this Section 6.3) may make dividend payments to the Parent. Section 6.4. Financial Covenants. (a) The Parent shall not permit the reserve of unrestricted Cash and Cash Equivalents (that in either case are free from all Liens other than Permitted Encumbrances of the type described in clause (vii) of the definition of Permitted Encumbrances) of the Borrower and its Wholly-Owned Subsidiaries to be 74 less than $40,000,000, it being understood that to the extent that obligations in respect of cash collateralized letters of credit or other similar instruments are excluded from the definition of Indebtedness for the purpose of determining compliance with either of Sections 6.4(b) or (c), the Cash or Cash Equivalents that secures such obligations shall be excluded from unrestricted Cash and Cash Equivalents. (b) The Parent shall not permit its ratio of consolidated Indebtedness as of the dates specified below, or at any time during the fiscal quarter ending on such dates, to Consolidated EBITDAR (calculated for the four fiscal quarters ending on such dates) to be greater than the applicable ratio set forth below: - -------------------------------------- ----------------------------------------- Applicable Consolidated Indebtedness to Fiscal Quarter Ending: EBITDAR Ratio - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- March 31, 2005 7.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- June 30, 2005 7.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- September 30, 2005 7.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- December 31, 2005 7.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- March 31, 2006 7.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- June 30, 2006 7.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- September 30, 2006 7.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- December 31, 2006 7.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- March 31, 2007 6.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- June 30, 2007 6.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- September 30, 2007 6.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- December 31, 2007 6.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- March 31, 2008 6.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- June 30, 2008 6.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- September 30, 2008 6.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- December 31, 2008 6.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------------------------------------------------- (c) The Parent shall not permit its ratio of Consolidated EBITDAR (calculated for the four fiscal quarters ending on the dates specified below) to Consolidated Fixed Charges for such four fiscal quarters to be less than the applicable ratio specified below: - -------------------------------------- ----------------------------------------- Applicable Consolidated EBITDAR to Consolidated Fixed Charges Ratio Fiscal Quarter Ending: - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- September 30, 2004 1.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- December 31, 2004 1.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- March 31, 2005 1.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- June 30, 2005 1.00:1.00 - -------------------------------------- ----------------------------------------- 75 - -------------------------------------- ----------------------------------------- September 30, 2005 1.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- December 31, 2005 1.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- March 31, 2006 1.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- June 30, 2006 1.00:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- September 30, 2006 1.15:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- December 31, 2006 1.15:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- March 31, 2007 1.15:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- June 30, 2007 1.15:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- September 30, 2007 1.15:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- December 31, 2007 1.15:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- March 31, 2008 1.25:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- June 30, 2008 1.25:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- September 30, 2008 1.25:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------- ----------------------------------------- December 31, 2008 1.25:1.00 - -------------------------------------- ----------------------------------------- - -------------------------------------------------------------------------------- Section 6.5. Restriction on Acquisitions; New Subsidiaries. (a) Neither Obligor shall, nor shall permit any of its Subsidiaries to, liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution) or acquire by purchase or otherwise, including in a transaction structured as a merger, all or any portion of the business, property or assets (excluding therefrom purchases and acquisitions in the ordinary course of business by the Parent, the Borrower and their Subsidiaries of property from any Person not constituting all or substantially all of the property of such Person), or Capital Stock or other evidence of beneficial ownership of, any Person or any division or line of business of any Person, except that: (i) (A) any Wholly-Owned Subsidiary of the Borrower may be merged with or into the Borrower or any Wholly-Owned Subsidiary of the Borrower or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to the Borrower or any Wholly-Owned Subsidiary of the Borrower, and (B) any Subsidiary of the Parent (other than the Borrower and any of its Subsidiaries) may be merged with or into the Parent or any Wholly-Owned Subsidiary of the Parent or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to the Parent or any such Wholly-Owned Subsidiary of the Parent (or, with respect to clauses (A) and (B), in the case of any Non-Guarantor Subsidiary, to the Parent or any Subsidiary of the Parent that is a Restricted Subsidiary as of the date hereof); and 76 (ii) the Obligors may make (A) Investments permitted under Section 6.2 above at any time, and (B) after the date on which the outstanding principal amount of the Loan is equal to or less than $100,000,000, acquisitions of Capital Stock, the assets and/or the business of another Person (including any division or line of business of such Person); provided, that, (A) the acquisition primarily involves the acquisition of assets to be used in the business of the Obligors, (B) with respect to such acquisition any newly acquired Subsidiary of the Borrower shall be a Wholly-Owned Subsidiary, and any newly acquired Subsidiary of the Parent shall be, a Wholly-Owned Subsidiary, (C) immediately before and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing, (D) immediately after giving effect to the acquisition, the Borrower shall be in compliance on a Pro Forma Basis with Section 6.4 (in the case of Section 6.4(b), as of the end of the most recently ended fiscal quarter) and such compliance shall be evidenced by an Officer's Certificate from a Responsible Officer demonstrating such compliance, (E) immediately following such acquisition, the Borrower's credit rating is no lower than immediately prior thereto, (F) the aggregate purchase price in connection with all such acquisitions (excluding therefrom any Indebtedness assumed in connection with such acquisitions and any portion of the purchase price thereof paid with the Borrower's Common Stock) does not exceed $20,000,000, and (G) neither Obligor nor any Subsidiary shall assume any Indebtedness that was incurred or issued by any Person to finance such acquisition; and (iii) the Obligors may enter into a consolidation or merger that complies with Section 6.9 hereof. (b) Neither Obligor will change its Fiscal Year if such change will cause an unreasonable delay in the production of the financial statements required by Section 5.1(b)(ii). Section 6.6. Sales and Lease-Backs. The Obligors shall not, and shall not permit any of their Subsidiaries to, directly or indirectly, become or remain liable as lessee or as a guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any property (whether real, personal or mixed), whether now owned or hereafter acquired (other than leases of Aircraft Related Equipment) which (a) the Obligors or any of their Subsidiaries has sold or transferred or is to sell or transfer to any other Person (other than the Obligors or any of their Subsidiaries) or (b) the Obligors or any of their Subsidiaries intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by the Obligors or any of their Subsidiaries to any Person (other than the Obligors or any of their Subsidiaries) in connection with such lease; provided, that the Obligors may consummate the transactions on Schedule 6.6 hereto, but subject to Section 2.6(c) to the extent of all proceeds of a sale as part of a sale-leaseback transaction described on Schedule 6.6 that exceeds the book value (as of the date of such sale) of the assets so sold, and subject to Section 2.6(b), either Obligor and their Subsidiaries may become and remain liable as lessee, guarantor or other surety with respect to any such lease if and to the 77 extent that the annual aggregate rentals under all such leases does not exceed $10,000,000. Section 6.7. Transactions with Affiliates. (a) Neither Obligor nor any of its Subsidiaries shall, directly or indirectly (i) sell, lease, transfer or otherwise dispose of any of its properties or assets, or issue securities to, (ii) purchase any property, assets or securities from, (iii) make any Investment in, or (iv) enter into or suffer to exist any contract or agreement with or for the benefit of, any Affiliate or holder of 5% or more of any class of Capital Stock (and any Affiliate of such holder) of the Borrower (an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under Section 6.7(b) hereof and (y) Affiliate Transactions (including lease transactions) which are on fair and reasonable terms no less favorable to such Obligor or such Subsidiary, as the case may be, than those that might reasonably have been obtainable at such time from an unaffiliated party; provided, that if an Affiliate Transaction or series of Affiliate Transactions involves or has a value in excess of $1,000,000, such Obligor or such Subsidiary, as the case may be, shall not enter into such Affiliate Transaction or series of Affiliate Transactions unless a majority of the disinterested members of the board of directors of the Parent shall reasonably and in good faith determine that such Affiliate Transaction is fair and reasonable to such Obligor or such Subsidiary, as the case may be, or is on terms no less favorable to such Obligor or such Subsidiary, as the case may be, than those that might reasonably have been obtained at such time from an unaffiliated party. (b) The provisions of Section 6.7(a) shall not apply to (i) the agreements listed on Schedule 6.7 as in effect on the Closing Date or any transaction contemplated thereby so long as any such agreement or transaction is not disadvantageous to the Board, the Lenders or (solely in respect of its interest in the transactions contemplated by this Agreement and its Participation) any Participant in any material respect; (ii) any transaction between the Parent and any of its Wholly-Owned Subsidiaries or between such Wholly-Owned Subsidiaries, provided such transactions are not otherwise prohibited by this Agreement; (iii) reasonable and customary fees and compensation paid to, and indemnity provided on behalf of, officers, directors or employees of either Obligor or any of its Subsidiaries, as determined by the board of directors of such Obligor or any of its Subsidiaries or the senior management thereof in good faith; (iv) any Restricted Payments permitted by Section 6.3; (v) any payments or other transactions pursuant to any tax sharing agreement between either Obligor and its Subsidiaries; (vi) transactions contemplated by any Alliance Agreements permitted hereunder; (vii) the Loan Documents and the transactions contemplated thereby; and (viii) repayment of Indebtedness owed by, making of loans or advances by or transfers of property or assets by any Non-Guarantor Subsidiaries, in each case, to the Parent or any Subsidiary of the Parent that is a Restricted Subsidiary as of the date hereof. Section 6.8. Conduct of Business. From and after the date hereof, neither Obligor shall, nor shall permit any of its Subsidiaries to, engage in any business other than (a) the businesses engaged in by the Obligors and their 78 Subsidiaries on the date hereof and related businesses and (b) such other lines of business as may be consented to by the Board and the Requisite Lenders. Section 6.9. Merger or Consolidation. Neither Obligor shall consolidate with or merge with any other Person or convey, lease, sub-lease, otherwise dispose of, or transfer all or substantially all its or their business, properties and assets substantially as an entirety to any Person, unless: (a) (i) in the case of a consolidation or merger involving the Borrower, the Borrower is the surviving entity or if the Borrower is not the surviving entity, such surviving entity or the Person that acquires by conveyance, lease or transfer the properties and assets of the Borrower substantially as an entirety, shall be a corporation organized and existing under the laws of the United States of America or any State or the District of Columbia and can make the representations contained in Section 4.1(b), and shall expressly assume, by an agreement executed and delivered to the Agent, for the benefit of the Lenders, the Participants (as third-party beneficiaries hereof) and the Board, in form satisfactory to the Agent, the Obligations and all of the other obligations of the Borrower hereunder and under the other Loan Documents, or (ii) in the case of a consolidation or merger involving the Parent, the Parent is the surviving entity or if the Parent is not the surviving entity, such surviving entity, or the Person that acquires by conveyance, lease or transfer the properties and assets of the Parent substantially as an entirety, shall be a corporation organized and existing under the laws of the United States of America or any State or the District of Columbia and can make the representations contained in Section 4.1(b) and shall expressly assume, by an agreement executed and delivered to the Agent and Board, in form satisfactory to the Agent and the Board, all of the Parent's obligations hereunder and under the Loan Documents; (b) immediately before and after giving effect to such transaction, no Event of Default or Default shall have occurred and be continuing and immediately after giving effect to such transaction the Obligors shall be in Pro Forma compliance with Section 6.4 (in the case of Section 6.4(b), as of the end of the most recently ended fiscal quarter); (c) immediately following such acquisition, the Borrower's credit rating is no lower than immediately prior thereto; (d) neither Obligor nor any of its Subsidiaries shall assume any Indebtedness that was incurred or issued by any Person to finance such transaction; (e) the Borrower has delivered to the Agent and the Board an Officer's Certificate from a Responsible Officer and an opinion of counsel from counsel satisfactory to the Agent, in form and substance satisfactory to the Agent and the Board, stating that such transaction and such agreement comply with this Section and that all conditions precedent herein provided for relating to such transaction have been complied with and addressing such other matters as may be reasonably requested by the Board and the Agent; provided, however, that notwithstanding the foregoing provisions of this Section 6.9, prior to the date on which the outstanding principal amount of the Loan is equal to or less than $75,000,000, neither Obligor shall consolidate with or merge with any other Person or convey, lease or transfer its properties and assets substantially as an entirety to any Person. Section 6.10. Limitation on Asset Sales. Neither Obligor will, and the Obligors shall cause their Subsidiaries not to, directly or indirectly, consummate any Asset Sale unless (a) the consideration received in respect of such Asset Sale is at least equal to the Fair Market Value of the assets subject to such Asset Sale, (b) at least 85% of the value of the consideration therefrom 79 received by such Obligor or Subsidiary is in the form of a combination of the following: (i) cash or Cash Equivalents, (ii) Aircraft Related Equipment or other assets to be owned by and used in the business of an Obligor or (iii) the assumption by the Person acquiring the assets in such Asset Sale of Indebtedness or Trade Payables of such Obligor or such Subsidiary with the effect that the Obligors and their Subsidiaries will no longer have any obligation with respect to such Indebtedness or Trade Payables, (c) immediately before and after giving effect to such Asset Sale, no Default or Event of Default shall have occurred and be continuing, and (d) immediately after giving effect to such Asset Sale and the application of the proceeds thereof, there shall not exist any Value Differential; provided, however, that this Section 6.10 shall not apply to (x) any transfer of property of a Non-Guarantor Subsidiary to the Parent or any Subsidiary of the Parent that is a Restricted Subsidiary as of the date hereof or, (y) Asset Sales to the BATA Joint Venture pursuant to the terms thereof as such terms exist on the Closing Date. Section 6.11. Limitations with Respect to Subsidiaries. (a) Each Subsidiary of each Obligor shall at all times be a Wholly-Owned Subsidiary of such Obligor and there shall not exist any restrictions on the right of either Obligor to vote any Capital Stock of its Subsidiaries. (b) Neither Obligor may create or acquire new Subsidiaries, except Wholly-Owned Subsidiaries, and if (i) in the case of the Parent, the total assets of such Subsidiaries in the aggregate (other than single purpose Subsidiaries created solely for the purpose of financing aircraft for use by the Borrower) do not at any time exceed five percent (5%) of the consolidated total assets of the Parent, in each case determined in accordance with GAAP and (ii) the Obligors comply with the provisions of Section 5.15 hereof, but the Obligors may make Investments permitted under Section 6.2. (c) From and after the date hereof, Washington Assurance Limited shall not engage in any business other than the business it is engaged in on the date hereof. Section 6.12. Partnerships and Joint Ventures; Speculative Transactions. Neither of the Obligors, nor any Subsidiary thereof, shall become a general partner in any general or limited partnership or joint venture engaged or involved in, nor shall either of the Obligors nor any Subsidiary thereof engage in any transaction involving, commodity options or future contracts or any similar speculative transactions; provided, however, that entry into those transactions designed to hedge against fluctuations in fuel costs incurred in the ordinary course of business, consistent with past business practice and industry standards, and not entered into for speculative purposes shall not be prohibited by this Section 6.12. Section 6.13. Limitations on Amendments. (a) Neither Obligor, nor any of its Subsidiaries, shall amend, waive or modify, nor shall it consent to or request any amendment, waiver or 80 modification, of any of the material terms, conditions, representations and covenants contained in any Indebtedness for borrowed money that (i) shortens the final maturity date of such Indebtedness (without giving effect to any amendment, waiver or modification, the "Initial Indebtedness", and after giving effect to any such amendment, waiver or modification, the "Amended Indebtedness"), (ii) requires the acceleration of the final scheduled maturity date and/or any principal payments, including but not limited to scheduled payments and mandatory prepayments, and/or increases the principal amount payable on any date (including, without limitation, pursuant to mandatory prepayments) prior to the dates of analogous payments of such Initial Indebtedness, or (iii) provides for an interest rate applicable to such Amended Indebtedness, plus the interest rate equivalent of all remaining fees and costs associated with closing and servicing such Amended Indebtedness higher than the average remaining interest rate applicable to such Initial Indebtedness plus the interest rate equivalent of the average remaining fees and costs associated with servicing such Initial Indebtedness. (b) Neither Obligor shall, nor shall it permit any of its Subsidiaries to, agree to any amendment, waiver or modification of the Concessions if such amendment, waiver or modification would result in a material reduction in the aggregate value that the Obligors realize or are scheduled to realize from all of the Concessions during the period that is the shorter of the term of the Loan and the term of the Concession that is proposed to be amended, waived or modified. Section 6.14. Going Private Transactions. Neither Obligor, nor any of their Subsidiaries, shall redeem, purchase or otherwise acquire any Capital Stock of the Parent, or otherwise engage or participate in any "Rule 13e-3 transaction" (as defined in Rule 13e-3 under the Exchange Act) or similar transaction, or agree to engage in or commence any such transaction; provided, that this Section 6.14 shall not apply to any involuntary delisting of the Common Stock of the Parent from NASDAQ or any other national securities exchange (as defined in the Securities Exchange Act of 1934, as amended), other than any such delisting that occurs in connection with a transaction otherwise prohibited by this Section 6.14. Section 6.15. No Further Negative Pledges. Except with respect to (a) specific property encumbered to secure payment of particular Indebtedness (or to be sold pursuant to an executed agreement with respect to a permitted asset sale), and (b) restrictions by reason of customary provisions restricting assignments, subletting or other transfers contained in leases, licenses and similar agreements entered into in the ordinary course of business (provided that such restrictions are limited to the property or assets secured by such Liens or the property or assets subject to such leases, licenses or similar agreements, as the case may be), after the date hereof neither Obligor nor any of its Subsidiaries shall enter into any agreement prohibiting the creation or assumption of any Lien upon any of their properties or assets, whether now owned or hereafter acquired. 81 Section 6.16. Incentive Equity Plan and Other Incentive Compensation. (a) Any employee stock options granted under any incentive stock or stock option plan maintained by the Parent or any of its Subsidiaries on or prior to the Closing Date shall not have been, and shall not be, repriced (within the meaning of Item 402(i) of Regulation S-K under the Securities Act of 1933, as amended) from the initial date of the Borrower's Application for so long as any of the Obligations shall remain outstanding. Neither Obligor shall award or pay any compensation to any officer, director or employee who holds options that are subject to the restriction in this Section 6.16 which is intended to off-set the effect of such repricing restriction. (b) Neither of the Obligors or any of their Subsidiaries shall award or pay any equity-based compensation, including any restrictive stock, stock options or phantom stock, to or for the benefit of J. George Mikelsons. Article VII Events of Default Section 7.1. Events of Default. Each of the following events shall be an Event of Default (whatever the reason for such Event of Default and whether such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administration or governmental body): (a) (i) Failure by the Borrower to pay any installment of principal of the Loan when due, whether at stated maturity, by acceleration, by mandatory prepayment or otherwise; or (ii) failure by the Borrower to pay any interest on the Loan or any fee or any other amount due under this Agreement or any other Loan Document within five Business Days after the date due; or (b) Either Obligor or any of its Subsidiaries (i) fails to make (whether as primary obligor or as guarantor or other surety) any payment in respect of rent, or principal, interest or premium, if any, with respect to any Indebtedness (other than Indebtedness referred to in Section 7.1(a)) and the aggregate amount of all Indebtedness as to which such a payment default relates is equal to or exceeds $5,000,000 or otherwise defaults in the performance of any one or more obligations relating to any Indebtedness in an aggregate amount of $5,000,000 or more beyond any applicable grace periods if the effect of such default is to accelerate such Indebtedness or permit the holders thereof to accelerate such Indebtedness (it being acknowledged that the aggregate amount of Indebtedness with respect to any Capital Lease shall be determined as set forth in the definition thereof in Section 1.1); (ii) fails to make any payment under any one or more Operating Leases with respect to aircraft, aircraft engines or aircraft-related spare parts, beyond any period of grace provided with respect thereto and the aggregate defaulted payments under all Operating Leases relating to aircraft, aircraft engines and aircraft spare parts as to which such a payment default shall occur and be continuing is equal to or exceeds $500,000; (iii) defaults with respect to any lease or license obligation that would materially and adversely affect, or preclude, continued operations by the Borrower at Chicago-Midway Airport, New York-LaGuardia Airport, Los Angeles 82 International Airport or Indianapolis International Airport (and is not capable of being cured within 30 days in a manner which would permit continuous operations in a manner substantially as if such defaults had not occurred); or (iv) defaults in payment obligations that exceed $5,000,000 in the aggregate in respect of any lease obligations (other than those obligations included in clauses (i), (ii) and (iii) above) beyond any grace period provided with respect thereto; or (c) Failure of either Obligor to perform or comply in any material respect with any term or condition contained in Section 2.4(f), 5.2, 5.10 or 6.14 of this Agreement; or (d) Any representation, warranty, certification or other statement made by either Obligor in any Loan Document or in any statement or certificate at any time given by either Obligor in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect on the date as of which made; or (e) Any default in the performance of or compliance with any term contained in this Agreement or any of the other Loan Documents (other than any such term referred to in any other subsection of this Section 7.1), including, without limitation, any failure by any Subsidiary of either Obligor to comply with any of such terms as if it were a party hereto and such default shall not have been remedied or waived (i) within 30 days after the earlier of (A) a Responsible Officer of the Borrower becoming aware of such default or (B) receipt by the Borrower of notice from the Agent or the Board of such default or (ii) with respect to a default under Section 6.4 by the earlier of (A) an officer of the Borrower becoming aware of the default after the applicable measurement date and (B) the delivery of financial statements pursuant to Section 5.1 for the end of the accounting period as of which or during which such default exists; or (f) (i) A court shall enter a decree or order for relief in respect of either Obligor in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect or any other relief described in clause (ii) below, or other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against either Obligor seeking (A) relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, (B) the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over either Obligor, or over all or a substantial part of its property, or (C) the appointment of an interim receiver, trustee or other custodian of either Obligor for all or a substantial part of its property; and any such event described in this clause (ii) shall continue for 60 days without being dismissed or discharged; or (iii) a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of either Obligor; or 83 (g) (i) (A) Either Obligor shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian of all or a substantial part of its property; or (B) either Obligor shall make a general assignment for the benefit of creditors; or (ii) the board of directors of either Obligor (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to in clause (i) above; or (h) There shall be any period of 60 consecutive days following entry of a final judgment or order that causes the aggregate amount for all final judgments or orders outstanding against the Obligors and their Subsidiaries and not covered by insurance (treating any deductibles, self-insurance or retention as not so covered) to exceed $2,500,000 during which a stay of enforcement of such final judgments or orders, by reason of a pending appeal or otherwise, shall not be in effect; or (i) Any order, judgment or decree shall be entered against either Obligor decreeing the dissolution or split up of such Obligor and such order, judgment or decree shall remain undischarged or unstayed for a period in excess of 30 days; or (j) The Parent Guarantee or any Subsidiary Guarantee shall for any reason cease to be in full force and effect or the Parent or any Subsidiary shall, in writing, repudiate the Parent Guarantee or any Subsidiary Guarantee or deny that its obligations thereunder are valid, binding and enforceable; or (k) The Board Guarantee shall for any reason (other than by reason of Section 2.03, 2.04 or 2.05 of the Board Guarantee) cease to be in full force and effect or the Board shall assert that any of its obligations thereunder are invalid or unenforceable; or (l) The invalidity or failure to obtain and maintain a first priority perfected Lien on Collateral having a value in excess of $300,000, except for such invalidity or failure attributable to (i) the sale or other disposition of the applicable Collateral in a transaction permitted under the Loan Documents or (ii) the Collateral Agent's failure to maintain any possession (through no fault of the Obligors) that may be necessary for perfection and provided that the Borrower is taking all reasonably required action to ensure the perfection of such Collateral in accordance with Section 5.17; or (m) The Security Agreement shall for any reason cease to be in full force and effect or the Borrower shall assert that any of its obligations thereunder are invalid or unenforceable; or (n) Any failure by the Existing Shareholder, the Parent or Borrower to comply with any terms of the Existing Shareholder Undertaking; or 84 (o) (i) The Borrower shall fail to carry and maintain, or cause to be carried and maintained, insurance on and in respect of the Aircraft, Airframes, Engines, Propellers and Spare Engines (as such terms are defined in the Security Agreement) in accordance with the provisions of the Security Agreement or (ii) any of the other insurance coverages required to be maintained by the Obligors and their Subsidiaries pursuant hereto or to the Security Agreement shall lapse, terminate or otherwise cease to be in full force and effect, other than coverage of losses and liabilities that are in the aggregate reasonably expected to be immaterial; or (p) (i)(A) A court shall enter a decree or order for relief in respect of any Subsidiary of the Parent or the Borrower (other than the Borrower) in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or any other similar relief shall be granted under any applicable federal or state law; or (B) an involuntary case shall be commenced against any Subsidiary of the Parent or the Borrower (other than the Borrower) under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over any Subsidiary of the Parent or the Borrower (other than the Borrower), or over all or a substantial part of its property, shall have been entered; or (C) there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of any Subsidiary of the Parent or the Borrower (other than the Borrower) for all or a substantial part of its property; or (D) a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of any Subsidiary of the Parent or the Borrower (other than the Borrower); and (ii) any such event described in clause (i) above which could reasonably be expected to have a Material Adverse Effect and shall continue without being dismissed, bonded or discharged for sixty (60) consecutive days; or (q) (i)(A) Any Subsidiary of the Parent or the Borrower (other than the Borrower) shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian of all or a substantial part of its property, or (B) any Subsidiary of the Parent or the Borrower (other than the Borrower) shall make any assignment for the benefit of creditors, or (C) any Subsidiary of the Parent or the Borrower (other than the Borrower) shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due, and such event described in this clause (i) could reasonably be expected to have a Material Adverse Effect; or (ii) the board of directors of any Subsidiary of the Parent or the Borrower (other than the Borrower) (or any committee thereof) shall adopt any resolution to approve any of the actions referred to in clause (i) above; or (r) Either the Parent or the Borrower shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due. 85 Section 7.2. Remedies. During the continuance of any Event of Default, the Agent shall, solely at the request of the Board or, if the Board Guarantee is no longer in full force and effect, the Requisite Lenders, by notice to the Borrower, declare the Loan, all interest thereon and all other amounts and Obligations payable under this Agreement to be immediately due and payable, whereupon the Loan, all such interest and all such amounts and Obligations shall become and be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that upon the occurrence of the Event of Default specified in Section 7.1(f) or 7.1(g), the Loan, all such interest and all such amounts and Obligations shall automatically become and be immediately due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. For so long as the Board Guarantee shall remain in effect, remedies exercisable by the Agent hereunder or the Collateral Agent under the Security Agreement shall be exercised solely upon instructions received in writing by the Agent or the Collateral Agent, as the case may be, from the Board or, if the Board Guarantee is no longer in effect, the Requisite Lenders. If an Event of Default shall occur and be continuing, the Collateral Agent may upon the instructions of the Board, or if the Board Guarantee is no longer in effect, the Requisite Lenders, exercise any or all of the rights and powers and pursue any and all of the remedies available to the Collateral Agent under the Security Agreement and shall have and may upon the written request of the Board or, if the Board Guarantee is no longer in effect, the Requisite Lenders, exercise any and all of the rights and remedies of a secured party under the Uniform Commercial Code of any applicable jurisdiction and under any other applicable law. Article VIII THE LOAN ADMINISTRATOR Section 8.1. Acceptance of Appointment and Services. (a) The Lenders hereby appoint the Loan Administrator to provide the services described in Sections 8.1(b) and (c) below for the benefit of the Lenders and the Board in respect of the Loan and the Loan Documents. The Loan Administrator hereby accepts such appointment and agrees to perform such services in a professional, diligent and 86 workmanlike manner for the benefit of the Lenders and the Board, on and subject to the terms and conditions set forth in this Agreement, but shall have no other obligations to the Lenders, the Board or any other Person except as expressly provided herein. (b) The Loan Administrator hereby agrees to perform at any time and from time to time, at the request of the Board, any Participant or any Lender (other than the Primary Tranche A Lender, which shall not make any requests of the Loan Administrator) (any such person so requesting, a "Requesting Party") all of the following services: (i) monitor and promptly distribute to the Requesting Party any financial information, compliance certificates and other reports or written communications provided by or on behalf of the Borrower, the Parent or the Agent to the Loan Administrator hereunder or under any other Loan Document, and report to the Requesting Party whether such documents on their face comply with the requirements of the Loan Documents; (ii) based on the public reports of the Borrower and the Parent, monitor the performance of the Borrower and of the Parent under this Agreement and the other Loan Documents, as applicable, and promptly report to the Requesting Party any failure by Borrower or the Parent to comply with its respective obligations hereunder and thereunder; (iii) promptly notify the Requesting Party of (A) any downgrade in the senior unsecured credit rating of the Borrower by either S&P, Moody's or Fitch, (B) any receipt by the Loan Administrator of a notice of a Default or Event of Default, or (C) any receipt by the Loan Administrator of notice of any prepayment of the Loan under Section 2.5 or Section 2.6 hereof; (iv) for each fiscal quarter of the Borrower, provide (A) a quarterly financial report, within four weeks of the Borrower's delivery of financial statements for such quarter to the Loan Administrator, analyzing the Borrower's and the Parent's financial statements and operations for such fiscal quarter, including a review of variances from targets identified in the operating plans of the Borrower and the Parent, revenue and expense performance, operating cash flow results, quarterly investment cash flows, net changes in the Borrower's and the Parent's cash position, debt covenant compliance and such other financial matters as shall be reasonably requested in writing by a Requesting Party and (B) an indicative credit rating of the Borrower and the Parent; it being acknowledged and agreed that the Loan Administrator may retain a sub-servicer reasonably acceptable to the Requesting Party to provide these services, in which event, the Loan Administrator shall not be in default of its obligations hereunder (x) if the sub-servicer fails to comply with its obligations to provide the quarterly financial reports or indicative credit rating of the Borrower and the Parent described herein so long as the Loan Administrator had exercised reasonable care and good faith in providing the financial statements to the sub-servicer and attempting to procure the report or indicative credit rating on behalf of the Requesting Party, or (y) if the Loan Administrator is unable, after exercising reasonable care and good faith, to retain a sub-servicer to provide an indicative credit rating of the Borrower and the Parent; (v) review the periodic reports and other reports which the Obligors are obligated to provide to the Loan Administrator, the Lenders or the Board hereunder or under any other Loan Document, and report to the Requesting Party regarding such matters as are specifically identified in writing by such Requesting Party with respect to such reports; (vi) at the written direction of a Requesting Party, give notices or provide instructions on behalf of the Requesting Party to any Person under this Agreement or any of the other Loan Documents in accordance with the terms and conditions hereof and thereof; 87 (vii) at the written request of a Requesting Party and at the expense of the Borrower, report to the Requesting Party on the business and financial substance of any proposed amendment to, or assignment of, this Agreement or any other Loan Document; (viii) at the written request of a Requesting Party and at the expense of the Borrower, visit the Borrower or the Parent, or both, and inspect the financial and accounting records and take extracts therefrom and make relevant inquiries of each such Person so as to respond to specific questions from the Requesting Party regarding such Person's financial condition and ability to perform its respective obligations under the other Loan Documents; (ix) at the direction and expense of the Requesting Party, procure and coordinate the advice of professional advisers necessary for such Requesting Party to perform its obligations and enforce its rights under the Loan Documents; (x) analyze the Appraisal Reports submitted by the Borrower under the Loan Documents and report to the Board regarding the Appraised Value of the collateral reflected in such reports; (xi) promptly notify the Board of any material changes in the value of Collateral of which it becomes aware through the Borrower's or the Parent's public reports or certificates, notices, appraisals or other communications delivered by or on behalf of the Borrower or the Parent hereunder; (xii) based on the public reports of the Borrower and certificates, notices, appraisals or other communications delivered by or on behalf of the Borrower and the Parent hereunder, monitor their compliance with covenants and agreements relating to Collateral including Borrower's obligations to prepay the Loan in the amount of the Value Differential; (xiii) monitor Collateral-related regulatory and UCC filings to ensure that continuation statements, extensions or renewals, as applicable, are timely filed; (xiv) following an Event of Default, at the written request and expense of the Requesting Party, assist and advise such Requesting Party in connection with the liquidation of the Collateral, including selecting specialists to assist in appraisal and liquidation of collateral, recommending liquidation strategies, identifying potential buyers of the assets and analyzing bids; and (xv) subject to subsection (c) below, at the expense of the Requesting Party, take such other actions as may be reasonably requested in writing by the Requesting Party in respect of the Loan and the Loan Documents, such actions to be upon such terms and conditions as shall be mutually agreed to by the Requesting Party and the Loan Administrator. 88 (c) With respect to the Loan Administrator's responsibilities under Section 8.1(b) above, the Loan Administrator shall not be required to take any action which exposes the Loan Administrator to liability or which is contrary to this Agreement, any other Loan Document, the Board Guarantee or applicable law. The execution and delivery of this Agreement by the Loan Administrator shall not give rise to any implied duties or fiduciary obligations of the Loan Administrator to any Requesting Party or any other Person. The Board hereby acknowledges and agrees that the failure of the Loan Administrator to perform any of its obligations hereunder shall not invalidate or otherwise affect the Board Guarantee. (d) Except as permitted in subsection (b)(iv) above, the Loan Administrator shall not be permitted to assign any of its obligations hereunder, enter into sub-servicing agreements or otherwise delegate any of its duties under this Agreement without the prior written consent of the Requisite Lenders and the Board. The Loan Administrator hereby acknowledges and agrees that the fees and expenses payable to any sub-servicer retained by it in accordance with this Agreement shall be paid out of the fees payable by the Borrower to the Loan Administrator under Section 2.8(g). (e) The Loan Administrator may retain legal counsel (including counsel for the Loan Administrator), independent public accountants and other experts or advisers as desirable to provide the services set forth in Section 8.1(b), and shall be reimbursed by the Borrower for the reasonable associated costs and such other reasonable expenses as the Loan Administrator shall incur in providing such services. The Borrower shall be responsible for such costs and expenses with respect to the services set forth in Section 8.1(b)(vii) and (viii) hereof (calculated in the manner set forth in Section 2.8(g)), and a Requesting Party shall be responsible for the costs and expenses with respect to the services set forth in Section 8.1(b)(ix), (xiv) and (xv) if requested by such Requesting Party (calculated in the manner set forth in Section 2.8(g)). (f) In the event that any of the Lenders, the Participants or the Board shall request that the Loan Administrator provide additional services to it under Section 8.1(b)(xiv) and (xv) or which are otherwise outside the scope of the services to be provided by the Loan Administrator hereunder, the Loan Administrator shall, to the extent it agrees to provide such additional services to such party, be entitled to charge such party such additional fees. Unless otherwise agreed to by such Person and the Loan Administrator, the terms and conditions of this Article VIII shall apply to the provision by the Loan Administrator of such additional services to such party. Section 8.2. Loan Administrator's Reliance. (a) The Loan Administrator shall be entitled to rely upon any note, notice, consent, certificate, affidavit, letter, telegram, teletype message, facsimile transmission, statement, order or other document in good faith believed by it to be genuine and correct and to have been signed or sent by the proper person or persons and, in respect of legal matters, upon the opinion of counsel selected by the Loan Administrator. 89 (b) Neither the Loan Administrator nor any of its directors, officers, agents, employees or its sub-servicer shall be liable to any Lender, the Board or any Participant for any action taken or omitted to be taken by it or by such directors, officers, agents or employees under or in connection with this Agreement or any other Loan Document, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Loan Administrator: (i) may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable to any Lender, any Participant or the Board for any action taken or omitted to be taken in good faith by it in accordance with the advice of such experts; (ii) except as provided in Section 8.1(b) above, shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement, the Notes or any other Loan Document on the part of the Parent or the Borrower or to inspect the property (including the books and records) of the Parent, the Borrower or any of their Subsidiaries; (iii) except as otherwise provided in this Article VIII, shall not be responsible to any Lender, any Participant or the Board for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, the Notes or any other Loan Document, or any other instrument or document furnished pursuant thereto; and (iv) shall incur no liability under or in respect to this Agreement, the Notes or any other Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, facsimile transmission, cable or telex) in good faith believed by it to be genuine and signed or sent by the proper party or parties. (c) IN NO EVENT SHALL THE LOAN ADMINISTRATOR, ITS EMPLOYEES, OFFICERS, DIRECTORS, AGENTS OR ITS SUB-SERVICER BE LIABLE FOR CONSEQUENTIAL, SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE OR EXEMPLARY DAMAGES, COSTS, EXPENSES, OR LOSSES (INCLUDING, WITHOUT LIMITATION, LOST PROFITS AND OPPORTUNITY COSTS). THE LENDERS, THE PARTICIPANTS AND THE BOARD AGREE THAT THE LOAN ADMINISTRATOR, ITS EMPLOYEES, OFFICERS, DIRECTORS, AGENTS AND ITS SUB-SERVICER SHALL NOT BE LIABLE TO THE LENDERS, THE PARTICIPANTS AND THE BOARD FOR ANY ACTIONS, DAMAGES, CLAIMS, LIABILITIES, COSTS, EXPENSES OR LOSSES IN ANY WAY ARISING OUT OF OR RELATING TO THE PERFORMANCE OR NONPERFORMANCE OF SERVICES HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT FOR AN AGGREGATE AMOUNT IN EXCESS OF THE FEES PAID BY THE LENDERS, THE PARTICIPANTS AND THE BOARD TO THE LOAN ADMINISTRATOR IN PERFORMING THE SERVICES DESCRIBED HEREIN. NO TERMS OF THIS AGREEMENT, OR ANY OTHER LOAN DOCUMENT SHALL BENEFIT OR CREATE ANY RIGHT OR CAUSE OF ACTION IN OR ON BEHALF OF ANY PERSON OR ENTITY OTHER THAN THE LENDERS, THE PARTICIPANTS AND THE BOARD. THE PROVISIONS OF THIS SUBSECTION SHALL APPLY REGARDLESS OF THE FORM OF ACTION, DAMAGE, CLAIM, LIABILITY, COST, EXPENSE, OR LOSS, WHETHER IN CONTRACT, STATUTE, TORT (INCLUDING, WITHOUT LIMITATION, NEGLIGENCE), OR OTHERWISE. 90 Section 8.3. Indemnification. The Borrower, the Parent and each Requesting Party (other than the Board) agrees to indemnify the Loan Administrator and its directors, officers, employees, advisors, sub-servicer and representatives from and against any and all costs, losses, liabilities, claims, damages or expenses (excluding Taxes) which may be incurred by or asserted or awarded against the Loan Administrator in any way relating to or arising out of the services provided by the Loan Administrator on behalf of and at the request of such Requesting Party in connection with this Agreement or any action taken or omitted by the Loan Administrator under this Agreement or any other Loan Document or both on behalf of and at the request of such Requesting Party; provided, that none of the Borrower, the Parent, any Requesting Party or the Govco Administrative Agent shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Loan Administrator's gross negligence or willful misconduct. Without limitation of the foregoing, and to the extent that the Loan Administrator is not reimbursed therefor by the Borrower under any Loan Document, any Requesting Party requesting the Loan Administrator to take any action hereunder on its behalf agrees to reimburse the Loan Administrator promptly upon demand (but in all events within 30 days after written request) for any and all fees of the Loan Administrator, reasonable out-of-pocket costs and expenses (including counsel fees) incurred by the Loan Administrator in connection with the performance of the requested services requested by such Requesting Party hereunder and under the Loan Documents. Except as provided in the preceding sentence regarding reimbursement, in no event shall the Board be obligated to indemnify the Loan Administrator or any of its directors, officers, employees, advisors, representatives or any other party under any circumstances. Section 8.4. Successor Loan Administrator. The Loan Administrator may resign at any time by giving 30 days prior written notice thereof to the Agent, the Lenders, the Participants and the Board and may be removed at any time with or without cause by the Requisite Lenders and the Board; provided, however, that the Loan Administrator shall continue to perform all Loan Administrator functions hereunder until a successor Loan Administrator shall have been appointed. Upon any such resignation or removal, the Requisite Lenders shall have the right to appoint a successor Loan Administrator, subject to confirmation by the Board. If no successor Loan Administrator shall have accepted such appointment within 120 days after the retiring Loan Administrator's giving of notice of resignation or the removal of the Loan Administrator, the Loan Administrator may appoint a successor Loan Administrator who shall be willing to accept such appointment. Upon the acceptance of any appointment as Loan Administrator hereunder by a successor Loan Administrator, such successor Loan Administrator shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Loan Administrator, and the retiring or removed Loan Administrator shall be discharged from its duties and obligations as Loan Administrator under this Agreement. After any Loan Administrator's resignation or removal hereunder as Loan Administrator the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Loan Administrator under this Agreement. 91 Section 8.5. Conflict of Interest. (a) The parties hereto acknowledge and agree that (i) in addition to serving as Loan Administrator under this Agreement, the Loan Administrator may at any time and from time to time service, manage or enter into other commercial arrangements with respect to other property, loans and assets of the Agent, any Lender or any participant (each a "Loan Administrator Relationship"); (ii) in the course of conducting such activities or the services to be provided by it hereunder, or both, the Loan Administrator may from time to time have conflicts of interest by virtue of a Loan Administrator Relationship; and (iii) the parties hereto expressly recognize that such conflicts of interest may arise, do hereby waive such conflicts and agree that when such conflicts of interest arise the Loan Administrator shall perform the services to be provided by it hereunder in a professional, diligent and workmanlike fashion. The parties hereto and the Participants further acknowledge and agree that the Loan Administrator, in its capacity as Loan Administrator, is not acting as an Affiliate of any of the parties hereto, and the performance of the Loan Administrator's obligations hereunder shall not affect any right or remedy which the Agent, any Lender or any participant may have under any Loan Document, any participation or the Board Guarantee. Each Requesting Party expressly acknowledges and agrees that at all times it shall take such action or omit to take such action hereunder based on its own independent analysis of the relevant transaction and attendant facts and circumstances. (b) Notwithstanding any provision herein to the contrary, if in connection with the provision of services, a conflict of interest shall exist that, in the good faith opinion of the Loan Administrator, requires an arm's-length negotiation between the Loan Administrator, on the one hand, and any Person with a Loan Administrator Relationship, on the other hand, and the Loan Administrator believes it would not be appropriate for the Loan Administrator to act on behalf of the Requesting Party in connection with such matter, then the Loan Administrator shall withdraw from acting as Loan Administrator in connection with the matter giving rise to such conflict of interest by giving written notice to the Requesting Party not more than ten (10) Business Days after it has made such determination. In such event, the Requesting Party shall be entitled to appoint an independent representative to act on its behalf and at its expense for purposes of the matter giving rise to such conflict of interest, and the Loan Administrator shall have no responsibility or liability to the Requesting Party with respect to such matter. During the period of such independent representative's appointment, the Loan Administrator shall continue to perform its ordinary functions as Loan Administrator to the extent that the performance of the Loan Administrator does not, in the reasonable opinion of the Requesting Party, directly or indirectly affect the matter giving rise to the conflict of interest. Section 8.6. Representations, Warranties and Covenants of the Loan Administrator. The Loan Administrator hereby represents, warrants and covenants with the Lenders and the Board as follows: (a) it is duly incorporated and validly existing under the laws of its jurisdiction of incorporation; 92 (b) it has the corporate power and authority to execute, deliver and perform its obligations under this Agreement, and this Agreement has been duly authorized by it by all necessary corporate action; (c) no authorization, consent or approval of any Governmental Authority, regulatory body or other Person is required for the due authorization, execution, delivery or performance by it of this Agreement; (d) this Agreement has been duly executed and delivered by it and constitutes a legal and binding obligation of it, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereinafter in effect, relating to the enforcement of creditors' rights in general and except as such enforceability may be limited by general principles of equity (whether considered in a proceeding at law or in equity); (e) the execution, delivery and performance by it of this Agreement does not violate any provision of any existing law or regulation or any material agreement to which it is subject or to which it is a party or result in the creation of any Lien; (f) it has all corporate power and governmental licenses, authorizations, and consents and approvals required to carry on its business as now conducted, except where the failure to have such licenses, authorizations, and consents and approvals would not have a material adverse effect on its ability to perform its duties under this Agreement; and (g) it will maintain and implement administrative and operating procedures, and keep and maintain all documents, books, computer records and other information reasonably necessary or advisable for the performance of the services to be provided by it hereunder. Article IX THE FACILITY AGENTS Section 9.1. Authorization and Action. Each Lender and the Board (and, with respect to clause (ii) only, each Participant) hereby appoints and authorizes (i) the Agent to take such action as administrative agent on its behalf and to exercise such powers under this Agreement, the Notes and the other Loan Documents as are delegated by such Lender and the Board to it as Agent by the terms hereof and thereof and (ii) the Collateral Agent to take such action as collateral agent on its behalf and to exercise such powers under the Security Agreement as are delegated by such Lender, such Participant and the Board to it as Collateral Agent by the terms hereof and thereof, together, in each case, with such powers as are reasonably incidental thereto (the Agent and the Collateral Agent are referred to in this Article IX individually as a "Facility Agent" and collectively, as the "Facility Agents"), and each Facility Agent 93 hereby accepts such authorization and appointment. As to any matters not expressly provided for by this Agreement, the Notes, the Security Agreement or any other Loan Document or provided for with specific reference to this Section 9.1 (including, without limitation, enforcement or collection of the Notes), neither Facility Agent shall be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from action) upon the instructions of the Board or, if the Board Guarantee is no longer in full force and effect, the Requisite Lenders and such instructions shall be binding upon all Lenders; provided, however, that neither Facility Agent shall be required to take any action which exposes such Facility Agent to liability or which is contrary to this Agreement, the Board Guarantee, the Security Documents, any Participation Agreement, any Note or applicable law. As to any provision of this Agreement, the Security Agreement or any other Loan Document under which action may be taken or approval given by the Requisite Lenders or the Board or both, as the case may be, the action taken or approval given by the Requisite Lenders or the Board or both, as the case may be, shall be binding upon all Lenders and Participants to the same extent and with the same effect as if each Lender and each Participant had joined therein. Each Facility Agent shall be entitled to rely upon any note, notice, consent, certificate, affidavit, letter, telegram, teletype message, facsimile transmission, statement, order, other document or other instrument or writing believed by it to be genuine and correct and to have been signed or sent by the proper person or persons and, in respect of legal matters, upon the opinion of counsel selected by such Facility Agent. The Agent may deem and treat the payee of each Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Agent. Any request, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of a Note shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note. Subject to the proviso contained in Section 9.7(b), neither Facility Agent shall be required to expend or risk any of its own funds or otherwise incur any financial or other liability in the performance of any of its duties hereunder. Upon any delivery of any instructions to the Collateral Agent by the Requisite Lenders pursuant to this Agreement, the Agent shall certify to the Collateral Agent that the Lenders delivering such instructions constitute the Requisite Lenders under this Agreement. Section 9.2. Facility Agents' Reliance, Etc. Neither Facility Agent nor any of its directors, officers, agents or employees shall be liable to any Lender, any Participant, the Loan Administrator or the Board for any action taken or omitted to be taken by it or by such directors, officers, agents or employees under or in connection with this Agreement, any Note or any other Loan Document, except for its or their own gross negligence or willful misconduct as actually and finally determined by a final, non-appealable judgment of a court of competent jurisdiction and only to the extent of direct (as opposed to special, indirect, consequential or punitive) damages. Without limitation of the generality of the foregoing, each Facility Agent: (a) may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable to any Lender, any Participant, the Loan Administrator or the Board for any action taken or omitted to be taken in good faith by it in 94 accordance with the advice of such experts; (b) makes no warranty or representation to any Lender, any Participant, the Loan Administrator or, except as expressly provided in the Board Guarantee, the Board and shall not be responsible to any Lender, any Participant, the Loan Administrator or, except as expressly provided in the Board Guarantee, the Board for any statements, warranties or representations (whether oral or written) made in or in connection with this Agreement, any Note or any other Loan Document; (c) shall not have any duty, and shall incur no liability for its failure, to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement, any Note or any other Loan Document on the part of the Parent or the Borrower or to inspect the property (including the books and records) of the Parent, the Borrower or any of their respective Subsidiaries; (d) shall not be responsible to any Lender, any Participant, the Loan Administrator or the Board for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any Note or any other Loan Document, or any other instrument or document furnished pursuant thereto; (e) shall incur no liability under or in respect to this Agreement, any Note or any other Loan Document by acting upon any note, notice, consent, certificate, affidavit, letter, telegram, teletype message, facsimile transmission, statement, order or other instrument or writing (which may be by telegram, facsimile transmission, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties; and (f) may deem and treat each Lender which makes a loan hereunder as the holder of the indebtedness resulting therefrom for all purposes hereof until the Agent receives and accepts an Assignment and Acceptance Agreement entered into by such Lender, as assignor, and an eligible assignee as provided in Section 10.2 hereof. Section 9.3. Facility Agents and Affiliates. If and so long as either Facility Agent shall remain a Lender, such Facility Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not a Facility Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include such Facility Agent in its individual capacity. Unrelated to its role as a Facility Agent as set forth herein, each Facility Agent and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, the Parent, any of their respective Subsidiaries and any Person who may do business with or own securities of the Borrower, all as if it were not a Facility Agent hereunder and without any duty to account therefor to the Lenders. Section 9.4. Representations of the Lenders and of the Board. Each Lender, each Participant, the Loan Administrator and the Board has actively engaged in the negotiation of all of the terms of this Agreement. The Board has met with the Borrower and the Parent to discuss the business, affairs, financial condition and prospects of the Borrower. Neither Facility Agent has any duty or responsibility, either initially or on a continuing basis, to provide any Lender, any Participant, the Loan Administrator or the Board with any credit or other information with respect to the Borrower whether coming into its possession as of the date of this Agreement or at any time thereafter, or to notify any Lender, any Participant, the Loan Administrator or the Board of any Event of Default except as provided in Section 9.5 hereof. This Agreement and all instruments or documents delivered in connection with this Agreement have 95 been reviewed and approved by each Lender, each Participant, the Loan Administrator and the Board and none of the Lenders, the Participants, the Loan Administrator nor the Board have relied on any Facility Agent as to any legal or factual matter in connection therewith or in connection with the transactions contemplated thereunder. Section 9.5. Events of Default; Termination of Board Guarantee. (a) In the event of the occurrence of any Default or Event of Default, any Lender, any Participant or the Board knowing of such event may (but shall have no duty to), or the Borrower pursuant to Section 5.1(b)(v) hereof shall, give the Agent written notice specifying such Event of Default or other event and expressly stating that such notice is a "notice of default". The Agent shall not be deemed to have knowledge of such events unless the Agent has received such notice, or unless the Event of Default consists of a failure of payment of principal or interest on the Notes. In the event that the Agent receives such a notice of the occurrence of an Event of Default, the Agent shall give written notice thereof to the Collateral Agent, the Lenders, the Participants, the Loan Administrator and the Board. Each Facility Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed in writing by the Board or, if the Board Guarantee is no longer in full force and effect, the Requisite Lenders, subject to the provisions of Section 9.6; provided, however, that, unless and until such Facility Agent shall have received such directions, such Facility Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default as it shall deem advisable and in the best interest of the Lenders and of the Board and shall incur no liability for acting or refraining to act in such manner except for such Facility Agent's gross negligence or willful misconduct as actually and finally determined by a court of competent jurisdiction and only to the extent of direct (as opposed to special, indirect, consequential or punitive) damages. (b) In the event the Agent shall receive any notice from the Board to the effect that (i) the Board has the right to terminate the Board Guarantee under Section 2.05 thereof, (ii) any portion of the Board Guarantee has terminated under Section 2.04 thereof or otherwise, or (iii) the Board Guarantee shall for any reason have ceased to be in full force and effect or the Board shall have asserted that any of its obligations thereunder is invalid or unenforceable, the Agent shall promptly give written notice thereof to the Collateral Agent and the Lenders. The Agent shall not be deemed to have knowledge of any such event unless the Agent has received such notice (except if any such event results from the failure of the Agent to perform any of its obligations under the Board Guarantee). Section 9.6. Facility Agents' Right to Indemnity. Except for action expressly required of a Facility Agent hereunder without instructions from any Person, each Facility Agent shall be fully justified in failing or refusing to take any action hereunder on behalf of any Lender or the Board unless it shall first be indemnified to its satisfaction by such Person (or any affiliate thereof) or the Board, as the case may be, against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 96 Section 9.7. Indemnification of Facility Agents. (a) The Lenders (other than the Primary Tranche A Lender) and the Participants hereby agree to indemnify each Facility Agent and all affiliates, directors, officers, employees, advisors and representatives thereof (to the extent not reimbursed by the Borrower), ratably in accordance with the Obligations owed thereto as most recently in effect prior to the date indemnification is sought, from and against any and all costs, losses, liabilities, claims, damages or expenses which may be incurred by or asserted or awarded against such Facility Agent in any way relating to or arising out of this Agreement, the Notes or the other Loan Documents or any action taken or omitted by such Facility Agent under this Agreement, the Notes or the other Loan Documents; provided, that the Lenders and the Participants shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from any Facility Agent's gross negligence or willful misconduct as actually and finally determined by a final, non-appealable judgment of a court of competent jurisdiction and only to the extent of direct (as opposed to special, indirect, consequential or punitive) damages. Without limitation of the foregoing, each Lender (other than the Primary Tranche A Lender) and each Participant agrees to reimburse each Facility Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by such Facility Agent in connection with the administration, or enforcement of, or the preservation of any rights under, this Agreement, the Notes or the other Loan Documents, to the extent that such Facility Agent is not reimbursed for such expenses by the Borrower. (b) In addition, in the event that the Board or the Requisite Lenders (as the case may be) instructs the Collateral Agent to take any action under this Agreement or the Security Documents which requires the payment or advancement of funds in connection with the fulfillment of its obligations hereunder or thereunder, the Requisite Lenders or the Board (as the case may be) shall, upon demand, advance to the Collateral Agent the necessary funds to satisfy the Collateral Agent's obligations hereunder and thereunder and the Collateral Agent shall have no obligation, and shall incur no liability for its failure, to execute such instruction(s) prior to the Collateral Agent's receipt of such funds; provided, however, that prior to the occurrence of an Event of Default, the Collateral Agent shall not seek the advancement of funds from the Board or the Requisite Lenders prior to the performance of the requested action if the amount required to perform such action is less than $10,000. Section 9.8. Successor Facility Agents. (a) Each Facility Agent may resign at any time by giving written notice thereof to the Lenders, the Board and the Borrower and may be removed at any time with cause (or, following the Board's honoring of a demand for payment in accordance with the Board Guarantee, without cause) by the Board. Upon any such resignation or removal, the Borrower shall have the right with the prior written consent of the Board and the Requisite Lenders to appoint a successor Facility Agent. If no successor Facility Agent shall have accepted such appointment within 30 days after the retiring Facility Agent's giving of notice of resignation or the Board's removal of such Facility Agent, the Board and the 97 Requisite Lenders shall have the right to appoint a successor Facility Agent who shall be willing to accept such appointment. In any event such successor Facility Agent shall be a commercial bank organized under the laws of the United States of America or of any State thereof and shall have a combined capital and surplus of at least $1,000,000,000. Upon the acceptance of any appointment as a Facility Agent hereunder by a successor Facility Agent, such successor Facility Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Facility Agent, and the retiring or removed Facility Agent shall be discharged from its duties and obligations as agent under this Agreement or as collateral agent under the Security Agreement, as the case may be. After any Facility Agent's resignation or removal hereunder as a Facility Agent the provisions of this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was a Facility Agent under this Agreement or the Security Agreement, as the case may be. (b) Any corporation into which either Facility Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which either Facility Agent shall be a party, or any corporation succeeding to the business of either Facility Agent, provided that such corporation is a commercial bank organized under the laws of the United States of America or any State thereof and has a combined capital and surplus of at least $1,000,000,000, shall be the successor of such Facility Agent hereunder without the execution or filing of any paper with any party hereto or any further act on the part of any of the parties hereto except where an instrument of transfer or assignment is required by law to effect such succession. Section 9.9. Collateral Agent's Further Protections (a) Neither this Agreement nor the Security Agreement shall be deemed to give, either express or implied, any legal or equitable right, remedy, or claim to any other entity or person whatsoever except as provided in Section 9.8 hereof with respect to the resignation of either Facility Agent. (b) If at any time the Collateral Agent is served with any judicial or administrative order, judgment, decree, writ or other form of judicial or administrative process which in any way affects the Collateral (including but not limited to orders of attachment or garnishment or other forms of levies or injunctions or stays relating to the transfer of the Collateral), the Collateral Agent is authorized to comply therewith in any manner the Collateral Agent, acting in a commercially reasonable manner or in accordance with the advice of legal counsel of the Collateral Agent's own choosing deems appropriate; and if the Collateral Agent complies with any such judicial or administrative order, judgment, decree, writ or other form of judicial or administrative process, the Collateral Agent shall not be liable to any of the parties hereto or to any other person or entity even though such order, judgment, decree, writ or process may be subsequently modified or vacated or otherwise determined to have been without legal force or effect. The Collateral Agent shall have no duty to solicit the Collateral. 98 (c) In no event shall the Collateral Agent be liable (i) for acting in accordance with or relying upon any instruction, notice, demand, certificate or document from the Board, the Requisite Lenders or the Borrower, (ii) for the acts or omissions of its nominees, correspondents, designees, agents, subagents or subcustodians, (iii) for the investment or reinvestment of any cash held by it hereunder, in each case in good faith, in accordance with the terms hereof, including without limitation any liability for any delays in the investment or reinvestment of the Collateral, or any loss of interest incident to any such delays and (iv) for any action taken or omitted or any loss or injury resulting from its actions or its performance or lack of performance of its duties hereunder, in each case, in the absence of gross negligence or willful misconduct on its part. (d) The Collateral Agent shall not incur any liability for not performing any act or fulfilling any duty, obligation or responsibility hereunder by reason of any occurrence beyond the control of the Collateral Agent (including but not limited to any act or provision of any present or future law or regulation or governmental authority, any act of God, terrorism or war, or the unavailability of the Federal Reserve Bank wire or facsimile or other wire or communication facility). (e) The Collateral Agent shall not be responsible in any respect for the form, execution, validity, value or genuineness of documents or securities deposited hereunder, or for any description therein, or for the identity, authority or rights of persons executing or delivering or purporting to execute or deliver any such document, security or endorsement. The Collateral Agent shall not be called upon to advise any party as to the wisdom in selling or retaining or taking or refraining from any action with respect to any securities or other property deposited hereunder. (f) In the event of any ambiguity or uncertainty hereunder or in any notice, instruction or other communication received by the Collateral Agent hereunder, the Collateral Agent may, in its sole discretion, refrain from taking any action other than to retain possession of the Collateral, unless the Collateral Agent receives written instructions, signed by the Borrower and the Board (or if the Board Guarantee is no longer in effect, the Requisite Lenders), which eliminates such ambiguity or uncertainty. (g) The Collateral Agent does not have any interest in the Collateral deposited hereunder but is serving as Collateral holder only and having only possession thereof. The Borrower shall pay or reimburse the Collateral Agent upon request for any transfer taxes or other taxes relating to the Collateral incurred in connection with its duties as Collateral Agent hereunder and shall indemnify and hold harmless the Collateral Agent from any amounts that it is obligated to pay in the way of such taxes. Any payments of income from any Collateral account shall be subject to withholding regulations then in force with respect to United States taxes. The Obligors will provide the Collateral Agent with appropriate W-9 forms for tax I.D., number certifications, or W-8 forms for non-resident alien certifications. This paragraph shall survive notwithstanding any termination of this Agreement or the Security Agreement or the resignation or removal of the Collateral Agent. 99 (h) Notwithstanding anything contained herein to the contrary, (i) the Collateral Agent does not assume any responsibility and shall not be deemed to have assumed any responsibility, either express or implied, to monitor the compliance by the Borrower with any statement, representation, covenant, agreement, or undertaking provided for in the Loan Documents, including the Security Documents, or to monitor or verify the accuracy of any statement, representation, covenant, agreement, or undertaking made by the Borrower in any documents, certificates, or instruments delivered by the Borrower pursuant to the terms of this Agreement or any of the Security Documents, (ii) the Collateral Agent shall be authorized to rely upon, and to act or refrain from acting, in accordance with the terms of the Security Documents in reliance upon any certificate or instrument submitted to it and certified by an officer of the Borrower in circumstances in which the delivery or such certificate or instrument is contemplated by the terms of this Agreement or the Security Documents, (iii) the Collateral Agent does not assume any responsibility and shall not be deemed to have assumed any responsibility, either express or implied, to inspect any of the Collateral, to observe any maintenance or repairs in respect thereof, or to pay any expenses incurred in connection with any inspection of the Collateral or observation of the maintenance or repairs and(iv) the Collateral Agent may assume without inquiry, and shall incur no liability with such assumption, that the Borrower has performed and fulfilled its obligations under this Agreement and the Collateral Agent shall not be charged with notice or knowledge of any Default or any Event of Default, unless written notice of any such event is received by the Collateral Agent in accordance with the terms of this Agreement. (i) Notwithstanding anything contained herein or in any of the other Loan Documents to the contrary, the parties hereto acknowledge and agree that (i) any of the acknowledgements, consents, agreements and statements made by the Collateral Agent in respect of the Collateral in the exercise of its duties under the Security Documents are being made as directed agent for, and on behalf and at the request of, the Lenders and the Board and that such acknowledgements, consents, or agreements are being made without independent investigation and without liability as a principal, (ii) the Collateral Agent shall have no obligation, and shall incur no liability for its failure, to monitor or verify the filing of UCC financing statements (or amendments thereto) and the information contained therein and (iii) the provisions of the Loan Documents which empower and/or entitle the Collateral Agent to take action, to refrain from taking action, or to request the taking or refraining from taking action, with respect to the Collateral shall not impose, and shall not be deemed to impose, on the Collateral Agent an obligation to act independently from the instructions of the Lenders and/or the Board or to monitor the contingencies that may give rise to the exercise of such power or entitlement. 100 Article X MISCELLANEOUS Section 10.1. Amendments, Waivers, Etc. (a) No amendment, modification or waiver of any provision of this Agreement or any other Loan Document nor consent to any departure by the Obligors therefrom shall in any event be effective unless the same shall be in writing and, with respect to any such amendment or modification, signed by the Obligors, and with respect to any such amendment, modification, waiver or consent (i) so long as the Board Guarantee is in full force and effect, signed by the Board or (ii) if the Board Guarantee is no longer in effect, signed by the Requisite Lenders, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that (i) no amendment, modification, waiver or consent shall, unless in writing and signed by each Lender, do any of the following: (A) subject the Lenders or the Participants to any additional obligations; (B) change the scheduled final maturity of the Loan, or change the amount or date for payment of any date fixed for the payment or reduction of principal; (C) change the principal amount of the Loan (other than by the payment or prepayment thereof); (D) change the rate of interest on the Loan or any fee, indemnity or other amount payable to such Person; (E) change any date fixed for payment of such interest, indemnity or other amount or fees; (F) release all or any portion of the Collateral with a material Collateral Value (other than upon any sale or other disposition thereof permitted under this Agreement or the Security Agreement); (G) amend the definition of "Requisite Lenders" or this Section 10.1(a); (H) modify the application of payments to the Loan under Section 2.9; and (I) amend or modify any provision of Articles II and IX, Sections 5.1, 5.10, 5.11, 5.12, 5.14, 5.17, 6.14, 10.1, 10.2, 10.3, 10.4, 10.6, 10.7, 10.10, 10.11, 10.12, 10.13, 10.16, 10.18, 10.19 and 10.20 or any of the definitions as relevant thereto; and 101 (ii) no amendment or modification of any provision of Article VII (other than amendments to add Events of Default) shall be effective unless in writing and signed by the Requisite Lenders; and provided, further, that no amendment, modification, waiver or consent shall, unless in writing and signed by the affected Facility Agent in addition to the Persons required above to take such action, affect the rights or duties of either Facility Agent under this Agreement, the other Loan Documents, any Participation Agreement or the Board Guarantee. (b) The Agent may, but shall have no obligation to, with the written concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of that Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on the Obligors in any case shall entitle the Obligors to any other or further notice or demand in similar or other circumstances. (c) Notwithstanding anything herein to the contrary, in the event that the Obligors shall have requested each of the Lenders, in writing, to agree to an amendment, modification, waiver or consent with respect to any particular provision or provisions hereof, and any such Lender shall have failed to state, in writing, that it either agrees or disagrees (in full or in part) with such request (in the case of its statement of agreement, subject to satisfactory documentation and such other conditions it may specify) within 30 days of such request, then such Lender hereby irrevocably authorizes the Agent to agree or disagree, in full or in part, and in the Agent's sole discretion, to such requests on behalf of such Lender as such Lender's attorney-in-fact and to execute and deliver any writing approved by the Agent which evidences such agreement as such Lender's duly authorized agent for such purposes. (d) In connection with any proposed amendment, modification, waiver or termination (a "Proposed Change") requiring the consent of all affected Lenders, if the consent of the Requisite Lenders is obtained, but the consent of other Lenders whose consent is required is not obtained (any such Lender whose consent is not obtained as described in this Section 10.1 being referred to as a "Non-Consenting Lender"), then, so long as the Lender that is acting as the Agent is not a Non-Consenting Lender, at the Borrower's request, the Agent or an Eligible Lender that is acceptable to the Agent and the Board shall have the right with the Agent's consent and in the Agent's sole discretion (but shall have no obligation) to purchase from such Non-Consenting Lender, and such Non-Consenting Lender agrees that it shall, upon the Agent's request, sell and assign to the Lender that is acting as the Agent or such Eligible Lender, all of the portion of the Loan of such Non-Consenting Lender for an amount equal to the principal balance of such portion of the Loan held by the Non-Consenting Lender and all accrued interest and fees with respect thereto through the date of sale, such purchase and sale to be consummated pursuant to an executed Assignment and Acceptance. 102 Section 10.2. Assignments and Participations. (a) Each Lender may sell, transfer, negotiate or assign either in whole or in part to one or more Eligible Lenders its rights and obligations hereunder and under the Notes and the other Loan Documents without the prior consent of the Obligors but, except as otherwise provided in Section 10.2(d), with the consent, not to be unreasonably withheld, of the Agent, and the prior written approval of the Board (such consent, in the case of an assignment to an Affiliate of any Lender that is an Eligible Lender, not to be unreasonably withheld); provided, that (i) the assigning Lender shall give prompt written notice to the Agent and the Board of the terms of and the parties to any such assignment, (ii) the proposed assignee shall provide to the Agent and the Board all documentation and certificates as required by the Agent and the Board to confirm to the Agent's and the Board's satisfaction that such proposed assignee is an Eligible Lender, and (iii) the Borrower will not be obligated to pay any greater amount under Section 2.10(c) or Section 2.12(a) (in respect of increased costs or Indemnified Taxes imposed pursuant to applicable law in effect on the date of such assignment) to the assignee than the Borrower is then obligated to pay to the assigning Lender under such Sections; provided, however, that the consent of the Board shall not be required for any assignment which occurs after the Board has been reimbursed in full for all payments under the Board Guarantee or the Board Guarantee shall have terminated. Notwithstanding the foregoing the Primary Tranche A Lender may assign its rights and obligations hereunder and under the Tranche A Note to the Alternate Tranche A Lender without the prior consent of any party to this Agreement or any other Loan Document. Without prejudice to any restrictions or limitations in the Participation Agreements or any other Loan Document, each Participant may sell, transfer or assign either in whole or in part to one or more Eligible Participants its rights and obligations hereunder and the other Loan Documents without the prior consent of the Obligors but with the consent, not to be unreasonably withheld, of the Agent, and the prior written approval of the Board (such consent, in the case of an assignment to an Affiliate of any Participant that is an Eligible Participant, not to be unreasonably withheld); provided, that (i) the assigning Participant shall give prompt written notice to the Agent and the Board of the terms of and the parties to any such assignment, (ii) the proposed assignee shall provide to the Agent and the Board all documentation and certificates as required by the Agent and the Board to confirm to the Agent's and the Board's satisfaction that such proposed assignee is an Eligible Participant, and (iii) the Borrower will not be obligated to pay any greater amount under Section 2.10(c) or Section 2.12(a) (in respect of increased costs or Indemnified Taxes imposed pursuant to applicable law in effect on the date of such assignment) to the assignee than the Borrower is then obligated to pay to the assigning Participant under such Sections; provided, however, that the consent of the Board shall not be required for any assignment which occurs after the Board has been reimbursed in full for all payments under the Board Guarantee or the Board Guarantee shall have terminated. (b) The parties to each assignment shall execute and deliver to the Agent, for its acceptance and recording, an Assignment and Acceptance, and the assignee, if a Non-U.S. Person, shall deliver to the Borrower and the Agent on or prior to the date of the assignment, two completed copies of either IRS Form 103 W-8BEN or W-8ECI or other applicable form, certificate or document required to satisfy the requirements of Section 2.12. Upon such execution, delivery and acceptance and the receipt by the Agent of an assignment fee in the amount of $10,000 (except that so long as Citibank, N.A. is the Agent, no fee shall be payable in connection with any assignment to any affiliate of Citibank, N.A.), the Agent shall record such Assignment and Acceptance and from and after the effective date specified in such Assignment and Acceptance (i) the assignee thereunder of all or any portion of the Loan shall become a party hereto and, to the extent that rights and obligations under the Loan Documents have been assigned to such assignee pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender and (ii) the assignor thereunder shall, to the extent that rights and obligations under this Agreement have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except those which survive the payment in full of the Obligations) and be released from its obligations under the Loan Documents, other than those relating to events or circumstances occurring prior to such assignment (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under the Loan Documents, such Lender shall cease to be a party hereto). (c) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee, the Agent shall, if such Assignment and Acceptance has been completed, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, (iii) give prompt notice thereof to the Borrower and (iv) give prompt written notice of the terms of and parties to any such assignment to the Board. (d) In addition to the other assignment rights provided in this Section 10.2, each Lender may assign, without the prior consent of the Obligors, the Agent or the Board, as collateral or otherwise, any of its rights under this Agreement to any Federal Reserve Bank pursuant to Regulation A of the Federal Reserve Board, provided, however, that no such assignment shall release the assigning Lender from any of its obligations hereunder. (e) Each Lender may, without the prior consent of the Obligors or any other Person, sell participations in addition to the Participations, to the extent permitted by the Regulations and except as provided in Section 5.04(b) of the Board Guarantee, in or to all or a portion of its rights and obligations hereunder and under any Note and the other Loan Documents; provided, that (i) neither any Note nor the Board Guarantee is assigned, conveyed, sold or transferred in whole or in part in connection with any participation, (ii) the Board's ability to assert any and all defenses available to it under the Board Guarantee and the law is not adversely affected and (iii) the Borrower will not be obligated to pay any greater amount under Section 2.10(c) or Section 2.12(a) (in respect of increased costs or Indemnified Taxes imposed pursuant to applicable law in effect on the date of such participation) to such participant than the Borrower is then obligated to pay to any selling Lender under such Sections. In the event of the sale of any participation by any Lender, except as otherwise expressly provided herein, (A) such Lender's obligations under the Loan Documents shall remain unchanged, (B) such Lender shall remain solely 104 responsible to the other parties for the performance of such obligations, (C) such Lender shall remain the holder of such Obligations for all purposes of this Agreement, (D) the Agent, the Board and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and (E) each holder of such a participation, if a Non-U.S. Person, shall deliver to the Borrower, the Agent and such Lender, on or prior to the date of the sale of the participation, two completed copies of either IRS Form W-8BEN or W-8ECI or other applicable form, certificate or document required to satisfy the requirements of Section 2.12. Any holder of such a participation will be entitled to the benefits of Sections 2.10(c), 2.10(f), 2.11 and 2.12 to the same extent as if such Person were a Lender (but subject to the restrictions of Section 2.12(i)). (f) Without prejudice to any restrictions or limitations in the Participation Agreements or any other Loan Document, each Participant may, without the prior consent of the Obligors, the Agent or the Board, sell subparticipations in respect of the Participations, to the extent permitted by the Regulations; provided, that (i) neither any Note nor the Board Guarantee is assigned, conveyed, sold or transferred in whole or in part in connection with any subparticipation, (ii) the Board's ability to assert any and all defenses available to it under the Board Guarantee and the law is not adversely affected and (iii) the Borrower will not be obligated to pay any greater amount under Section 2.10(c) or Section 2.12(a) (in respect of increased costs or Indemnified Taxes imposed pursuant to applicable law in effect on the date of such subparticipation) to such subparticipant than the Borrower is then obligated to pay to any selling Participant under such Sections. In the event of the sale of any subparticipation by any Participant, except as otherwise expressly provided herein, (A) such Participant's obligations under the Loan Documents shall remain unchanged, (B) such Participant shall remain solely responsible to the other parties for the performance of such obligations, (C) such Participant shall remain the holder of the applicable Participation for all purposes of this Agreement, (D) the Agent, the Board and the Lenders shall continue to deal solely and directly with such Participant in connection with such Participant's rights and obligations under this Agreement, and (E) each holder of such a subparticipation, if a Non-U.S. Person, shall deliver to the Borrower, the Agent and such Participant, on or prior to the date of the sale of the subparticipation, two completed copies of either IRS Form W-8BEN or W-8ECI or other applicable form, certificate or document required to satisfy the requirements of Section 2.12. Section 10.3. Costs and Expenses. Whether or not the transactions contemplated hereby shall be consummated, the Obligors agree to pay promptly (i) all costs and expenses incurred by the Loan Administrator, the Lenders, each Participant, the Collateral Agent and the Agent in connection with the negotiation, preparation, execution and delivery of the Loan Documents, the Board Guarantee and all documents (including, without limitation, documents required to be delivered after the Closing Date under any provision of the Loan Documents, including, without limitation, under Section 2(b)(ii) of the Participation Agreements) relating thereto (including, without limitation, reasonable legal fees and expenses), (ii) all costs and expenses incurred by the Loan Administrator, the Lenders, the Participants, any other participant, the Collateral Agent and the Agent in connection with any consents, amendments, waivers or other modifications hereto or thereto (including, without limitation, 105 reasonable legal fees and expenses), (iii) all costs and expenses incurred by the Agent in connection with the syndication of the Loan (if any), and (iv) all costs and expenses, including, without limitation, legal fees and expenses incurred by the Agent, the Collateral Agent, the Lenders, the Loan Administrator, each Participant and any other participant in enforcing any Obligations of, or in collecting any payments due from, the Obligors hereunder or under the other Loan Documents (including without limitation the costs and expenses contemplated under Section 4.02 of the Security Agreement) or in connection with the administration, or enforcement of, or the preservation of any rights under any Loan Document. Section 10.4. Indemnities. Whether or not the transactions contemplated hereby shall be consummated, the Obligors agree, jointly and severally, to defend, indemnify, pay and hold harmless the Board, the Agent, the Collateral Agent, the Lenders, the Participants, the Govco Administrative Agent, the Loan Administrator and their respective Affiliates, officers, directors, employees, agents and advisors (collectively called the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation the reasonable fees and disbursements of counsel for such Indemnitees, but excluding Taxes), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including without limitation securities and commercial laws, statutes and rules or regulations), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner arising out of this Agreement, the other Loan Documents or the transactions contemplated hereby or thereby (including, without limitation, the use or intended use of the proceeds of the Loan) or the syndication of the Loan or any statement contained in the Application or otherwise made by or on behalf of either Obligor to the Board or any breach or default by either Obligor of any provision of the Loan Documents (collectively called the "Indemnified Liabilities"); provided, that neither Obligor shall have any obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise (i) from the gross negligence or willful misconduct of that Indemnitee (as actually and finally determined by a final, non-appealable judgment of a court of competent jurisdiction) and only to the extent such Indemnified Liabilities constitute direct (as opposed to special, indirect, consequential or punitive) damages or (ii) constitute ordinary and usual operating or overhead expenses of an Indemnitee (excluding, without limitation, costs and expenses of any outside counsel, consultant or agent). To the extent that the undertaking to defend, indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Obligors shall contribute the maximum portion that they are permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them. No Indemnitee shall have any liability (whether direct or indirect, in contract, tort or otherwise) to either of the Obligors or any of their security holders or creditors for or in connection with the transactions contemplated hereby, except to the extent such liability is determined by a final, non-appealable judgment of a court of competent jurisdiction to have resulted primarily from such Indemnitee's gross negligence or willful misconduct. In no event, however, shall any Indemnitee be liable on any theory of liability for 106 any special, indirect, consequential or punitive damages (including, without limitation, any loss of profits, business or anticipated savings). Section 10.5. Right of Set-off. (a) In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, to the fullest extent permitted by law, each Lender is hereby authorized by the Borrower at any time or from time to time, without notice to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, Indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other Indebtedness at any time held or owing by that Lender to or for the credit or the account of the Borrower against and on account of the obligations and liabilities of the Borrower to that Lender under this Agreement, the Notes, and the other Loan Documents, including, but not limited to, all claims of any nature or description arising out of or connected with this Agreement, the Notes, or any other Loan Document, irrespective of whether or not (i) that Lender shall have made any demand hereunder or (ii) the principal of or the interest on the Loan or any other amounts due hereunder shall have become due and payable pursuant to Section 7.2 and although said obligations and liabilities, or any of them, may be contingent or unmatured. (b) If any fees, expenses or costs incurred by, or any obligations owed to, the Collateral Agent or its counsel hereunder are not promptly paid when due, the Collateral Agent may reimburse itself therefor from any cash held by it and may sell, convey or otherwise dispose of any securities held by it for such purpose. The Collateral Agent may in its sole discretion withhold from any distribution of Collateral an amount of Collateral it believes would, upon sale or liquidation, produce proceeds equal to any unpaid amounts to which the Collateral Agent is entitled to hereunder. Section 10.6. Sharing of Payments, Etc. The Lenders and the Participants (collectively the "Recipients") hereby agree among themselves that if any of them shall, whether by voluntary payment, by realization upon security, through the exercise of any right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any right under the Loan Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, fees and other amounts then due and owing to that Recipient hereunder or under the other Loan Documents (collectively, the "Aggregate Amounts Due" to each Recipient) which is greater than the proportion received by any other Recipient in respect of the Aggregate Amounts Due to such other Recipient, then the Recipient receiving such proportionately greater payment shall (i) notify the Agent and each other Recipient of the receipt of such payment and (ii) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) in the Aggregate Amounts Due to the other Recipients so that all such recoveries of Aggregate Amounts Due shall be shared by all Recipients in proportion to the Aggregate Amounts Due to them; provided, that if all or part of such 107 proportionately greater payment received by such purchasing Recipient is thereafter recovered from such Recipient upon the bankruptcy or reorganization of either Obligor or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such purchasing Recipient ratably to the extent of such recovery, but without interest. The Obligors expressly consent to the foregoing arrangement and agree that any holder of a participation so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by the Obligors to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder. Section 10.7. Notices, Etc. Unless otherwise specifically provided herein, any notice, request or other communication herein required or permitted to be given shall be in writing and may be personally served or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, or upon receipt of telefacsimile, or five (5) Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided, that notices shall not be effective until received. For the purposes hereof, the address of each party hereto and each Participant shall be as set forth under such party's name on Annex A, or (i) as to either of the Obligors and the Agent, such other address as shall be designated by such Person in a written notice delivered to the other parties hereto and (ii) as to each other party hereto, such other address as shall be designated by such party in a written notice delivered to the Agent. A copy of any and all notices, requests, communications, demands, reports, documents or other materials (including, without limitation, any of the materials delivered by the Obligors under Section 5.1(b)) delivered or sent by any party pursuant to the terms of this Agreement or any other Loan Document, shall be given to the Loan Administrator. Section 10.8. No Waiver; Remedies. No failure on the part of the Board, any Lender, the Collateral Agent or the Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 10.9. Independence of Representations, Warranties and Covenants. All representations and warranties made in and covenants under this Agreement shall be given independent effect so that (a) if a particular representation and warranty is unqualified, the fact that another representation and warranty is qualified shall not affect the operation of the former provision; and (b) if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Default if such action is taken or condition exists. Section 10.10. Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by, and construed in accordance with, 108 the law of the State of New York; provided, that in the event the Board becomes a Lender pursuant to the Board Guarantee, the rights and obligations of the Board hereunder shall be governed by, and construed in accordance with, the Federal law of the United States of America, if and to the extent such Federal law is applicable, and otherwise in accordance with the law of the State of New York. Section 10.11. Submission to Jurisdiction; Service of Process. (a) Any legal action or proceeding with respect to this Agreement or any other Loan Document may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, each of the Obligors hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The parties hereto hereby irrevocably waive any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens, which any of them may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. (b) Each of the Obligors hereby irrevocably consents to the service of any and all legal process, summons, notices and documents in any suit, action or proceeding brought in the United States of America arising out of or in connection with this Agreement or any of the other Loan Documents by the mailing (by registered or certified mail, postage prepaid) or delivering of a copy of such process to such Obligor in accordance with the provisions of Section 10.7. Each of the Obligors agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (c) Nothing contained in this Section 10.11 shall affect the right of the Agent or any Lender or other party to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against either Obligor in any other jurisdiction. Section 10.12. Waiver of Jury Trial. Each of the parties hereto irrevocably waives trial by jury in any action or proceeding with respect to this Agreement or any other Loan Document. Section 10.13. Marshaling; Payments Set Aside. Neither the Agent nor any Lender shall be under any obligation to marshal any assets in favor of the Obligors or any other party or against or in payment of any or all of the Obligations. To the extent that either of the Obligors make a payment or payments to the Agent for the account of the Board, the Loan Administrator, any Lender or any Participant (each, a "Payee") or any Payee receives payment from exercise of their rights of setoff, and such payment or payments or the proceeds of such setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party, then (i) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all rights and remedies therefor, shall be revived and continued in full force and effect 109 as if such payment had not been made or such enforcement or setoff had not occurred, and (ii) each Payee shall pay and return such amount to the Agent as the Agent may be required to disgorge or otherwise pay to a trustee, receiver or any other party in respect of the portion of the payment from the Obligors distributed by the Agent to such Payee hereunder. Section 10.14. Section Titles. The Section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. Section 10.15. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are attached to the same document. Delivery of an executed signature page of this Agreement by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. A set of the copies of this Agreement signed by all parties shall be lodged with the Borrower and the Agent. Section 10.16. Third Party Beneficiary. Each Participant shall be an express third party beneficiary of this Agreement to the extent the provisions of this Agreement by their terms confer upon such Participant any right or remedy and shall be entitled to rely on each representation and warranty of the Obligors hereunder and the covenants of the Obligors contained in Articles V and VI hereof as fully and with the same force and effect as if made expressly to such Participant, and the execution and delivery of its Participation Agreement to the Agent and the Tranche B Lender shall constitute such Participant's agreement to the provisions of this Agreement, the Parent Guarantee, the Subsidiary Guarantee and the Security Agreement and to be bound by the terms and conditions hereof and thereof applicable to the Participants (including, without limitation, Article IX and Sections 2.8, 2.9, 10.6, 10.13, 10.18, 10.19 and 10.20 hereof) in asserting any right or remedy hereunder. Section 10.17. Severability. In case any provision in or obligation under this Agreement, any Note or the other Loan Documents shall be invalid, illegal or unenforceable in any jurisdiction the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. Section 10.18. Confidentiality. Each party hereto (other than the Board) and each Participant shall, and shall procure that its respective officers, employees and agents shall, keep confidential and shall not, without the prior written consent of the other parties, disclose to any third party this Agreement, any other Loan Document or any of the information, reports or documents supplied by or on behalf of such other party not otherwise publicly available, except that a party shall be entitled to disclose this Agreement, any other Loan Document, and any such information, reports or documents: 110 (i) in connection with any proceeding arising out of or in connection with this Agreement, any of the other Loan Documents, the Board Guarantee or any Participation Agreement to the extent that such party may reasonably consider necessary to protect its interest; or (ii) to any potential assignee or transferee of any party's rights under this Agreement or any of the Loan Documents or any Participant's rights under its Participation Agreement or any other Person proposing to enter into contractual arrangements with any party in relation to this Agreement, any of the other Loan Documents, the Board Guarantee or any Participation Agreement subject to the relevant party obtaining an undertaking from such potential assignee or transferee or other person in corresponding terms to this Section 10.18; or (iii) pursuant to any applicable laws, ordinances, judgments, decrees, injunctions, writs, rules, regulations, orders, interpretations, licenses, permits and orders of any competent court, arbitrator or governmental agency or authority in any relevant jurisdiction; or (iv) to bank examiners or any other regulatory authority or rating agencies or similar entities, if requested to do so; or (v) to its auditors, legal, tax or to other professional advisers; or (vi) to its Affiliates and their respective directors, officers, employees and agents. The provisions of this Section 10.18 shall survive any termination of this Agreement, any Participation Agreement or any other Loan Document or any assignment, transfer, participation or subparticipation under this Agreement or any Participation Agreement. Section 10.19. No Proceedings. Each of the Obligors, the Board, the Loan Administrator, the Agent, the Collateral Agent, each Participant and each Lender (other than the Primary Tranche A Lender) hereby agrees that it will not institute against, or join any other person in instituting against, the Primary Tranche A Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or any other proceeding under any federal or state bankruptcy or similar law, so long as any commercial paper issued by the Primary Tranche A Lender shall be outstanding or there shall not have elapsed one year plus one day since the last day on which any such commercial paper shall have been outstanding. Section 10.20. Govco Administrative Agent. Each of the Obligors, the Board, the Loan Administrator, the Agent, the Collateral Agent, each Participant and each Lender acknowledges that the Govco Administrative Agent is a party hereto only in its capacity as administrative agent of the Primary Tranche A Lender and the Primary Tranche A Lender's commercial paper holders. The parties hereto agree that none of the provisions hereof shall at any time apply to or restrict 111 the ability of the Govco Administrative Agent to resign its position of Govco Administrative Agent. Section 10.21. Acknowledgement Regarding Federal Authority. (a) Each of the parties hereto and each of the Participants acknowledges and agrees that: (i) the operations and assets of the Obligors and their Subsidiaries (including, without limitation, Aircraft Related Equipment and other assets that constitute Collateral) are subject, directly and indirectly, to the actions, inaction and policies of various Governmental Authorities, including, in particular but without limitation, the United States Department of Transportation (of which the Federal Aviation Administration is a component) and the United States Department of Justice; (ii) Governmental Authorities, in discharging their current and future statutory or regulatory responsibilities, may act, decline to act, or adopt policies resulting in material adverse effects on (A) the business, condition (financial or otherwise), operations, performance, prospects, assets or properties of the Obligors and their Subsidiaries, (B) the ability of the Obligors and their Subsidiaries to perform their payment or other material obligations under the Loan Documents, and (C) the value of the Collateral or the practical ability of the Collateral Agent to realize such value in the event of a Default or an Event of Default; (iii) no Governmental Authority, in discharging its statutory or regulatory responsibilities, has or shall have any obligation whatsoever to either of the Obligors, any of their Subsidiaries, or to any secured party by reason of such Governmental Authority's representation on the Board, the Board's issuance of the Board Guarantee, or the Board's participation as a party to the other Loan Documents, to consider the potential that any of the material adverse effects referred to in clause (ii) above may result from such Governmental Authority's discharge of its statutory or regulatory responsibilities; and (iv) neither the Board, in discharging its rights and responsibilities, or in exercising its discretion, under the Act, the Regulations, the Board Guarantee or the other Loan Documents, nor any of the Board's members, acting in their capacities as such, has or shall have any obligation whatsoever to either of the Obligors, any of their Subsidiaries or to any of the secured parties to take any action in connection with a Governmental Authority's discharge of its statutory or regulatory responsibilities which may have any of the material adverse effects referred to in clause (ii) above, and the Board may not take any action depriving a Governmental Authority of its rights and powers to discharge its statutory and regulatory responsibilities in any manner that may have any of the material adverse effects referred to in clause (ii) above. (b) Without limiting the generality of the foregoing, the parties and the Participants acknowledge and agree that (i) the Department of Transportation, through the Federal Aviation Administration, has broad authority under Title 49 112 of the United States Code to regulate the use of the navigable airspace of the United States so as to ensure its safe and efficient utilization, (ii) the exercise of such authority may substantially impair or eliminate altogether the utility to the Obligors and their Subsidiaries and value to the secured parties of Aircraft Related Equipment pledged as Collateral and other assets of the Obligors and their Subsidiaries such as gates and slots utilized at airports, and (iii) no assurance, express or implied, has been given by any Governmental Authority, including the Board, to the Obligors or to any secured party, nor has either of the Obligors or any secured party relied upon any such assurance, with respect to any future action, inaction or policy of the Federal Aviation Administration or any other Governmental Authority relating to any such Collateral or other assets. (c) Nothing in this Section 10.21 shall be construed to limit or otherwise affect the Board's obligations under the Board Guarantee. Section 10.22. Cumulative Rights and Remedies. The rights and remedies conferred upon the parties hereto shall be cumulative, and the exercise or waiver of any such right or remedy shall not preclude or inhibit the exercise of any additional rights or remedies. The waiver of any right or remedy hereunder shall not preclude the subsequent exercise of such right or remedy. 113 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by respective officers thereunto duly authorized, as of the date first above written. AMERICAN TRANS AIR, INC. By: /s/ Kenneth K. Wolff Name: Kenneth K. Wolff Title: Executive Vice President & CFO ATA HOLDINGS corp. By: /s/ Kenneth K. Wolff Name: Kenneth K. Wolff Title: Executive Vice President & CFO GOVCO INCORPORATED, as Primary Tranche A Lender By: Citicorp North America, Inc., as its attorney-in-fact and administrative agent By: /s/ P.A. Botticelli Name: Patrick Botticelli Title: Managing Director CITIBANK, N.A., as Alternate Tranche A Lender By: /s/ AE Kyong Chung Name: AE Kyong Chung Title: Director CITICORP NORTH AMERICA, INC., as Govco Administrative Agent By: /s/Patrick Botticelli Name: Patrick Botticelli Title: Managing Director CITIBANK, N.A., as Tranche B Lender By: /s/ Gaylord C. Holmes Name: Gaylord C. Holmes Title: Director CITIBANK, N.A., as Collateral Agent By: /s/ Edward Morelli Name: Edward C. Morelli Title: Vice President BEARINGPOINT, INC., as Loan Administrator By: /s/ Timothy F. Kenny Name: Timothy F. Kenny Title: Financial Services Consultant CITIBANK, N.A., as Agent By: /s/ AE Kyong Chung Name: AE Kyong Chung Title: Director AIR TRANSPORTATION STABILIZATION BOARD By: /s/ Daniel G. Montgomery Name: Daniel G. Montgomery Title: Executive Director Exhibit A FORM OF ASSIGNMENT AND ACCEPTANCE Assignment and Acceptance dated as of _________, ____ between ______________ (the "Assignor") and ______________ (the "Assignee"). Reference is made to the Loan Agreement, dated as of November 20, 2002 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement"), among the Borrower, the Parent, Govco Incorporated, as Primary Tranche A Lender, Citibank, N.A., as Alternate Tranche A Lender, Tranche B Lender and as Agent, Citicorp North America, Inc., as Govco Administrative Agent, BearingPoint, Inc., as the Loan Administrator, Citibank, N.A., as the Collateral Agent and Air Transportation Stabilization Board. Capitalized terms used herein and not otherwise defined herein are used herein as defined in the Loan Agreement. The Assignor and the Assignee hereby agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, [all of] [a __% interest in] the Assignor's rights and obligations under the Loan Agreement and the [Tranche A/Tranche B] Note. The principal amount of the portion of [Tranche A/Tranche B] of the Loan and the [Tranche A/Tranche B] Note assigned to the Assignee are set forth in Section 1 of Schedule I [and the principal amount of [Tranche A/Tranche B] of the Loan and the [Tranche A/Tranche B] Note retained by the Assignor after giving effect to such sale and assignment are set forth in Section 2 of Schedule I.]. 2. The Assignor (i) represents and warrants that[, subject to the rights of any participant,] it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Agreement or any other Loan Document or any other instrument or document furnished pursuant thereto or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Agreement or any other Loan Document or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Loan Agreement or any other Loan Document or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Agreement; (ii) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Agreement and the other Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (iii) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Agreement are required to be performed by it as a Lender; (iv) represents and warrants that it is an Eligible Lender; (v) confirms it has received such documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; and (vi) specifies as its Lending Office (and address for notices) the office set forth beneath its name on the signature pages hereof. 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Agent [(with a copy to the Board)]1 for acceptance and recording by the Agent, together with an assignment fee of [...***...]. The effective date of this Assignment and Acceptance shall be __________ [or such later date as of which the Board shall have consented to the sale and assignment of [all of] [a __% interest in] the Assignor's rights and obligations under the Loan Agreement and the Tranche A Note to the Assignee as provided herein and as evidenced by its signed confirmation thereof set forth on the signature pages hereof (the "Effective Date")]2. 5. Upon such acceptance and recording by the Agent, then, as of the Effective Date, (i) the Assignee shall be a party to the Loan Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations under the Loan Agreement of a Lender and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights (except those which survive the payment in full of the Obligations) other than those relating to events or circumstances occurring prior to the Effective Date and be released from its obligations under the Loan Documents. 6. Upon such acceptance and recording by the Agent, from and after the Effective Date, the Agent shall make all payments under the Loan Documents in respect of the interest assigned hereby (i) to or for the account of the Assignee, in the case of amounts accrued with respect to any period on or after the Effective Date, and (ii) to or for the account of the Assignor, in the case of amounts accrued with respect to any period prior to the Effective Date. 7. This Assignment and Acceptance shall be governed by, and be construed in accordance with, the law of the State of New York. 8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed shall be ***Confidential Treatment Requested deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Assignment and Acceptance by telecopier shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. In Witness Whereof, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written. [Assignor] By:___________________________ Name: Title: [Assignee] By:___________________________ Name: Title: Lending Office (and address for notices): [Address] Accepted this day ------------- of , ____ ------------------------ [ ], as Agent By: ____________________ Name: Title: [The Board hereby confirms its consent to this Assignment and Acceptance in accordance with the provisions of Section 10.2 of the Loan Agreement]3 Air Transportation Stabilization Board By: ______________________ Name: Title: Schedule I to Assignment and Acceptance Section 1. Aggregate Outstanding Principal Amount of [Tranche A/Tranche B] of the Loan and of the [Tranche A/Tranche B] Note Assigned to Assignee: $ -------------------- Section 2. Aggregate Outstanding Principal Amount of [Tranche A/Tranche B] of the Loan and of the [Tranche A/Tranche B] Note retained by Assignor: $ -------------------- EXHIBIT B1 FORM OF TRANCHE A NOTE New York, New York $_____________ November [_], 2002 FOR VALUE RECEIVED, the undersigned AMERICAN TRANS AIR, INC., an Indiana corporation (the "Borrower"), hereby promises to pay to CITIBANK, N.A. as Agent, for the account of the Tranche A Lenders, the principal amount set forth above, or, if less, the aggregate unpaid principal amount of Tranche A of the Loan, payable at such times, and in such amounts, as are specified in the Loan Agreement. The Borrower hereby promises to pay interest on the unpaid principal amount of Tranche A of the Loan from the date hereof until such principal amount is paid in full, at the rate or rates, and payable at such times as are specified in the Loan Agreement. This Tranche A Note shall be payable at the principal office of the Agent presently located at 399 Park Avenue in New York City. This Tranche A Note is the "Tranche A Note" referred to in that certain Loan Agreement, dated as of November 20, 2002 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement"), among the Borrower, the Parent, Govco Incorporated, as Primary Tranche A Lender, Citibank, N.A., as Alternate Tranche A Lender, Tranche B Lender and as Agent, Citicorp North America, Inc., as Govco Administrative Agent, BearingPoint, Inc., as the Loan Administrator, Citibank, N.A., as the Collateral Agent and Air Transportation Stabilization Board and entitled to the benefits thereof and of the Security Agreement. Capitalized terms used herein and not defined herein are used herein as defined in the Loan Agreement. Demand, diligence, presentment, protest and notice of non-payment and protest are hereby waived by the Borrower. This Tranche A Note may be prepaid solely as provided in the Loan Agreement and may be accelerated in whole or in part as provided in the Loan Agreement. This Tranche A Note shall be governed by, and construed in accordance with, the law of the State of New York; provided, that in the event the Board becomes a Tranche A Lender pursuant to the Board Guarantee, the rights and obligations of the Board hereunder shall be governed by, and construed in accordance with, the Federal law of the United States of America, if and to the extent such Federal law is applicable, and otherwise in accordance with the law of the State of New York. IN WITNESS WHEREOF, the Borrower has caused this Tranche A Note to be executed and delivered by its duly authorized officer as of the date and at the place set forth above. AMERICAN TRANS AIR, INC. By: ____________________________ Name: Title: THIS TRANCHE B NOTE CONTAINS ORIGINAL ISSUE DISCOUNT AS DEFINED IN SECTION 1273 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. YOU MAY CONTACT THE CHIEF FINANCIAL OFFICER OF ATA HOLDINGS CORP. AT 7337 WEST WASHINGTON STREET, INDIANAPOLIS, INDIANA 46251 IN ORDER TO OBTAIN THE ISSUE PRICE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, THE ISSUE DATE, AND THE YIELD TO MATURITY OF THIS NOTE. EXHIBIT B2 FORM OF TRANCHE B NOTE New York, New York $_______________ November [_], 2002 FOR VALUE RECEIVED, the undersigned AMERICAN TRANS AIR, INC., an Indiana corporation (the "Borrower"), hereby promises to pay to CITIBANK, N.A. as Agent, for the account of the Tranche B Lender, the principal amount set forth above, or, if less, the aggregate unpaid principal amount of Tranche B of the Loan, payable at such times, and in such amounts, as are specified in the Loan Agreement. The Borrower hereby promises to pay interest on the unpaid principal amount of Tranche B of the Loan from the date hereof until such principal amount is paid in full, at the rate or rates, and payable at such times as are specified in the Loan Agreement. This Tranche B Note shall be payable at the principal office of the Agent presently located at 399 Park Avenue in New York City. This Tranche B Note is the "Tranche B Note" referred to in that certain Loan Agreement, dated as of November 20, 2002 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement"), among the Borrower, the Parent, Govco Incorporated, as Primary Tranche A Lender, Citibank, N.A., as Alternate Tranche A Lender, Tranche B Lender and as Agent, Citicorp North America, Inc., as Govco Administrative Agent, BearingPoint, Inc., as the Loan Administrator, Citibank, N.A. as the Collateral Agent and Air Transportation Stabilization Board and entitled to the benefits thereof and of the Security Agreement. Capitalized terms used herein and not defined herein are used herein as defined in the Loan Agreement. Demand, diligence, presentment, protest and notice of non-payment and protest are hereby waived by the Borrower. This Tranche B Note may be prepaid solely as provided in the Loan Agreement and may be accelerated in whole or in part as provided in the Loan Agreement. This Tranche B Note shall be governed by, and construed in accordance with, the law of the State of New York. IN WITNESS WHEREOF, the Borrower has caused this Tranche B Note to be executed and delivered by its duly authorized officer as of the date and at the place set forth above. AMERICAN TRANS AIR, INC. By: ______________________ Name: Title: EXHIBIT C FORM OF NOTICE OF BORROWING Citibank, N.A., as Agent under the Loan Agreement referred to below 399 Park Avenue, New York, New York 10043 November [_], 2002 Re: AMERICAN TRANS AIR, INC. (the "Borrower") Reference is made to the Loan Agreement, dated as of November 20, 2002 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement"), among the Borrower, the Parent, Govco Incorporated, as Primary Tranche A Lender, Citibank, N.A., as Alternate Tranche A Lender, Tranche B Lender and as Agent, Citicorp North America, Inc., as Govco Administrative Agent, BearingPoint, Inc., as the Loan Administrator, Citibank, N.A., as the Collateral Agent and Air Transportation Stabilization Board. Capitalized terms used herein and not otherwise defined herein are used herein as therein defined. The Borrower hereby gives you irrevocable notice, pursuant to Section 2.2 of the Loan Agreement, that the undersigned hereby requests a Borrowing under the Loan Agreement and, in that connection, sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.2 of the Loan Agreement: (i) The date of the Proposed Borrowing is November [__], 2002 (the "Closing Date"). (ii) The aggregate amount of the Proposed Borrowing is $--------. The undersigned hereby certifies that the following statements are true on the date hereof and shall be true on the Closing Date both before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom: (i) the representations, warranties and certifications set forth in Article IV of the Loan Agreement, in the other Loan Documents and the Application and any other document, certificate or written statement delivered in connection therewith are true and correct on and as of the Closing Date before and after giving effect to the Borrowing and to the application of the proceeds therefrom, with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date; and (ii) no Event of Default or event which, with the giving of notice or passage of time or both, would be an Event of Default, has occurred and is continuing on the Closing Date, or would result from the Borrowing after giving effect to the Borrowing and the application of the proceeds therefrom. AMERICAN TRANS AIR, INC. By: _______________________ Name: Title: [Chief Financial Officer/President/ Chief Executive Officer] EXHIBIT D FORM OF BOARD GUARANTEE EXHIBIT E FORM OF PARTICIPATION AGREEMENT EXHIBIT F FORM OF WARRANT AGREEMENT EXHIBIT G FORM OF SECURITY AGREEMENT EXHIBIT H FORM OF COLLATERAL VALUE CERTIFICATE Reference is made to the Loan Agreement dated as of November 20, 2002 among American Trans Air, Inc. (the "Borrower"), ATA Holdings Corp., Govco Incorporated, as Primary Tranche A Lender, Citibank, N.A., as Alternate Tranche A Lender, Tranche B Lender and Agent, Citicorp North America, Inc., as Govco Administrative Agent, BearingPoint, Inc., as Loan Administrator, Citibank, N.A., as the Collateral Agent and the Air Transportation Stabilization Board (as the same may be amended, restated or supplemented or otherwise modified from time to time, the "Loan Agreement"). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Loan Agreement. The undersigned, being the _________________ of Borrower, does hereby certify as of the date hereof, that the Collateral Value is as follows: - ------------------------------------- ----------------------------------- 1. Appraised Collateral [(other than Appraised Value [market value (in Pledged Spare Parts) for the Collateral the case of the Collateral Value ValueCertificate delivered on the Certificate delivered on the Closing Closing Date] Date)] less Ineligible Assets identified on Schedule I hereto (as shown on the Appraisal Report(s) attached hereto): 2. Eligible Accounts Value of Eligible Accounts (computed in accordance with the definition of Eligible Accounts, as further reflected on the attachment hereto) x 85%: 3. Pledged Spare Parts [for the Book Value of Pledged Spare Parts as Collateral Value Certificate delivered of September 30, 2002 [for the on the Closing Date] Collateral Value Certificate delivered on the Closing Date]: Total Collateral Value: In addition, the undersigned hereby certifies as of the date hereof as follows: 1. [None of the Collateral included in the calculation of the Collateral Value is subject to any event of loss, damage or other casualty, and, to the knowledge of the undersigned, no other event has occurred and no other condition exists, that has, or would reasonably be expected to, materially adversely affect the value of such Collateral, in any such case, whether insured or not.] or [The Collateral identified on Schedule I hereto which is included in the calculation of the Collateral Value has suffered an event of loss, damage or other casualty (as described on such Schedule I) such that the value of such Collateral has been materially adversely affected.] or [An event has occurred or condition now exists that could reasonably be expected to materially adversely effect (as described on such Schedule I) the value of the Collateral identified on Schedule I hereto which is included in the calculation of the Collateral Value.] 2. [No Value Differential exists] or [A Value Differential of $_______ exists.]. The undersigned hereby certifies that all statements made in this Collateral Value Certificate are true and correct as of the date hereof. AMERICAN TRANS AIR, INC. By: _____________________ Name: Title: EXHIBIT I FORM OF SUBSIDIARY GUARANTEE EXHIBIT J FORM OF PARENT GUARANTEE EXHIBIT K CERTAIN ECONOMIC TERMS - ---------------------------------------------- --------------------------------- Insured Amount for each The fair market value of aircraft: such aircraft as reflected in the then most recent Appraisal Report delivered pursuant to the Loan Agreement. Obsolete Parts Cap: $550,000 Minimum Liability Insurance Amount: $750,000,000 Loss Payee Amount: $2,500,000 Overdue Rate: Two percent per annum in excess of the Applicable Tranche B Interest Rate as in effect from time to time EX-10 4 atah2002exhibit1012.txt ATA HOLDINGS CORP. - EXHIBIT 10.12 Exhibit 10.12 MORTGAGE AND SECURITY AGREEMENT Dated as of November 20, 2002 made by AMERICAN TRANS AIR, INC. in favor of CITIBANK, N.A., as the Collateral Agent TABLE OF CONTENTS Page RECITALS......................................................................1 GRANTING CLAUSE...............................................................1 HABENDUM CLAUSE...............................................................4 ARTICLE 1 DEFINITIONS........................................................6 Section 1.01 Definitions....................................................6 ARTICLE 2 COVENANTS OF THE COMPANY..........................................14 Section 2.01 Aircraft Registration, Maintenance and Operation; Possession and Permitted Leases; Insignia................................14 (a) (i) Registration and Maintenance.............................14 (ii) Operation of Aircraft and Spare Engines.................15 (iii) Reregistration.........................................16 (b) Possession and Permitted Leases...............................18 (c) Insignia......................................................22 (d) Substitution of Engines/Propellers............................22 (e) Additional Aircraft-related Collateral........................22 Section 2.02 Replacement and Pooling of Parts; Alterations, Modifications and Additions.................................................23 (a) Replacement of Parts..........................................23 (b) Pooling of Parts..............................................23 (c) Alterations, Modifications and Additions......................23 (d) Certain Matters Regarding Passenger Convenience Equipment.....24 Section 2.03 Pledged Spare Parts Use, Possession and Designated Locations..25 Section 2.04 Insurance.....................................................26 (a) Public Liability and Property Damage Insurance................26 (b) Insurance Against Loss or Damage to an Aircraft, a Spare Engine, etc..........................................................27 (c) War-Risk, Hijacking and Related Perils Insurance..............28 (d) Reports, Certificates, etc....................................28 (e) Self-Insurance................................................29 (f) Additional Insurance by the Company...........................29 (g) Indemnification by Government in Lieu of Insurance............29 (h) Terms of Insurance Policies...................................30 (i) Application of Payments During Existence of a Specified Default or an Event of Default........................................31 Section 2.05 Inspection....................................................31 Section 2.06 UCC Collateral................................................31 Section 2.07 Liens.........................................................33 Section 2.08 Performance...................................................33 Section 2.09 Further Assurances............................................33 ARTICLE 3 EVENT OF LOSS.....................................................33 Section 3.01 (a) Event of Loss with Respect to an Aircraft..................33 (b) Event of Loss with Respect to an Engine, a Propeller or Spare Engine................................................36 (c) Event of Loss with Respect to Pledged Spare Parts...........38 (d) Application of Payments from Governmental Authorities for Requisition of Title, etc...................................38 (e) Requisition for Use of an Aircraft by the United States Government or Government of Registry of an Aircraft.........39 (f) Requisition for Use of an Engine, a Propeller or Spare Engine by the United States Government or the Government of Registry of an Aircraft.............................................39 (g) Application of Payments During Existence of Specified Defaults and Events of Default......................................39 (h) Treatment of Insurance Proceeds in Accordance with Loan Agreement..................................................40 ARTICLE 4 REMEDIES..........................................................40 Section 4.01 Remedies Available to Collateral Agent........................40 Section 4.02 Expenses......................................................43 Section 4.03 Waiver of Claims..............................................43 Section 4.04 Discontinuance of Proceedings.................................44 ARTICLE 5 TERMINATION OF SECURITY AGREEMENT.................................44 Section 5.01 Termination of Security Agreement.............................44 ARTICLE 6 MISCELLANEOUS.....................................................45 Section 6.01 Notices.......................................................45 Section 6.02 GOVERNING LAW.................................................45 Section 6.03 Execution in Counterparts.....................................46 Section 6.04 Amendments....................................................46 Section 6.05 Documentation.................................................46 Section 6.06 Cash Collateral...............................................46 EXHIBITS Exhibit A1 Form of Mortgage and Security Agreement Supplement (Aircraft) Exhibit A2 Form of Mortgage and Security Agreement Supplement (Engine/Propeller) Exhibit A3 Form of Mortgage and Security Agreement Supplement (Pledged Spare Parts) Exhibit B Schedule of Aircraft Exhibit C Schedule of Spare Engines Exhibit D Summary Description of Pledged Spare Parts Exhibit E Designated Locations Exhibit F Schedule of Countries Authorized for Domicile of Permitted Lessee Exhibit G Schedule of Countries Authorized for Aircraft Registration MORTGAGE AND SECURITY AGREEMENT This MORTGAGE AND SECURITY AGREEMENT (as amended, modified, restated or otherwise supplemented from time to time in accordance with the terms hereof, this "Security Agreement") dated as of November 20, 2002 is made by AMERICAN TRANS AIR, INC., an Indiana corporation (the "Company") in favor of CITIBANK, N.A., a national banking association organized and existing under the laws of the United States of America, acting solely in its capacity as Collateral Agent for the Board, the Lenders and the Participants (as such terms are defined in the Loan Agreement (as defined below)) and as directed by the Board and the Lenders (the "Collateral Agent"). W I T N E S S E T H: WHEREAS, all capitalized terms used and not otherwise defined herein shall have the respective meanings set forth or referred to in Article 1 hereof; WHEREAS, the Company is an air carrier certificated under Sections 41102 and 44705 of Title 49 of the United States Code and holds air carrier operating certificates; WHEREAS, the Company, ATA Holdings Corp., certain lenders, the Collateral Agent, Citibank, N.A., as Agent, Air Transportation Stabilization Board and certain other institutions are parties to a Loan Agreement dated as of November 20, 2002 (as amended, modified, restated or otherwise supplemented from time to time in accordance with its terms, the "Loan Agreement") providing, subject to the terms and conditions thereof, for a single term loan (the "Loan") to be made by such lenders; WHEREAS, it is a condition precedent to the making of the Loan that the Company shall have executed and delivered to the Collateral Agent this Security Agreement; WHEREAS, the Company wishes to execute this Security Agreement to satisfy the condition described in the preceding paragraph and to grant certain first priority perfected security interests in the Collateral in favor of the Collateral Agent for the ratable benefit and security of the Board, the Lenders and the Participants; and WHEREAS, all things necessary to make this Security Agreement the legal, valid and binding obligation of the Company and the Collateral Agent, for the uses and purposes herein set forth, in accordance with its terms, have been done and performed and have happened; GRANTING CLAUSE NOW, THEREFORE, THIS MORTGAGE AND SECURITY AGREEMENT WITNESSETH, that, to secure the prompt payment of the principal of, interest on, and all other amounts due with respect to, the Loan and to secure the performance and observance by the Obligors under the Loan Agreement of all the agreements, covenants and provisions contained herein, in the Loan Agreement and in the other Loan Documents, and the prompt payment of any and all amounts from time to time owing hereunder, under the Loan Agreement and the other Loan Documents, and for the uses and purposes and subject to the terms and provisions hereof, and in consideration of the premises and of the covenants herein contained, and of other good and valuable consideration the receipt and adequacy whereof are hereby acknowledged, the Company has granted, bargained, sold, assigned, transferred, conveyed, mortgaged, pledged and confirmed, and does hereby grant, bargain, sell, assign, transfer, convey, mortgage, pledge and confirm unto the Collateral Agent, its successors and assigns, for the ratable security and benefit of the Board, the Lenders and the Participants, a first priority security interest in and first priority mortgage Lien on all estate, right, title and interest of the Company in, to and under the following described property, rights, interests and privileges whether now owned or hereafter acquired, and wherever located (which collectively, including all property hereafter specifically subjected to the Lien of the Security Documents by any instrument supplemental hereto, are herein called the "Collateral"): (1) each Aircraft (including, without limitation, each Airframe, each Engine (each such Engine having 750 or more rated take-off horsepower or the equivalent thereof) and each Propeller (each such Propeller capable of absorbing 750 or more related takeoff shaft horse power or the equivalent thereof)) as the same is now and will hereafter be constituted, whether now owned or hereafter acquired, and in the case of such Engines or Propellers, whether or not any such Engine or Propeller shall be installed in or attached to any Airframe or any other airframe and all substitutions or replacements therefor, as provided in this Security Agreement, together with all Parts of whatever nature which are from time to time included in the "Airframe", the "Engines" or the "Propellers", whether now owned or hereafter acquired, and all renewals, substitutions, replacements, additions, improvements, accessories and accumulations with respect to any of the foregoing; (2) each Spare Engine (each such Spare Engine having 750 or more rated take-off horsepower or the equivalent thereof) as the same is now and will hereafter be constituted, whether now owned or hereafter acquired, and whether or not any such Spare Engine shall be installed in or attached to any Airframe or any other airframe and all substitutions or replacements therefor, as provided in this Security Agreement, together with all Parts of whatever nature which are from time to time included in the "Spare Engines", whether now owned or hereafter acquired, and all renewals, substitutions, replacements, additions, improvements, accessories and accumulations with respect to any of the foregoing; (3) all Spare Parts and Appliances whether now owned or hereafter acquired by the Company that are appropriate for installation or use on, in or with a Boeing model 757-200, 757-300 or 737-800 aircraft, or on any engine or Appliance utilized on any such aircraft and without regard to whether any such Spare Parts or Appliances are appropriate for installation or use on, in or with any other type or model of aircraft ("Qualified Spare Parts") including any replacements, substitutions or renewals therefor, and accessions thereto, including but not limited to Qualified Spare Parts (by way of illustration and not limitation) described on Exhibit D attached hereto and incorporated herein by reference and located at the Designated Locations described on Exhibit E attached hereto and incorporated herein by reference or any supplement or amendment thereto supplied hereunder or in any Security Agreement Supplement (Pledged Spare Parts) executed and delivered from time to time hereunder; provided that the following shall be excluded from the Lien under this paragraph (3) of this Granting Clause of this Security Agreement: (a) any Qualified Spare Part so long as it is incorporated in, installed on or attached or appurtenant to an aircraft or engine, (b) any Qualified Spare Part leased to, loaned to or held on consignment by, the Company and (c) any and all Expendables (such Qualified Spare Parts and any replacements, substitutions or renewals therefor and accessions thereto, giving effect to such exclusion, the "Pledged Spare Parts"); 2 (4) without limiting the generality of the foregoing, all requisition proceeds (including, without limitation, all payments and proceeds or other revenues or income under the Civil Reserve Air Fleet Program) with respect to any Aircraft, any Airframe, any Engine, any Propeller, any Spare Engine, any Pledged Spare Part or any Part thereof or any other property described in any paragraph of this Granting Clause and all insurance proceeds with respect to any Aircraft, any Airframe, any Engine, any Propeller, any Spare Engine, any Pledged Spare Part or any Part thereof or any other property described in any paragraph of this Granting Clause from insurance required to be maintained by the Company under Section 2.04, but excluding any insurance maintained by the Company and not required under Section 2.04 and all proceeds from the sale or disposition of any Aircraft, any Airframe, any Engine, any Propeller, any Spare Engine, any Pledged Spare Part or any Part thereof or any other property described in any paragraph of this Granting Clause; (5) the Purchase Agreements, the Warranty Bills of Sale and the FAA Bills of Sale; (6) the rights of the Company under any warranty, indemnity or agreement, express or implied, regarding title, materials, workmanship, design or patent infringement or related matters in respect of any Aircraft, any Airframe, any Engine, any Propeller, any Spare Engine or any Part thereof or any Pledged Spare Part; (7) all repair, maintenance and inventory records, logs, manuals and all other documents and materials similar thereto (including, without limitation, any such records, logs, manuals, documents and materials that are in electronic format or are computer print-outs) at any time maintained, created or used by the Company, and all records, logs, documents and other materials required at any time to be maintained by the Company pursuant to the FAA or under the Federal Aviation Act, in each case with respect to any Airframe, any Engine, any Propeller, any Spare Engine or any Part thereof or any of the Pledged Spare Parts ("Records"); (8) all Pledged Accounts and Pledged Equipment, in each case, whether now owned or existing or hereafter acquired or arising, and all proceeds, products, accessions, rents, profits, income, benefits, indemnification proceeds, substitutions and replacements of and to any of such Collateral and, to the extent related to such Collateral, all books, correspondence, credit files, records, invoices and other papers (including, without limitation, all tapes, cards, computer runs and other papers and documents in the possession or under the control of the Company or any computer bureau or service company from time to time acting for the Company) (collectively, the "UCC Collateral") provided, that if any of the Pledged Equipment is subject to a lease, title retention or security agreement and cannot be transferred or encumbered by the Company without resulting in the termination of such agreement or causing a default thereunder, then the grant of a security interest therein in accordance with this Security Agreement (a) shall exclude such Pledged Equipment and (b) shall include the Company's right, title and interest in, to and under such lease, title retention or security agreement, together with the benefits of all deposits and payments now or hereafter made thereunder by or on behalf of the Company and subject to all of the terms and conditions of such lease or agreement and the liens and security interests thereunder; 3 (9) all moneys and securities now or hereafter paid or deposited or required to be paid or deposited to or with the Collateral Agent by or for the account of the Company pursuant to any term hereof or of any other Loan Document and held or required to be held by the Collateral Agent hereunder or thereunder; (10) all right, title, interest, claims and demands of the Company, in, to and under any lease of any Aircraft; and (11) all proceeds (including, without limitation, Proceeds) of the foregoing. HABENDUM CLAUSE TO HAVE AND TO HOLD all and singular the aforesaid property unto the Collateral Agent, its successors and assigns, and for the uses and purposes and subject to the terms and provisions set forth in this Security Agreement. (1) It is expressly agreed that anything herein contained to the contrary notwithstanding, the Company shall remain liable under each of the Loan Documents to which it is a party to perform all of the obligations assumed by it thereunder, all in accordance with and pursuant to the terms and provisions thereof, and the Collateral Agent shall have no obligation or liability under any of the Loan Documents by reason of or arising out of the assignment hereunder, nor shall the Collateral Agent be required or obligated in any manner to perform or fulfill any obligations of the Company under any of the Loan Documents to which the Company is a party, or, except as herein expressly provided, to make any payment, or to make any inquiry as to the nature or sufficiency of any payment received by it, or present or file any claim, or take any action to collect or enforce the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (2) The Company does hereby constitute the Collateral Agent as its true and lawful attorney, irrevocably, for good and valuable consideration and coupled with an interest and with full power of substitution (in its name or otherwise) subject to the terms and conditions of this Security Agreement, to ask, require, demand, receive, sue for, compound and give acquittance for any and all moneys and claims for moneys due and to become due to it under or arising out of the Loan Documents, to endorse any checks or other instruments or orders in connection therewith, to file any claims or take any action or institute any proceedings which the Collateral Agent may deem to be necessary or advisable in the premises as fully as the Company itself could do. (3) The Company agrees that at any time and from time to time, at its sole cost and expense, upon the written request of the Collateral Agent, it will 4 promptly and duly execute, deliver, file and record (as applicable) any and all such further agreements, certificates, instruments and documents as may be necessary or desirable or which the Collateral Agent may reasonably request in order to create, preserve, perfect, confirm or validate the security interests in the Collateral or to enable the Collateral Agent to obtain the full benefits of this Security Agreement and the other Security Documents or to enable the Collateral Agent lawfully to enforce any of its rights, powers, and remedies hereunder or thereunder with respect to any of the Collateral, it being acknowledged and agreed that the Collateral Agent is expressly authorized to unilaterally exercise or cause to be exercised any and all rights of a secured party hereunder or under applicable law, including the filing of UCC financing statements (or amendment thereto) in respect of any of the Collateral. Notwithstanding any contrary provision in this Security Agreement or the other Security Documents, the Company shall not be obligated to perfect the security interest of the Collateral Agent in motor vehicles for which the Company has a Certificate of Title and which are a part of the Pledged Equipment ("Vehicle Collateral"), except as follows: the Company will cause the Lien of the Collateral Agent to be perfected on any Vehicle Collateral acquired: (a) after the date of this Security Agreement at a cost in excess of $50,000; or (b) at any time while the aggregate book value of all of Vehicle Collateral on which the Collateral Agent does not have a perfected Lien, net of depreciation and as determined in accordance with GAAP, exceeds $150,000 or while an Event of Default or Specified Default exists. In addition, the Company, at the request of the Collateral Agent made at any time after the occurrence of and during the continuance of any Event of Default or Specified Default, shall cause the Lien of the Collateral Agent to be perfected on all Vehicle Collateral. (4) The Company does hereby warrant and represent that (a) it has not assigned or pledged, and hereby covenants that it will not (i) assign or pledge to any Person other than the Collateral Agent, so long as the Lien of the Security Documents has not been discharged in accordance with the terms hereof, any of its rights, titles or interests hereby assigned (including, with respect to the Pledged Accounts, any rights of the Company under any supporting obligation, instrument or other document evidencing or supporting its right to payment in respect of the Pledged Accounts) and (ii) subject to the provisions of the Loan Agreement, except as provided hereunder or except in a manner that does not adversely affect the Collateral Agent, the Board, the Participants and the Lenders, (A) enter into any agreement amending or supplementing any Security Document or, except in the ordinary course of business of the Company, any other material agreement assigned or pledged hereunder, (B) execute any waiver or modification of, or consent under, the terms of, or during the continuance of an Event of Default, exercise any rights, powers or privileges under, any Security Document, or (C) during the continuance of an Event of Default, settle or compromise any claim arising under any Security Document, submit or consent to the submission of any dispute, difference or other matter arising under or in respect of any Security Document, or to arbitration thereunder; (b) Exhibit D is in all material respects a true and correct summary description by type of all Pledged Spare Parts located at any Designated Location owned by the Company as of the date hereof; (c) all of the Pledged Spare Parts are or will (upon becoming subject to the Lien of the Security Documents) be maintained by or on behalf of the Company at the Designated Locations, subject to Section 2.03 hereof; (d) Exhibit E sets forth a true and complete list of all locations at which the Company maintains Qualified Spare Parts; (e) the Company has full power, authority and legal right to assign and pledge all of the Collateral, and the Company owns and has good and marketable title to the Collateral now subject to the Lien of the Security Documents, free and clear of any Liens, except for 5 the Lien of the Security Documents and except for Permitted Liens; (f) the Company's location (as such term is used in Section 9-307 of the UCC) is Indiana and the full and correct legal name and mailing address of the Company are correctly set forth in Annex A to the Loan Agreement; (g) the Collateral Agent is entitled to the benefits of Section 1110 of the Bankruptcy Code with respect to the right to take possession of the Aircraft, Spare Engines and Pledged Spare Parts, in each case only to the extent that such Aircraft, Spare Engine or Pledged Spare Part, as the case may be, was first placed in service after October 22, 1994, and to enforce any of its other rights or remedies as provided in this Security Agreement in the event of a case under Chapter 11 of the Bankruptcy Code in which the Company is a debtor all subject to the provisions and limitations of the Bankruptcy Code; and (h) excepting motor vehicles for which the Company has a Certificate of Title, and except for the filing of UCC financing statements and such documents with the FAA as may be necessary or advisable, no registration, recordation or filing with any Governmental Authority is required in connection with the execution and delivery of this Security Agreement and the other Security Documents or is necessary for the validity or enforceability hereof or thereof or for the perfection or enforcement of the security interests created hereunder or thereunder. (5) It is hereby further agreed that any and all property of the type described or referred to in the Granting Clause hereof which is hereafter acquired by the Company shall ipso facto, and without any other conveyance, assignment or act on the part of the Company or the Collateral Agent, become and be subject to the Lien herein granted as fully and completely as though specifically described herein. IT IS HEREBY FURTHER COVENANTED AND AGREED by and among the parties hereto as follows: ARTICLE 1 DEFINITIONS Section 1.01 Definitions. (a) For all purposes of this Security Agreement, except as otherwise expressly provided or unless the context otherwise requires: (i) each of the "Company", "Collateral Agent", or any other Person includes, without prejudice to the provisions of any Loan Documents, any successor in interest to it and any permitted transferee, permitted purchaser or permitted assignee of it; (ii) the terms defined in this Article 1 have the meanings assigned to them in this Article 1, and include the plural as well as the singular; (iii) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles in the United States; (iv) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Security Agreement as a whole and not to any particular Article, Section or other subdivision; 6 (v) all references in this Security Agreement to Articles, Sections and Exhibits refer to Articles, Sections and Exhibits of this Security Agreement; and (vi) all references in this Security Agreement to Exhibits refer to such Exhibits as such Exhibits may be amended, supplemented or otherwise modified from time to time in accordance with the terms hereof. (b) The terms "aircraft", "aircraft engine", "appliance", "cargo" and "propeller" shall have the respective meanings ascribed thereto in Section 40102 of Chapter 401 of Title 49 of the United States Code and the term "engine" shall include an "aircraft engine" as defined therein. (c) The term "UCC" means the Uniform Commercial Code as in effect on the date hereof in the State of New York; provided, however, that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of any security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, then for purposes of the provisions hereof relating to such perfection or the effect of perfection or non-perfection of any security interest the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction and references to Article 9 of the UCC shall include such Article however numbered in any relevant jurisdiction. (d) The terms "Account", "Equipment", "Fixtures", "Goods", "Proceeds" and "Inventory" shall have the respective meanings ascribed thereto in Article 9 of the UCC. (e) For all purposes of this Security Agreement, the following capitalized terms have the following respective meanings: "Acceptable Alternate Engine" means a Rolls-Royce RB211-22B-02 or General Electric CT7-98 engine or an engine of either such or another manufacturer of equivalent or greater value and utility (without regard to hours and cycles), and suitable for installation and use on the relevant Airframe or an airframe, as applicable; provided that such engine shall (i) be of the same make, model and manufacturer as (A) the other Engine pledged with such Airframe or (B) the Spare Engine replaced by such engine and (ii) be an engine of a type then being utilized by the Company on other L1011-50/500 or Saab 340B aircraft owned by the Company. "Acceptable Alternate Propeller" means a Hamilton Standard propeller or a propeller of the same or another manufacturer of equivalent or greater value and utility (without regard to hours and cycles), and suitable for installation and use on the relevant Airframe or an airframe, as applicable; provided that such propeller shall (i) be of the same make, model and manufacturer as the other Propeller pledged with such Airframe, and (ii) be a propeller of a type then being utilized by the Company on other Saab 340B aircraft operated by the Company. "Account Debtor" means each Person obligated on an Account. "Additional Insured" means each Lender, the Board, the Collateral Agent, the Agent, the Loan Administrator, the Govco Administrative Agent, each 7 Participant, the Company in its capacity as lessor under any Permitted Lease, and each of their respective Affiliates, successors and permitted assigns, and the respective directors, officers and employees of each of the foregoing. "Aircraft" means each Airframe together with the Engines and Propellers relating to such Airframe as specified on Exhibit B hereto, and all Records relating to such Aircraft. "Airframe" means: (i) each of the aircraft (excluding Engines or Propellers, or engines or propellers either initially or from time to time installed thereon) specified by United States Registration Number and Manufacturer's serial number on Exhibit B hereto and on any Security Agreement Supplement (Aircraft) executed and delivered from time to time hereunder; (ii) any Replacement Airframe which may from time to time be substituted pursuant to clause (B)(2) of Section 3.01(a)(i) hereof and (iii) in either case any and all Parts which are from time to time incorporated or installed in or attached thereto or which have been removed therefrom, unless the Lien of the Security Documents shall not be applicable to such Part in accordance with Section 2.02. "Appliances" means an instrument, equipment, apparatus, a part, an appurtenance, or an accessory used, capable of being used, or intended to be used in operating or controlling aircraft in flight, including a parachute, communication equipment, and another mechanism installed in or attached to aircraft during flight, and not part of an aircraft, engine, or Propeller. "Bankruptcy Default" means any event or condition which is or upon notice, lapse of time or both would, unless cured or waived, become an Event of Default under clause (f), (g), (p) or (q) of Section 7.1 of the Loan Agreement. "Card Receivables" means all rights to payment of monetary obligations, now or hereafter existing and whether or not earned by performance, arising out of the use of a credit or charge card to purchase property or services from the Company. "Certificated Air Carrier" means a Person holding an air carrier operating certificate issued by the Secretary of Transportation of the United States pursuant to Chapter 447 of Title 49 of the United States Code or any analogous successor provision of the United States Code, for aircraft capable of carrying ten or more individuals or 6,000 pounds or more of cargo. "Civil Reserve Air Fleet Program" means the Civil Reserve Air Fleet Program administered by the United States Government pursuant to Executive Order No. 11490, as amended, or any substantially similar program. "Closing Date" means the date of this Security Agreement. "Collateral" has the meaning assigned thereto in the Granting Clause hereof. "Company" has the meaning assigned thereto in the preamble to this Agreement. 8 "Designated Locations" means the locations in the United States designated from time to time by the Company at which it may keep Pledged Spare Parts, which initially shall be the locations set forth in Exhibit E and shall include the additional locations designated by the Company pursuant to Section 2.03 hereof. "Eligible Investment" means (i) any bond, note or other obligation which is a direct obligation of or guaranteed by the U.S. or any agency thereof having maturities no later than 90 days following the date of such investment; (ii) any obligation which is a direct obligation of or guaranteed by any state of the U.S. or any subdivision thereof or any agency of any such state or subdivision, and which has the highest rating published by Moody's or Standard & Poor's; (iii) any commercial paper issued by a U.S. obligor and having the highest rating published by Moody's or Standard & Poor's; (iv) any money market investment instrument relying upon the credit and backing of any bank or trust company which is a member of the Federal Reserve System and which has a combined capital (including capital reserves to the extent not included in capital) and surplus and undivided profits of not less than $250,000,000 (including the Collateral Agent and its Affiliates if such requirements as to Federal Reserve System membership and combined capital and surplus and undivided profits are satisfied), including, without limitation, certificates of deposit, time and other interest-bearing deposits, bankers' acceptances, commercial paper, loan and mortgage participation certificates and documented discount notes accompanied by irrevocable letters of credit and money market fund investing solely in securities backed by the full faith and credit of the United States; or (v) repurchase agreements collateralized by any of the foregoing. "Engine" means (i) each of the engines listed by Manufacturer's serial number on Exhibit B hereto and on any Security Agreement Supplement (Aircraft) or Security Agreement Supplement (Engine/Propeller) executed and delivered from time to time hereunder, and whether or not either initially or from time to time installed on any Airframe or any other airframe; (ii) any Replacement Engine which may from time to time be substituted for any of such Engines pursuant to the terms hereof; and (iii) in either case, any and all Parts which are from time to time incorporated or installed in or attached to any such engine and any and all Parts removed therefrom unless the Lien of the Security Documents shall not apply to such Parts in accordance with Section 2.02, and all Records relating to such Engine. "Event of Loss" means, with respect to any Aircraft, Airframe, Engine, Propeller, Spare Engine or any Pledged Spare Part, any of the following events with respect to such property: (i) the loss of such property or of the use thereof due to the destruction of or damage to such property which renders repair uneconomic or which renders such property permanently unfit for normal use for any reason whatsoever; (ii) any damage to such property which results in an insurance settlement with respect to such property on the basis of a total loss or a constructive or compromised total loss; (iii) the theft or disappearance of such property for the lesser of (A) a period in excess of ninety (90) consecutive days, (B) the period to the date when the Net Insurance Proceeds with respect to such property are paid to the Collateral Agent, or (C) the period to the date when the Company has confirmed to the Collateral Agent in writing that it cannot recover such property; (iv) the confiscation, 9 condemnation or seizure of, or requisition of, title to, or use of, such property by any Governmental Authority or purported Governmental Authority (other than a requisition of title, or for use, by the United States Government or by any other government of registry of such Aircraft, or any agency or instrumentality of any thereof, which is governed by clause (vi) below), which shall have resulted in the loss of possession of such property by the Company or any lessee permitted pursuant to Section 2.01(b) hereof with respect to such Aircraft or Spare Engine, or pursuant to Section 2.03(b) hereof with respect to such Pledged Spare Part, for a period in excess of sixty (60) consecutive days or shall have resulted in the loss of title of such property by the Company; (v) as a result of any law, rule, regulation, order or other action by the FAA or other Governmental Authority of the government of registry of such Aircraft, use of such property in the normal course of the business of air transportation shall have been prohibited for a period of sixty (60) consecutive days (a "grounding"); (vi) the requisition of title, or for use, by (x) the United States Government or (y) any other government of registry of such Aircraft or any instrumentality or agency of any thereof, which shall have occurred while the Loan remains outstanding and shall continue, (A) in the case of such a requisition of title, for a period in excess of fifteen (15) days, or (B) in the case of such a requisition for use under (x), beyond the Loan Maturity Date, or (C) in the case of such a requisition for use under (y), for a period in excess of six (6) months; and (vii) with respect to an Engine, Propeller or Spare Engine only, any requisition of title to such Engine, Propeller or such Spare Engine, as applicable, or other event which constitutes an Event of Loss pursuant to Section 3.01(b) or 3.01(f) hereof. An Event of Loss with respect to an Aircraft shall be deemed to have occurred if an Event of Loss occurs with respect to the Airframe of such Aircraft. "Excluded Equipment" means, collectively, the following: (a) all of the Aircraft and Airframes and any other aircraft of any sort, make or model; (b) all of the Engines and Propellers, and any other aircraft engine and propeller of any sort, make or model; (c) all of the Spare Engines, including any Replacement Engine; (d) all Spare Parts, all Appliances and all Expendables, and all other parts, appliances, instruments, accessory, avionics, furnishings, seats, cargo containers and other equipment of any nature, which is or may be incorporated, used or installed in or attached to any aircraft, aircraft engine or propeller; (e) all Equipment which is now or hereafter leased by the Company (whether under a Capital Lease, an operating lease or any other type of lease), including without limitation all Equipment which is leased by the Company pursuant to leases with any of the Existing Equipment Lessors; (f) all Equipment subject to Liens described in Schedule 6.1 to the Loan Agreement or in Section 6.1(a)(ii) of the Loan Agreement; (g) all Passenger Convenience Equipment; (h) all Fixtures which are leasehold improvements, and any Equipment which is released as part of the Collateral by the Collateral Agent; and (i) all parts and components of, and accessions, accessories and appurtenances of whatever nature attached to or intended to be attached to any of the Equipment identified in the foregoing items (a) through (h). "Existing Equipment Lessors" means, collectively, the following: Sanwa Leasing; Fleet Leasing Corporation; Fleet Capital Leasing - Technology Finance; Ameritech Credit Corporation; Key Equipment Finance; Aviation Financial Services; Steelcase Financial Services; Tynan Equipment Co., Inc.; Compaq Financial Services Corporation; Keycorp Leasing, a division of Keycorp Capital Inc.; KeyCorp Leasing, a division of Key Corporate Capital Inc.; Fleet National 10 Bank (Shawmut); Firstar Bank, N.A.; Wells Fargo Bank, N.A., as Owner Trustee; Wilmington Trust Company; U.S. Bancorp Leasing & Financial; AMR Leasing Corporation; Unionbanc Leasing Corporation; GATX Third Aircraft Corporation; First Security Bank, National Association; First Fidelity Bank, as Indenture Trustee and First Union National Bank as successor; Shawmut Bank; Provident Commercial Group; Summit Bank; Fleet Business Credit Corp.; Keycorp Leasing; Wells Fargo Financial Leasing, Inc.; Citicorp Del Lease, Inc.; and NCR Corporation. "Expendables" means those Spare Parts of a type normally used only once and thereby consumed or otherwise discarded including all Parts which have a limited life or repair cycle and are not classified as Fixed Assets in accordance with GAAP. "FAA" means the United States Federal Aviation Administration or any successor thereto administering the functions of the Federal Aviation Administration under the Federal Aviation Act. "FAA Bills of Sale" means, collectively, each bill of sale on AC Form 8050-2 or such other form as in effect on the date thereof executed by the applicable Manufacturer in favor of the Company in respect of each Aircraft. "Federal Aviation Act" means Subtitle VII of Title 49 of the United States Code relating to aviation, as amended from time to time, or any similar legislation of the United States enacted to supersede, amend or supplement such Subtitle. "Insurance Brokers" has the meaning assigned thereto in Section 2.04(d). "Loss Payment Date" has the meaning assigned thereto in clause (B)(1) of Section 3.01(a)(i). "Manufacturer" means with respect to each Airframe, Engine, Propeller, Spare Engine and Pledged Spare Part, the manufacturer thereof, and its successors and assigns. "Mortgage and Security Agreement" or "this Agreement" means this Security Agreement. "Parts" means, in respect of any Airframe, any Engine, any Propeller, any Spare Engine or any Pledged Spare Part, any and all Appliances, parts, instruments, appurtenances, accessories, avionics, furnishings, seats and other equipment of whatever nature (other than (i) complete Engines, Propellers, Spare Engines, engines or propellers, (ii) any items leased by the Company from a third party, (iii) any Passenger Convenience Equipment and (iv) cargo containers) which may from time to time be incorporated or installed in or attached to such Airframe, Engine, Propeller, Spare Engine or such Pledged Spare Part. "Passenger Convenience Equipment" means severable components or systems installed on or affixed to any Airframe that are used to provide individual telecommunications or electronic entertainment to passengers aboard an Aircraft, 11 if and for so long as such equipment shall be owned by, or shall be subject to a security interest, license or other interest of, another Person (other than any Affiliate of the Company) in accordance with the provisions of Section 2.02(d) hereof. "Payment Default" means any event or condition which is or upon notice, lapse of time or both would, unless cured or waived, become an Event of Default under Section 7.1(a) of the Loan Agreement. "Permitted Air Carrier" means any Certificated Air Carrier or any air carrier principally domiciled in a country listed on Exhibit F hereto. "Permitted Lease" means a lease permitted under Section 2.01(b) hereof. "Permitted Lessee" means the lessee under a Permitted Lease. "Permitted Liens" means those Liens permitted under clauses (i), (ii), (iii) and (v) of the definition of Permitted Encumbrances contained in the Loan Agreement. "Pledged Accounts" means all of the Accounts of the Company, now existing, or hereafter arising; provided, however, that Pledged Accounts shall not include (i) any Card Receivables (whether owed by a card holder or a third party processor of Card Receivables), now existing, or hereafter arising, to the extent, and for so long as such Card Receivables are subject to a security interest in favor of any Card Receivables processor; (ii) proceeds of the Company's membership interest in BATA Leasing, LLC; and (iii) rents which are payable to the Company in respect to the leasing of any Excluded Equipment which is identified in section (e) and (f) of the definition of Excluded Equipment, and Accounts which arise from the sale or other disposition of any Excluded Equipment which is not any of the Aircraft, Engines, Spare Engines, Propellers or Spare Parts. "Pledged Equipment" means all Equipment now owned or hereafter acquired by the Company, excluding all Excluded Equipment, now owned or hereafter acquired by the Company. "Pledged Spare Parts" has the meaning assigned thereto in paragraph (3) of the Granting Clause hereof. "Propeller" means (i) each of the Hamilton Standard propellers listed by Manufacturer's serial number on Exhibit B hereto and on any Security Agreement Supplement (Aircraft) or Security Agreement Supplement (Engine/Propeller) executed and delivered from time to time hereunder, and whether or not either initially or from time to time installed on any Airframe or any other airframe; (ii) any Replacement Propeller which may from time to time be substituted for any of such Propellers pursuant to the terms hereof; and (iii) in either case, any and all Parts which are from time to time incorporated or installed in or attached to any such propeller and any and all Parts removed therefrom unless the Lien of the Security Documents shall not apply to such Parts in accordance with Section 2.02. 12 "Purchase Agreements" means, collectively, (i) with respect to each Airframe, the agreement between the Company and the applicable Manufacturer relating to the purchase by the Company of such Airframe, as originally executed or as modified, amended or supplemented in accordance with the terms thereof, but only insofar as the foregoing relates to such Airframe and to such Manufacturer's warranty obligations with respect thereto and (ii) with respect to each Engine, Propeller or Spare Engine, the agreement between the Company and the applicable Manufacturer relating to the purchase by the Company of such Engine, Propeller or such Spare Engine, as applicable, as originally executed or as modified, amended or supplemented in accordance with the terms thereof, but only insofar as the foregoing relates to such Engine, Propeller or such Spare Engine, as applicable, and to such Manufacturer's warranty obligations with respect thereto. "Qualified Spare Parts" has the meaning assigned thereto in paragraph (3) of the Granting Clause hereof. "Records" has the meaning assigned thereto in paragraph (7) of the Granting Clause hereof. "Replacement Airframe" means any airframe substituted for an airframe in accordance with Section 3.01(a)(i) hereof. "Replacement Engine" means any engine substituted for an Engine or Spare Engine in accordance with Sections 2.01(d), 3.01(a)(i) or 3.01(b) hereof. "Replacement Propeller" means any propeller substituted for a Propeller in accordance with Sections 2.01(d), 3.01(a)(i) or 3.01(b) hereof. "Security Agreement Supplement (Aircraft)" means a supplement to this Security Agreement in the form of Exhibit A1. "Security Agreement Supplement (Engine/Propeller)" means a supplement to this Security Agreement in the form of Exhibit A2. "Security Agreement Supplement (Pledged Spare Parts)" means a supplement to this Security Agreement in the form of Exhibit A3. "Security Documents" means, collectively, this Security Agreement, any Security Agreement Supplement (Aircraft), any Security Agreement Supplement (Engine/Propeller), any Security Agreement Supplement (Pledged Spare Parts), and any additional pledge agreements, security agreements, supplements or other agreements delivered pursuant to the Loan Documents to secure the obligations of the Obligors thereunder, and each certificate, instrument, financing statement or other document executed, delivered, filed or recorded by, on behalf, or in respect of (as applicable) any Obligor, in connection with or pursuant to the foregoing. "Spare Engine" means (i) each of the engines listed by Manufacturer's serial number on Exhibit C hereto and on any Security Agreement Supplement 13 (Engine/Propeller) executed and delivered from time to time hereunder, and whether or not either initially or from time to time installed on any Airframe or any other airframe; (ii) any Replacement Engine which may from time to time be substituted for any of such Spare Engines pursuant to the terms hereof; and (iii) in either case, any and all Parts which are from time to time incorporated or installed in or attached to any such engine and any and all Parts removed therefrom, unless the Lien of the Security Documents shall not apply to such Parts in accordance with Section 2.02. "Spare Part" means an accessory, appurtenance, or part of an aircraft (except an engine or propeller), engine (except a propeller), spare engine, propeller, or Appliance, that is to be installed at a later time on an aircraft, engine, propeller or Appliance. "Specified Default" means a Payment Default or a Bankruptcy Default. "UCC Collateral" has the meaning assigned thereto in paragraph (8) of the Granting Clause hereof. "United States" or "U.S." means the United States of America. "United States Government" means the federal government of the United States or any instrumentality or agency thereof. "Warranty Bills of Sale" means, collectively, each full warranty bill of sale delivered to the Company from the applicable Manufacturer in respect of each Airframe, Engine, Propeller and Spare Engine. "Wet Lease" means any arrangement whereby the Company (or any Permitted Lessee) agrees to furnish the Airframe and Engines or Propellers or engines or propellers installed thereon to a third party pursuant to which such Airframe and Engines or Propellers or engines or propellers (i) shall remain in the operational control of the Company (or such Permitted Lessee) and (ii) shall be maintained, insured and otherwise used and operated in accordance with the provisions hereof. (f) Capitalized terms which are defined in the Loan Agreement and which are not otherwise defined herein shall have the meanings assigned to such terms in the Loan Agreement. ARTICLE 2 COVENANTS OF THE COMPANY The Company covenants and agrees as follows: Section 2.01 Aircraft Registration, Maintenance and Operation; Possession and Permitted Leases; Insignia. (a) (i) Registration and Maintenance. The Company, at its own cost and expense, shall (or shall cause any Permitted Lessee to): (A) on or prior to the 14 Closing Date, cause each Aircraft to be duly registered in the Company's name, and, subject to subparagraph (iii) of this Section 2.01(a), to remain duly registered in the Company's name under the Federal Aviation Act; (B) maintain, service, repair, and overhaul (or cause to be maintained, serviced, repaired, and overhauled) each Aircraft (and any engine which is not an Engine and any propeller which is not a Propeller but which, in either case, is installed on any Aircraft), Spare Engine and each of the Pledged Spare Parts (x) so as at all times to keep each Aircraft in as good an operating condition as when initially subjected to the Lien hereof, ordinary wear and tear excepted, and as may be necessary to enable the airworthiness certification for such Aircraft to be maintained in good standing at all times (other than during temporary periods of maintenance, overhaul or storage in accordance with applicable regulations) under the Federal Aviation Act or the applicable laws of any other jurisdiction in which such Aircraft may then be registered from time to time and in substantially the same manner as the Company (or any Permitted Lessee) maintains, services, repairs or overhauls similar aircraft, engines or propellers operated by the Company (or Permitted Lessee) in similar circumstances; (y) so as to keep the Spare Engines in an airworthy condition and suitable for installation and operation on an Airframe in accordance with any applicable maintenance program and in compliance with all applicable airworthiness directives; and (z) so as to maintain the Pledged Spare Parts in good working order and condition and shall perform all maintenance thereon necessary for that purpose and in accordance with the requirements of each of the Manufacturer's manuals and mandatory service bulletins and each of the Manufacturer's non-mandatory service bulletins which relate to airworthiness, excluding Pledged Spare Parts that have become worn out or obsolete or unfit for use and are not reasonably repairable; (C) maintain or cause to be maintained all Records, logs and other materials required to be maintained by the FAA or any other applicable regulatory agency or body in respect of each Aircraft, Spare Engine and each of the Pledged Spare Parts; and (D) promptly furnish or cause to be furnished to the Collateral Agent, the Board or any Lender such information as may be required to enable the Collateral Agent, the Board or any Lender to file any reports required to be filed by the Collateral Agent, the Board or any Lender with any Governmental Authority because of such person's interest in the Aircraft, Spare Engines or Pledged Spare Parts hereunder. (ii) Operation of Aircraft and Spare Engines. The Company will not (or permit any Permitted Lessee to) maintain, use, store, service, repair, overhaul or operate any Aircraft or any Spare Engine in material violation of any law, rule, regulation, treaty, order or certificate of any government or Governmental Authority (domestic or foreign) having jurisdiction, or in violation of any airworthiness certificate or material violation of any license or registration relating to such Aircraft or Spare Engine issued by any such authority. In the event that any such law, rule, regulation, treaty, order, certificate, license or registration requires alteration of any Aircraft or Spare Engine, the Company will, at its sole cost and expense, conform thereto or obtain conformance therewith. Notwithstanding the foregoing, the Company or any Permitted Lessee may contest in good faith the validity or application of any such law, rule, regulation, treaty, order, certificate, license or registration in any reasonable manner which does not materially adversely affect the Collateral Agent, the Board or any Lender, or any of their respective legal and economic interests in or to any of the Aircraft, Spare Engines or any Loan Documents, including the Lien of the Security Documents. In every case, operation, use, storage, maintenance, servicing, repair or overhaul of the Aircraft is subject to compliance by the Company with the provisions of Section 2.04. If the indemnities or insurance from the United States Government specified in Section 2.04(g), or some combination thereof in amounts equal to amounts required by 15 Section 2.04(g), have not been obtained (unless indemnities or insurance in amounts so required are available in the commercial aviation insurance market and are obtained), the Company will not operate or locate any Aircraft or Spare Engine, or permit any Permitted Lessee or any other Person to operate or locate any Aircraft or Spare Engine, in or to any area excluded from coverage by any insurance required to be maintained by the terms of Section 2.04; provided, however, that the failure of the Company to comply with the provisions of this Section 2.01(a)(ii) shall not give rise to an Event of Default where such failure is attributable to a hijacking, medical emergency, equipment malfunction, weather conditions, navigational error or act of terrorism and the Company (or such Permitted Lessee, as the case may be) is taking all reasonable steps to remedy such failure as soon as practicable. (iii) Reregistration. (A) So long as the Lien of the Security Documents shall not have been discharged and no Specified Default or Event of Default shall have occurred or be continuing, if the Company has requested the Collateral Agent's consent to registration of any Aircraft in the name of the Company (or, if appropriate, in the name of a Permitted Lessee as a "lessee"), at the Company's own cost and expense, under the laws of (1) any country listed on Exhibit G with which the United States then maintains normal diplomatic relations or, if Taiwan, the United States then maintains diplomatic relations at least as good as those in effect on the Closing Date (a "Scheduled Country"), or (2) any other country with which the United States maintains diplomatic relations, and the Collateral Agent has determined, based on the information contemplated below, that the laws of such other country would provide substantially equivalent protection (including the right to take possession of such Aircraft in the event of the bankruptcy of the Company or such Permitted Lessee, if any) for the rights of lenders to that enjoyed by the Collateral Agent under the Security Documents as provided under United States law, the Collateral Agent will not (subject to the terms of this Section 2.01) in the case of either (1) or (2) above, unreasonably withhold its consent to such change of registration. Such consent shall only be given if the Collateral Agent shall have received reasonable evidence that after giving effect to such re-registration the Collateral Agent shall possess a Lien and security interest over such Aircraft with priority and perfection (to the extent perfection is a relevant concept in such country) to substantially the same extent as is available under the corresponding laws of the United States (it being agreed that the lack of such reasonable evidence shall constitute sole reasonable grounds to withhold such consent with respect to a Scheduled Country or a country mentioned in clause (2) above. (B) Prior to any such re-registration under the laws of a Scheduled Country or the United States, the Collateral Agent shall have received (1) an Officer's Certificate from the Company certifying that the conditions of this Section 2.01(a)(iii) have been satisfied and (2) a favorable opinion of counsel (which opinion and counsel shall be reasonably satisfactory to the Collateral Agent) addressed to the Collateral Agent to the effect that (I) the laws of the new country of registration will recognize the Company's right of ownership with respect to such Aircraft and will give effect to the priority and perfection (to the extent perfection is a relevant concept in such country) of the Lien and security interest created by this Security Agreement (or the Company shall enter into such other instrument as shall be necessary to convey a valid and enforceable first priority perfected security interest (except for Permitted Liens) to the Collateral Agent, such instrument to be in form and substance reasonably satisfactory to the Collateral Agent), (II) this Security Agreement (or such other instrument) and the Collateral Agent's Lien and right to 16 repossession thereunder is valid and enforceable under the laws of such country and (III) all filing, recording and other action necessary to perfect (to the extent perfection is a relevant concept in such country) and protect the Lien of the Security Documents (or other such instrument) in such new jurisdiction either has been accomplished prior to such change in the country of registry or, if such opinion cannot under applicable law be given at the time of registration, are specified in such opinion and the Company undertakes to accomplish such filing, recording or other action as soon as practicable (but in any event no later than five (5) Business Days) after giving effect to such change in registry (in which case a further opinion shall be received by the Collateral Agent immediately thereafter to the effect that all such recording, filing and other action have been accomplished). (C) Prior to any such re-registration under the laws of any country other than the U.S. or a Scheduled Country, the Collateral Agent shall have received (1) an Officer's Certificate from the Company certifying that the conditions of this Section 2.01(a)(iii) have been satisfied and (2) a favorable opinion of counsel (which opinion and counsel shall be reasonably satisfactory to the Collateral Agent) in the new jurisdiction of registry covering the matters set forth in the preceding paragraph and addressed to it, and to the effect that (I) the terms (including, without limitation, the governing law, service of process and jurisdictional submission provisions thereof) of this Security Agreement (or such other instrument) are legal, valid, binding and enforceable in such jurisdiction, (II) that it is not necessary for the Collateral Agent to register or qualify to do business in such jurisdiction, (III) that there is no tort liability of the lender of an aircraft or engine not in possession thereof under the laws of such jurisdiction other than tort liability which might have been imposed on such lender under the laws of the United States or any state thereof (it being understood that, such opinion shall be waived if insurance reasonably satisfactory to Collateral Agent is provided, at the Company's expense, to cover such risk), (IV) (unless the Company shall have agreed to provide insurance covering the risk of requisition of use or title of such Aircraft by the government of such jurisdiction so long as such Aircraft is registered under the laws of such jurisdiction) that the laws of such jurisdiction require fair compensation by the government of such jurisdiction payable in currency freely convertible into Dollars for the loss of use or title of such Aircraft in the event of the requisition by such government of such use or title, (V) if a Permitted Lease is then in effect, the laws of the new jurisdiction of registry do not provide the Permitted Lessee or any third party possessory rights which would, upon the Company's bankruptcy or insolvency or other Event of Default (assuming that at such time the Permitted Lessee is not subject to a proceeding or final order under applicable bankruptcy, insolvency or reorganization laws of such jurisdiction), prevent the return of such Aircraft in accordance with the terms of this Security Agreement (or such other instrument) (such opinion to be subject to customary qualifications and exceptions in the relevant domicile of the Permitted Lessee but only to the extent that they do not deny the Collateral Agent the practical realization of its rights and benefits pursuant to this Security Agreement (or such other instrument)), and (VI) to such further effect with respect to such other matters as the Collateral Agent may reasonably request. (D) In addition to the opinion contemplated above, prior to any such re-registration under the laws of any country other than the U.S. or a Scheduled Country, the Collateral Agent shall have received assurances, reasonably satisfactory to it, to the effect that (1) the insurance provisions of this Security Agreement will have been complied with after giving effect to such change of registry, (2) the original indemnities (and any additional indemnities for which the Company is then willing to enter into a binding agreement to 17 indemnify) in favor of the Collateral Agent, the Board, the Lenders and the Participants under the Loan Agreement afford each such party substantially the same protection as provided prior to such change of registry, (3) such change will not result in the imposition of, or increase in the amount of, any Tax for which the Company is not required to indemnify, or is not then willing to enter into a binding agreement to indemnify, the Collateral Agent, the Board, the Lenders or the Participants and (4) such new country of registry imposes aircraft maintenance standards not materially less stringent than those of the FAA or the Civil Aviation Authority of the United Kingdom, France, Germany, Japan or Canada. (E) In connection with any such re-registration, the Company shall, at its cost and to the extent permitted by the laws of such country, cause the interests of the Collateral Agent in such Aircraft to be duly registered or recorded under the laws of such country and at all times thereafter to remain so duly registered or recorded unless and until changed as provided herein, and shall, at its sole cost and expense, cause to be done at all times all other acts (including the filing, recording and delivery of any document or instrument and the payment of any sum) necessary or, by reference to prudent industry practice in such country, advisable in order to establish the Collateral Agent's interest in and to such Aircraft as against the Company, any Permitted Lessee or any third parties in such jurisdiction. (F) The Collateral Agent shall execute and deliver, at the Company's expense, all such documents as the Company may reasonably request and otherwise cooperate with the Company for the purpose of effecting, continuing or (as provided in this Section 2.01(a)(iii)) changing the registration of such Aircraft as may be permissible hereunder. (G) The Company shall pay all reasonable fees and expenses of the Collateral Agent, the Board or any Lender in connection with any change of registry of any Aircraft. (b) Possession and Permitted Leases. (i) The Company will not, without the prior written consent of the Collateral Agent, lease or otherwise in any manner deliver, transfer or relinquish possession of any Airframe, Engine, Propeller or any Spare Engine or install or permit any Engine, Propeller or any Spare Engine to be installed on any airframe other than an Airframe; provided that, so long as (x) no Specified Default or Event of Default shall have occurred and be continuing at the time of such lease, delivery, transfer or relinquishment of possession or installation and (y) such action shall not deprive the Collateral Agent of the first priority perfected Lien of the Security Documents on any Aircraft, any Airframe, any Engine, Propeller or any Spare Engine, the Company (or, except with respect to subparagraph (H) below, any Permitted Lessee) may, without the prior written consent of Collateral Agent: (A) subject the Airframes, the Engines, the Propellers or engines or propellers then installed thereon and the Spare Engines to normal interchange agreements or any Engine, Propeller or any Spare Engine to normal pooling or similar arrangements, in each case customary in the airline industry and entered into by the Company (or any Permitted Lessee) in the ordinary course of its business; provided, that (1) no such agreement or arrangement contemplates or requires the transfer of title to any Airframe, any Engine, any Propeller or any Spare Engine, (2) if the Company's title to any Airframe, any Engine, any Propeller or any Spare Engine shall be divested under any such agreement or 18 arrangement, such divestiture shall be deemed to be an Event of Loss with respect to such Airframe, Engine, Propeller or Spare Engine, as applicable, and the Company shall (or shall cause any Permitted Lessee to) comply with Section 3.01 hereof in respect thereof and (3) no such Airframe interchange arrangement shall (I) be for a period in excess of 5 days or (II) result in such Certificated Air Carrier, Permitted Lessee or other approved air carrier obtaining possessory rights for a period in excess of 5 days with respect to, or a Lien on, any Airframe, Engines, Spare Engines, Propellers, engine(s) or propeller(s) then installed on such Airframe; (B) deliver possession of any Airframe, any Engine, any Propeller or any Spare Engine to the Manufacturer thereof or to any other Person for testing, service, repair, maintenance or overhaul work on such Airframe, such Engine, such Propeller or such Spare Engine or any part thereof or for alterations or modifications in or additions to such Airframe, such Engine, such Propeller or such Spare Engine to the extent required or permitted by the terms hereof; (C) install an Engine, a Propeller or Spare Engine on an airframe owned by the Company (or any Permitted Lessee) which airframe is free and clear of all Liens, except: (1) Permitted Liens and those which apply only to the engines (other than Engines or Spare Engines), propellers (other than Propellers), Appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment (other than Parts) installed on such airframe (but not to the airframe as an entirety), (2) the rights of third parties under interchange agreements which would be permitted under clause (A) above, provided that Company's title to such Engine, Propeller or Spare Engine shall not be divested as a result thereof and (3) mortgage Liens or other security interests, provided, that (as regards this clause (3)), such mortgage Liens or other security interests effectively provide that such Engine, Propeller or Spare Engine shall not become subject to the Lien of such mortgage or security interest, notwithstanding the installation thereof on such airframe; (D) install an Engine, Propeller or Spare Engine on an airframe leased to the Company (or any Permitted Lessee) or purchased by the Company (or any Permitted Lessee) subject to a conditional sale or other security agreement, provided that (1) such airframe is free and clear of all Liens, except: (x) the rights of the parties to the lease or conditional sale or other security agreement covering such airframe, or their assignees, and (y) Liens of the type permitted by subparagraph (C) of this Section 2.01(b)(i) and (2) such lease, conditional sale or other security agreement effectively provides that such Engine, Propeller or Spare Engine shall not become subject to the Lien of such lease, conditional sale or other security agreement, notwithstanding the installation thereof on such airframe; (E) install an Engine, Propeller or Spare Engine on an airframe owned by the Company (or any Permitted Lessee), leased to the Company (or any Permitted Lessee) or purchased by the Company (or any Permitted Lessee) subject to a conditional sale or other security agreement under circumstances where neither subparagraph (C) nor subparagraph (D) of this Section 2.01(b)(i) is applicable, provided that any divestiture of title to such Engine, Propeller or Spare Engine resulting from such installation shall be deemed an Event of Loss with respect to such Engine, Propeller or Spare Engine and the Company shall (or shall cause 19 any Permitted Lessee to) comply with Section 3.01(b) hereof in respect thereof, the Collateral Agent not intending hereby to waive any right or interest it may have to or in such Engine, Propeller or Spare Engine under applicable law until compliance by the Company with such Section 3.01(b); (F) transfer (or permit any Permitted Lessee to transfer) possession of any Airframe, Engine, Propeller or any Spare Engine to the United States of America or any instrumentality or agency thereof pursuant to the Civil Reserve Air Fleet Program so long as the Company (or any Permitted Lessee) shall notify the Collateral Agent (1) prior to transferring possession of any such Airframe, Engine, Propeller or any such Spare Engine to the United States of America or any agency or instrumentality thereof pursuant to the Civil Reserve Air Fleet Program and (2) of the name and the address of the Contracting Office Representative for the Air Mobility Command of the United States Air Force to whom notice must be given pursuant to Section 4.01(a) hereof; (G) transfer possession of any Airframe, Engine, Propeller or any Spare Engine to the United States of America or any instrumentality or agency thereof pursuant to a lease, contract or other instrument, a copy of which shall be provided to the Collateral Agent; or (H) the Company may, at any time so long as no Specified Default or Event of Default shall have occurred and be continuing, enter into a lease of any Aircraft or any Spare Engine with (1) a Certificated Air Carrier, (2) any airline domiciled and principally located in a country listed on Exhibit F hereto, or (3) any other Person approved in writing by the Collateral Agent; provided that (I) no such lease shall be permitted to a lessee that is subject to a proceeding or final order under applicable bankruptcy, insolvency or reorganization laws on the date the lease is entered into, (II) in the case of a lease under subclause (2) or (3) above, on the date of such lease or any renewal or extension thereof, the United States and the country in which such lessee is domiciled and principally located maintain diplomatic relations (which for purposes of this clause (H) shall include Taiwan and any other country that is similarly situated), (III) in the case only of a lease to any Person under subclause (3) above, the Collateral Agent receives at the time of such lease an opinion of counsel (in form and from counsel reasonably satisfactory to the Collateral Agent) to the effect that (w) the terms of the proposed lease will be legal, valid, binding and (subject to customary exceptions in foreign opinions generally) enforceable in accordance with its terms against the proposed lessee in the country in which the proposed lessee is principally based, (x) there exist no possessory rights in favor of the lessee under such lease under the laws of such lessee's country of domicile that would, upon bankruptcy or insolvency of or other default by the Company and assuming at such time such lessee is not insolvent or bankrupt, prevent the return or repossession of such Aircraft or such Spare Engine in accordance with the lease and when permitted by the terms of Section 4 upon the exercise by the Collateral Agent of its remedies pursuant to such Section, (y) the laws of such lessee's country of domicile require fair compensation by the government of such jurisdiction payable in currency freely convertible into Dollars for the loss of use of such Aircraft or such Spare Engine in the event of the requisition by such government of such use, and (z) in the case of an Airframe or Spare Engine, the laws of such lessee's country of domicile would give recognition to the Company's title to 20 the applicable Aircraft of which such Airframe is a part or such Spare Engine, to the registry of the applicable Aircraft of which such Airframe is a part or such Spare Engine (if such country maintains a registry for engines) in the name of the Company (or the proposed lessee, as "lessee", as appropriate), and to the Lien of the Security Documents, (IV) if the lessee under such lease is a governmental entity, such lessee has waived all rights of sovereign immunity, and (V) if the lessee is a Certificated Air Carrier and the Aircraft or such Spare Engine was first placed in service after October 22, 1994, the Company will be entitled as lessor to the benefits of Section 1110 of the Bankruptcy Code with respect to such Aircraft or such Spare Engine in connection with a proceeding under Chapter 11 of the Bankruptcy Code in which the lessee is the debtor. (ii) The rights of any Permitted Lessee or other transferee (other than a transferee where the transfer is of an Engine, a Propeller or Spare Engine which is to be an Event of Loss) shall be (and the sublease, assignment or other transfer document under which such transfer or sublease is governed shall explicitly provide that) during the period of such possession, subject and subordinate to, all the terms of the Security Documents (and any Permitted Lease shall expressly state that it is so subject and subordinate), including, without limitation, the covenants contained in this Article 2, including the inspection rights contained in Section 2.05 and the Collateral Agent's right to repossess such Aircraft or such Spare Engine and to avoid and terminate any lease upon such repossession, and the Company shall remain primarily liable for the performance of all of the terms of the Security Documents, and the terms of any such Permitted Lease shall not permit any Permitted Lessee to take any action not permitted to be taken by the Company in the Security Documents with respect to such Aircraft or such Spare Engine. No pooling agreement, Permitted Lease or other relinquishment of possession of any Airframe, any Engine, any Propeller or any Spare Engine shall in any way discharge or diminish any of the Company's obligations to the Collateral Agent under the Security Documents or constitute a waiver of Collateral Agent's rights or remedies hereunder or thereunder. The Collateral Agent agrees, for the benefit of the Company (and any Permitted Lessee) and for the benefit of any mortgagee or other holder of a security interest in any engine or propeller owned by the Company (or any Permitted Lessee), any lessor of any engine (other than an Engine) or propeller (other than a Propeller) leased to the Company (or any Permitted Lessee) and any conditional vendor of any engine (other than an Engine or Spare Engine) or propeller (other than a Propeller) purchased by the Company (or any Permitted Lessee) subject to a conditional sale agreement or any other security agreement, that no interest shall be created under this Security Agreement in any engine or propeller so owned, leased or purchased and that neither the Collateral Agent nor its successors or assigns will acquire or claim, as against the Company (or any Permitted Lessee) or any such mortgagee, lessor or conditional vendor or other holder of a security interest or any successor or assignee of any thereof, any right, title or interest in such engine or propeller as the result of such engine or propeller being installed on any Airframe. The Company shall provide the Collateral Agent with a copy of any Permitted Lease having a term of more than one (1) year upon entering into such Permitted Lease. (iii) In connection with any Permitted Lease, all necessary action shall be taken by the Company at its expense which is required to continue the Collateral Agent's security interest in the Aircraft, Airframes, Engines, Propellers and Spare Engines, and such Permitted Lease and all other necessary documents shall 21 be duly filed, registered or recorded in such public offices as may be required to fully preserve the priority of the security interest of the Collateral Agent in the Aircraft, Airframes, Engines, Propellers and Spare Engines. (iv) Any Wet Lease shall not constitute a delivery, transfer or relinquishment of possession for purposes of this Section 2.01. The Collateral Agent acknowledges that any consolidation or merger of the Company or conveyance, transfer or lease of all or substantially all of the Company's assets, in each case as permitted by the Loan Documents, shall not be prohibited by this Section 2.01. (v) No Permitted Lease entered into pursuant to this Section 2.01(b) shall permit any subleasing of any Aircraft or any Spare Engine. (c) Insignia. Within ninety (90) days after (x) the Closing Date (with respect to Aircraft, Engines and Spare Engines covered by the Lien of the Security Documents as of the Closing Date), and (y) the date on which any Security Agreement Supplement (Aircraft), Security Agreement Supplement (Engine/Propeller) or Security Agreement Supplement (Spare Engine) is delivered (with respect to such additional Collateral), and so long as any Aircraft, Engines or Spare Engines are subject to the Lien of the Security Documents, the Company agrees to affix and maintain (or cause to be affixed and maintained) in the cockpit of each Airframe adjacent to the registration certificate therein, on each Engine and on each Spare Engine a nameplate bearing the inscription: "THIS [AIRCRAFT/ENGINE] IS MORTGAGED TO CITIBANK, N.A. AS COLLATERAL AGENT, FOR THE BENEFIT AND SECURITY OF THE AIR TRANSPORTATION STABILIZATION BOARD, THE LENDERS AND THE PARTICIPANTS" (such nameplate to be replaced, if necessary, with a nameplate reflecting the name of any successor collateral agent, in each case as permitted under the Loan Documents). Except as above provided, the Company will not allow the name of any Person other than the Company to be placed on any Airframe, any Engine, any Propeller or on any Spare Engine as a designation that might be interpreted as a claim of ownership or of any rights therein. (d) Substitution of Engines/Propellers. The Company may at any time, at its sole cost and expense, replace any Engine, any Propeller or any Spare Engine subjected to the Lien hereof by causing an Acceptable Alternate Engine or an Acceptable Alternate Propeller, as the case may be, to be substituted for such Engine, Propeller or Spare Engine, as the case may be, hereunder in accordance with the provisions of Section 3.01(b) hereof to the same extent as if an Event of Loss has occurred with respect to such Engine, such Propeller or such Spare Engine. (e) Additional Aircraft-related Collateral. The Company may at any time, at its sole cost and expense, subject additional airframes, engines and propellers to the Lien of the Security Documents by entering into any one or more Security Agreement Supplements and otherwise complying with the terms of Section 5.14 of the Loan Agreement with respect to such additional collateral. 22 Section 2.02 Replacement and Pooling of Parts; Alterations, Modifications and Additions. (a) Replacement of Parts. The Company, at its own cost and expense, will promptly replace or cause to be replaced all Parts which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever, except as otherwise provided in Section 2.02(c). All replacement Parts shall be owned by the Company free and clear of all Liens (except Permitted Liens, pooling arrangements permitted by Section 2.02(b) hereof and replacement Parts temporarily installed on an emergency basis) and shall be in as good an operating condition as, and shall have a value and utility at least equal to, the Parts replaced assuming such replaced Parts were in the condition and repair required to be maintained by the terms hereof. All Parts at any time removed from any Airframe, any Engine, any Propeller or any Spare Engine shall remain the property of the Company and subject to the Lien of the Security Documents, no matter where located, until such time as such Parts shall be replaced by Parts which meet the requirements for replacement Parts specified above as certified to the Collateral Agent by an Officer's Certificate from the Company. Immediately upon any replacement Part becoming incorporated or installed in or attached to any Airframe, any Engine, any Propeller or any Spare Engine, without further act (subject only to Permitted Liens and any pooling arrangement permitted by Section 2.02(b) hereof and except any replacement Part temporarily installed on an emergency basis), (i) such replacement Part shall become the property of the Company and subject to the Lien of the Security Documents and be deemed a Part for all purposes hereof to the same extent as the Part originally incorporated or installed in or attached to such Airframe, such Engine, such Propeller or such Spare Engine and (ii) the replaced Part shall be free and clear of all rights of the Collateral Agent and shall no longer be deemed a Part or Spare Part hereunder. (b) Pooling of Parts. Any Part removed from any Airframe, any Engine, any Propeller or any Spare Engine as provided in Section 2.02(a) hereof may be subjected by the Company (or any Permitted Lessee) to a pooling arrangement of the type which is permitted by clause (A) of Section 2.01(b)(i) hereof; provided, that the Part replacing such removed Part shall be incorporated or installed in or attached to such Airframe, Engine, Propeller or Spare Engine in accordance with Section 2.02(a) as promptly as practicable after the removal of such removed Part. In addition, any replacement Part when incorporated or installed in or attached to an Airframe, an Engine, a Propeller or a Spare Engine in accordance with such Section may be owned by any third party subject to such a pooling arrangement, provided, that the Company (or any Permitted Lessee), at its expense, as promptly thereafter as practicable, either (i) causes such replacement Part to become subject to the Lien of the Security Documents, free and clear of all Liens other than Permitted Liens or (ii) replaces such replacement Part with a further replacement Part owned by the Company (or any Permitted Lessee) which shall become the property of the Company and subject to the Lien of the Security Documents, free and clear of all Liens other than Permitted Liens. (c) Alterations, Modifications and Additions. The Company, at its own expense, will make (or cause to be made) such alterations and modifications in and additions to the Airframes, Engines, Propellers and Spare Engines as may be required to be made from time to time so as to comply with any law, rule, regulation or order of any regulatory agency or body of any jurisdiction in which any Aircraft may then be registered; provided, however, that the Company 23 or any Permitted Lessee may, in good faith, and by appropriate proceedings contest the validity or application of any such law, rule, regulation or order in any reasonable manner which does not materially adversely affect the Collateral Agent, the Board or any Lender or any of their respective legal and economic interests in or to such Airframe, Engine, Propeller or Spare Engine, or subject any such Person to risk of any material civil or any criminal penalties or involve any material risk of loss or forfeiture of title to such Aircraft, Engine, Propeller or such Spare Engine. In addition, the Company (or any Permitted Lessee), at its own expense, may from time to time make such alterations and modifications in and additions to any Airframe, any Engine, any Propeller or any Spare Engine as the Company (or any Permitted Lessee) may deem desirable in the proper conduct of its business, including removal of Parts which the Company (or any Permitted Lessee) deems to be obsolete or no longer suitable or appropriate for use on such Airframe, such Engine, such Propeller or such Spare Engine (such parts, "Obsolete Parts"); provided that no such alteration, modification, removal or addition impairs the condition or airworthiness of such Airframe, such Engine, such Propeller or such Spare Engine, or materially diminishes the value or utility of such Airframe, such Engine, such Propeller or such Spare Engine below the condition, airworthiness, value or utility thereof immediately prior to such alteration, modification, removal or addition assuming such Airframe, such Engine, such Propeller or such Spare Engine was then in the condition required to be maintained by the terms of this Security Agreement. In addition, the value (but not the utility, condition or airworthiness) of any Airframe, any Engine, any Propeller or any Spare Engine may be reduced by the value, if any, of Obsolete Parts which shall have been removed so long as the aggregate value of all Obsolete Parts which shall have been removed and not replaced shall not exceed the Obsolete Parts Cap. All Parts incorporated or installed in or attached or added to an Airframe, an Engine, a Propeller or a Spare Engine as the result of such alteration, modification or addition (except those parts which are excluded from the definition of Parts or which may be removed by the Company pursuant to the next sentence) (the "Additional Parts") shall, without further act, become subject to the Lien of the Security Documents. Notwithstanding the foregoing sentence, the Company (or any Permitted Lessee) may, at its own expense, so long as no Event of Default shall have occurred and be continuing, remove or suffer to be removed any Additional Part, provided that such Additional Part (i) is in addition to, and not in replacement of or substitution for, any Part originally incorporated or installed in or attached to such Airframe, any Engine, any Propeller or any Spare Engine at the time of delivery thereof hereunder or any Part in replacement of or substitution for any such Part, (ii) is not required to be incorporated or installed in or attached or added to any Airframe, any Engine, any Propeller or any Spare Engine pursuant to the first sentence of this paragraph (c) and (iii) can be removed from such Airframe, such Engine, such Propeller or such Spare Engine without diminishing the condition, airworthiness, value or utility of the Airframe, such Engine, such Propeller or such Spare Engine which such Airframe, such Engine, such Propeller or such Spare Engine would have had at such time had such alteration, modification or addition not occurred. Upon the removal thereof as provided above, such Additional Part shall no longer be deemed to be subject to the Lien of the Security Documents or part of the Airframe, Engine, Propeller or Spare Engine from which it was removed. (d) Certain Matters Regarding Passenger Convenience Equipment. The Company may at any time and from time to time install on any Airframe, subject to the requirements of Section 2.02(c) above, Passenger Convenience Equipment that is (i) owned by another Person and leased to the Company, (ii) sold to the Company 24 by another Person subject to a conditional sale contract or other retained security interest, (iii) leased to the Company pursuant to a lease which is subject to a security interest in favor of another Person or (iv) installed on the applicable Aircraft subject to a license granted to the Company by another Person, and in any such case (A) the Collateral Agent will not acquire or claim, as against any such other Person, any right, title or interest in any such Passenger Convenience Equipment solely as a result of its installation on such Airframe, (B) the Company shall notify such Person of Collateral Agent's interest in such Aircraft, and (C) the Company shall procure that, upon the occurrence of any default under the applicable lease, conditional sale agreement, security agreement or license, such Person shall not be entitled to repossess such Passenger Convenience Equipment unless it shall, in connection with such repossession, undertake to restore such Aircraft to the condition it had been in had the installation of such Passenger Convenience Equipment not occurred. Section 2.03 Pledged Spare Parts Use, Possession and Designated Locations. (a) The Company shall have the right, at any time and from time to time at its own cost and expense, without any release from or consent by the Collateral Agent, to deal with the Pledged Spare Parts in any manner consistent with the Company's ordinary course of business, including without limitation any of the following: (i) to incorporate in, install on or attach or make appurtenant to any aircraft, engine or Appliance leased to or owned by the Company (whether or not subject to any Lien) or any Pledged Spare Part, free from the Lien of the Security Documents; (ii) to dismantle any Pledged Spare Part that has become worn out or obsolete or unfit for use, and to sell or dispose of any such Pledged Spare Part or any salvage resulting from such dismantling, free from the Lien of the Security Documents; and (iii) to transfer any or all of the Pledged Spare Parts located at one or more Designated Locations to one or more other Designated Locations. (b) Without the prior consent of the Collateral Agent, the Company will not sell, lease, transfer or relinquish possession of any Pledged Spare Part to anyone other than the Company, except as permitted by the provisions of this Section 2.03 and except that the Company shall have the right in the ordinary course of business, (i) to transfer possession of any Pledged Spare Part to the Manufacturer thereof or any service provider for testing, overhaul, repairs, maintenance, alterations or modifications purposes or (ii) to subject any Pledged Spare Part to an interchange or pooling, exchange, borrowing or maintenance servicing arrangement customary in the airline industry and entered into in the ordinary course of business; provided, however, that if the Company's title to any such Pledged Spare Part shall be divested under any such agreement or arrangement, such divestiture shall be deemed to be an Event of Loss with respect to such Pledged Spare Part subject to the provisions of Section 3.01(c). (c) The Company shall maintain and keep the Pledged Spare Parts at one or more of the Designated Locations, except as otherwise permitted under this Section 2.03. If any Pledged Spare Part, at any time and for any reason, is located at any other than a Designated Location or if the Company wishes to 25 subject additional Qualified Spare Parts to the Lien of the Security Documents and such Qualified Spare Parts are not located at any Designated Location, the Company will promptly furnish to the Collateral Agent the following: (i) a Security Agreement Supplement (Pledged Spare Parts) duly executed by the Company, identifying each location that is to become a Designated Location and specifically subjecting the Pledged Spare Parts at such location to the Lien of the Security Documents; (ii) a legal opinion from counsel (which opinion and counsel shall be reasonably satisfactory to the Collateral Agent), dated the date of execution of said Security Agreement Supplement (Pledged Spare Parts), stating that said Security Agreement Supplement (Pledged Spare Parts) has been duly filed for recording in accordance with the provisions of the Federal Aviation Act, and either: (A) no other filing or recording is required in any other place within the United States in order to perfect the Lien of the Security Documents on the Qualified Spare Parts held at the Designated Locations specified in such Security Agreement Supplement (Pledged Spare Parts) under the laws of the United States, or (B) if any such filing or recording shall be required that said filing has been accomplished in such other manner and places, which shall be specified in such legal opinion, as are necessary to perfect the Lien of the Security Documents; and (iii) an Officer's Certificate stating that in the opinion of the officer executing the Officers' Certificate, all conditions precedent provided for in this Security Agreement relating to the subjection of such property to the Lien of the Security Documents have been complied with. The Company shall, on an ongoing basis, effect any filings or recordings (or amend any existing filings or recordings) which are necessary or desirable to perfect the security interest of the Collateral Agent in the Qualified Spare Parts which are being subjected to the Lien hereof in accordance with this Section 2.03 and shall promptly deliver copies of any such filings or recordings to the Collateral Agent. Section 2.04 Insurance. (a) Public Liability and Property Damage Insurance. (i) Except as provided in clause (ii) of this Section 2.04(a), and subject to self-insurance to the extent permitted by Section 2.04(e) hereof at all times, the Company will carry or cause to be carried with respect to each Aircraft and each Spare Engine at its or any Permitted Lessee's expense (A) comprehensive airline liability (including, without limitation, passenger, contractual, bodily injury, and property damage liability and product liability) insurance (exclusive of Manufacturer's product liability insurance), (B) cargo liability insurance and (C) war risk liability insurance in each case (I) in an amount per occurrence not less than the greater of (x) the amounts of comprehensive airline liability insurance from time to time applicable per occurrence to aircraft and engines owned or leased and operated by the Company of the same type as such Aircraft and such Spare Engines and (y) the Minimum Liability Insurance Amount, (II) of the same type (subject, however, to Section 2.04(h)) and covering at least the 26 same risks as from time to time are applicable to aircraft and engines owned or leased and operated by the Company of the same type as such Aircraft and such Spare Engines, and (III) which is maintained in effect with insurers (or reinsurers) of nationally or internationally recognized reputation and reasonably believed to be financially sound. (ii) During any period that an Airframe, Engine, Propeller or Spare Engine, as the case may be, is on the ground and not in operation, the Company may carry or cause to be carried as to such non-operating property, in lieu of the insurance required by clause (i) above, and subject to the self-insurance to the extent permitted by Section 2.04(e) hereof, insurance by insurers of recognized reputation and reasonably believed to be financially sound otherwise conforming with the provisions of clause (i) except that (A) the amounts of coverage shall not be required to exceed the amounts of comprehensive airline liability insurance from time to time applicable to property owned or leased by the Company of the same type as such non-operating property and which is on the ground and not in operation; and (B) the scope of the risks covered and the type of insurance shall be the same as from time to time shall be applicable to property owned or leased by the Company of the same type as such non-operating property and which is on the ground and not in operation. (iii) The Company will carry or cause to be carried at all times comprehensive airline liability insurance, including, without limitation, property damage liability insurance with respect to the Pledged Spare Parts and Pledged Equipment, which is (A) of amount and scope as may be customarily maintained by similar corporations engaged in the same or similar business and similarly situated as the Company for property similar to the Pledged Spare Parts and Pledged Equipment, (B) maintained in effect with insurers (or reinsurers) of nationally or internationally recognized reputation and reasonably believed to be financially sound and (C) with such retentions as the Company customarily maintains (provided, however, that any self-insurance retention or deductible shall not exceed $1,000,000 per occurrence). (b) Insurance Against Loss or Damage to an Aircraft, a Spare Engine, etc. (i) With respect to Aircraft only, subject to the provisions of Section 2.04(e) hereof permitting self-insurance, the Company shall maintain or cause to be maintained in effect, at its or any Permitted Lessee's expense, with insurers of recognized reputation and reasonably believed to be financially sound (A) "all-risk" aircraft hull insurance covering each Aircraft, (B) "all-risk" coverage of Spare Engines, Engines, Propellers and Parts (while such Spare Engines, Engines, Propellers and Parts are temporarily removed from such Aircraft and not replaced by similar components) and (C) "all-risk" coverage with respect to Pledged Spare Parts and Pledged Equipment, in such forms and amounts and with such retentions as the Company customarily maintains with respect to similar property owned or operated by the Company (provided, however, that any self-insurance retention or deductible shall not exceed $1,000,000 per occurrence); provided, that such insurance shall at all times while such Aircraft and Spare Engines are subject to the Security Documents be for an amount (taking into account self-insurance to the extent permitted by Section 2.04(e) hereof) not less than the Insured Amount for such Aircraft and Spare Engines. In the case of a loss with respect to an engine (other than an Engine or Spare Engine) or propeller (other than a Propeller) installed on any Airframe, the Collateral Agent shall, subject to Section 2.6(c) of the Loan 27 Agreement, as promptly as practicable remit any payment made to it of any insurance proceeds in respect of such loss to the Company or any other third party identified, to the Collateral Agent by the Company in an Officer's Certificate, entitled to receive such proceeds. (ii) All losses will be adjusted by the Company (giving due regard to the interest of the Collateral Agent) with the insurers; provided, however, that during a period when any Specified Default or Event of Default shall have occurred and be continuing, the Company shall not agree to any such adjustment without the prior written consent of the Collateral Agent. As between the Collateral Agent and the Company, it is agreed that all proceeds of insurance maintained in compliance with the preceding paragraph and received as the result of the occurrence of an Event of Loss will be applied in accordance with Section 3.01. (c) War-Risk, Hijacking and Related Perils Insurance. (i) The Company shall at all times maintain hull coverage, in an amount not less than the Insured Amount for each Aircraft and Spare Engine, for war risk, hijacking and related perils at least as broad as Lloyd's of London Form LSW555B as in effect on the date hereof, or its substantive equivalent as reasonably determined by the Collateral Agent (such determination to be made after consultation with the Company's insurance broker). (ii) At all times when Section 2.04(a)(ii) shall not apply, the Company shall maintain or cause to be maintained world-wide liability coverage of war-risk, hijacking and related perils insurance at least as broad as AVN 52D as in effect on the date hereof, or its substantive equivalent as reasonably determined by the Collateral Agent (such determination to be made after consultation with the Company's insurance broker) in an amount, subject to the provisions of Section 2.04(e), not less than the Minimum Liability Insurance Amount. (d) Reports, Certificates, etc. The Company will furnish, or cause to be furnished, to the Collateral Agent on or before the Closing Date, and each annual renewal of the applicable insurances, (i) a report, signed by an authorized representative of Aon Risk Services, Inc. or any other independent firm of insurance brokers reasonably acceptable to the Collateral Agent which brokers may be regularly retained by the Company (the "Insurance Brokers"), describing in reasonable detail the hull and liability insurance (and property insurance for detached engines, parts and other items) then carried and maintained with respect to the Collateral and stating the opinion of such firm that (A) such insurance complies with the terms hereof, (B) all premiums in connection with such insurance then due have been paid and (C) such insurance together with any self-insurance permitted hereby provides coverages against risks that are customarily insured against by Certificated Air Carriers and that such coverages are in substantially similar forms, are of such types and have limits as are customarily carried by Certificated Air Carriers; and (ii) a certificate of insurance evidencing the due compliance with the terms of this Section 2.04 relating to insurance with respect to the Collateral. The Company will cause such Insurance Broker to agree to advise the Collateral Agent in writing of any default in the payment of any premium and of any act or omission on the part of the Company of which it has knowledge and which might invalidate or render unenforceable, in whole or in part, any insurance on the applicable Collateral and to advise the Collateral Agent in writing at least thirty (30) days (twenty (20) days in the case of lapse for nonpayment of premiums and seven (7) days in the case of war risk and allied perils coverage) prior to the 28 cancellation (but not expiration), lapse for non-payment of premium or material adverse change of any insurance maintained pursuant to this Section 2.04; provided that if the notice period specified above is not reasonably obtainable, the Company will cause the Insurance Broker to provide for as long a period of prior notice as shall then be reasonably obtainable. In addition, the Company will also cause such Insurance Broker to deliver to the Collateral Agent on or prior to the date of expiration of any insurance policy referenced in a previously delivered certificate of insurance, a new certificate of insurance, substantially in the same form as delivered by the Company to the Collateral Agent on the Closing Date except for changes in the report or the coverage consistent with the terms hereof. In the event that the Company shall fail to maintain or cause to be maintained insurance as herein provided, the Collateral Agent may, at its sole option, but shall be under no duty to, procure such insurance on behalf of the Company and, in such event, the Company shall, upon demand, reimburse the Collateral Agent for the cost thereof to the Collateral Agent, together with interest on such cost at the Overdue Rate from the date of such payment by the Collateral Agent to the date of reimbursement without waiver of any other rights the Collateral Agent may have; provided, however, that no exercise by the Collateral Agent of said option shall affect the provisions of this Security Agreement or the other Loan Documents, including the provisions that failure by the Company to maintain the prescribed insurance shall constitute an Event of Default. Upon receipt of any notices or reports, the Collateral Agent shall as promptly as practicable forward copies of the same to the Agent, the Loan Administrator, the Board, each of the Lenders and each of the Participants. The Collateral Agent shall have no responsibility for independently verifying the accuracy or completeness of any information contained in any report or certificate provided by the Insurance Brokers. (e) Self-Insurance. The Company (but no Permitted Lessee) may self-insure the risks required to be insured against pursuant to this Section 2.04 under a program applicable to all aircraft (whether owned or leased) in the Company's fleet, but in no case shall the aggregate amount of such self-insurance in regard to Sections 2.04(a) and 2.04(b) hereof exceed for any calendar year, with respect to all of the aircraft (whether owned or leased) in the Company's fleet (including, without limitation, the Aircraft) $2,500,000. In addition to the foregoing right to self-insure, the Company (and any Permitted Lessee) may self-insure, to the extent of any applicable mandatory minimum per aircraft (or, if applicable, per annum or other period) the hull or liability insurance deductible imposed by the aircraft hull or liability insurer, which are commensurate with the standard deductibles in the aircraft insurance industry. (f) Additional Insurance by the Company. The Company (and, if applicable, any Permitted Lessee) may at its own expense carry insurance with respect to its interest in the Aircraft, Engines, Propellers, Spare Engines and Pledged Spare Parts in amounts in excess of that required to be maintained by this Section 2.04; provided, however, that such insurance does not prevent the Company (or such Permitted Lessee) from carrying the insurance required or permitted by this Section 2.04 or adversely affect such insurance or the cost thereof; and provided, further, that the proceeds of such insurance shall be subject to Section 2.6(c) of the Loan Agreement. (g) Indemnification by Government in Lieu of Insurance. Notwithstanding any provisions of this Section 2.04 requiring insurance, the Collateral Agent agrees to accept, in lieu of insurance against any risk with respect to the Aircraft or Spare Engines, indemnification from, or insurance provided by, the United States 29 Government, against such risk in an amount which, when added to the amount of insurance against such risk maintained by the Company (or any Permitted Lessee) shall be at least equal to the amount of insurance against such risk otherwise required by this Section 2.04 (taking into account self-insurance permitted by Section 2.04(e) hereof). Any such indemnification or insurance provided by the United States Government shall provide substantially similar protection as the insurance required by this Section 2.04. The Company shall furnish to the Collateral Agent, in advance of attachment of such indemnity or insurance, an Officer's Certificate stating that such indemnification or insurance complies with the preceding sentence, and promptly following such attachment, an Officer's Certificate confirming in reasonable detail the amount and scope of such indemnification or insurance and an FAA Certificate of Insurance confirming that such insurance has been obtained from the United States Government in compliance with this Section 2.4. (h) Terms of Insurance Policies. Any policies carried in accordance with Sections 2.04(a) through 2.04(c) hereof covering the applicable Collateral, and any policies taken out in substitution or replacement for any such policies, (i) shall name the Additional Insureds as additional insureds and, for purposes of Sections 2.04(b), 2.04(c)(i) and 2.04(i), the Collateral Agent as sole loss payee, as their respective interests may appear (but without imposing on any such party liability to pay premiums with respect to such insurance), (ii) may provide for self-insurance to the extent permitted in Section 2.04(e) hereof, (iii) shall provide that if the insurers cancel such insurance for any reason whatever, or if the same is allowed to lapse for non-payment of premium or if any material change is made in the insurance which adversely affects the interest of any Additional Insured, such lapse, cancellation or change shall not be effective as to any Additional Insured for thirty (30) days (twenty (20) days in the case of lapse for non-payment of premiums and seven (7) days in the case of war risk and allied perils coverage) after receipt by such Additional Insured of written notice by such insurers of such lapse, cancellation or change; provided, however, that if any notice period specified above is not reasonably obtainable, such policies shall provide for as long a period of prior notice as shall then be reasonably obtainable, (iv) shall provide that in respect of the respective interests of each Additional Insured in such policies the insurance shall not be invalidated by any action or inaction of the Company (or any Permitted Lessee) or any other Person and shall insure the respective interests of the Additional Insureds, as they appear, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by the Company (or any Permitted Lessee) or by any other Person, (v) shall be primary without any right of contribution from any other insurance which is carried by any Additional Insured, (vi) shall expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each Additional Insured, (vii) shall waive any right of the insurers to set-off, recoupment or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of any Additional Insured, (viii) in the case of hull insurance policies carried in accordance with this Section 2.04, shall name the Collateral Agent as sole loss payee in accordance with the provisions of clause (ix), (ix) shall provide that in the event of a loss involving an Aircraft, Airframe, Engine, Propeller or Spare Engine the proceeds in respect of such loss for such Aircraft, Airframe, Engine, Propeller or Spare Engine shall be payable to the Collateral Agent and shall be applied in accordance with Section 2.6(c) of the Loan Agreement), (x) shall waive any right of the insurers to subrogation against any Additional Insured, and (xi) shall provide for a 50/50 claims settlement per AVS 103 or its equivalent. 30 (i) Application of Payments During Existence of a Specified Default or an Event of Default. Any amount referred to in this Section 2.04 which is payable to or retainable by the Company (or any Permitted Lessee) shall not be paid to or retained by the Company (or any Permitted Lessee) if at the time of such payment or retention a Specified Default or an Event of Default shall have occurred and be continuing, but shall be held by or paid over to the Collateral Agent and applied against the obligations of the Company under the Loan Documents. At such time as there shall not be continuing any such Specified Default or Event of Default, such amount shall be paid to the Company to the extent not previously applied in accordance with the preceding sentence. Prior to remitting any such funds to the Company, the Collateral Agent shall be authorized to request and receive an Officer's Certificate from the Company certifying that no Specified Default or Event of Default has occurred and is continuing. Section 2.05 Inspection. (a) At reasonable times not more often than once in any twelve (12) month period, and upon at least ten (10) days prior written notice to the Company (provided, however, that if a Specified Default or Event of Default shall have occurred and be continuing, any such inspection shall be at reasonable times without any limit on the number of times and upon at least three (3) Business Days' prior written notice to and at the expense of the Company), the Collateral Agent or the Board or their respective authorized representatives may inspect the Aircraft, Spare Engines and Pledged Spare Parts and inspect and make copies of the books and of the Company and any Permitted Lessee required to be maintained by the FAA or other applicable regulatory agency or body (at the Company's risk and expense). Any such inspection of any Aircraft, any Spare Engine or any Pledged Spare Part shall be subject to the Company's (or any Permitted Lessee's) safety and security rules applicable at the location of such Collateral and, so long as no Specified Default of Event of Default shall have occurred and be continuing, no exercise of such inspection right shall interfere with the normal operation or maintenance of such Collateral by, or the normal business operations of, the Company (or any Permitted Lessee). Neither the Collateral Agent nor the Board shall have any duty to make any such inspection and shall incur no liability or obligation by reason of not making any such inspection. (b) The Collateral Agent may by written notice to the Company request notice of the next scheduled heavy maintenance visit of any Aircraft and the Company shall permit observation of such visit subject to the terms and conditions set forth above. Section 2.06 UCC Collateral. The Company shall: (a) upon the occurrence and during the continuance of an Event of Default and upon the request of the Collateral Agent, promptly (i) notify each Account Debtor in respect of the Pledged Accounts that such Accounts have been assigned to the Collateral Agent hereunder, and that any payments due or to become due in respect thereof are to be made directly to the Collateral Agent or its designee (it being understood and agreed that the foregoing shall not limit the rights of the Collateral Agent upon the occurrence and during the continuance of an Event of Default to so notify the Account Debtors without giving prior notice to or making a demand upon the Company including, without limitation, any notices required to be given under the Anti-Assignment Act (41 U.S.C. ss. 15 and 31 U.S.C. ss. 3727)) and (ii) transfer to the Collateral Agent or its designee all funds received by it from or on behalf of an Account Debtor in respect of the Pledged Accounts (it being acknowledged and agreed that the Company shall be 31 deemed to be holding all such funds as trustee for the Collateral Agent and, as such, shall not commingle such funds with other funds of the Company); (b) upon the acquisition after the date hereof by the Company of any additional or replacement Pledged Equipment covered by a certificate of title or ownership, cause the Collateral Agent to be listed as the lienholder on such certificate of title and take such other steps as may be required under the law applicable to perfection of a security interest in such property to perfect such security interest, and within thirty (30) days of the acquisition thereof deliver evidence of the same to the Collateral Agent; (c) (i) keep full and accurate books and records relating to the UCC Collateral, including, without limitation, a current and complete list of all Account Debtors obligated on any of the Pledged Accounts, along with their respective names, addresses, telephone numbers, account or other identification numbers and the balance and aging of their respective Pledged Accounts, copies of which list the Company shall deliver to the Collateral Agent promptly after the end of each fiscal quarter of the Company and as soon as practicable following the Collateral Agent's request, and (ii) stamp or otherwise mark such books and records in such manner as may be required to perfect the security interest in such Collateral or at the request of the Collateral Agent in order to reflect the security interests granted by this Security Agreement; (d) permit representatives of the Collateral Agent, upon reasonable notice, at any time during normal business hours to inspect the Pledged Equipment and to inspect and make abstracts from its books and records pertaining to the UCC Collateral, and permit representatives of the Collateral Agent to be present at the Company's place of business to receive copies of all communications and remittances relating to the UCC Collateral, and forward copies of any notices or communications received by the Company with respect to the UCC Collateral, all in such manner as may be deemed necessary or advisable; (e) if it wishes to subject any additional Accounts, Equipment or other Goods to the Lien of the Security Documents, at its sole cost and expense, amend or supplement this Agreement to include such Accounts, Equipment or other Goods (which amendment or supplement shall constitute a "Security Agreement Supplement" under the Loan Agreement), and the Collateral Agent shall take, and the Company shall authorize the Collateral Agent to take (to the extent such authorization is necessary or required), at the Company's sole cost and expense such action (including, without limitation, filing UCC financing statements and the provision of requisite notices of assignment pursuant to applicable law and the terms and conditions of any military charter contracts renewed or entered into after the Closing Date) that may be deemed necessary or desirable in order to perfect and protect the security interest to be created in such Accounts or Goods and the Company shall otherwise comply with the terms of Section 5.14 of the Loan Agreement with respect to such additional collateral; (f) use commercially reasonable efforts to cause to be collected from its Account Debtors, as and when due all amounts owing under or on account of each of its Pledged Accounts (including, without limitation, Pledged Accounts which 32 are delinquent, which shall be collected in accordance with lawful collection procedures) and shall apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Pledged Accounts; (g) keep the UCC Collateral (as applicable) in good working order and repair, ordinary wear and tear excepted, and not use such Collateral in violation of law or any policy of insurance thereon; (h) not change (i) its name, identity or corporate structure in any manner, (ii) the location of its chief executive office or (iii) its jurisdiction of organization in any manner unless it shall have given the Collateral Agent at least thirty (30) days' prior written notice thereof; and (i) not change the location of any UCC Collateral owned by it if such change would cause the security interests of the Collateral Agent in such Collateral to lapse or cease to be perfected. Section 2.07 Liens. The Company will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to any Collateral, except Permitted Liens. The Company shall promptly, at its own expense, take such action as may be necessary to duly discharge any Lien (other than a Permitted Liens) arising at any time. Section 2.08 Performance. The Company shall perform and observe all of its agreements, covenants and obligations contained in the Loan Agreement and the Notes, all of which are hereby incorporated by reference herein. Section 2.09 Further Assurances. The Company agrees that it will promptly correct any defect or error that may be discovered in any document delivered in connection with the Security Documents to which it is a party or in the execution, acknowledgment or recordation thereof. ARTICLE 3 EVENT OF LOSS Section 3.01 (a) Event of Loss with Respect to an Aircraft. (i) Upon the occurrence of an Event of Loss with respect to any Airframe or any Airframe and the Engines, Propellers, Spare Engines and/or engines then installed on any Airframe, the Company shall: (A) forthwith (and in any event, within five (5) Business Days after such occurrence) give the Collateral Agent written notice of such Event of Loss; and (B) not later than the earlier of (x) 60 days after the occurrence of such Event of Loss or (y) the fifth (5th) Business Day following notification to the Company of receipt by the loss payee of the insurance proceeds with respect to such Event of Loss, give the Collateral Agent written notice of its election to perform one of the following options (it being understood that the failure to 33 give such notice shall be deemed to be an election of the option set forth in subclause (1) below): (1) Not later than the earlier of (x) the Business Day next succeeding the one hundred eightieth (180th) day following the occurrence of such Event of Loss or (y) the first Interest Payment Date that is at least three (3) Business Days after receipt by the loss payee of the insurance proceeds with respect to such Event of Loss (but not earlier than the first Business Day next succeeding the thirtieth (30th) day following the occurrence of such Event of Loss) (the applicable day being the "Loss Payment Date"), the Company shall, to the extent not paid to the Collateral Agent as insurance proceeds, pay or cause to be paid to the Collateral Agent the insurance proceeds in respect of such Event of Loss. Upon receipt of the insurance proceeds from the Company or the relevant insurance provider, the Collateral Agent shall apply such insurance proceeds on behalf of the Company as a prepayment in accordance with Section 2.6(c) of the Loan Agreement. If such insurance proceeds are less than the Insured Amount, the Company shall pay or cause to be paid to the Collateral Agent the difference between the Insured Amount and the amount of such proceeds; or (2) Not later than the Business Day next succeeding the one hundred eightieth (180th) day following the occurrence of such Event of Loss, the Company shall substitute an aircraft (together with engines and, if applicable, propellers installed thereon) in accordance with the terms hereof subject to the provisions of Section 2.6(c) of the Loan Agreement, provided that if (x) a Specified Default or Event of Default shall have occurred and be continuing as of such election date or (y) the Company shall have elected to make a substitution under this clause (2) and shall fail for any reason to make such substitution in accordance with the terms hereof, then the Company shall make the payments required by clause (1) above on such date. (ii) At such time as the Company shall have complied fully with the provisions of clause (1) above, the Collateral Agent shall release from the Lien of the Security Documents such Aircraft by executing and delivering to the Company all documents and instruments, prepared at the Company's sole cost and expense, as the Company may reasonably request to evidence such release. (iii) The Company's right to substitute any Replacement Airframe, Replacement Engine and Replacement Propeller as provided in Clause (B)(2) of Section 3.01(a)(i) shall be subject to the fulfillment, at the Company's sole cost and expense, of the following conditions precedent: (A) on the date when any Replacement Airframe, Replacement Engine and Replacement Propeller is subjected to the Lien of the Security Documents (such date being referred to in this Section 3.01 as the "Replacement Closing Date"), the following documents shall have been duly authorized, executed and delivered by the respective party or parties thereto and shall be in full force and effect, and an executed counterpart of each thereof shall have been delivered by the Company to the Collateral Agent: 34 (I) a Security Agreement Supplement (Aircraft) covering each such Replacement Airframe, Replacement Engine and Replacement Propeller shall have been duly filed for recordation pursuant to the Federal Aviation Act or such other applicable law of such jurisdiction other than the United States in which each such Replacement Airframe, Replacement Engine and Replacement Propeller is to be registered in accordance with Section 2.01(a)(iii), as the case may be; and (II) UCC financing statements (and any similar statements or other documents required to be filed or delivered pursuant to the laws of the jurisdiction in which each such Replacement Airframe, Replacement Engine and Replacement Propeller, may be registered in accordance with Section 2.01(a)(iii)) as may be necessary or advisable to protect the security interests of the Collateral Agent in each such Replacement Airframe, Replacement Engine and Replacement Propeller; (B) each Replacement Airframe shall be one or more airframes, shall be of the same Manufacturer and type as the Aircraft (unless consented to by the Collateral Agent) and shall have been manufactured by the Manufacturer in or after the year that the Aircraft subject of the Event of Loss was manufactured and each Replacement Engine shall be the engine applicable to such airframe or airframes, as the case may be, of the same Manufacturer and type as the Engine to be replaced and each Replacement Propeller shall be the propeller applicable to such engine or engines, as the case may be, of the same Manufacturer and type as the Propeller to be replaced and the Collateral Agent shall have received an Appraisal Report from an Appraiser of each such Replacement Airframe, Replacement Engine and Replacement Propeller, dated within ten (10) Business Days of the Replacement Closing Date, evidencing that such Replacement Airframe, Replacement Engine or Replacement Propeller, as the case may be, is of at least the same value as the original Airframe, Engine or Propeller, as the case may be, at the time of replacement (assuming the original Airframe, Engine or Propeller, as the case may be, was in the condition and state of repair required by this Security Agreement); (C) the Collateral Agent shall have received satisfactory evidence as to the compliance with Section 2.04 with respect to each such Replacement Airframe, Replacement Engine and Replacement Propeller; (D) the Collateral Agent, at the expense of the Company, shall have received (acting directly or by authorization to its special counsel) (I) an opinion of counsel to the Company (which opinion and counsel shall be reasonably satisfactory to the Collateral Agent), addressed to the Collateral Agent, to the effect that each Replacement Airframe, Replacement Engine and Replacement Propeller, if any, has been made subject to the Lien of the Security Documents, that all required action has been taken in order to maintain, and such action shall maintain, the effectiveness, perfection and priority (to the extent the same existed immediately prior to the occurrence of such Event of Loss, assuming the Company was in compliance with all relevant terms hereof) of the security interests in each such Airframe, Engine and Propeller and title thereto created by this Security Agreement and that, except as may have been effected by a change in law, the protections afforded to the Collateral Agent by Section 1110 35 of the Bankruptcy Code will not be less than such protections immediately prior to the occurrence of such Event of Loss (assuming the Company was in compliance with all relevant terms hereof) and (II) an opinion of qualified FAA counsel (or counsel in any jurisdiction outside the United States where the Aircraft may be registered in accordance with Section 2.01(a)(iii)) (which opinion and counsel shall be reasonably satisfactory to the Collateral Agent), addressed to the Collateral Agent, as to, in the case of FAA counsel, the due recordation of the Security Agreement Supplement (Aircraft) and all other documents or instruments the recordation of which is necessary to perfect and protect the rights of the Collateral Agent in each such Replacement Airframe, Replacement Engine and Replacement Propeller or, in the case of counsel in another jurisdiction, the taking of all action necessary in such jurisdiction for such purposes; (E) the representation contained in Section 4.6 of the Loan Agreement with respect to each such Replacement Airframe, Replacement Engine and Replacement Propeller shall be true and correct; and (F) the Collateral Agent shall have received an Officer's Certificate of the Company stating that all conditions precedent provided for in this Section 3.01(a) relating to such replacement have been complied with and representing that any such Replacement Engine or Replacement Propeller is an Acceptable Alternate Engine or Acceptable Alternate Propeller, as applicable, and authorizing the Collateral Agent to rely on such Officer's Certificate. (iv) Upon satisfaction of all conditions to such substitution, (A) the Collateral Agent shall execute and deliver to the Company such documents and instruments, prepared by the Company at the Company's sole cost and expense, as the Company shall reasonably request to evidence the release of each such replaced Airframe, Engine, Propeller or Spare Engine from the Lien of the Security Documents, (B) the Collateral Agent shall assign to the Company all claims it may have against any other Person relating to any Event of Loss giving rise to such substitution and (C) subject to Section 2.6(c) of the Loan Agreement, the Company shall receive all insurance proceeds and proceeds in respect of any Event of Loss giving rise to such replacement. For all purposes hereof, the property so substituted shall be deemed to be subjected to the Lien of the Security Documents and shall be deemed an "Aircraft", "Airframe", "Engine" or "Propeller", as the case may be, as defined herein. (b) Event of Loss with Respect to an Engine, a Propeller or Spare Engine. (i) Upon the occurrence of an Event of Loss with respect to an Engine or a Propeller under circumstances in which there has not occurred an Event of Loss with respect to an Airframe to which such Engine or Propeller was attached, or an Event of Loss with respect to a Spare Engine not installed on any Airframe, the Company shall forthwith (and in any event, within five (5) Business Days after such occurrence) give the Collateral Agent written notice thereof and shall, within one hundred and eighty (180) days after the occurrence of such Event of Loss, substitute an Acceptable Alternate Engine or Acceptable Alternate Propeller, as the case may be, free and clear of all Liens (other than Permitted Liens) and cause such Acceptable Alternate Engine or Acceptable Alternate Propeller, as the case may be, to be subjected to the Lien of the Security 36 Documents. The Company's right to make a replacement hereunder shall be subject to the fulfillment (which may be simultaneous with such replacement) of the following conditions precedent at the Company's sole cost and expense and the Collateral Agent agrees to cooperate with the Company to the extent necessary to enable it to timely satisfy such conditions: (A) the following documents shall be duly authorized, executed and delivered by the respective party or parties thereto, and an executed counterpart of each shall be delivered to the Collateral Agent: (I) a Security Agreement Supplement (Engine/Propeller) covering the Replacement Engine or Replacement Propeller, as the case may be, which shall have been duly filed for recordation by the Company pursuant to the Federal Aviation Act (or such other applicable law of the jurisdiction other than the United States in which such Aircraft of which such Engine or Propeller is a part) is registered in accordance with Section 2.01(a)(iii); and (II) UCC financing statements covering the security interests created by this Security Agreement (and any similar statements or other documents required to be filed or delivered pursuant to the laws of the jurisdiction in which such Aircraft may be registered) as may be necessary or advisable to perfect the security interests of the Collateral Agent in the Replacement Engine or Replacement Propeller, as the case may be; (B) the Company shall cause to be delivered to the Collateral Agent, an opinion of counsel (which opinion and counsel shall be reasonably satisfactory to the Collateral Agent) to the effect that the Lien of the Security Documents continues to be in full force and effect, that the Replacement Engine or Replacement Propeller, as the case may be, has duly been made subject to the Lien of the Security Documents, that all required action has been taken in order to maintain, and such action shall maintain, the effectiveness, perfection and priority (to the extent the same existed, immediately prior to the occurrence of such Event of Loss, assuming the Company was in compliance with all relevant terms hereof) of the security interest on such Engine, Propeller or Spare Engine, as applicable, and title thereto created by this Security Agreement and that, except as may have been effected by a change in law, the protections afforded to the Collateral Agent by Section 1110 of the Bankruptcy Code will not be less than such protections immediately prior to the occurrence of such Event of Loss (assuming the Company was in compliance with all relevant terms hereof); (C) an opinion of qualified FAA counsel (or counsel in any jurisdiction outside the United States where such Aircraft may be registered in accordance with Section 2.01(a)(iii)) (which opinion and counsel shall be reasonably satisfactory to the Collateral Agent), addressed to the Collateral Agent, as to, in the case of FAA counsel, the due recordation of the Security Agreement Supplement (Engine/Propeller) and all other documents or instruments the recordation of which is necessary to perfect and protect the rights of the Collateral Agent in the Replacement Engine or Replacement Propeller, as the case 37 may be or in the case of counsel in another jurisdiction, the taking of all action necessary in such jurisdiction for such purposes; (D) the representation contained in Section 4.6 of the Loan Agreement with respect to each such Replacement Engine and Replacement Propeller shall be true and correct; and (E) the Company shall deliver to the Collateral Agent an Officer's Certificate stating that in the opinion of such signer, all conditions precedent provided for in this Section 3.01(b) relating to such replacement have been complied with and representing that such alternate engine or alternate propeller is an Acceptable Alternate Engine or Acceptable Alternate Propeller, as applicable, and authorizing the Collateral Agent to rely on such Officer's Certificate. (ii) Upon satisfaction of all conditions to such substitution, (x) the Collateral Agent shall execute and deliver to the Company such documents and instruments, prepared at the Company's sole cost and expense, as the Company shall reasonably request to evidence the release of such replaced Engine, replaced Propeller or replaced Spare Engine, as the case may be, from the Lien of the Security Documents, (y) the Collateral Agent shall assign to the Company all claims it may have against any other Person relating to any Event of Loss giving rise to such substitution and (z) subject to Section 2.6(c) of the Loan Agreement, the Company shall receive all insurance proceeds and proceeds in respect of any Event of Loss giving rise to such replacement. For all purposes hereof, each such replacement engine and replacement propeller shall be deemed to be subjected to the Lien of the Security Documents and shall be deemed an "Engine", a "Spare Engine" or a "Propeller", as the case may be. (c) Event of Loss with Respect to Pledged Spare Parts. As between the Company and the Collateral Agent, all insurance proceeds received in respect of Pledged Spare Parts, whether as a result of the occurrence of an Event of Loss, or property damage or loss not constituting an Event of Loss, under policies required to be maintained by the Company pursuant to Section 2.04 will be applied in accordance with the provisions of Section 2.6(c) of the Loan Agreement. If either the Collateral Agent or the Company receives a payment of such insurance proceeds in excess of its entitlement pursuant to the preceding sentence, it shall cause such payment to be applied in accordance with Section 2.6(c) of the Loan Agreement. (d) Application of Payments from Governmental Authorities for Requisition of Title, etc. Any payments (other than insurance proceeds the application of which is provided for in Section 2.04) received at any time by the Collateral Agent or by the Company from any Governmental Authority or other Person with respect to an Event of Loss, other than a requisition for use by the United States Government or other government of registry of an Aircraft or any instrumentality or agency of any thereof not constituting an Event of Loss, will be applied as follows: (i) if payments are received with respect to an Airframe (or an Airframe and any Engine, any Propeller, any Spare Engine or engines or propellers then installed thereon), (A) unless the same are replaced pursuant to clause (B)(2) 38 of Section 3.01(a)(i), such payments shall be paid and applied in accordance with clause (B)(1) of Section 3.01(a)(i); or (B) if such property is replaced pursuant to clause (B)(2) of Section 3.01(a)(i), such payments shall, subject to Section 2.6(c) of the Loan Agreement, be paid over to or retained by, the Company; provided, that the Company shall have fully performed or, concurrently therewith will fully perform, the terms of Section 3.01(a)(iii) with respect to the Event of Loss for which such payments are made; (ii) if such payments are received with respect to an Engine, Propeller or Spare Engine under circumstances contemplated by Section 3.01(b) hereof, such payments shall be paid in accordance with Section 2.6(c) of the Loan Agreement; and (iii) if such payments are received with respect to any Pledged Spare Part under circumstances contemplated by Section 3.01(c) hereof, such payments shall be paid in accordance with Section 2.6(c) of the Loan Agreement. (e) Requisition for Use of an Aircraft by the United States Government or Government of Registry of an Aircraft. In the event of the requisition for use of any Airframe and the Engines or engines or Propellers or propellers installed on such Airframe by the United States Government or any other government of registry of such Aircraft or any instrumentality or agency of any thereof, the Company shall promptly notify the Collateral Agent of such requisition, and all of the Company's obligations under this Security Agreement with respect to such Aircraft shall continue to the same extent as if such requisition had not occurred. Subject to the rights of the Collateral Agent, upon the occurrence and during the continuance of a Specified Default or Event of Default, all payments received by the Collateral Agent or the Company from such government for the use of such Airframe and Engines or engines or Propellers or propellers shall be paid over to, or retained by, the Company (or, if directed by the Company, any Permitted Lessee). (f) Requisition for Use of an Engine, a Propeller or Spare Engine by the United States Government or the Government of Registry of an Aircraft. In the event of the requisition for use of an Engine, a Propeller or Spare Engine by the United States Government or any other government of registry of the applicable Aircraft or any agency or instrumentality of any thereof (other than in the circumstances contemplated by subsection (e)), the Company shall replace (or cause any Permitted Lessee to replace) such Engine, Propeller or Spare Engine hereunder and Collateral Agent and the Company (or Permitted Lessee as the case may be) shall comply with the terms of Section 3.01(b) hereof to the same extent as if an Event of Loss had occurred at the time of such requisition with respect to such Engine, such Propeller or such Spare Engine. Upon compliance with, and subject to the rights of the Collateral Agent pursuant to, Section 3.01(b) hereof, any payments received by Collateral Agent or the Company from such government with respect to such requisition shall be paid over to, or retained by the Company. (g) Application of Payments During Existence of Specified Defaults and Events of Default. Any amount referred to in this Section 3.01 which is payable to or retainable by the Company (or any Permitted Lessee) shall not be paid to or retained by the Company (or any Permitted Lessee) if at the time of such payment or retention a Specified Default or any Event of Default shall have 39 occurred and be continuing, but shall be held by or paid over to Collateral Agent and applied against the obligations of the Company (or such Permitted Lessee) under the Loan Documents. At such time as there shall not be continuing any such Specified Default or Event of Default, such amount shall be paid to the Company to the extent not previously applied in accordance with the preceding sentence. Prior to remitting any such funds to the Company, the Collateral Agent shall be authorized to request and receive an Officer's Certificate from the Company certifying that no Specified Default or Event of Default has occurred and is continuing. (h) Treatment of Insurance Proceeds in Accordance with Loan Agreement. Notwithstanding anything to the contrary contained herein, any insurance proceeds and any proceeds received in connection with a requisition of title by any Governmental Authority payable to the Company or the loss payee as a result of an Event of Loss with respect to all or any portion of the Collateral shall be subject to Section 2.6(c) of the Loan Agreement without regard to whether the Company elects pursuant to this Section 3.01 to substitute an aircraft, Replacement Airframe, Replacement Engine, Replacement Propeller, Acceptable Alternate Engine, Acceptable Alternate Propeller, Pledged Spare Parts or other Collateral, as the case may be, in respect of Collateral which has suffered an Event of Loss. ARTICLE 4 REMEDIES Section 4.01 Remedies Available to Collateral Agent. (a) For the purpose of enforcing any and all rights and remedies under this Security Agreement, after an Event of Default shall have occurred and so long as such Event of Default shall be continuing: (i) upon the written demand of the Collateral Agent and at the Company's expense, the Company shall promptly deliver possession of any Collateral as the Collateral Agent may so demand to the Collateral Agent or its designee in the manner and condition required by, and otherwise in accordance with all the provisions of, this Security Agreement, or the Collateral Agent at its option may enter upon the premises where all or any part of the Collateral is located and take immediate possession of and remove the same by summary proceedings or otherwise (and at the Collateral Agent's option, store the same at the Company's premises until disposal thereof by the Collateral Agent), all without liability accruing to the Collateral Agent (other than that caused by the Collateral Agent's willful misconduct or gross negligence as actually and finally determined by a final, non-appealable judgment of a court of competent jurisdiction) for or by reason of such entry or taking of possession or removing whether for the restoration of damage to property caused by such action or otherwise; and (ii) the Company shall, at the request of the Collateral Agent, promptly execute and deliver to the Collateral Agent such instruments or other documents as may be necessary or advisable to enable the Collateral Agent or an agent or representative designated by the Collateral Agent, at such time or times and place or places as the Collateral Agent may specify, to obtain possession of all or any part of the Collateral the possession of which the Collateral Agent shall at the time be entitled to hereunder; provided, that during any period any Aircraft is activated under the Civil Reserve Air Fleet Program in accordance with the provisions of Section 2.01(b)(i)(F) hereof and in the possession of the government of the United States of America or an instrumentality or agency thereof, the Collateral Agent shall not, on account of any Event of Default, be entitled to exercise any of its rights under this Section 4.01 against the Collateral in such manner as to 40 limit the Company's control of the associated Airframe or any Engines installed thereon, unless at least sixty (60) days' (or such lesser period as may then be applicable under the Air Mobility Command program of the United States Government) prior written notice of Default hereunder shall have been given by the Collateral Agent to the Company with a copy addressed to the Contracting Office Representative for the Air Mobility Command of the United States Air Force under the contract with the Company relating to such Aircraft. (b) After an Event of Default shall have occurred and so long as such Event of Default shall be continuing, then and in every such case the Collateral Agent, as holder of a security interest in the Collateral may, and when required pursuant to the provisions of Section 7.2 of the Loan Agreement shall, exercise, any or all of the rights and powers and pursue any and all of the remedies accorded to a secured party under the UCC and under any other applicable law, may recover judgment in its own name as Collateral Agent against the Collateral and may take possession of all or any part of the Collateral and may exclude the Company and all Persons claiming under any of them wholly or partly therefrom. Any proceeds received or realized by the Collateral Agent at any time pursuant to the exercise of remedies hereunder shall be promptly transferred by the Collateral Agent to the account of the Agent specified in Section 2.9(a) of the Loan Agreement for application in accordance with the priority of payments set forth in Section 2.9(e) of the Loan Agreement. (c) So long as an Event of Default shall have occurred and be continuing, the Collateral Agent may, if at the time such action may be lawful and always subject to compliance with any mandatory legal requirements, either with or without taking possession, and either before or after taking possession and without instituting any legal proceedings whatsoever, and having first given notice of such sale by registered mail to the Company, at least 20 days prior to the date of such sale, and any other notice which may be required by law, sell and dispose of the Collateral, or any part thereof, or interest therein, at public auction or private sale, in one lot as an entirety or in separate lots, and either for cash or on credit and on such terms as the Collateral Agent may determine, and at any place (whether or not it be the location of the Collateral or any part thereof) and time designated in the notice above referred to. (d) Any such sale may be adjourned from time to time by announcement at the time and place appointed for such sale, or for any such adjourned sale, without further notice, and the Collateral Agent or any Lender may bid and become the purchaser at any such sale and each Lender shall be entitled at any public auction sale to credit against any purchase price bid at such public auction sale by such Lender all or any part of any unpaid obligations owing to such Lender secured by the Lien of the Security Documents. (e) If an Event of Default has occurred and is continuing, the Collateral Agent shall also be entitled to pursue all or any part of the Collateral wherever it may be found and may enter any of the premises of the Company or any other Person wherever the Collateral may be or be supposed to be and search for the Collateral and take possession of any item of the Collateral pursuant to this Section 4.01(e). The Collateral Agent may, from time to time, at the expense of the Company, make all such expenditures for the collection, maintenance, insurance, repairs, replacements, alterations, additions and improvements to and of the Collateral, as it may deem proper. In each such case, the Collateral Agent shall have the right to collect, maintain, use, insure, operate, store, lease, control or manage the Collateral, and to carry on business and exercise all rights and powers of the Company relating to the Collateral as the Collateral Agent shall deem appropriate, including the right 41 to enter into any and all such agreements with respect to the collection, maintenance, use, insurance, operation, storage, leasing, control or management of the Collateral or any part thereof. The Collateral Agent shall be entitled to collect, sue for and receive directly all monies due or to become due, tolls, rents, issues, profits, products, revenues or other income pursuant to this Section 4.01(e). In accordance with the terms of this Section 4.01(e), such monies due or to become due, tolls, rents, issues, profits, products, revenues and other income shall be applied to pay the expenses of collecting, using, operating, storing, leasing, controlling or managing the Collateral, and of all maintenance, insurance, repairs, replacements, alterations, additions and improvements, and to make all payments which the Collateral Agent may be required or may elect to make, if any, for taxes, assessments, insurance or other proper charges upon the Collateral or any part thereof (including the employment of engineers and accountants to examine, inspect and make reports upon the properties and books and records of the Company), and all other payments which the Collateral Agent may be required or authorized to make under any provision of this Security Agreement, including this Section 4.01(e), as well as just and reasonable compensation for the services of the Collateral Agent, and of all persons properly engaged and employed by the Collateral Agent. (f) Subject to Section 4.01(c), the Collateral Agent may proceed to protect and enforce this Security Agreement by suit or suits or proceedings in equity, at law or in bankruptcy, and whether for the specific performance of any covenant or agreement herein contained or in execution or aid of any power herein granted; or for foreclosure hereunder, or for the appointment of a receiver or receivers for the Collateral or any part thereof, or for the recovery of judgment for the indebtedness secured by the Lien created under this Security Agreement or for the enforcement of any other proper, legal or equitable remedy available under applicable law. (g) Each and every right, power and remedy herein given to the Collateral Agent specifically or otherwise in this Security Agreement shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often in such order as may be deemed expedient by the Collateral Agent, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. No delay or omission by the Collateral Agent in the exercise of any right, remedy or power or in pursuing any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of the Company or to be an acquiescence therein. (h) Upon and during the continuance of an Event of Default the Collateral Agent shall be entitled to undertake an acceptance of all or a part of the Collateral in satisfaction of all or a specified part of the Obligations pursuant to and in accordance with the provisions of Sections 9-620 and 9-621 of the UCC and, if pursuant to such Sections and after such Event of Default the Company consents to such acceptance, which consent shall not be unreasonably withheld, then the Company shall execute and deliver such deeds of conveyance, assignments and other documents or instruments (including any notices or applications to the FAA or any other Governmental Authority having jurisdiction over the Collateral subject to such conveyance) as shall be reasonably required to effectuate the transfer of such Collateral, together with the certificates, 42 if any, representing the same and any other rights of the Company with respect thereto, to the Collateral Agent or any designee or designees selected by the Collateral Agent. Section 4.02 Expenses. The Company agrees that it will upon demand pay to the Collateral Agent: (a) the amount of any taxes payable by reason of the Collateral Agent's security interests in respect of the Collateral or to free any of the Collateral from any Lien thereon; and (b) the amount of any and all reasonable out-of-pocket expenses, including, but not limited to, any excise, property, transfer, sales and use taxes imposed by any state, federal or other local authority on any of the Collateral, and reasonable fees and disbursements of counsel and of any other experts payable in connection with the enforcement of this Security Agreement after and during the continuance of any Event of Default, including such expenses as are incurred in connection with: (i) the collection, sale or other disposition of the Collateral; (ii) any action taken by the Collateral Agent to effect compliance on behalf of the Company in respect of a failure by the Company to comply with the provisions of this Security Agreement which results (or is likely to result) in the diminution of the value of the Collateral or the validity, perfection, rank or value of the Collateral Agent's security interest in the Collateral; (iii) protecting, storing, warehousing, appraising, insuring, handling, maintaining, shipping, overhauling and repairing the Collateral; or (iv) the exercise by the Collateral Agent of any of the rights or powers conferred upon it hereunder. Any such amount not paid to the Collateral Agent on demand shall bear interest for each day until paid at a rate per annum equal to the sum of 2% per annum plus the Applicable Tranche A Interest Rate for such day. Section 4.03 Waiver of Claims. (a) Except as otherwise provided in this Security Agreement, the Company hereby waives, to the maximum extent permitted by applicable law, notice and judicial hearing in connection with the Collateral Agent's taking possession, retention, disposition or sale of any Collateral, including any and all prior notice and hearing for any prejudgment remedy or remedies and any such right which the Company would otherwise have under any applicable law, and the Company hereby further waives, to the maximum extent permitted by law: (i) provided that the actions taken comply, in all material respects, with applicable law, including but not limited to all applicable provisions of the UCC, all claims, damages and demands against the Collateral Agent, the Board, the Lenders and the Participants arising out of such taking of possession, retention, disposition or sale of the Collateral except such claims, damages and 43 demands as may arise out of such Person's own gross negligence or willful misconduct as actually and finally determined by a final non-appealable judgment of a court of competent jurisdiction and only to the extent of direct (as opposed to special, indirect, consequential or punitive) damages; (ii) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Collateral Agent's rights hereunder; and (iii) all rights of redemption, appraisal, valuation, stay, extension or moratorium now or hereafter in force under any applicable law in order to prevent or delay the enforcement of this Security Agreement or the absolute sale or other disposition of any part of the Collateral, and the Company, for itself and all who may claim under it, insofar as it or they now or hereafter lawfully may, hereby waives the benefit of all such laws; provided, however, that the actions taken by the Collateral Agent as described in Section 4.03 herein comply, in all material respects, with applicable law, including but not limited to all applicable provisions of the UCC. (b) The Company, for itself and all who claim through it, hereby waives all right to have the Collateral marshaled upon any foreclosure hereof and agrees that any court having jurisdiction to foreclose this Security Agreement may order the sale of the Collateral as an entity. Section 4.04 Discontinuance of Proceedings. In case the Collateral Agent shall have instituted any proceeding to enforce any right, power or remedy under this Security Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Collateral Agent, then and in every such case the Company, the Collateral Agent and each Lender shall be restored to their former positions and rights hereunder with respect to the Collateral subject to the security interest and Lien created under the Security Documents and all rights, remedies and powers of the Collateral Agent shall continue as if no such proceeding had been instituted. ARTICLE 5 TERMINATION OF SECURITY AGREEMENT Section 5.01 Termination of Security Agreement. This Security Agreement shall terminate upon payment and performance in full of all of the obligations hereby secured. Upon termination, the Company shall direct, at the Company's sole cost and expense, the Collateral Agent to execute and deliver, at the Company's sole cost and expense, to or as directed in writing by the Company appropriate instruments reasonably required to release all the property included in the Collateral from the Lien of the Security Documents and the Collateral Agent shall execute and deliver such instruments as aforesaid; provided, however, that this Security Agreement shall earlier terminate and this Security Agreement shall be of no further force or effect upon any sale or other final disposition by the Collateral Agent of all property constituting part of the Collateral and the final distribution by the Collateral Agent of all monies or 44 other property or proceeds constituting part of the Collateral in accordance with the terms hereof. Except as aforesaid otherwise provided, this Security Agreement shall continue in full force and effect in accordance with the terms hereof. ARTICLE 6 MISCELLANEOUS Section 6.01 Notices. All notices and other communication provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy as follows: if to the Company, to: American Trans Air, Inc. 7337 West Washington Street Indianapolis, Indiana 46231 Attention: 317-247-4000 Facsimile: 317-247-7091 if to the Collateral Agent, to: Citibank, N.A., Agency and Trust 111 Wall Street, 14th Floor New York, NY 10043 Attention: Fernando Moreyra Facsimile: 212-657-2762 Either party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other party hereto. All notices and other communications given to either party hereto in accordance with the provisions of this Security Agreement shall be deemed to have been given on the date of receipt. Section 6.02 GOVERNING LAW. THIS SECURITY AGREEMENT IS BEING DELIVERED IN THE STATE OF NEW YORK. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK; PROVIDED THAT IN THE EVENT THE BOARD BECOMES A LENDER PURSUANT TO THE BOARD GUARANTEE, THE RIGHTS AND OBLIGATIONS OF THE BOARD HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE FEDERAL LAW OF THE UNITED STATES OF AMERICA, IF AND TO THE EXTENT SUCH FEDERAL LAW IS APPLICABLE, AND OTHERWISE IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. THE PROVISIONS OF SECTION 10.11 OF THE LOAN AGREEMENT 45 ARE INCORPORATED HEREIN MUTATIS MUTANDIS, AS IF FULLY SET FORTH HEREIN. Section 6.03 Execution in Counterparts. This Security Agreement may be executed in any number of counterparts, each of which shall be an original but such counterparts shall together constitute but one instrument. Section 6.04 Amendments. This Security Agreement may be amended in accordance with the provisions set forth in Section 10.1 of the Loan Agreement. Section 6.05 Documentation. The Company shall provide the Collateral Agent with copies of all documents executed in connection with the Security Documents. Section 6.06 Cash Collateral. (a) Any amounts held by the Collateral Agent pursuant to the provisions of this Agreement shall be invested by the Collateral Agent from time to time in Eligible Investments as directed in an Officer's Certificate from the Company so long as the Collateral Agent may acquire the same using commercially reasonable efforts. The parties hereto agree that the Collateral Agent and/or an Affiliate of the Collateral Agent may charge and/or collect fees and expenses in connection with the purchase of Eligible Investments or for other services rendered to the parties hereto (provided that such charges, fees and expenses are on terms consistent with terms negotiated at arm's length). Neither the Collateral Agent nor any of its Affiliates shall be required to account for any profits or benefits described in the preceding sentence. All Eligible Investments held by the Collateral Agent pursuant to this Section 6.05 shall be registered in the name of, payable to the order of, or specially endorsed to, the Collateral Agent. Any income realized as a result of any such investment, net of the Collateral Agent's reasonable fees and expenses in making such investment, shall be held and applied by the Collateral Agent in the same manner as the principal amount of such investment is to be applied and any losses, net of earnings and such reasonable fees and expenses, shall be charged against the principal amount invested. All taxes on any income so realized shall be charged to the Company. The Collateral Agent shall not be liable for any loss resulting from any investment to be made by it under this Agreement other than by reason of its willful misconduct or gross negligence as actually and finally determined in a final, non-appealable judgment of a court of competent jurisdiction. (b) Neither the Collateral Agent nor any of its Affiliates assume any duty or liability for monitoring the rating of the selected investment. In the event an investment selection is not made, the amounts held by the Collateral Agent pursuant to the provisions of this Security Agreement shall not be invested and the Collateral Agent shall not incur any liability for interest or income thereon. (c) The Collateral Agent shall have no obligation to invest or reinvest amounts to be held by the Collateral Agent if all or a portion of such amounts are deposited with the Collateral Agent after 11:00 a.m. (New York time) on the day of the deposit. Instructions to invest or reinvest that are received after 11:00 a.m. (New York time) will be treated as if received on the following Business Day in New York. 46 (d) The Collateral Agent shall have the power to sell or liquidate the foregoing investments whenever the Collateral Agent shall be required to distribute the amounts held pursuant to the terms of this Security Agreement or as otherwise contemplated in this Security Agreement. Requests or instructions received after 11:00 a.m. (New York time) by the Collateral Agent to liquidate such amounts will be treated as if received on the following Business Day in New York. (e) The Collateral Agent shall have no responsibility for any investment losses resulting from the investment, reinvestment or liquidation of the amounts held by the Collateral Agent pursuant to the terms of this Security Agreement provided that the Collateral Agent has made such investment, reinvestment or liquidation of the trust assets in accordance with the terms, and subject to the conditions, of this Security Agreement. (f) Each of the parties to this Security Agreement acknowledge that non-deposit investment products are not obligations of, or guaranteed by, Citibank, N.A. or Citigroup North America, Inc., nor any of their affiliates; are not FDIC insured; and are subject to investment risks, including the possible loss of principal amount invested in one of the money market funds made available by the Collateral Agent and selected by the Company. (g) Any investment direction contained herein may be executed through an affiliated broker or dealer of the Collateral Agent and any such affiliated broker or dealer shall be entitled to such broker's or dealer's usual and customary fees for such execution. (h) The Eligible Investments may be held by the Collateral Agent directly or through any clearing agency or depository (collectively, the "Clearing Agency") including, without limitation, the Federal Reserve/Treasury Book-Entry System for United States and federal agency securities, and The Depository Trust Company. The Collateral Agent shall not have any responsibility or liability for the actions or omissions to act on the part of any Clearing Agency. (i) Notwithstanding anything contained herein to the contrary, the parties hereto hereby agree and acknowledge that due to the potential conflict of interest, the Collateral Agent will not purchase Citigroup North America, Inc. or any affiliate's commercial paper (collectively, "Citigroup Paper") unless the Collateral Agent is specifically instructed to purchase Citigroup Paper in an Officer's Certificate from the Company. Any instruction for the purchase of Citigroup Paper must be given by the Company on a transaction by transaction basis in the manner set forth in the preceding sentence. 47 IN WITNESS WHEREOF, the parties to hereto have caused this Mortgage and Security Agreement to be duly executed by their respective officers thereunto duly authorized. AMERICAN TRANS AIR, INC. By: /s/Kenneth K. Wolff Name: Kenneth K. Wolff Title: Executive Vice President & CFO CITIBANK, N.A., as Collateral Agent By: /s/Edward C. Morelli Name: Edward C. Morelli Title: Vice President EXHIBIT A1 to Mortgage and Security Agreement MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT (AIRCRAFT) NO. ( ) This MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT (AIRCRAFT) NO. (___) dated __________ (herein called this "Security Agreement Supplement") made by AMERICAN TRANS AIR, INC., an Indiana corporation (herein called the "Company"), in favor of CITIBANK, N.A., as Collateral Agent for, and directed by, the Board and the Lenders (as defined in the Loan Agreement (as defined in the Security Agreement (as defined below))) (the "Collateral Agent"). WITNESSETH: WHEREAS, the Company has heretofore executed and delivered to the Collateral Agent a Mortgage and Security Agreement dated as of November 20, 2002 (as amended, modified, restated or otherwise supplemented from time to time in accordance with its terms, the "Security Agreement"), covering, inter alia, Aircraft, Airframes, Engines and Propellers of the Company; WHEREAS, terms that are defined in the Security Agreement or the Loan Agreement (as such term is defined in the Security Agreement) and which are not otherwise defined herein shall have the meanings assigned to such terms in the Security Agreement or the Loan Agreement; WHEREAS, the Security Agreement has been recorded, pursuant to the Federal Aviation Act, by the FAA at Oklahoma City, Oklahoma, on ________ and assigned Conveyance No. _________; and WHEREAS, the Security Agreement provides for the execution and delivery from time to time of Mortgage and Security Agreement Supplements, each substantially in the form hereof, for the purpose of subjecting an aircraft, airframe, engine and/or propeller to the Lien of the Security Agreement. NOW, THEREFORE, this Security Agreement Supplement Witnesseth, that to secure the prompt payment of the principal of, interest on, and all other amounts due with respect to the Loan and to secure the performance and observance by the Company of all the agreements, covenants and provisions contained in the Security Agreement, in the Loan Agreement and in the other Loan Documents and the prompt payment of any and all amounts from time to time owing hereunder, under the Loan Agreement and the other Loan Documents, and for the uses and purposes and subject to the terms and provisions of the Security Agreement, and in consideration of the premises and of the covenants contained in the Security Agreement, and of other good and valuable consideration the receipt and adequacy whereof are hereby acknowledged, the Company has granted, bargained, sold, assigned, transferred, conveyed, mortgaged, pledged and confirmed, and does hereby grant, bargain, sell, assign, transfer, convey, mortgage, pledge and confirm, unto the Collateral Agent, its successors and assigns, for the security and benefit of the Board, the Lenders and the Participants, a first priority security interest in and first priority mortgage Lien on the following described property: AIRFRAME One Airframe identified as follows: FAA Registration Manufacturer's Manufacturer Model Number Serial Number together with all Parts which are from time to time incorporated or installed in or attached thereto, unless the Lien of the Security Agreement shall not be applicable to such Part pursuant to the provisions of the Security Agreement. AIRCRAFT ENGINES [____] aircraft engines, each such engine having 750 or more rated take-off horsepower or the equivalent thereof, whether or not such engines shall be installed in or attached to the above Airframe or any other Aircraft or airframe, identified as follows: Manufacturer's Manufacturer Model Serial Number PROPELLERS [____] propellers, each such propeller capable of absorbing 750 or more rated take-off shaft horsepower or the equivalent thereof, whether or not such propellers shall be installed in or attached to the above Engines or any other engine, identified as follows: Manufacturer's Manufacturer Model Serial Number in each case, together with all Parts which are from time to time incorporated or installed in or attached thereto, unless the Lien of the Security Agreement shall not be applicable to such Part pursuant to the provisions of the Security Agreement. TO HAVE AND TO HOLD all and singular the aforesaid property unto the Collateral Agent, its successors and assigns, for the uses and purposes and subject to the terms and provisions set forth in the Security Agreement. This Security Agreement Supplement shall be construed as a supplemental Security Agreement and shall form a part thereof, and the Security Agreement is hereby incorporated by reference herein and is hereby ratified, approved and confirmed. IN WITNESS WHEREOF, the Company caused this Mortgage and Security Agreement Supplement (Aircraft) No. (__) to be duly executed by one of its officers, thereunto duly authorized, on the day and year first above written. AMERICAN TRANS AIR, INC. By: ------------------------------- Name: Title: EXHIBIT A2 to Mortgage and Security Agreement MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT (ENGINE/PROPELLER) NO. ( ) This MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT (ENGINE/PROPELLER) NO. (__) dated ______________ (herein called this "Security Agreement Supplement") made by American Trans Air, Inc., an Indiana corporation (herein called the "Company"), in favor of CITIBANK, N.A., as Collateral Agent for, and directed by, the Board and the Lenders (as defined in the Loan Agreement (as defined in the Security Agreement (as defined below))) (the "Collateral Agent"). W I T N E S S E T H: WHEREAS, the Company has heretofore executed and delivered to the Collateral Agent a Mortgage and Security Agreement dated as of November 20, 2002 (as amended, modified, restated or otherwise supplemented from time to time in accordance with its terms, the "Security Agreement"), covering, inter alia, Engines, Propellers and Spare Engines of the Company; WHEREAS, terms that are defined in the Security Agreement or the Loan Agreement (as such term is defined in the Security Agreement) and which are not otherwise defined herein shall have the meanings assigned to such terms in the Security Agreement or the Loan Agreement; WHEREAS, the Security Agreement has been recorded, pursuant to the Federal Aviation Act, by the FAA at Oklahoma City, Oklahoma, on ________ and assigned Conveyance No. _________; and WHEREAS, the Security Agreement provides for the execution and delivery from time to time of Mortgage and Security Agreement Supplements, each substantially in the form hereof, for the purpose of subjecting engines and/or propellers to the Lien of the Security Agreement. NOW, THEREFORE, this Security Agreement Supplement Witnesseth, that to secure the prompt payment of the principal of, interest on and all other amounts due with respect to the Loan and to secure the performance and observance by the Company of all the agreements, covenants and provisions contained in the Security Agreement, in the Loan Agreement and in the other Loan Documents and the prompt payment of any and all amounts from time to time owing hereunder, under the Loan Agreement and the other Loan Documents and for the uses and purposes and subject to the terms and provisions of the Security Agreement, and in consideration of the premises and of the covenants contained in the Security Agreement, and of other good and valuable consideration the receipt and adequacy whereof are hereby acknowledged, the Company has granted, bargained, sold, assigned, transferred, conveyed, mortgaged, pledged and confirmed, and does hereby grant, bargain, sell, assign, transfer, convey, mortgage, pledge and confirm, unto the Collateral Agent, its successors and assigns, for the security and benefit of the Board, the Lenders and the Participants, a first priority security interest in and first priority mortgage Lien on the following described property: AIRCRAFT ENGINES [____] aircraft engines, each such engine having 750 or more rated take-off horsepower or the equivalent thereof, whether or not such engines shall be installed in or attached to any Aircraft or airframe, identified as follows: Manufacturer's Manufacturer Model Serial Number PROPELLERS [____] propellers, each such propeller capable of absorbing 750 or more rated take-off shaft horsepower or the equivalent thereof, whether or not such propellers shall be installed in or attached to the above Engines or any other engine, identified as follows: Manufacturer's Manufacturer Model Serial Number together with all Parts which are from time to time incorporated or installed in or attached thereto or which have been removed therefrom, unless the Lien of the Security Agreement shall not be applicable to such Part pursuant to the provisions of the Security Agreement. TO HAVE AND TO HOLD all and singular the aforesaid property unto the Collateral Agent, its successors and assigns, for the uses and purposes and subject to the terms and provisions set forth in the Security Agreement. This Security Agreement Supplement shall be construed as a supplemental Security Agreement and shall form a part thereof, and the Security Agreement is hereby incorporated by reference herein and is hereby ratified, approved and confirmed. IN WITNESS WHEREOF, the Company has caused this Mortgage and Security Agreement Supplement (Engine/Propeller) No. (__) to be duly executed by one of its officers, thereunto duly authorized, on the day and year first above written. AMERICAN TRANS AIR, INC. By: ----------------------------------- Name: Title: EXHIBIT A3 to Mortgage and Security Agreement MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT (PLEDGED SPARE PARTS) NO. ( ) This MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT (PLEDGED SPARE PARTS) NO. (__) dated ______________ (herein called this "Security Agreement Supplement") made by AMERICAN TRANS AIR, INC., an Indiana corporation (herein called the "Company"), in favor of CITIBANK, N.A., as Collateral Agent for, and directed by, the Board and the Lenders (as defined in the Loan Agreement (as defined in the Security Agreement (as defined below))) (the "Collateral Agent"). W I T N E S S E T H: WHEREAS, the Company has heretofore executed and delivered to the Collateral Agent a Mortgage and Security Agreement dated as of November 20, 2002 (as amended, modified, restated or otherwise supplemented from time to time in accordance with its terms, the "Security Agreement"), covering, inter alia, certain Spare Parts and Appliances of the Company; WHEREAS, terms that are defined in the Security Agreement or the Loan Agreement (as such term is defined in the Security Agreement) and which are not otherwise defined herein shall have the meanings assigned to such terms in the Security Agreement or the Loan Agreement; WHEREAS, the Security Agreement has been recorded, pursuant to the Federal Aviation Act, by the FAA at Oklahoma City, Oklahoma, on ________ and assigned Conveyance No. _________; and WHEREAS, the Security Agreement provides for the execution and delivery from time to time of Mortgage and Security Agreement Supplements, each substantially in the form hereof, for the purpose of subjecting spare parts and appliances to the Lien of the Security Agreement. NOW, THEREFORE, this Security Agreement Supplement Witnesseth, that to secure the prompt payment of the principal of, interest on and all other amounts due with respect to the Loan and to secure the performance and observance by the Company of all the agreements, covenants and provisions contained in the Security Agreement, in the Loan Agreement and in the other Loan Documents and the prompt payment of any and all amounts from time to time owing hereunder, under the Loan Agreement and the other Loan Documents and for the uses and purposes and subject to the terms and provisions of the Security Agreement, and in consideration of the premises and of the covenants contained in the Security Agreement, and of other good and valuable consideration the receipt and adequacy whereof are hereby acknowledged, the Company has granted, bargained, sold, assigned, transferred, conveyed, mortgaged, pledged and confirmed, and does hereby grant, bargain, sell, assign, transfer, convey, mortgage, pledge and confirm, unto the Collateral Agent, its successors and assigns, for the security and benefit of the Board, the Lenders and the Participants, a first priority security interest in and first priority mortgage Lien on the following described property: PLEDGED SPARE PARTS [Describe] The Pledged Spare Parts described above are located, as of the date hereof, at [specify locations] (each such location to be included as a Designated Location). TO HAVE AND TO HOLD all and singular the aforesaid property unto the Collateral Agent, its successors and assigns, for the uses and purposes and subject to the terms and provisions set forth in the Security Agreement. This Security Agreement Supplement shall be construed as a supplemental Security Agreement and shall form a part thereof, and the Security Agreement is hereby incorporated by reference herein and is hereby ratified, approved and confirmed. IN WITNESS WHEREOF, the Company has caused this Mortgage and Security Agreement Supplement (Pledged Spare Parts) No. (__) to be duly executed by one of its officers, thereunto duly authorized, on the day and year first above written. AMERICAN TRANS AIR, INC. By: -------------------------------------- Name: Title: EXHIBIT B to Mortgage and Security Agreement SCHEDULE OF AIRCRAFT EXHIBIT C to Mortgage and Security Agreement SCHEDULE OF SPARE ENGINES EXHIBIT D to Mortgage and Security Agreement SUMMARY DESCRIPTION OF PLEDGED SPARE PARTS Boeing Model 737-83N aircraft (737-800) rotable parts, meaning an accessory, appurtenance, or part of an aircraft (except an engine or propeller), engine (except a propeller), spare engine, propeller, or Appliance, that is to be installed at a later time on an aircraft, engine, propeller or Appliance. Boeing Model 757-33N (757-200/300) aircraft rotable parts, meaning an accessory, appurtenance, or part of an aircraft (except an engine or propeller), engine (except a propeller), spare engine, propeller, or Appliance, that is to be installed at a later time on an aircraft, engine, propeller or Appliance. Multi-fleet rotables compatible with B737-800, B757-200, and/or B757-300 aircraft types, meaning an accessory, appurtenance, or part of an aircraft (except an engine or propeller), engine (except a propeller), spare engine, propeller, or Appliance, that is to be installed at a later time on an aircraft, engine, propeller or Appliance. (this summary description is by way of illustration and not limitation) EXHIBIT E to Mortgage and Security Agreement DESIGNATED LOCATIONS Boston, Massachusetts (BOS) Logan International Airport c/o Hudson General American Airlines Hgr. East Boston, MA 02128 Chicago, Illinois (MDW) Midway Airport ATA Warehouse 6535 South Austin Avenue Bedford Park, Illinois 60638 Chicago, Illinois (MDW) Midway Airport ATA MDW Hangar 5245 W. 55th St. Chicago, IL 60638 Chicago, Illinois (ORD) Terminal 5 O'Hare International Airport (P.O. Box 66499) Gate M4, Lower Chicago, Illinois 60666 Detroit, Michigan (DTW) Detroit Metropolitan Airport ATA Maintenance, Bldg 719 Detroit, MI 48242 Ft. Lauderdale, Florida (FLL) 100 Terminal Drive Terminal No. 2 Ft. Lauderdale / Hollywood International Airport Ft. Lauderdale, FL 33315 Honolulu, Hawaii (HNL) Honolulu International Airport ATA Maintenance Office 300 Rodgers Blvd. No. 5 Honolulu, HI 96819 Indianapolis, Indiana (IND) ATA Distribution Center 4555 West Bradbury Avenue. Suite No. 3 Indianapolis, IN 46241 Indianapolis, Indiana (IND) ATA IND Hangar 7661 N. Perimeter Rd. Indianapolis, IN 46241 Las Vegas, Nevada (LAS) Charter Int'l Terminal 5757 Wayne Newton Blvd. Las Vegas, NV 89111 Las Vegas, Nevada (LAS) McCarran International Airport ATA Maintenance P.O. Box 11027 Las Vegas, NV 89111 Las Vegas, Nevada (LAS) Nelles AFB, Bldg #2094 Las Vegas, NV 89191 Los Angeles, California (LAX) 5720 Avion Drive, Unit A LAX International Airport Los Angeles, CA 90045 Los Angeles, California (LAX) c/o Ogden Allied 6951 World Way West Los Angeles, CA 90045 Milwaukee, Wisconsin (MKE) 201 W. Cargo Way Milwaukee, WI 53207 Minneapolis, Minnesota (MSP) 3000 E 72nd Street Bloomington, MN 55450 Minneapolis, Minnesota (MSP) 6300 34th Ave So Minneapolis, MN 55450 New York City, New York (JFK) JFK International Airport Horizon Aviation Hangar No. 4 Jamaica, NY 11430 Orlando, Florida (MCO) 9043 Tradeport Drive Orlando, FL 32827-4365 Orlando, Florida (MCO) 9443 Benford Road Orlando, FL 32827 Philadelphia, Pennsylvania (PHL) c/o AMR, Inc. Cargo Unit No. 1 Philadelphia, PA 19152 Philadelphia, Pennsylvania (PHL) Art Milano c/o American Trans Air 1343 Bullens Lane Woodlyn, PA 19094 Phoenix, Arizona (PHX) Phoenix International Airport c/o America West Airlines 4000 E. Skyharbor Blvd. Terminal No. 4 Phoenix, AZ 85034 St. Petersburg/Tampa, Florida (PIE) St. Petersburg-Clearwater Int'l Airport 4707 140th Avenue North Suite 307 Clearwater, FL 33762 San Francisco, California (SFO) San Francisco Int'l Airport Gate 24, Lower San Francisco, CA 94128 Sarasota/Bradenton, Florida (SRQ) c/o Servisair Cargo Sarasota / Bradenton Airport 8051 N. Tamiani, Trail, Suite 25 Sarasota, FL 34243 EXHIBIT F to Mortgage and Security Agreement SCHEDULE OF COUNTRIES AUTHORIZED FOR DOMICILE OF PERMITTED LESSEES Australia Austria Belgium Brazil Canada Chile Czech Republic Denmark Finland France Germany Iceland Ireland Italy Japan Luxembourg Mexico Netherlands New Zealand Norway Poland Republic of China (Taiwan) South Africa South Korea Sweden Switzerland United Kingdom EXHIBIT G to Mortgage and Security Agreement SCHEDULE OF COUNTRIES AUTHORIZED FOR AIRCRAFT REGISTRATION Australia Austria Belgium Brazil Canada Chile Czech Republic Denmark Finland France Germany Iceland Ireland Italy Japan Luxembourg Mexico Netherlands New Zealand Norway Poland Republic of China (Taiwan) South Africa South Korea Sweden Switzerland United Kingdom EX-21 5 atah2002exhibit21.txt ATA HOLDINGS CORP. - EXHIBIT 21 Exhibit 21 Subsidiaries of the Registrant Name under which Subsidiaries do State or other Jurisdiction of Business Incorporation or Organization - -------------------------------------------------------------------------------- ATA Airlines, Inc. (formerly American Trans Air) Indiana Ambassadair Travel Club, Inc. Indiana American Trans Air Leisure Corporation Indiana Amber Travel, Inc. Indiana American Trans Air Training Corporation Indiana American Trans Air Execujet, Inc. Indiana ATA Cargo, Inc. California Chicago Express Airlines, Inc. Georgia EX-99 6 atah2002exhibit991.txt ATA HOLDINGS CORP. - EXHIBIT 99.1 Exhibit 99.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, J. George Mikelsons, certify that: 1. I have reviewed this annual report on Form 10-K of ATA Holdings Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ J. George Mikelsons J. George Mikelsons Chairman and Chief Executive Officer EX-99 7 atah2002exhibit992.txt ATA HOLDINGS CORP. - EXHIBIT 99.2 Exhibit 99.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, David M. Wing, certify that: 1. I have reviewed this annual report on Form 10-K of ATA Holdings Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ David M. Wing David M. Wing Executive Vice President and Chief Financial Officer EX-99 8 atah2002exhibit993.txt ATA HOLDINGS CORP. - EXHIBIT 99.3 Exhibit 99.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of ATA Holdings Corp., formerly Amtran Inc. (the "Company"), does hereby certify that: The Annual Report of Form 10-K for the year ended December 31, 2002 (the "Form 10-K") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 31, 2003 /s/ J. George Mikelsons ------------------------ J. George Mikelsons Chief Executive Officer Dated: March 28, 2003 /s/ David M. Wing ----------------- David M. Wing Chief Financial Officer The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----