Discovery Air announces agreement to issue $70 million of secured convertible debentures

Discovery Air Inc. (“Discovery Air” or the “Corporation”) announced today that it has entered into an agreement to complete a private placement (the “Private Placement”) of an aggregate of $70,000,000 Cdn. principal amount of secured convertible debentures (the “Debentures”). Net proceeds of the transaction will be used to repay existing debt owed to certain of the Corporation’s lenders. The Debentures will be issued to Clairvest Group Inc. and certain of its affiliates (collectively, “Clairvest”).

As of the date hereof, Clairvest owns, directly and indirectly, 595,207 Common Shares of Discovery Air, representing less than 0.5% of the Corporation’s issued and outstanding Common Shares. Upon closing of the Private Placement, and before giving effect to the Corporation’s share consolidation plan discussed below, the Debentures will be convertible into 93,333,333 Class A common shares (“Common Shares”) for an initial effective issue price of $0.75 per Common Share, subject to anti-dilution adjustment provisions. The 93,333,333 Common Shares represent 64.12% of the Corporation’s currently issued and outstanding shares and, on a fully diluted and “as converted” basis, represent 32.33% of the Corporation’s issued and outstanding shares. Clairvest acts at arm’s length to the Corporation.

The Debentures will mature 5 ½ years from issuance, subject to earlier redemption rights in favour of the Corporation relating to certain milestone events by Discovery Air’s Top Aces Inc. subsidiary. The Corporation may also redeem the debentures three years after issuance providing the Common Share weighted average trading price exceeds 116% of the then-applicable conversion price over an agreed trading period prior to issuance of the redemption notice. Interest on the Debentures will accrue at a rate of 10% per annum and will be payable annually commencing 12 months after closing on an “in kind” basis through the issuance of additional Debentures. The original conversion price of the Debentures, $0.75 per Common Share, will also increase at 10% per annum, and as a result, the original face amount of the Debentures plus all paid-in-kind interest will continue to be convertible into 93,333,333 Common Shares (subject to customary anti-dilution adjustments). The Debentures shall have a first-lien security interest in all assets of Discovery Air and its subsidiaries except with respect to accounts receivable and certain inventory, and except with respect to certain assets already pledged to the Northwest Territories Opportunities Fund, another senior lender to the Corporation. The Corporation will have the right to require full subordination of the Debentures’ security interest in respect of new indebtedness upon the achievement of agreed milestone events by Discovery Air’s Top Aces Inc. subsidiary. Prior to any of the milestone events being achieved, the Corporation can require subordination of the Debentures’ security interest in yet to be acquired assets in an amount up to $50 million.

The Debentures will contain, in addition to standard anti-dilution rights for events such as consolidations and stock splits, “reset” provisions which will adjust the Debentures’ conversion price if, in the 24 months following issuance, the Corporation issues equity, or securities convertible into equity, at prices less than the conversion price of the Debentures (herein “US Style Anti-Dilution Rights”). The Debentures will also contain a “change of control” provision which will, upon the occurrence of a Change of Control (defined below), require the Corporation to make an offer to purchase, within 30 days following consummation of the Change of Control, all of the Debentures at a price equal to 100% of the Debenture principal amount plus accrued and unpaid interest. Subject to regulatory approval, in the event of a Change of Control where the consideration is or can be received wholly or partially in cash (being 10% or more in cash), debentureholders may elect to convert their Debentures and receive, in addition to the number of Common Shares they otherwise would have been entitled to, an additional number of Common Shares not exceeding the specified number of Common Shares per $1,000 of Debentures determined by a Change of Control Conversion Price formula (defined below), provided that the Change of Control Conversion Price is not less than any regulatory permitted discounts to market price, in which case the Change of Control Conversion Price shall be deemed to be that implied by the maximum permitted discount to market price.

The “Change of Control Conversion Price” shall be calculated as follows:

COCCP = OCP / (1 + (CP x (c/t))) where:
COCCP = Change of Control Price
OCP = Conversion Price
CP = means 46 per cent
c = means the number of days from and including the date of the Change of Control to but excluding the Maturity Date; and
t = means the number of days from and including the Closing Date to but excluding the Maturity Date.

A “Change of Control” will be deemed to occur upon the acquisition of (i) voting control or direction over more than 50% of the Common Shares on an “as converted” basis, or (ii) more than 50% of the consolidated assets of the Corporation. A Change of Control cannot occur as a result of any action on the part of Clairvest.

Since the Private Placement will provide for (i) the issuance of securities that could materially affect the control of the Corporation as the Private Placement results, or could result, in a new holding of more than 20% of the voting securities by one security holder, (ii) the issuance of an aggregate number of Common Shares issuable greater than 25% of the number of Common Shares outstanding, on a non-diluted basis, prior to the date of closing of the Debentures, and (iii) US Style Anti-Dilution Rights, the rules of the Toronto Stock Exchange (“TSX”) require that the Corporation obtain approval of the Private Placement from the holders of a majority of its voting shares. However, TSX rules also provide that such approval may be obtained without the requirement to convene a shareholders’ meeting for such purpose. The Corporation confirms that it has obtained written consent to the Private Placement from holders of more than 50% of its Common Shares.

On closing of the Private Placement, Clairvest shall have the right to nominate three directors to the Corporation’s Board of Directors, which currently consists of six members. Two of such directors will be appointed on the Closing of the Private Placement, thereby increasing the Board to eight members, and one additional director will be nominated at the Corporation’s 2012 annual general meeting, thereby increasing the Board to nine members.

The proposed Private Placement is subject to a number of conditions including: (i) the approval of the TSX, (ii) Board approval of, and the execution of, definitive documentation, and (iii) the receipt of all consents required from lenders to Discovery Air. It is currently anticipated that the closing of the Private Placement will occur by September 30, 2011.

Dave Jennings, President and CEO of Discovery Air, commented, “We are very pleased with this financing and are excited to have the Clairvest team as financial partners going forward. While our cash flow and liquidity have been strong under our existing capital structure, the terms of this deal will greatly enhance our cash flow, allowing us to pursue the aggressive growth we’re targeting in the short and medium term future. The in kind interest combined with the escalating conversion price make this convertible debt deal as close to an equity deal at appropriate prices as is reasonably practical in today’s market. The terms allow us to eliminate many of the cumbersome financial and other restrictions in our legacy senior debt arrangements. This will give us significantly more flexibility to deploy assets and manage the business effectively. Clairvest’s agreement to subordinate its security position in favour of new senior debt is important in positioning us to raise funding as required for future projects that support our growth strategy. And finally, the addition of Clairvest’s nominees will bring additional depth to the Corporation’s already-strong Board of Directors. Closing of this transaction will complete the capital structure overhaul we began early in 2011, and will position Discovery Air to both better support our existing customers and to target aggressive growth in new markets.”

Ken Rotman, Co-CEO of Clairvest, commented, “We have been closely following Discovery Air and its management for many years, commencing in 2005 when our affiliate, Wellington Financial, helped to finance one of Discovery Air’s subsidiaries. We see in Discovery Air an undervalued company with significant market share in its various market verticals, strong and deep management and tremendous expansion opportunities. We look forward to a long and positive association with the company and assisting them, in any way we can, with their exciting growth initiatives.”

The Corporation also announced that subject to the approval of the TSX and to final approval of its Board of Directors, it intends to effect a share consolidation (the “Consolidation”) on the basis of 10 “old” Common Shares for every 1 “new” Common Share concurrently with or as soon as practicable after closing of the Private Placement. The consolidation will reduce the number of shares outstanding from approximately 145,556,150 to approximately 14,555,616. The Consolidation was approved by shareholders at the Corporation’s Annual and Special Meeting on June 7, 2011, and is expected to assist with possible future capital raises, by allowing certain institutional investors, precluded from investing at the Corporation’s current share price, to acquire shares. Increased institutional ownership may increase the average daily volume of trading in the Corporation’s shares, providing shareholders a more liquid market in the Corporation’s securities, and may also reduce bid/ask spreads, resulting in more efficient pricing for both buyers and sellers of the Corporation’s shares.

No fractional shares will be issued as a result of the consolidation. If the consolidation results in a registered shareholder having a fractional interest of less than a whole share, such fractional interest will be rounded down to the nearest whole number. Registered shareholders of Discovery Air will receive instructions by mail on how to obtain a new share certificate representing their consolidated common shares. Discovery Air shares held through a broker, bank, trust company, nominee or other financial intermediary will be adjusted by that firm.

The above disclosure of the terms of the Private Placement does not give effect to the Consolidation.

ABOUT DISCOVERY AIR AND ITS SUBSIDIARIES
Founded in 2004, Discovery Air is a specialty aviation services company operating across Canada and in select locations internationally. With over 130 aircraft, it is one of the largest air operators in Canada, employing more than 600 flight crew, maintainers and support staff to deliver a variety of air transport, maintenance and logistics solutions to a wide range of government, airline and business customers. Discovery Air’s subsidiaries include Top Aces, which delivers airborne training and special mission services to the Canadian military; Hicks & Lawrence, a supplier of airborne fire management services to the Ontario government and charter services to government agencies and corporate customers; Discovery Air Technical Services, which provides a range of aircraft maintenance, repair, overhaul, modification, engineering and certification services; Great Slave Helicopters, one of the largest VFR helicopter operator in the country; Air Tindi, the largest fixed-wing aircraft charter provider based in Northern Canada; Discovery Mining Services, which supplies all-weather exploration camps as well as expediting and logistics support services; and Discovery Air Innovations, the innovations arm of Discovery Air that identifies and captures large, new market opportunities.