<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 13, 1995
WORLDCORP, INC.
(Exact name of registrant as specified in charter)
Virginia 1-5351 94-3040585
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
13873 Park Center Road, Suite 490, Herndon, Virginia 22071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 834-9200
<PAGE>
ITEM 5. OTHER EVENTS
On September 13, 1995, World Airways, Inc. ("World Airways"), a subsidiary
of WorldCorp, Inc. ("WorldCorp"), filed an amendment to a Registration Statement
on Form S-1 for a proposed offering of 2,900,000 shares of World Airways Common
Stock (plus up to an additional 435,000 shares of World Airways Common Stock
subject to the underwriters' over-allotment option). Of the 2,900,000 shares
proposed to be sold in the offering, 900,000 shares would be sold by WorldCorp
as a selling shareholder (and 135,000 shares owned by WorldCorp are subject to
the over-allotment option).
Included as an exhibit to this Form 8-K is World Airways' preliminary
prospectus dated September 13, 1995 which contains information about the
offering, including WorldCorp's participation therein, and the business and
financial results of World Airways.
ITEM 7. EXHIBITS
Exhibit 99.1 World Airways, Inc. Preliminary Prospectus dated
September 13, 1995.
-2-
<PAGE>
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 hereunto duly authorized.
WORLDCORP, INC.
Date: September 13, 1995 By: ANDREW M. PAALBORG
-----------------------------
Andrew M. Paalborg
Vice President and General
Counsel
-3-
<PAGE>
INDEX TO EXHIBITS
99.1 World Airways, Inc. Preliminary Prospectus dated September 13, 1995.
-4-
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 13, 1995
[LOGO OF WORLD AIRWAYS APPEARS HERE]
2,900,000 SHARES
WORLD AIRWAYS, INC.
COMMON STOCK
Of the 2,900,000 shares of Common Stock offered hereby, 2,000,000
shares are being offered by World Airways, Inc. (the "Company"), and
900,000 shares are being offered by WorldCorp, Inc. ("WorldCorp" or the
"Selling Stockholder"). The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholder. Upon
completion of this offering (the "Offering"), WorldCorp will own
approximately 59.3% of the Common Stock. See "Principal and Selling
Stockholders."
Prior to the Offering, there has been no public market for the
Common Stock. It is currently anticipated that the initial public
offering price per share of Common Stock will be between $12.00 and
$14.00 per share. For a discussion of the factors to be considered in
determining the initial public offering price, see "Underwriting". The
Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "WLDA", subject to official notice of issuance.
SEE "RISK FACTORS", PAGE 7, FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholder(2)
<S> <C> <C> <C> <C>
Per Share ................................... $ $ $ $
Total ....................................... $ $ $ $
Total Assuming Full Exercise of Over-
Allotment Option(3) ......................... $ $ $ $
</TABLE>
(1) See "Underwriting".
(2) Before deducting expenses estimated at $466,000 and $209,000,
which are payable by the Company and the Selling Stockholder,
respectively.
(3) Assuming exercise in full of the 30-day option granted by the
Company and the Selling Stockholder to the Underwriters to
purchase up to 300,000 and 135,000 additional shares of Common
Stock, respectively, on the same terms, solely to cover
over-allotments. See "Underwriting".
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to their right to reject orders in whole or in part. It is
expected that delivery of the Common Stock will be made in New York City on
or about , 1995.
PAINEWEBBER INCORPORATED
J.P. MORGAN SECURITIES INC.
SALOMON BROTHERS INC
L. H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
THE DATE OF THIS PROSPECTUS IS , 1995.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (as amended, the
"Registration Statement"), pursuant to the provisions of the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder, for the registration of the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and financial statements and notes filed as a
part thereof. Statements made in this Prospectus concerning the contents of any
contract or other document are not necessarily complete, however, such
statements accurately describe the material provisions of all such contracts or
documents. With respect to each such contract or other document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits and schedules thereto filed by the
Company with the Commission may be inspected at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained from the Public Reference Section of the Commission, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
As a result of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the periodic
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
intends to furnish holders of the Common Stock with annual reports containing,
among other information, audited financial statements certified by an
independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. The Company also intends to furnish such other reports from time to time
as it may determine or as may be required by law.
The World Airways logo is the registered trademark of the Company. The
Air Mobility Command insignia is the property of the U.S. Government. The
Asiana Cargo logo is the registered trademark of Asiana Airlines, Inc. The
Garuda Indonesia logo is the registered trademark of P.T. Garuda Indonesia.
The International Lease Finance Corporation logo is the registered trademark
of the International Lease Finance Corporation. The MHS Berhad logo is the
registered trademark of MHS Berhad. The Malaysian Airlines logo is the
registered trademark of Malaysian Airline System Berhad. The McDonnell Douglas
logo is the registered trademark of the McDonnell Douglas Corporation. The
United Technologies Pratt & Whitney logo is the registered trademark of United
Technologies Corporation's Pratt & Whitney Group.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
WORLD BENEFITS FROM
[LOGO]MSH BERHAO
[LOGO]MALAYSIA
MALAYSIAN AIRLINE SYSTEM
WORLD
[LOGO]
MCDONNELL DOUGLAS[LOGO]
ILFC
INTERNATIONAL LEASE FINANCE/R/
CORPORATION
<PAGE>
IMPORTANT RELATIONSHIPS
AIR MOBILITY COMMAND
GARUDA INDONESIA/R/
THE AIRLINE OF INDONESIA
[LOGO]ASIANA CARGO/R/
[LOGO]UNITED
TECHNOLOGIES
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
included elsewhere in this Prospectus. Except as otherwise noted, all
information in the Prospectus assumes no exercise of the Underwriters'
over-allotment option. See "Description of Capital Stock and Underwriting."
THE COMPANY
The Company is a leading provider of long-range passenger and cargo air
transportation, serving customers in four distinct markets: (i) major
international air carriers; (ii) the U.S. Government; (iii) international tour
operators in the leisure passenger market; and (iv) small package shippers and
freight forwarders. In addition, in July 1995, the Company commenced
year-round scheduled passenger service between New York and Tel Aviv. The
Company's customers include: Malaysian Airline System Berhad, P.T. Garuda
Indonesia, Asiana Airlines, Inc., the U.S. Air Force and United Parcel
Service. The Company operates a fleet of MD-11 and DC10-30 aircraft and has
been in continuous operation since it was founded in 1948.
BUSINESS STRATEGY
The Company's business strategy is to maximize the utilization of its
aircraft in order to achieve consistent profitability and create a foundation
for continued growth. The Company deploys five of its seven MD-11 aircraft in
year-round operations under multi-year contracts with a long-term customer.
The Company currently supplements its MD-11 fleet with DC10-30 aircraft to
serve selected markets that the Company believes offer significant profit
potential. In executing this strategy, the Company believes it enjoys several
competitive advantages:
Key Strategic Alliance in Southeast Asia. As a result of its strategic
alliance with MHS Berhad, a diversified Malaysian aviation services holding
company, the Company has established a strong position in the rapidly growing
markets of Southeast Asia. MHS currently owns 19.9% of the Company's
outstanding Common Stock. In addition, MHS currently owns 32% of the common
stock, and exercises management control, of Malaysian Airlines, the largest
air carrier in Southeast Asia and the Company's largest customer. The
Company's strategic alliance with MHS has further strengthened the Company's
15-year relationship with Malaysian Airlines. Malaysian Airlines is expanding
rapidly due to the economic growth in Southeast Asia and a Malaysian
government initiative to modernize the country's industrial infrastructure.
Aviation is one of the government's highest priorities in this program.
The Company provides Malaysian Airlines with highly reliable,
state-of-the-art, long-range aircraft, the unique operating route authorities
of a U.S. air carrier and 48 years of operating experience. The Company
presently operates three cargo and two passenger MD-11s for Malaysian Airlines
under multi-year agreements, expiring between 1997 and 2000, with high minimum
monthly utilization levels. These contracts have increased the year-round
usage of the Company's MD-11 fleet, reduced the seasonality of the Company's
business and contributed to its recently improved operating performance. Block
hours contracted with Malaysian Airlines under these agreements will increase
from 3,581 in 1994 to 14,788 in 1995 and 22,080 in 1996. The Company has an
additional significant contract with Malaysian Airlines under which it flies
Malaysian Muslim pilgrims to Saudi Arabia for the annual Hadj religious
pilgrimage.
Long-Term Customer Relationships. The Company has long-term customer
relationships that the Company believes increase the predictability of its
revenue base and provide a stable platform for future growth. In addition to
its relationship with Malaysian Airlines, a customer since 1981, the Company
has flown for the U.S. Air Force since 1956, Garuda Indonesia since 1973 and
UPS since 1985, generally under annual contracts. The Company expects to have
one of the largest U.S. Air Force fixed awards under the Civil Reserve Air
Fleet program for the U.S. Government's 1995-1996 fiscal year. The Company
also believes that, since 1988, it has been one of the largest providers of
passenger services to Garuda Indonesia for the Hadj pilgrimage.
Contracts Which Reduce Operating Risk. The Company's contractual
arrangements with its customers reduce the load, yield and operating expense
risks traditionally associated with the airline business. Substantially
3
<PAGE>
all of the Company's services are provided under contracts in which the
Company's customers are responsible for filling the passenger or cargo
capacity of each of the contracted aircraft. These contracts also typically
provide for the Company's customers to guarantee monthly minimum aircraft
utilization levels at fixed hourly rates. In addition, an increasing
percentage of the Company's services are provided under basic contracts, under
which customers are responsible for all operating services and related
expenses (including fuel), except for the aircraft, cockpit crew, maintenance
and insurance.
Significant Growth Opportunities. In addition to its prospects with
existing customers, the Company believes it has significant growth
opportunities in new markets, including scheduled charter service in markets
that demonstrate predictably strong seasonal demand and carefully selected
scheduled passenger routes. In the scheduled charter market, the Company has
identified what it believes is a significant opportunity to increase revenues
and profits by serving the leisure passenger markets between the U.S. and
Europe. In the scheduled charter business, blocks of seats are sold on a
less-than-planeload basis to tour operators. The Company is developing
schedules and is marketing capacity to international tour operators for the
1996 summer season. In the scheduled passenger business, the Company will
consider entering only those markets that it believes (i) are well suited to
the competitive advantages of the Company's long-range, wide-body aircraft,
(ii) have prospects for rapid growth, and (iii) have high barriers to entry.
After determining that the market between New York and Tel Aviv met these
criteria, the Company commenced scheduled passenger service in this market in
July 1995.
Attractive Fleet Characteristics. The Company operates a balanced fleet
of passenger, cargo and passenger/cargo convertible aircraft, allowing it to
serve the needs of its diverse customer base, respond to market changes
throughout the year and reduce seasonality. To strengthen its competitive
position, particularly with its Southeast Asian customers, the Company
re-equipped its fleet with new generation MD-11 aircraft, a state-of-the-art,
wide-body aircraft which provides superior range, payload and operating
economics. Because the Company contracted for its MD-11s in 1992 and early
1993 during a period of weak demand for new aircraft, the Company believes it
obtained these aircraft on favorable lease terms.
RECENT OPERATING AND FINANCIAL RESULTS
As a result of executing its business strategy, the Company's operating
and financial results have improved substantially in the first six months of
1995:
. Average daily aircraft utilization (block hours flown per day per
aircraft) increased 24% to 9.8 hours from 7.9 hours for the six months
ended June 30, 1994.
. Operating income per block hour increased to $483 from $104 for the six
months ended June 30, 1994.
. Net earnings increased to $7.1 million compared to a net loss of $0.2
million for the six months ended June 30, 1994 and net losses of
approximately $9.0 million for each of the years ended December 31, 1993
and 1994.
In addition, the Company's contract backlog was $465 million at June 30,
1995 compared to $67 million at June 30, 1994. Of this $465 million, $363
million relates to fiscal years 1996 through 2000, substantially all of which
relates to contracts with Malaysian Airlines. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
For the two months ended August 31, 1995 compared to the two months ended
August 31, 1994, net earnings of the Company increased $6.1 million to $3.9
million from a net loss of $2.2 million, largely due to the new multi-year
contracts with Malaysian Airlines. See "Recent Financial Results."
The Company was incorporated in Delaware in 1948 and became a wholly
owned subsidiary of WorldCorp in a holding company reorganization in 1987.
WorldCorp and MHS currently own 80.1% and 19.9%, respectively, of the
outstanding Common Stock. WorldCorp and MHS will own approximately 59.3% and
16.6%, respectively, of the outstanding Common Stock upon completion of the
Offering.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......................... 2,000,000 shares
Common Stock Offered by the Selling Stockholder............. 900,000 shares
Common Stock to be Outstanding after the Offering(1)........ 12,000,064 shares
Use of Proceeds............................................. General corporate purposes, including working
capital and funding expenditures relating to the
development of new routes. The Company will not
receive any proceeds from the sale of Common Stock
by the Selling Stockholder. See "Use of Proceeds."
Nasdaq National Market Trading Symbol....................... "WLDA"
</TABLE>
(1) Excludes 1,050,083 shares of Common Stock issuable upon the exercise of
options. See Management--1995 Stock Option Plan and "--Compensation of
Directors" and "Principal and Selling Stockholders."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors in the Common Stock offered hereby.
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total operating revenues. $225,344 $215,129 $180,293 $178,737 $180,715 $ 87,586 $116,317
Operating income (loss).. 18,280 15,246 7,265(1) (7,328)(2) (5,201)(3) 1,424 8,328
Earnings (loss) before
income taxes and change
in accounting principle. 12,256 21,329(4) 8,654 (8,984) (9,027) (280) 7,404
Earnings (loss) before
change in accounting
principle............... 11,971 20,481 8,418 (9,048) (9,001) (230) 7,133
Net earnings (loss)...... 11,971 20,481 6,445 (9,048) (9,001) (230) 7,133
Weighted average common
stock and common
equivalent shares
outstanding (in
thousands)(5)........... 9,036 9,036 9,036 9,036 9,974 9,787 10,162
Earnings (loss) per
common share before
change in accounting
principle............... $ 1.32 $ 2.27 $ 0.93 $ (1.00) $ (0.90) $ (0.02) $ 0.70
Net earnings (loss) per
common share............ 1.32 2.27 0.71 (1.00) (0.90) (0.02) 0.70
Cash dividends per
common share............ -- -- 2.15 -- -- -- --
OPERATING DATA:
Total block hours
flown(6)................ 30,464 25,569 22,263 23,462 26,455 13,660 17,225
Daily aircraft
utilization (in block
hours)(7)............... 8.9 9.6 8.4 7.3 8.8 7.9 9.8
Average aircraft
equivalents(8).......... 9.4 7.3 7.2 8.8 8.2 9.5 9.7
Operating income (loss)
per block hour(9)....... $ 600 $ 596 $ 326 $ (312) $ (197) $ 104 $ 483
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1995
-----------------------------
ACTUAL AS ADJUSTED(10)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 4,447 $ 28,161
Working capital (deficit)...................... (30,505) (6,791)
Net equipment and property..................... 40,883 40,883
Total assets................................... 91,023 114,737
Notes payable and long-term obligations
(including current maturities)................ 31,925 31,925
Accumulated deficit............................ (16,747) (16,747)
Total stockholders' equity..................... 5,766 29,480
</TABLE>
(1) Operating income in 1992 includes $4.1 million related to settlement of
contract claims with the U.S. Government related to Operation Desert
Shield/Desert Storm.
(2) Operating income in 1993 was reduced by $2.3 million of termination fees
related to the early return of three DC10-30 aircraft.
(3) Operating income (loss) in 1994 includes a $4.2 million reversal of
excess accrued maintenance reserves associated with the expiration of
three DC10-30 aircraft leases during 1994.
(4) 1991 earnings include a $5.5 million gain as a result of settling
litigation with the State of California Franchise Tax Board.
(5) All share and per share data for the periods presented have been restated
to reflect the stock split which was effective February 1994.
(6) "Total block hours flown" for an aircraft represents the elapsed time
computed from the moment the aircraft first moves under its own power at
the point of origin to the time it comes to rest at its destination.
(7) "Daily aircraft utilization" is determined by dividing the block hours
flown during such period by the number of days during such period that
the aircraft were leased by the Company.
(8) "Average aircraft equivalents" represents the total number of aircraft in
service during each day of a given period divided by the number of days
in the given period.
(9) "Operating income (loss) per block hour" for any period represents the
amount determined by dividing operating income (loss) for such period by
the total block hours flown for such period.
(10) As adjusted to give effect to the sale of 2,000,000 shares of Common
Stock by the Company pursuant to the Offering and the application of the
net proceeds therefrom. "See Use of Proceeds."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors prior to making an
investment in the Common Stock.
RISKS RELATED TO THE COMPANY
Dependence Upon Key Customers. The Company's business relies heavily on
its contracts with Malaysian Airline System Berhad ("Malaysian Airlines"), P.T.
Garuda Indonesia ("Garuda Indonesia") and the U.S. Air Force. These customers
provided approximately 42%, 23% and 14% of revenues, respectively, and 42%,
22% and 9% of total block hours, respectively, during the first six months of
1995. These customers provided approximately 18%, 18% and 22% of the Company's
revenues, respectively, in 1994 and 23%, 20% and 14% of total block hours,
respectively, in 1994. As a result of new multi-year contracts with Malaysian
Airlines, the Company expects that Malaysian Airlines will provide a larger
percentage of the Company's revenues in the future. Approximately 89% of the
Company's contract backlog of $465 million at June 30, 1995 is attributable to
the Malaysian Airlines contracts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview." The loss of any of
these contracts or a substantial reduction in business from any of these three
customers, if not replaced, would have a material adverse effect on the
Company's financial condition and results of operations.
Geographic Concentration. The Company derives a significant percentage of
its revenues and block hours from its operations in Southeast Asia and the
Middle East primarily as a result of its contracts with Malaysian Airlines and
Garuda Indonesia. While the Company believes Southeast Asia and the Middle
East are growth markets for air transportation, any economic decline or any
military or political disturbance in these areas may interfere with the
Company's ability to provide service in these areas and could have a material
adverse effect on the Company's financial condition and results of operations.
Operating Losses. While the Company was profitable each year from 1987
through 1992 and in the first six months of 1995, the Company sustained
operating losses in 1993 and 1994 of $7.3 million and $5.2 million,
respectively, and net losses of $9.0 million in each of these two years. There
can be no assurance that the Company will be able to sustain its current
profitability. See "Selected Financial and Operating Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Financial Leverage. The Company is highly leveraged. The Company incurred
substantial debt and operating lease commitments during 1993 in connection
with its acquisition of MD-11 aircraft and related spare parts. At June 30,
1995, the Company had total long-term indebtedness of approximately $14.5
million and notes payable and current maturities of long-term obligations of
$17.5 million. In addition, the Company has significant future long-term
obligations under aircraft lease obligations relating to its aircraft. See
Note 10 to "Notes to Financial Statements." The degree to which the Company is
leveraged could have important consequences to holders of Common Stock,
including the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions or other purposes may be limited; (ii) the Company's degree of
leverage and related debt service obligations, as well as its obligations
under operating leases for aircraft, may make it more vulnerable than some of
its competitors in a prolonged economic downturn; and (iii) the Company's
financial position may restrict its ability to pursue new business
opportunities and limit its flexibility in responding to changing business
conditions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
Liquidity and Commitments. As is common in the airline industry, the
Company operates with a working capital deficit. While at June 30, 1995, the
Company had negative working capital of $30.5 million, the Company believes
that its current financing arrangements, income from operations and the
additional proposed financings discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," together with the proceeds of the Offering, will be
sufficient to allow the Company to meet its operating and capital requirements
for at least the next 12 months. The Company's cash and cash equivalents were
$4.4 million at June 30, 1995.
7
<PAGE>
The Company has substantial long-term aircraft lease obligations with
respect to its current aircraft fleet and is negotiating the lease of two
additional MD-11 passenger aircraft. The Company also has significant capital
commitments during the next 12 months relating to the proposed purchase of one
spare engine and spare parts for its MD-11 aircraft (and an additional engine
and spare parts if the Company commits to lease two additional MD-11s). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Capital Commitments." The Company
has obtained financing for certain of these commitments and is seeking
financing for certain other of these expenditures. No assurances can be given,
however, that the Company will obtain all of the required financing. Under the
Company's $20 million credit agreement, dated December 7, 1993, with BNY
Financial Corporation (as amended through August 1995, the "Credit Agreement"),
the Company has agreed that it will not incur in excess of $25 million of
additional debt. In addition, WorldCorp is subject to an indenture that limits
the Company's ability to incur additional debt. At June 30, 1995, the Company,
WorldCorp and WorldCorp's other subsidiaries were permitted to incur an
aggregate of $30.4 million of additional debt under such indenture. The
incurrence of additional debt by WorldCorp or certain of its subsidiaries
would (absent reduction in the amount of debt outstanding of the applicable
WorldCorp entities as of June 30, 1995) reduce the amount of additional debt
the Company could incur. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources," and
"Certain Relationships and Transactions."
Control by WorldCorp; Potential Conflicts of Interest. Upon the
completion of the Offering, WorldCorp will own approximately 59.3% (or
approximately 56.7% if the Underwriters' over-allotment option is exercised in
full) of the outstanding Common Stock. See "--Risks Related to the
Offering--Shares Eligible for Future Sale; Possible Adverse Effect on Market
Price." WorldCorp is a holding company that owns majority positions in two
companies: US Order, Inc. ("US Order") and the Company. WorldCorp is highly
leveraged and therefore requires substantial funds to cover debt service each
year. As a holding company, all of WorldCorp's funds are generated through its
subsidiaries, neither of which is expected to pay dividends in the foreseeable
future. As a result of WorldCorp's cash requirements, it may be required to
sell additional shares of Common Stock of the Company from time to time, and
such sales, or the threat of such sales, could have a material adverse effect
on the market price of the Company's Common Stock. Except as limited by
contractual arrangements with MHS Berhad ("MHS"), see "Certain Relationships and
Transactions," WorldCorp also will be in a position to control the outcome of
substantially all issues submitted to the Company's stockholders, including
the election of all of the Company's Board of Directors, adoption of
amendments to the Company's Certificate of Incorporation and approval of
mergers. Under Delaware law, WorldCorp will be able to approve certain actions
by written consent without a meeting of the stockholders of the Company. The
purchasers of the Common Stock offered hereby will be minority stockholders,
both individually and in the aggregate. See "Principal and Selling
Stockholders." In addition, the Company's Board of Directors has eight members,
one of whom, T. Coleman Andrews, III, is President, Chief Executive Officer
and a director of WorldCorp. See "Management" and "Certain Relationships and
Transactions."
If an active trading market for the Common Stock develops as a result of
this Offering, the Selling Stockholder will have greater ability to liquidate
its investment in the Company. Assuming an initial public offering price of
$13.00 per share (the midpoint of the estimated initial public offering price
range), the Selling Stockholder estimates that it would realize a gain of
approximately $16.7 million (net of underwriting discounts and commissions and
offering expenses payable by the Selling Stockholder) upon completion of the
Offering and that the resulting market value of the Selling Stockholder's
remaining shares of Common Stock at such price would be approximately $92.4
million (or $72.6 million in excess of the Selling Stockholder's carrying
value of such shares). See "Dilution" and "Certain Relationships and
Transactions."
Shareholders Agreement with MHS. Under a shareholders agreement among the
Company, WorldCorp and MHS (the "Shareholders Agreement"), WorldCorp has agreed
to vote its shares of Common Stock to elect the number of directors nominated
by MHS that represent MHS' proportionate interest in the Company (not less
than two directors). In addition, the Company is not permitted to consummate
the sale of all or substantially all of its business or make a fundamental
change in its line of business without the approval of the directors
designated by MHS. Accordingly, MHS could block the Company from entering into
a transaction or taking actions that could be in the best interests of
stockholders. Also, if without the prior written consent of MHS, the Company
sells all
8
<PAGE>
or substantially all of its business or fundamentally changes its line of
business, then MHS has the right to require WorldCorp to purchase all or part
of MHS' shares at fair market value, which could have the effect of
discouraging WorldCorp from taking certain actions that could be in the best
interests of the Company's stockholders. The Shareholders Agreement terminates
if either WorldCorp's or MHS' ownership interest falls below 5% of the
outstanding capital stock of the Company. See "Certain Relationships and
Transactions."
Employee Relations. The collective bargaining agreement between the
Company and the International Brotherhood of Teamsters (the "Teamsters") on
behalf of the Company's flight attendants expired in 1992. The parties
exchanged their opening contract proposals in 1992 and have had numerous
contract negotiation sessions. The outcome of the negotiations with the flight
attendants cannot be determined at this time. The inability to reach an
agreement upon terms favorable to the Company could have a material adverse
effect on the Company. The Company's flight attendants also recently
challenged the use of foreign flight attendant crews on the Company's flights
for Malaysian Airlines and Garuda Indonesia, which has historically been the
Company's operating procedure. The Company is contractually obligated to
permit its Southeast Asian customers to deploy their own flight attendants.
The arbitration on this issue is scheduled for October 1995. While the Company
intends to contest this matter vigorously, an unfavorable ruling for the
Company could have a material adverse effect on the Company.
Ability to Manage Growth. The Company is currently experiencing rapid
growth in its existing operations and intends to enter new markets. If the
Company's management is unable to manage this growth, the Company's results of
operations may be adversely affected. The Company's entrance into new markets
requires additional skilled personnel and distribution capability. An
inability to hire skilled personnel or to develop its distribution capability
may also adversely affect the Company's ability to operate profitably in its
new markets. See "Management" and "Business--Business Strategy and Competitive
Advantages--Significant Growth Opportunities."
Effect of Offering on the Company's NOLs. As of December 31, 1994, the
Company had net operating loss carryforwards ("NOLs") for federal income tax
purposes of $110.9 million ($72.6 million of which is subject to a $6.3
million annual limitation as a result of an ownership change of the Company
for tax purposes in 1991). These NOLs, if not utilized to offset taxable
income in future periods, will expire between 1997 and 2009. While the Company
believes that the Offering will not cause an ownership change, the application
of the Internal Revenue Code of 1986, as amended (the "Code"), in this area is
subject to interpretation by the Internal Revenue Service (the "IRS"). If future
transactions in the capital stock of WorldCorp, or of the Company, combined
with the effect of this Offering, result in an ownership change for tax
purposes, then the use of these NOLs in future years would be further limited.
In the event that more than approximately $5.0 million of the outstanding
convertible debentures of WorldCorp are converted into WorldCorp common stock,
the Company believes an ownership change will occur. In addition, there can be
no assurance that operations of the Company will generate taxable income in
future years so as to realize a tax benefit from its NOLs. The NOLs are
subject to examination by the IRS and, thus, are subject to adjustment or
disallowance resulting from any such IRS examination. In addition to the
ownership change that may occur upon the conversion of the WorldCorp
debentures, it is possible that additional ownership changes of the Company
may occur in the future and may result in the imposition of a lower annual
limitation on the Company's NOLs existing at the time of any such ownership
change. Accordingly, prospective purchasers of Common Stock should not assume
the unrestricted availability of the Company's currently existing or future
NOLs, if any, in making their investment decisions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Income and Other Taxes."
Restrictions on Payment of Dividends. The Credit Agreement contains
restrictions on the Company's ability to pay dividends on the Common Stock.
The Credit Agreement provides that the Company shall not declare, pay or make
any dividends or distributions in any six-month period which aggregate in
excess of the lesser of $4.5 million or 50% of the Company's net income for
the previous six months and requires that the Company have a cash balance of
not less than $7.5 million after giving effect to such dividend or
distribution. Additionally, WorldCorp is subject to the provisions of two
indentures, expiring in 1997 and 2004, respectively, under which it is
obligated to cause the Company not to pay dividends upon the occurrence of any
events of default by WorldCorp under such indentures. See "Dividend Policy."
9
<PAGE>
Operations Dependent upon Limited Fleet. Each of the MD-11 and DC10-30
aircraft in the Company's existing fleet is to a large extent contractually
dedicated by the Company to the service of one or more customers, with limited
aircraft available to provide back-up capability. Therefore, in the event one
or more of the Company's aircraft were to be lost or out of service, the
Company might have difficulty fulfilling its obligations under one or more of
these contracts, if it were unable to obtain substitute aircraft. See
"Business--Business Strategy and Competitive Advantages--Long-Term Customer
Relationships." As is customary in the airline business, the Company has no
business interruption insurance. Any extended interruption of the Company's
operations due to the loss, or unavailability due to unscheduled servicing or
repair, or lack of availability of substitute aircraft could have a material
adverse effect on the Company. Also, as the Company enters into additional
agreements to use its aircraft fleet on a year-round as opposed to seasonal
basis, the Company will have fewer aircraft available to meet the peak
seasonal demands for its traditional customers such as Garuda Indonesia for
the Hadj pilgrimage and the U.S. Air Force for short-term expansion flying. To
continue to meet the peak seasonal demand requirements of its customers, the
Company will have to acquire additional aircraft on short-term leases. There
can be no assurances, however, that reliable aircraft will be available for
such leases or, if such aircraft are available, that the Company will be able
to lease such aircraft on favorable terms. See "Business--Aircraft Fleet."
Fluctuations in Quarterly Results. Historically, the Company's business
has been significantly affected by seasonal factors. During the first quarter,
the Company typically experiences lower levels of utilization and yields as
demand for passenger and cargo services is lower relative to other times of
the year. The Company experiences higher levels of utilization and yields in
the second quarter, principally due to peak demand for commercial passenger
services associated with the annual Hadj pilgrimage. During 1995, the
Company's flight operations associated with the Hadj pilgrimage occurred from
April 1 to April 30 and from May 13 to June 8. Because the Hadj occurs
approximately 10 to 12 days earlier each year, revenues resulting from future
Hadj contracts will begin to shift from the second quarter to the first
quarter over the next several years. In recent years, soft demand and
weakening yields in worldwide passenger markets adversely affected the
Company's results in the third quarter. Fourth quarter utilization depends
primarily upon the demand for air cargo services in connection with the
shipment of merchandise in advance of the U.S. holiday season. The Company
believes that its recent multi-year contracts with Malaysian Airlines and a
recent increase in peak European summer tourist travel occurring in the third
quarter should lessen the effect of these seasonal factors. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and Note 16 of "Notes to Financial Statements."
Anti-takeover Provisions; Certain Provisions of Delaware Law, Certificate
of Incorporation and Bylaws. Certain provisions of Delaware law, the Company's
Certificate of Incorporation and Bylaws and certain provisions in agreements
with MHS (see "Certain Relationships and Transactions") could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. As long as
WorldCorp owns more than 50% of the Common Stock, it can make additional
changes to provisions of the Company's Certificate of Incorporation and Bylaws
to make it more difficult for a third party to acquire control of the Company.
Additionally, subject to certain contractual limitations in its agreements
with MHS, WorldCorp has control over any sale of the Company and such
provisions and control could limit the price that certain investors might be
willing to pay in the future for shares of Common Stock. Certain of these
provisions allow the Company to issue Preferred Stock with rights senior to
those of the Common Stock without any further vote or action by the holders of
Common Stock. The issuance of Preferred Stock could decrease the amount of
earnings and assets available for distribution to the holders of Common Stock
or could adversely affect the rights and powers, including voting rights, of
the holders of the Common Stock. In certain circumstances, such issuance could
have the effect of decreasing the market price of the Common Stock. See
"--Control by WorldCorp; Potential Conflicts of Interest" and "Description of
Capital Stock--Preferred Stock" and "--Delaware Law and Certain Charter and
Bylaw Provisions."
Limitation on Voting by Foreign Citizens. Under applicable regulatory
restrictions, no more than 25% of the voting stock of the Company can be owned
or controlled, directly or indirectly, by persons who are not U.S. citizens
("Foreign Citizens"). The Company's Certificate of Incorporation and Bylaws
provide that no shares of capital stock may be voted by or at the direction of
Foreign Citizens unless such shares are registered on a separate stock record
(the "Foreign Stock Record"). MHS will own approximately 16.6% of the
outstanding shares of Common Stock upon completion of the Offering. No shares
of Common Stock owned by Foreign Citizens will be registered on the Foreign
Stock Record of the Company to the extent that the aggregate
10
<PAGE>
ownership by Foreign Citizens reflected in the Foreign Stock Record would
exceed 25% of the Company's outstanding shares of Common Stock. See
"Description of Capital Stock--Limitations on Voting by Foreign Owners."
Reliance on Others. The Company has entered into agreements with
contractors, including other airlines, to provide certain facilities and
services required for its operations, including all of the Company's off-wing
engine maintenance and most airframe maintenance. The Company has also entered
into agreements with contractors to provide ground handling and personnel
training. The Company will likely enter into similar agreements in any new
market it serves. Although the Company believes that there are many advantages
to outsourcing these activities, the Company's reliance on others to provide
essential services to it could have an adverse impact on the Company's
financial condition, results of operations and operating performance because
the efficiency, timeliness and quality of the contract services the Company
receives are not entirely within its control. See "Business--Maintenance."
Possible Effects of Litigation Against the Company. WorldCorp and the
Company are defendants in litigation pursuant to which the Committee of
Unsecured Creditors of Washington Bancorporation (the "Committee") seeks to
recover approximately $4.8 million from the Company and approximately $2.0
million from WorldCorp, which are alleged to be the amounts paid to each of
the Company and WorldCorp upon the maturity of Washington Bancorporation
commercial paper in the 90 days before the filing of the bankruptcy petition
by Washington Bancorporation. On June 9, 1993, WorldCorp and the Company filed
a motion to dismiss the litigation and intend to vigorously contest the claim.
The Company believes it has substantial defenses to this action, although no
assurance can be given of the eventual outcome of this litigation. Depending
upon the timing of the resolution of this claim, if the Committee were
successful in recovering the full amount claimed, the resolution could have a
material adverse effect on the Company's financial condition and results of
operations. See "Business--Legal and Administrative Proceedings."
RISKS RELATED TO THE AIR TRANSPORTATION INDUSTRY
Cyclical Nature of Air Carrier Business. The Company operates in a
challenging business environment. The air transportation industry is highly
sensitive to general economic conditions. Since a substantial portion of
passenger airline travel (both business and personal) is discretionary, the
industry tends to experience severe adverse financial results during general
economic downturns and can be adversely affected by unexpected global
political developments. The financial results of air cargo carriers are also
adversely affected by general economic downturns due to the reduced demand for
air cargo transportation. In recent years, the combination of a generally weak
global economy and the depressed state of the air transportation industry has
adversely affected the Company's operating performance. Although the Company
recently has experienced a growth in demand, such that the Company has
increased block hours flown by 26% in the first six months of 1995 compared to
the first six months of 1994 and 13% in 1994 over 1993, there can be no
assurance that this growth will continue.
Competition. The air transportation industry is highly competitive and
susceptible to price discounting due to excess capacity. Certain of the
passenger and cargo air carriers against which the Company competes possess
substantially greater financial resources and more extensive facilities and
equipment than those which are now, or will in the foreseeable future become,
available to the Company.
The Company's ability to provide service in certain foreign markets in
the future may depend in part on the willingness of the U.S. Department of
Transportation (the "DOT") to allocate limited traffic rights to the Company
rather than to competing U.S. airlines, including major scheduled passenger
carriers capable of carrying greater passenger traffic, and the approval of
the applicable foreign regulators. There can be no assurance that the Company
will be able to obtain the traffic rights it seeks in expanding its business.
The allocation of military air transportation contracts by the U.S. Air
Force is based upon the number and type of aircraft a carrier, alone or
through a teaming arrangement, makes available for use in times of national
emergencies. The formation of competing teaming arrangements that have larger
partners than those sponsored by the Company, an increase by other air
carriers in their commitment of aircraft to the emergency program, or the
withdrawal of the Company's current partners, could adversely affect the size
of the U.S. Air Force contracts, if any, which are awarded to the Company in
future years.
In the passenger airline market, the Company generally competes on the
basis of price, quality of service, including on-time reliability and
in-flight service, and convenience. Many of the Company's competitors in the
11
<PAGE>
passenger airline market (both scheduled and non-scheduled passenger air
carriers) compete for passengers in a variety of ways. During periods of
dramatic fare cuts by the Company's competitors, the Company may be forced to
respond with reduced pricing, which could have a material adverse effect on
the Company's financial condition and results of operations. The Company also
competes directly against charter airlines, some of which are substantially
larger than it, and certain of which are affiliates of major scheduled
airlines or tour operators. As a result, in addition to greater access to
financial resources, these charter airlines may have greater distribution
capabilities, including exclusive or preferential relationships with
affiliates that are tour operators.
The Company believes that the most important bases for competition in the
air cargo business are the payload and cubic capacities of the aircraft, and
the price, flexibility, quality and reliability of the cargo transportation
service. Competitors in the cargo market include all-cargo carriers, such as
Atlas Air, Inc. and Polar Air Cargo, and scheduled and non-scheduled passenger
carriers which have substantial belly cargo capacity.
See "Business--Competition."
Government Regulation. The Company is subject to government regulation
and control under U.S. laws and the laws of the various countries which it
serves. It is also governed by bilateral services agreements between the U.S.
and the countries to which the Company provides airline service. Under
bilateral air services agreements between the U.S. and many foreign countries,
traffic rights in those countries are available to only a limited number of,
and in some cases only one or two, U.S. carriers and are subject to approval
by the applicable foreign regulators.
The Company is subject to the Federal Aviation Act of 1958, as amended
(the "Aviation Act"), under which the DOT and the Federal Aviation
Administration (the "FAA") exercise regulatory authority. Generally, the FAA has
regulatory jurisdiction over flight operations, including equipment,
personnel, maintenance and other safety matters. To assure compliance with its
operational standards, the FAA requires air carriers to obtain operating,
airworthiness and other certificates, which may be suspended or revoked for
cause. The FAA also conducts safety audits and has the power to impose fines
and other sanctions for violations of airline safety regulations. The DOT
maintains authority over international aviation, subject to review by the
President of the U.S., and has jurisdiction over unfair trade practices and
consumer protection policies on international routes and fares. Additionally,
foreign governments assert jurisdiction over air routes and fares to and from
the U.S., airport operation rights and facilities access.
While the Company believes it is currently in compliance in all material
respects with all appropriate standards and has all required licenses and
authorities, any material non-compliance by the Company therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on the Company. See "Business--Regulation."
Insurance Coverage and Expenses. The Company is exposed to potential
losses that may be incurred in the event of an aircraft accident. Any such
accident could involve not only repair or replacement of a damaged aircraft
and its consequent temporary or permanent loss from service, but also
significant potential claims of injured passengers and others. The Company is
required by the DOT to carry liability insurance on each of its aircraft. The
Company currently maintains public liability insurance in the amount of $750
million per occurrence. Although the Company believes its current insurance
coverage is adequate and consistent with current industry practice, there can
be no assurance that the amount of such coverage will not be changed or that
the Company will not bear substantial losses from accidents. Substantial
claims resulting from an accident in excess of related insurance coverage
could have a material adverse effect on the Company. The Company's insurance
policies impose certain geographical restrictions on where the Company may
provide airline service, excluding, for example, Iran and Iraq. In addition,
the Company's insurance expenses could significantly increase if the Company
were to provide service to destinations where military action is taking place.
Any such increases in expenses could have a material adverse effect on the
Company. See "Business--Insurance."
Aviation Fuel. The air transportation industry in general is affected by
the price and availability of aviation fuel. Both the cost and availability of
aviation fuel are subject to many economic and political factors and events
occurring throughout the world and remain subject to the various unpredictable
economic and market factors that affect the supply of all petroleum products.
The price of fuel has not historically had a significant impact on the
Company's operations because, in general, the Company's contracts with its
customers limit the Company's exposure to increases in fuel prices. See
"Business--Business Strategy and Competitive Advantages--Contracts
12
<PAGE>
Which Reduce Operating Risk." However, a substantial increase in the price or
the unavailability of aviation fuel could have a material adverse effect on
the air transportation industry in general and on the financial condition and
results of operations of the Company.
RISKS RELATED TO THE OFFERING
Substantial Dilution. Purchasers of the Common Stock offered hereby will
experience an immediate and substantial dilution in net tangible book value
per share of the Common Stock from the initial public offering price. See
"Dilution."
Shares Eligible for Future Sale; Possible Adverse Effect on Market Price.
Upon completion of the Offering, the Company will have outstanding 12,000,064
shares of Common Stock and 1,050,083 shares subject to outstanding options. Of
this amount, the 2,900,000 Shares sold in the Offering will be freely
transferable and may be resold without further registration under the
Securities Act. The remaining shares held by the Selling Stockholder and MHS
are "restricted securities" under the Securities Act, and such holders will be
entitled to resell them only pursuant to a registration statement under the
Securities Act or an applicable exemption from registration thereunder such as
an exemption provided by Rule 144. If at any time after October 30, 1996 the
Company registers its Common Stock under the Securities Act, then MHS has the
right to demand the registration of the 1,990,000 shares of Common Stock that
it owns. The Company and its executive officers and directors have agreed not
to offer, sell or contract to sell, or otherwise dispose of, or announce the
offering of, any shares of Common Stock, or any rights to acquire such shares,
or any securities convertible into, or exchangeable for, shares of Common
Stock (other than, in the case of such executive officers and directors,
shares disposed of as bona fide gifts or shares of Common Stock delivered to
the Company in order to exercise, but not dispose of shares of Common Stock
received pursuant to the exercise of, stock options pursuant to the terms of
such stock options) for a period of 180 days after the date of this Prospectus
without the prior written consent of the representatives of the Underwriters.
During the period of 180 days commencing after the date of the closing of the
Offering, the Company has agreed that it will not, without the prior written
consent of the representatives of the Underwriters, grant options to purchase
shares of Common Stock at a price less than the initial public offering price,
except for the issuance of up to an aggregate of 100,000 options to purchase
Common Stock to certain employees of the Company at an exercise price of not
less than $11.00 per share, which options may not be exercised prior to 180
days after the closing of the Offering. The Selling Stockholder has agreed not
to sell, contract to sell or otherwise dispose of any shares of Common Stock
or rights to acquire such shares, for a period of 270 days after the date of
this Prospectus, without the prior written consent of the representatives of
the Underwriters. Pursuant to the Shareholders Agreement, subject to certain
exceptions, MHS may not sell, transfer or pledge any shares of Common Stock of
the Company before February 28, 1997 without WorldCorp's prior written
consent. See Certain Relationships and Transactions. WorldCorp has agreed with
the Underwriters that WorldCorp will not consent to any sale, transfer or
pledge by MHS of any shares of Common Stock of the Company for a period of 270
days after the date of this Prospectus. Sales of substantial amounts of Common
Stock in the public market or the prospect of such sales after the Offering
could adversely affect the market price for the Company's Common Stock. See
"Shares Eligible for Future Sale," "Description of Capital Stock" and
"Underwriting."
Absence of Prior Market; Determination of Offering Price; Volatility of
Stock Price. Prior to the Offering, there has been no public market for the
Common Stock. Although the Common Stock has been approved for quotation on the
Nasdaq National Market, subject to official notice of issuance, there can be
no assurance that an active or liquid trading market in the Common Stock will
develop upon completion of the Offering, or if developed, that it will
continue. The initial public offering price of the Common Stock will be
determined through negotiations among the Company, the Selling Stockholder and
the representatives of the Underwriters and may not be indicative of the
market price for the Common Stock after the Offering. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The market price of the Common Stock could be subject to
significant fluctuations in response to the Company's operating results and
other factors, and there can be no assurance that the market price of the
Common Stock will not decline below the initial public offering price. In
addition, the stock market has from time to time experienced extreme price and
volume volatility. These fluctuations may be unrelated to the operating
performance of particular companies whose shares are traded and may adversely
affect the market price of the Common Stock.
13
<PAGE>
THE COMPANY
The Company was incorporated in Delaware in 1948 and became a wholly
owned subsidiary of WorldCorp in a holding company reorganization in 1987.
WorldCorp and MHS currently own 80.1% and 19.9%, respectively, of the
outstanding Common Stock. Upon completion of the Offering, WorldCorp and MHS
will own 59.3% and 16.6%, respectively, of the outstanding Common Stock (or
56.7% and 16.2%, respectively, if the Underwriters' over-allotment option is
exercised in full). See "Principal and Selling Stockholders" and "Certain
Relationships and Transactions."
The Company's principal executive offices are located at 13873 Park
Center Road, Suite 490, Herndon, Virginia 22071-3223 and its telephone number
is (703) 834-9200.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company are estimated to be $23.7 million (approximately
$27.3 million if the Underwriters exercise the over-allotment option in full)
assuming an initial public offering price of $13.00 per share (the midpoint of
the estimated initial public offering price range) and after deducting
underwriting discounts and commissions and offering expenses payable by the
Company. The Company will use the net proceeds of the Offering for general
corporate purposes, including working capital and funding expenditures
relating to the development of new routes. See "Business--Business Strategy and
Competitive Advantages--Significant Growth Opportunities."
The Company will not receive the proceeds from the sale of shares of Common
Stock by the Selling Stockholder. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock since the payment of dividends to WorldCorp in 1992, the last year the
Company had net earnings. The Company currently intends to retain its future
earnings, if any, to fund the development and growth of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. Any future decision concerning the payment of dividends on the Common
Stock will depend upon the results of operations, financial condition and
capital expenditure plans of the Company, as well as such other factors as the
Board of Directors, in its sole discretion, may consider relevant. See "Risk
Factors--Risks Related to the Company--Control by WorldCorp; Potential
Conflicts of Interest."
Under the terms of the Shareholders Agreement, the Company has agreed to
declare and distribute all dividends properly payable, subject to the
requirements of law and general overall financial prudence. The Credit
Agreement contains restrictions on the Company's ability to pay dividends on
the Common Stock. The Credit Agreement provides that the Company shall not
declare, pay or make any dividends or distributions in any six-month period
which aggregate in excess of the lesser of $4.5 million or 50% of the
Company's net income for the previous six months and requires that the Company
have a cash balance of not less than $7.5 million after giving effect to such
dividend or distribution. Additionally, WorldCorp, which upon completion of
the Offering will own approximately 59.3% of the then outstanding Common
Stock, is subject to the provisions of two indentures expiring in 1997 and
2004, respectively, under which it is obligated to cause the Company not to
pay dividends upon the occurrence of any events of default by WorldCorp under
such indentures.
14
<PAGE>
DILUTION
At June 30, 1995, the Company had a net tangible book value of $0.6 million,
or $0.06 per share. Net tangible book value represents the Company's net
tangible assets less its total liabilities. After giving effect to the Offering
and the use of proceeds therefrom at an assumed initial public offering price of
$13.00 per share (the midpoint of the estimated public offering price range),
and after deducting estimated offering expenses and underwriting discounts and
commissions, the pro forma net tangible book value of the Company as of June 30,
1995 would have been approximately $24.3 million, or $2.03 per share of Common
Stock. This represents an immediate dilution of $10.97 per share to new
investors purchasing shares in the Offering.
The following table illustrates the per share dilution as of June 30, 1995:
<TABLE>
<S> <C> <C>
Assumed initial public offering price................... $13.00
Net tangible book value as of June 30, 1995............. $ 0.06
Increase in net tangible book value attributable to new
investors.............................................. 1.97
------
Pro forma net tangible book value after the Offering.... 2.03
------
Dilution to new investors............................... $10.97
======
</TABLE>
The following table summarizes as of June 30, 1995, after giving effect to the
Offering, the number of shares of Common Stock purchased from the Company, the
total cash consideration paid therefor and the average price per share paid by
the existing stockholders and by the new investors purchasing shares of Common
Stock in the Offering, before deduction of the estimated underwriting discounts
and commissions and offering expenses payable by the Company (using an assumed
initial public offering price of $13.00 per share for the new investors).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 10,000,064 83.3% $38,958,000 60.0% $ 3.90
New investors....................... 2,000,000 16.7 26,000,000 40.0 13.00
---------- ----- ----------- ----- ------
Total............................... 12,000,064 100.0% $64,958,000 100.0% $ 5.41
========== ===== =========== ===== ======
</TABLE>
The above computations assume (i) no exercise of the Underwriters'
over-allotment option and (ii) no exercise of outstanding options. At June 30,
1995, the Company had options outstanding to purchase 1,070,083 shares of
Common Stock at a weighted average exercise price of $11.00 per share. At June
30, 1995, options to purchase 284,310 shares of Common Stock at a weighted
average exercise price of $11.00 per share were exercisable. To the extent all
outstanding options are exercised, there would be dilution of $10.24 per share
to new investors.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1995, and as adjusted to give effect to the sale of the 2,000,000 shares
of Common Stock offered hereby by the Company at an assumed initial public
offering price of $13.00 per share (the midpoint of the estimated initial
public offering price range), after deducting estimated offering expenses and
underwriting discounts and commissions, and the application of the net
proceeds therefrom. See "Use of Proceeds." This information should be read in
conjunction with the Company's Financial Statements and the Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1995
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notes payable and current maturities of long-term obligations............................. $ 17,453 $ 17,453
======== ========
Long-term obligations, net of current maturities (including capital lease obligations) $ 14,472 $ 14,472
Stockholders' equity:
Preferred stock, $0.001 par value; none authorized, issued and outstanding; 5,000,000
shares authorized and none issued and outstanding as adjusted........................... -- --
Common stock, $0.001 par value; 20,000,000 shares authorized, 10,000,064 shares issued
and outstanding; 40,000,000 shares authorized and 12,000,064 shares issued and
outstanding as adjusted.............................................................. 10 12
Additional paid-in capital(1)........................................................... 19,503 43,215
Contributed capital..................................................................... 3,000 3,000
Accumulated deficit..................................................................... (16,747) (16,747)
-------- --------
Total stockholders' equity........................................................... 5,766 29,480
-------- --------
Total capitalization............................................................ $ 20,238 $ 43,952
======== ========
</TABLE>
--------
(1) See Note 4 to "Notes to Financial Statements."
RECENT FINANCIAL RESULTS
For the two months ended August 31, 1995 compared to the two months ended
August 31, 1994, the Company's revenues increased 41% to $58.6 million from
$41.7 million, operating income increased $5.9 million to $4.4 million from an
operating loss of $1.5 million, and net earnings increased $6.1 million to
$3.9 million from a net loss of $2.2 million. This increase in revenues and
profitability resulted primarily from an increase in block hours flown during
such two-month period in 1995, which was largely due to the new multi-year
contracts with Malaysian Airlines. During such two-month period in 1995, total
block hours flown were 7,758 versus 5,322 in the comparable two-month period
during 1994. Available aircraft averaged 11.9 for the two months ended August
31, 1995 versus 7.7 during the comparable two-month period during 1994, while
average daily utilization decreased 5% to 10.5 block hours from 11.1 block
hours. The Company had a net loss of $5.3 million for September 1994. The
Company expects that its results for September 1995 will be significantly
improved as compared to September 1994, although it is unlikely that the
Company will be profitable for this month.
16
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data of the Company for and as of the
end of each of the years in the five-year period ended December 31, 1994 and
the six months ended June 30, 1995, are derived from the Company's audited
financial statements. The following selected financial data for the six months
ended June 30, 1994 are derived from the Company's unaudited financial
statements. In the opinion of management of the Company, such unaudited
financial statements include all adjustments necessary for a fair presentation
of the results of operations for such period. Operating results for the six
months ended June 30, 1995 are not necessarily indicative of results that may
be expected for the entire year ending December 31, 1995. The data appearing
under the caption "Operating Data" are derived from the records of the Company.
The selected financial and operating data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and the Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------------- ------------------
1990 1991 1992 1993 1994 1994 1995
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total operating revenues.. $225,344 $215,129 $180,293 $ 178,737 $180,715 $ 87,586 $116,317
Total operating expenses.. 207,064 199,883 173,028 186,065(1) 185,916(2) 86,162 107,989
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)... 18,280 15,246 7,265(3) (7,328) (5,201) 1,424 8,328
Total other income
(expense)................ (6,024) 6,083(4) 1,389 (1,656) (3,826) (1,704) (924)
Earnings (loss) before
income taxes and change
in accounting principle.. 12,256 21,329 8,654 (8,984) (9,027) (280) 7,404
Income tax expense
(benefit)................ 285 848 236 64 (26) (50) 271
Earnings (loss) before
change in accounting
principle................ 11,971 20,481 8,418 (9,048) (9,001) (230) 7,133
Cumulative effect of
change in accounting
principle................ -- -- (1,973) -- -- -- --
Net earnings (loss)....... $ 11,971 $ 20,481 $ 6,445 $ (9,048) $ (9,001) $ (230) $ 7,133
Weighted average common
stock and common
equivalent shares
outstanding (in
thousands)(5)............ 9,036 9,036 9,036 9,036 9,974 9,787 10,162
Earnings (loss) per
common share before
change in accounting
principle................ $ 1.32 $ 2.27 $ 0.93 $ (1.00) $ (0.90) $ (0.02) $ 0.70
Net earnings (loss) per
common share............. 1.32 2.27 0.71 (1.00) (0.90) (0.02) 0.70
Cash dividends per common
share.................... -- -- 2.15 -- -- -- --
OPERATING DATA:
Total block hours flown(6) 30,464 25,569 22,263 23,462 26,455 13,660 17,225
Daily aircraft
utilization (in block
hours)(7)................ 8.9 9.6 8.4 7.3 8.8 7.9 9.8
Average aircraft
equivalents(8)........... 9.4 7.3 7.2 8.8 8.2 9.5 9.7
Operating income (loss)
per block hour(9)........ $ 600 $ 596 $ 326 $ (312) $ (197) $ 104 $ 483
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------- AT JUNE 30,
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents. $ 9,213 $ 17,611 $ 12,509 $ 11,596 $ 4,054 $ 4,447
Working capital (deficit). (9,889) 8,230 (8,305) (17,441) (25,794) (30,505)
Net equipment and property 68,374 28,894 26,957 28,700 24,666 40,883
Total assets.............. 108,404 74,725 66,486 88,512 78,051 91,023
Notes payable and
long-term obligations
(including current
maturities).............. 58,390 6,530 13,076 42,256 33,826 31,925
Accumulated deficit....... (32,757) (12,276) (5,831) (14,879) (23,880) (16,747)
Total stockholders' equity (6,189) (14,292) 1,292 (7,756) (1,367) 5,766
</TABLE>
(1) Operating expenses in 1993 include $2.3 million of termination fees
related to the early return of three DC10-30 aircraft.
(2) Operating expenses in 1994 include a $4.2 million reversal of excess
accrued maintenance reserves associated with the expiration of three
DC10-30 aircraft leases during 1994.
(3) Operating income in 1992 includes $4.1 million related to settlement of
contract claims with the U.S. Government related to Operation Desert
Shield/Desert Storm.
(4) Other income in 1991 includes a $5.5 million gain as a result of settling
litigation with the State of California Franchise Tax Board.
(5) All share and per share data for the periods presented have been restated
to reflect the stock split which was effective February 1994.
(6) "Total block hours flown" for an aircraft represents the elapsed time
computed from the moment the aircraft first moves under its own power at
the point of origin to the time it comes to rest at its destination.
(7) "Daily aircraft utilization" is determined by dividing the block hours flown
during such period by the number of days during such period that the
aircraft were leased by the Company.
(8) "Average aircraft equivalents" represents the total number of aircraft in
service during each day of a given period divided by the number of days in
the given period.
(9) "Operating income (loss) per block hour" for any period represents the
amount determined by dividing operating income (loss) for such period by
the total block hours flown for such period.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
General. The Company earns revenue primarily from four distinct markets
within the air transportation industry: passenger and cargo services to major
international air carriers; passenger and cargo services, on a scheduled and
ad hoc basis, to the U.S. Government; passenger services in seasonal charter
markets; and cargo services to small package shippers and freight forwarders.
In addition, in July 1995, the Company commenced year-round scheduled
passenger service between New York and Tel Aviv. The Company's principal
customers are Malaysian Airlines, Garuda Indonesia and Asiana Airlines, Inc.
("Asiana Airlines") within the international air carrier market; the U.S. Air
Force within the U.S. Government market; Look Charters of France and Dimensao
Turismo of Brazil within the charter passenger market; and United Parcel
Service ("UPS") within the freight shipping market. The following table sets
expressed in dollars and as a percentage of revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------- --------------------------------
1992 1993 1994 1994 1995
--------------- -------------- --------------- --------------- --------------
$ % $ % $ % $ % $ %
-------- ---- -------- ---- --------- ---- --------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International carriers.... $ 57,245 31.7% $ 64,516 36.1% $ 83,858 46.4% $53,707 61.3% $ 81,874 70.4%
U.S. Government........... 73,154 40.6 54,201 30.3 41,295 22.8 20,436 23.3 15,979 13.7
Charter and scheduled
passenger service....... 6,069 3.4 25,482 14.2 37,159 20.6 7,509 8.6 9,670 8.3
Freight shippers.......... 27,243 15.1 32,294 18.1 11,613 6.4 5,244 6.0 775 0.7
Flight operations
subcontracted to other
carriers................ 11,499 6.4 1,221 0.7 5,378 3.0 277 0.3 7,344 6.3
Other..................... 5,083 2.8 1,023 0.6 1,412 0.8 413 0.5 675 0.6
-------- ----- -------- ----- -------- ----- ------- ----- -------- -----
Total revenues........ $180,293 100.0% $178,737 100.0% $180,715 100.0% $87,586 100.0% $116,317 100.0%
======== ===== ======== ===== ======== ===== ======= ===== ======== =====
</TABLE>
The Company generally charges customers on a block hour basis rather than
a per seat or per pound basis. A "block hour" is defined as the elapsed time
computed from the moment the aircraft first moves under its own power at the
point of origin to the time it comes to rest at its destination. The Company
provides most services under two types of contracts: basic contracts and full
service contracts. Under the terms of basic contracts, the Company provides
the aircraft, cockpit crew, maintenance and insurance and the customer
provides all other operating services and bears all other operating expenses,
including fuel and fuel servicing, marketing costs associated with obtaining
passengers and/or cargo, airport passenger and cargo handling fees, landing
fees, cabin crews, catering, and ground handling and aircraft push-back and
de-icing services. Under the terms of full service contracts, the Company
provides fuel, catering, ground handling, cabin crew and all related support
services as well. Accordingly, the Company charges a lower rate per block hour
for basic contracts than full service contracts, although it does not
necessarily earn a lower profit. Because of shifts in the mix between full
service contracts and basic contracts, fluctuations in revenues are not
necessarily indicative of growth and profitability. It is important,
therefore, to measure growth in the Company's business by block hours flown
and to measure profitability by operating income per block hour. The following
table sets forth for the periods indicated the block hours flown within each
of the Company's markets:
18
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- ---------------------------------
1992 1993 1994 1994 1995
------------- ------------- ------------- --------------- -------------
BLOCK BLOCK BLOCK BLOCK BLOCK
HOURS % HOURS % HOURS % HOURS % HOURS %
----- ----- ----- ----- ----- ----- ----- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International carriers.............. 9,553 42.9 10,174 43.3 16,345 61.8 9,789 71.7 14,019 81.4
U.S. Government..................... 7,642 34.3 5,153 22.0 4,082 15.4 1,979 14.5 1,524 8.8
Charter and scheduled passenger
service........................... 737 3.3 3,026 12.9 4,561 17.2 1,055 7.7 1,179 6.8
Freight shippers.................... 3,985 17.9 4,698 20.0 1,029 3.9 603 4.4 132 0.8
Flight operations subcontracted to
other carriers.................... -- -- -- -- -- -- -- -- -- --
Non-revenue flights(1).............. 346 1.6 411 1.8 438 1.7 234 1.7 371 2.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total block hours............... 22,263 100.0% 23,462 100.0% 26,455 100.0% 13,660 100.0% 17,225 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
--------
(1) Includes flights for crew and aircraft repositioning and crew training.
Consistent with other companies in the air transportation industry, the
Company has relatively high fixed costs. Therefore, achieving high average
daily utilization of its aircraft is one of the most critical factors to the
Company's financial results. While the Company believes that the lease rates
on its MD-11 aircraft are favorable relative to lease rates of other MD-11
operators, the Company's MD-11 aircraft have higher lease costs (although
lower operating costs) than its DC10-30 aircraft. In addition, a portion of
the Company's labor costs are fixed due to monthly minimum guarantees to
cockpit crewmembers and flight attendants.
As a means of improving average daily utilization, the Company has
recently sought multi-year contracts with high utilization guarantees. In late
1994, the Company entered into a series of multi-year contracts, with
expiration dates running from 1997 through 2000, to provide basic services to
Malaysian Airlines. One contract provides for the Company's operation of three
MD-11 freighter aircraft for a five-year period for a combined guaranteed
minimum of 1,200 hours per month (except when an aircraft is in scheduled
maintenance). The lease for one of the aircraft commenced in June 1994, and
the leases for the other two aircraft commenced in June and July 1995. A
second contract provides for each of two of the Company's MD-11 passenger
aircraft to operate a guaranteed minimum of 320 hours per month from October
1994 through March 1997. For the 1994 fiscal year and the six months ended
June 30, 1995, 9% and 20%, respectively, of the Company's revenues and 14% and
24%, respectively, of the Company's block hours flown resulted from these new
multi-year contracts with Malaysian Airlines. As a result of these new
multi-year contracts, the Company expects that Malaysian Airlines will provide
a larger percentage of total revenues and block hours in the future. See
"Business--Business Strategy and Competitive Advantages--Key Strategic Alliance
in Southeast Asia."
The Company has received fixed awards from the U.S. Air Force since 1956,
and the current annual contract expires on September 30, 1995. The Company is
awaiting finalization of its U.S. Air Force contract for the U.S. Government
fiscal year beginning October 1, 1995. These contracts provide for a fixed
level of scheduled business from the U.S. Air Force with opportunities for
additional short-term expansion business. The Company expects the fixed award
for the pending contract to exceed that of the prior contract. Due to the
utilization of a significant number of the Company's MD-11 aircraft under
multi-year contracts with Malaysian Airlines and other contractual
commitments, it is unlikely that the Company will be able to accept all of the
available expansion business. See "Business--Business Strategy and Competitive
Advantages--Long-Term Customer Relationships" and "--Key Strategic Alliance in
Southeast Asia."
The Company also receives significant revenues from airline services
provided to Malaysian Airlines and Garuda Indonesia in connection with the
annual Hadj pilgrimage. The current five-year Hadj contract with Malaysian
Airlines expires after the 1996 Hadj. The Company provides Hadj services to
Garuda Indonesia under contracts which are awarded on an annual basis. See
"Business--Business Strategy and Competitive Advantages--Long-Term Customer
Relationships."
As a result of these and other contracts, the Company had an overall
contract backlog at June 30, 1995 of $465 million, compared to $67 million at
June 30, 1994. The Company's backlog for each contract is determined by
multiplying the minimum number of block hours guaranteed under the applicable
contract by the specified
19
<PAGE>
hourly rate under such contract. The following table shows the allocation of the
contract backlog by market at June 30, 1995, to the years to which it pertains:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 2000 TOTAL
-------- -------- ------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
International carriers............... $ 60,291 $123,144 $74,880 $66,240 $60,720 $33,120 $418,395
U.S. Government...................... 16,322 -- -- -- -- -- 16,322
Charter and scheduled passenger
service............................. 22,514 3,168 -- -- -- -- 25,682
Freight shippers..................... 2,176 2,176 -- -- -- -- 4,352
-------- -------- ------- ------- ------- ------- --------
Total.............................. $101,303 $128,488 $74,880 $66,240 $60,720 $33,120 $464,751
======== ======== ======= ======= ======= ======= ========
</TABLE>
Substantially all of the backlog (including all of the backlog beginning
in 1997) relates to the multi-year contracts with Malaysian Airlines. The loss
of any of the Company's key contracts or a substantial reduction in business
from these key customers, if not replaced, would have a material adverse
effect on the Company's financial condition and results of operations. See
"Risk Factors--Risks Related to the Company--Dependence Upon Key Customers."
Historically, the Company's business has been significantly affected by
seasonal factors. During the first quarter, the Company typically experiences
lower levels of utilization and yields as demand for passenger and cargo
services is lower relative to other times of the year. The Company experiences
higher levels of utilization and yields in the second quarter, principally due
to peak demand for commercial passenger services associated with the annual
Hadj pilgrimage. During 1995, the Company's flight operations associated with
the Hadj pilgrimage occurred from April 1 to April 30 and from May 13 to June
8. Because the Hadj occurs approximately 10 to 12 days earlier each year,
revenues resulting from future Hadj contracts will begin to shift from the
second quarter to the first quarter over the next several years. In recent
years, soft demand and weakening yields in worldwide passenger markets
adversely affected the Company's results in the third quarter. Fourth quarter
utilization depends primarily upon the demand for air cargo services in
connection with the shipment of merchandise in advance of the U.S. holiday
season. The Company believes that its recent multi-year contracts with
Malaysian Airlines and a recent increase in peak European summer tourist
travel occurring in the third quarter should lessen the effect of these
seasonal factors. See Note 16 of "Notes to Financial Statements."
The price of fuel has not had a significant impact on the Company's
operations in recent years. The Company's exposure to fuel risk is limited
because (i) under the terms of the Company's basic contracts, the customer is
responsible for providing fuel, (ii) under the terms of its full service
contracts with the U.S. Government, the Company is reimbursed for the cost of
fuel it provides, and (iii) under the Company's charter contracts, the Company
is reimbursed for fuel price increases in excess of 5% of the price agreed
upon in the contract, subject to a 10% cap. The Company is, however, exposed
to fuel price increases with respect to its scheduled passenger services. It
does not purchase fuel under long-term contracts and does not enter into
futures or fuel swap contracts.
Business Trends. The Company operates in a challenging business
environment. During 1993 and 1994, the combination of a generally weak
worldwide economy and excess capacity in the air transportation industry
resulted in soft demand and weakening yields, which adversely affected the
Company's operating performance. In addition, the Company incurred significant
training costs and capital expenditures during this period in connection with
shifting the mix of its aircraft fleet from DC10-30s to predominately MD-11s.
The Company believes, however, that its multi-year contracts with
Malaysian Airlines, in combination with its continued relationships with other
key customers, provide the Company with a more predictable base of revenue
than existed in the past when the Company was more dependent on ad hoc
short-term business.
20
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1994
Operating Revenues
Total block hours increased 3,565 hours, or 26%, to 17,225 hours for the
first six months of 1995 from 13,660 hours in the comparable 1994 period, with
an average of 9.7 available aircraft per day for the first six months of 1995
compared to 9.5 in the comparable 1994 period. Average daily utilization
(block hours flown per day per aircraft) increased 24% to 9.8 hours for the
six months ended June 30, 1995 from 7.9 hours for the six months ended June
30, 1994. During 1994 and in the first six months of 1995, the Company began
to obtain a higher percentage of its revenues under basic contracts as opposed
to full service contracts. For the six months ended June 30, 1995, basic
contracts accounted for 81% of total block hours, up from 72% for the six
months ended June 30, 1994. Total operating revenues increased $28.7 million,
or 33%, for the six months ended June 30, 1995 to $116.3 million from $87.6
million for the six months ended June 30, 1994.
Revenues from services to international carriers increased $28.2 million,
or 53%, for the six months ended June 30, 1995 to $81.9 million from $53.7
million for the six months ended June 30, 1994. This increase was primarily
attributable to the $23.3 million in revenues generated from the new
multi-year contracts with Malaysian Airlines. Average daily utilization on
these contracts for the six months ended June 30, 1995 was 10.7 hours. The
Company also realized a $5.7 million increase in revenues associated with
flight operations for Asiana Airlines. See "Business--Markets."
U.S. Government military charter revenues decreased $4.4 million, or 22%,
for the six months ended June 30, 1995 to $16.0 million from $20.4 million for
the six months ended June 30, 1994. This decrease was due to a 23% decrease in
military charter block hours from 1,979 for the six months ended June 30, 1994
to 1,524 for the six months ended June 30, 1995. As a result of the Company's
current teaming arrangement (see "Business--Markets--U.S. Government"), the
Company's military fixed award revenues increased for the six months ended
June 30, 1995 compared to the same period in 1994. This increase was offset by
a planned decrease in military charter short-term expansion flying due to
reduced availability of the Company's aircraft which were deployed in other
markets. Because this short-term expansion business depends in large part upon
the deployment or repatriation of troops, revenues from this market are
subject to significant fluctuation.
Charter and scheduled passenger service revenues increased $2.2 million,
or 29%, for the six months ended June 30, 1995 to $9.7 million from $7.5
million for the six months ended June 30, 1994. This increase was primarily
due to additional charter programs from South America to the U.S.
Cargo revenues from freight shippers decreased $4.4 million, or 85%, for
the six months ended June 30, 1995 to $0.8 million from $5.2 million for the
six months ended June 30, 1994. This decrease was primarily due to an aircraft
redeployment into the international carrier market.
Revenues from flight operations subcontracted to other carriers increased
$7.0 million for the six months ended June 30, 1995 to $7.3 million from $0.3
million for the six months ended June 30, 1994. The Company was required to
subcontract certain flights to other carriers due to peak airlift requirements
for the 1995 Hadj pilgrimage.
Operating Expenses
Operating expenses include those related to flight operations,
maintenance, aircraft costs, fuel, depreciation and amortization, selling and
administrative expenses and flight operations subcontracted to other carriers.
Total operating expenses increased $21.8 million, or 25%, for the six months
ended June 30, 1995 to $108.0 million from $86.2 million for the six months
ended June 30, 1994.
Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft cost, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Handling fees are negotiated with third party contractors on
an airport specific basis. Landing fees are subject to unilateral increases by
various governments. Navigation fees are incurred primarily in international
flights. Flight operations expenses increased $3.3 million, or 13%, for the
six months ended
21
<PAGE>
June 30, 1995 to $28.9 million from $25.6 million for the six months ended
June 30, 1994. Of this increase, 10% was due to an increase in block hours
flown, 1% was due to an increase in cockpit crew training costs and higher
cockpit crew levels associated with the planned integration of two MD-11s into
the Company's fleet in 1995 and 4% was due to an increase in accruals under
the Company's profit sharing plans for its crewmembers during the 1995 period.
These factors were partially offset by the shift from full service to basic
contracts.
Maintenance expenses increased $9.6 million, or 87%, for the six months
ended June 30, 1995, to $20.6 million from $11.0 million for the same period
in 1994. This increase resulted primarily from a non-recurring 1994 reversal
of $4.2 million of excess accrued maintenance reserves associated with the
expiration of three DC10-30 aircraft leases and the increase in block hours
flown in 1995 partially offset by lower costs associated with reduced
maintenance requirements of new MD-11 aircraft and the guarantees and
warranties received from the engine and aircraft manufacturers of the MD-11
aircraft and related engines, which guarantees and warranties began to expire
in 1995. See "Business--Maintenance."
Aircraft costs increased $4.4 million, or 15%, for the six months ended
June 30, 1995 to $32.8 million from $28.4 million for the six months ended
June 30, 1994. This increase was primarily due to the lease of two additional
MD-11 convertible aircraft in the first quarter of 1995, partially offset by
the return of three lower-cost DC10-30 aircraft to the lessor in the third
quarter of 1994.
Fuel expenses decreased $1.5 million, or 20%, for the six months ended
June 30, 1995 to $5.9 million from $7.4 million for the same period in 1994.
This decrease was primarily due to the shift to basic contracts in 1995 under
which the Company is not responsible for fuel.
Depreciation and amortization increased $0.6 million, or 30%, for the six
months ended June 30, 1995 to $2.6 million from $2.0 million for the same
period in 1994. This increase resulted primarily from the purchase of
additional spare parts to support the two additional MD-11 aircraft which the
Company began leasing during the first six months of 1995 as well as the
amortization of certain MD-11 aircraft integration costs and other deferred
costs.
Despite the 26% increase in block hours flown, selling and administrative
expenses decreased $1.6 million, or 14%, for the six months ended June 30,
1995 to $9.8 million from $11.4 million for the same period in 1994 primarily
as a result of the Company's ongoing cost control efforts.
Other Income (Expenses)
Interest expense decreased $0.2 million, or 10%, for the six months ended
June 30, 1995 to $1.8 million from $2.0 million for the same period in 1994
primarily due to a reduction in the Company's debt obligations.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Operating Revenues
Total block hours increased 2,993 hours, or 13%, to 26,455 hours in 1994
from 23,462 hours in 1993. Average daily utilization increased from 7.3 block
hours in 1993 to 8.8 block hours in 1994 partially due to a planned reduction
in average available aircraft per day from 8.8 in 1993 to 8.2 in 1994. During
1994, the Company began to obtain a higher percentage of its revenues under
basic contracts as opposed to full service contracts. In 1994, basic contracts
accounted for 63% of total block hours, up from 45% in 1993. Total operating
revenues increased $2.0 million, or 1%, in 1994 to $180.7 million from $178.7
million in 1993.
Revenues from services to international carriers increased $19.4 million,
or 30%, in 1994 to $83.9 million from $64.5 million in 1993, primarily due to
revenues of $17.1 million generated from the multi-year Malaysian Airlines
contracts entered into during 1994.
U.S. Government military charter revenues decreased $12.9 million, or
24%, in 1994 to $41.3 million from $54.2 million in 1993. This decrease was
due to a 21% decrease in military charter block hours from 5,153 in 1993 to
4,082 in 1994. While the Company's U.S. Air Force fixed award revenues
increased during 1994, this increase was offset by a decrease in short-term
expansion flying. During 1993, the Company participated in short-term
expansion flying in connection with the transportation of military personnel
to Mogadishu, Somalia.
22
<PAGE>
Charter and scheduled passenger service revenues increased $11.7 million,
or 46%, in 1994 to $37.2 million from $25.5 million in 1993. This increase was
primarily due to additional charter programs to Europe and South America.
Cargo revenues from freight shippers decreased $20.7 million, or 64%, in
1994 to $11.6 million from $32.3 million in 1993. This decrease was primarily
due to the expiration of a contract with a cargo carrier in January 1994.
Revenues from flight operations subcontracted to other carriers were $5.4
million in 1994 compared to $1.2 million in 1993. This increase was required
primarily to make aircraft capacity available for commencement of operations
under the Company's multi-year contracts with Malaysian Airlines.
Operating Expenses
Total operating expenses decreased slightly in 1994 to $185.9 million
from $186.1 million in 1993.
Flight operations expenses increased $2.7 million, or 5%, in 1994 to
$57.8 million from $55.1 million in 1993. This increase was primarily due to
the increase in block hours flown, partially offset by the shift to more basic
contracts. In addition, in 1993, the Company incurred costs related to MD-11
integration which were not incurred in 1994.
Maintenance expenses decreased $2.5 million, or 9%, in 1994 to $26.2
million from $28.7 million in 1993 primarily due to a $4.2 million reversal of
excess accrued maintenance reserves associated with the expiration of three
DC10-30 aircraft leases during 1994. Excluding the effect of this reversal,
maintenance expenses increased $1.7 million, or 6%, primarily due to an
increase in block hours flown in 1994, partially offset by lower costs
associated with reduced maintenance requirements of new MD-11 aircraft and the
guarantees and warranties received from the engine and aircraft manufacturers
of the MD-11 aircraft and related engines, which guarantees and warranties
began to expire in 1995. See "Business--Maintenance."
Aircraft costs increased $1.8 million, or 3%, in 1994 to $53.9 million
from $52.1 million in 1993. This increase was primarily due to the higher
lease costs associated with MD-11 aircraft, partially offset by the Company's
return of three DC10-30 aircraft with long-term leases in 1993 and related
termination fees of $2.3 million.
Fuel expenses decreased $8.8 million, or 34%, in 1994 to $16.9 million
from $25.7 million in 1993. This decrease was primarily due to the shift to
basic contracts in 1994 under which the Company is not responsible for fuel.
Depreciation and amortization decreased $1.6 million, or 29%, in 1994 to
$4.0 million from $5.6 million in 1993 primarily due to the elimination of
amortization for leasehold improvements in connection with two DC10-30
aircraft returned to the lessor in July 1993. In addition, depreciation was
reduced due to the transfer of DC10-30 spare parts to assets held for sale
following the return of the DC10-30 aircraft. This decrease was partially
offset by the depreciation of spare parts purchased for MD-11 aircraft.
Selling and administrative expenses increased $3.9 million, or 22%, in
1994 to $21.6 million from $17.7 million in 1993 primarily due to increased
professional fees and marketing expenses. During 1994, the Company began
increasing its marketing and sales personnel and related activities to develop
future marketing programs.
Other Income (Expenses)
Interest expense increased $1.6 million, or 76%, in 1994 to $3.7 million
from $2.1 million in 1993 primarily due to MD-11 rotable financing, and use of
a bank line of credit in 1994.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
Operating Revenues
Total block hours increased 1,199 hours, or 5%, to 23,462 hours in 1993
from 22,263 hours in 1992. Average available aircraft per day increased to 8.8
in 1993 from 7.2 in 1992. Average daily utilization decreased
23
<PAGE>
to 7.3 block hours in 1993 from 8.4 block hours in 1992. In each year, full
service contracts accounted for 55% of total block hours. Total operating
revenues decreased $1.6 million, or less than 1%, in 1993 to $178.7 million
from $180.3 million in 1992.
Revenues from services to international carriers increased $7.3 million,
or 13%, in 1993 to $64.5 million from $57.2 million in 1992. This increase was
primarily due to a higher level of flight operations for Garuda Indonesia in
connection with the 1993 Hadj program.
U.S. Government military charter revenues decreased $19.0 million, or
26%, in 1993 to $54.2 million from $73.2 million in 1992. This decrease was
due to a 33% decrease in military charter block hours from 7,642 in 1992 to
5,153 in 1993. During 1992, the Company continued to derive military charter
revenues in connection with the transportation of troops from Operation Desert
Shield/Desert Storm.
Charter and scheduled passenger service revenues increased $19.4 million,
or 318%, in 1993 to $25.5 million from $6.1 million in 1992 primarily due to
additional European and South American charter programs.
Cargo revenues from freight shippers increased $5.1 million, or 19%, in
1993 to $32.3 million from $27.2 million in 1992 primarily due to expanded
full service cargo contracts.
Revenue from flight operations subcontracted to other carriers decreased
to $1.2 million in 1993 from $11.5 million due to reduced subservice
requirements. In 1992, the Company subcontracted flight operations to other
carriers in order to meet peak airlift requirements of the Company's customers
for the Hadj pilgrimage.
Included in other revenues in 1992 is $4.1 million related to settlement
of contract claims with the U.S. Government arising from the Desert
Shield/Desert Storm operation.
Operating Expenses
Total operating expenses increased $13.1 million, or 8%, in 1993 to
$186.1 million from $173.0 million in 1992.
Flight operations expenses increased $9.6 million, or 21%, in 1993 to
$55.1 million from $45.5 million in 1992 primarily due to costs associated
with the integration of new MD-11 aircraft and an increase in full-service
block hours flown. The Company maintained the maximum number of crews
available during the first six months of 1993 in order to support intensive
crew member training for its aircraft and to staff for ad hoc charter flights.
This temporary increase resulted in higher crew costs given the lower level of
aircraft utilization in early 1993.
Maintenance expenses decreased $5.8 million, or 17%, in 1993 to $28.7
million from $34.5 million in 1992 primarily due to lower maintenance costs
for new MD-11 aircraft and lower engine overhaul repair expense for the
DC10-30 fleet. The reduced maintenance costs are due, in part, to guarantees
and warranties received from the engine and aircraft manufacturers of the
MD-11 aircraft and related engines, which guarantees and warranties began to
expire in 1995. See "Business--Maintenance."
Aircraft costs increased $17.0 million, or 48%, in 1993 to $52.1 million
from $35.1 million in 1992 primarily due to additional lease costs associated
with the delivery of four MD-11 aircraft during March and April 1993. In
addition, three DC10-30 aircraft were returned to their lessors, resulting in
an early termination payment of which $2.3 million was expensed in 1993. This
increase in aircraft costs was partially offset by a $5.4 million reduction in
lease costs in connection with the return of the two DC10-30 aircraft and
short-term aircraft leases not required in 1993.
Fuel expenses increased $1.1 million, or 4%, in 1993 to $25.7 million
from $24.6 million in 1992 primarily due to the increase in full service block
hours flown.
Depreciation and amortization expenses increased $0.7 million, or 14%, in
1993 to $5.6 million from $4.9 million in 1992 primarily due to accelerating
depreciation in connection with return of certain DC10-30 aircraft during the
year.
24
<PAGE>
Selling and administrative expenses increased $0.9 million, or 5%, in
1993 to $17.7 million from $16.8 million in 1992 primarily due to an increase
in legal fees and marketing expenses.
Other Income (Expense)
In order to maintain high maintenance dispatch reliability, the Company
carries spare part kits on board its aircraft as well as an inventory of spare
parts. Interest expense increased $1.7 million in 1993 to $2.1 million from
$0.4 million in 1993 primarily due to financing of spare parts for its newly
acquired MD-11 aircraft.
Interest income decreased $0.9 million in 1993 to $0.5 million from $1.4
million as a result of lower investment balances and lower interest rates in
1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company is highly leveraged. The Company incurred substantial debt
and operating lease commitments during 1993 in connection with its acquisition
of MD-11 aircraft and related spare parts. The Company has historically
financed its working capital and capital expenditure requirements out of cash
flow from operating activities, secured borrowings, and other financings from
banks and other lenders. See "Risk Factors--Risks Related to the
Company--Liquidity and Commitments" for a discussion of the restrictions on the
Company's ability to incur additional debt.
The Company's cash and cash equivalents at December 31, 1993, December
31, 1994, and June 30, 1995 were $11.6 million, $4.0 million, and $4.4
million, respectively. At June 30, 1995, the Company's current assets were
$25.4 million and current liabilities were $55.9 million. The Company believes
that the combination of the financings consummated to date, income from
operations and the additional proposed financings described below, together
with the proceeds from the Offering, will be sufficient to allow the Company
to meet its operating and capital requirements for at least the next 12
months. In addition, the proceeds from the Offering will result in a decrease
in the Company's working capital deficit.
Cash Flows from Operating Activities
During the first six months of 1995, operating activities provided $12.8
million of cash compared to using $1.0 million of cash during the first six
months of 1994. This increase in cash for 1995 was primarily due to the
following activity in the first six months of 1995: an increase in operating
income over 1994, increases in accounts payable and accrued expenses, and
decreases in deposits and prepaid expenses incurred during the period. These
factors were partially offset by an increase in accounts receivable during the
first six months of 1995 over the comparable 1994 period.
Operating activities used $2.4 million of cash in the year ended December
31, 1994 compared to $7.4 million of cash in 1993. This decrease in cash used
resulted primarily from a decrease in accounts receivable in 1994, partially
offset by MD-11 aircraft security deposits made during the period. In
addition, the Company deferred certain aircraft rental payments in 1993.
Cash Flows from Investing Activities
Investing activities used $10.3 million of cash in the six months ended
June 30, 1995 compared to $2.8 million during the first six months of 1994.
This increase in cash used resulted primarily from the purchase of rotable
spare parts required for the integration of two MD-11 aircraft in the first
six months of 1995. In addition, the Company purchased additional spare parts
to be maintained in Malaysia as a result of the new contracts with Malaysian
Airlines.
Investing activities used $3.1 million of cash for the year ended
December 31, 1994 compared to $18.4 million in 1993. In 1994, the Company
purchased spare parts for one MD-11 aircraft integrated into the fleet in
April. In 1993, the Company purchased spare parts for four MD-11 aircraft
integrated into the fleet in March and April.
25
<PAGE>
Cash Flows from Financing Activities
In the first six months of 1995, financing activities used $2.1 million
of cash, as the Company reduced net borrowings by $3.9 million and obtained
short-term advances from WorldCorp of $1.8 million. This use of cash compares
to a $2.6 million use of cash during the same period in 1994. In February
1994, WorldCorp and the Company sold 24.9% of the Common Stock to MHS for
$24.7 million in cash, of which the Company received $12.4 million in cash.
Also in 1994, the Company made net repayments of $15.0 million of its
borrowings.
Financing activities used $2.0 million of cash for the year ended
December 31, 1994 compared to providing $24.9 million of cash in 1993. In
1994, the Company made $14.4 million of net borrowing repayments versus
incurring $25.4 million in borrowings in 1993. In addition, the Company
received $12.4 million in cash in 1994 from the sale of Common Stock to MHS.
Capital Commitments
In October 1992 and January 1993, the Company signed a series of
agreements to lease seven new MD-11 aircraft for initial lease terms of two to
five years, renewable for up to 10 years (and in the case of one aircraft, for
13 years) by the Company with increasing rent costs. See "Business--Aircraft
Fleet." As of June 30, 1995, the Company had taken delivery of all seven
aircraft, consisting of four passenger MD-11 aircraft, one freighter MD-11,
and two convertible MD-11s. As part of the lease agreements, the Company was
assigned purchase options for four additional MD-11 aircraft. In 1992, the
Company made non-refundable deposits of $1.8 million toward the option
aircraft. During 1995, the options' exercise dates were extended to October
31, 1995, with scheduled aircraft delivery dates beginning no earlier than
1996. If the options are exercised, the Company intends to obtain financing
from external sources. There can be no assurance, however, that the Company
will be able to obtain such financing. See Note 10 of "Notes to Financial
Statements."
The Company maintains three long-term DC10-30 aircraft leases with terms
expiring in 1997, 1998, and 2003. The Company may choose to lease additional
DC10-30 aircraft primarily to meet peak demand requirements.
As of June 30, 1995, annual minimum payments required under the Company's
aircraft and lease obligations total $35.3 million for the remainder of 1995
and $70.0 million and $68.9 million for 1996 and 1997, respectively.
The Company spent $9.8 million to purchase spare parts and to make cash
security deposits for MD-11 integration in the first six months of 1995. The
Company estimates that its required capital expenditures for MD-11 integration
will be approximately $3.9 million for the remainder of 1995. In August 1995,
the Company amended its aircraft spare parts facility under the Credit
Agreement to provide for a variable rate borrowing of $10.5 million.
Approximately $2.5 million of this facility was used to pay off the previously
outstanding balance of the spare parts loan facility and approximately $2.2
million will be used to purchase additional spare parts for MD-11s required in
the second half of 1995. The balance of this loan facility will be used to
increase cash balances which were drawn down during the first half of 1995 to
purchase MD-11 spare parts. In addition, the Company intends to purchase a
spare engine in the first quarter of 1996. The engine will cost approximately
$8.0 million. The Company has a commitment from the engine manufacturer to
finance 80% of the purchase price over a seven-year term with an interest rate
to be fixed at the time of delivery.
The Company anticipates that its total capital expenditures in 1995 and
in 1996 will be approximately $15.0 million and $22.4 million, respectively.
While the Credit Agreement limits capital expenditures by the Company to no
more than $15.0 million in each of 1995 and 1996, the Company currently is
negotiating with BNY Financial Corporation to amend the Credit Agreement to
increase the annual limit in capital expenditures. There can be no assurance
that the Credit Agreement will be so amended or that a waiver will be
obtained, in which event the Company would expect to limit its annual capital
expenditures to $15.0 million. See "--Financing Developments."
In addition, the Company is negotiating for the lease of two additional
MD-11 aircraft beginning in the first quarter of 1996 to provide additional
capacity for growth opportunities. Such aircraft might be used if the Company
is successful in obtaining the authority for scheduled service to West Africa
and South Africa as described below. If the Company enters into a lease
agreement with respect to such additional MD-11 aircraft,
26
<PAGE>
the Company estimates that it will require approximately $6.4 million for
additional spare parts and $8.0 million for an additional spare engine in the
first quarter of 1996. The Company would seek financing for any of these
expenditures. No assurances can be given, however, that the Company will take
delivery of the above-mentioned aircraft, obtain the consents required to
incur such capital expenditures or obtain financing necessary to make the
associated spare parts and engine purchases.
The Company began scheduled passenger service between New York and Tel
Aviv in July 1995. The Company anticipates that working capital requirements
will be approximately $1.0 million through the end of 1995 in connection with
this scheduled service.
The Company is seeking authority to provide scheduled passenger and cargo
service between New York and points in West Africa and South Africa. If the
Company receives such approval, it will incur start-up costs in an as yet
undetermined amount. The Company believes it will be able to fund such
start-up costs from its operating cash flow and the proceeds of the Offering.
In the event the Company decides to acquire additional aircraft and/or related
spare parts (including but not limited to spare engines) in connection with
such new scheduled service, the Company would seek external financing. No
assurances can be given that the Company would be able to obtain such
financing on terms acceptable to the Company. See "Business--Business Strategy
and Competitive Advantages--Significant Growth Opportunities."
As of June 30, 1995, the Company held approximately $5.9 million (at book
value) of aircraft spare parts currently available for sale.
Financing Developments
On October 30, 1993, WorldCorp, the Company and MHS entered into the MHS
Stock Purchase Agreement pursuant to which MHS, subject to satisfactory
completion of its due diligence investigations, agreed to purchase 24.9% of
the Common Stock. On February 28, 1994, the transaction was completed. The
Company received upon closing $12.4 million to fund its working capital
requirements. The remaining proceeds from the sale ($15.0 million less a $2.7
million deposit received in November 1993) were paid directly to WorldCorp.
See "Certain Relationships and Transactions."
In 1993, the Company entered into the Credit Agreement, which included a
$12.0 million spare parts loan and an $8.0 million revolving line of credit
collateralized by certain receivables, inventory, equipment, and general
intangibles. The Company is prohibited from granting a security interest in
such collateral to anyone other than BNY Financial Corporation. Approximately
$10.8 million of the proceeds from this borrowing were used to retire existing
obligations. This agreement contains certain covenants related to the
Company's financial condition and operating results. At December 31, 1994, the
Company was not in compliance with certain of these covenants, including
minimum net income requirements, but obtained a waiver of these covenants from
the financial institution. In March 1995 and in August 1995, the Company
amended this agreement to adjust certain covenants beginning in the first
quarter of 1995 and in August 1995, respectively, and extended the credit
facility's term to 1998. Under the terms of the Credit Agreement, the Company
is not permitted to (i) incur indebtedness in excess of $25.0 million
(excluding capital leases), (ii) declare or pay dividends if after giving
effect to such dividends the Company's cash or cash equivalents would be less
than $7.5 million or (iii) make capital expenditures in any year of more than
$15.0 million. The Company must also maintain a net worth of at least $11.4
million at December 31, 1995, $15.4 million at December 31, 1996 and $18.4
million at December 31, 1997. Additionally, the Company must meet quarterly
net income (loss) requirements through December 31, 1997 including $(1.7)
million, $(7.0) million, $7.0 million and $1.0 million for each of the
three-month periods ended December 31, 1995, March 31, 1996, June 30, 1996 and
September 30, 1996, respectively. At June 30, 1995, the Company was in
compliance with the terms of the credit agreement as in effect as of such
date. No assurances can be given that the Company will continue to meet these
revised covenants or, if necessary, obtain the required waivers. As of June
30, 1995, $6.9 million of the $8.0 million portion of the credit facility
collateralized by receivables was utilized, with no borrowing capacity
currently available, and $3.4 million of the $12.0 million spare parts loan
was outstanding. As discussed above, the Company has amended the aircraft
spare parts facility under the Credit Agreement to provide for a variable rate
borrowing of $10.5 million. The Company used a portion of the proceeds from
this loan to pay off the previously outstanding balance (which was reduced to
$2.5 million subsequent to June 30, 1995).
27
<PAGE>
In the first quarter of 1995, the Company obtained approximately $6.0
million in short-term borrowings from equipment lessors for working capital
purposes. These borrowings bear interest at an average interest rate of
approximately 11%. Approximately $5.1 million of this financing was repaid in
the second quarter of 1995. The remaining balance will be repaid in monthly
installments through December 1995.
INCOME AND OTHER TAXES
In August 1991, 5.7 million shares of WorldCorp common stock were sold by
a group of existing shareholders. This transaction constituted an "ownership
change" of WorldCorp (and thus of the Company) as defined under Section 382 of
the Code (the "1991 Ownership Change"). The 1991 Ownership Change subjected
WorldCorp to an annual limitation in 1991 and future years in the use of NOLs
that were available to WorldCorp (and thus allocable to the Company) on the
date on which the 1991 Ownership Change occurred. As of December 31, 1994, the
Company had NOLs for federal income tax purposes of $110.9 million which, if
not utilized to offset taxable income in future periods, will expire from 1997
to 2009. Of this amount, $72.6 million is subject to a $6.3 million annual
limitation resulting from the 1991 Ownership Change. The remaining $38.3
million was generated after the 1991 Ownership Change and, therefore, is not
currently subject to annual limitation.
While the Company believes that the Offering will not cause an ownership
change, the application of the Code in this area is subject to interpretation
by the IRS. If future transactions in the capital stock of WorldCorp or the
Company, combined with the effect of the Offering, result in an ownership
change, then use of the Company's NOLs in future years would be further
limited. The amount of the annual limitation that would apply to the Company's
NOLs after an ownership change would equal the product of the value of the
outstanding stock of the Company immediately prior to such ownership change
multiplied by the long-term tax-exempt rate at such time, which is determined
monthly and was 5.75% in September 1995. In the event that more than
approximately $5.0 million of the outstanding convertible debentures of
WorldCorp are converted into WorldCorp common stock, the Company believes an
ownership change will occur.
There can be no assurance that the operations of the Company will
generate taxable income in future years so as to allow the Company to realize
a tax benefit from its NOLs. The NOLs are subject to examination by the IRS
and, thus, are subject to adjustment or disallowance resulting from any such
IRS examination. In addition to the change in ownership that might occur upon
the conversion of the WorldCorp debentures, additional ownership changes of
the Company may occur in the future and may result in the imposition of a
lower annual limitation on the Company's NOLs existing at the time of any such
ownership change.
For the foregoing reasons, prospective purchasers of Common Stock should
not assume the unrestricted availability of the Company's currently existing
NOLs or future NOLs, if any, in making their investment decisions.
NEW ACCOUNTING STANDARD
In June 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed of ("SFAS No. 121").
SFAS No. 121 requires companies to review long-lived assets and certain
identifiable intangibles to be held, used or disposed of, for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company believes the adoption of this
statement will not have a significant effect on its financial statements. The
Company is required to adopt this statement in 1996.
INFLATION
The Company believes that inflation has not had a material effect on the
Company's revenues during the past three years.
28
<PAGE>
BUSINESS
GENERAL
The Company is a leading provider of long-range passenger and cargo air
transportation, serving customers in four distinct markets: (i) major
international air carriers; (ii) the U.S. Government; (iii) international tour
operators in the leisure passenger market; and (iv) small package shippers and
freight forwarders. In addition, in July 1995, the Company commenced
year-round scheduled passenger service between New York and Tel Aviv. The
Company's customers include: Malaysian Airlines, Garuda Indonesia, Asiana
Airlines, the U.S. Air Force and UPS. The Company operates a fleet of MD-11
and DC10-30 aircraft and has been in continuous operation since it was founded
in 1948.
The Company was incorporated in Delaware in 1948 and became a wholly
owned subsidiary of WorldCorp in a holding company reorganization in 1987.
WorldCorp and MHS currently own 80.1% and 19.9%, respectively, of the
outstanding Common Stock. WorldCorp and MHS will own approximately 59.3% and
16.6%, respectively, of the outstanding Common Stock upon completion of the
Offering.
BUSINESS STRATEGY AND COMPETITIVE ADVANTAGES
The Company's business strategy is to maximize the utilization of its
aircraft in order to achieve consistent profitability and create a foundation
for continued growth. The Company deploys five of its seven MD-11 aircraft in
year-round operations under multi-year contracts with a long-term customer.
The Company currently supplements its MD-11 fleet with DC10-30 aircraft to
serve selected markets that the Company believes offer significant profit
potential. In executing this strategy, the Company believes it enjoys several
competitive advantages:
Key Strategic Alliance in Southeast Asia
As a result of its strategic alliance with MHS, the Company has
established a strong position in the rapidly growing markets of Southeast
Asia. Southeast Asia is projected to remain the world's fastest growing region
over the next 10 years. Gross national product ("GNP") growth for the countries
comprising Southeast Asia is expected to average over 7% per year over the
next few years versus approximately 3% for the major industrialized countries.
Southeast Asia accounts for approximately 20% of the world's air traffic, a
figure that is expected to exceed 26% by the year 2000.
MHS, a Malaysian company with diversified aviation holdings in Southeast
Asia, Europe and North America, currently owns 19.9% of the Company's
outstanding Common Stock. MHS is publicly traded on the Kuala Lumpur Stock
Exchange ("KLSE"). In 1994, MHS acquired 32% of the common stock, and assumed
management control, of Malaysian Airlines, the largest air carrier in
Southeast Asia and the Company's largest customer. The Company's strategic
alliance with MHS has further strengthened the Company's 15-year relationship
with Malaysian Airlines. Malaysian Airlines operates a fleet of more than 90
narrow-body and wide-body aircraft, serving both domestic and international
routes. It is publicly traded on the KLSE and reported US$1.89 billion of
revenue for fiscal year 1994.
Malaysian Airlines is expanding rapidly due to the economic growth in
Southeast Asia, particularly in Malaysia. Malaysian GNP has grown by 8% or
more in each of the last seven years and is projected by the central bank of
Malaysia to grow by approximately 10% during 1995. In addition, the Malaysian
government has established an initiative to modernize the country's industrial
infrastructure. Aviation is one of the government's highest priorities in this
program.
The Company provides Malaysian Airlines with highly reliable,
state-of-the-art, long-range aircraft, the unique operating route authorities
of a U.S. air carrier and 48 years of operating experience. The Company
presently operates three cargo and two passenger MD-11s for Malaysian Airlines
under multi-year basic contracts, expiring between 1997 and 2000, with high
minimum monthly utilization levels. The first agreement with Malaysian
Airlines provides for the Company to operate three MD-11 freighter aircraft
for Malaysian Airlines for a five-year term, with one lease having commenced
in June 1994, the second in June 1995 and the third in July 1995. Operating on
routes between Malaysia and Europe and Malaysia and North America, these three
MD-11s form the core of Malaysian Airlines' air cargo capacity. Under this
agreement, Malaysian Airlines
29
<PAGE>
has agreed to operate a combined guaranteed minimum of 1,200 block hours per
month (except when an aircraft is in scheduled maintenance), equivalent to an
average daily utilization of approximately 12.7 block hours per aircraft. The
second agreement provides for the Company to operate two MD-11 passenger
aircraft for Malaysian Airlines for a two and one-half year term expiring in
March 1997. These two MD-11s serve Malaysian Airlines' long-range,
medium-density routes such as Kuala Lumpur to Johannesburg and Jeddah, Saudi
Arabia. Under this agreement, Malaysian Airlines has agreed to operate each
aircraft a guaranteed minimum of 320 block hours per month, equivalent to an
average daily utilization of approximately 10.5 block hours per aircraft.
These contracts have increased the year-round usage of the Company's MD-11
fleet, reduced the seasonality of the Company's business and contributed to
its recently improved operating performance. Block hours contracted under
these agreements with Malaysian Airlines will increase from 3,581 in 1994 to
14,788 in 1995 and 22,080 in 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company has an additional significant basic contract with Malaysian
Airlines under which it flies Malaysian Muslim pilgrims to Saudi Arabia for
the annual Hadj religious pilgrimage. This agreement provides for the Company
to operate three DC10-30 aircraft for Malaysian Airlines on the route between
Malaysia and Jeddah for a five-year term expiring after the 1996 Hadj season.
Under this agreement, Malaysian Airlines has agreed to operate these aircraft
a combined guaranteed minimum of 2,350 block hours during the 10-week season,
equivalent to an average daily utilization of approximately 11.2 block hours
per aircraft. In 1995, approximately 25,000 Malaysians traveled to Jeddah for
the Hadj pilgrimage, of which approximately 20,000 travelled on the Company's
aircraft.
The Hadj pilgrimage is one of the five primary duties of Islam, requiring
all Muslims with available means to travel to Mecca once in their lifetime.
There are over one billion Muslims worldwide, of whom more than 200 million
live in Southeast Asia. More than two million Muslims from 130 countries
travel annually to Mecca for the Hadj. During 1995, the Company's Malaysian
Airlines flight operations associated with the Hadj pilgrimage occurred from
April 1 to April 30 and from May 13 to June 8. Due to the nature of the
Islamic calendar, the Hadj occurs approximately 10 to 12 days earlier each
year. In 1996, transportation for the Hadj will begin on March 18 and end on
June 1.
See "Certain Relationships and Transactions" for a description of the
history of the relationship among the Company, Malaysian Airlines and MHS and
the related agreements.
Long-Term Customer Relationships
The Company has long-term customer relationships that the Company
believes increase the predictability of its revenue base and provide a stable
platform for future growth. In addition to its relationship with Malaysian
Airlines, a customer since 1981, the Company has flown for the U.S. Air Force
since 1956, Garuda Indonesia since 1973 and UPS since 1985, generally under
annual contracts. The Company expects to have one of the largest U.S. Air
Force fixed awards under the Civil Reserve Air Fleet (the "CRAF") program for
the U.S. Government's 1995-1996 fiscal year. The Company also believes that,
since 1988, it has been one of the largest providers of passenger services to
Garuda Indonesia for the Hadj pilgrimage.
Garuda Indonesia. The Company has provided passenger services to Garuda
Indonesia periodically since 1973 and yearly since 1988. Garuda Indonesia, the
national flag carrier of Indonesia, reported revenues of US$1.75 billion for
fiscal year 1994. Garuda Indonesia operates a fleet of 55 narrow-body and
wide-body aircraft, serves both domestic and international routes and is owned
by the government of Indonesia. The Company's services to Garuda Indonesia
involve operating passenger aircraft during the peak passenger season related
to the annual Hadj pilgrimage. Indonesia is the world's largest Muslim nation,
with a population of approximately 190 million, nearly 88% of whom are Muslim.
As the largest Muslim nation, Indonesia experiences significant demand for air
transportation to Jeddah during the Hadj period. In 1995, approximately
200,000 Indonesians travelled to Jeddah for the Hadj pilgrimage. Unable to
satisfy this peak demand with its own aircraft, Garuda Indonesia leased 20
wide-body passenger aircraft for a 10-week period in 1995. Because Garuda
Indonesia's bid specifications require modern, long-range aircraft capable of
10-to 11-hour nonstop flights, the Company's fleet is particularly well suited
to Garuda Indonesia's requirements.
30
<PAGE>
The Company has won annual Hadj contract awards from Garuda Indonesia
since 1988. During the 1995 Hadj pilgrimage, the Company provided passenger
service to Garuda Indonesia with five MD-11s, flying approximately 40,000
Indonesians on Company aircraft. Under the 1995 agreement, Garuda Indonesia
agreed to operate each aircraft a minimum of 750 block hours during the
10-week season, equivalent to an average daily utilization of approximately
10.7 block hours per aircraft. Due to the use of a significant number of the
Company's MD-11 aircraft under multi-year contracts with Malaysian Airlines,
the Company may not be able to commit as many aircraft to Garuda Indonesia for
the 1996 Hadj as it did in 1995. See "--Key Strategic Alliance in Southeast
Asia."
U.S. Government. The Company has provided international air
transportation to the U.S. Air Force since 1956. In exchange for requiring
pledges of aircraft to the CRAF for use in times of national emergency, the
U.S. Air Force grants awards to CRAF participants for peacetime transportation
of personnel and cargo. The U.S. Air Force contracts for aircraft in two
primary ways: through fixed awards for known, scheduled transportation needs
throughout the year and through short-term expansion awards, which are offered
to CRAF participants on an ad hoc basis as needs arise.
The U.S. Air Force awards points to air carriers acting alone or through
teaming arrangements in proportion to the number and type of aircraft that the
carriers make available to CRAF. The Company utilizes such arrangements to
maximize the value of potential awards. The current members of the Company's
teaming arrangement are Continental Airlines, Inc., Northwest Airlines, Inc.
("Northwest"), Evergreen International Airlines, Inc., Emery Worldwide Airlines,
Inc., Miami Air International, Inc. and Rich International Airways, Inc.
The Company's teaming arrangement purchases CRAF points from other
carriers to increase the size of its fixed award and then allocates these
points among the team members. In addition, the Company pays commissions to
Northwest in exchange for using its points to fly additional routes. The
Company's operating revenues from CRAF are net of these commissions. As a
result of the Company's increasingly effective use of teaming arrangements,
the Company's fixed awards have grown in recent years and the Company expects
to have one of the largest U.S. Air Force fixed awards under the CRAF program
for the U.S. Government's 1995-96 fiscal year.
U.S. Air Force fixed awards provide predictable utilization of the
Company's aircraft. Under the pending 1995-96 contract, the Company will
operate one MD-11 from St. Louis and Los Angeles to military bases in Japan
and Korea for approximately 10 months. The Company also will operate one
DC10-30 from Philadelphia to military bases in Europe and the Middle East for
a minimum of six months. These operating schedules are specified in the
contract award and serve as minimum utilization commitments to the Company.
Predictable aircraft utilization and attractive compensation levels, as well
as international routes well suited to the Company's wide-body, long-range
fleet, have allowed the Company to operate profitably under U.S. Air Force
contracts.
U.S. Air Force short-term expansion business is offered to carriers
throughout the contract year in proportion to the level of the carriers' fixed
awards. The Company, through its teaming arrangement, will be eligible in the
1995-96 fiscal year to receive from the U.S. Air Force a greater percentage of
the short-term expansion business than the Company received in the prior
fiscal year. Due to the utilization of a significant number of the Company's
MD-11 aircraft under multi-year contracts with Malaysian Airlines and other
contractual commitments, it is unlikely that the Company will be able to
accept all of the available expansion business.
Due to its participation in CRAF, the Company is subject to inspections
approximately every two years by the military as a condition of retaining its
eligibility to perform military charter flights. The last such inspection was
undertaken in 1994 and the next is anticipated to occur in 1996. As a result
of such inspections, the Company has been required to implement measures, such
as the establishment of a crew resource management course, beyond those
required by the DOT, FAA and other government agencies. The U.S. Air Force may
terminate its contract with the Company if the Company fails to pass such
inspections or otherwise fails to maintain satisfactory performance levels, if
the Company loses its airworthiness certificate or if the aircraft pledged to
the contracts lose their U.S. registry or are leased to unapproved carriers.
31
<PAGE>
Authorized funding levels for CRAF have remained in the $250 million to
$275 million range over the last three fiscal years. Although overall military
expenses are being reduced, the U.S. military continues to place a high
priority on its rapid mobilization and deployment capability. Accordingly, the
level of U.S. Air Force contract awards has remained relatively constant in
recent years, although future funding levels are dependent on Congressional
authorization.
UPS. The Company has provided cargo services to UPS from time to time
since 1985 and every year since 1988. These services consist of leasing cargo
aircraft to UPS during a two-week period in December when UPS experiences peak
demand for small package shipments. UPS has historically paid attractive
hourly rates for modern, well-maintained aircraft that meet UPS's demanding
departure reliability standards.
Contracts Which Reduce Operating Risk
The Company's contractual arrangements with its customers reduce the
load, yield and operating expense risks traditionally associated with the
airline business. Substantially all of the Company's services are provided
under contracts in which the Company's customers are responsible for filling
the passenger or cargo capacity of each of the contracted aircraft. These
contracts also typically provide for the Company's customers to guarantee
monthly minimum aircraft utilization levels at fixed hourly rates and are
typically in force for periods of one to five years, subject to certain
termination provisions. In addition, an increasing percentage of the Company's
services are provided under basic contracts. Under the terms of basic
contracts, the Company provides the aircraft, cockpit crew, maintenance and
insurance and the customer provides all other operating services and bears all
other operating expenses, including fuel and fuel servicing, marketing costs
associated with obtaining passengers and/or cargo, airport passenger and cargo
handling fees, landing fees, cabin crews, catering, and ground handling and
aircraft push-back and de-icing services. Basic contracts accounted for 81% of
block hours flown in the first six months of 1995, compared to 63% for fiscal
1994 and 45% for fiscal 1993.
See "--Key Strategic Alliance in Southeast Asia" and "--Long-Term Customer
Relationships--Garuda Indonesia" for a description of the Company's current
basic contracts.
Significant Growth Opportunities
In the scheduled charter market, the Company has identified what it
believes is a significant opportunity to increase revenue and profits by
serving the leisure passenger markets between the U.S. and Europe. In the
scheduled charter business, the Company is in the process of identifying
potentially profitable leisure travel routes and plans to publish flight
schedules and sell blocks of seats on a less-than-planeload basis to
international tour operators. Based on the successful experience of European
carriers, the Company believes serving the seasonal passenger markets on a
scheduled charter basis will have several benefits which the Company believes
outweigh the potential increased load and yield risk associated with serving
this market. First, it should be possible to achieve greater revenue per block
hour because tour operator customers will pay higher prices in exchange for
not bearing the risk of filling an entire aircraft. Second, the Company
expects to increase the hourly utilization of aircraft deployed in this market
because the Company will set the schedules rather than a tour operator who, in
the case of a full-planeload charter, has contracted for the entire aircraft
and controls scheduling. This strategy gives the Company more control within
the charter distribution channel and a stronger commercial position in this
market than it would have in the full-load charter business. For the 1996
leisure market season, the Company is developing schedules and is marketing
capacity to tour operators with particular emphasis on the markets between the
U.S. and Germany, Switzerland, France and the United Kingdom.
In the scheduled passenger business, the Company will consider entering
only those markets that it believes (i) are well-suited to the competitive
advantages of the Company's long-range, wide-body aircraft, (ii) have
prospects for rapid growth and (iii) have high barriers to entry. After
determining that the market between New York and Tel Aviv met these criteria,
the Company commenced scheduled passenger service in this market in July 1995
with three weekly round trips. The Company achieved an average passenger load
factor of 87% during the first two months of operation. While the Company
believes it is well-positioned in this market because of its excellent service
and security and competitive prices, there can be no assurance that this load
factor will be sustained or that the Company will be able to operate the route
profitably.
32
<PAGE>
Consistent with the Company's scheduled passenger strategy, the Company
is seeking authority to provide scheduled passenger service between New York
and points in West Africa and South Africa. In addition, the Company is
seeking to provide cargo service between such points.
On August 30, 1995, the DOT granted the Company a one-year renewable
authority to provide scheduled air transportation (both passenger and cargo)
between New York and Accra, Ghana. The Company's authority to serve Accra is
subject to approval by the Government of Ghana. On September 11, 1995, the DOT
tentatively allocated five of the seven weekly frequencies available to U.S.
carriers for scheduled service between New York and Johannesburg, South Africa
to the Company for a period of one year. Three of the five weekly frequencies
would be used by the Company for combination cargo and passenger service and
the other two frequencies would be utilized for all-cargo service. The
allocation of frequencies to the Company will not become effective until the
DOT issues a final order confirming its tentative decision, which is not
expected to be issued before September 25, 1995. Until such time, interested
parties have the right to object to the DOT's proposed allocation. There can
be no assurance, however, that the Company will obtain the final approval to
provide such scheduled service to South Africa or that it will obtain approval
from the Government of Ghana to provide such scheduled service to Ghana. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Capital Commitments."
Attractive Fleet Characteristics
The Company operates a balanced fleet of passenger, cargo and
passenger/cargo convertible aircraft, allowing it to serve the needs of its
diverse customer base, respond to market changes throughout the year and
reduce seasonality. To strengthen its competitive position, particularly with
its Southeast Asian customers, the Company re-equipped its fleet with new
generation MD-11 aircraft, a state-of-the-art, wide-body aircraft which
provides superior range, payload and operating economics. Because the Company
contracted for MD-11s in 1992 and early 1993 during a period of weak demand
for new aircraft, the Company believes it obtained these aircraft on favorable
lease terms. The average age of the Company's MD-11 aircraft is under two
years.
The MD-11 is available in passenger-only, freighter-only and
passenger-convertible configurations. Manufactured by McDonnell Douglas, the
MD-11 is a derivative of the DC10-30, which had formed the backbone of the
Company's fleet since 1979 and still retains certain advantages. Improvements
in the MD-11 include greater range and payload, reduced fuel consumption,
lengthened cabin and enhanced passenger comfort features, and a
state-of-the-art cockpit. The MD-11 can fly a commercial passenger load 12-14
hours nonstop, allowing the Company to serve routes that could not be served
with DC10-30 or older generation Boeing 747 aircraft. On passenger routes of
eight to 10 hours, the MD-11 can also carry significant cargo payloads in its
lower deck cargo compartments, enhancing its revenue potential on routes where
the DC10-30 and older generation Boeing 747 have limited cargo capability.
Moreover, the MD-11 delivers these performance advantages at lower hourly
operating costs than the DC10-30 and older Boeing 747s. Over the last two
years, the Company's MD-11s have demonstrated lower hourly fuel consumption
rates and maintenance costs than its DC10-30s. These lower maintenance costs
result primarily from the reduced maintenance requirements of new MD-11
aircraft and the guarantees and warranties received from the engine and
aircraft manufacturers of the MD-11 and related engines, which guarantees and
warranties began to expire in 1995. See "--Maintenance."
The Company's DC10-30 aircraft have lower fixed costs than its MD-11s,
can be leased for short terms on short notice and have lower operating costs
at lower utilization rates than the MD-11 aircraft. These factors combine to
make the DC10-30 aircraft less risky to use in new potential growth markets.
MARKETS
Within the air transportation industry, the Company earns revenue from
four distinct markets: passenger and cargo services to major international air
carriers; passenger and cargo services, on a scheduled and ad hoc basis, to
the U.S. Government; passenger services to tour operators in seasonal charter
markets; and cargo services to small package shippers and freight forwarders.
In addition, in July 1995, the Company commenced year-round scheduled
passenger service between New York and Tel Aviv. The Company's principal
customers are Malaysian Airlines, Garuda Indonesia and Asiana Airlines within
the international air carrier market; the U.S. Air Force within the U.S.
Government market; Look Charters of France and Dimensao Turismo of Brazil
within
33
<PAGE>
the charter passenger market; and UPS within the freight shippers market. The
following customers generated 10% or more of the Company's revenues during
fiscal year 1994: the U.S. Government ($44.6 million), Malaysian Airlines
($32.8 million), Garuda Indonesia ($32.4 million) and Look Charters ($21.2
million). See Note 13 to "Notes to Financial Statements" for additional
information related to the Company's major customers and export revenues.
International Carriers. The Company targets international carriers based
outside the U.S. to provide services under basic contracts. International
carriers use the Company's services for one or more of the following reasons:
to gain access to route authorities otherwise available only to U.S. flag
carriers; to acquire additional capacity to meet seasonal demand peaks; to
expand route structures without capital commitments for new aircraft; to
bridge the lead times associated with the delivery of new aircraft; or to
address competitive issues such as cost structure or aircraft performance.
In the Company's experience, international carriers seeking air carrier
services often prefer new generation aircraft. This preference is especially
prevalent in Southeast Asian region, where international carriers generally
operate modern, fuel efficient fleets. The Company intends to continue to
target rapidly growing carriers in the Southeast Asian region.
U.S. Government. As discussed above under "--Business Strategy and
Competitive Advantages--Long-Term Customer Relationships--U.S. Government," the
Company provides scheduled passenger and cargo services to the U.S. Air Force
under fixed awards and short-term expansion awards. For the last three years,
the size of the Company's fixed award has increased as a result of more
effective teaming arrangements. During the same period, however, the Company's
revenues from short-term expansion awards decreased because of (i) the absence
of major troop deployments such as Operation Desert Shield/Desert Storm and
the U.S. mission to Somalia and (ii) limited availability of Company aircraft
for ad hoc expansion flying due to the Company's focus on utilizing its
aircraft in year-round operations. The Company expects an increasing
U.S. Air Force for the last three U.S. Government fiscal years (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
1992-1993 1993-1994 1994-1995(1)
--------- --------- ------------
<S> <C> <C> <C>
Fixed................. $15,693 $22,238 $33,926
Short-term expansion.. 34,329 27,632 7,892
------- ------- -------
Total................. $50,022 $49,870 $41,818
======= ======= =======
</TABLE>
--------
(1) Includes contract revenue expected through September 30, 1995.
The Company also provides domestic passenger services to the U.S. Army in
support of various training exercises. The U.S. Army makes these awards based
on competitive bids.
Passenger Services. The Company provides passenger services for its
customers in full-planeload charter service and scheduled passenger service
markets. In addition, as discussed above, the Company has plans to enter the
scheduled charter market in 1996. Under full-planeload charter service, a
customer, such as a tour operator, contracts for the entire capacity of one of
the Company's aircraft for a specified period of time and assumes the
responsibility and the risk for distribution of seats. Under the scheduled
charter service, the Company pursues contracts with multiple customers, such
as tour operators, for less-than-planeload blocks of capacity on the Company's
aircraft and may also sell a limited portion of capacity on an individually
ticketed basis. Within each of these charter markets, the Company focuses on
seasonal leisure travel between the U.S. and Europe and the U.S. and South
America. These markets exhibit predictably strong seasonal demand and are well
suited to the Company's long-haul fleet.
In its scheduled passenger business, the Company sells the entire
capacity of an aircraft on an individually-ticketed basis primarily through
the retail travel agency distribution channels. The Company is listed in the
WorldSpan(R) computer reservation system ("CRS") and is displayed in all of the
major CRS systems.
34
<PAGE>
Freight Shippers. In addition to providing UPS with peak seasonal cargo
services, the Company markets its cargo capacity to major freight forwarders
for short-term and long-term programs. Freight forwarders purchase the entire
capacity of the Company's aircraft and are responsible for marketing such
capacity to individual retail shippers. Freight forwarders contract for cargo
services based largely upon price. Due to over-capacity and declining yields
in full-planeload cargo markets, the Company has shifted its cargo marketing
focus away from this segment in favor of providing cargo services under basic
contracts to international airlines, such as Malaysian Airlines and Asiana
Airlines. Nevertheless, the Company seeks to market belly cargo capacity of
its passenger aircraft to freight forwarders to enhance revenues generated in
its passenger operations.
AIRCRAFT FLEET
The following table summarizes the lease term, date of manufacture,
engine type, range and capacity of the Company's aircraft fleet:
<TABLE>
<CAPTION>
LEASE
EXPIRATION YEAR OF ENGINE
AIRCRAFT(1) (MONTH/YEAR)(2) MANUFACTURE TYPE RANGE(3) CAPACITY(4)
----------- --------------- ----------- ------ -------- -----------
<S> <C> <C> <C> <C> <C>
MD-11CF...... 03/2010 1995 PW4462 6200 410 seats or 90 tons
MD-11CF...... 03/2010 1995 PW4462 6200 410 seats or 90 tons
MD-11F....... 03/2009 1994 PW4462 6200 95 tons
MD-11........ 04/2008 1993 PW4462 6200 409 seats
MD-11........ 03/2008 1993 PW4462 6200 409 seats
MD-11........ 09/2008 1992 PW4462 6200 409 seats
MD-11........ 05/1999 1990 PW4462 6200 409 seats
DC10-30...... 11/1998 1988 CF6-50C2 4700 356 seats
DC10-30CF.... 01/2009 1979 CF6-50C2 4700 354 seats or 65 tons
DC10-30...... 08/1997 1977 CF6-50C2 4700 350 seats
DC10-30CF.... 09/1995 1973 CF6-50C2 4700 354 seats or 65 tons
</TABLE>
--------
(1) "F" aircraft are freighters, "CF" aircraft are convertible freighters and
may operate in either passenger or freight configuration and aircraft with
no letter designation are passenger-only aircraft.
(2) Assumes exercise of all lease extensions.
(3) Range is in nautical miles based on operational take-off weight with full
fuel load and no runway constraints.
(4) Number of seats or tons of freight.
Six of the Company's MD-11 aircraft are leased from International Lease
Finance Corporation ("ILFC"). The leases expire beginning in 1998, with each
lease providing for 10 one-year renewal options (except that one lease expires
in September 1995 and provides for 13 one-year renewal options). The Company
also has options to purchase each aircraft in specified years under each
lease. If the Company does not exercise its renewal options for any of these
aircraft, it must pay a fee with respect to such aircraft based on the number
of accumulated engine hours. The lease for the seventh MD-11 aircraft expires
in May 1999. The lessor may terminate this lease prior to the end of the lease
term, on eight-months prior notice to the Company. All of the MD-11 leases
contain typical default provisions.
The Company leases four DC10-30 aircraft, including one under a short-term
lease, two under long-term leases and one under a lease with Malaysian
Airlines. See "Certain Relationships and Transactions." One of the long-term
leases expires in January 2003, and includes renewal options allowing the
Company to extend the lease for up to six years. The other long-term DC10-30
lease expires in November 1997, with the lease providing for one 12-month
renewal option. All of the DC10-30 leases contain typical default provisions.
The Company leases certain of its spare engines. Some of the Company's
rotable spare parts inventory and certain of the Company's spare engines are
subject to mortgages and other security interests granted in favor of the
Company's lenders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." As of
June 30, 1995, the Company owned $5.9 million of DC10 aircraft spare parts
which are classified as assets held for sale. These spare parts were not
required by the Company following its transition in 1993 and 1994 from a fleet
of all DC10s to a fleet of predominantly MD-11 aircraft. The Company has
consigned these parts to be sold by a third party over a reasonable period of
time with the objective of maximizing the proceeds from such sale. See Note 8
to "Notes to Financial Statements."
The Company intends to acquire additional aircraft on short-term leases
primarily to continue to meet the peak seasonal demand requirements of certain
of its customers. There can be no assurances, however, that
35
<PAGE>
reliable aircraft will be available for short-term leases to the Company or,
if such aircraft are available, that the Company will be able to lease such
aircraft on terms as favorable as its current leases. From time to time the
Company may subcontract with other carriers to meet requirements during
periods of peak demand.
MAINTENANCE
The Company's maintenance and engineering group is responsible for
maintaining the technical condition of its aircraft fleet in compliance with
FAA approved maintenance programs. Aircraft maintenance includes six basic
activities: maintenance control; line maintenance; scheduled airframe heavy
maintenance; power plant maintenance; material services; and quality
assurance. These activities are managed in the Company's headquarters at
Washington Dulles International Airport.
The Company's maintenance control center coordinates routine and
non-routine maintenance operations worldwide on a 24-hour basis. This activity
includes tracking the maintenance status of each aircraft, communicating with
maintenance personnel in connection with every arrival and departure,
consulting with manufacturers about procedures to correct irregularities, and
advising maintenance personnel on the requirements of the Company's FAA
approved maintenance programs.
The Company's line maintenance group performs routine and non-routine
aircraft maintenance at line stations. This activity includes correcting
irregularities noted by flight crews and maintaining aircraft logbooks. To
support this activity, the Company has established maintenance support
stations in Philadelphia, New York, Miami, Frankfurt and Kuala Lumpur.
The Company's airframe maintenance group plans and supervises major
airframe maintenance checks at appropriate intervals based on hours flown. To
maintain a competitive cost structure, the Company outsources this high fixed
cost activity to several suppliers of airframe maintenance. The Company
currently has agreements with SwissAir at its facilities in Zurich, KLM at its
facilities in Amsterdam, Lufthansa at its facilities in Frankfurt, Israeli
Aircraft Industries at its facilities in Tel Aviv, Malaysian Airlines at its
facilities in Kuala Lumpur, and TIMCO at its facilities in Greensboro. The
Company deploys maintenance representatives to supervise the work of certain
of its maintenance contractors. See "Certain Relationships and Transactions" for
a description of the maintenance agreement with Malaysian Airlines.
The Company's power plant maintenance group plans and supervises major
maintenance work on its fleet of over 40 jet engines. The maintenance program
includes a sophisticated continuous monitoring program of engine performance
and trends that enables the Company to detect potential problems at an early
stage. In the Company's experience, early detection of adverse trends avoids
the significant repair costs and aircraft downtime necessitated by the failure
of major engine components.
As with scheduled airframe maintenance, the Company outsources major
power plant work to several suppliers of power plant services. The Company has
a 10-year contract ending in August 2003 with United Technologies
Corporation's Pratt & Whitney Group ("Pratt & Whitney") for all off-wing
maintenance on the PW 4462 engines that power its MD-11 aircraft. Under this
contract, the manufacturer agreed to provide such maintenance services at a
cost not to exceed a specified rate per hour during the term of the contract.
The specified rate per hour is subject to annual escalation, and increases
substantially in September 1998. Accordingly, while the Company believes the
terms of this agreement will result in lower engine maintenance costs than it
otherwise would incur during the first five years of the agreement, these
costs will increase substantially during the last five years of the agreement.
The Company has contracted with Caledonian Airmotive Limited for off-wing
maintenance on the CF6-50C2 engines that power its DC10-30 aircraft. The
Company believes these contracts provide high quality power plant services at
competitive costs.
The Company's maintenance costs associated with the MD-11 aircraft and PW
4462 engines have been significantly reduced due in part to manufacturer
guarantees and warranties, which guarantees and warranties began to expire in
1995.
The Company's material services group acquires and manages the inventory
of spare parts and consumable materials required to support line maintenance,
scheduled airframe maintenance and power plant maintenance. The Company has
established an inventory management facility in Wilmington, Delaware, to
support this activity. As part of this activity, the material services group
tracks the inventory status of the spare parts kits carried aboard each of the
Company's aircraft. Each of the Company's aircraft carries spare parts and
support
36
<PAGE>
kits, which consist of approximately $1.5 to $3.5 million in parts and special
equipment. In addition, a highly-trained maintenance representative is on
board all flights to destinations where the Company does not have on-site
maintenance facilities.
The Company's quality assurance group audits overall maintenance
activities to assure compliance with FAA requirements and FAA approved
maintenance programs.
As described above, the Company has entered into agreements with
contractors, including other airlines, to provide certain facilities and
services required for its operations, including all of the Company's off-wing
engine maintenance and most airframe maintenance. The Company has also entered
into agreements with contractors to provide ground handling and personnel
training. The Company will likely enter into similar agreements in any new
market it serves. Although the Company believes that there are many advantages
to outsourcing these activities, the Company's reliance on others to provide
essential services to it could have an adverse impact on the Company's
financial condition, results of operations and operating performance because
the efficiency, timeliness and quality of the contract services the Company
receives are not entirely within its control.
FLIGHT OPERATIONS
Worldwide flight operations (including aircraft dispatching and crew
scheduling) are planned and controlled by the Company's flight operations
group operating out of the Company's headquarters in Herndon, Virginia, which
are staffed on a 24-hour basis, seven days a week. Logistical support
necessary for extended operations outside the Company's fixed bases are
coordinated through the Company's global communications network.
PHYSICAL FACILITIES
The Company leases approximately 58,000 square feet of office space for
its headquarters and operations staff in Herndon, Virginia. In addition, the
Company leases certain other facilities at various locations as required by
its sales staff, flight crews, maintenance staff and other employees. The
Company considers its present office space and other facilities to be
sufficient for its needs.
AVIATION FUEL
The air transportation industry in general is affected by the price and
availability of aviation fuel. Both the cost and availability of aviation fuel
are subject to many economic and political factors and events occurring
throughout the world and remain subject to the various unpredictable economic
and market factors that affect the supply of all petroleum products. The price
of fuel has not had a significant impact on the Company's operations in recent
years. The Company's exposure to fuel risk is limited because (i) under the
terms of the Company's basic contracts, the customer is responsible for
providing fuel, (ii) under the terms of its full service contracts with the
U.S. Government, the Company is reimbursed for the cost of fuel it provides,
and (iii) under the Company's charter contracts, the Company is reimbursed for
fuel price increases in excess of 5% of the price agreed upon in the contract,
subject to a 10% cap. However, a substantial increase in the price or the
unavailability of aviation fuel could have a material adverse effect on the
air transportation industry in general and the financial condition and results
of operations of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
SECURITY
The Company believes its security program complies with the FAA and the
U.S. Department of Defense requirements and is tailored to the needs of the
markets it serves, including increased security necessary to serve certain
customers such as passengers on its Tel Aviv flights.
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. The Company maintains insurance coverage
with major insurance carriers with coverage of up to $140 million for damage
per aircraft and $750 million of third party liability per occurrence. The
Company has a low claim experience with its insurers and believes that it
enjoys a good reputation with insurance providers. The "Hull War Risks" section
of these policies imposes a $400 million annual aggregate limit. Additionally,
the Company carries deductible insurance which lowers its per aircraft
deductible from
37
<PAGE>
$1 million to $100,000 for any one claim, subject to an aggregate of $3.6
million in claims per policy year. The Company also obtains war risks
insurance from the U.S. Government under Title XIII of the Aviation Act ("Title
XIII"). Title XIII generally authorizes the U.S. Government to issue insurance
with respect to aircraft engaged in operations deemed by the U.S. Government
to be necessary to carry out the foreign policy of the U.S. when such
insurance is either unavailable or prohibitively expensive when sought from
private insurers. Payment of valid claims pursuant to insurance issued under
Title XIII is made out of and subject to Congressional appropriations. As is
customary in the air transportation business, the Company does not maintain
business interruption insurance.
EMPLOYEES
As of June 30, 1995, the Company had 725 full-time employees, classified
as follows:
<TABLE>
<CAPTION>
NUMBER OF
CLASSIFICATION FULL-TIME EMPLOYEES
-------------- -------------------
<S> <C>
Management..................................... 12
Administrative and Operations.................. 255
Cockpit Crew (including pilots)................ 234
Flight Attendants.............................. 224
---
Total Employees.............................. 725
===
</TABLE>
The Company's cockpit crew members are highly trained individuals with
significant international flight experience. The Company has 67 cockpit crew
members who have been employed with the Company for over 20 years.
The Company's cockpit crew members, who are represented by the Teamsters,
are subject to a four-year collective bargaining agreement expiring in June
1998. This agreement permitted the Company to modify crew member work rules in
exchange for pay increases.
The Company's flight attendants are represented by the Teamsters. The
collective bargaining agreement between the Company and the Teamsters on
behalf of the Company's flight attendants expired in 1992. The parties
exchanged their opening contract proposals in 1992 and have had numerous
contract negotiation sessions. In December 1994, the Company and the Teamsters
jointly requested the assistance of a federal mediator to facilitate
negotiations. After several mediated sessions, the National Mediation Board
(the "NMB") mediator recommended that the NMB release the parties to pursue
"direct" (i.e., non-mediated) negotiations with the flight attendants. The
Company and the Teamsters agreed and direct negotiations continue. The outcome
of the negotiations with the flight attendants cannot be determined at this
time. The inability to reach an agreement upon terms favorable to the Company
could have a material adverse effect on the Company. The Company's flight
attendants also recently challenged the use of foreign flight attendant crews
on the Company's flights for Malaysian Airlines and Garuda Indonesia which has
historically been the Company's operating procedure. The Company is
contractually obligated to permit its Southeast Asian customers to deploy
their own flight attendants. The arbitration on this issue is scheduled for
October 1995. While the Company intends to contest this matter vigorously, an
unfavorable ruling for the Company could have a material adverse effect on the
Company.
The Company's aircraft dispatchers are represented by the Transport
Workers Union (the "TWU"). This contract became subject to renegotiation on June
30, 1993. In May 1995, the parties reached agreement with respect to a new
four-year contract which remains subject to employee ratification. Fewer than
12 Company employees are covered by this collective bargaining agreement.
The Company is unable to predict whether any of its employees not
currently represented by a labor union, such as the Company's maintenance
personnel, will elect to be represented by a labor union or collective
bargaining unit. The election of such employees for representation in such an
organization could result in employee compensation and working condition
demands that could have a material adverse effect on the financial results of
the Company.
COMPETITION
The air transportation industry is highly competitive and susceptible to
price discounting due to excess capacity. Certain of the passenger and cargo
air carriers against which the Company competes possess
38
<PAGE>
substantially greater financial resources and more extensive facilities and
equipment than those which are now, or will in the foreseeable future become,
available to the Company.
There are relatively few barriers to entry into the airline business,
apart from the need for certain government licenses and the need for and
availability of financing, particularly for those seeking to operate on a
small scale with limited infrastructure. In recent years, several new
passenger and cargo carriers have entered the industry, typically with
low-cost structures. Aircraft, skilled labor and gates at most airports
generally continue to be readily available. As a result, the Company may face
increased competition from start-up airlines in selected markets from time to
time. The commencement of service by new carriers on the Company's routes
could negatively impact the Company's operating results.
U.S. Government. The allocation of military air transportation contracts
by the U.S. Air Force is based upon the number and type of aircraft a carrier,
alone or through teaming arrangements, makes available for use in times of
national emergency. The formation of competing teaming arrangements that have
larger partners than those sponsored by the Company, an increase by other air
carriers in their commitment of aircraft to CRAF or the withdrawal of the
Company's current partners, could adversely affect the size of the U.S. Air
Force contracts, if any, which are awarded to the Company in future years.
Passenger Services. In the passenger airline market, the Company
generally competes on the basis of price, quality of service, including
on-time reliability and in-flight service, and convenience. Many of the
Company's competitors in the Company's passenger airline market (both
scheduled and non-scheduled passenger air carriers) compete for passengers in
a variety of ways, including wholesaling to tour operators, discounting seats
on scheduled flights, promoting to travel agents, offering frequent flyer
awards, prepackaging tours for sale to retail customers and selling
discounted, excursion airfare-only products to the public. During periods of
dramatic fare cuts by the Company's competitors, the Company may be forced to
respond with reduced pricing, which could have a material adverse effect on
the Company's financial condition and results of operations. In the passenger
airline market, the Company competes directly against charter airlines, some
of which are substantially larger than it, and certain of which are affiliates
of major scheduled airlines or tour operators. As a result, in addition to
greater access to financial resources, these charter airlines may have greater
distribution capabilities, including exclusive or preferential relationships
with affiliates that are tour operators.
Under bilateral air services agreements between the U.S. and many foreign
countries, traffic rights in those countries are available to only a limited
number of, and in some cases only one or two, U.S. carriers and are subject to
approval by the applicable foreign regulators. Consequently, the Company's
ability to provide service in some foreign markets in the future may depend in
part on the willingness of the DOT to allocate limited traffic rights to the
Company rather than to competing U.S. airlines, including major scheduled
passenger carriers capable of carrying greater passenger traffic, and the
approval of the applicable foreign regulators. There can be no assurance that
the Company will be able to obtain the traffic rights it seeks in expanding
its business.
Freight Shippers. The market for air cargo services is highly
competitive. A number of airlines currently provide services for themselves
and for others similar to the services offered by the Company, and new
airlines may be formed that would also compete with the Company. Such airlines
may have substantially greater financial resources and a larger fleet of cargo
aircraft than the Company. The Company believes that the most important bases
for competition in the air cargo business are the payload and cubic capacities
of the aircraft, and the price, flexibility, quality and reliability of the
cargo transportation service. Competitors in the cargo market include
all-cargo carriers, such as Atlas Air, Inc. and Polar Air Cargo, and scheduled
and non-scheduled passenger carriers which have substantial belly cargo
capacity.
REGULATION
Since it was founded in 1948, the Company has been authorized to engage
in commercial air transportation by the DOT or its predecessor agencies. The
Company is currently authorized to engage in the scheduled and charter air
transportation of combination (persons, property and mail) and all-cargo
services between all points in the U.S., its territories and possessions. It
also holds worldwide charter authority for both combination and all-cargo
operations. In addition, the Company is authorized to conduct scheduled
combination services to all foreign points where it is currently flying. It
also holds certificates of authority to engage in scheduled all-cargo services
to a limited number of foreign destinations.
39
<PAGE>
The Company is subject to the Aviation Act, under which the DOT and the
FAA exercise regulatory authority. Generally, the FAA has regulatory
jurisdiction over flight operations, including equipment, personnel,
maintenance and other safety matters. To assure compliance with its
operational standards, the FAA requires air carriers to obtain operating,
airworthiness and other certificates, which may be suspended or revoked for
cause. The FAA also conducts safety audits and has the power to impose fines
and other sanctions for violations of airline safety regulations. The DOT
maintains authority over international aviation, subject to review by the
President of the U.S. and has jurisdiction over unfair trade practices and
consumer protection policies on international routes and fares. Additionally,
foreign governments assert jurisdiction over air routes and fares to and from
the U.S., airport operation rights and facilities access.
The Company is subject to the jurisdiction of the FAA with respect to
aircraft maintenance and operations, including flight operations, equipment,
aircraft noise, ground facilities, dispatch, communications, training weather
observation, flight time, crew qualifications, aircraft registration and other
matters affecting air safety. The FAA requires each air carrier to obtain an
operating certificate and operations specifications authorizing the carrier to
operate to particular airports on approved international routes using
specified equipment, such certificates and specifications being subject to
amendment, suspension, revocation or termination by the FAA. All of the
Company's aircraft must have and maintain certificates of airworthiness issued
or approved by the FAA. The Company currently holds an FAA air carrier
operating certificate and operations specifications under Part 121 of the
Federal Aviation Regulations. The FAA has the authority to suspend temporarily
or revoke permanently the authority of the Company or its licensed personnel
for failure to comply with regulations promulgated by the FAA and to assess
civil penalties for such failures.
Under the Airport Noise and Capacity Act of 1990 and related FAA
regulations, the Company's aircraft fleet must comply with certain Stage 3
noise restrictions by certain specified deadlines. All of the Company's
aircraft currently meet the Stage 3 noise reduction requirement. FAA
regulations require compliance with the Traffic Alert and Collision Avoidance
System ("TCAS"), approved airborne windshear warning system and aging aircraft
regulations.
Additional laws and regulations have been proposed from time to time
which could significantly increase the cost of airline operations by imposing
additional requirements or restrictions on operations. Laws and regulations
have been considered from time to time that would prohibit or restrict the
ownership and transfer of airline routes or slots. There is no assurance that
laws and regulations currently enacted or enacted in the future will not
adversely affect the Company's ability to maintain its current level of
operating results.
Several aspects of airline operations are subject to regulation or
oversight by Federal agencies other than the DOT or FAA. For instance, 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. In addition, the Company is
subject to the jurisdiction of other governmental entities, including (i) the
FCC regarding its use of radio facilities pursuant to the Federal
Communications Act of 1934, as amended, (ii) the Commerce Department, the
Customs Service, the Immigration and Naturalization Service and the Animal and
Plant Health Inspection Service of the Department of Agriculture regarding the
Company's international operations, (iii) the Environmental Protection Agency
(the "EPA") regarding compliance with standards for aircraft exhaust emissions
and (iv) the Department of Justice regarding certain merger and acquisition
transactions. The EPA regulates operations, including air carrier operations,
which affect the quality of air in the U.S. The Company has made all necessary
modifications to its operating fleet to meet fuel-venting requirements and
smoke emissions standards issued by the EPA.
The Company's international operations are generally governed by the
network of bilateral civil air transport agreements providing for the exchange
of traffic rights between governments which then select and designate air
carriers authorized to exercise such rights. In the absence of a bilateral
agreement, such international air services are governed by principles of
comity and reciprocity. Bilateral provisions pertaining to the charter
services in which the Company is primarily engaged vary considerably depending
on the particular country. Most bilateral agreements into which the U.S. has
entered permit either country to terminate the agreement with one year's
notification to the other. In the event a bilateral agreement is terminated,
international air service between the affected countries is governed by the
principles of comity and reciprocity.
40
<PAGE>
Certain airports served by the Company are subject to slot allocations
administered by the governments of the countries in which such airports are
located or by coordinating committees comprising airline representatives. A
"slot" is an authorization to take off or land at the designated airport within
a specified time window. In the past, the Company has generally been
successful in obtaining the slots it needs to conduct planned operations.
There can be no assurance, however, that it will be able to do so in the
future because, among other factors, government policies regulating the
distribution of slots, both in the U.S., and in foreign countries, are subject
to change.
Pursuant to federal law, no more than 25% of the voting interest in the
Company may be owned or controlled by Foreign Citizens. In addition, under
existing precedent and policy, actual control must reside in U.S. citizens. As
a matter of regulatory policy, the DOT has stated that it would not permit
aggregate equity ownership of a domestic air carrier by Foreign Citizens in an
amount in excess of 49%. The Company fully complies as of the date hereof with
these U.S. citizen ownership requirements. See "Description of Capital Stock."
The Company believes it is in compliance in all material respects 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. The Company also is subject to state and local laws and
regulations at locations where it operates and the regulations of various
local authorities which operate the airports it serves. Certain airport
operations have adopted local regulations which, among other things, impose
curfews and noise abatement regulations. While the Company believes it is
currently in compliance in all material respects with all appropriate
standards and has all required licenses and authorities, any material
non-compliance by the Company therewith or the revocation or suspension of
licenses or authorities could have a material adverse effect on the Company.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
The Company and WorldCorp (the "World Defendants") are defendants in
litigation brought by the Committee of Unsecured Creditors of Washington
Bancorporation (the "Committee") in August 1992, captioned Washington
Bancorporation v. Boster, et. al., Adv. Proc. 92-0133 (Bankr. D.D.C.) (the
"Boster Litigation").
The complaint asserts that the World Defendants received preferential
transfers or fraudulent conveyances from Washington Bancorporation when the
World Defendants received payment at maturity on May 4, 1990 of Washington
Bancorporation commercial paper purchased from National Bank of Washington on
May 3, 1990. Washington Bancorporation filed for relief under the Federal
Bankruptcy Code on August 1, 1990. The Committee seeks recovery of
approximately $4.8 million from the Company and approximately $2.0 million
from WorldCorp, which are alleged to the amounts paid to each of the Company
and WorldCorp in the 90 days before the filing of the bankruptcy petition by
Washington Bancorporation. On the motion of the World Defendants, among
others, the Boster Litigation was removed from the Bankruptcy Court to the
District Court for the District of Columbia on May 10, 1993. The World
Defendants filed a motion to dismiss the Boster Litigation as it pertains to
them on June 9, 1993, and intend to vigorously contest liability. The Company
believes it has substantial defenses to this action, although no assurance can
be given of the eventual outcome of this litigation. Depending upon the timing
of the resolution of this claim, if the Committee were successful in
recovering the full amount claimed, the resolution could have a material
adverse effect on the Company's financial condition and results of operations.
In addition, the Company is party to routine litigation and
administrative proceedings incidental to its business, none of which is
believed by the Company to be likely to have a material adverse effect on the
financial condition, liquidity or results of operations of the Company.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions and a brief description of
the business experience of the Company's directors and executive officers. All
directors hold office until the annual meeting of stockholders following the end
of their three-year term and until their successors are duly elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
T. Coleman Andrews, III(1).................. 41 Chairman of the Board and Chief Executive Officer
Charles W. Pollard(1)....................... 38 Director and President
Vance Fort.................................. 52 Senior Vice President--Government Affairs and General Counsel
Henk J. Guitjens............................ 57 Senior Vice President--Marketing and Sales
Ahmad M. Khatib............................. 46 Director and Executive Vice President--Operations
Michael E. Savage........................... 37 Vice President and Chief Financial Officer
A. Scott Andrews(2)(3)...................... 37 Director
Wan Malek Ibrahim(1)........................ 47 Director
Russell L. Ray, Jr.(2)(3)................... 60 Director
Peter M. Sontag(2)(3)....................... 52 Director
Lim Kheng Yew............................... 44 Director
</TABLE>
----------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
T. COLEMAN ANDREWS, III has served as Chairman of the Board and Chief
Executive Officer of the Company since September 1986. He is a Director, the
Chief Executive Officer and the President of WorldCorp, the Selling
Stockholder, and has served as a Director and as Chairman of the Executive
Committee of US Order since 1990. From 1978 through 1986, he was affiliated
with Bain & Company, Inc., an international strategy consulting firm. At Bain,
he was elected partner in 1982 and was a founding general partner in 1984 of
The Bain Capital Fund, a private venture capital partnership. Prior to his
experience with Bain, Mr. Andrews served in several appointed positions in the
White House for the Ford Administration. He is the brother of A. Scott
Andrews.
CHARLES W. POLLARD has served as a Director of the Company since
September 1989 and as President of the Company since June 1992. He served as
General Counsel and Secretary of the Selling Stockholder from October 1987
until October 1990, and Vice President, Administration and Legal Affairs of
the Selling Stockholder from October 1990 until June 1992. From August 1983 to
October 1987, he practiced law in the corporate department of the law firm of
Skadden, Arps, Slate, Meagher & Flom, Washington, D.C.
VANCE FORT has served as Senior Vice President--Government Affairs and
General Counsel of the Company since July 1993 and currently manages the Human
Resources and Management Information Systems departments of the Company. He
joined the Company as Senior Vice President, Government and International
Affairs, in September 1989. He served as Vice President, International and
Government Affairs for the Flying Tiger Line, an air cargo service provider,
from September 1987 to September 1989. From 1978 to 1987 he served in various
positions at the U.S. Department of Transportation, including service as
Deputy Assistant Secretary for Policy and International Affairs.
HENK J. GUITJENS has served as Senior Vice President--Marketing and Sales
of the Company since April 1995. Prior to joining the Company, Mr. Guitjens
served in various executive capacities with Martinair Holland N.V.
("Martinair"), a passenger airline and provider of air cargo services, for 27
years, most recently as Vice President and General Manager, the Americas. Mr.
Guitjens began his 33 years in the air travel business as a charter wholesaler
for Boston-based University Air Travel, after which he joined KLM where he
managed the North American division of its charter unit, Martinair.
AHMAD M. KHATIB has served as a Director and Executive Vice
President--Operations of the Company since February 1994. Mr. Khatib has
served as Senior Vice President, in different capacities, since June 1988. He
joined the Company in May 1972 as a passenger service agent. During his more
than 20 years with the
42
<PAGE>
Company, he has held numerous management positions in the areas of sales,
planning and services as well as in aircraft leasing and agreements, becoming
Vice President of Marketing and Customer Services in 1987.
MICHAEL E. SAVAGE has served as Vice President and Chief Financial
Officer of the Company since May 1994. He served as Vice President and Chief
Financial Officer of Tower Air, Inc., a long-haul scheduled and charter
passenger airline, from April 1991 until April 1994. From 1983 to April 1991
Mr. Savage was with the accounting firm of Arthur Young & Company (which
became Ernst & Young) where he was promoted to the position of Manager in 1985
and to the position of Principal in 1989.
A. SCOTT ANDREWS has served as a Director of the Company since June 1992.
He was a founder and has served as Managing Director of Winston Partners, a
private investment firm, since May 1994. He served as Chief Financial Officer
of the Company and WorldCorp from May 1992 until May 1994. He joined WorldCorp
as Treasurer in August 1987 and was elected Vice President--Finance and
Treasurer of WorldCorp in April 1988. From August 1985 to February 1987, he
was Vice President, Finance of Presidential Airways, a passenger airline. From
September 1980 to August 1985, he was associated with J.P. Morgan & Co., a
banking firm, most recently as Assistant Vice President. He is the brother of
T. Coleman Andrews, III.
WAN MALEK IBRAHIM has served as a Director of the Company since February
1994. Mr. Malek has served as Executive Director of MHS since prior to 1990.
Mr. Malek is Managing Director and a member of the Board of Directors of
Malaysian Airlines. He is a Director of MHS and Polypulp Paper Industries
Berhad ("Polypulp"), an industrial paper manufacturer. Pursuant to the
Shareholders Agreement, WorldCorp is obligated to vote its shares to elect two
directors nominated by MHS. Mr. Malek is one of such nominees designated by
MHS.
RUSSELL L. RAY, JR. has served as a Director of the Company since July
1993. Mr. Ray is an aviation consultant and is the U.S. advisor to Airport
Group International, a company engaged in airport development and management.
From 1992 to 1993, Mr. Ray served as Executive Vice President of British
Aerospace, Inc. From 1991 to 1992, Mr. Ray served as President and Chief
Executive Officer of Pan American World Airways. From 1988 to 1991, he served
as Vice President and General Manager of Commercial Marketing of McDonnell
Douglas Corporation and from 1985 to 1988, he served as President and Chief
Operating Officer of Pacific Southwest Airlines.
PETER M. SONTAG has served as a Director of the Company since February
1994. In July 1995, Mr. Sontag joined OAG Travel Services, a travel services
related company and a subsidiary of Reed Travel Group, as President. From
January 1995 to July 1995, Mr. Sontag served as Chairman and Chief Executive
Officer of Sontag & Associates, Inc., a company providing advice and counsel
to entities interested in worldwide travel and travel-related growth. From
1986 to 1994, Mr. Sontag served as Chairman and Chief Executive Officer of
USTravel, a travel company he founded in 1986.
LIM KHENG YEW has served as a Director of the Company since February
1994. Mr. Lim has served as Executive Director of Technology Resources
Industries Berhad ("TRI"), a telecommunications company, since prior to 1990. He
is a Director of MHS, TRI and Polypulp. Pursuant to the Shareholders
Agreement, WorldCorp is obligated to vote its shares to elect two directors
nominated by MHS. Mr. Lim is one of such nominees designated by MHS.
CLASSIFIED BOARD OF DIRECTORS
The Company anticipates that prior to completion of the Offering, the
Company's Board of Directors will consist of eight directors, divided into
three classes. The initial term of the first class will expire at the annual
meeting of stockholders to be held in 1996, the initial term of the second
class will expire in 1997, and the initial term of the third class will expire
in 1998. Messrs. A. Scott Andrews, Malek and Khatib are in the first class,
Messrs. Pollard, Ray and Lim are in the second class, and Messrs. T. Coleman
Andrews, III and Sontag are in the third class. Officers are elected annually
by the Board of Directors for one-year terms subject to removal by the Board.
See "--Employment Agreements."
BOARD COMMITTEES
The Board of Directors has three standing committees: a Compensation
Committee, an Audit Committee and an Executive Committee, all of which were
formed in July 1995. The Compensation Committee reviews and
43
<PAGE>
monitors key employee compensation policies and administers the Company's
management incentive compensation plans, including its stock option plans. The
Audit Committee recommends the Company's independent auditors, reviews the
results and scope of the audit and other accounting related services provided
by such auditors and reviews the terms of all material transactions between
the Company and its affiliates. The Executive Committee exercises all of the
power of the Board of Directors during intervals between meetings of the
Board, subject to certain limitations as provided by the General Corporation
Law of the State of Delaware.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee are Peter M. Sontag
(Chairman), Russell L. Ray, Jr. and A. Scott Andrews. During the last fiscal
year, the Company did not have a Compensation Committee. Compensation for the
Company's executive officers was determined by the entire Board of Directors
of the Company with substantial involvement of the Selling Stockholder as the
majority shareholder of the Company. During the last fiscal year, Charles W.
Pollard, the President of the Company, and Ahmad M. Khatib, the Executive Vice
President--Operations of the Company, each served as directors of the Company.
In addition, T. Coleman Andrews, III, the Chief Executive Officer of the
Company and the Chief Executive Officer and President of the Selling
Stockholder, served as Chairman of the Board of Directors of the Company and
as a director of the Selling Stockholder. Although a portion of Mr. Andrews'
annual salary is allocated to the Company, his compensation is determined
solely by the compensation committee of the Board of Directors of the Selling
Stockholder. See "--Executive Compensation". Patrick F. Graham, a member of the
compensation committee of the Board of Directors of the Selling Stockholder,
is a director of Bain & Company, Inc., which provided consulting services to
the Company totalling approximately $400,000 during 1994 and $88,000 during
1995. In May 1995, WorldCorp granted to Mr. Khatib options to purchase 50,000
shares of Common Stock held by WorldCorp at an exercise price of $11.00 per
share of Common Stock.
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation for attendance at Board
meetings or meetings of Board committees. Directors who are not also executive
officers of the Company or of an affiliate of the Company ("Non-Affiliate
Directors") are reimbursed for usual and ordinary expenses of meeting
attendance. The Company intends to adopt the Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"), pursuant to which each Non-Affiliate
Director will be offered options to purchase shares of Common Stock. It is
anticipated that up to 250,000 shares of Common Stock may be issued under the
Directors' Plan, subject to certain adjustments.
On May 31, 1995, the Company granted to three Non-Affiliate Directors
30,000 options to purchase 30,000 shares of Common Stock under the World
Airways Stock Option Plan (the "1995 Plan"), all of which options expire on May
30, 2003. The Company granted to Russell L. Ray, Jr. 10,000 options, of which
7,083 became exercisable on the date of grant and the remaining 2,917 become
exercisable in seven equal monthly installments of 417 options following the
date of grant. The first 5,000 options to vest have an exercise price of
$10.00 per share and the second 5,000 options to vest have an exercise price
of $10.50 per share. The Company granted to Peter M. Sontag 10,000 options, of
which 6,667 became exercisable on the date of grant and the remaining 3,333
become exercisable in eight equal monthly installments of 417 options
following the date of grant. The first 5,000 options to vest have an exercise
price of $11.00 per share and the second 5,000 options to vest have an
exercise price of $11.55 per share. The Company granted to A. Scott Andrews
10,000 options, of which 5,000 became exercisable on the date of grant and the
remaining 5,000 become exercisable in 12 equal monthly installments of 417
options following the date of grant. These options have an exercise price of
$11.00 per share. All future grants of options to Non-Affiliate Directors will
be made under the Directors' Plan. See --"1995 Stock Option Plan."
EXECUTIVE COMPENSATION
T. Coleman Andrews, who serves as President and Chief Executive Officer
of WorldCorp and Chairman of the Board and Chief Executive Officer of the
Company, is compensated directly by WorldCorp. A portion of his annual salary,
however, is allocated to the Company, which amount is set forth in the Summary
Compensation Table below. See "--Employment Agreements--T. Coleman Andrews,
III." In May 1995, the Board of
44
<PAGE>
Directors of the Company approved the 1995 Plan, which is described in detail
below. Prior to the establishment of the 1995 Plan, executives of the Company
were eligible to receive awards of options to purchase common stock of WorldCorp
pursuant to the WorldCorp 1988 Amended and Restated Stock Option Plan.
The following table sets forth information concerning the compensation
received for services rendered to the Company during the years ended December
31, 1992, 1993 and 1994 by the Chief Executive Officer of the Company and the
four other most highly compensated executive officers who received at least
$100,000 in compensation in 1994 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ---------------------
SECURITIES UNDERLYING ALL OTHER
YEAR SALARY BONUS OPTIONS(#)(1) COMPENSATION(2)
---- ------ ----- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
T. Coleman Andrews, III (3).. 1994 $199,500 -- 800,000(4) $13,037
Chief Executive Officer 1993 174,991 -- -- 13,201
and Chairman of the Board 1992 231,922 $21,000 -- 9,125
Charles W. Pollard........... 1994 176,539 -- -- 12,895
President 1993 172,316 -- -- 13,579
1992 165,892 -- 100,000 8,109
Ahmad M. Khatib.............. 1994 165,000 50,000 -- 6,885
Executive Vice President-- 1993 125,000 -- -- 5,567
Operations 1992 140,385 85,000 -- 2,331
Vance Fort................... 1994 143,175 -- -- 5,803
Senior Vice President-- 1993 127,020 -- -- 2,904
Government Affairs and 1992 125,002 -- -- 1,134
General Counsel
Michael E. Savage(5)......... 1994 67,500 50,000 -- 145
Vice President and 1993 -- -- -- --
Chief Financial Officer 1992 -- -- -- --
</TABLE>
----------
(1) In May 1995, the Board of Directors of the Company approved the 1995 Plan.
See "--1995 Stock Option Plan." The option grants made pursuant to the 1995
Plan are set forth under "--1995 Stock Option Plan." Prior to the
establishment of the 1995 Plan, executives of the Company were eligible to
receive awards of options to purchase common stock of WorldCorp pursuant to
the WorldCorp 1988 Amended and Restated Stock Option Plan. All awards are
for options to acquire common stock of WorldCorp.
(2) Amount consists of the value of WorldCorp contributions to WorldCorp's
employee savings and stock ownership plan, which contributions are made by
WorldCorp in shares of common stock of WorldCorp and are valued using
closing prices for the year in which the contributions are made, and the
group term life insurance paid on behalf of the employee by the Company.
(3) Mr. Andrews, who serves as President and Chief Executive Officer of
WorldCorp and Chief Executive Officer and Chairman of the Board of the
Company, is compensated directly by WorldCorp. A portion of his annual
salary and his 1992 bonus, however, is allocated to the Company, which
amounts are set forth in this table. See "--Employment Agreements--T.
Coleman Andrews, III."
(4) Mr. Andrews was granted options to purchase common stock of WorldCorp
pursuant to the terms of his new WorldCorp employment agreement dated August
19, 1994. See "--Employment Agreements--T. Coleman Andrews, III."
(5) Reflects compensation received from May 1994, when Mr. Savage joined the
Company, through December 31, 1994.
45
<PAGE>
The following table provides details regarding stock options to purchase
shares of common stock of WorldCorp granted to the Named Executive Officers in
1994 by WorldCorp. In addition, in accordance with the rules of the
Commission, the table sets forth hypothetical gains that would exist for the
respective options based on assumed rates of annual compounded growth in the
stock price of 0%, 5% and 10% from the date the options were granted over the
full option term. The actual value, if any, that an executive may realize will
depend on the spread between the market price and the exercise price on the
date the options are exercised.
WORLDCORP
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
------------------------------------------------------------- ------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS/
SECURITIES SARS GRANTED MARKET
UNDERLYING TO WORLDCORP EXERCISE PRICE ON
OPTIONS/SARS EMPLOYEES IN ($/SH) EXPIRATION DATE OF
NAME GRANTED(#) FISCAL YEAR PRICE DATE GRANT 0% 5% 10%
---- ------------ -------------- -------- ---------- -------- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
T. Coleman Andrews, III.... 800,000(1) 76% $4.50 08/19/2004 $6.87 $1,896,000 $5,352,405 $10,655,209
Charles W. Pollard......... -- -- -- -- -- -- -- --
Ahmad M. Khatib............. -- -- -- -- -- -- -- --
Vance Fort.................. -- -- -- -- -- -- -- --
Michael E. Savage........... -- -- -- -- -- -- -- --
</TABLE>
--------
(1) Of these options 200,000 were immediately exercisable and 600,000 become
exercisable 10 years less 90 days from the original date of grant, but such
vesting may be accelerated if certain targets are achieved with respect to
the price per share of the common stock of WorldCorp. The exercise price for
the grant to Mr. Andrews reflected in this table was set at the average
closing price on the New York Stock Exchange of WorldCorp's common stock for
the 30 days prior to and including the date on which the compensation
committee of WorldCorp and Mr. Andrews reached agreement on the principal
terms and conditions of his employment agreement. See "--Employment
Agreements--T. Coleman Andrews, III."
The following table sets forth the number of shares covered by both
exercisable and unexercisable stock options to purchase shares of common stock
of WorldCorp as of December 31, 1994. Also reported are the values for
"in-the-money" options which represent the positive spread between the exercise
price of any such existing stock options and the market price of the common
stock of WorldCorp as of December 30, 1994.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS/SAR VALUES
WITH RESPECT TO WORLDCORP COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
--------------------------- ---------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
T. Coleman Andrews, III.... -- -- 400,000 400,000 1,100,000 1,100,000
Charles W. Pollard(2)...... -- -- 281,667 48,333 390,000 --
Ahmad M. Khatib............ -- -- 189,400 25,000 307,775 40,625
Vance Fort................. -- -- 33,900 -- 55,087 --
Michael E. Savage.......... -- -- -- -- -- --
</TABLE>
--------
(1) The calculations in this table are based upon a December 30, 1994 closing
price of $7.25 per share of the common stock of WorldCorp on the New York
Stock Exchange.
(2) Mr. Pollard was granted (i) warrants to purchase 130,000 shares of common
stock of WorldCorp in 1989 and (ii) options to purchase 200,000 shares of
common stock of WorldCorp between 1988 and 1992. At year end 1994, warrants
to purchase 130,000 shares of common stock of WorldCorp and options to
purchase 151,667 shares of common stock of WorldCorp were exercisable. In
connection with Mr. Pollard's employment agreement with the Company, dated
as of January 1, 1995, the parties agreed that 100,000 of Mr. Pollard's
200,000 options, with an exercise price of $9.64 per share, would be
canceled upon the grant to Mr. Pollard pursuant to the 1995 Plan of options
to purchase 250,000 shares of Common Stock of the Company. See "--Employment
Agreements--Charles W. Pollard."
46
<PAGE>
EMPLOYMENT AGREEMENTS
Charles W. Pollard. The Company has entered into an employment agreement
with Charles W. Pollard, dated as of January 1, 1995, providing that Mr.
Pollard will serve as Director and President of the Company until December 31,
1997 unless terminated earlier or extended. Mr. Pollard is entitled to a base
salary of $225,000 per year and bonuses under the Company's 1995 Management
Incentive Compensation Plan, the right to participate in all bonus and
incentive compensation plans or arrangements made available to other Company
officers and directors and certain other benefits, including a $2 million life
insurance policy and non-qualified retirement benefits that guarantee a
retirement income of at least $50,000 per year commencing at age 60, subject
to vesting. Mr. Pollard is entitled to receive performance stock options in
accordance with the 1995 Plan. The agreement terminates upon Mr. Pollard's
death. The Company may terminate the agreement upon disability which continues
for a period of 12 months, or for cause (as defined) upon the affirmative vote
of the majority of the Board of Directors. If the Board terminates Mr. Pollard
without cause, Mr. Pollard is entitled to receive the remainder of the base
salary and certain other compensation due under the agreement and all options
granted to Mr. Pollard but unexercisable under the 1995 Plan will become
immediately exercisable. The nonqualified retirement benefits also will fully
vest. Mr. Pollard may terminate the agreement upon 30 days notice under
certain circumstances, including a substantial alteration of his
responsibilities, a relocation of the Company's executive offices outside of
the Washington, D.C. area or a change of control of the Company. Under the
terms of the employment agreement, a change of control includes (i) any
person, other than WorldCorp, becoming the beneficial owner of more than 50%
of the then outstanding securities of the Company or WorldCorp, (ii) certain
changes involving a majority of the Board of Directors of the Company or
WorldCorp, (iii) certain mergers or acquisitions of the Company or WorldCorp
with any other corporations and (iv) the liquidation or sale of all or
substantially all of the Company's or WorldCorp's assets. Upon such
termination by Mr. Pollard, he is entitled to receive the greater of the
remainder of his base salary or six months salary and certain other
compensation due under the agreement and all options granted but unvested
under the 1995 Plan shall become immediately exercisable. If, on December 31,
1996, Mr. Pollard and the Company have not executed a new employment
agreement, and neither party has given written notice to the other that they
intend to allow the agreement to expire at the end of its term on December 31,
1997, then Mr. Pollard's employment agreement will be automatically extended
through June 30, 1998, with all economic provisions extended on a pro rata
basis.
As part of his employment agreement, Mr. Pollard has agreed that
following the Company's initial public offering of its Common Stock, he will
hold a specified minimum number of shares of Common Stock and/or common stock
of WorldCorp during the term of the agreement. Upon the completion of the
Offering, Mr. Pollard will be required to hold 11,750 shares of Common Stock
and/or common stock of WorldCorp; upon the earlier of April 1, 1996 or his
exercise of 235,000 options, Mr. Pollard will be required to hold 17,625
shares of Common Stock and/or common stock of WorldCorp and upon the earlier
of April 1, 1997 or his exercise of 293,750 options, Mr. Pollard will be
required to hold 23,500 shares of Common Stock and/or common stock of
WorldCorp. In connection with the execution of a stock option agreement with
the Company referred to below, Mr. Pollard agreed to cancel options to
purchase 100,000 shares of common stock of WorldCorp at an exercise price of
$9.64 per share.
Pursuant to a stock option agreement between the Company and Mr. Pollard,
Mr. Pollard has been awarded options to purchase up to 250,000 shares of
Common Stock at an exercise price of $11.00 per share. The options for 100,000
shares are immediately exercisable. The options for the remaining 150,000
shares will become exercisable on September 30, 2002; however, the exercise
date will be accelerated with respect to increments of 25,000 shares if
certain targets are achieved regarding the Company's stock price. Pursuant to
this provision, Mr. Pollard will be entitled to exercise options to purchase
25,000 shares of Common Stock, at the $11.00 exercise price, each time that
the Common Stock trades at a price that is an increase of 25% over the
preceding eligibility level for 20 trading days. Thus, Mr. Pollard will first
be entitled to exercise options for 25,000 shares if the Common Stock trades
at or above $13.75 for 20 consecutive trading days. The same entitlement would
arise for five additional blocks of 25,000 options, at the exercise price of
$11.00 per share, if the Common Stock trades at or above $17.19, $21.49,
$26.86, $33.57, and $41.96, for 20 trading days each (each of these trading
prices is 25% above the price of the Common Stock at the earlier tier). In the
event that Mr. Pollard is no longer employed in that capacity or other
specified capacities by the Company, options that have not become exercisable
47
<PAGE>
by such time will not thereafter become exercisable. Options exercisable at
such time will remain exercisable for one year.
T. Coleman Andrews, III. WorldCorp and T. Coleman Andrews, III, entered
into an employment agreement and a stock option agreement on August 19, 1994.
The principal terms of the employment agreement are as follows: (i) Mr.
Andrews will receive a minimum salary of $350,000 per year beginning on the
date of the executed contract; (ii) the term of the agreement expires on
December 31, 1997, subject to a renewal and extension provision described
below; (iii) Mr. Andrews is eligible to receive bonuses pursuant to
WorldCorp's Management Incentive Compensation Plan; (iv) Mr. Andrews received
a grant of options to purchase 800,000 shares of common stock of WorldCorp;
(v) Mr. Andrews has agreed to hold a substantial number of shares of common
stock of WorldCorp; and (vi) WorldCorp will maintain a $5 million life
insurance policy, the proceeds of which will be used to repurchase options and
WorldCorp common stock from Mr. Andrews' estate. If, as of December 31, 1996,
Mr. Andrews and WorldCorp have not executed a new employment agreement, or
neither party has given written notice to the other that they intend to allow
this agreement to expire at the end of its term on December 31, 1997, then and
in that event Mr. Andrews' employment agreement will be automatically extended
through June 30, 1998, with all economic provisions extended on a pro rata
basis.
Mr. Andrews may terminate his employment in the event (i) WorldCorp
relocates its headquarters outside of the Washington, D.C. area, (ii) his
duties are diminished in a manner materially altering his responsibilities,
(iii) the board of directors of WorldCorp determines that WorldCorp should be
liquidated or dissolved during the term of the employment agreement or (iv)
there is a change in control of WorldCorp. Under the terms of the employment
agreement, a change in control includes (i) any person, other than WorldCorp,
becoming the beneficial owner of more than 50% of the then outstanding
securities of WorldCorp, (ii) certain changes involving a majority of the
Board of Directors of WorldCorp, (iii) certain mergers or acquisitions of
WorldCorp with any other corporations and (iv) the liquidation or sale of
substantially all of WorldCorp's assets. In the event Mr. Andrews exercises
this termination right, or, in the event WorldCorp terminates Mr. Andrews'
employment with the Company other than for cause (as defined in the employment
agreement), WorldCorp is obligated to pay Mr. Andrews the undiscounted
remainder of his base salary then in effect, any deferred salary and/or bonus
compensation payable, and all granted but unexercisable stock options under
Mr. Andrews' stock option agreement shall become immediately exercisable for a
period of one year following the date of termination. WorldCorp may terminate
the agreement for cause or if Mr. Andrews becomes disabled for a period of 12
months.
Mr. Andrews serves as Director, President and Chief Executive Officer of
WorldCorp and also as Chairman of the Board and Chief Executive Officer of the
Company. Although WorldCorp compensates Mr. Andrews directly, a portion of his
annual salary is allocated to the Company. See "--Executive Compensation." The
Company anticipates that for fiscal years 1995 and 1996 the Company will be
allocated $200,000 of Mr. Andrews' annual salary and a portion of his bonus by
WorldCorp pursuant to a services agreement between WorldCorp and the Company.
See "Certain Relationships and Transactions."
1995 MANAGEMENT INCENTIVE COMPENSATION PLAN
The Company's 1995 Management Incentive Compensation Plan makes eligible
for incentive cash bonus awards all Company employees at the management level
or above who are not covered by sales commissions, or similar agreements, or
by collective bargaining agreements. The award amount paid to eligible
employees under the plan is a function of three components: (i) a target award
(expressed as a percentage of base salary) for each level of management; (ii)
a weighted measure for individual results, team results (by department) and
Company results for each level of management; and (iii) an adjustment of
target awards upward or downward based upon an appraisal of individual, team
and company results. Awards for the Chief Executive Officer and the President
are based solely on Company results; awards for the Vice Presidents and
Department Heads are based only on team and Company results; and awards for
Management Directors and Managers are based on individual, team and Company
results. The goals of the plan are to (i) focus management attention on a
limited number of measurable objectives that drive Company performance, (ii)
reward and encourage individual results and excellence, (iii) encourage
contribution to team results and (iv) encourage all managers to look beyond
individual and team performance towards achievement of Company results. The
bonus levels attainable under the plan vary according to level of management.
The target bonus levels for the Chief Executive Officer and the President are
48
<PAGE>
40% of salary, for the Vice Presidents and the Department Heads are 30% of
salary, for the director level employees are 20% of salary, and for managers
are 10% of salary. These levels can be adjusted up or down depending on
operating results.
1995 STOCK OPTION PLAN
On May 24, 1995, the Company's stockholders approved the 1995 Plan that
took effect May 31, 1995. Members of the Company's Board of Directors,
employees and consultants to the Company or its affiliates are eligible to
participate in the 1995 Plan. The Company has reserved 1,100,000 shares of
Common Stock for issuance upon the exercise of options granted to participants
under the 1995 Plan. As of June 30, 1995, the Company had awarded options to
purchase 1,070,083 shares of Common Stock, which are exercisable at prices
ranging from $10.00 to $11.55 per share. Of such options, 284,310 were
exercisable as of June 30, 1995.
The 1995 Plan is designed to help the Company attract and retain key
management level employees, and to reward the Company's employees for results
that contribute to strong earnings performance and improved share values. The
number of options granted in the case of Company executives is set by the
Board of Directors based upon a range of factors, including scope of
responsibilities, internal equity and external competitiveness. The number of
stock options granted to non-executives is determined by a formula based on
annual salary and the share price on the date of the grant.
Accelerated vesting of options is one element of the 1995 Plan designed
to align the interests of the Company's employees with those of the Company's
stockholders. In the case of Company executives, 20% of options granted vest
on the later of the grant date or completion of the first full year of
employment, while vesting of the balance of the options is based on
performance of the Company's stock. An additional 25% of the options will vest
for each 25% improvement in share value (compounded). Vesting for participants
below the vice president level is designed to encourage retention of
employees, and occurs in equal monthly installments over three years following
the grant date. No option is exercisable more than 10 years following the
grant date.
The 1995 Plan permits the grant of both incentive stock options and
nonqualified stock options. The 1995 Plan is administered by the Compensation
Committee, which has the authority to select individuals to participate in the
1995 Plan and to determine the terms of all options awards made under the 1995
Plan.
The exercise price for options awarded under the 1995 Plan may not be
less than 85% of the fair market value (as defined) of the Common Stock at the
time of grant, except that incentive stock options may not be less than the
fair market value of the Common Stock. Participants may pay the exercise price
in cash or shares of Common Stock already held by the participant.
The following table provides details regarding stock options granted to
the Named Executive Officers in 1995. In addition, in accordance with the
rules of the Commission, the table sets forth hypothetical gains that would
exist for the respective options based on assumed rates of annual compounded
growth in the stock price of 0%, 5% and 10% from the date the options were
granted over the full option term. The actual value, if any, that an executive
may realize will depend on the spread between the market price and the
exercise price on the date the options are exercised.
49
<PAGE>
COMPANY
OPTION/SAR GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
------------------------------------------------------- --------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS/
SECURITIES SARS GRANTED
UNDERLYING TO COMPANY EXERCISE
OPTIONS/SARS EMPLOYEES IN ($/SH) EXPIRATION
NAME GRANTED(#) FISCAL YEAR PRICE DATE 0% 5% 10%
---- ------------- ------------- -------- ---------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
T. Coleman Andrews, III...... -- -- -- -- -- -- --
Charles W. Pollard........... 250,000 23.4% $ 11.00 12/31/2004 $ 0 $1,729,460 $4,382,792
Ahmad M. Khatib.............. 150,000 14.0 11.00 05/30/2003 0 787,801 1,886,922
Vance Fort................... 125,000 11.7 11.00 05/30/2003 0 656,501 1,572,435
Michael E. Savage............ 120,000 11.2 11.00 05/30/2003 0 630,241 1,509,537
</TABLE>
The following table sets forth the number of shares covered by both
exercisable and unexercisable stock options. Also reported are the values for
"in-the-money" options which represent the positive spread between the exercise
price of any such existing stock options and the midpoint of the estimated
initial public offering price range of the Common Stock.
AGGREGATED OPTION/SAR EXERCISES IN 1995
AND OPTIONS/SAR VALUES
WITH RESPECT TO COMPANY COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT JUNE 30, 1995(POUND) AT JUNE 30, 1995($)(1)
-------------------------- --------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
T. Coleman Andrews, III...... -- -- -- -- -- --
Charles W. Pollard........... -- -- 100,000 150,000 $200,000 $300,000
Ahmad M. Khatib.............. -- -- 30,000 120,000 60,000 240,000
Vance Fort................... -- -- 43,750 81,250 87,500 162,500
Michael E. Savage............ -- -- 40,000 80,000 80,000 160,000
</TABLE>
--------
(1) Calculated as of June 30, 1995 using an assumed initial public
offering price of $13.00 per share (the midpoint of the estimated
initial public offering price range).
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock and common stock of WorldCorp as of
June 30, 1995, and as adjusted to reflect the sale of Common Stock offered
hereby by (i) each person who is known by the Company to beneficially own more
than 5% of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, (iv) the Selling
Stockholder and (v) all current directors and executive officers as a group.
Unless otherwise indicated in the footnotes to the table, each person or entity
has sole voting and investment power with respect to all shares of the Common
Stock and common stock of WorldCorp shown as beneficially owned by such person
or entity.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
------------------------------- NUMBER OF ------------------------------
NUMBER OF SHARES BEING NUMBER OF
NAME OF STOCKHOLDER SHARES(1) PERCENT OFFERED SHARES(1) PERCENT
------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
WorldCorp........................ 8,010,064 WA 80.1% 900,000 7,110,064 WA 59.3%
13873 Park Center Road,
Suite 490
Herndon, Virginia 22071
MHS.............................. 1,990,000 WA 19.9 -- 1,990,000 WA 16.6
No. 4, Lorong 19/1A
46300 Petaling Jaya
Selangor Darul Ehsan, West
Malaysia
T. Coleman Andrews, III.......... 520,559(2) WC 3.2 -- 520,559(2) WC 3.2
Charles W. Pollard............... 100,000(3) WA 1.0 -- 100,000(3) WA *
228,443(4) WC 1.4 -- 228,443(4) WC 1.4
Vance Fort....................... 43,750(5) WA * -- 43,750(5) WA *
16,363(6) WC * -- 16,363(6) WC *
Henk J. Guitjens................. -- -- -- -- --
Ahmad M. Khatib.................. 80,000(7) WA * -- 80,000(7) WA *
213,988(8) WC 1.3 -- 213,988(8) WC 1.3
Michael E. Savage................ 40,000(9) WA * -- 40,000(9) WA *
290(10) WC * -- 290(10) WC *
A. Scott Andrews................. 6,250(11) WA * -- 6,250(11) WA *
165,334(12) WC 1.0 -- 165,334(12) WC 1.0
Wan Malek Ibrahim................ -- -- -- -- --
Russell L. Ray, Jr............... 8,333(13) WA * -- 8,333(13) WA *
Peter M. Sontag.................. 7,917(14) WA * -- 7,917(14) WA *
Lim Kheng Yew.................... -- -- -- -- --
Directors and executive officers
as a group (11 persons)......... 286,250 WA 2.8 -- 286,250 WA 2.3
1,144,977 WC 6.7 -- 1,144,977 WC 6.7
</TABLE>
--------
* Less than 1%.
WA represents the Common Stock of the Company.
WC represents the common stock of WorldCorp.
(footnotes continued on following page)
51
<PAGE>
(1) The table above includes shares of common stock of WorldCorp held in
WorldCorp's employee savings and stock ownership plan (the "WorldCorp
ESSOP") allocated through March 31, 1995.
(2) Consists of (i) 500,000 shares of common stock of WorldCorp issuable upon
the exercise of stock options granted under the WorldCorp 1988 Stock Option
Plan and (ii) 16,420 shares of common stock of WorldCorp allocated to Mr.
Andrews under the WorldCorp ESSOP and (iii) 4,139 shares of common stock of
WorldCorp owned directly by Mr. Andrews.
(3) Consists of 100,000 shares of Common Stock issuable upon the exercise of
options granted under the 1995 Plan.
(4) Consists of (i) 130,000 shares of common stock of WorldCorp issuable upon
the exercise of warrants, (ii) 80,000 shares of common stock of WorldCorp
issuable upon the exercise of options granted under the WorldCorp 1988
Stock Option Plan, (iii) 17,443 shares of common stock of WorldCorp
allocated to Mr. Pollard under the WorldCorp ESSOP and (iv) 1,000 shares of
common stock of WorldCorp owned through an individual retirement account.
(5) Consists of 43,750 shares of Common Stock issuable upon the exercise of
options granted under the 1995 Plan.
(6) Consists of (i) 13,900 shares of common stock of WorldCorp issuable upon
the exercise of options granted under the WorldCorp 1988 Stock Option Plan
and (ii) 2,463 shares of common stock of WorldCorp allocated to Mr. Fort
under the WorldCorp ESSOP.
(7) Consists of 30,000 shares of Common Stock issuable upon the exercise of
options granted under the 1995 Plan and 50,000 shares of Common Stock
which may be acquired from WorldCorp pursuant to an option granted to Mr.
Khatib by WorldCorp in May 1995.
(8) Consists of (i) 209,400 shares of common stock of WorldCorp issuable upon
the exercise of options granted under the WorldCorp 1988 Stock Option Plan
and (ii) 4,588 shares of common stock of WorldCorp allocated to Mr. Khatib
under the WorldCorp ESSOP.
(9) Consists of 40,000 shares of Common Stock issuable upon the exercise of
options granted under the 1995 Plan.
(10) Consists of 290 shares of common stock of WorldCorp allocated to Mr.
Savage under the WorldCorp ESSOP.
(11) Consists of 6,250 shares of Common Stock issuable upon the exercise of
options granted under the 1995 Plan.
(12) Consists of (i) 155,334 shares of common stock of WorldCorp issuable upon
the exercise of options granted under the WorldCorp 1988 Stock Option Plan
and (ii) 10,000 shares of common stock of WorldCorp owned directly by Mr.
Andrews.
(13) Consists of 8,333 shares of Common Stock issuable upon the exercise of
options granted under the 1995 Plan.
(14) Consists of 7,917 shares of Common Stock issuable upon the exercise of
options granted under the 1995 Plan.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company operated as a wholly owned subsidiary of the Selling
Stockholder from June 1987 until February 1994 and has operated since February
1994 as a majority owned subsidiary of the Selling Stockholder. The Chairman
of the Board and Chief Executive Officer of the Company serves as President,
Chief Executive Officer and a Director of the Selling Stockholder. See
"Management--Directors and Executive Officers" and "--Compensation Committee
Interlocks and Insider Participation."
WorldCorp and the Company historically have utilized a single corporate
staff for administrative services, thus permitting the Company to utilize
WorldCorp management personnel as needed. Allocations of $6.8 million, $6.7
million and $5.9 million of corporate administrative costs were made to the
Company in 1992, 1993 and 1994, respectively. These allocations included the
costs of directing or performing certain accounting, financial, legal, tax,
marketing, cash management, employee benefits, human resources, management
information services activities and operations and maintenance administrative
services. Office space, furniture and fixtures and other items were also
included in the administrative cost allocation.
Effective January 1, 1995, however, substantially all of WorldCorp's
management personnel became employees of the Company and since such date, the
Company has provided certain administrative services to WorldCorp. WorldCorp
and the Company have entered into a services agreement pursuant to which the
Company and WorldCorp will continue to provide services to each other at
negotiated rates, which the Company believes are comparable to those that
could be obtained on an arms-length basis. In June 1995, the Company borrowed
$1.8 million from WorldCorp pursuant to a demand promissory note with an
interest rate of 13.875%. In July 1995, this note was repaid to WorldCorp.
WorldCorp is subject to an indenture that may have the effect of
preventing the Company from incurring additional debt. Under this indenture,
the Company is restricted from incurring any debt unless, after giving effect
to such new debt, (i) the ratio of senior debt to subordinated debt of
WorldCorp and certain subsidiaries does not exceed 1.0 and the aggregate
principal amount of such outstanding senior debt does not exceed $75 million,
(ii) the ratio of total debt to total capitalization of WorldCorp and certain
subsidiaries is less than 66 2/3% or (iii) the pro forma fixed charge coverage
ratio of WorldCorp and certain subsidiaries for the period consisting of the
four fiscal quarters immediately preceding such debt incurrence is greater
than 1.5 (as such terms are
52
<PAGE>
defined in such indenture). At June 30, 1995, the Company, WorldCorp and
WorldCorp's other subsidiaries were permitted to incur an aggregate of $30.4
million of additional debt under the WorldCorp indenture. The incurrence of
additional debt by WorldCorp or certain of its subsidiaries would (absent
reduction in the amount of debt outstanding of such WorldCorp entities as of
June 30, 1995) reduce the amount of additional debt the Company could incur.
In addition, WorldCorp is subject to two indentures under which it is
obligated to cause the Company not to pay dividends upon the occurrence of
certain events of default by WorldCorp. For a discussion of the restrictions
on payment of dividends by the Company, see "Dividend Policy."
Pursuant to the MHS Stock Purchase Agreement, the Company and WorldCorp
sold 24.9% of the outstanding shares of Common Stock to MHS for $27.4 million
(or $11.00 per share) in February 1994. In August 1994, MHS acquired 32% of
the Common Stock, and assumed management control, of Malaysian Airlines.
Effective December 31, 1994, WorldCorp agreed to pay MHS $8.5 million pursuant
to a promissory note due December 31, 1995 which is secured by approximately
500,000 shares of Common Stock owned by WorldCorp (or $17.00 per share) in
exchange for (i) 5% of the outstanding shares of Common Stock of the Company
which was held by MHS and (ii) the execution of a series of multi-year
contracts between the Company and Malaysian Airlines described below. Of the
$8.5 million consideration paid by WorldCorp to MHS, $3.0 million is
attributable to certain contract enhancements received by the Company as a
result of such multi-year contracts with Malaysian Airlines. Such $3.0 million
amount is included in the Company's balance sheets in "Other Assets and
Deferred Charges" and in "Contributed Capital," and is being amortized over the
terms of the Malaysian Airlines contracts, ranging from two to five years. See
Note 4 to "Notes to Financial Statements." MHS currently owns 19.9% of the
Company's outstanding Common Stock.
In connection with the MHS Stock Purchase Agreement, the Company and MHS
executed a stock registration rights agreement, dated October 30, 1993 (the
"Stock Registration Rights Agreement") and the Company, MHS and WorldCorp
executed the Shareholders Agreement. Under the Stock Registration Rights
Agreement, if at any time after October 30, 1996 the Company registers its
Common Stock under the Securities Act, MHS has the right to demand the
registration of its shares of Common Stock. Under the Shareholders Agreement,
MHS agreed not to transfer, sell or pledge any of its shares of Common Stock
prior to February 28, 1997 without the prior written consent of WorldCorp.
WorldCorp has agreed with the Underwriters that WorldCorp will not consent to
any sale, transfer or pledge by MHS of any shares of Common Stock of the
Company for a period of 270 days after the date of this Prospectus. Also, if
without the prior written consent of MHS: (1) the Company sells all or
substantially all of its business; or (2) the Company fundamentally changes
its line of business, then MHS has the option to (a) sell or transfer all or a
portion of its shares to a third party prior to February 28, 1997; and/or (b)
require WorldCorp to purchase all or part of MHS' shares at fair market value.
Fair market value is defined to be not less than the aggregate of the costs
borne by MHS in acquiring and holding its shares of Common Stock. The
Shareholders Agreement also provides that if WorldCorp's ownership interest in
the Company falls below 51% of the outstanding shares of Common Stock, then
MHS may either sell its shares to a third party or require WorldCorp to sell a
pro rata number of shares held by MHS to the party purchasing WorldCorp's
shares. The Shareholders Agreement also grants MHS a right of first refusal to
purchase shares of Common Stock issued by the Company or sold by WorldCorp and
to purchase additional shares of Common Stock to maintain its ownership
percentage in the Company which rights have been waived by MHS in connection
with the Offering. In addition, the Shareholders Agreement provides that (i)
WorldCorp will vote its shares of Common Stock to elect the number of
directors nominated by MHS that represent MHS' proportionate interest in the
Company (not less than two directors), (ii) the Company will declare and
distribute all dividends properly payable, subject to the requirements of law
and general overall financial prudence, and (iii) the Board of Directors will
hold Board meetings only if a director nominated by MHS is present and will
not approve a sale of substantially all of the business of the Company,
transactions not in the ordinary course of the air transportation business in
excess of $500,000, the winding up of the business, the appointment of outside
auditors, or the appointment of committees of the Board of Directors or the
delegation of authority to such committees, without the consent of MHS, or the
directors nominated by MHS. See "Risk Factors--Risks Related to the
Company--Shareholders Agreement with MHS." WorldCorp-nominated directors must
abstain from voting on certain transactions in which WorldCorp or its
affiliates have a beneficial interest. One of the Company's directors, Wan
Malek Ibrahim, serves as Executive Director and Managing Director,
respectively, of
53
<PAGE>
MHS and Malaysian Airlines. Another director, Lim Kheng Yew, serves as
Director of MHS. See "Principal and Selling Stockholders." The Shareholders
Agreement terminates if either WorldCorp's or MHS' ownership interest falls
below 5% of the outstanding capital stock of the Company.
The Company presently operates five MD-11 aircraft under two multi-year
basic contracts with Malaysian Airlines. The first agreement with Malaysian
Airlines provides for the Company to operate three MD-11 freighter aircraft
for Malaysian Airlines for five-year terms, with the lease for one aircraft
commencing June 1994, the second June 1995 and the third aircraft commencing
July 1995. Under this agreement, Malaysian Airlines has agreed to operate the
three aircraft a combined guaranteed minimum total of 1,200 block hours per
month, except when an aircraft is in scheduled maintenance. Under this
freighter services contract, the Company provides aircraft, cockpit crew,
maintenance and insurance, and Malaysian Airlines provides all other services.
The Company may terminate the agreement upon the occurrence of certain events.
Malaysian Airlines may terminate this agreement upon the failure by the
Company to make any payment or to perform any material covenant required to be
performed under this agreement, in either case within applicable grace
periods, the failure by the Company to maintain required insurance, the
insolvency or bankruptcy of the Company or the confiscation of substantially
all of the assets of the Company. The Company has agreed to shift substantial
amounts of airframe maintenance to Malaysian Airlines' facilities and to
collaborate with Malaysian Airlines to build its world-wide cargo system.
The second agreement provides for the Company to operate two MD-11
passenger aircraft for Malaysian Airlines for a two and one-half year term
expiring in March 1997. Under this agreement, Malaysian Airlines has agreed to
operate each aircraft a minimum of 320 block hours per month. The other terms
of this agreement, including termination events, are substantially similar to
the terms in the freighter services agreement.
The Company has an additional significant contract with Malaysian
Airlines under which it flies Malaysian Muslim pilgrims to Saudi Arabia for
the annual Hadj religious pilgrimage. This agreement provides for the Company
to operate three DC10-30 aircraft for Malaysian Airlines for a five-year term
expiring after the 1996 Hadj season. Under this agreement, Malaysian Airlines
has agreed to operate the three aircraft a minimum combined total of 2,350
block hours during each Hadj season through 1996.
During 1994, the Company generated revenues of $32.8 million from
Malaysian Airlines under the MD-11 freighter and passenger service agreements
and the agreement related to DC10-30 aircraft utilized for the Hadj.
The Company leases one DC10-30 aircraft from Malaysian Airlines under a
lease that expires in August 1997. Malaysian Airlines may terminate this
agreement upon, among other things, the failure by the Company to make any
payment or to perform any provision of this agreement within any applicable
cure periods, the failure by the Company to maintain required insurance, any
event of default by the Company with respect to any obligation to make a
payment to Malaysian Airlines under any other agreement between the Company
and Malaysian Airlines, the termination of government permits required by the
Company, or the modification of such permits in a manner unacceptable to
Malaysian Airlines, a change in control of the Company, or the occurrence of
any events which in the reasonable opinion of Malaysian Airlines might have a
material adverse effect on the financial condition or operations of the
Company or on the Company's ability to comply with its obligations under this
agreement. The Company has paid rent, maintenance reserves and operating
deposits for this aircraft of $823,000 through August 31, 1995.
The Company and Malaysian Airlines entered into an agreement in March
1995 pursuant to which Malaysian Airlines provides routine maintenance checks,
structural inspections and other necessary work for the Company's MD-11 and
DC10-30 aircraft in Kuala Lampur. The Company paid Malaysian Airlines
approximately $20,000 through August 31, 1995 for maintenance services.
During part of 1994, Joseph J. Shallcross served as Executive Vice
President--Operations of the Company. Pursuant to a separation agreement,
dated March 24, 1994, Mr. Shallcross received certain payments from the
Company which, together with his salary and benefits, totaled $295,724 for
1994.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, the Company had two stockholders of record. Upon
completion of the Offering, the Company will have outstanding 12,000,064
shares of Common Stock and 1,050,083 shares subject to outstanding options. Of
this amount, the 2,900,000 Shares sold in the Offering will be freely
transferable and may be resold without further registration under the
Securities Act. The 9,100,064 remaining shares held by the Selling Stockholder
and MHS are "restricted" securities under the Securities Act and such holders
will be entitled to resell them only pursuant to a registration statement
under the Securities Act or an applicable exemption from registration
thereunder such as an exemption provided by Rule 144. If at any time after
October 30, 1996 the Company registers its Common Stock under the Securities
Act, then MHS has the right to demand the registration of the 1,990,000 shares
of Common Stock that it owns. See "Certain Relationships and Transactions."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least two years may, under certain circumstances, resell within any
three-month period such number of shares as does not exceed the greater of 1%
of the then-outstanding shares (approximately 120,000 shares upon completion
of the Offering) or the average weekly trading volume during the four calendar
weeks prior to such resale. Rule 144 also permits, under certain
circumstances, the resale of shares without any quantity limitation by a
person who has satisfied a three-year holding period and who is not, and has
not been for the preceding three months, an affiliate of the Company. In
addition, holding periods of successive non-affiliate owners are aggregated
for purposes of determining compliance with these two-and three-year holding
period requirements.
The Company and its executive officers and directors have agreed not to
offer, sell or contract to sell, or otherwise dispose of, or announce the
offering of, any shares of Common Stock, or any rights to acquire such shares,
or any securities convertible into, or exchangeable for, shares of Common
Stock (other than, in the case of such executive officers and directors,
shares disposed of as bona fide gifts or shares of Common Stock delivered to
the Company in order to exercise, but not dispose of shares of Common Stock
received pursuant to the exercise of, stock options pursuant to the terms of
such stock options) for a period of 180 days after the date of this Prospectus
without the prior written consent of the representatives of the Underwriters.
In addition, the Company may issue shares of Common Stock issuable upon
exercise of stock options that are outstanding as of the date of this
Prospectus. During the period of 180 days commencing after the date of the
closing of the Offering, the Company has agreed that it will not, without the
prior written consent of the representatives of the Underwriters, grant
options to purchase shares of Common Stock at a price less than the initial
public offering price, except for the issuance of up to an aggregate of
100,000 options to purchase Common Stock to certain employees of the Company
at an exercise price of not less than $11.00 per share, which options may not
be exercised prior to 180 days after the closing of the Offering. The Selling
Stockholder has agreed not to sell, contract to sell or otherwise dispose of
any shares of Common Stock or rights to acquire such shares, for a period of
270 days after the date of this Prospectus, without the prior written consent
of the representatives of the Underwriters. Pursuant to the Shareholders
Agreement, subject to certain exceptions, MHS may not sell, transfer or pledge
any shares of Common Stock of the Company before February 28, 1997 without
WorldCorp's prior written consent. See "Certain Relationships and Transactions."
WorldCorp has agreed with the Underwriters that WorldCorp will not consent to
any sale, transfer or pledge by MHS of any shares of Common Stock of the
Company for a period of 270 days after the date of this Prospectus.
The Company intends to file a registration statement on Form S-8 no
earlier than 180 days following the completion of the Offering to register the
1,050,083 shares issuable upon exercise of outstanding options granted
pursuant to the 1995 Plan. Upon filing of such registration statement, the
shares of Common Stock issuable upon exercise of such options would be freely
transferable.
Prior to the Offering there has been no market for the Common Stock and
no prediction can be made of the effect if any, that sales of Common Stock or
the availability of shares for sale could have on the market price prevailing
from time to time. The sale of a substantial number of shares of Common Stock
(or the announcement of a plan to do so) or the availability of shares of
Common Stock for sale could adversely affect the market price of the Common
Stock.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Offering, the Company's authorized capital stock
will consist of 40,000,000 shares of Common Stock, par value $0.001 per share,
and 5,000,000 shares of preferred stock, par value $0.001 per share (the
"Preferred Stock") of which 12,000,064 shares of Common Stock and no shares of
Preferred Stock will be issued and outstanding. All of the issued and
outstanding shares of Common Stock will be fully paid and nonassessable.
The following summary description of the Company's capital stock
accurately describes the material rights of holders of the Company's capital
stock but does not purport to be complete and is qualified in its entirety by
reference to the Company's Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Amended and Restated Bylaws (the
"Bylaws"), copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
COMMON STOCK
The holders of validly issued and outstanding shares of Common Stock are
entitled to one vote per share of record on all matters to be voted upon by
stockholders. At a meeting of stockholders at which a quorum is present, a
majority of the votes cast decides all questions, unless the matter is one
upon which a different vote is required by express provision of law or the
Company's Certificate of Incorporation or Bylaws. There is no cumulative
voting with respect to the election of directors (or any other matter), but
the Company's Board of Directors is classified, which means that the holders
of a majority of the shares at a meeting at which a quorum is present can
elect all of the directors of the class then to be elected if they choose to
do so, and, in such event, the holders of the remaining shares would not be
able to elect any directors of that class. Under Delaware law, as long as
WorldCorp owns a majority of the outstanding Common Stock, WorldCorp will be
able to approve certain actions by written consent without a meeting of the
stockholders of the Company, subject to (i) WorldCorp's obligation to vote its
shares of Common Stock for two directors nominated by MHS, (ii) the
requirement that one director nominated by MHS be present to constitute a
quorum at a meeting of the Board of Directors and (iii) the requirement that
MHS' approval be obtained for certain actions. See "Certain Relationships and
Transactions."
The holders of Common Stock have no preemptive rights and have no rights
to convert their Common Stock into any other securities.
Subject to the rights of holders of Preferred Stock, if any, in the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to participate equally, share for share, in all assets
remaining after payment of liabilities.
The holders of Common Stock are entitled to receive ratably such
dividends as the Board of Directors may declare out of funds legally available
therefor, when and if so declared. The payment by the Company of dividends, if
any, rests within the discretion of its Board of Directors and will depend
upon the Company's results of operations, financial condition and capital
expenditure plans, as well as other factors considered relevant by the Board
of Directors. The Credit Agreement contains restrictions on the Company's
ability to pay dividends. The Credit Agreement provides that the Company shall
not declare, pay or make any dividend or distribution in excess of the lesser
of $4.5 million or 50% of net income for the previous six months and requires
that the Company have a cash balance of not less than $7.5 million after
giving effect to such dividend or distribution. The Company may enter into
additional bank credit agreements which include financial covenants
restricting the payment of dividends. The payment of dividends by the Company
also is restricted by two indentures to which WorldCorp is subject. See
"Dividend Policy."
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to establish such relative voting, dividend, redemption,
liquidation, conversion and other powers, preferences, rights, qualifications,
limitations and restrictions as the Board of Directors may determine without
further approval of the stockholders of the Company. The issuance of Preferred
Stock by the Board of Directors could, among other things, adversely affect
the voting power of the
56
<PAGE>
holders of Common Stock and, under certain circumstances, make it more
difficult for a person or group to gain control of the Company.
The issuance of any series of Preferred Stock, and the relative powers,
preferences, rights, qualifications, limitations and restrictions of such
series, if and when established, will depend upon, among other things, the
future capital needs of the Company, the then-existing market conditions and
other factors that, in the judgment of the Board of Directors, might warrant
the issuance of Preferred Stock. At the date of this Prospectus, there are no
plans, agreements or understandings relative to the issuance of any shares of
Preferred Stock.
LIMITATION ON VOTING BY FOREIGN OWNERS
The Certificate of Incorporation defines "Foreign Ownership Restrictions"
as applicable provisions of law and regulations relating to ownership or
control of U.S. air carriers (as amended or modified from time to time). Such
restrictions currently require that no more than 25% of the voting stock of
the Company be owned or controlled, directly or indirectly, by Foreign
Citizens for purposes of the Foreign Ownership Restrictions, and that the
Company's President and at least two-thirds of its directors be U.S. citizens.
The Certificate of Incorporation and Bylaws provide that no shares of capital
stock may be voted by or at the direction of Foreign Citizens, unless such
shares are registered on the Foreign Stock Record. The Company's Bylaws
further provide that no shares will be registered on the Foreign Stock Record
if the amount so registered would exceed the Foreign Ownership Restrictions.
Registration on the Foreign Stock Record is made in chronological order based
on the date the Company receives a written request for registration. MHS will
own approximately 16.6% of the outstanding Common Stock following the Offering
(or 16.2% if the Underwriters' over-allotment option is exercised in full),
and such shares will be registered on the Foreign Stock Record.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the General Corporation Law of the State of
Delaware and of the Company's Certificate of Incorporation and Bylaws,
summarized in the following paragraphs, may be considered to have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.
Delaware Anti-takeover Law. The Company, a Delaware corporation, is
subject to the provisions of the General Corporation Law of the State of
Delaware, including Section 203. In general, Section 203 prohibits a public
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which such person became an interested stockholder unless: (i)
prior to such date, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; or (ii) upon becoming an interested stockholder, the
stockholder then owned at least 85% of the voting stock, as defined in Section
203; or (iii) subsequent to such date, the business combination is approved by
both the Board of Directors and by holders of at least 66 2/3% of the
corporation's outstanding voting stock, excluding shares owned by the
interested stockholder. For these purposes, the term "business combination"
includes mergers, asset sales and other similar transactions with an
"interested stockholder." An "interested stockholder" is a person who, together
with affiliates and associates, owns (or, within the prior three years, did
own) 15% or more of the corporation's voting stock. Although Section 203
permits a corporation to elect not to be governed by its provisions, the
Company to date has not made this election.
Classified Board of Directors. The Certificate of Incorporation provides
for the Board of Directors to be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of
the Board of Directors will be elected each year. Classification of the Board
of Directors expands the time required to change the composition of a majority
of directors and may tend to discourage an acquisition proposal for the
Company. Moreover, under the General Corporation Law of the State of Delaware,
in the case of corporations having a classified Board of Directors, the
stockholders may remove a director only for cause unless the corporation
elects otherwise in its charter. The Company's Certificate of Incorporation
and Bylaws provide for removal of directors only with cause.
57
<PAGE>
Special Meetings of Stockholders; Action by Consent. The Company's Bylaws
provide that special meetings of stockholders may be called only by the
Chairman of the Board of Directors at the request in writing of a majority of
the Board of Directors of the Company. The Company's Bylaws also provide that
any action required to be taken at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without
a vote upon the written consent of the minimum number of stockholders
necessary to authorize such action.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Company's Bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates
for election as directors at an annual or a special meeting of stockholders,
must provide timely notice thereof in writing. To be timely, a stockholder's
notice must be delivered to, or mailed and received at, the principal
executive office of the Company, not less than 60 days prior to the scheduled
annual meeting regardless of any postponements, deferrals or adjournments of
the meeting. The Bylaws also specify certain requirements pertaining to the
form and substance of a stockholder's meeting. These provisions may preclude
some stockholders from making nominations for directors at an annual or
special meeting or from bringing other matters before the stockholders at a
meeting.
Indemnification. The Company's Certificate of Incorporation provides that
directors and officers of the Company will be indemnified by the Company to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company.
Limitation of Liability. In addition, the Certificate of Incorporation
provides that directors of the Company will not be personally liable for
monetary damages to the Company for certain breaches of their fiduciary duty
as directors, unless they violated their duty of loyalty to the Company or its
stockholders, acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an improper personal
benefit from their action as directors. This provision does not affect the
availability of equitable remedies or non-monetary relief, such as an
injunction or rescission for breach of the duty of care. In addition, the
provision applies only to claims against the director arising out of his role
as a director and not in any other capacity (such as an officer or employee of
the Company). Furthermore, liability of a director for violations of the
federal securities laws will not be limited by this provision. Directors are
not, however, liable for monetary damages arising from decisions involving
violations of the duty of care which could be deemed grossly negligent.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is The First
National Bank of Boston, Canton, Massachusetts.
58
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company and the Selling Stockholder have agreed to sell to the
Underwriters, and each of the Underwriters, for whom PaineWebber Incorporated,
J.P. Morgan Securities Inc., Salomon Brothers Inc and L.H. Friend, Weinress,
Frankson & Presson, Inc. are acting as representatives (the "Representatives"),
has severally agreed to purchase from the Company and the Selling Stockholder,
the number of shares set forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
PaineWebber Incorporated......................................
J.P. Morgan Securities Inc....................................
Salomon Brothers Inc..........................................
L.H. Friend, Weinress, Frankson & Presson, Inc................
---------
Total....................................................... 2,900,000
=========
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase the
2,900,000 shares of Common Stock offered hereby (other than the shares of
Common Stock covered by the over-allotment option described below), if any
such shares of Common Stock are purchased. In the event of a default by any
Underwriter, the Underwriting Agreement provides that, in certain
circumstances, purchase commitments of the nondefaulting Underwriters may be
increased or the Underwriting Agreement may be terminated. The Company has
been advised by the Representatives that the several Underwriters propose
initially to offer such shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to other dealers. After the initial offering, the
public initial offering price and such concessions may be changed.
The Company and the Selling Stockholder have granted to the Underwriters
an option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 300,000 and 135,000 additional shares of Common
Stock, respectively, (435,000 shares in the aggregate) at the initial public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. The Underwriters may exercise such option
only to cover over-allotments in the sale of the shares of Common Stock that
the Underwriters have agreed to purchase. To the extent that the Underwriters
exercise such option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase a number of option shares proportionate to
such Underwriter's inital commitment. In the event that the Underwriters
exercise less than their full over-allotment option, the number of shares to
be sold pursuant thereto by the Company and the Selling Stockholder shall be
allocated between the two pro rata in accordance with the number of shares
being offered by each in this Offering.
The Company and its executive officers and directors have agreed not to
offer, sell or contract to sell, or otherwise dispose of, or announce the
offering of, any shares of Common Stock, or any rights to acquire such shares,
or any securities convertible into, or exchangeable for, shares of Common
Stock (other than, in the case of such executive officers and directors,
shares disposed of as bona fide gifts or shares of Common Stock delivered to
the Company in order to exercise, but not dispose of shares of Common Stock
received pursuant to the exercise of, stock options pursuant to the terms of
such stock options) for a period of 180 days after the date of this Prospectus
without the prior written consent of the representatives of the Underwriters.
In addition, the Company may issue shares of Common Stock issuable upon
exercise of stock options that are outstanding as of the date of this
Prospectus. During the period of 180 days commencing after the date of the
closing of the Offering, the Company has agreed that it will not, without the
prior written consent of the representatives of the Underwriters, grant
options to purchase shares of Common Stock at a price less than the initial
public offering price, except for the issuance of up to an aggregate of
100,000 options to purchase Common Stock to certain
59
<PAGE>
employees of the Company at an exercise price of not less than $11.00 per
share, which options may not be exercised prior to 180 days after the closing
of the Offering. The Selling Stockholder has agreed not to sell, contract to
sell or otherwise dispose of any shares of Common Stock or rights to acquire
such shares, for a period of 270 days after the date of this Prospectus,
without the prior written consent of the representatives of the Underwriters.
Pursuant to the Shareholders Agreement, subject to certain exceptions, MHS may
not sell, transfer or pledge any shares of Common Stock of the Company before
February 28, 1997 without WorldCorp's prior written consent. See "Certain
Relationships and Transactions." WorldCorp has agreed with the Underwriters
that WorldCorp will not consent to any sale, transfer or pledge by MHS of any
shares of Common Stock of the Company for a period of 270 days after the date
of this Prospectus.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. Accordingly, the initial public offering price will be
determined by negotiations among the Company, the Selling Stockholder and the
Representatives of the Underwriters. Among the factors to be considered in
determining the initial public offering price will be the Company's results of
operations, its current financial condition, its future prospects, the market
for its services, the experience of its management, the economic conditions of
the air transportation industry in general, the general conditions of the
equity securities market, the demand for similar securities of companies
considered comparable to the Company and other relevant factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Hunton & Williams, Richmond, Virginia. Certain legal matters
relating to the Offering will be passed upon for the Underwriters by Hughes
Hubbard & Reed, New York, New York.
EXPERTS
The financial statements of the Company as of December 31, 1993 and 1994
and June 30, 1995 and for each of the years in the three-year period ended
December 31, 1994 and the six-month period ended June 30, 1995, and the
related financial statement schedule included herein and in the Registration
Statement have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick
LLP refers to changes in the methods of accounting for post-retirement
benefits other than pensions and income taxes.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report....................................... F-2
Financial Statements
Balance Sheets as of December 31, 1993 and 1994 and
June 30, 1995................................................... F-3
Statements of Operations for the Years Ended December 31, 1992,
1993 and 1994 and for the Six Months Ended June 30, 1994
(unaudited) and 1995............................................ F-4
Statements of Changes in Common Stockholders' Equity (Deficit)
for the Years Ended December 31, 1992, 1993 and 1994 and the
Six Months Ended June 30, 1995.................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1992,
1993 and 1994 and for the Six Months Ended June 30, 1994
(unaudited) and 1995............................................ F-6
Notes to Financial Statements.................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
WORLD AIRWAYS, INC.:
We have audited the accompanying balance sheets of World Airways, Inc. ("World
Airways") as of December 31, 1993 and 1994 and June 30, 1995, and the related
statements of operations, changes in common stockholders' equity (deficit) and
cash flows for each of the years in the three-year period ended December 31,
1994 and the six-month period ended June 30, 1995. In connection with our
audits of the financial statements, we also have audited the related financial
statement schedule as listed in Item 16(b) herein. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of World Airways, Inc. as of
December 31, 1993 and 1994 and June 30, 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1994 and the six-month period ended June 30, 1995, in
conformity with generally accepted accounting principles. 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 therein.
As discussed in Notes 11 and 12 to the financial statements, effective January
1, 1992, World Airways adopted the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, and No.
109, Accounting for Income Taxes.
KPMG PEAT MARWICK LLP
WASHINGTON, D.C.
AUGUST 4, 1995, EXCEPT AS TO
NOTE 10, WHICH IS AS OF AUGUST 24, 1995
F-2
<PAGE>
WORLD AIRWAYS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995
------------ ------------ --------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents, including restricted cash of
$658 at December 31, 1993, $103 at December 31, 1994,
and $2,119 at June 30, 1995 (Note 15).................. $ 11,596 $ 4,054 $ 4,447
Restricted short-term investments (Notes 6 and 15)...... 150 668 768
Trade accounts receivable, less allowance for doubtful
accounts of $277 at December 31, 1993, $35 at
December 31, 1994, and $65 at June 30, 1995 (Note 9)... 8,475 5,480 10,509
Other receivables....................................... 4,956 2,936 2,951
Due from affiliate...................................... 6,105 -- --
Prepaid expenses and other current assets (Note 7)...... 1,531 6,931 5,475
Assets held for sale (Notes 8 and 10)................... 6,000 2,500 1,250
-------- -------- --------
Total current assets................................. 38,813 22,569 25,400
-------- -------- --------
ASSETS HELD FOR SALE (Notes 8 and 10).................... 6,819 11,328 4,675
EQUIPMENT AND PROPERTY (Note 10)
Flight and other equipment.............................. 29,352 22,457 40,329
Equipment under capital leases.......................... 11,466 11,466 11,466
-------- -------- --------
40,818 33,923 51,795
Less accumulated depreciation and amortization.......... 12,118 9,257 10,912
-------- -------- --------
Net equipment and property........................... 28,700 24,666 40,883
-------- -------- --------
LONG-TERM OPERATING DEPOSITS (Note 10)................... 10,028 13,562 14,924
OTHER ASSETS AND DEFERRED CHARGES, NET (Notes 4 and 7)... 4,152 5,926 5,141
-------- -------- --------
TOTAL ASSETS......................................... $ 88,512 $ 78,051 $ 91,023
======== ======== ========
CURRENT LIABILITIES
Notes payable (Note 9).................................. $ 7,069 $ 7,162 $ 9,256
Note payable to affiliate (Note 14)..................... -- -- 1,800
Current maturities of long-term obligations (Note 10)... 9,825 9,550 6,397
Deferred aircraft rent (Note 10)........................ 6,295 907 887
Accounts payable........................................ 11,399 11,609 13,454
Unearned revenue........................................ 1,293 5,300 4,572
Air traffic liability................................... -- -- 1,370
Accrued maintenance in excess of reserves paid.......... 14,732 6,395 8,379
Accrued salaries and wages.............................. 4,484 5,328 7,657
Accrued taxes........................................... 826 1,601 1,160
Due to affiliate (Note 2)............................... -- 97 736
Other accrued liabilities............................... 331 414 237
-------- -------- --------
Total current liabilities............................ 56,254 48,363 55,905
-------- -------- --------
LONG-TERM OBLIGATIONS, NET (Note 10)..................... 25,362 17,114 14,472
-------- -------- --------
OTHER LIABILITIES
Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $30,395 at
December 31, 1993, $32,344 at December 31, 1994,
and $17,510 at June 30, 1995 (Note 5).................. 10,322 8,373 7,842
Accrued maintenance in excess of reserves paid.......... 2,080 2,866 3,481
Accrued postretirement benefits (Note 11)............... 2,250 2,384 2,490
Other liabilities....................................... -- 318 1,067
-------- -------- --------
Total other liabilities.............................. 14,652 13,941 14,880
-------- -------- --------
TOTAL LIABILITIES.................................... 96,268 79,418 85,257
-------- -------- --------
COMMON STOCKHOLDERS' EQUITY (DEFICIT) (Notes 2, 4, 10,
11 and 14) Common stock, $1 par value (100 shares
authorized, issued and outstanding) at
December 31, 1993, and $.001 par value (20,000,000
shares authorized, 10,000,064 shares issued and
outstanding) at December 31, 1994, and June 30, 1995.... -- 10 10
Additional paid-in capital.............................. 7,123 19,503 19,503
Contributed capital..................................... -- 3,000 3,000
Accumulated deficit..................................... (14,879) (23,880) (16,747)
-------- -------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY (DEFICIT).......... (7,756) (1,367) 5,766
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 9, 10, 11,
12, 13, and 15)......................................... -- -- --
TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
(DEFICIT)........................................... $ 88,512 $ 78,051 $ 91,023
======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements
F-3
<PAGE>
WORLD AIRWAYS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ ---------------------
1992 1993 1994 1994 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES (Note 13)
Contract flight operations.............................. $163,711 $176,493 $173,925 $ 86,896 $108,298
Flight operations subcontracted to other
carriers.............................................. 11,499 1,221 5,378 277 7,344
Other................................................... 5,083 1,023 1,412 413 675
-------- -------- -------- -------- --------
Total operating revenues............................ 180,293 178,737 180,715 87,586 116,317
-------- -------- -------- -------- --------
OPERATING EXPENSES
Flight.................................................. 45,528 55,055 57,792 25,608 28,869
Maintenance (Notes 10 and 15)........................... 34,458 28,667 26,212 11,036 20,587
Aircraft costs (Note 10)................................ 35,135 52,056 53,860 28,407 32,844
Fuel.................................................... 24,591 25,660 16,915 7,433 5,933
Flight operations subcontracted to other
carriers.............................................. 11,612 1,312 5,549 257 7,353
Depreciation and amortization........................... 4,921 5,573 4,006 2,008 2,637
Selling and administrative (Note 2)..................... 16,783 17,742 21,582 11,413 9,766
-------- -------- -------- -------- --------
Total operating expenses............................ 173,028 186,065 185,916 86,162 107,989
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS).................................. 7,265 (7,328) (5,201) 1,424 8,328
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense (Notes 9 and 10)....................... (426) (2,103) (3,684) (1,978) (1,793)
Interest income......................................... 1,411 499 426 225 327
Other, net.............................................. 404 (52) (568) 49 542
-------- -------- -------- -------- --------
Total other income (expense)........................ 1,389 (1,656) (3,826) (1,704) (924)
-------- -------- -------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES AND CHANGE IN
ACCOUNTING PRINCIPLE.................................... 8,654 (8,984) (9,027) (280) 7,404
INCOME TAX EXPENSE (BENEFIT) (Note 12)................... 236 64 (26) (50) 271
-------- -------- -------- -------- --------
EARNINGS (LOSS) BEFORE CHANGE IN ACCOUNTING
PRINCIPLE............................................... 8,418 (9,048) (9,001) (230) 7,133
-------- -------- -------- -------- --------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Accumulated benefit obligation of postretirement
benefits (Note 11)...................................... (1,973) -- -- -- --
-------- -------- -------- -------- --------
NET EARNINGS (LOSS)...................................... $ 6,445 $ (9,048) $ (9,001) $ (230) $ 7,133
======== ======== ======== ======== ========
EARNINGS (LOSS) PER COMMON EQUIVALENT SHARE
Earnings (loss) before change in accounting
principle............................................. $0.93 $(1.00) $(0.90) $(0.02) $0.70
Cumulative effect of change in accounting
principle............................................. (0.22) -- -- -- --
-------- -------- -------- -------- --------
Net earnings (loss)................................. $0.71 $(1.00) $(0.90) $(0.02) $0.70
======== ======== ======== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (IN THOUSANDS)....................... 9,036 9,036 9,974 9,787 10,162
======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements
F-4
<PAGE>
WORLD AIRWAYS, INC.
STATEMENTS OF CHANGES
IN COMMON STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994,
AND FOR THE SIX MONTHS ENDED JUNE 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON
ADDITIONAL STOCKHOLDERS'
COMMON PAID-IN CONTRIBUTED ACCUMULATED EQUITY
STOCK CAPITAL CAPITAL DEFICIT (DEFICIT)
--------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991............................. $ -- $ 26,568 $ -- $(12,276) $ 14,292
Distribution to WorldCorp (Note 2)....................... -- (19,445) -- -- (19,445)
Net earnings............................................. -- -- -- 6,445 6,445
--------- -------- ----------- -------- --------
Balance at December 31, 1992............................. $ -- $ 7,123 $ -- $ (5,831) $ 1,292
Net loss................................................. -- -- -- (9,048) (9,048)
--------- -------- ----------- -------- --------
Balance at December 31, 1993............................. $ -- $ 7,123 $ -- $(14,879) $ (7,756)
1 for 88,737 stock split (Note 1)........................ 9 (9) -- -- --
Sale of stock to MHS (Note 4)............................ 1 12,389 -- -- 12,390
Contributed capital (Note 4)............................. -- -- 3,000 -- 3,000
Net loss................................................. -- -- -- (9,001) (9,001)
--------- -------- ----------- -------- --------
Balance at December 31, 1994............................. $ 10 $ 19,503 $ 3,000 $(23,880) $ (1,367)
Net earnings............................................. -- -- -- 7,133 7,133
--------- -------- ----------- -------- --------
Balance at June 30, 1995................................. $ 10 $ 19,503 $ 3,000 $(16,747) $ 5,766
========= ======== =========== ======== ========
</TABLE>
See accompanying Notes to Financial Statements
F-5
<PAGE>
WORLD AIRWAYS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ -----------------------
1992 1993 1994 1994 1995
-------- ------- -------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
(Note 5)................................................ $ 17,611 $ 12,509 $ 11,596 $ 11,596 $ 4,054
-------- -------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)..................................... 6,445 (9,048) (9,001) (230) 7,133
Adjustments to reconcile net earnings (loss) to
cash provided (used) by operating activities:
Depreciation and amortization.......................... 4,921 5,573 4,006 2,008 2,637
Deferred gain recognition.............................. (4,558) (4,587) (1,949) (1,418) (531)
Deferred aircraft rent payments, net................... -- 8,145 576 371 153
(Gain) loss on sale of equipment and property.......... -- (14) 725 53 (33)
Reversal of excess accrued maintenance
reserves............................................ -- -- (4,200) (4,200) --
Cumulative effect of change in accounting
principle........................................... 1,973 -- -- -- --
Other.................................................. (83) 32 (96) 134 140
Changes in certain assets and liabilities net of
effects of non-cash transactions:
(Increase) decrease in accounts receivable............. (694) (5,405) 11,120 2,155 (5,044)
(Increase) decrease in deposits, prepaid expenses
and other assets.................................... (4,928) (2,656) (8,511) (4,402) 6
Increase (decrease) in accounts payable, accrued
expenses and other liabilities........................... (3,390) 536 4,881 4,499 8,291
-------- -------- -------- -------- --------
Net cash provided (used) by operating activities........ (314) (7,424) (2,449) (1,030) 12,752
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to equipment and property..................... (7,124) (19,599) (4,358) (3,420) (10,712)
Proceeds from disposal of equipment and property........ 687 864 1,787 489 527
Sale of investments..................................... 7,574 427 316 121 --
Purchase of investments................................. (250) (128) (834) -- (100)
Distribution to WorldCorp, Inc.......................... (19,445) -- -- -- --
Other................................................... (671) -- -- -- --
-------- -------- -------- -------- --------
Net cash used by investing activities............... (19,229) (18,436) (3,089) (2,810) (10,285)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in line of credit borrowing
arrangement, net....................................... -- 7,069 (4,275) (9,148) 4,111
Issuance of debt........................................ 5,754 32,762 5,999 -- 6,202
Repayment of debt....................................... (1,801) (14,394) (16,118) (5,821) (14,187)
Borrowing from affiliate................................ 10,488 -- -- -- 1,800
Proceeds from sale of stock............................. -- -- 12,390 12,390 --
Debt issuance costs..................................... -- (490) -- -- --
-------- -------- -------- -------- --------
Net cash provided (used) by financing activities.... 14,441 24,947 (2,004) (2,579) (2,074)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................................. (5,102) (913) (7,542) (6,419) 393
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD (Note 5)...... $ 12,509 $ 11,596 $ 4,054 $ 5,177 $ 4,447
======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements
F-6
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Plan of Reorganization
Effective June 23, 1987, World Airways, Inc. ("World Airways" or the
"Company") became a wholly owned subsidiary of WorldCorp, Inc. ("WorldCorp")
pursuant to a Merger Agreement and Plan of Reorganization (the "Plan"). Under
the Plan, the shareholders of World Airways exchanged their outstanding common
shares, warrants and/or options for common shares, warrants and/or options of
WorldCorp in a one-for-one exchange. This transaction was accounted for on an
as-if-pooled basis.
On October 30, 1993, WorldCorp, World Airways, and MHS Berhad ("MHS")
entered into a stock purchase agreement pursuant to which MHS, subject to
satisfactory completion of its due diligence investigations, agreed to
purchase 24.9% of World Airways' common stock. On February 28, 1994,
WorldCorp, World Airways, and MHS concluded the transaction. Effective
December 31, 1994, WorldCorp purchased 5% of World Airways' common stock from
MHS, increasing WorldCorp's ownership to 80.1%. Therefore, at December 31,
1994 and June 30, 1995, MHS owns 19.9% of World Airways' common stock (see
Note 4).
B. Financial Statement Reclassifications
Certain items in prior year financial statements included herein have
been reclassified to conform to June 30, 1995 financial statement
presentation. In addition, in 1995 the Company changed its presentation of
activity under contracts in which certain of the services to be provided are
subcontracted by the Company to the customer. In prior years, equal amounts of
revenue and expenses related to these subcontracted services were reflected in
the financial statements. For the six months ended June 30, 1995, no revenue
or expenses have been included in the financial statements for these
subcontracted services. Prior year financial statements have been reclassified
to conform to June 30, 1995 presentation. The revenue and expenses which have
been reclassified amounted to $20.0 million, $22.8 million, and $22.3 million
for the years ended December 31, 1992, 1993, and 1994, respectively.
C. Cash Equivalents
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments purchased with an original maturity of ninety days
or less to be cash equivalents.
D. Revenue Recognition
Contract flight operations and scheduled service revenues are recognized
as the services are provided.
E. Administrative and Interest Expenses
Administrative expenses incurred by WorldCorp are allocated as described
in Note 2. This allocation is intended to reflect the costs that would have
been incurred had World Airways been operated on a stand-alone basis. Interest
expense is charged based upon the outstanding balance of long-term payables to
WorldCorp, if any. In the opinion of WorldCorp management, such allocations
are made on a reasonable basis; however, the allocations are not necessarily
indicative of the costs which may be incurred in subsequent periods. The
amounts due to/from affiliate, resulting from allocations of expenses are
short-term in nature, and are non-interest bearing.
F. Income Taxes
The results of the Company's operations prior to February 28, 1994 are
included in WorldCorp's consolidated income tax returns. As a result of
certain transactions with MHS during 1994 (see Note 4), the results of the
Company's operations for the period from February 28, 1994 to December 31,
1994, and for periods subsequent to December 31, 1994, will not be included in
WorldCorp's consolidated income tax returns. Income tax expenses included in
the Company's financial statements were computed as if the Company filed its
own tax return for the whole year.
F-7
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, ("SFAS No. 109"). Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Effective January 1, 1992, the Company adopted SFAS No. 109 which
resulted in no cumulative adjustment to the accompanying financial statements.
In accordance with SFAS No. 109, income tax expense for the six months
ended June 30, 1995 is calculated using an estimated annual effective tax rate
that is based on estimated income tax expense for the year ending December 31,
1995.
G. Earnings (Loss) Per Common Share
Primary earnings (loss) per common share is computed by dividing net
earnings (loss) by the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares consist of
stock options. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin Topic 4:D, stock issued and stock options granted during the 12-month
period preceding the date of the Company's planned initial public offering
have been included in the calculation of weighted average shares of common
stock and common stock equivalents outstanding for all periods using the
treasury stock method based on the assumed initial public offering price of
$13.00 per share (the midpoint of the estimated initial public offering price
range).
The computation of fully diluted earnings (loss) per share includes all
other shares of common stock that potentially may be issued as a result of
conversion privileges. Any reduction of less than 3% in the aggregate has not
been considered dilutive in the presentation of fully diluted earnings per
share. For the years ended December 31, 1992, 1993, and 1994, and for the six
months ended June 30, 1994 and 1995, the computations of fully diluted
earnings per share were not dilutive.
On October 21, 1993, the Board of Directors approved the recapitalization
of the Company and declared a one for 88,737 stock split effective February 2,
1994, and changed the par value of the common stock from $1 to $.001 per
share. The par value of the new shares issued totaled approximately $9,000 and
this amount was transferred from additional paid-in capital to common stock.
All share and per share data for prior periods presented have been restated to
reflect the stock split.
H. Investments
Short-term investments are carried at the lower of aggregate cost or
market value.
I. Equipment and Property
Equipment and property are stated at cost or, if acquired under capital
leases, at the present value of the minimum lease payments. Engine overhauls
and major airframe maintenance and repairs are charged to operating expense on
an accrual basis. Modifications performed in response to Airworthiness
Directives issued by the Federal Aviation Administration are capitalized at
cost.
Provisions for depreciation and amortization of equipment and property
are computed over estimated useful lives or the term of the lease, if shorter,
for capital leases, by the straight-line method, with estimated residual
values of 0 - 15%. Estimated useful lives of equipment and property are as
follows:
DC10 and MD-11 flight equipment..................................15-16 years
Other equipment and property..................................... 5-10 years
F-8
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred gains realized in connection with sale-leasebacks of aircraft
and equipment are amortized over the periods of the respective leases.
J. Assets Held for Sale
Assets held for sale are recorded at the lower of cost or estimated net
realizable value. Net realizable value is based on the estimated fair value
(measured by using a current selling price for similar assets) less estimated
costs to sell.
K. Air Traffic Liability
The air traffic liability relates to scheduled service to Tel Aviv,
Israel, which the Company began in July 1995. Scheduled service passenger
ticket sales are initially recorded in the air traffic liability account. When
transportation is provided by the Company, revenue is recognized and the
liability is reduced. The liability is also reduced by any refunds to
passengers or billings from other airlines that provide the passenger
transportation.
L. Postretirement Benefits Other Than Pensions
World Airways' cockpit crewmembers and eligible dependents are covered
under postretirement health care benefits to age 65. Effective January 1,
1992, World Airways adopted Statement of Financial Accounting Standards No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions
("SFAS No. 106"). The Company elected to immediately recognize the cumulative
effect of the change in accounting for postretirement benefits of $2.0
million. The Company funds the benefit costs on a pay-as-you-go (cash) basis.
M. Unaudited Financial Statements
The accompanying financial statements and related footnotes for the
six-month period ended June 30, 1994 are unaudited. These unaudited financial
statements reflect adjustments, all of which are of a normal recurring nature,
which are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented and are not necessarily indicative
of full year results.
2. TRANSACTIONS WITH PARENT COMPANY
A. Administrative Cost Allocation
Prior to December 31, 1994, WorldCorp and its operating subsidiaries
utilized a single corporate staff for administrative support services thus
permitting the Company to draw upon the expertise of WorldCorp management
personnel as needed. Allocations of $6.8 million, $6.7 million, and $5.9
million of corporate administrative costs were made to the Company in 1992,
1993 and 1994, respectively. These allocations include the costs of directing
or performing certain accounting, financial, legal, tax, marketing, cash
management, employee benefits, human resources, management information
services activities, and operations and maintenance administrative services.
Office space, furniture and fixtures and other items were also considered in
the administrative cost allocation. This allocation and other costs incurred
directly by the Company are reflected in selling and administrative expense in
the accompanying statements of operations. Effective January 1, 1995, a
majority of the WorldCorp employees providing services to World Airways became
employees of the Company. As a result, the allocation of corporate
administrative costs to the Company for the six months ended June 30, 1995
amounted to $0.2 million. In addition, there was an allocation of
administrative costs from the Company to WorldCorp for services provided by
the Company during the six months ended June 30, 1995 amounting to $0.2
million.
B. Control by WorldCorp
As of June 30, 1995, WorldCorp owns 80.1% of the common stock of World
Airways. WorldCorp is a holding company that owns majority positions in two
companies: US Order, Inc. and the Company. WorldCorp
F-9
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
is highly leveraged, and therefore requires substantial funds to cover debt
service. As a holding company, WorldCorp's funds are generated through its
subsidiaries, neither of which has paid dividends since 1992. The Company
intends to retain any earnings for the foreseeable future. Additionally,
WorldCorp is subject to two indentures under which it is obligated to cause
the Company not to pay dividends upon the occurrence of certain events of
default by WorldCorp.
C. Distribution to WorldCorp
During 1992, in order to meet certain cash needs of WorldCorp, the
Company distributed $19.4 million to WorldCorp.
3. OPERATING ENVIRONMENT
See "Risk Factors--Risks Related to the Company--Financial Leverage" and
"--Liquidity and Commitments," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for information relating to the
operating environment.
4. TRANSACTIONS WITH MHS AND MALAYSIAN AIRLINES
On October 30, 1993, WorldCorp, World Airways and MHS entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to which MHS,
subject to satisfactory completion of its due diligence investigations, agreed
to purchase 24.9% of World Airways' common stock for $27.4 million in cash.
Under this agreement, World Airways would receive upon closing $12.4 million
to fund its working capital requirements. The remaining $15.0 million would be
paid to WorldCorp to add to its cash reserves. WorldCorp received $2.7 million
prior to December 31, 1993 as an advance on the sales price. At the time of
the signing of the Stock Purchase Agreement, World Airways was a wholly-owned
subsidiary of WorldCorp. On February 28, 1994, WorldCorp, World Airways, and
MHS concluded the transaction according to the terms described above. Under
the Agreement, if at any time after October 30, 1996 World Airways registers
its common stock under the Securities Act of 1933, MHS has the right to demand
the registration of its shares of the Company's common stock. Under a
shareholders agreement, MHS agreed not to transfer, sell, or pledge any of its
shares of common stock prior to February 28, 1997 without the prior written
consent of WorldCorp. MHS has the right to nominate two members to the
Company's board of directors and WorldCorp has agreed to vote its shares of
common stock to elect such nominees. Also, if without the prior written
consent of MHS: (1) World Airways sells all or substantially all of its
business; or (2) World Airways fundamentally changes its line of business,
then MHS has the option to (a) sell or transfer all or a portion of its shares
to a third party prior to February 28, 1997, and/or (b) require WorldCorp to
purchase all or part of MHS's shares at fair market value. Fair market value
is defined to be not less than the aggregate of the costs borne by MHS in
acquiring and holding its World Airways shares. Management has indicated that
it does not have any current intent to take any such actions without the prior
consent of MHS or the directors nominated by MHS. The shareholders agreement
also provides that if WorldCorp's ownership interest in the Company falls
below 51% of the outstanding shares of common stock, then MHS may either sell
its shares to a third party or require WorldCorp to sell a pro rata number of
shares held by MHS to the party purchasing WorldCorp's shares. MHS also has a
right of first refusal to purchase shares of common stock issued by the
Company or sold by WorldCorp and to purchase additional shares of common stock
to maintain its ownership percentage in the Company.
During 1994, MHS acquired 32% of Malaysian Airline System Berhad
("Malaysian Airlines"), the flag carrier of Malaysia. World Airways has provided
service to Malaysian Airlines for many years, providing aircraft for
integration into Malaysian Airlines' scheduled passenger and cargo operations
as well as transporting passengers for the annual Hadj pilgrimage. The current
Malaysian Airlines Hadj contract, which was entered into in 1992, expires in
1996. World Airways provided two aircraft for the 1994 Hadj operations and
three aircraft for the 1995 Hadj operations. Malaysian Airlines is the
Company's largest customer (see Note 13).
Effective December 31, 1994, WorldCorp entered into a 6% note payable to
MHS in the amount of $8.5 million, due December 31, 1995, in exchange for 5%
of World Airways' common stock held by MHS and
F-10
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the execution of a series of multi-year contracts between World Airways and
Malaysian Airlines. The shares purchased are pledged as security for the note
payable. As a result of this transaction, effective December 31, 1994, MHS
owns 19.9% of World Airways' common stock.
Under the terms of its new multi-year contracts with Malaysian Airlines,
World Airways will operate three freighter aircraft for a combined guaranteed
minimum of 1,200 block hours per month (except when an aircraft is in
scheduled maintenance). One freighter began service in June 1994 and will
operate through September 1999; two additional freighters began service in
June and July 1995, respectively, and will operate through September 2000.
Also under the new contracts, Malaysian Airlines has extended through March
1997 the operation of two MD-11 passenger aircraft that had been previously
contracted by Malaysian Airlines to operate from October 1994 through March
1995. Each of these passenger aircraft will operate a minimum of 320 block
hours per month.
Of the $8.5 million consideration paid by WorldCorp to MHS, $3.0 million
is attributable to the contract enhancements discussed above. This amount is
included in other assets and deferred charges and in contributed capital in
the accompanying December 31, 1994 and June 30, 1995 balance sheets, and is
being amortized over the terms of the Malaysian Airlines contracts,
approximately two to five years. As of June 30, 1995, the unamortized balance
of the deferred contract cost is $2.7 million, net of $0.3 million accumulated
amortization (see Note 7).
5. SUPPLEMENTAL INFORMATION--STATEMENTS OF CASH FLOWS
Additional information pertaining to certain cash payments and noncash
investing and financing activities is as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ -----------------
1992 1993 1994 1994 1995
---- ---- ---- ----- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid for:
Interest...... $ 400 $1,779 $3,334 $1,899 $1,754
Income taxes.. 100 62 15 15 258
</TABLE>
During 1993, the Company sold $9.5 million of MD-11 aircraft spare parts
and leased the parts back under a 79-month capital lease. The following is a
summary of the transaction (in thousands):
Sale price of parts..................................... $ 9,463
Debt retired............................................ (7,570)
Security deposit........................................ (1,893)
---------
Net cash proceeds.................................... $ 0
=========
In 1994, the Company paid approximately $1.8 million and exchanged a DC10
engine valued at approximately $1.0 million in connection with the settlement
of maintenance reserves due on the return of three DC10 aircraft.
6. SHORT-TERM INVESTMENTS
At December 31, 1993 and 1994, and at June 30, 1995, short-term
investments consist of cash pledged as collateral for letters of credit with
expiration dates in excess of 90 days.
F-11
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. OTHER ASSETS
Prepaid expenses and other current assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1993 1994 1995
------- ------ --------
<S> <C> <C> <C>
Prepaid rent............................................................. $ 865 $ 975 $1,633
Prepaid insurance........................................................ 354 4,821 2,598
Other.................................................................... 312 1,135 1,244
------ ------ ------
Total.................................................................. $1,531 $6,931 $5,475
====== ====== ======
</TABLE>
Other assets and deferred charges include net deferred contract costs of
$3.0 million and $2.7 million as of December 31, 1994 and June 30, 1995,
respectively (see Note 4), and net MD-11 aircraft integration costs of $2.7
million and $2.9 million as of December 31, 1993 and 1994, respectively, and
$2.4 million as of June 30, 1995. Aircraft integration costs consist of
pre-operating costs incurred in connection with integrating the new MD-11
aircraft into the Company's fleet (see Note 10). These costs, consisting
primarily of flight crew training, are being amortized on a straight-line
basis over a five-year period.
8. ASSETS HELD FOR SALE
Assets held for sale consists of two DC10 engines and DC10 rotables with
a net book value of $12.8 million, $13.8 million, and $5.9 million as of
December 31, 1993, December 31, 1994, and June 30, 1995, respectively. The
Company has consigned these parts with a third party to sell these parts over
a reasonable period of time with the objective of maximizing the proceeds from
sale.
Due to the increased number of DC10 aircraft leased by the Company,
effective January 1, 1995, DC10 rotables with a net book value of $7.1 million
were reclassified from assets held for sale to flight and other equipment in
the accompanying balance sheet. This amount represents the Company's estimate
of the additional spare parts needed to support the Company's fleet of five
DC10 aircraft.
9. NOTES PAYABLE
In 1993, the Company entered into an $8.0 million revolving line of
credit borrowing arrangement which is collateralized by certain receivables
which were sold to the bank with recourse. Borrowing availability under the
line is based on the amount of eligible receivables. At December 31, 1994 and
June 30, 1995, World Airways had no unused borrowing capacity available.
Borrowings under the line of credit were $2.8 million and $6.9 million at
December 31, 1994 and June 30, 1995, respectively, and bear interest at the
greater of the federal funds rate plus 2.5% or the prime rate plus 2%. At
December 31, 1994 and June 30, 1995, the interest rate was 10.5% and 11%,
respectively. World Airways is required to pay any outstanding amounts under
the line of credit on January 7, 1998. This agreement contains certain
covenants related to World Airways' financial condition and operating results,
including minimum quarterly net income tests. World Airways was not in
compliance with its debt covenants as of December 31, 1994, but obtained a
waiver of these covenants from the financial institution. In March 1995, World
Airways amended this agreement to adjust certain covenants beginning in the
first quarter of 1995. No assurances can be given that the Company will
continue to meet these revised covenants or, if necessary, obtain the required
waivers. The agreement also requires an unused facility fee of 0.5% per year.
Also included in notes payable as of December 31, 1994 and June 30, 1995
is a 4.38% note payable in the amount of $4.4 million and $1.5 million,
respectively, with principal and interest payable monthly in 1995.
In the first quarter of 1995, World Airways received approximately $6.0
million in working capital and short-term financing from certain of its
equipment lessors. This financing bears interest at approximately 11%.
Approximately $5.1 million of this financing was repaid in the second quarter
of 1995. The balance will be repaid in installments through December 1995.
F-12
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. LONG-TERM OBLIGATIONS
Long-Term Debt
The Company's long-term obligations are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1993 1994 1995
------- ------ --------
<S> <C> <C> <C>
Note payable due 1995--with interest at one month LIBOR plus 1.95% payable
monthly (7.95% at December 31, 1994 and 5.51% at December 31, 1993)
collateralized by one General Electric CF6-50C2 engine........................ $ 1,020 $ 300 $ --
Note payable due 1994--with interest at one month LIBOR plus 1.75% payable
monthly (5.31% at December 31, 1993) collateralized by one General Electric
CF6-50C2 engine............................................................... 952 -- --
Spare parts loan due 1998--with principal and interest at 8.5% payable
monthly, collateralized by certain MD-11 spare parts.......................... 4,392 4,004 3,810
Spare parts loan due 1997--with principal paid semi-annually beginning in 1995
and interest at 8.5% payable semi-annually, collateralized by certain MD-11
spare parts................................................................... 5,000 5,000 3,571
Aircraft spare parts security agreement payable to a bank due 1998--with
interest at the greater of the federal funds rate plus 2.5% or the prime
rate plus 2% (8% at December 31, 1993, 10.5% at December 31, 1994, and 11%
at June 30, 1995) collateralized by certain rotables.......................... 11,815 6,371 3,376
Deferred aircraft rent, non-current............................................. 1,850 1,522 1,251
Capitalized lease obligations................................................... 10,158 9,467 8,861
------- ------- -------
Total.................................................................... 35,187 26,664 20,869
Less current maturities......................................................... 9,825 9,550 6,397
------- ------- -------
Total long-term obligations, net......................................... $25,362 $17,114 $14,472
======= ======= =======
</TABLE>
The aircraft parts security agreement is subject to the terms of the $8.0
million revolving line of credit borrowing (see Note 9). Under this agreement,
the borrowing must be reduced by the amount of proceeds received from the sale
of excess spare parts, subject to a minimum of $0.5 million each month. The
borrowing facility also restricts World Airways' ability to pay dividends.
Under this agreement, World Airways cannot declare, pay, or make any dividends
or distributions in any six-month period which aggregate in excess of the
lesser of $4.5 million or 50% of net income for the previous six months. In
addition, World Airways must have a cash balance of at least $7.5 million
immediately after giving effect to such dividend. In 1995, World Airways
amended this agreement to adjust certain covenants beginning in the first
quarter of 1995, extend the credit facility to 1998, and to defer payments of
principal due in February and March, 1995 until the second quarter of 1995. No
assurances can be given that the Company will continue to meet these revised
covenants or, if necessary, obtain the required waivers.
On August 24, 1995, the Company amended its aircraft spare parts loan to
provide for a variable rate, $10.5 million borrowing, which is payable over a
21-month term. The Company used a portion of the proceeds from this loan to
pay off the previously outstanding balance of the aircraft parts loan (which
was reduced to $2.5 million subsequent to June 30, 1995). The Company also has a
commitment for a seven-year loan of approximately $6.4 million with an engine
manufacturer for the purchase of a spare engine in the first quarter of 1996.
F-13
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table shows the aggregate annual amount of scheduled
principal maturities (in thousands) of debt outstanding.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995
------------ --------
<S> <C> <C>
1995............................................................................ $ 8,830 $ 4,157
1996............................................................................ 2,187 1,943
1997............................................................................ 1,816 1,816
1998............................................................................ 2,842 2,841
Thereafter...................................................................... -- --
------- -------
Total........................................................................ $15,675 $10,757
======= =======
</TABLE>
Deferred Aircraft Rent
During 1993, the Company negotiated with several of its lessors to defer
approximately $14.7 million of lease payments on eight aircraft. Of this
amount, approximately $13.3 million was repaid during 1993, 1994, and the
first six months of 1995. In addition, during 1994 and the first six months of
1995, the Company deferred approximately $0.7 million of rent, pursuant to the
1993 agreement. The remaining deferrals at June 30, 1995 bear interest at
rates ranging from 7% to 12% and are due as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995
------------ --------
<S> <C> <C>
1995............................................................................ $ 907 $ 462
1996............................................................................ 553 533
1997............................................................................ 240 227
1998............................................................................ 257 244
1999............................................................................ 276 261
2000............................................................................ -- 280
Thereafter...................................................................... 196 131
------- -------
Total........................................................................ $ 2,429 $ 2,138
======= =======
</TABLE>
Capital Leases
The present value of the obligations under capital leases at December 31,
1994 and June 30, 1995 are calculated using rates ranging from 6.14% to 11.7%.
The following are scheduled minimum capital lease payments (in thousands) due
in the succeeding five years and thereafter, together with the present value
of such obligations:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995
------------ --------
<S> <C> <C>
1995............................................................................ $ 1,677 $ 640
1996............................................................................ 1,920 1,926
1997............................................................................ 1,657 1,689
1998............................................................................ 3,341 3,363
1999............................................................................ 1,309 1,324
2000............................................................................ -- 2,942
Thereafter...................................................................... 2,940 --
------- -------
Total minimum lease payments................................................. 12,844 11,884
Less imputed interest........................................................... 3,377 3,023
------- -------
Present value of obligations under capital lease............................. $ 9,467 $ 8,861
======= =======
</TABLE>
F-14
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property under capital leases consists of equipment leases and are
amortized over the lease terms or expected useful life of the assets.
Accumulated amortization under capital leases was $2.1 million, $2.8 million,
and $3.2 million at December 31, 1993 and 1994, and June 30, 1995,
respectively. Amortization expense of property under capital leases totaled
approximately $129,000, $445,000, and $760,000 for the years ended December
31, 1992, 1993, and 1994, respectively, and $380,052 for the six months ended
June 30, 1995.
Operating Leases
In October 1992 and January 1993, World Airways signed a series of
agreements with International Lease Finance Corporation ("ILFC"), McDonnell
Douglas Corporation, GATX Capital Corporation, and United Technologies
Corporation's Pratt & Whitney Group to lease seven new McDonnell Douglas MD-11
aircraft under initial lease terms of two to five years. Six of the seven
aircraft leases contain annual renewal options in years six through fifteen of
the lease term. Under the terms of the lease agreements, World Airways may be
required to pay additional rent in excess of the fixed monthly amounts
depending on block hours flown.
As of June 30, 1995, World Airways' fleet consisted of four passenger
MD-11 aircraft, one freighter MD-11 aircraft, two convertible MD-11 aircraft,
three passenger DC10-30 aircraft and two convertible DC10-30 aircraft. The
MD-11 leases contain options to purchase the aircraft at various times
throughout the lease terms. Long-term deposits consist primarily of deposits
on the MD-11 leases. As part of the lease agreements, World Airways was
assigned purchase options for four additional MD-11 aircraft. In 1992, World
Airways made non-refundable deposits toward four of the option aircraft.
During 1995, the option exercise dates were extended to October 31, 1995, with
scheduled aircraft delivery dates beginning no earlier than 1996. If the
options are exercised, World Airways intends to obtain financing for the
purchases.
In February 1992, World Airways signed 12-year operating leases for two
McDonnell Douglas DC10-30 passenger aircraft. In July 1993, World Airways
returned these aircraft to their lessor which resulted in a $1.5 million early
termination payment of which $1.1 million was expensed in 1993 and included in
aircraft costs. In October 1993, the Company returned an aircraft to its
lessor and recorded an expense of $1.2 million related to the early
termination of the lease which is also included in aircraft costs. In 1994,
the Company recorded a $4.2 million reversal of excess accrued maintenance
reserves associated with the expiration of three additional DC10-30 aircraft
leases in 1994. This reversal is recorded as a reduction to maintenance
expense.
Rental expense, primarily relating to aircraft leases, totaled
approximately $38.4 million, $50.6 million, and $52.5 million for the years
ended December 31, 1992, 1993 and 1994, respectively and $32.0 million for the
six months ended June 30, 1995.
The following is a schedule of future annual minimum rental payments,
principally aircraft rentals (excluding variable portions), required under
operating leases that have initial or remaining noncancellable lease terms in
excess of one year as of December 31, 1994 and June 30, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995
------------ --------
<S> <C> <C>
1995............................ $ 60,619 $ 34,674
1996............................ 61,992 68,087
1997............................ 62,056 67,190
1998............................ 61,242 63,417
1999............................ 55,690 55,944
2000............................ -- 53,230
Thereafter...................... 451,923 401,280
-------- --------
Total....................... $753,522 $743,822
======== ========
</TABLE>
These future annual minimum rental payments include all option years.
Under the terms of certain of the leases, if the options are not exercised,
the Company must pay a penalty to the lessor based on the number of block
hours flown since delivery of the aircraft. The Company intends to exercise
the options under these leases.
F-15
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. EMPLOYEE BENEFIT PLANS
The World Airways' Crewmembers Target Benefit Plan is a defined
contribution plan covering flight engineers and pilots with contributions
based upon defined wages. This is a tax-qualified retirement plan under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code").
The World Airways' Flight Attendants Target Benefit Plan is a defined
contribution plan covering flight attendants with contributions based upon
defined wages. This is a tax-qualified retirement plan under Section 401(a) of
the Code. Pension expense for both plans totaled $1.3 million, $1.5 million,
and $1.4 million for the years ended December 31, 1992, 1993, and 1994,
respectively, and $0.8 million for the six months ended June 30, 1995.
Effective January 1, 1987, World Airways adopted the World Airways, Inc.
Profit Sharing Bonus Plan (the "1987 Profit Sharing Plan"). Contributions to the
1987 Profit Sharing Plan are equal to 20% of World Airways' defined operating
income, subject to an annual limitation of 10% of the total annual aggregate
compensation of World Airways' employees participating in the 1987 Profit
Sharing Plan in that year. This is not a tax-qualified retirement plan under
Section 401(a) of the Code. Prior to 1993, contributions to the 1987 Profit
Sharing Plan were allocated first to payments to all persons or their
beneficiaries whose wages were reduced during the time from December 1, 1982
to January 31, 1985. The total wage reduction for this period was
approximately $5.8 million. World Airways had repaid the entire $5.8 million
as of December 31, 1992. Approximately $0.8 million was distributed in 1993
pertaining to 1992 financial results. The Company made no distributions in
1994 or 1995 pertaining to 1993 or 1994 financial results, respectively. The
Company recorded expense of $0.9 million for the six months ended June 30,
1995 relating to the 1987 Profit Sharing Plan.
World Airways' cockpit crewmembers and eligible dependents are covered
under postretirement health care benefits to age 65. Effective January 1,
1992, World Airways adopted Statement of Financial Accounting Standards No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions
("SFAS No. 106"). SFAS No. 106 requires accrual accounting for all
postretirement benefits other than pensions. Prior to the adoption of SFAS No.
106, the cost of health benefits for cockpit retirees was recognized by
charging claims to expense as they were paid. The Company elected to
immediately recognize the cumulative effect of the change in accounting for
postretirement benefits of $2.0 million in 1992. World Airways funds the
benefit costs on a pay-as-you-go (cash) basis.
A summary of the net periodic postretirement benefit costs is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1992 1993 1994
------- -------- --------
<S> <C> <C> <C>
Service cost.................................................................. $ 91,000 $103,000 $145,000
Interest cost on accumulated postretirement benefit
obligation.................................................................. 148,000 156,000 143,000
-------- -------- --------
Net periodic postretirement benefit cost............................... $239,000 $259,000 $288,000
======== ======== ========
</TABLE>
The components of the Accumulated Postretirement Benefit Obligation are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1994
---------- ----------
<S> <C> <C>
Retirees and dependents....................................................... $ 941,000 $ 935,000
Fully eligible, active participants........................................... 211,000 211,000
Not fully eligible participants............................................... 1,098,000 1,238,000
---------- ----------
2,250,000 2,384,000
Less: plan assets............................................................. 0 0
---------- ----------
Accrued postretirement benefit obligation.............................. $2,250,000 $2,384,000
========== ==========
</TABLE>
The Company did not obtain an actuarial valuation as of June 30, 1995, as
there have been no changes in the assumptions used at December 31, 1994, and
no significant events have occurred during 1995 which would
F-16
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
materially effect the accrued postretirement obligation as of December 31,
1994. The net periodic postretirement benefit cost for the six-month period
ended June 30, 1995 was approximately $106,000.
The assumed discount rate used to measure the accumulated postretirement
benefit obligation was 6.25% for 1993 and 8.0% for December 31, 1994. The
medical cost trend rate in 1994 was 9.75% trending down to an ultimate rate in
2010 of 6.0%. A one percentage point increase in the assumed health care cost
trend rates for each future year would have increased the aggregate of the
service and interest cost components of 1994 net periodic postretirement
benefit cost by $26,000 and would have increased the accumulated
postretirement benefit obligation as of December 31, 1994 by $128,000.
On May 24, 1995, the Company's stockholders approved the 1995 Stock
Option Plan (the "1995 Plan") that took effect May 31, 1995. Members of the
Company's Board of Directors, employees, and consultants to the Company or its
affiliates are eligible to participate in the 1995 Plan. The Company has
reserved 1,100,000 shares of common stock for issuance upon the exercise of
options granted to participants under the 1995 Plan. As of June 30, 1995, the
Company had awarded options to purchase 1,070,083 shares of common stock,
which are exercisable at prices ranging from $10.00 to $11.55 per share. Of
such options, 284,310 were exercisable as of June 30, 1995. As of June 30,
1995, no options had been exercised. These options become vested at various
times through May 2003.
12. FEDERAL AND STATE INCOME TAXES
Effective January 1, 1992 the Company adopted SFAS No. 109. There was no
adjustment necessary for the cumulative effect of this change in accounting
for income taxes as of January 1, 1992. The provision for income taxes
consists entirely of current income taxes.
Income tax expense attributable to income from continuing operations
consists of (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SIX
DECEMBER 31, MONTHS ENDED
------------------------------- JUNE 30,
1992 1993 1994 1995
------- ------- ------- ------------
<S> <C> <C> <C> <C>
U.S. Federal....................................................... $ 179 $ 19 $ (44) $ 182
State.............................................................. 57 45 18 89
------- ------- ------- -------
Income tax expense (benefit)................................... $ 236 $ 64 $ (26) $ 271
======= ======= ======= =======
</TABLE>
There is no deferred tax expense or benefit for the six months ended June
30, 1995, or for the years ended December 31, 1992, 1993, and 1994.
Income tax expense attributable to income (loss) from continuing
operations for the years ended December 31, 1992, 1993, and 1994 and the six
months ended June 30, 1995 differed from the amounts computed by applying the
U.S. Federal income tax rate of 34 percent as a result of the following (in
thousands):
<TABLE>
<CAPTION>
SIX
YEARS ENDED DECEMBER 31, MONTHS ENDED
------------------------------- JUNE 30,
1992 1993 1994 1995
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Expected Federal income tax expense (benefit) at the statutory
rate............................................................... $ 2,942 $(3,055) $(3,069) $ 2,412
Generation (utilization) of net operating loss carryforward......... (2,887) 2,899 2,666 (2,767)
Alternative minimum and environmental taxes......................... -- -- -- 200
State income tax expense, net of Federal benefit.................... 38 30 12 59
Other............................................................... 143 190 365 367
------- ------- ------- -------
Income tax expense (benefit).................................... $ 236 $ 64 $ (26) $ 271
======= ======= ======= =======
</TABLE>
F-17
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, are as follows
(in thousands):
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................................. $28,828 $38,610
Recognition of sales/leaseback gains.......................................... 3,419 2,846
Accrued maintenance in excess of reserves paid, primarily due to accrual for
financial statement purposes................................................. 6,432 2,728
Accrued postretirement benefit obligation, due to accrual for financial
statement purposes........................................................... 765 811
Compensated absences, primarily due to accrual for financial statement
purposes..................................................................... 453 514
Alternative minimum tax credit carryforward................................... 2,211 2,211
Investment tax credit carryforward which expires primarily by 1995............ 9,600 7,100
Other......................................................................... 118 --
------- -------
Gross deferred tax assets.................................................... 51,826 54,820
Less: valuation allowance.................................................... 49,138 51,143
------- -------
Net deferred tax assets...................................................... 2,688 3,677
------- -------
Deferred tax liabilities:
Property and equipment........................................................ 2,688 3,451
Other......................................................................... -- 226
------- -------
Gross deferred tax liabilities............................................... 2,688 3,677
------- -------
Net deferred income taxes...................................................... -- --
======= =======
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1994 was
$49.1 million. The net change in the total valuation allowance for the year
ended December 31, 1994 was an increase of $2.0 million.
The availability of net operating loss, alternative minimum tax credit,
and investment tax credit carryforwards to reduce the Company's future federal
income tax liability is subject to limitations under Section 382 of the Code.
Generally, these limitations restrict the availability of net operating loss
and investment tax credit carryforwards upon certain changes in stock
ownership by five percent shareholders which, in aggregate, exceed 50
percentage points in value in a three-year period ("Ownership Change").
In August 1991, 5.7 million shares of WorldCorp common stock were sold by
a group of existing shareholders. This transaction constituted an Ownership
Change which subjects the Company to an annual limitation in 1991 and future
years in the use of net operating loss (NOLs), alternative minimum tax credit,
and investment tax credit carryforwards which were available to WorldCorp (and
thus allocable to the Company) on the date on which the Ownership Change
occurred. As of December 31, 1994, the Company had net operating loss
carryforwards for federal income tax purposes of $110.9 million. Of this
amount, $72.6 million is subject to a $6.3 million annual limitation resulting
from the 1991 Ownership Change. The remaining $38.3 million was generated
after the 1991 Ownership Change and, therefore, is not currently subject to
annual limitation. To the extent the Company has taxable income for the year
ending December 31, 1995, the NOLs which were available at December 31, 1994,
will be reduced by such taxable income. The Company's net operating loss
carryforwards expire as follows (in millions):
1997.................................................................. $ 8.2
1998.................................................................. 16.5
1999.................................................................. 12.0
2000.................................................................. 15.8
2001.................................................................. 10.2
2005.................................................................. 4.0
2008.................................................................. 20.4
2009.................................................................. 23.8
F-18
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of the Company's net operating loss carryforwards in future years
could be further limited if an Ownership Change were to occur in the future.
While the Company believes that the sale of common stock in the Offering
currently being contemplated by the Company will not cause an Ownership
Change, the application of the Code in this area is subject to interpretation
by the Internal Revenue Service. Also, any future transactions in the
Company's or WorldCorp's stock following the Offering could cause an Ownership
Change. In the event that more than approximately $5.0 million of the
outstanding convertible debentures of WorldCorp are converted into WorldCorp
common stock, the Company believes an Ownership Change will occur.
13. MAJOR CUSTOMERS
The Company operates in one business segment, the air transportation industry.
Information concerning customers for periods in which their revenues comprised
10% or more of the Company's operating revenues is presented in the following
table (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ ---------------------
1992 1993 1994 1994 1995
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
U.S. Government (including U.S. Air Force).. $88,683 $54,201 $44,572 $20,436 $17,190
Malaysian Airlines.......................... 37,629 24,162 32,773 12,964 48,777
P. T. Garuda Indonesia...................... 17,072 30,309 32,356 32,356 26,263
Look Charters............................... 216 12,468 21,222 681 --
Burlington Air Express, Inc................. 10,811 22,358 526 526 --
</TABLE>
The Company's contract with the U.S. Air Force expires in September 1995.
The Company anticipates that future renewals of the U.S. Air Force contract
will be on an annual basis.
World Airways has provided service to Malaysian Airlines since 1981,
providing aircraft for integration into Malaysian Airlines' scheduled
passenger and cargo operations as well as transporting passengers for the
annual Hadj pilgrimage. World Airways recently entered into a series of
multi-year contracts with Malaysian Airlines (see Note 4). World Airways has
agreed to provide five aircraft to Malaysian Airlines under multi-year
contracts with expirations ranging from March 1997 to September 2000. As a
result of these contracts, World Airways expects that the percentage of the
Company's total revenue generated from Malaysian Airlines will continue to
increase as compared to historical levels. The current Malaysian Airlines Hadj
contract, which was entered into in 1992, expires in 1996. World Airways
provided two aircraft for the 1994 Hadj operations and three aircraft for the
1995 Hadj operations.
The Company has provided service to P.T. Garuda Indonesia ("Garuda
Indonesia") since 1988 under an annual contract. World Airways provided six
aircraft for the 1994 Garuda Indonesia Hadj operations and provided five
aircraft for the 1995 Garuda Indonesia Hadj operations. In addition, World
Airways has provided aircraft for Garuda Indonesia's cargo operations in
previous years.
World Airways has provided service to Look Charters under an annual
contract since 1992. In 1994, World Airways performed operations for a summer
charter program transporting passengers between Paris, France and various
locations in the United States and Mexico. World Airways has entered into a
contract with Look Charters to provide operations for a 1995 summer charter
program.
World Airways provided service to Burlington Air Express in 1992 and 1993
and a limited amount in 1994. At this time, the Company has no contract for
services in 1995.
The loss of any of the Company's contracts described above, or a
substantial reduction in business from any of the Company's major customers,
could have a material adverse effect on the Company's results of operations
and financial condition.
All export contracts are denominated in U.S. dollars as are substantially
all of the related expenses. The classification between domestic and export
revenues is based on entity definitions prescribed in the economic
F-19
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
regulations of the Department of Transportation. Information concerning the
Company's export revenues is presented in the following table (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1992 1993 1994 1994 1995
--------- --------- --------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Domestic........... $111,260 $ 96,637 $ 63,156 $31,061 $ 21,209
Export--Malaysia... 37,629 24,162 32,773 12,964 48,777
--Indonesia.. 17,072 30,310 32,356 32,356 26,263
--France..... 732 12,531 22,217 1,761 372
--Other...... 13,600 15,097 30,213 9,444 19,696
-------- -------- -------- ------- --------
Total........... $180,293 $178,737 $180,715 $87,586 $116,317
======== ======== ======== ======= ========
</TABLE>
14. RELATED PARTY TRANSACTIONS
Effective December 31, 1994, MHS Berhad ("MHS") owns 19.9% of World
Airways. During 1994, MHS acquired 32% of Malaysian Airlines, the flag carrier
of Malaysia. Malaysian Airlines is one of World Airways' largest customers
(see Notes 4 and 13). In June 1995, the Company entered into an agreement with
Malaysian Airlines to lease a DC10 aircraft. Rent expense related to this
lease for the six months ending June 30, 1995 was approximately $50,000.
In June 1995, the Company entered into a $1.8 million note payable to
WorldCorp with an interest rate of 13.875%. In July 1995, the note balance of
$1.8 million was repaid.
Bain & Company, Inc. provided consulting services to the Company
totalling approximately $400,000 during 1994 and approximately $88,000 during
1995. A director of Bain & Company is also a member of the compensation
committee of the Board of Directors of WorldCorp.
W. Jerrold Scoutt, Jr., a member of the Board of Directors of WorldCorp
until May 1994, is a member of the law firm of Zuckert, Scoutt & Rasenberger,
Washington, D.C. Zuckert, Scoutt & Rasenberger rendered legal services to the
Company during 1992 through 1994.
15. COMMITMENTS AND CONTINGENCIES
Litigation and Claims
On August 11, 1992, WorldCorp, World Airways, and certain other
commercial paper customers of Washington Bancorporation ("WBC") were served with
a complaint by WBC as debtor-in-possession by and through the Committee of
Unsecured Creditors of WBC (the "Committee"). The complaint arises from
investment proceeds totaling $6.8 million received by WorldCorp and World
Airways from WBC in May 1990 in connection with the maturity of WBC commercial
paper. The Committee seeks to recover $2.0 million from WorldCorp and $4.8
million from World Airways on the grounds that these payments constituted
voidable preferences and/or fraudulent conveyances under the Federal
Bankruptcy Code and under applicable state law. On June 9, 1993, the Company
filed a motion to dismiss this complaint and intends to defend vigorously
against these claims. Although the Company believes it has substantial
defenses to this action, no assurances can be given of the eventual outcome of
this litigation. Depending upon the timing of the resolution of this claim, if
the Committee were successful in recovering the full amount claimed, the
resolution could have a material adverse effect on the Company's financial
condition and results of operations.
The collective bargaining agreement between the Company and the
International Brotherhood of Teamsters on behalf of the Company's flight
attendants expired in 1992. The parties exchanged their opening contract
proposals in 1992 and have had numerous contract negotiation sessions. The
outcome of the negotiations with flight attendants cannot be determined at
this time. The Company's flight attendants also recently challenged the use of
foreign flight attendant crews on the Company's flights for Malaysian Airlines
and Garuda Indonesia. The
F-20
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Company is contractually obligated to permit its Southeast Asian customers to
deploy their own flight attendants. The arbitration on this issue is scheduled
for October 1995. While the Company intends to contest this matter vigorously,
an unfavorable ruling for the Company could have a material adverse effect on
the Company.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial condition.
Letters of Credit
At December 31, 1993 and 1994, and at June 30, 1995, restricted cash and
short-term investments included customer deposits held in escrow and cash
pledged as collateral for various letters of credit facilities issued by a
bank on the Company's behalf totaling $0.2 million, $0.7 million, and $0.8
million, respectively, with expiration dates principally occurring in 1995.
Options on MD-11 Aircraft
The Company has options to purchase four MD-11 aircraft, which, if
exercised, would require a down payment equal to five percent of the purchase
price upon exercise.
MD-11 Engine Maintenance Agreement
In July 1995, the Company amended its MD-11 engine maintenance agreement
covering the leased MD-11 engines. Under the terms of the amended agreement
with the engine manufacturer, which expires in August 2003, the manufacturer
will perform a significant portion of the Company's required engine overhauls.
In exchange, the manufacturer agreed to provide such maintenance services at a
cost not to exceed a specified rate per hour during the term of the contract.
The specified rate per hour is subject to annual escalation, and increases
substantially in September 1998. Accordingly, while the Company believes the
terms of this agreement will result in lower engine maintenance costs than it
otherwise would incur during the first five years of the agreement, these
costs will increase substantially during the last five years of the agreement.
Also, under this agreement, the Company is required to purchase $3.9 million
and $2.2 million of MD-11 spare parts in the remaining six months of 1995 and
in 1996, respectively.
16. UNAUDITED QUARTERLY RESULTS
The results of the Company's quarterly operations for 1993, 1994 and 1995
are as follows (in thousands except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL YEAR
-------- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
1993
Operating revenues.................... $27,665 $63,466 $ 43,918 $43,688 $178,737
Operating income (loss)............... (9,616) 14,804 (9,959)(1) (2,557)(2) (7,328)
Net earnings (loss)................... (9,767) 14,267 (10,028) (3,520) (9,048)
Net earnings (loss) per common share.. (1.08) 1.58 (1.11) (0.39) (1.00)
1994
Operating revenues.................... $31,720 $55,866 $ 51,543 $41,586 $180,715
Operating income (loss)............... (5,521)(3) 6,945 (6,149) (476) (5,201)
Net earnings (loss)................... (6,454) 6,224 (7,490) (1,281) (9,001)
Net earnings (loss) per common share.. (0.69) 0.61 (0.74) (0.13) (0.90)
1995
Operating revenues.................... $40,651 $75,666 $ -- $ -- $ --
Operating income (loss)............... (3,074) 11,402 -- -- --
Net earnings (loss)................... (3,801) 10,934 -- -- --
Net earnings (loss) per common share.. (0.37) 1.08 -- -- --
</TABLE>
---------------
(1) Operating loss in the quarter ended September 30, 1993 includes $1.1
million in termination fees related to the early return of two DC10
aircraft.
(2) Operating loss in the quarter ended December 31, 1993 includes $1.2
million in termination fees related to the early return of a DC10
aircraft.
(3) Operating loss in the quarter ended March 31, 1994 includes a $4.2 million
reversal of excess accrued maintenance reserves associated with the
expiration of three DC10 aircraft leases in 1994.
F-21
<PAGE>
[LOGO OF WORLD AIRWAYS APPEARS HERE]
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING STOCKHOLDER OR THE UNDERWRITERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
Additional Information............................. 2
Prospectus Summary................................. 3
Risk Factors....................................... 7
The Company........................................ 14
Use of Proceeds.................................... 14
Dividend Policy.................................... 14
Dilution........................................... 15
Capitalization..................................... 16
Recent Financial Results........................... 16
Selected Financial and Operating Data.............. 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 18
Business........................................... 29
Management......................................... 42
Principal and Selling Stockholders................. 51
Certain Relationships and Transactions............. 52
Shares Eligible for Future Sale.................... 55
Description of Capital Stock....................... 56
Underwriting....................................... 59
Legal Matters...................................... 60
Experts............................................ 60
Index to Financial Statements...................... F-1
</TABLE>
----------------------
UNTIL , 1995 ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
2,900,000 SHARES
[LOGO OF WORLD AIRWAYS APPEARS HERE]
WORLD AIRWAYS, INC.
COMMON STOCK
----------
PROSPECTUS
----------
PAINEWEBBER INCORPORATED
J.P. MORGAN SECURITIES INC.
SALOMON BROTHERS INC
L.H. FRIEND, WEINRESS, FRANKSON
& PRESSON, INC.
----------------------
, 1995
================================================================================
