<PAGE>
As filed with the Securities and Exchange Commission on December 5, 1997
Registration No. 333-37487
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________________
AIRTRAN AIRLINES, INC.
AIRTRAN HOLDINGS, INC.
AIRTRAN AIRWAYS, INC.
VALUJET MANAGEMENT CORP.
VALUJET CAPITAL CORP.
VALUJET CORPORATE PARTNERS, L.P.
VALUJET I, LTD.
VALUJET RESERVATION PARTNERS, L.P.
VALUJET II, LTD.
VALUJET INVESTMENT CORP.
(Exact name of registrant as specified in its charter)
__________________
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AirTran Airlines, Inc. - Nevada 4512 AirTran Airlines, Inc. - 88-0290707
Other Registrants - * (Primary Standard Industrial Other Registrants - *
(State or other Jurisdiction of Classification Code Number (I.R.S. Employer Identification No.)
incorporation or organization)
AirTran Airlines, Inc. * See Chart Michael D. Acks
1800 Phoenix Boulevard, Suite 126 on following page 1800 Phoenix Boulevard, Suite 126
Atlanta, Georgia 30349 Atlanta, Georgia 30349
(770) 907-2580 (770) 907-2580
Other Registrants - * (Address, including zip code, and
(Address, including zip code, and telephone number including area code,
telephone number including area code, of agent for service)
of registrant's principal executive offices)
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________________________
Copies to:
Robert B. Goldberg, Esq.
Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
3490 Piedmont Road, N.E., Suite 400
Atlanta, Georgia 30305
(404) 233-2800
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding Company and there is compliance with
General Instruction G, check the following box: [_]
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered Amount to be Proposed Maximum Proposed Maximum Amount of
Registered Offering Price Aggregate Offering Registration
Per Security (1) Price Fee
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10 1/2% Senior Secured Notes due 2001 $80,000,000 100% $80,000,000 $24,242.42(3)
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Subsidiary Guarantees (2) (2) (2) (2) (2)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) The Issuer's parent Company and wholly-owned subsidiaries (the
"Guarantors") have guaranteed on an unsecured, senior basis, jointly and
severally, the payment of the principal of premium, if any, and interest on
the 10 1/2% Senior Secured Notes being registered hereby (the "Subsidiary
Guarantees"). The Guarantors are registering the guarantees. Pursuant to
Rule 457(n) under the securities Act of 1933, as amended, no separate fee
is payable for the registration of the Guarantees.
(3) Previously paid.
_______________________
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective sate until the registrant shall
file a futher amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the securities Act of 1933 or until the Registration Statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Cover Page - Page 2
Information on Registrants Guaranteeing Notes
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Address, Including Zip
State or Other I.R.S. Code, and Telephone
Jurisdiction of Employer Number Including Area
Incorporation or Identification Code, of Principal
Name Organization No. Executive Offices
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AirTran Holdings, Inc. (3) Nevada 58-2189551 (1)
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AirTran Airways, Inc. Delaware 65-0440712 (4)
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ValuJet Investment Corp. Nevada 88-0339721 (2)
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ValuJet Capital Corp. Nevada 88-0339719 (2)
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ValuJet Corporate Partners, L.P. Georgia 58-2179372 (1)
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ValuJet Reservation Partners, L.P. Georgia 58-2179373 (1)
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ValuJet Management Corp. Nevada 58-2179370 (1)
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ValuJet I, Ltd. Nevada 88-0339723 (2)
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ValuJet II, Ltd. Nevada 88-0339725 (2)
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(1) 1800 Phoenix Boulevard, Suite 126, Atlanta, Georgia 30349; telephone (770)
907-2580
(2) 6900 Westcliff Drive, Suite 505, Las Vegas, Nevada 89128; telephone (702)
256-4332
(3) Formerly known as ValuJet, Inc.
(4) 6280 Hazeltine National Drive; Orlando, Florida 32822; telephone (407) 859-
1579.
<PAGE>
AIRTRAN AIRLINES, INC.
Cross Reference Sheet
Pursuant to Item 501(b) Of Regulation S-K, showing the location in the
Prospectus of the information required by Part I of Form S-4.
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Item Number and Caption in Form S-4 Location or Caption in Prospectus
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A. INFORMATION ABOUT THE TRANSACTION.
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus........................... Cover Page of Registration Statement; Cross
Reference Sheet; Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................... Inside Front Cover Page; Outside Back Cover Page
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information.................................... Prospectus Summary; Risk Factors; Business of
ValuJet; Selected Consolidated Financial and
Operating Data
4. Terms of the Transaction................................. Prospectus Summary; The Exchange Offer;
Description of the Exchange Notes; United States
Federal Income Tax Consequences of the Exchange
of Notes
5. Pro Forma Financial Information.......................... Prospectus Summary; Selected Consolidated
Financial and Operating Data
6. Material Contacts with the Company being Acquired Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters Not Applicable
8. Interests of Named Experts and Counsel................... Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Not Applicable
B. INFORMATION ABOUT THE REGISTRANT.
10 Information With Respect to S-3 Registrants.............. Prospectus Summary; Risk Factors; Capitalization;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Selected
Consolidated Financial and Operating Data;
Business of ValuJet; Management; Principal
Stockholders; Description of the Exchange Notes;
Financial Statements
11 Incorporation of Certain Information by Reference........ Incorporation of Certain Information by Reference
12 Information With Respect to S-2 or S-3 Registrants....... Not Applicable
13 Incorporation of Certain Information by Reference........ Not Applicable
14 Information With Respect to Registrants Other
Than S-2 or S-3 Registrants.............................. Prospectus Summary; Risk Factors; Capitalization;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Selected
Consolidated Financial and Operating Data;
Business of ValuJet; Management; Principal
Stockholders; Description of the Exchange Notes;
Financial Statements; Supplemental Guarantor
Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED.
15 Information With Respect to S-3 Companies................ Not Applicable
16 Information With Respect to S-2 or S-3 Companies......... Not Applicable
17 Information With Respect to Companies Other
Than S-2 or S-3 Companies................................ Not Applicable
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<PAGE>
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D. VOTING AND MANAGEMENT INFORMATION.
18. Information if Proxies, Consents or Other Authorizations
are to be Solicited.......................................... Not Applicable
19. Information if Proxies, Consents or Other Authorizations are
not to be Solicited or in an Exchange Offer.................. Management
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<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER ___, 1997
PROSPECTUS
AIRTRAN AIRLINES, INC.
[LOGO]
OFFER TO EXCHANGE
10 1/2% Senior Secured Notes Due 2001
for
All Outstanding 10 1/2% Senior Secured Notes Due 2001
The Exchange Offer will expire at 5:00 p.m., New York Time
on __________________, 1998, unless extended.
AirTran Airlines, Inc., a Nevada corporation formerly known as ValuJet
Airlines, Inc. ("ValuJet Airlines" or the "Issuer") , hereby offers, upon the
terms and subject to conditions set forth in this Prospectus (the "Prospectus")
and the accompanying Letter of Transmittal (the "Letter of Transmittal";
together with the Prospectus, the "Exchange Offer"), to exchange up to an
aggregate principal amount of $80,000,000 of its registered 10 1/2% Series B
Senior Secured Notes Due 2001 (the "Exchange Notes") for up to an aggregate
principal amount of $80,000,000 of its outstanding unregistered 10 1/2% Senior
Secured Notes Due 2001 (the "Outstanding Notes"). The terms of the Exchange
Notes are identical in all material respects to those of the Outstanding Notes,
except for certain transfer restrictions and registration rights relating to the
Outstanding Notes and except for certain interest provisions related to such
registration rights. The Exchange Notes will be issued pursuant to, and
entitled to the benefits of, the Indenture (as defined herein) governing the
Outstanding Notes. The Exchange Notes and the Outstanding Notes are sometimes
referred to collectively as the "Notes".
The Exchange Notes will mature on April 15, 2001 and will not be redeemable
prior to their maturity. The Exchange Notes will be guaranteed (the
"Guarantees") by the parent of ValuJet Airlines, AirTran Holdings, Inc. formerly
known as ValuJet, Inc. (the "Company" or "ValuJet"), and by each of the
Company's other subsidiaries (the Company and such other subsidiaries being
sometimes referred to herein as the "Guarantors"). If a Change of Control
occurs, each holder will have the right to require the Issuer to repurchase its
Exchange Notes at a repurchase price equal to 101% of their principal amount
plus accrued interest to the repurchase date.
The Exchange Notes and the Guarantees will be senior obligations of the
Issuer and the Guarantors, respectively, ranking pari passu with all other
existing and future unsubordinated indebtedness of the Issuer and the
Guarantors. As of September 30, 1997, the Company had approximately $243.0
million of indebtedness outstanding. The Exchange Notes will be secured by a
first priority security interest in 17 Stage 3 DC-9 aircraft, seven Stage 2 DC-9
aircraft, three spare engines and four hush kits after their purchase by ValuJet
Airlines. The Notes will be effectively subordinated to all other existing and
future secured indebtedness of the Issuer and the Guarantors to the extent of
the collateral securing such other indebtedness.
The Issuer will accept for exchange any and all Outstanding Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York time, on
__________________, 1998, unless extended by the Issuer in its sole discretion
(the "Expiration Date"). The Exchange Offer will not in any event be extended
to a date beyond ____________, 1998. Tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York time, on the Expiration Date.
If the Issuer terminates the Exchange Offer and does not accept for exchange any
Outstanding Notes with respect to the Exchange Offer, the Issuer will promptly
return the Outstanding Notes to the holders thereof. The Exchange Offer is not
conditioned upon any minimum principal amount of Outstanding Notes being
tendered for exchange, but is otherwise subject to certain customary conditions.
The Outstanding Notes may be tendered only in integral multiples of $1,000.
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
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.
___________________________________
The date of this Prospectus is December ____, 1997.
<PAGE>
(cover page continued)
Interest on the Exchange Notes will be payable semi-annually on April 15 and
October 15 of each year, commencing April 15, 1998. Holders of the Exchange
Notes will receive interest on April 15, 1998, from the date of initial issuance
of the Exchange Notes, plus an amount equal to the accrued interest on the
Outstanding Notes from the most recent date to which interest has been paid
thereon to the date of exchange thereof.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement dated
August 13, 1997 (the "Registration Rights Agreement") by and among the Issuer,
the Company and UBS Securities, LLC, as the initial purchaser (the "Initial
Purchaser") with respect to the initial sale of the Outstanding Notes. Based on
positions taken by the staff of the Securities and Exchange Commission (the
"Commission") that have been enunciated in no-action letters issued in Exxon
-----
Capital Holdings Corp. (available April 13, 1989) and Morgan Stanley & Co. Inc.
- ---------------------- -------------------------
(available June 5, 1991), among others, the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Outstanding Notes may be offered for resale,
resold and otherwise transferred by the respective holders thereof (other than
any such holder which is an "affiliate" of the Issuer within the meaning of Rule
405 under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act of 1933, as amended (the
"Securities Act"), provided that the Exchange Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement with any
person to participate in the distribution of such Exchange Notes and is not
engaged in and does not intend to engage in a distribution of the Exchange
Notes. Holders who tender Outstanding Notes in the Exchange Offer with the
intention to participate in a distribution of the Exchange Notes may not rely
upon the Morgan Stanley or similar no-action letters. Each broker-dealer that
--------------
receives Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of the Exchange Notes received in
exchange for Outstanding Notes if such Exchange Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution".
Prior to the Exchange Offer, there has been no public market for the Exchange
Notes. There can be no assurance as to the liquidity of any markets that may
develop for the Exchange Notes, the ability of holders to sell the Exchange
Notes or the price at which holders would be able to sell the Exchange Notes.
The Issuer does not intend to list the Exchange Notes for trading on any
national securities exchange or over-the-counter market system. Future trading
prices of the Exchange Notes will depend on many factors, including among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. Historically, the market for securities similar
to the Exchange Notes, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the Exchange Notes, if
such market develops, will not be subject to similar disruptions. The Initial
Purchaser has advised the Issuer that it currently intends to make a market in
the Exchange Notes offered hereby. However, the Initial Purchaser is not
obligated to do so and any market making may be discontinued at any time without
notice.
The Issuer will not receive any proceeds from the Exchange Offer. The Issuer
has agreed to pay certain expenses incident to the Exchange Offer.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE ISSUER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER, OR A SOLICITATION
IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE ISSUER OR THE COMPANY SINCE THE DATE
HEREOF.
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TABLE OF CONTENTS
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Page
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Available Information.................................................................. 3
Incorporation of Certain Information by Reference...................................... 4
Prospectus Summary..................................................................... 5
Risk Factors........................................................................... 19
Use of Proceeds........................................................................ 29
Capitalization......................................................................... 30
The Exchange Offer..................................................................... 31
Selected Consolidated Financial and Operating Data..................................... 39
Pro Forma Condensed Combined Financial Information..................................... 42
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 46
Business of ValuJet.................................................................... 70
Business of Airways.................................................................... 86
Management............................................................................. 91
Principal Stockholders................................................................. 94
Description of the Exchange Notes...................................................... 97
Certain United States Federal Income Tax Consequences of the Exchange of Notes......... 124
Plan of Distribution................................................................... 124
Legal Matters.......................................................................... 125
Experts................................................................................ 125
Supplemental Guarantor Financial Statements............................................ 125
Index to Financial Statements.......................................................... F-1
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AVAILABLE INFORMATION
The Issuer and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-4 (the
"Registration Statement", which term shall include all amendments, exhibits,
annexes and schedules thereto) pursuant to the Securities Act, and the rules and
regulations promulgated thereunder, covering the Exchange Notes being offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. The Company is subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Periodic reports, proxy
statements and other information filed by the Company with the Commission may be
inspected at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional
offices located at the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York
10007. Copies of such material can be obtained from the Company upon request.
The Issuer has agreed to file with the Commission, to the extent permitted,
and distribute to holders of the Exchange Notes reports, information and
documents specified in Section 13 and 15(d) of the Exchange Act, so long as the
Exchange Notes are outstanding, whether or not the Issuer is subject to such
informational requirements of the Exchange Act. While any Exchange Notes remain
outstanding, the Issuer will make available, upon request, to any holder of the
Exchange Notes, the information required pursuant to Rule 144A(d)(4) under the
Securities Act during any period in which the Issuer is not subject to Section
13 or 15(d) of the Exchange Act. Any such request should be directed to the
Vice President - Controller of the Company at 1800 Phoenix Boulevard, Suite 126,
Atlanta, Georgia 30349, telephone number (770) 907-2580.
All operations of the Company are conducted by AirTran Airlines, Inc. and
AirTran Airways, Inc., wholly owned subsidiaries of the Company, and all of
AirTran Airlines' subsidiaries. Separate financial statements of the Issuer and
of the Guarantors who are subsidiaries of the Issuer are not presented because
the Company and all of the Issuer's subsidiaries will guarantee the Exchange
Notes on a full, unconditional and joint and several basis and management of the
Company has determined that separate financial statements would not be material
to investors.
-3-
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed by the Company with the Commission
are hereby incorporated herein by reference: (i) the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996; (ii) the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997; (iii)
the Company's current reports on Form 8-K dated July 10, 1997 and August 13,
1997; and (iv) all reports filed by the Registrant pursuant to Section 13(a) or
15(d) of the Exchange Act since the end of the quarter covered by the
Registrant's Quarterly Report on Form 10-Q for its quarter ended September 30,
1997. All documents filed by the Company pursuant to Section 13(a), 13(c), 14,
or 15(d) of the Exchange Act after the date of this Prospectus and prior to the
date which is 90 days after the termination of the Exchange Offer shall be
deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated or deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
____________________________________________
SAFE HARBOR STATEMENTS
Statements made by the Company in this Prospectus regarding the Company's
ability to increase its service levels, to maintain its low cost structure and
to become profitable again are forward-looking statements and are not historical
facts. Instead they are estimates or projections involving numerous risks and
uncertainties including, but not limited to, governmental approval of increases
in service by the Company, the utilization level of the Company's aircraft, the
level of those costs which are beyond the Company's control, the effect of the
Company's accounting policies, the Company's ability to hire and retain
qualified personnel under its new compensation program and results of pending
lawsuits. These risks and uncertainties could potentially cause the Company's
implementation of additional service to be delayed or the Company's costs to
exceed present estimates. The Company disclaims any obligation to update or
correct any of its forward-looking statements.
-4-
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the information and financial statements (including the notes
thereto) included elsewhere or incorporated by reference in this Prospectus.
Prospective investors should carefully consider the factors set forth in "Risk
Factors." Unless the context otherwise requires, all references to the
"Company" or "ValuJet" shall include ValuJet, Inc., its wholly owned subsidiary
(AirTran Airlines, Inc.) and its other subsidiaries.
THE COMPANY
The Company, through its wholly owned subsidiary, AirTran Airlines, Inc.
(formerly known as ValuJet Airlines, Inc.), operates an affordable, no frills,
limited frequency, scheduled airline serving short haul markets primarily in the
eastern United States. The Company believes that its low cost, no frills
philosophy allows it to offer among the lowest fares in its markets and generate
its own traffic by stimulating incremental demand with fare conscious travelers.
The Company commenced flight operations in October 1993 with two DC-9
aircraft serving three cities from Atlanta with eight flights per day. Prior
to June 17, 1996, the Company offered service to 31 cities from Atlanta,
Washington, D.C. (Dulles Airport), Boston and Orlando and operated up to 320
flights per peak day with its fleet of 51 aircraft. The Company's operations
were interrupted by the suspension of the Company's service on June 17, 1996,
pursuant to a consent order entered into with the United States Federal Aviation
Administration ("FAA") following the accident involving Flight 592 on May 11,
1996, and the ensuing extensive adverse media coverage and intense FAA scrutiny
into the Company's maintenance and safety procedures.
Prior to the Company's resumption of service, the Company undertook a
thorough review of operations, implemented several measures to respond to the
concerns that were raised by the FAA and reaffirmed its focus on the safety of
its aircraft and operations. These measures included: (i) creating a new
position of Senior Vice President of Maintenance and Engineering reporting
directly to the President of ValuJet Airlines; (ii) implementing intensified
performance, safety and compliance-assurance audits of key maintenance
subcontractors, together with revised procedures for qualification, inspection
and supervision of all maintenance contractors; (iii) creating an in-house
organization to supervise all engineering and maintenance planning functions;
(iv) instituting improved maintenance training procedures that require more
hours for initial DC-9 familiarization and orientation training, expanded on-
the-job and initial avionics training, mandatory recurrent training for all
ValuJet and outstation contract mechanics, and new courses for inspectors, lead
mechanics and maintenance managers; (v) reviewing thoroughly all aircraft prior
to reintroducing them into service, including, in each case, reconfirming
compliance with all Airworthiness Directives, correcting aircraft-specific FAA
inspection findings and performing special emphasis "B" checks; and (vi)
expanding training for customer service and station personnel.
Upon implementation of the Company's response outlined above and receipt of
FAA approval, the Company resumed limited operations with service between
Atlanta and four other cities as of September 30, 1996. The Company has
continued to work with the FAA since that time to recertify aircraft and expand
its flight operations. As of August 31, 1997, the FAA has approved 31 of the
Company's DC-9 series 30 aircraft for flight and the Company operates a total of
200 flights per peak day of which 182 flights per peak day are between Atlanta
and 23 other cities. Additional service is offered between Washington, D.C.
(Dulles Airport) and Boston and Chicago and between Boston and Philadelphia.
As a result of the accident, the suspension of operations and subsequent
reduced service levels, the Company recorded net losses of $41.5 million for the
year ended December 31, 1996, and $42.3 million in the first nine months of
1997. The Company attributes these losses to substantial nonrecurring expenses
incurred in connection with the accident, the allocation of fixed costs over
fewer available seat miles ("ASMs") as a result of the Company's reduced flight
operations, and lower revenues resulting from reduced flight operations, lower
load factors and reduced average fares.
Since the Company resumed service on September 30, 1996, its principal near-
term objective has been to return to profitability by increasing flight
operations and regaining its low historic cost level per ASM. The Company's
operating cost per ASM was 6.77c for the year ending December 31, 1995.
Although the Company's operating cost per ASM (excluding those expenses
classified as shutdown and other nonrecurring expenses) increased to 10.24c
during first quarter 1997, the Company reported that its operating cost per ASM
declined to 8.22c and 8.11c for second and third quarters of 1997, respectively.
The Company's goal is to continue to reduce its cost per ASM through the end of
1997.
-5-
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<PAGE>
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MERGER WITH AIRWAYS CORPORATION
On July 10, 1997, the Company entered into a merger agreement with Airways
Corporation ("Airways"). Under the merger agreement, the Company acquired
Airways on November 17, 1997 through a merger of Airways with and into the
Company (the "Merger"). In connection with the Merger, the Company changed its
name to AirTran Holdings, Inc. In anticipation of the Merger, the name of
ValuJet Airlines was changed to AirTran Airlines, while Airways' operating
subsidiary, AirTran Airways Inc. ("AirTran"), will continue to operate under its
current name. The Company has announced that it will move its headquarters to
Airways' existing headquarters in Orlando, Florida. While the Company intends
to initially operate ValuJet Airlines and AirTran under separate operating
certificates, it may also merge these two operating subsidiaries at a later date
(the Merger and such subsequent merger being referred to herein as the "Airways
Acquisition").
The Company believes that the Airways Acquisition will enable it to operate
more competitively and profitably in the eastern United States. Like ValuJet
Airlines, AirTran operates lower cost, used aircraft and targets fare conscious
leisure travelers with a limited flight frequency, no-frills product. Both
airlines rely on achieving and maintaining operating costs below industry
averages in order to offer low fares. The Company believes that the combined
entity can achieve significant financial and operating synergies and cost
savings in the first twelve months after the Merger by eliminating certain
redundant operations, reducing personnel and taking advantage of economies of
scale in maintenance operations and fuel purchasing. The 11 Boeing 737-200
aircraft operated by AirTran will provide increased revenue opportunities for
the Company through their longer flight range and greater seating capacity as
compared with the Company's DC-9 aircraft. The Company expects that the change
in name and product image that will accompany the Merger will further increase
its revenue opportunities. In addition, the Company believes that the Airways
Acquisition will afford it a competitive advantage in the consolidating airline
industry.
The purchase price paid by the Company in the Merger consisted of
approximately 9.1 million shares of common stock of the Company. The Merger
will also result in an increase in the consolidated debt of the Company of $9.4
million as of September 30, 1997 (which amount reflects the preexisting debt of
Airways), and the assumption by the Company on a consolidated basis of certain
off balance sheet operating lease obligations of Airways. In addition, as a
result of the Merger, a loan of $12.7 million from the Company to AirTran will
be converted into an intercompany loan. As part of the Merger, the Company will
acquire cash and cash equivalents and restricted cash held by Airways of
approximately $15.2 million, as of September 30, 1997. The Company will also
acquire all other assets of Airways, including four Boeing 737's currently owned
by Airways, three of which are Stage 3 aircraft, Airways' fixed base operation
located in Grand Rapids, Minnesota, and Airways' hangar located in Orlando,
Florida. See "Risk Factors -- Risks Associated with Merger" and "Summary Pro
Forma Condensed Combined Financial Information." There can be no assurance that
the Company will be able to realize the expected benefits from the Merger.
STRATEGY
In order to return to profitability and resume growth, the Company intends to
pursue a three-pronged strategy (i) to maintain its traditional cost and value
leadership in the markets that it serves, (ii) to reposition its brand image
with its target value-conscious customers to address the long-term adverse
effects of the May 1996 accident and the subsequent suspension of operations and
(iii) to gradually expand capacity as market demand warrants.
The Company's strategy is to provide a safe, reliable, customer friendly
alternative for affordable air transportation. The Company's operating strategy
is based on its commitment to offer everyday low fares that stimulate demand
from leisure and fare conscious business travelers. The key elements in this
strategy are a simple fare structure and a competitive low cost structure based
on a ticketless distribution system, a fleet of low cost DC-9 aircraft and
relatively low labor costs. For the customer, "simple" means the service is
easy to understand and use, including a simplified fare structure, with everyday
low prices, simplified reservations and check-in procedures and a ticketless
process. In contrast, today's airline industry is characterized by complex
fares, schedules, reservations, check-in procedures and, in most cases, physical
ticketing.
The Company's service is intended to satisfy the basic air transportation
needs of the Company's targeted customers who are short haul leisure travelers
visiting friends and relatives or vacationing and fare conscious business
travelers. The Company believes that the basic air transportation needs of its
targeted customers can be satisfied by providing a limited number of flights
-6-
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<PAGE>
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per day (currently up to nine frequencies), baggage service, in-flight beverages
and the ability to make advance reservations. The Company avoids what it
believes to be unnecessary and nonproductive costs such as meals, a frequent
flyer program, airport clubs or other amenities offered by many of its
competitors.
The Company's pricing structure and affordable fares are intended to
stimulate new demand for air travel by leisure customers and fare conscious
business travelers who would have otherwise used ground transportation or not
travel. The Company's simple fare system incorporates a predictable, "everyday
low pricing" fare structure designed to provide its customers with substantial
savings over its competitors based on walk-up fares and further savings by
purchasing seats in advance or by flying during off peak times. In the first six
months of 1997, the Company's average fare in its markets was substantially less
than the average fare in those markets prior to the Company's commencement of
operations. The Company believes it has historically generated its own traffic
through low fare market stimulation rather than pursuing the more traditional
airline approach of competing for market share with existing carriers.
The Company's thrifty and informal brand image has traditionally complemented
its position as the cost and value leader in its target markets. While the
Company believes that its basic business model remains viable, it believes that
its name and image have been significantly impaired by the accident in May 1996,
the subsequent suspension of operations and the resulting adverse media
exposure. As a result, the Company has commenced the implementation of a program
to enhance its image. In anticipation of the Merger, ValuJet Airlines has
changed its name to AirTran Airlines, is repainting its aircraft with the
AirTran logo and is changing its marketing accordingly. In addition, the Company
is reconfiguring its aircraft to provide 16 business class seats on each
aircraft and commenced to offer advance seat selection beginning in fourth
quarter 1997. This program is being implemented during the second half of 1997
and is expected to result in the incurrence of material expenses during the
period.
Once the Company reestablishes profitability and a favorable brand image, the
Company intends to pursue a prudent growth strategy. The Company has entered
into a contract with the Boeing Company to purchase 50 new MD-95 aircraft, to be
delivered from 1999 through 2002, with options to purchase an additional 50
aircraft. The MD-95 will have 115 seats consisting of 16 business class seats
and 99 coach seats. The Company estimates that the MD-95 aircraft, which have a
slightly larger seating capacity, increased fuel efficiency and lower
maintenance costs than the Company's DC-9 aircraft, will provide a cost per ASM
lower than the DC-9 fleet, even after taking into account the aircraft's higher
acquisition cost. The Company is the "launch" customer of the MD-95 aircraft. As
the launch customer, the Company anticipates that this contract will provide
material value in terms of acquisition cost and manufacturer financing
assistance. The Company determined that the MD-95 aircraft offers the optimum
balance between operating cost and revenue opportunity.
COLLATERAL
As security for the Notes, the Company has granted to the Trustee for the
benefit of the Holders of the Notes a security interest in 17 Stage 3 DC-9
aircraft and seven Stage 2 DC-9 aircraft (the "Collateral Aircraft"), together
with the installed engines, three spare engines, four hush kits after their
purchase by ValuJet Airlines (which are to be installed on such aircraft) and
all warranties of any manufacturer with respect thereto. The Collateral
Aircraft were manufactured between 1967 and 1976 and have an average number of
take-off and landing cycles of approximately 57,300. A portion of the proceeds
of the sale of the Outstanding Notes will be applied to the purchase of hush
kits for four of such Stage 2 Collateral Aircraft. The Company has obtained two
appraisals of the estimated aggregate market value of the Collateral Aircraft as
of July 1997 and of the estimated aggregate future market value of such aircraft
in 2001. The average of the appraisals reflect an aggregate current value of
$116.1 million and an aggregate future value of $90.7 million.
As additional security for the Notes, the Company has granted to the Trustee
for the benefit of the Holders of the Notes a security interest in certain
monies and securities deposited or required to be deposited with the Trustee; in
certain insurance policies covering loss or damage to the aircraft; and in all
proceeds of the foregoing Collateral Aircraft, monies and securities and
insurance policies (collectively, the "Collateral").
-7-
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<PAGE>
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THE EXCHANGE OFFER
The Exchange Notes......... The form and terms of the Exchange Notes are
identical in all material respects to the terms of
the Outstanding Notes for which they may be
exchanged pursuant to the Exchange Offer, except
for certain transfer restrictions and registration
rights relating to the Outstanding Notes and
except for certain interest provisions relating to
such registration rights described below under
"Description of the Exchange Notes."
The Exchange Offer......... The Company is offering to exchange up to
$80,000,000 aggregate principal amount of
registered 10 1/2% Series B Senior Secured Notes
due 2001 (the "Exchange Notes") for up to
$80,000,000 aggregate principal amount of its
outstanding unregistered 10 1/2% Senior Secured
Notes due 2001 (the "Outstanding Notes").
Outstanding Notes may be exchanged only in
integral multiples of $1,000.
Expiration Date; Withdrawal
of Tender................ The Exchange Offer will expire at 5:00 p.m., New
York time, on _______________, 1998, or such later
date and time to which it is extended by the
Company. The Exchange Offer will not in any event
be extended to a date beyond ___________, 1998.
The tender of Outstanding Notes pursuant to the
Exchange Offer may be withdrawn at any time prior
to the Expiration Date. Any Outstanding Notes not
accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
Certain Conditions to the
Exchange Offer............ The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company.
See "The Exchange Offer - Certain Conditions to
the Exchange Offer."
Procedures for Tendering
Outstanding Notes......... Each holder of Outstanding Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise deliver
such Letter of Transmittal, or such facsimile,
together with such Outstanding Notes and any other
required documentation to the Exchange Agent (as
defined) at the address set forth herein. By
executing the Letter of Transmittal, each holder
will represent to the Company that, among other
things, (i) any Exchange Notes to be received by
it will be acquired in the ordinary course of its
business, (ii) it has no arrangement with any
person to participate in the distribution of the
Exchange Notes and (iii) it is not an "affiliate,"
as defined in Rule 405 of the Securities Act, of
the Company or, if it is an affiliate, it will
comply with the registration and prospectus
delivery requirements of the Securities Act to the
extent applicable.
Interest on the Exchange
Notes..................... The Exchange Notes will bear interest at the rate
of 10 1/2% per annum, payable semi-annually on
April 15 and October 15, commencing April 15,
1998, to holders of record on the immediately
preceding April 1 and October 1, respectively.
Holders of the Exchange Notes will receive
interest on April 15, 1998 from the date of
initial issuance of the Exchange Notes, plus an
amount equal to the accrued interest on the
Outstanding Notes from the most recent date to
which interest has been paid thereon to the date
of exchange thereof. Interest on the Outstanding
Notes accepted for exchange will cease to accrue
upon issuance of the Exchange Notes.
Special Procedures for
Beneficial Owners......... Any beneficial owner whose Outstanding Notes are
registered in the name of a broker, dealer,
commercial bank, trust Company or other nominee
and who wishes to tender such Outstanding Notes in
the Exchange Offer should contact such registered
holder
-8-
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<PAGE>
- --------------------------------------------------------------------------------
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering its Outstanding Notes, either make
appropriate arrangements to register ownership of
the Outstanding Notes in such owner's name or
obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may not
be able to be completed prior to the Expiration
Date.
Guaranteed Delivery
Procedures................ Holders of Notes who wish to tender their
Outstanding Notes and whose Outstanding Notes are
not immediately available or who cannot deliver
their Outstanding Notes, the Letter of Transmittal
or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date, must tender their Outstanding
Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer -
Guaranteed Delivery Procedures."
Registration Requirements.. The Company has agreed to use its best efforts to
consummate the Exchange Offer to offer holders of
the Outstanding Notes an opportunity to exchange
their Outstanding Notes for the Exchange Notes
which will be issued without legends restricting
the transfer thereof. If the Company is not
permitted to effect the Exchange Offer under
certain previously enunciated positions of the
staff of the Commission, or in certain other
circumstances, the Company has agreed to file a
shelf registration statement (the "Shelf
Registration Statement") covering resales of the
Outstanding Notes and to use its best efforts to
cause the Shelf Registration Statement to be
declared effective under the Securities Act and,
subject to certain exceptions, keep the Shelf
Registration Statement effective until two years
after the effective date thereof.
Certain Federal Income Tax
Considerations............ For a discussion of certain federal income tax
considerations relating to the exchange of Notes,
see "United States Federal Income Tax Consequences
of the Exchange of Notes."
Use of Proceeds............ There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
Exchange Agent............. The Bank of New York is the Exchange Agent. The
address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer - Exchange
Agent."
SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
Notes Offered.............. $80.0 million principal amount of 10 1/2% Series B
Senior Secured Notes due 2001 issued by ValuJet
Airlines and guaranteed by the Company, ValuJet
Airlines' subsidiaries and AirTran Airways.
Maturity Date.............. April 15, 2001.
Interest Payment Dates..... April 15 and October 15 of each year, commencing
April 15, 1998.
Change of Control.......... Upon the occurrence of a Change of Control, each
Holder of Exchange Notes will have the right to
require the Issuer to purchase all or a portion of
such holder's Exchange Notes at 101% of the
principal amount thereof, together with accrued
and unpaid interest (if any) to the date of
purchase. See "Description of the Exchange Notes -
Certain Covenants - Change of Control."
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Guarantees................. The Company and each of the Issuer's subsidiaries
other than the Issuer, until such subsidiaries
cease to be Restricted Subsidiaries under the
Indenture, will fully and unconditionally
guarantee jointly and severally on a senior basis
the due and punctual payment of all amounts due
under the Exchange Notes. The Company will cause
any future restricted subsidiary to be a Guarantor
while it is a Restricted Subsidiary. See "Risk
Factors -- Fraudulent Conveyance."
The Exchange Notes will be senior secured
obligations of the Issuer and will rank pari passu
in right of payment with all other existing and
future unsubordinated indebtedness of the Issuer
and senior in right of payment to existing and
future subordinated indebtedness of the Issuer.
The Exchange Notes will have the benefit of the
security interests described under "-- Security".
The Exchange Notes will be effectively
subordinated to other senior secured indebtedness
of the Issuer with respect to the assets securing
such indebtedness of the Issuer. The Guarantees
will rank pari passu in right of payment with all
existing and future unsecured unsubordinated
indebtedness of the Guarantors and will rank
senior in right of payment to any existing and
future subordinated indebtedness of the
Guarantors. The Guarantees will be effectively
subordinated to all existing and future secured
indebtedness of the Guarantors to the extent of
the collateral securing such indebtedness.
Security................... As security for the Notes, the Issuer has given to
the Trustee for the equal and ratable benefit of
the Holders of the Notes a first priority security
interest in: (i) all right, title and interest of
the Issuer in and to 17 Stage 3 DC-9 aircraft and
7 Stage 2 DC-9 aircraft together with the engines
relating thereto, three spare engines, four hush
kits after their purchase by ValuJet Airlines
(which are to be installed on such aircraft) and
all warranties of any manufacturer with respect
thereto; (ii) all monies and securities deposited
or required to be deposited with the Trustee
pursuant to any term of the Indenture or required
to be held by the Trustee thereunder; (iii) all
policies covering loss or damage to the aircraft
that are made payable to the Trustee; and (iv) all
proceeds of the foregoing (collectively, the
"Collateral"). See "Risk Factors -- Limitations
Regarding Aircraft Collateral."
Certain Restrictions....... The Indenture restricts, among other things, the
ability of the Company and its Restricted
Subsidiaries (including the Issuer) (i) to incur
additional indebtedness, (ii) to pledge or dispose
of assets, (iii) to engage in transactions with
affiliates, (iv) to make distributions on and
repurchases of its Common Stock and to make
certain other restricted payments, (v) to have
restrictions on the ability of Restricted
Subsidiaries to make dividend or other payments
and (vii) to merge or consolidate with or transfer
all or substantially all its assets to another
entity. The restrictions referred to above are
subject to certain significant exceptions. In
addition, the Company is entitled to designate
certain subsidiaries as unrestricted subsidiaries
which will generally not be subject to such
restrictions and will not be Guarantors. See
"Description of the Exchange Notes."
For additional information regarding the Exchange Notes, see "Description
of the Exchange Notes" and "United States Federal Income Tax Consequences of the
Exchange of Notes."
RISK FACTORS
See "Risk Factors", below, for a discussion of certain factors that should
be considered by holders of Outstanding Notes prior to tendering Outstanding
Notes in the Exchange Offer.
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SUMMARY FINANCIAL AND OPERATING DATA
The following summary financial and operating data of the Company for the
period from July 10, 1992 (date of inception) to December 31, 1992 and for the
years ended December 31, 1993, 1994, 1995 and 1996, are derived from the audited
consolidated financial statements of the Company. The financial and operating
data for the nine month periods ended September 30, 1996 and 1997 are derived
from unaudited consolidated financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals
which the Company considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the entire year. The summary financial data of
Airways for the years ended March 31, 1995, 1996 and 1997, which follows the
information regarding the Company, are derived from the audited consolidated
financial statements of Airways, and the summary financial and operating data of
Airways for the six month periods ended September 30, 1996 and 1997 are derived
from unaudited consolidated financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals
which Airways considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Airways' operating
results for the six months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the entire year. The data
should be read in conjunction with the financial statements, related notes and
other financial information included herein.
<TABLE>
<CAPTION>
VALUJET, INC.
Period from
Inception
(July 10, 1992) Year ended Nine Months
to December 31 December 31 Ended September 30
----------------------------------------------------------------------------------
1992(a) 1993(a) 1994 1995 1996 (b) 1996(b) 1997
---------------- -------------- ------------- --------- ----------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA: (dollars in thousands)
Operating revenues......... - $ 5,811 $133,901 $367,757 $ 219,636 $ 191,523 $ 141,100
Operating expenses:
Flight operations....... - 474 6,967 16,273 16,479 13,272 13,998
Aircraft fuel........... - 977 21,775 55,813 46,691 39,183 33,373
Maintenance............. - 732 14,862 47,330 49,500 38,167 40,906
Station operations...... - 1,199 20,198 49,931 42,018 32,895 35,343
Passenger services...... - 228 3,942 10,363 8,879 7,626 6,370
Marketing and
advertising............ - 1,097 6,546 8,989 8,426 6,923 8,115
Sales and reservations.. - 967 11,325 31,156 18,378 15,495 11,345
General and
administrative......... $ 23 866 5,039 10,617 13,659 10,946 9,272
Employee bonus......... - - 5,146 14,382 1,245 1,245 -
Depreciation............ - 138 3,555 15,147 17,551 13,296 20,508
Arrangement fee for
aircraft transfers..... - - - - (13,036) (13,036) -
Gain on insurance recovery - - - (1,094) (2,815) (2,815) -
Gain (loss) on sale of
assets................... - - - - ( 3,934) (2,335) ( 275)
Rebranding expenses..... - - - - - - 325
Shutdown and other
nonrecurring
expenses............. - - - - 67,994 54,663 9,338
----- ---------- -------- -------- ---------- ---------- ----------
Total operating expenses... 23 6,678 99,355 258,907 271,035 215,525 188,618
----- ---------- -------- -------- ---------- ---------- ----------
Operating income (loss).... (23) (867) 34,546 108,850 ( 51,399) (24,002) ( 47,518)
Interest expense........ - 112 2,388 6,579 22,186 15,822 19,854
Interest income......... - (85) (1,423) ( 5,555) ( 7,653) ( 6,799) ( 4,913)
----- ---------- -------- -------- ---------- ---------- ----------
Income (loss) before
income taxes.............. (23) (894) 33,581 107,826 (65,932) (33,025) ( 62,459)
Provision for income
taxes.................. - - 12,849 40,063 ( 24,463) (12,173) ( 20,114)
----- ---------- -------- -------- --------- ---------- ----------
Net income (loss).......... ($23) ($894) $ 20,732 $ 67,763 ($ 41,469) $ (20,852) $( 42,345)
===== ========== ======== ======== ========= ========== ==========
Ratio of earnings to fixed
charges (c)............... -(d) -(d) 9.5x 11.0x -(d) -(d) -(d)
----- ---------- -------- -------- ---------- ---------- ----------
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents.. $ 495 $ 13,247 $ 85,078 $127,947 $ 150,013 $ 178,986 $ 123,210
Working capital............ 482 10,284 58,585 63,523 168,555 182,650 112,756
Property and equipment, net - 13,458 71,880 196,954 162,572 171,273 195,198
Total assets............... 495 30,264 173,039 346,741 417,187 454,353 372,176
Total debt................. - 10,397 46,965 109,038 244,706 273,867 242,958
Stockholders' equity....... 482 15,143 93,117 162,065 123,400 143,742 81,419
</TABLE>
See footnotes beginning on page 13
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<PAGE>
________________________________________________________________________________
<TABLE>
<CAPTION>
Nine Months
Year ended December 31, Ended September 30,
--------------------------------------------------------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA (E):
Revenue passengers enplaned........................ 2,040,892 5,177,629 3,003,883 2,523,728 2,206,242
Revenue passenger miles (RPM)(thousands)........... 940,546 2,624,298 1,534,439 1,313,048 1,101,672
Available seat miles (ASM)(thousands).............. 1,470,614 3,812,696 2,689,127 2,320,043 2,066,495
Load factor........................................ 64.0% 68.8% 57.1% 57.0% 53.3%
Break-even load factor excluding shutdown
and other nonrecurring expenses................. 44.6% 45.8% 57.0% 50.8% 75.1%
Average fare....................................... $63.48 $68.10 $69.81 $72.73 $60.68
Passenger yield.................................... 13.77cents 13.44cents 13.67cents 13.98cents 12.15cents
Total revenue per ASM.............................. 9.05cents 9.62cents 8.12cents 8.32cents 6.83cents
Operating cost per ASM excluding shutdown
and other nonrecurring expenses................. 6.71cents 6.77cents 7.50cents 6.99cents 8.70cents
Completion factor.................................. 99.5% 99.0% 90.3% 95.2% 99.1%
Aircraft in service (end of period)................ 22 42 15 4 31
Cities served (end of period)...................... 17 26 18 5 22
Average passenger trip length (miles).............. 461 507 511 520 499
Average stage length (miles)....................... 444 497 501 511 466
</TABLE>
_______________________________________________________________________________
12
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AIRWAYS CORPORATION
<TABLE>
<CAPTION>
Six Months
Year ended March 31 Ended September 30
-------------------------------------- ----------------------
1995 1996 1997 1996 1997
------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:..... (dollars in thousands)
Operating revenues................. $ 9,607 $ 68,361 $ 102,623 $ 51,998 $ 50,674
Operating expenses................. 16,028 66,867 114,745 59,846 55,749
-------- -------- ---------- --------- ---------
Operating income (loss)............ (6,421) 1,494 (12,122) ( 7,848) ( 5,075)
Interest expense............... - 524 1,507 782 1,087
Interest income and other...... (59) (1,007) ( 984) ( 621) ( 375)
-------- -------- ---------- --------- ---------
Income (loss) before income taxes.. (6,362) 1,977 (12,645) ( 8,009) ( 5,787)
Provision for income taxes..... (2,866) 790 (5,654) ( 3,604) (218)
-------- -------- ---------- --------- ---------
Net income (loss).................. ($3,496) $ 1,187 ($6,991) ($ 4,405) ($ 5,569)
======== ======== ========== ========= =========
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents.......... $ 961 $ 16,437 $ 2,354 $ 11,399 $ 5,170
Working capital.................... 2,058 3,212 (7,144) (1,257) (22,617)
Property and equipment, net....... 2,211 29,458 37,698 30,425 38,866
Total assets....................... 13,544 69,654 73,948 62,326 75,770
Total debt......................... - 13,851 13,696 14,310 22,080
Stockholders' equity............... 7,690 24,363 17,641 20,111 12,150
OPERATING DATA:
Revenue passengers enplaned........ 87,000 685,000 1,089,000 573,257 559,841
RPMs (thousands)................... 80,783 605,130 932,305 497,099 480,029
ASMs (thousands)................... 180,480 974,642 1,426,873 753,048 705,534
Load factor........................ 44.8% 62.1% 65.3% 66.0% 68.0%
Passenger yield.................... 9.8c 10.7c 10.7c 10.2c 10.1c
Aircraft in service (end of
period)........................... 4 10 10 10 11
Average stage length (miles)....... 880 873 832 871 718
</TABLE>
___________________________
(a) The Company's flight operations commenced October 26, 1993. Prior to that
time, the Company was in the development stage.
(b) The Company's operations were suspended from June 18, 1996 until September
30, 1996 as a result of a consent order entered into between the Company
and the FAA.
(c) For purposes of calculating the ratio of earnings to fixed charges (i)
earnings consist of income (loss) before income taxes, plus fixed charges
and (ii) fixed charges consist of interest expense incurred, plus the
portion of rent expense under operating leases deemed by the Company to be
representative of the interest factor.
(d) For the periods ending December 31, 1992, December 31, 1993, December 31,
1996, September 30, 1996 and September 30, 1997, the Company's earnings
were insufficient to cover fixed charges by $23,000, $894,000, $65.9
million, $33.0 million and $62.5 million, respectively.
(e) All operating data other than total revenue per ASM and total cost per ASM
refers to scheduled service. The terms included in Operating Data have the
meanings indicated below:
"REVENUE PASSENGERS ENPLANED" represents the number of paid passengers
boarded.
"REVENUE PASSENGER MILES" or "RPMS" represents the number of miles flown by
revenue passengers on scheduled flights.
"AVAILABLE SEAT MILES" or "ASMS" represents the number of seats available
for passengers on scheduled flights multiplied by the number of miles those
seats are flown.
"LOAD FACTOR" represents revenue passenger miles divided by scheduled
service ASMs.
"BREAK-EVEN LOAD FACTOR" represents the percentage of revenue passenger
miles which must be flown for the airline to break-even after operating and
interest expenses but without regard to amounts payable under the employee
bonus program which will be paid at the discretion of the Company only if
the Company is profitable. Break-even load factor is calculated by taking
total expenses less employee bonuses and non-passenger revenue, divided by
scheduled service ASMs, divided by passenger yield
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"AVERAGE FARE" represents passenger revenue divided by revenue passengers
enplaned.
"PASSENGER YIELD" represents the total passenger revenue divided by RPMs.
"TOTAL REVENUE PER ASM" represents total revenues divided by total
available seat miles (including charter service ASMs).
"OPERATING COST PER ASM EXCLUDING SHUTDOWN AND OTHER NONRECURRING EXPENSES"
represents total operating expenses (other than shutdown and other
nonrecurring expenses) divided by total available seat miles (including
charter service ASMs).
"COMPLETION FACTOR" represents the percentage of scheduled flights actually
flown by the Company.
"AVERAGE PASSENGER TRIP LENGTH" represents the distance computed by
dividing passenger miles by revenue passengers enplaned.
"AVERAGE STAGE LENGTH" represents the scheduled aircraft miles flown
divided by the total number of departures.
- --------------------------------------------------------------------------------
14
<PAGE>
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PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements of
ValuJet and Airways give effect to (i) the sale by ValuJet of $80.0 million of
the Notes on August 13, 1997, and the application of the proceeds as set forth
below, and (ii) the sale by ValuJet of the Notes as described in (i) above and
the Merger as if such transactions had occurred as of January 1, 1996 and 1997
with respect to the statements of operations for the year ended December 31,
1996 and the nine months ended September 30, 1997, respectively, and as of
September 30, 1997 with respect to the balance sheet. ValuJet received
approximately $77.5 million of net proceeds from the Notes, after deduction of
the initial purchaser's discount and expenses of the debt offering. The net
proceeds, along with approximately $6.2 million of ValuJet's cash were used to
repay $68.5 million of secured debt of ValuJet and to pay the fees and expenses
(approximately $6.0 million) incurred by ValuJet in connection with a consent
solicitation to the holders of ValuJet's 10 1/4% senior notes and will also be
used to purchase approximately $9.2 million of hush kits for up to four of
ValuJet's Stage 2 DC-9 aircraft. The Merger is reflected using the purchase
method of accounting for business combinations. The pro forma condensed
combined financial information is provided for comparative purposes only and
does not purport to be indicative of the results that would have been obtained
if the events set forth above had been effected on the dates indicated or of
those results that may be obtained in the future. The pro forma condensed
combined financial information with respect to the Merger is based on
preliminary estimates of values and transaction costs which may be incurred in
connection with the Merger. The actual recording of the Merger will be based on
final appraisals, values and transaction costs. Accordingly, the actual
recording of the transaction can be expected to differ from these pro forma
condensed combined financial statements. However, ValuJet's management believes
the asset and liability valuations and allocations utilized for the Merger will
not be materially different from the pro forma information presented
herein.
For purposes of preparing the unaudited pro forma condensed combined
statements of operations for the nine months ended September 30, 1997 and the
year ended December 31, 1996, Airways' operating results for the nine months
ended September 30, 1997 and the year ended March 31, 1997, were combined with
ValuJet's operating results for the nine months ended September 30, 1997 and the
year ended December 31, 1996, respectively. Accordingly, Airways' operating
results for the three months ended March 31, 1997 are included in the nine
months ended September 30, 1997 and in the year ended December 31, 1996 pro
forma results. Airways' revenues and net income for that three month period
were $29,777,000 and $277,000, respectively.
BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
ValuJet Airways Adjustments Combined
-------- ------- --------------- ---------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.. $123,210 $ 5,170 $128,380
Restricted cash............ 0 10,048 10,048
Accounts receivable, net... 7,775 4,510 $ (1,416)(a) 10,869
Notes receivable........... 12,700 0 (12,700)(a) 0
Inventory.................. 7,812 923 8,735
Prepaid items.............. 688 3,598 4,286
Income tax receivable...... 12,684 0 12,684
Deferred tax asset......... 0 4,449 (3,375)(d) 0
(1,074)(b)
Other current assets....... 1,764 0 1,764
-------- ------- -------- --------
Total current assets.......... 166,633 28,698 (18,565) 176,766
Property and equipment, net... 195,198 40,711 235,909
Debt issuance costs........... 10,345 0 10,345
Goodwill, net................. 0 1,677 (1,677)(c) 61,647
61,647(f)
Deferred tax asset............ 0 4,166 (4,166)(d) 0
Other assets, net............. 0 518 (518)(b) 0
-------- ------- -------- --------
Total assets.................. $372,176 $75,770 $ 36,721 $484,667
======== ======= ======== ========
</TABLE>
-15-
- --------------------------------------------------------------------------------
<PAGE>
________________________________________________________________________________
<TABLE>
<CAPTION>
Pro Forma Pro Forma
ValuJet Airways Adjustments Combined
-------- --------- --------------- ---------
(in thousands)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses............................ $ 35,354 $ 19,900 $ 3,250 (e) $ 57,088
(1,416)(a)
Air traffic liability.................... 8,913 15,942 24,855
Deferred tax liability................... 485 0 485
Short-term notes payable................. 0 12,700 (12,700)(a) 0
Current portion of long-term debt........ 9,125 2,489 11,614
Current portion of maintenance reserves.. 0 284 (284)(b) 0
-------- -------- -------- --------
Total current liabilities................... 53,877 51,315 (11,150) 94,042
Long-term debt less current
maturities............................ 233,833 6,891 240,724
Maintenance reserves........................ 0 2,620 (2,620)(b) 0
Deferred taxes.............................. 3,047 2,794 (2,602)(d) 2,207
(192)(b)
(840)(e)
Stockholders' equity:
Preferred stock.......................... 0 0 0
Common stock............................. 55 91 (91)(f) 64
9 (f)
Additional paid-in capital............... 77,601 26,696 (26,696)(f) 143,867
63,466 (f)
2,800 (f)
Retained earnings (deficit).............. 3,763 (14,637) 14,637 (f) 3,763
-------- -------- -------- --------
Total stockholders' equity.................. 81,419 12,150 54,125 147,694
-------- -------- -------- --------
Total liabilities and
stockholders' equity................... $372,176 $ 75,770 $ 36,721 $484,667
======== ======== ======== ========
</TABLE>
STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
-------------------------------------------------------------------------------
Pro Forma ValuJet Pro Forma Pro Forma
ValuJet Adjustments As Adjusted Airways Adjustments Combined
------- ----------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................... $141,100 $141,100 $80,451 $221,551
Operating expenses......................... 188,618 188,618 84,803 $ (333)(l) 274,522
(107)(m)
1,541 (n)
--------- ------- -------- ------- ------- --------
Operating income (loss).................... (47,518) (47,518) (4,352) (1,101) (52,971)
Interest expense........................ 19,854 $(3,699)(g) 22,735 1,457 24,192
5,250 (h)
1,330 (i)
Interest income......................... (4,913) (4,913) (557) (5,470)
-------- ------- -------- ------- ------- --------
Income (loss) before
income taxes.............................. (62,459) (2,881) (65,340) (5,252) (1,101) (71,693)
Income tax expense
(benefit)................................. (20,114) (922)(j) (21,036) 41 117 (o) (20,878)
-------- ------- -------- ------- ------- --------
Net income (loss).......................... $(42,345) $(1,959) $(44,304) $(5,293) $(1,218) $(50,815)
======== ======= ======== ======= ======= ========
Net income (loss) per share................ $(0.77) $(0.77) $(0.58) $(0.79)
======== ======== ======= =======
Weighted average shares
outstanding.......................... 54,923 54,923 9,054 63,991
======== ======== ======= ========
Ratio of earnings to
fixed charges (p)........................ --(q)
========
</TABLE>
-16-
________________________________________________________________________________
<PAGE>
________________________________________________________________________________
<TABLE>
<CAPTION>
Year Ended
----------- ----------- ---------- --------- --------------- -----------
December 31, Pro Forma ValuJet March 31,
1996 Adjust- As 1997 Pro Forma Pro Forma
ValuJet ments Adjusted Airways Adjustments Combined
----------- ----------- ---------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................. $219,636 $219,636 $102,623 $ 322,259
Operating expenses........ 271,035 $ 750 (k) 271,785 114,745 $(443)(l) 387,999
(143)(m)
2,055 (n)
---------- ------- -------- -------- ------- ---------
Operating loss............ (51,399) (750) (52,149) (12,122) (1,469) (65,740)
Interest expense....... 22,186 (5,917)(g) 26,796 1,507 28,303
8,400 (h)
2,127 (i)
Interest income........ (7,653) ( 7,653) ( 984) (8,637)
---------- ------- -------- -------- ------- --------
Loss before income taxes.. (65,932) (5,360) (71,292) (12,645) (1,469) (85,406)
Income tax benefit........ (24,463) (1,876)(j) (26,339) (5,654) 155 (o) (31,838)
---------- ------- -------- -------- ------- --------
Net loss.................. $(41,469) $(3,484) $(44,953) $ (6,991) $(1,624) ($53,568)
========== ======= ======== ======== ======= ========
Net loss per share........ $(0.76) $(0.82) $(0.77) $(0.84)
========== ======== ======== ========
Weighted average shares
outstanding......... 54,702 54,702 9,029 63,770
========== ======== ======== ========
Ratio of earnings to
fixed charges(p)....... --(q)
========
</TABLE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(a) Reflects the elimination of amounts due to/from ValuJet and Airways.
(b) Reflects the reversal of preoperating costs and maintenance reserves, and
the related deferred tax amounts, to conform accounting policies.
(c) Reflects the reversal of Airways' historical excess of cost over fair value
of the net tangible assets acquired ("goodwill").
(d) Reflects the reversal of Airways' net deferred tax asset.
(e) Reflects the accrual of estimated merger costs with the related income tax
effect.
(f) Reflects the excess of cost over the estimated fair value of the net
tangible assets acquired in the Merger, the elimination of Airways'
historical common stock, additional paid-in capital and retained deficit,
the value of the Common Stock issued to the Airways stockholders and the
value of options issued to Airways option holders in the Merger.
<TABLE>
<S> <C>
Number of shares issued to acquire Airways 9,067,937
Per share price at date of Agreement and joint press release 7.00
----------
Value of stock $ 63,476
Value of Airways options 2,800
Transaction costs 3,250
----------
Purchase price 69,526
Less estimated fair value of net tangible assets acquired 7,879
----------
Excess of cost over fair value of net tangible assets acquired $ 61,647
==========
</TABLE>
Excess of cost over fair value of the net tangible assets acquired is
presented in the pro forma balance sheet utilizing estimated amounts at
September 30, 1997 and will be determined at the Effective Date. Such amount
will also be allocated according to the estimated fair values of assets at
the Effective Date.
(g) Reflects the elimination of interest on $68.5 million of debt refinanced by
the $80.0 million secured debt offering.
(h) Reflects interest on the $80.0 million of 10 1/2% senior secured notes.
(i) Reflects the amortization of debt issuance costs.
(j) Reflects the income tax effect of the pro forma adjustments.
(k) Reflects the effect of expensing certain transaction costs.
(l) Reflects the reversal of historical amortization of preoperating costs of
Airways.
(m) Reflects the reversal of historical amortization of goodwill of Airways.
(n) Reflects the amortization of goodwill resulting from the Merger by use of
the straight line method over a 30-year period.
(o) Reflects the income tax effect of the pro forma adjustments.
(p) For purposes of calculating the ratio of earnings to fixed charges (i)
earnings consist of income (loss) before income taxes, plus fixed charges
and (ii) fixed charges consist of interest expense incurred, plus the
portion of rent expense under operating leases deemed by the Company to be
representative of the interest factor.
(q) For the periods ending September 30, 1997 and December 31, 1996, the pro
forma combined earnings were insufficient to cover fixed charges by $71.7
million and $85.4 million, respectively.
-17-
________________________________________________________________________________
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative per share data relating
to net income and book value on (i) an historical basis for ValuJet and Airways,
and (ii) a pro forma combined basis per share of ValuJet Common Stock, giving
effect to the sale by ValuJet of the Notes and the application of the proceeds
therefrom and the Merger. The ValuJet and Airways pro forma combined information
gives effect to the Merger on a purchase accounting basis and is based upon the
Exchange Ratio of one share of ValuJet Common Stock for each share of Airways
Common Stock. The unaudited pro forma data is presented for informational
purposes only and is not necessarily indicative of the results of operations or
combined financial position that would have resulted had the sale by ValuJet of
the Notes and the application of the proceeds therefrom and the Merger been
consummated at the dates or during the periods indicated, nor is it necessarily
indicative of future results of operations or combined financial position.
The information shown below for the year ended December 31, 1996 is derived
from the audited consolidated financial statements of ValuJet for the period
then ended and the audited consolidated financial statements of Airways for the
year ending on the ensuing March 31 and should be read in conjunction with, and
is qualified in its entirety by, the historical financial statements, including
the respective notes thereto, and the pro forma financial information included
herein. The information shown below for the nine months ended September 30, 1997
is derived from the unaudited consolidated financial statements of ValuJet and
Airways, including the respective notes thereto, and should be read in
conjunction with, and is qualified in its entirety by, the pro forma financial
information included herein. See "Pro Forma Condensed Combined Financial
Information."
<TABLE>
<CAPTION>
Nine Months Year ended
Ended December 31,
Income (loss) per share September 30, 1997 1996(1)
------------------- ---------------
<S> <C> <C>
ValuJet historical.......................... $(.77) $(.76)
Airways historical.......................... (.58) (.77)
ValuJet and Airways pro forma combined (2).. (.79) (.84)
Book Value per Share (Period End)
ValuJet historical.......................... 1.48
Airways historical.......................... 1.34
ValuJet and Airways pro forma combined (2).. 2.30
</TABLE>
(1) ValuJet's fiscal year end is December 31 and Airways' fiscal year end is
March 31. Consequently, the data included for Airways as of the date
indicated is based on audited financial statements of Airways for the year
ending on March 31, 1997.
(2) Represents the combined results of ValuJet and Airways giving effect to the
sale by ValuJet of the Notes and the application of the proceeds therefrom
and the Merger as if such transactions had occurred as of January 1, 1996
and 1997, with respect to the statements of operations for the year ended
December 31, 1996, and the nine months ended September 30, 1997,
respectively, and as of September 30, 1997, with respect to the balance
sheet. The Merger is reflected using the purchase method of accounting for
business combinations.
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<PAGE>
RISK FACTORS
Prior to tendering Outstanding Notes in the Exchange Offer, holders of
Outstanding Notes should read this entire Prospectus carefully and should
consider, among other things, the risks and the speculative factors inherent in
and affecting the Company's business described below and throughout this
Prospectus.
RISKS RELATED TO THE COMPANY
Accident/Suspension of Operations
As a result of the accident involving Flight 592, the ensuing adverse media
coverage and intensive FAA scrutiny, the Company suspended its operations on
June 17, 1996, pursuant to a consent order entered into with the FAA. The
Company now faces the following additional risk factors: (i) the suspension of
operations has resulted in the failure of the Company to meet certain financial
covenants (the fixed charge coverage ratio) under certain of its secured debt
instruments. All of this debt was repaid from the proceeds of the Notes; (ii)
there can be no assurance that the Company will be able to regain and maintain
its low cost structure or to recover sufficient customer acceptance in order to
regain profitability; (iii) if the Company regains profitability, the Company
may have increased costs or reduced customer support which could decrease the
Company's profitability indefinitely; (iv) the expansion of the Company's
operations will likely be subject to FAA and DOT approval for an indefinite
period of time; and (v) the occurrence of one or more subsequent incidents or
accidents involving the Company's aircraft would likely have a substantial
adverse effect on the Company's public perception and future operations.
Recent Operating Losses
The Company has realized net losses in each of its last six quarters. The
Company's earnings before fixed charges for the fiscal year ended December 31,
1996 and the nine months ended September 30, 1997 were inadequate to cover fixed
charges by approximately $65.9 million and $62.5 million, respectively.
Continued failure by the Company to cover fixed charges in the future could
result in a failure to meet the Company's debt service obligations, restrictions
on the Company's activities or other material adverse effects on the Company's
financial condition and results of operations. The Company's consolidated
leverage and recent history of losses may adversely affect the Company's ability
to obtain financing on terms satisfactory to the Company in the future.
Ability to Repay Indebtedness At Maturity
The Company had approximately $243.0 million of Indebtedness on a
consolidated basis as of September 30, 1997. The Indenture limits, but does not
prohibit, the incurrence of additional indebtedness, secured or unsecured, by
the Company and its subsidiaries. Subject to limitations under the Indenture,
the Company expects that it and its subsidiaries will incur substantial
additional indebtedness in the future in connection with the acquisition of
additional aircraft and for other purposes. As a result, a substantial portion
of the Company's cash flow is, and will continue to be, devoted to debt service.
The debt service requirements of any additional indebtedness could make it more
difficult for the Company to make principal and interest payments on the
Notes.
The entire principal amount of the Notes becomes due on April 15, 2001, at
which time the entire principal amount of the Company's Senior Notes due 2001
(initial principal amount of $150.0 million) will also become due. The Company
does not expect to generate sufficient cash flow from operations to repay all
$230.0 million of such indebtedness and, accordingly, in order to repay this
indebtedness, the Company will likely need to seek refinancing through
additional equity or debt or a combination thereof. There can be no assurance
that sufficient equity or debt financing will be available, or, if available,
that it will be on terms acceptable to the Company. If no such financing were
available, the Company could be forced to default on its debt obligations and,
as an ultimate remedy, seek protection under the Federal bankruptcy laws.
The Company's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness (including the Notes) depends on
its future performance and financial results, which, to a certain extent, are
subject to general economic, financial, competitive, legislative, regulatory and
other factors beyond its control. There can be no assurance that the Company's
business will generate sufficient cash flow from operations or that future
borrowings will be available in an amount sufficient to enable the Company to
service its indebtedness, including the Notes, or make necessary capital
expenditures. The degree to which the
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<PAGE>
Company will be leveraged following the Offering could have important
consequences to the holders of the Notes, including, but not limited to, the
following: (i) a substantial portion of the Company's cash flow from operations
will be required to be dedicated to debt service and will not be available to
the Company for its operations; (ii) the Company's ability to obtain additional
financing in the future for aircraft purchases, capital expenditures, working
capital or general corporate purposes could be limited, and (iii) the Company's
increased vulnerability to adverse general economic and industry conditions.
Limited Operating History
The Company began flight operations on October 26, 1993, and was profitable
for the two years prior to the May 11, 1996 accident. The Company's operations
since September 30, 1996 have been constrained by a phased return to service of
its aircraft fleet as the return to service of each aircraft is subject to FAA
approval. There can be no assurance that the Company will be able to regain and
maintain its profitability based on its limited period of operations. The
Company's success in the future will depend on the Company's ability to continue
to stimulate air traffic and attract customers in its markets and to maintain a
low cost structure that will allow the Company to operate profitably its low
fare, no frills, limited frequency service.
Atlanta Market Dominance by Delta Air Lines, Inc.
The Atlanta market which is the Company's principal hub is currently
dominated by Delta Air Lines, Inc. ("Delta"), which presently offers more than
600 flights per day from Atlanta. During 1996, Delta enplaned approximately 78%
of all passengers at Atlanta's Hartsfield International Airport. There can be
no assurance that the Company will be able to be successful in light of Delta's
Atlanta market dominance.
Airways leases five gates at Orlando from Delta and also obtains ground
handling services from Delta. Airways has entered into a code-sharing agreement
with Comair under which Comair operates certain flights using AirTran's flight
reservation designator code and trademarks. Comair is a regional airline
affiliated with Delta that provides service to Delta under a separate code-
sharing agreement. There can be no assurance that Delta will not seek to alter
or terminate its relationship with Airways or to influence the code-sharing
relationship between Airways and Comair. Airways believe that gates are
available from the Orlando Airport Commission and that it could obtain ground
handling services from other providers. See "Risk Factors -- Reliance on
Others" below.
Litigation
As a result of the accident and suspension of operations, several class
action suits have been filed by stockholders against the Company and various
officers and directors alleging, among other things, misrepresentations under
applicable securities laws. The plaintiffs seek unspecified damages based upon
the decrease in market value of shares of the Company's stock. Although the
Company denies that it has violated any of its obligations under the federal
securities laws, there can be no assurance that the Company will not sustain
material liability under such or related lawsuits. See "Business of ValuJet -
Litigation."
Numerous lawsuits have also been filed against the Company seeking damages
attributable to the deaths of those on Flight 592, and additional lawsuits are
expected. The Company's insurance carrier has assumed defense of these lawsuits
under a reservation of rights. See "Business of ValuJet - Litigation." The
Company maintains $750.0 million of liability insurance per occurrence with a
major group of independent insurers that provides facilities for all forms of
aviation insurance for many major airlines. Although the Company believes,
based on the information currently available to it, that such coverage will be
sufficient to cover claims associated with this accident and that the insurers
have sufficient financial strength to pay claims, there can be no assurance that
the total amount of judgments and settlements will not exceed the amount of
insurance available therefor or that all damages awarded will be covered by
insurance.
Several governmental inquiries and investigations have been launched in
connection with the loss of Flight 592, including investigations by the DOT, the
NTSB, the U.S. Attorney's Office in Atlanta, Georgia and Miami, Florida and
certain state agencies in Florida. Although the Company does not believe, based
on information currently available to it, that such investigations and inquiries
will result in any finding of criminal wrongdoing on its part, the
investigations have not yet been concluded and the possibility of such a finding
cannot be ruled out. The Company may also be named as a partially responsible
party and/or be assessed civil penalties in connection with the accident and/or
the results of ensuing investigations. Any such findings or
-20-
<PAGE>
penalties could be material. In addition, it is possible that the Company could
be indirectly affected by negative publicity related to charges of wrongdoing,
if any, against others acting on behalf of the Company at the time of the
accident.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit
against the Company in State Court in Tennessee for breach of contract and a
declaratory judgment for an anticipatory breach. The Nashville Airport
Authority seeks damages of approximately $2.6 million. The dispute involves
whether the Company was entitled to exercise a termination right contained in
its lease Agreement.
In May 1997, the State of Florida filed suit against the Company and its
insurers in the United States District Court for the Southern District of
Florida seeking recovery of costs incurred relating to the accident involving
Flight 592. the Company's insurance carrier has assumed defense of this suit on
the Company's behalf. The Company does not believe that it is obligated for
such amounts and has filed a motion to dismiss this lawsuit. However, the suit
is in its preliminary stages and there can be no assurance that the Company will
not sustain material liability under such suit.
Aging Aircraft; Maintenance and Reliability
ValuJet Airlines' entire fleet consists of DC-9 aircraft manufactured
between 1967 and 1976 and having an average number of take-off and landing
cycles per aircraft of approximately 57,300, which is higher than the industry
average. Airways' entire fleet consists of Boeing 737-200 aircraft manufactured
between 1968 and 1985. Because many aircraft components are required to be
replaced after specified numbers of flight hours or take-off and landing cycles
and because new aviation technology may be required to be retrofitted, in
general, the cost to maintain aging aircraft will exceed the cost to maintain
newer aircraft. The Company believes that its cost to maintain its aircraft in
the long-term will be consistent with industry experience for this aircraft type
and age used by comparable airlines. However, since the resumption of the
Company's service in September 1996, the Company has incurred higher than usual
maintenance expenses as a result of expenses related to reactivating its
aircraft. Amendments to FAA regulations are under consideration which would
require certain heavy maintenance checks and other additional maintenance
requirements for aircraft operating beyond certain operational limits. It is
likely that these maintenance requirements will apply to the aircraft operated
by the Company, although it is uncertain whether the proposed amendments will
require any changes to the heavy maintenance procedures already utilized by the
Company. In addition, the Company will be required to comply with any other
future regulations or Airworthiness Directives issued with respect to aging
aircraft. There can be no assurance that the Company's costs of maintenance
(including costs to comply with aging aircraft requirements) will not materially
increase in the future.
The Company believes that its aircraft are mechanically reliable based on
the percentage of scheduled flights completed. However, there can be no
assurance that the Company's aircraft will continue to be sufficiently reliable
over longer periods of time. Furthermore, given the age of the Company's fleet,
any public perception that the Company's aircraft are less than completely
reliable could have a material adverse effect on the Company's business.
Various incidents involving the Company's aircraft prior to May 1996, the
accident involving Flight 592 and the suspension of operations have further
contributed to a negative public perception as to the safety of the Company's
aircraft and operations. See"Risk Factors -- Risks Related to the Company --
Accident/Suspension of Operations."
Various FAA findings and safety violations by the Company discovered by the
FAA in connection with its special scrutiny of the Company led to the consent
order under which the Company's operations were suspended. Although the Company
has satisfied the FAA sufficiently to justify a return of its operating
certificate, the Company continues to be subject to a high level of FAA scrutiny
and there can be no assurance that the Company will be able to avoid violations
in the future. See "Business of ValuJet -- Maintenance and Repairs" and
"Business of ValuJet -- Government Regulation."
Risks Associated With Merger
As a result of the Merger, the Company will face the following additional
risks: (i) the usual risks associated with the combination of two businesses;
(ii) risks associated with the name change and possible loss of market
recognition; (iii) Airways has a limited operating history and has incurred
losses during two of its three fiscal years of operations; (iv) although the
Company is seeking to achieve various economies of scale and cost savings
synergies, there can be no assurance that the
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<PAGE>
Company will be able to realize such benefits; (v) the FAA and DOT may elect to
monitor AirTran more closely and may seek to impose limitations on AirTran's
operations that are not currently in effect; and (vi) AirTran operates Boeing
737-200 aircraft, thereby adding a second aircraft type to the fleets to be
operated by the Company's operating subsidiaries. In addition, the Company
expects to incur material expenses (estimated to be up to $10 million during the
second half of 1997) in connection with the marketing program being implemented
by the Company in connection with the Merger. See "Business of ValuJet --
Strategy."
Stage 3 Compliance
To satisfy FAA rules regarding allowable noise levels, each new entrant
airline must have at least 50% of its fleet in compliance with Stage 3 noise
level requirements during 1997. The balance of each airline's fleet must be
brought into compliance with Stage 3 noise requirements in phases, with 75%
compliance required by December 31, 1998, and full compliance by December 31,
1999. As of August 31, 1997, only 18 of the Company's 42 aircraft meet the Stage
3 requirements. As of August 31, 1997, the Company complies with Stage 3
requirements by virtue of 16 of the 31 operating aircraft complying with these
requirements. Six of Airways' 11 aircraft currently satisfy the Stage 3
requirements. However, compliance with Stage 3 requirements could be affected by
the planned disposition of certain of the Company's aircraft. See "Business of
ValuJet - Aircraft." The Company intends to meet its Stage 3 noise requirement
obligations by installing hush kits on Stage 2 aircraft and acquiring Stage 3
aircraft. For a discussion of the cost of Stage 3 hush kits, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." Although the Company does not believe that
there will be a problem in installing the hush kits or acquiring Stage 3
aircraft on a timely basis, there can be no assurance that the Company will be
able to do so or that failure to do so will not have a material adverse effect
on the Company's business.
Low Fuel Efficiency of the Company's Fleet
The Company's DC-9-32 aircraft and Airways' Boeing 737-200 aircraft are
relatively fuel inefficient compared to newer aircraft and industry averages. A
significant increase in the price of jet fuel would therefore result in a
disproportionately higher increase in the Company's average total costs than
that of its competitors using more fuel efficient aircraft. Fuel costs also are
affected by increases in taxes imposed on sale of fuel. For example, in August
1993, the federal taxes on domestic fuel were increased by 4.3 cents per gallon.
The Company estimates that a 1c increase in fuel cost would increase the
Company's fuel expenses by approximately $79,000 per month based on the
Company's current fuel consumption rate.
The cost and availability of fuel are subject to many economic and political
factors and events occurring throughout the world. The Company has no Agreement
with any fuel suppliers assuring the availability and price stability of fuel.
Consequently, the future cost and availability of fuel to the Company cannot be
predicted, and substantial price or tax increases or the unavailability of
adequate supplies could have a material adverse effect on the Company's
business.
Aircraft Acquisition Expenditures
The Company has contracted with the Boeing Company ("Boeing") to purchase 50
MD-95 aircraft to be delivered from 1999 to 2002. The total cost of the MD-95
aircraft to be provided by Boeing will exceed $1.0 billion. While Boeing has
committed to provide assistance with respect to the financing of the aircraft to
be acquired, the Company will be required to obtain the financing from other
sources. While the Company believes that financing for these aircraft will be
available, there can be no assurances that such additional financing will remain
available when needed or be available on attractive terms.
For a summary of some of the Company's capital requirements under its
aircraft acquisition program, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
As a result of the accident involving Flight 592, the resulting heightened
FAA scrutiny, customer acceptance concerns and the requirement that the FAA
approve additional aircraft, the Company's continuing
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<PAGE>
expansion has been and may continue to be delayed. Accordingly, the Company may
not be able to utilize all the aircraft it has committed to purchase. Although
the Company has obtained attractive purchase terms from Boeing, if the Company
cannot use such aircraft, it may be required to sell or lease such aircraft on
terms which will depend upon market conditions at the time. There can be no
assurance that the Company will not suffer a financial loss from any such sales
or leases. See "Risk Factors -- Risks Related to the Company -Accident/
Suspension of Operations."
Employee Relations
The Company believes it operates with lower labor costs than many
established airlines, principally due to greater flexibility in the utilization
of personnel. There can be no assurance that the Company will be able to
maintain these advantages for any extended period of time. Many airline industry
employees are represented by labor unions. The Company's employees are non-union
other than the Company's flight attendants and mechanics. The Association of
Flight Attendants ("AFA") and one former flight attendent have filed a lawsuit
against the Company. See "Business of ValuJet -- Litigation." There can be no
assurance that there will not be further unionization or that the existing level
of unionization of the Company's employees will not materially increase the
Company's costs.
Airways has 33 mechanics and ten maintenance stores personnel represented by
the International Association of Machinists (IAM). Contract negotiations are
underway with the mechanics. The remainder of the employees at Airways are non-
union. Union organizing activity directed at various employee groups is
ongoing; therefore, there can be no assurance that the current labor environment
will continue.
Risks of Expansion
The Company intends to expand its operations into new markets, subject to
FAA and DOT approval. Although the Company's low fare service had previously
been accepted in the Company's markets, there can be no assurance that its
service will continue to be accepted in its markets, particularly in light of
the accident involving Flight 592 and greater competition in the Company's
markets. Furthermore, the Company's continued expansion will require
substantial additional capital expenditures, thereby increasing the risks
associated with expansion.
Nontraditional Distribution System and Reliance on Automation
The Company employs a computerized airline reservation system designed to
meet its specifications. Under this system, the Company does not issue
traditional airline tickets; instead at the time of sale/reservation, the
Company provides its customers with a confirmation number similar to the systems
used by hotels and car rental agencies. Furthermore, the Company does not
participate in the Airline Reporting Corporation ("ARC"), the airline industry
collection agent for travel agency sales. The Company bills and collects
directly from travel agents based on sales information generated through its
automation system at the time of the travel agent reservation. The Company
relies on its computerized information and reservation system as an important
factor in its business strategy. In the event of unanticipated problems, the
Company might experience system breakdowns, delays and additional, unbudgeted
expense to remedy the defect or to replace the defective system with an
alternative system. Any material failure of such system could materially
adversely affect the Company's business.
Airport Access
The Company's markets are located primarily in the eastern United States.
Access to certain "slot" controlled airports (such as Washington's National, New
York's Kennedy and LaGuardia and Chicago's O'Hare) is limited and there can be
no assurance that the Company would be able to obtain or maintain access to such
airports at an acceptable cost. Any condition which would deny or limit the
Company's access to the airports it serves or seeks to serve may have a material
adverse effect on the Company's business.
-23-
<PAGE>
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 aircraft maintenance, ground facilities, baggage handling
and personnel training. The Company will likely need to enter into similar
agreements in any new markets it decides to serve. All of these agreements are
subject to termination after notice. The Company's reliance upon others to
provide essential services on behalf of the Company may result in relative
inability to control the efficiency, timeliness and quality of contract
services. For example, the Company's reliance on SabreTech, Inc. for certain
maintenance work appears to have contributed to the accident involving Flight
592. Management expects that the Company will be required to rely on such
contractors for some time in the future.
AirTran contracts with Delta to provide ground handling service and five
gates at Orlando International Airport. In addition, AirTran contracts for
ground handling services with Delta at the Cincinnati Airport. The contracts
under which those services are performed are cancelable by either party provided
the requisite notice provisions are met. Although no notice has been given to
date that Delta intends to cancel these contracts, there can be no assurance
that Delta will not serve notice at a later date of its intention to cancel,
forcing AirTran to find alternate gates in Orlando and make alternate
arrangements for ground handling in Orlando and Cincinnati.
AirTran entered into a code share agreement with Comair on June 19, 1997
wherein AirTran sells through flights from Airtran cities (other than Cincinnati
and Orlando) to nine Comair destinations in Florida and Nassau under the
tradename "AirTran Florida Connection." Comair is owned 25% by Delta and has
its own code share agreement with Delta under which through passengers from
Delta cities fly on Comair to its destinations, tradenamed "The Delta
Connection." The code share agreement that AirTran has with Comair can be
canceled by either party, provided the requisite notice provisions are met.
Although no notice has been given to date that Comair intends to cancel this
contract, there can be no assurance that they will not serve notice at a later
date of their intention to cancel, forcing AirTran to stop selling those routes
and potentially reducing AirTran's traffic and revenue.
Risk of Loss
As evidenced by the crash of Flight 592 on May 11, 1996, the Company is
exposed to potential catastrophic 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 Department of Transportation ("DOT") to
carry liability insurance on each of its aircraft. The Company currently
maintains liability insurance in the amount of $750.0 million per occurrence.
Although the Company currently believes its insurance coverage is adequate,
there can be no assurance that the amount of such coverage will not be changed
or that the Company will not be forced to bear substantial losses from
accidents. The Company's cost of insurance substantially increased after the
accident. Substantial claims resulting from an accident in excess of related
insurance coverage could have a material adverse effect on the Company.
Moreover, any aircraft accident, even if fully insured, could cause and has
caused a public perception that some of the Company's aircraft are less safe or
reliable than other aircraft, which could have and has had a material adverse
effect on the Company's business.
Dependence on Executive Officers
The Company is dependent on the services of D. Joseph Corr (President and
Chief Executive Officer) and its other executive officers. The loss of services
of these officers could materially and adversely affect the business of the
Company and its future prospects. The Company does not, and does not presently
intend to, maintain key man life insurance on any of the Company's
officers.
-24-
<PAGE>
RISKS RELATED TO THE INDUSTRY AND THE COMPANY
Competition and Competitive Reaction
The airline industry is highly competitive, primarily due to the effects of
the Airline Deregulation Act of 1978 (the "Deregulation Act"), which has
substantially eliminated government authority to regulate domestic routes and
fares, and has increased the ability of airlines to compete with respect to
destination, flight frequencies and fares. The Company competes with airlines
which presently serve the Company's current and proposed routes and which are
larger and have greater name recognition and greater financial resources than
the Company. The Company may also face competition from airlines which may
begin serving any of the markets the Company serves or may subsequently serve,
from an expansion of existing low fare service offered by current competitors,
from new low cost airlines that may be formed to compete in the low fare market
and from ground transportation alternatives.
Other airlines may meet or price their fares below the Company's fares or
introduce new non-stop service between cities served by the Company on a one-
stop basis, and prevent the Company from attaining a share of the passenger
traffic necessary to maintain profitable operations. The Company's ability to
meet price competition depends on its ability to operate at costs equal to or
lower than its competitors or potential competitors. In addition, competitors
with greater financial resources than the Company may price their fares below
the Company's fares or increase their service which could have a material
adverse effect on the Company's business.
Recent legislation imposes taxes on domestic airline transportation equal to
a per segment flown charge (initially $1.00 to be increased to $3.00 by 2003)
plus a percentage of the ticket price (initially 9% to be decreased to 7.5% in
1999). These taxes will likely have a greater effect on leisure travelers.
Since the Company relies to a large extent on leisure travelers, such a tax
increase may affect the Company to a greater extent than the Company's
competitors who rely more heavily on business travelers.
Delta Express, a low cost/low fare division of Delta, entered service in
several of Airways' markets in 1996. As a result of the intense competitive
environment generated by Delta Express and by Southwest Airlines' entry into
certain markets, Airways withdrew service from Nashville, Hartford and
Providence. Airways presently is engaged in competition with Delta Express on
its route to Islip, New York. Furthermore, Delta is the largest carrier in
Orlando, accounting for 31% of enplanements (based on February 1997 data). There
can be no assurance that Airways will not face greater competition from Delta,
Delta Express and Southwest Airlines in the future.
Cyclical Nature of Airline Industry
The airline industry is highly sensitive to general economic conditions.
Because a substantial portion of airline travel (both business and personal) is
leisure travel, the industry tends to experience severe adverse financial
results during general economic downturns. Any prolonged general reduction in
airline passenger traffic may adversely affect the Company, particularly since
the Company is substantially dependent on leisure travel and on the stimulation
of additional discretionary air travel.
Federal Regulation
The Company has the necessary authority to conduct flight operations,
including a Certificate of Public Convenience and Necessity from the DOT and an
operating certificate from the FAA; however, the continuation of such authority
is subject to continued compliance with applicable statutes, rules and
regulations pertaining to the airline industry, including any new rules and
regulations that may be adopted in the future. The FAA has the authority to
bring proceedings to enforce the safety laws and regulations under the Federal
Aviation Act of 1958, as amended (the "Aviation Act"), including the assessment
of civil penalties, suspension or revocation of the Company's authority to
operate and the pursuit of criminal sanctions. The DOT has similar authority
with regard to enforcement of the economic laws and regulations under the
Aviation Act. No assurance can be given with respect to the cost of compliance
with all present and future rules and regulations and the effect on the business
of the Company, particularly its expansion plans and aircraft acquisition
program.
-25-
<PAGE>
Extraordinary regulatory review of the Company's operations by the FAA
followed the accident involving Flight 592 on May 11, 1996, and various FAA
findings and violations of FAA safety rules ultimately resulted in the consent
order under which the Company's operations were suspended on June 17, 1996. In
the consent order, the FAA alleged that the Company violated various federal
regulations relating to aircraft maintenance, maintenance manuals, training,
record keeping and reporting and the Company agreed to present a plan to the FAA
specifying the methods by which it would demonstrate to the FAA its
qualifications to hold an air carrier operating certificate. The Company
implemented several operating and administrative changes to address the FAA's
concerns and to subsequently satisfied the FAA with respect to the safety
violations referenced in the consent order. The FAA returned the Company's
operating certificate to it on August 29, 1996. The Company is likely to be
subject to increased and continuing regulatory scrutiny which could affect the
Company's operations, acquisition program and expansion plans indefinitely.
Unauthorized Parts
The Company has heavy aircraft maintenance as well as engine and component
overhaul performed by FAA approved contract maintenance providers. Each of the
contractors as well as the Company has procedures in place to ensure the use of
authorized materials during the performance of maintenance. A risk exists that
through fraud or negligence unauthorized parts could be used on any air
carrier's aircraft including those of the Company.
LIMITATIONS REGARDING AIRCRAFT COLLATERAL
The Company's obligations under the Notes and the Collateral Agreement are
secured by, among other things, the Aircraft.
Aging Collateral
The Notes will be secured by 24 DC-9 series 30 aircraft (the "Aircraft")
manufactured between 1967 and 1976 and having an average number of take-off and
landing cycles of aircraft of approximately 57,300. As of the current time, the
Aircraft have been certificated by the manufacturer for flight up to
approximately 102,000 cycles. One of these Aircraft is currently being stored
and is not being currently operated by this Company. The Company is currently
offering to lease out or sell such Aircraft. Of these 24 Aircraft, 17 comply
with the Stage 3 noise requirements at this time. The age of and number of
cycles operated by the Aircraft materially affect their value and will affect
the amount realizable by the holders of the Notes in the event the Aircraft are
foreclosed upon.
Appraisals of Aircraft; Realizable Values
Appraisals in respect of the Aircraft have been prepared by BK Associates
Inc. ("BK Associates") and Aviation Solutions, Inc. ("AvSolutions"). According
to the appraisals of these firms, the Aircraft had an aggregate appraised value
of $119.6 million and $112.5 million, respectively, in July 1997 and estimated
future value in 2001 of $93.7 million and $87.7 million, respectively. The
appraisals were prepared without a physical inspection of the Aircraft. See
"Description of the Aircraft and the Appraisals." However, an appraisal is
only an estimate of value and should not be relied upon as a measure of
realizable value; the proceeds realized upon a sale of any Aircraft may be less
than the appraised value thereof. The value of the Aircraft in the event of the
exercise of remedies under the Collateral Agreement will depend on market and
economic conditions, the availability of buyers, the condition of the Aircraft
and other similar factors. Accordingly, there can be no assurance that the
proceeds realized upon any such exercise pursuant to the Collateral Agreement
would be sufficient to satisfy in full payments due on the Notes. If such
proceeds were not sufficient to pay or repay all amounts due under the Notes,
the then holders of the Notes (to the extent not repaid from the proceeds of the
sale of the Aircraft) would bear their allocable percentage of such
insufficiency and any resultant loss.
Effect of Bankruptcy on Exercise of Remedies
The right of the Indenture Trustee to repossess and dispose of any of the
Aircraft following an Event of Default is likely to be significantly impaired by
applicable bankruptcy law if a bankruptcy case relating to the Company were to
have commenced prior to the Indenture Trustee's having repossessed and disposed
of such Collateral Aircraft. Under Title 11 of the United States Code (the
"Bankruptcy Code"), a secured creditor, such as the Indenture Trustee, is
prohibited from repossessing its collateral from a debtor in reorganization, or
from disposing of collateral repossessed from such debtor, without bankruptcy
court approval. Moreover, the Bankruptcy
-26-
<PAGE>
Code permits the debtor in reorganization to continue to retain and to use the
collateral even though the debtor is in default, provided that the secured
creditor is given "adequate protection" for its interest in the collateral. The
protections afforded by Section 1110 of the Bankruptcy Code will not generally
be available to the Indenture Trustee. Provisions of bankruptcy laws in foreign
jurisdictions in which the Aircraft are operated or registered may also limit
the Indenture Trustee's ability to repossess the Aircraft.
Repossession
The Indenture does not contain any general geographic restriction on the
Company's (or any lessee's) ability to operate the Aircraft. Although the
Company has no current intention to do so, the Company is also permitted, upon
compliance with the Indenture, to register the Aircraft in the foreign
jurisdictions set forth in the Indenture (the "Permitted Countries") and to
lease the Aircraft to certain Permitted Air Carriers consisting of those
operating in the United States and the Permitted Countries. While the Indenture
Trustee's rights and remedies in the event of a default under the Indenture
include the right to repossess the Aircraft, it may be difficult, expensive and
time-consuming for the Indenture Trustee to obtain possession of the Aircraft,
particularly when an Aircraft located outside the United States has been
registered in a foreign jurisdiction or is leased to a foreign operator. Any
such exercise of the right to repossess the Aircraft may be subject to the
limitations and requirements of applicable law, including the need to obtain
consents or approvals for deregistration or reexport of the Aircraft, which may
be subject to delays and to political risk. When a defaulting lessee or other
permitted transferee is the subject of a bankruptcy, insolvency or similar
event, such as protective administration, additional limitations may apply.
Despite the limitations contained in the Indenture on Permitted Air Carriers
and reregistration, certain jurisdictions in which aircraft may be operated or
registered may not accord recognition to, or recognize the priority of, the
Indenture or may have no specific laws providing for the creation, recognition
or registration of mortgages over aircraft such as the Indenture, or may accord
higher priority to certain other liens or other third party rights over the
Aircraft. Some or all of these factors could limit the benefits to the
Indenture Trustee of the security interest in the Aircraft.
Maintenance
The Company is responsible for the maintenance, service, repair and overhaul
of the Aircraft, but only to the extent described in the Indenture. The failure
of the Company (or any lessee) to adequately maintain, service, repair or
overhaul the Aircraft may adversely affect the value of such Aircraft and, thus,
upon a liquidation of the Aircraft may affect the proceeds available to repay
the holders of the Notes. Under the Indenture, the applicable maintenance
standards will vary depending upon the jurisdiction in which an Aircraft is
registered and if an Aircraft is leased. Notwithstanding compliance by the
Company (or any lessee) with its obligations under the Indenture to adequately
maintain, service, repair or overhaul the Aircraft, the value of the Aircraft
may deteriorate. Such a deterioration in the value of the Aircraft would not,
in and of itself, constitute a breach by the Company of its obligations under
the Indenture. See "Description of the Exchange Notes -- Covenants Relating to
the Aircraft -- Registration and Maintenance."
Insurance
The Company is responsible for the maintenance of public liability, property
damage and all-risk aircraft hull insurance on the Aircraft to the extent
described in the Indenture. The failure of the Company to adequately insure the
Aircraft, or the retention of self-insurance amounts, will affect the proceeds
which could be obtained upon an Event of Loss and, thus, may affect the proceeds
available to repay the holders of the Notes.
With respect to any insurance required, the Company may maintain deductibles
or self-insurance amounts similar to those maintained by the Company with
respect to other aircraft owned or leased, and operated, by the Company, in each
case similar to such Aircraft; provided, however, that, in the case of required
all-risk aircraft hull insurance, such deductibles and self-insurance are
subject to certain maximum amounts. See "Description of the Exchange Notes --
Covenants Relating to the Aircraft -- Insurance."
-27-
<PAGE>
RISKS RELATED TO THE OFFERING
Fraudulent Conveyance
The Subsidiary Guarantees may be subject to review under federal or state
fraudulent transfer law. To the extent that a court were to find that (x) the
Subsidiary Guarantees were incurred by any Subsidiary Guarantor with intent to
hinder, delay or defraud any present or future creditor, or a Subsidiary
Guarantor contemplated insolvency with a design to prefer one or more creditors
to the exclusion in whole or in part of others, or (y) any Subsidiary Guarantor
did not receive fair consideration or reasonably equivalent value for issuing
its Subsidiary Guarantees and any Subsidiary guarantor (i) was insolvent, (ii)
was rendered insolvent by reason of the issuance of the Subsidiary Guarantees,
(iii) was engaged or about to engage in a business or transaction for which the
remaining assets of a Subsidiary Guarantor constituted unreasonably small
capital to carry on its business or (iv) intended to incur, or believed that it
would incur debts beyond its ability to pay such debts as they matured, a court
could avoid or subordinate the Subsidiary Guarantees in favor of a Subsidiary
Guarantor's creditors. If the Subsidiary Guarantees are subordinated, payments
of principal and interest on the Notes generally would be subject to the prior
payment in full of all indebtedness of the Subsidiary Guarantors. Among other
things, a legal challenge of the Subsidiary Guarantees on fraudulent conveyance
grounds may focus on the benefits, if any, realized by a Subsidiary Guarantor as
a result of the issuance by the Company of the New Notes. The extent (if any)
to which a particular Subsidiary Guarantor may be deemed to have received such
benefits may depend on the Company's use of the Offering proceeds, including the
extent (if any) to which such proceeds or benefits therefrom are contributed to
the Subsidiary Guarantor. The measure of insolvency for purposes of the
foregoing will vary depending on the law of the applicable jurisdiction.
Generally, however, an entity would be considered insolvent if the sum of its
debts (including contingent or unliquidated debts) is greater than all its
property at a fair valuation or if the present fair saleable value of its assets
is less than the amount that will be required to pay its probable liability
under its existing debts as such debts become absolute and matured. Based upon
financial and other information currently available to it, the Company presently
believes that the Subsidiary Guarantees are being incurred for proper purposes
and in good faith, and that the Subsidiary Guarantors (i) are solvent and will
continue to be solvent after issuing the Subsidiary Guarantees, (ii) will have
sufficient capital for carrying on their business after such issuance and (iii)
will be able to pay their debts as they mature. There can be no assurance,
however, that a court would necessarily agree with these conclusions, or
determine that any particular Subsidiary Guarantor received fair consideration
or reasonably equivalent value for issuing its Subsidiary Guarantee.
Absence of Public Market
There is no existing market for the Notes and there can be no assurance as
to the liquidity of any market that may develop for the Notes, the ability of
holders to sell the Notes, or the price at which holders would be able to sell
the Notes. Future trading prices of the Notes will depend on many factors,
including among other things, prevailing interest rates, the Company's operating
results and the market for similar securities. Historically, the market for
securities similar to the Notes has been subject to disruptions that have caused
substantial volatility in the prices of such securities. There can be no
assurance that any market for the Notes, if such market develops, will not be
subject to similar disruptions. The Initial Purchaser of the Outstanding Notes
has advised the Company that it currently intends to make a market in the Notes;
however, it is not obligated to do so and any market making may be discontinued
at any time without notice. The Outstanding Notes are eligible for trading in
the Private Offerings, Resale and Trading through Automated Linkages (PORTAL)
market. The Exchange Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the Exchange
Notes on any national securities exchange or to seek approval for quotation
through any automated quotation system. Accordingly, no assurance can be given
that an active public or other market will develop for the Exchange Notes or as
to the liquidity of the trading market for the Exchange Notes. If a trading
market does not develop, holders of the Exchange Notes may experience difficulty
in reselling the Exchange Notes or may be unable to sell them.
Consequences of Failure to Exchange; Possible Adverse Effect on Trading
Market for Outstanding Notes
Holders of Outstanding Notes who do not exchange their Outstanding Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Notes as set forth in the legend thereon as a
consequence of the issuance of the Outstanding Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the
Outstanding Notes may not be offered or sold unless registered under the
Securities Act and applicable state laws, or pursuant to an exemption therefrom.
Subject to the obligation by the Company to file a Shelf Registration Statement
covering resales of Outstanding Notes in certain circumstances, the Company does
not intend to register the
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<PAGE>
Outstanding Notes under the Securities Act and, after consummation of the
Exchange Offer, will not be obligated to do so. In addition, any holders of
Outstanding Notes who tender in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Additionally, as a result of the
Exchange Offer, it is expected that a substantial decrease in the aggregate
principal amount of Outstanding Notes outstanding will occur. As a result, it is
unlikely that a liquid trading market will exist for the Outstanding Notes at
any time. This lack of liquidity will make transactions more difficult and may
reduce the trading price of the Outstanding Notes. See "The Exchange Offer" and
"Description of the Exchange Notes - Registration Covenant; Exchange Offer."
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive, in exchange, Outstanding Notes in like principal
amount. The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Outstanding Notes, except as otherwise
described herein under "The Exchange Offer - Terms of the Exchange Offer." The
Outstanding Notes surrendered in exchange for the Exchange Notes will be retired
and canceled and cannot be reissued. Accordingly, issuance of the Exchange
Notes will not result in any increase in the outstanding debt of the Company.
-29-
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization and cash and
cash equivalents of the Company as of September 30, 1997, (i) on an historical
basis and (ii) as adjusted to give effect to the Merger. This table should be
read in conjunction with the financial statements and related notes appearing
elsewhere herein.
<TABLE>
<CAPTION>
September 30, 1997
------------------------------
As Adjusted
Actual for Merger (1)
------------ ---------------
(dollars in thousands)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $123,210 $138,428(2)
======== ========
SHORT-TERM DEBT:
Current maturities of long-term debt $ 9,125 $ 11,614
LONG-TERM DEBT:
Secured debt 3,833 10,724
10 1/2%senior secured notes due 2001 80,000 80,000
10 1/4% senior notes due 2001 150,000 150,000
-------- --------
233,833 240,724
-------- --------
Total debt 242,958(1) 252,338(1)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value;
1,000,000,000 shares authorized;
55,005,740 shares issued and
outstanding and 64,073,677
issued and outstanding as
adjusted .............................. 55 64
Additional paid-in capital.............. 77,601 143,867
Retained earnings....................... 3,763 3,763
-------- --------
Total stockholders' equity............. 81,419 147,694
-------- --------
Total capitalization.............. $324,377 $400,032
======== ========
</TABLE>
(1) The 10 1/4% senior notes dues 2001 ($150.0 million outstanding principal
balance) are the primary obligation of the Company and are guaranteed by
ValuJet Airlines, the Company's other subsidiaries and any future restricted
subsidiaries. All other debt (other than debt to be assumed in connection
with the Merger) is the primary obligation of ValuJet Airlines.
(2) Cash and cash equivalents of Airways includes restricted cash of $10.0
million.
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by the Company on August 13, 1997 to the
Initial Purchaser, who sold the Outstanding Notes to certain institutional
investors in reliance on Rule 144A and Regulation D promulgated by the
Commission under the Securities Act. In connection with the sale of the
Outstanding Notes, the Company and the Initial Purchaser entered into the
Registration Rights Agreement, pursuant to which the Company agreed (i) to file
a registration statement with respect to an offer to exchange the Outstanding
Notes for senior secured debt securities of the Company with terms substantially
identical to the Outstanding Notes (except that the Exchange Notes will not
contain terms with respect to transfer restrictions) within 60 days after the
date of original issuance of the Outstanding Notes and (ii) to use best efforts
to cause such registration statement to become effective under the Securities
Act within 150 days after such issue date. If applicable law or the positions
taken by the staff of the Commission that have been enunciated in the no-action
letters issued in Exxon Capital Holdings Corp. (available April 13, 1989) and
----------------------------
Morgan Stanley & Co. Inc. (available June 5, 1991), among others, do not permit
- -------------------------
the Company to cause the registration statement containing this Prospectus to
become effective or to effect the Exchange Offer, the Company will use its best
efforts to cause to become effective the Shelf Registration Statement with
respect to the resale of the Outstanding Notes and to keep the Shelf
Registration Statement effective until two years after the effective date
thereof. The interest rate on the Outstanding Notes is subject to increase
under certain circumstances if the Company is not in compliance with its
obligations under the Registration Rights Agreement. See "Description of the
Exchange Notes - Registration Covenant; Exchange Offer". Unless the context
requires otherwise, the term "holder" with respect to the Exchange Offer means
the registered holder of the Outstanding Notes or any other person who has
obtained a properly completed bond power from the registered holder.
Each holder of the Outstanding Notes who wishes to exchange such
Outstanding Notes for Exchange Notes in the Exchange Offer will be required to
make certain representations, including representations that (i) any Exchange
Notes to be received by it will be acquired in the ordinary course of its
business, (ii) at the time of the commencement of the Exchange Offer, it had no
arrangement with any person to participate in the distribution of the Exchange
Notes and (iii) it is not an "affiliate", as defined in Rule 405 of the
Securities Act, of the Company or, if it is an affiliate, it will comply with
the registration and prospectus delivery requirements of the Securities Act to
the extent applicable. See "Description of the Exchange Notes - Registration
Covenant; Exchange Offer". Holders who tender Outstanding Notes in the Exchange
Offer with the intention to participate in a distribution of the Exchange Notes
may not rely upon the Morgan Stanley or similar no-action letters.
--------------
RESALE OF EXCHANGE NOTES
Based on positions taken by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that, except as
described below, Exchange Notes issued pursuant to the Exchange Offer in
exchange for Outstanding Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than a holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who tenders in the Exchange
Offer with the intention or for the purpose of participating in a distribution
of the Exchange Notes cannot rely on such positions taken by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Unless an exemption from registration is otherwise available, any
such resale transaction should be covered by an effective registration statement
containing the selling security holders information required by Item 507 of
Regulation S-K under the Securities Act.
This Prospectus may be used for an offer to resell, resale or other
retransfer of Exchange Notes only as specifically set forth herein. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
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<PAGE>
Outstanding Notes, where such Outstanding Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution".
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Outstanding Notes properly tendered and not withdrawn prior to 5:00 p.m.,
New York time, on the Expiration Date. The Company will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
Outstanding Notes surrendered pursuant to the Exchange Offer. Outstanding Notes
may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Outstanding Notes, except that the Exchange Notes will be
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof. The Exchange Notes will evidence the same debt as the
Outstanding Notes. The Exchange Notes will be issued under and entitled to the
benefits of the Indenture, which also authorized the issuance of the Outstanding
Notes, such that both series will be treated as a single class of debt
securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Outstanding Notes being tendered for exchange. Holders of Outstanding
Notes do not have any appraisal or dissenters' rights in connection with the
Exchange Offer.
As of the date of this Prospectus, $80,000,000 aggregate principal amount
of the Outstanding Notes are outstanding. This Prospectus, together with the
Letter of Transmittal, is being sent to all registered holders of Outstanding
Notes. There will be no fixed record date for determining registered holders of
Outstanding Notes entitled to participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder.
Outstanding Notes which are not tendered for exchange in the Exchange Offer will
remain outstanding and continue to accrue interest and will be entitled to the
rights and benefits such holders have under the Indenture and the Registration
Rights Agreement.
The Company shall be deemed to have accepted for exchange properly tendered
Notes when, as and if the Company shall have given oral or written notice
thereof to the Exchange Agent and complied with the applicable provisions of the
Registration Rights Agreement. The Exchange Agent will act as agent for the
tendering holders for the purposes of receiving the Exchange Notes from the
Company. The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Outstanding Notes not
theretofore accepted for exchange, upon the occurrence of any of the conditions
specified below under "- Certain Conditions to the Exchange Offer".
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than certain applicable taxes described below, in
connection with the Exchange Offer. See "The Exchange Offer - Fees and
Expenses".
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York time on
____________________, 1998, unless the Company, in its sole discretion, extends
the Exchange Offer, in which case the term "Expiration Date"
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<PAGE>
shall mean the latest date and time to which the Exchange Offer is extended. The
Exchange Offer will not in any event be extended beyond _____________, 1998.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of Outstanding Notes an announcement thereof, each prior to 9:00 a.m.,
New York time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Notes, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under "- Certain
Conditions to the Exchange Offer" shall not have been satisfied, by giving oral
or written notice of such delay, extension or termination to the Exchange Agent
or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay
in acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the registered holders of
Outstanding Notes. If the Exchange Offer is amended in a manner determined by
the Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered holders, and the Company will extend the Exchange Offer,
depending upon the significance of the amendment and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during such
period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate of 10 1/2% per annum,
payable semi-annually, on each April 15 and October 15, commencing April 15,
1998. Holders of Exchange Notes will receive interest on April 15, 1998 from
the date of initial issuance of the Exchange Notes, plus an amount equal to the
accrued and unpaid interest on the Outstanding Notes from October 15, 1997 to
the date of exchange thereof for Exchange Notes. Interest on the Outstanding
Notes accepted for exchange will cease to accrue upon issuance of the Exchange
Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any Exchange Notes for, any
Outstanding Notes, and may terminate the Exchange Offer as provided herein
before the acceptance of any Outstanding Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the Company's reasonable judgment, might materially impair the
ability of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission, which, in the Company's reasonable judgment,
might materially impair the ability of the Company to proceed with the
Exchange Offer; or
(c) any governmental approval has not been obtained, which approval
the Company shall reasonably deem necessary for the consummation of the
Exchange Offer as contemplated hereby.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Outstanding Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified above. The Company will give oral or written notice of
any extension, amendment, non-acceptance or termination to the holders of the
Outstanding Notes as promptly as practicable, such notice in the case of any
extension to be issued no later than 9:00 a.m., New York time, on the next
business day after the previously scheduled Expiration Date.
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<PAGE>
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable judgment. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right, and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Outstanding Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Outstanding Notes, if at such time any stop order shall be threatened or in
effect with respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a holder of Outstanding Notes may tender such Outstanding Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signature
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile to the Exchange
Agent prior to 5:00 p.m., New York time, on the Expiration Date. In addition,
either (i) Outstanding Notes must be received by the Exchange Agent along with
the Letter of Transmittal, or (ii) a timely confirmation of book-entry transfer
(a "Book-Entry Confirmation") of such Outstanding Notes, if such procedure is
available, into the Exchange Agent's account at the Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Letter of
Transmittal and other required documents must be received by the Exchange Agent
at the address set forth below under "The Exchange Offer - Exchange Agent" prior
to 5:00 p.m., New York time, on the Expiration Date.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an Agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Outstanding Notes are registered in the name of
a broker, dealer, commercial bank, trust Company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder of Outstanding Notes to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on such owner's own behalf,
such owner must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Outstanding Notes, either make appropriate arrangements
to register ownership of the Outstanding Notes in such owner's name or obtain a
properly completed bond power from the registered holder of Outstanding Notes.
The transfer of registered ownership may take considerable time and may not be
able to be completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case may be, must be guaranteed by an Eligible Institution (as
defined below) unless the Outstanding Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. If
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<PAGE>
signatures on a Letter of Transmittal or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guarantor must be a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust Company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Outstanding Notes listed therein, such Outstanding
Notes must be endorsed or accompanied by a properly completed bond power, signed
by such registered holder as such registered holder's name appears on such
Outstanding Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding Notes will be determined by the Company in its sole discretion,
which determination will be final and binding. The Company reserves the absolute
right to reject any and all Outstanding Notes not properly tendered or any
Outstanding Notes the Company's acceptance of which would, in the opinion of
counsel for the Company, be unlawful. The Company also reserves the right to
waive any defects, irregularities or conditions of tender as to particular
Outstanding Notes. The Company's interpretation of the terms and conditions of
the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Outstanding Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify holders of defects or irregularities with respect to tenders of
Outstanding Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Outstanding Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Outstanding Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In all cases, issuance of Exchange Notes for Outstanding Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of Outstanding Notes or a timely Book-Entry
Confirmation of such Outstanding Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Outstanding Notes
are not accepted for exchange for any reason set forth in the terms and
conditions of the Exchange Offer or if Outstanding Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Outstanding Notes will be returned without expense to the
tendering holder thereof (or, in the case of Outstanding Notes tendered by book-
entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described below, such
non-exchanged Notes will be credited to an account maintained with such Book-
Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Outstanding Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Outstanding Notes by causing
the Book-Entry Transfer Facility to transfer such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such
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<PAGE>
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Notes may be effected through book-entry transfer at the Book-Entry
Transfer Facility, the Letter of Transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under "The Exchange Offer -Exchange Agent" on or prior to the
Expiration Date or, if the guaranteed delivery procedures described below are to
be complied with, within the time period provided under such procedures.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available or (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal or any other required documents to
the Exchange Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Outstanding Notes and the principal amount of Outstanding Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three (3) New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof) together
with the Outstanding Notes or a Book-Entry Confirmation, as the case may
be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three (3) New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent." Any such notice of withdrawal must specify the name of the person
having tendered the Outstanding Notes to be withdrawn, identify the Outstanding
Notes to be withdrawn (including the principal amount of such Outstanding
Notes), and (where certificates for Outstanding Notes have been transmitted)
specify the name in which such Outstanding Notes were registered, if different
from that of the withdrawing holder. If certificates for Outstanding Notes have
been delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates, the withdrawing holder must also submit the serial
numbers of the particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Outstanding Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Outstanding Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Outstanding Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the Exchange Offer. Any
Outstanding Notes which have been
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<PAGE>
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Outstanding Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Outstanding Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Outstanding
Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be
retendered by following one of the procedures described under "- Procedures for
Tendering" above at any time on or prior to the Expiration Date.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent of the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
The Bank of New York
101 Barclay Street, 21W
New York, New York 10286
Attn: Corporate Trust Operations
By Facsimile:
(212) 815-5915
(For Eligible Institutions Only)
Confirm by Telephone: [Add]
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$75,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees, printing costs and
related fees and expenses.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates representing
Outstanding Notes for principal amounts not tendered or accepted for exchange
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of Notes tendered, or if tendered Notes are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Outstanding Notes, as set forth in the
legend thereon, as a consequence of the issuance of the Outstanding Notes
pursuant to the exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Outstanding Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register the
Outstanding Notes under the Securities Act.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data for the
period from July 10, 1992 (date of inception) to December 31, 1992 and for the
years ended December 31, 1993, 1994, 1995 and 1996, are derived from the audited
consolidated financial statements of the Company. The financial and operating
data for the nine month periods ended September 30, 1996 and 1997, are derived
from unaudited consolidated financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for
the nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the entire year. The selected financial data
of Airways for the years ended March 31, 1995, 1996 and 1997, which follows the
information regarding the Company, are derived from the audited consolidated
financial statements of Airways, and the selected financial and operating data
of Airways for the six month periods ended September 30, 1996 and 1997 are
derived from unaudited consolidated financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals which Airways considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Airways'
operating results for the six months ended September 30, 1997, are not
necessarily indicative of the results that may be expected for the entire year.
The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
VALUJET, INC.
<TABLE>
<CAPTION>
Period from
Inception
(July 10, 1992) Year ended Nine months ended
to December 31 September 30
------------------------------------------------------ --------------------------
December 31, 1992 (a) 1993 (a) 1994 1995 1996(b) 1996(b) 1997
----------------- -------------- ------------- --------- ------------ ------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Operating revenues......... 0 $ 5,811 $133,901 $367,757 $ 219,636 $191,523 $ 141,100
Operating expenses:
Flight operations......... 0 474 6,967 16,273 16,479 13,272 13,998
Aircraft fuel............. 0 977 21,775 55,813 46,691 39,183 33,373
Maintenance............... 0 732 14,862 47,330 49,500 38,167 40,906
Station operations........ 0 1,199 20,198 49,931 42,018 32,895 35,343
Passenger services........ 0 228 3,942 10,363 8,879 7,626 6,370
Marketing and advertising. 0 1,097 6,546 8,989 8,426 6,923 8,115
Sales and reservations.... 0 967 11,325 31,156 18,378 15,495 11,345
General and administrative $ 23 866 5,039 10,617 13,659 10,946 9,272
Employee bonus............ 0 0 5,146 14,382 1,245 1,245 0
Depreciation.............. 0 138 3,555 15,147 17,551 13,296 20,508
Arrangement fee for
aircraft transfers....... 0 0 0 0 (13,036) (13,036) 0
Gain on insurance recovery 0 0 0 (1,094) (2,815) (2,815) 0
Gain (loss) on sale of
assets................ 0 0 0 0 (3,934) (2,335) (275)
Rebranding expenses....... - - - - - - 325
Shutdown and other
nonrecurring
expenses............... 0 0 0 0 67,994 54,663 9,338
----- ------- -------- -------- --------- -------- ---------
Total operating expenses... 23 6,678 99,355 258,907 271,035 215,525 188,618
----- ------- -------- -------- --------- -------- ---------
Operating income (loss).... (23) (867) 34,546 108,850 (51,399) (24,002) (47,518)
Interest expense.......... 0 112 2,388 6,579 22,186 15,822 19,854
Interest income........... 0 (85) (1,423) (5,555) (7,653) (6,799) (4,913)
----- ------- -------- -------- --------- -------- ---------
Income (loss) before
income taxes.............. (23) (894) 33,581 107,826 (65,932) (33,025) (62,459)
Provision for income taxes 0 0 12,849 40,063 (24,463) (12,173) (20,114)
----- ------- -------- -------- --------- -------- ---------
Net income (loss).......... ($23) ($894) $ 20,732 $ 67,763 ($41,469) $ 20,852 ($42,345)
===== ======= ======== ======== ========= ======== =========
Ratio of earnings to fixed
charges (c)............... - (d) - (d) 9.5x 11.0x - (d) -(d) - (d)
----- ------- -------- -------- --------- -------- ---------
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents.. $ 495 $13,247 $ 85,078 $127,947 $ 150,013 $178,986 $ 123,210
Working capital............ 482 10,284 58,585 63,523 168,555 182,650 112,756
Property and equipment, net 0 13,458 71,880 196,954 162,572 171,273 195,198
Total assets............... 495 30,264 173,039 346,741 417,187 454,353 372,176
Total debt................. 0 10,397 46,965 109,038 244,706 273,867 242,958
Stockholders' equity....... 482 15,143 93,117 162,065 123,400 143,742 81,419
</TABLE>
See footnotes on page 41
-39-
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Year ended December 31 Ended September 30
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA (E):
Revenue passengers enplaned................ 2,040,892 5,177,629 3,003,883 2,523,728 2,206,242
Revenue passenger miles (RPM)(thousands)... 940,546 2,624,298 1,534,439 1,313,048 1,101,672
Available seat miles (ASM)(thousands)...... 1,470,614 3,812,696 2,689,127 2,320,043 2,066,495
Load factor................................ 64.0% 68.8% 57.1% 57.0% 53.3%
Break-even load factor excluding shutdown
and other nonrecurring expenses......... 44.6% 45.8% 57.0% 50.8% 75.1%
Average fare............................... $ 63.48 $ 68.10 $ 69.81 $ 72.73 $ 60.68
Passenger yield............................ 13.77cents 13.44cents 13.67cents 13.98cents 12.15cents
Total revenue per ASM...................... 9.05cents 9.62cents 8.12cents 8.32cents 6.83cents
Operating cost per ASM excluding shutdown
and other nonrecurring expenses......... 6.71cents 6.77cents 7.50cents 6.99cents 8.70cents
Completion factor.......................... 99.5% 99.0% 90.3% 95.2% 99.1%
Aircraft in service (end of period)........ 22 42 15 4 31
Cities served (end of period).............. 17 26 18 5 22
Average passenger trip length (miles)...... 461 507 511 520 499
Average stage length (miles)............... 444 497 501 511 466
</TABLE>
40
<PAGE>
AIRWAYS CORPORATION
<TABLE>
<CAPTION>
Six Months
Year ended March 31 Ended September 30
----------------------------------------- ---------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- -------- -----------
STATEMENTS OF OPERATIONS DATA: (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues................... $ 9,607 $ 68,361 $ 102,623 $ 51,998 $ 50,674
Operating expenses................... 16,028 66,867 114,745 59,846 55,749
-------- -------- ---------- -------- --------
Operating income (loss).............. (6,421) 1,494 (12,122) (7,848) (5,075)
Interest expense................. - 524 1,507 782 1,087
Interest income and other........ (59) (1,007) ( 984) (621) (375)
-------- -------- ---------- -------- --------
Income (loss) before income taxes.... (6,362) 1,977 (12,645) (8,009) (5,787)
Provision for income taxes....... (2,866) 790 (5,654) (3,604) (218)
-------- -------- ---------- -------- --------
Net income (loss).................... ($3,496) $ 1,187 ($6,991) ($4,405) ($5,569)
======== ======== ========== ======== ========
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............ $ 961 $ 16,437 $ 2,354 $ 11,399 $ 5,170
Working capital...................... 2,058 3,212 (7,144) (1,257) (22,617)
Property and equipment, net......... 2,211 29,458 37,698 30,425 38,866
Total assets......................... 13,544 69,654 73,948 62,326 75,770
Total debt........................... - 13,851 13,696 14,310 22,080
Stockholders' equity................. 7,690 24,363 17,641 20,111 12,150
OPERATING DATA:
Revenue passengers enplaned.......... 87,000 685,000 1,089,000 573,257 559,841
RPMs (thousands)..................... 80,783 605,130 932,305 497,099 480,029
ASMs (thousands)..................... 180,480 974,642 1,426,873 753,048 705,534
Load factor.......................... 44.8% 62.1% 65.3% 66.0% 68.0%
Passenger yield...................... 9.8cents 10.7cents 10.7cents 10.2cents 10.1cents
Aircraft in service (end of period).. 4 10 10 10 11
Average stage length (miles)......... 880 873 832 871 718
</TABLE>
_____________________________________
(a) The Company's flight operations commenced October 26, 1993. Prior to that
time, the Company was in the development stage.
(b) The Company's operations were suspended from June 18, 1996 until September
30, 1996 as a result of a consent order entered into between the Company
and the FAA.
(c) For purposes of calculating the ratio of earnings to fixed charges (i)
earnings consist of income (loss) before income taxes, plus fixed charges
and (ii) fixed charges consist of interest expense incurred, plus the
portion of rent expense under operating leases deemed by the Company to be
representative of the interest factor.
(d) For the periods ending December 31, 1992, December 31, 1993, December 31,
1996, September 30, 1996 and September 30, 1997, the Company's earnings
were insufficient to cover fixed charges by $23,000, $894,000, $65.9
million $33.0 million and $62.5 million, respectively.
(e) All operating data other than total revenue per ASM and total cost per ASM
refers to scheduled service. See Note (e) to the table under "Prospectus
Summary, Summary Financial and Operating Data" for the definition of the
terms included in Operating Data.
41
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
of the Company and Airways give effect to (i) the sale by the Company of $80.0
million of the Notes on August 13, 1997, and the application of the proceeds
received, and (ii) the sale by the Company of the Notes as described in (i)
above and the Merger as if such transactions had occurred as of January 1, 1996
and 1997 with respect to the statements of operations for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively,
and as of September 30, 1997 with respect to the balance sheet. The Company
received approximately $77.5 million of net proceeds from the Notes, after
deduction of the initial purchaser's discount and expenses of the debt offering.
The net proceeds, along with approximately $6.2 million of the Company's cash
were used to repay $68.5 million of secured debt of the Company and to pay the
fees and expenses (approximately $6.0 million) incurred by the Company in
connection with a consent solicitation to the holders of the Company's 10 1/4%
senior notes and will also be used to purchase approximately $9.2 million of
hush kits for up to four of the Company's Stage 2 DC-9 aircraft. The Merger is
reflected using the purchase method of accounting for business combinations.
The pro forma condensed combined financial information is provided for
comparative purposes only and does not purport to be indicative of the results
that would have been obtained if the events set forth above had been effected on
the dates indicated or of those results that may be obtained in the future. The
pro forma condensed combined financial information with respect to the Merger is
based on preliminary estimates of values and transaction costs which may be
incurred in connection with the Merger. The actual recording of the Merger will
be based on final appraisals, values and transaction costs. Accordingly, the
actual recording of the transaction can be expected to differ from these pro
forma condensed combined financial statements. However, ValuJet's management
believes the asset and liability valuations and allocations utilized for the
Merger will not be materially different from the pro forma information presented
herein.
For purposes of preparing the unaudited pro forma condensed combined
statements of operations for the nine months ended September 30, 1997 and the
year ended December 31, 1996, Airways' operating results for the nine months
ended September 30, 1997 and the year ended March 31, 1997, were combined with
ValuJet's operating results for the nine months ended September 30, 1997 and the
year ending December 31, 1996, respectively. Accordingly, Airways' operating
results for the three months ended March 31, 1997 are included in the nine
months ended September 30, 1997 and in the year ended December 31, 1996 pro
forma results. Airways' revenues and net income for that three month period
were $29,777,000 and $277,000, respectively.
BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
ValuJet Airways Adjustments Combined
-------- ------- --------------- ---------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.. $123,210 $ 5,170 $128,380
Restricted cash............ 0 10,048 10,048
Accounts receivable, net... 7,775 4,510 $ (1,416)(a) 10,869
Notes receivable........... 12,700 (12,700)(a) 0
Inventory.................. 7,812 923 8,735
Prepaid items.............. 688 3,598 4,286
Income tax receivable...... 12,684 0 12,684
Deferred tax asset......... 0 4,449 (3,375)(d) 0
(1,074)(b)
Other current assets....... 1,764 0 1,764
-------- ------- -------- --------
Total current assets.......... 166,633 28,698 (18,565) 176,766
Property and equipment, net... 195,198 40,711 235,909
Debt issuance costs........... 10,345 0 10,345
Goodwill, net................. 0 1,677 (1,677)(c) 61,647
61,647 (f)
Deferred tax asset............ 0 4,166 (4,166)(d) 0
Other assets, net............. 0 518 (518)(b) 0
-------- ------- -------- --------
Total assets.................. $372,176 $75,770 $ 36,721 $484,667
======== ======= ======== ========
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma
ValuJet Airways Adjustments Combined
-------- --------- --------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses....................... $ 35,354 $ 19,900 $ 3,250 (e) $ 57,088
(1,416)(a)
Air traffic liability............... 8,913 15,942 24,855
Deferred tax liability.............. 485 0 485
Short-term notes payable............ 0 12,700 (12,700)(a) 0
Current portion of long-term debt... 9,125 2,489 11,614
Current portion of maintenance
reserves....................... 0 284 (284)(b) 0
-------- -------- -------- --------
Total current liabilities............. 53,877 51,315 (11,150) 94,042
Long-term debt less current
maturities...................... 233,833 6,891 240,724
Maintenance reserves.................. 0 2,620 (2,620)(b) 0
Deferred taxes........................ 3,047 2,794 (2,602)(d) 2,207
(192)(b)
(840)(e)
Stockholders' equity:
Preferred stock.................... 0 0 0
Common stock....................... 55 91 (91)(f) 64
9 (f)
Additional paid-in capital......... 77,601 26,696 (26,696)(f) 143,867
63,466 (f)
2,800 (f)
Retained earnings (deficit)........ 3,763 (14,637) 14,637 (f) 3,763
-------- -------- -------- --------
Total stockholders' equity............ 81,419 12,150 54,125 147,694
-------- -------- -------- --------
Total liabilities and
stockholders' equity............. $372,176 $ 75,770 $ 36,721 $484,667
======== ======== ======== ========
</TABLE>
STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
----------------------------------------------------------------------------------------------------
Pro Forma ValuJet Pro Forma Pro Forma
ValuJet Adjustments As Adjusted Airways Adjustments Combined
------------------------ --------------- ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $141,100 $141,100 $ 80,451 $ 221,551
Operating expenses......... 188,618 188,618 84,803 $ (333)(l) 274,522
(107)(m)
1,541 (n)
--------- ----------- --------- -------- ----------- ---------
Operating income (loss).... (47,518) (47,518) (4,352) (1,101) (52,971)
Interest expense......... 19,854 $ (3,699)(g) 22,735 1,457 24,192
5,250 (h)
1,330 (i)
Interest income.......... (4,913) (4,913) (557) (5,470)
-------- ------------ -------- -------- ---------- ----------
Income (loss) before
income taxes.............. (62,459) (2,881) (65,340) (5,252) (1,101) (71,693)
Income tax expense
(benefit)................. (20,114) (922)(j) (21,036) 41 117(o) (20,878)
-------- ------- -------- -------- ----------- ---------
Net income (loss).......... $(42,345) $(1,959) $(44,304) $ (5,293) $(1,218) $ (50,815)
======== ======= ======== ======== =========== =========
Net income (loss) per share $(0.77) $(0.77) $(0.58) $(0.79)
======== ======== ======== =========
Weighted average shares
outstanding............ 54,923 54,923 9,054 63,991
======== ======== ======== =========
Ratio of earnings to
fixed charges (p)...... -- (q)
==========
</TABLE>
-43-
<PAGE>
<TABLE>
<CAPTION>
Year Ended
---------------------------
December 31, Pro Forma ValuJet March 31,
1996 Adjust- As 1997 Pro Forma Pro Forma
ValuJet ments Adjusted Airways Adjustments Combined
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................... $219,636 $219,636 $102,623 $ 322,259
Operating expenses..................... 271,035 $ 750(k) 271,785 114,745 $(443)(l) 387,999
(143)(m)
2,055 (n)
-------- ------- -------- -------- ----------- -----------
Operating loss......................... (51,399) (750) (52,149) (12,122) (1,469) (65,740)
Interest expense...................... 22,186 (5,917)(g) 26,796 1,507 28,303
8,400 (h)
2,127 (i)
Interest income....................... ( 7,653) ( 7,653) ( 984) ( 8,637)
-------- ------- -------- -------- ----------- ---------
Loss before income taxes............... (65,932) (5,360) (71,292) (12,645) (1,469) (85,406)
Income tax benefit..................... (24,463) (1,876)(j) (26,339) (5,654) 155 (o) (31,838)
-------- ------- -------- -------- ----------- ---------
Net loss............................... $(41,469) $(3,484) $(44,953) $ (6,991) $(1,624) ($53,568)
======== ======= ======== ======== =========== =========
Net loss per share..................... $(0.76) $(0.82) $(0.77) $(0.84)
======== ======== ======== =========
Weighted average shares
outstanding......................... 54,702 54,702 9,029 63,770
======== ======== ======== =========
Ratio of earnings to
fixed charges(p).................... -- (q)
===========
</TABLE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(a) Reflects the elimination of amounts due to/from ValuJet and Airways.
(b) Reflects the reversal of preoperating costs and maintenance reserves, and
the related deferred tax amounts, to conform accounting policies.
(c) Reflects the reversal of Airways' historical excess of cost over fair value
of the net tangible assets acquired ("goodwill").
(d) Reflects the reversal of Airways' net deferred tax asset.
(e) Reflects the accrual of estimated merger costs with the related income tax
effect.
(f) Reflects the excess of cost over the estimated fair value of the net
tangible assets acquired in the Merger, the elimination of Airways'
historical common stock, additional paid-in capital and retained deficit,
the value of the Common Stock issued to the Airways stockholders and the
value of options issued to Airways option holders in the Merger.
<TABLE>
<S> <C>
Number of shares issued to acquire Airways 9,067,937
Per share price at date of Agreement and joint press release 7.00
----------
Value of stock $ 63,476
Value of Airways options 2,800
Transaction costs 3,250
----------
Purchase price 69,526
Less estimated fair value of net tangible assets acquired 7,879
----------
Excess of cost over fair value of net tangible assets acquired $ 61,647
==========
</TABLE>
Excess of cost over fair value of the net tangible assets acquired is
presented in the pro forma balance sheet utilizing estimated amounts at
September 30, 1997 and will be determined at the Effective Date. Such
amount will also be allocated according to the estimated fair values of
assets at the Effective Date.
(g) Reflects the elimination of interest on $68.5 million of debt refinanced by
the $80.0 million secured debt offering.
(h) Reflects interest on the $80.0 million of 10 1/2% senior secured notes.
(i) Reflects the amortization of debt issuance costs.
(j) Reflects the income tax effect of the pro forma adjustments.
(k) Reflects the effect of expensing certain transaction costs.
(l) Reflects the reversal of historical amortization of preoperating costs of
Airways.
(m) Reflects the reversal of historical amortization of goodwill of Airways.
(n) Reflects the amortization of goodwill resulting from the Merger by use of
the straight line method over a 30-year period.
(o) Reflects the income tax effect of the pro forma adjustments.
(p) For purposes of calculating the ratio of earnings to fixed charges (i)
earnings consist of income (loss) before income taxes, plus fixed charges
and (ii) fixed charges consist of interest expense incurred, plus the
portion of rent expense under operating leases deemed by the Company to be
representative of the interest factor.
(q) For the periods ending September 30, 1997 and December 31, 1996, the pro
forma combined earnings were insufficient to cover fixed charges by $71.7
million and $85.4 million, respectively.
-44-
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative per share data relating
to net income and book value on (i) an historical basis for ValuJet and Airways,
and (ii) a pro forma combined basis per share of ValuJet Common Stock, giving
effect to the sale by ValuJet of the Notes and the application of the proceeds
therefrom and the Merger. The ValuJet and Airways pro forma combined information
gives effect to the Merger on a purchase accounting basis and is based upon the
Exchange Ratio of one share of ValuJet Common Stock for each share of Airways
Common Stock. The unaudited pro forma data is presented for informational
purposes only and is not necessarily indicative of the results of operations or
combined financial position that would have resulted had the sale by ValuJet of
the Notes and the application of the proceeds therefrom and the Merger been
consummated at the dates or during the periods indicated, nor is it necessarily
indicative of future results of operations or combined financial position.
The information shown below for the year ended December 31, 1996 is derived
from the audited consolidated financial statements of ValuJet for the period
then ended and the audited consolidated financial statements of Airways for the
year ending on the ensuing March 31 and should be read in conjunction with, and
is qualified in its entirety by, the historical financial statements of ValuJet
and Airways, including the respective notes thereto, and the pro forma financial
information included herein. The information shown below for the nine months
ended September 30, 1997 is derived from the unaudited consolidated financial
statements of ValuJet and Airways, including the respective notes thereto, and
should be read in conjunction with, and is qualified in its entirety by, the pro
forma financial information included herein. See "Pro Forma Condensed Combined
Financial Information."
<TABLE>
<CAPTION>
Nine Months Year ended
Ended December 31,
Income (loss) per share September 30, 1997 1996(1)
------------------- --------
<S> <C> <C>
ValuJet historical.......................... $(.77) $(.76)
Airways historical.......................... (.58) (.77)
ValuJet and Airways pro forma combined (2).. (.79) (.84)
Book Value per Share (Period End)
ValuJet historical.......................... 1.48
Airways historical.......................... 1.34
ValuJet and Airways pro forma combined (2).. 2.30
</TABLE>
(1) ValuJet's fiscal year end is December 31 and Airways' fiscal year end is
March 31. Consequently, the data included for Airways as of the date
indicated is based on audited financial statements of Airways for the year
ending on March 31, 1997.
(2) Represents the combined results of ValuJet and Airways giving effect to the
sale by ValuJet of the Notes and the application of the proceeds therefrom
and the Merger as if such transactions had occurred as of January 1, 1996
and 1997, with respect to the statements of operations for the year ended
December 31, 1996, and the nine months ended September 30, 1997,
respectively, and as of September 30, 1997, with respect to the balance
sheet. The Merger is reflected using the purchase method of accounting for
business combinations.
-45-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following chart indicates the service offered by the Company from
December 1993 through September 1997:
<TABLE>
<CAPTION>
Number of
Total Number Number of Peak- Cities
As of of Aircraft Day Flights Served
- ----------------------- -------------- --------------- ---------
<S> <C> <C> <C>
December 31, 1993 6 34 8
March 31, 1994 10 70 13
June 30, 1994 14 92 15
September 30, 1994 16 114 17
December 31, 1994 22 124 17
March 31, 1995 27 184 23
June 30, 1995 28 208 24
September 30, 1995 34 228 26
December 31, 1995 42 268 26
March 31, 1996 47 286 28
June 30, 1996 51 0 (1)
September 30, 1996 46 (2) 16 (3)
December 31, 1996 43 (4) 124 18
March 31, 1997 42 (5) 148 21
June 30, 1997 42 (6) 184 24
September 30, 1997 42 (7) 200 22
</TABLE>
________________________
(1) Service suspended to all markets as of June 17, 1996
(2) Of which 4 had been approved for service by the FAA
(3) Service resumed on September 30, 1996 to Atlanta, Fort Lauderdale,
Orlando, Tampa and Washington, D.C.
(4) Of which 15 had been approved for service by the FAA
(5) Of which 24 had been approved for service by the FAA
(6) Of which 30 had been approved for service by the FAA
(7) Of which 31 had been approved for service by the FAA
On May 11, 1996, ValuJet tragically lost its Flight 592 en route from Miami
to Atlanta. There were no survivors. The accident resulted in extensive media
coverage calling into question the safety of low-fare airlines in general and
ValuJet in particular. In response to the accident, the FAA conducted an
extraordinary review of the ValuJet's operations. On June 17, 1996, ValuJet
entered into a consent order with the FAA under which: (i) ValuJet agreed to
suspend operations until such time as ValuJet was able to satisfy the FAA as to
various regulatory compliance concerns identified by the FAA as a result of its
intensive inspections of ValuJet's operations, (ii) the FAA agreed to work with
ValuJet in order to reestablish operations with up to 15 aircraft initially and
(iii) ValuJet paid $2.0 million to the FAA to compensate it for the costs of the
special inspections conducted. In order to reduce costs while ValuJet prepared
its plan to restore service, ValuJet furloughed more than 90% of its personnel
(approximately 3,600 of 4,000) for several weeks. On August 29, 1996, the FAA
returned ValuJet's operating certificate and the Department of Transportation
("DOT") issued a "show cause" order regarding ValuJet's fitness as an air
carrier. The DOT gave its final approval on September 26, 1996, and ValuJet
resumed operations with service between Atlanta and four other cities on
September 30, 1996.
Other effects of the accident, ensuing adverse media coverage, intensive FAA
scrutiny and suspension of operations include the following:
-46-
<PAGE>
1. The suspension of operations resulted in the failure of ValuJet to meet
certain financial covenants under certain of ValuJet's secured debt. All of
this debt was repaid with the proceeds of ValuJet's $80,000,000 secured debt
offering. See "-- Liquidity and Capital Resources" below.
2. The expansion of ValuJet's operations will remain subject to FAA and DOT
approval for an indefinite period of time. FAA approvals are required to
increase the number of aircraft on ValuJet's operating certificate and to
commence service to any new market.
3. ValuJet is unable to predict how significantly the accident and
suspension of operations will affect load factors and yield or the length of
time during which load factors and yield will be impacted. During first quarter
1997, ValuJet's load factor was 53.9% compared to 58.0% for first quarter 1996
and its average fare was $60.47 compared to $72.01 for first quarter 1996.
ValuJet has commenced the implementation of a program to enhance its image. See
"Business of ValuJet -- Strategy."
4. In 1996, ValuJet refunded fares paid by customers affected by ValuJet's
changing schedules and by those who otherwise chose to change their travel
plans.
5. ValuJet's cost per ASM has increased and is likely to remain inflated to
some extent to reflect the cost of additional maintenance procedures and
infrastructure adopted by ValuJet as well as lower aircraft utilization levels.
6. ValuJet may reduce its workforce permanently if reduced traffic levels
continue and ValuJet is unable to reestablish its previous service levels.
7. The aircraft lost was insured for $4.0 million, which was in excess of
book value. ValuJet carries $750.0 million of liability insurance. Although
ValuJet believes that such insurance will be sufficient to cover all claims
arising from the accident, there can be no assurance that all claims will be
covered or that the aggregate of all claims will not exceed such insurance
limits.
8. Several stockholder lawsuits have been filed against ValuJet and certain
of its officers and directors alleging, among other things, violation of federal
securities laws. While ValuJet denies that it has violated any of its
obligations under the federal securities laws, there can be no assurance that
ValuJet will not sustain material liability under such or related lawsuits. See
"Business of ValuJet -- Litigation."
9. Various governmental authorities are conducting investigations of the
circumstances surrounding the accident. ValuJet is cooperating with the
authorities in connection with these investigations. See "Business of ValuJet -
- - Litigation."
As a result of the accident, the ensuing extraordinary review of ValuJet's
operations by the FAA, the suspension of operations in June 1996 and the current
and prospective FAA imposed limitation on the number of aircraft that may be
operated by ValuJet, ValuJet's results for periods prior to May 11, 1996 are not
necessarily indicative of the results to be expected in future periods.
ValuJet's operations for 1996 are also not indicative of future operations as a
result of the suspension of operations for a significant portion of 1996.
ValuJet's operations for the first nine months of 1997 may not be indicative of
future operations as a result of the reduced level of service, ValuJet's
ownership of more aircraft than may be used and additional infrastructure to
support larger operations during the first nine months of 1997.
On July 10, 1997, the Company entered into a merger agreement with Airways
Corporation ("Airways"). Under the merger agreement, the Company has acquired
Airways through a merger of Airways with and into the Company effective on
November 17, 1997. In anticipation of the Merger, the name of ValuJet Airlines
has been changed to "AirTran Airlines." In connection with the Merger, the
Company changed its name to AirTran Holdings, Inc. Airways' operating
subsidiary (AirTran Airways, Inc. or "AirTran") will continue to operate under
its current name. The Company has announced that it will move its headquarters
to Airways' existing headquarters in Orlando, Florida. While the Company
intends to initially operate AirTran Airlines and AirTran Airways under separate
operating certificates, it may also merge these two operating subsidiaries at a
later date.
The Company believes that the Airways acquisition will enable it to operate
more competitively and profitably in the eastern United States. Like ValuJet
Airlines, AirTran operates lower cost, used aircraft and targets fare conscious
leisure travelers with a limited flight frequency, no-frills product. Both
airlines rely on achieving and maintaining operating costs below industry
averages in order to offer low fares. The Company
-47-
<PAGE>
believes that the combined entity can achieve significant financial and
operating synergies and cost savings in the first twelve months after the Merger
by eliminating certain redundant operations, reducing personnel and taking
advantage of economies of scale in maintenance operations and fuel purchasing.
The 11 Boeing 737-200 aircraft operated by AirTran will provide increased
revenue opportunities for the Company through their longer flight range and
greater seating capacity as compared with the Company's DC-9 aircraft. The
Company expects that the change in name and product image that will accompany
the Merger will further increase its revenue opportunities. In addition, the
Company believes that the Airways acquisition will afford it a competitive
advantage in the consolidating airline industry.
The purchase price paid by the Company in the Merger consisted of
approximately 9.1 million shares of common stock of the Company. The Merger
will also result in an increase in the consolidated debt of the Company of $9.4
million as of September 30, 1997 (which amount reflects the preexisting debt of
Airways), and the assumption by the Company on a consolidated basis of certain
off balance sheet operating lease obligations of Airways. In addition, as a
result of the Merger, a loan of $12.7 million from the Company to AirTran will
be converted into an intercompany loan. As part of the Merger, the Company will
acquire cash and cash equivalents and restricted cash held by Airways of
approximately $15.2 million, as of September 30, 1997. The Company will also
acquire all other assets of Airways, including four Boeing 737's currently owned
by Airways, three of which are Stage 3 aircraft, Airways' fixed based
operations, located in Grand Rapids, Minnesota and Airways' hangar, located in
Orlando, Florida. There can be no assurance that the Company will be able to
realize the expected benefits from the Merger.
VALUJET RESULTS OF OPERATIONS
The following discussion relates to the results of operations of the Company
for the periods indicated and does not include a discussion of the results of
operations of Airways which has merged into the Company as of November 17,
1997.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 31,
1994
<TABLE>
<CAPTION>
Year Ended December 31, 1994 Year Ended December 31, 1995
------------------------------ ------------------------------
% of % of
Amount Revenues Per ASM Amount Revenues Per ASM
------ -------- ------- ------ -------- -------
(000) (000)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES $133,901 100.0% 9.05cents $367,757 100.0% 9.62cents
======== ====== ===== ======== ===== =====
EXPENSE CATEGORY
Flight operations $ 6,967 5.2% 0.47cents $ 16,273 4.4% 0.42cents
Aircraft fuel 21,775 16.3 1.47 55,813 15.2 1.46
Maintenance 14,862 11.1 1.00 47,330 12.9 1.24
Station operations 20,198 15.1 1.37 49,931 13.6 1.31
Passenger services 3,942 2.9 0.27 10,363 2.8 0.27
Marketing and advertising 6,546 4.9 0.44 8,989 2.4 0.23
Sales and reservations 11,325 8.5 0.77 31,156 8.5 0.81
General and administrative 5,039 3.8 0.34 10,617 2.9 0.28
Employee bonuses 5,146 3.8 0.35 14,382 3.9 0.38
Depreciation 3,555 2.7 0.24 15,147 4.1 0.40
Other expenses (income), net 965 0.7 0.06 (70) (0.0) (0.00)
Shutdown and other nonrecurring 0 0.0 0.00 0 0.0 0.00
-------- ------ ----- -------- ----- -----
Total Expenses $100,320 75.0% 6.78cents $259,931 70.7% 6.80cents
======== ====== ===== ======== ===== =====
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
% of
Amount Revenues Per ASM
------ -------- -------
(000)
<S> <C> <C> <C>
OPERATING REVENUES $219,636 100.0% 8.12cents
======== ====== =====
EXPENSE CATEGORY
Flight operations $ 16,479 7.5% 0.61cents
Aircraft fuel 46,691 21.3 1.73
Maintenance 49,500 22.5 1.83
Station operations 42,018 19.1 1.55
Passenger services 8,879 4.0 0.33
Marketing and advertising 8,426 3.8 0.31
Sales and reservations 18,378 8.4 0.68
General and administrative 13,659 6.2 0.51
Employee bonuses 1,245 0.6 0.05
Depreciation 17,551 8.0 0.65
Other expenses (income), net (5,252) (2.4) (0.19)
Shutdown and other nonrecurring 67,994 31.0 2.51
-------- ------ ------
Total Expenses $285,568 130.0% 10.57cents
======== ====== ======
</TABLE>
OPERATING REVENUES
- ------------------
Total operating revenues for the year ended December 31, 1996 were
approximately $219.6 million as compared to $367.8 million and $133.9 million
for the years ending December 31, 1995 and 1994, respectively. The decrease from
1995 to 1996 is a result of ValuJet's reduced service level and suspension of
operations during the second and third quarters of 1996. The increase over 1994
is due to ValuJet flying more available seat miles (ASMs) during 1996. ValuJet
flew 2.7 billion ASMs in 1996 as compared to 3.8 billion and 1.5 billion in 1995
and 1994, respectively. ValuJet's load factors for 1996, 1995 and 1994 were
57.1%, 68.8% and 64.0%, respectively. The lower load factor in 1996 is due in
part to the accident and ensuing circumstances. ValuJet's average fare was
$69.81 for 1996, $68.10 for 1995 and $63.48 for 1994 due to the absence of the
10% federal excise tax for a substantial part of 1996.
EXPENSES
- --------
Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft fuel, maintenance expenses and
passenger services expenses. Expenses for hull insurance and compensation of
pilots (exclusive of bonuses) are included in flight operations. Flight
operations expenses were higher, on a per ASM basis, for the year ended December
31, 1996 than the previous two years due to the extended period of time that
ValuJet's operations were suspended, the additional training costs incurred at
restart and the change in ValuJet's compensation structure in September 1996,
which reduced the percentage of compensation represented by bonuses and shifted
this cost to base pay charged to each department. The cost of hull insurance
also increased substantially as of October 1, 1996. Certain flight operations
administrative costs were also incurred during the period of the suspension with
no corresponding ASMs being generated over which to spread these costs.
Aircraft fuel expenses include both the direct cost of the fuel as well as
the costs of delivering fuel into the aircraft. Fuel expense, on a per ASM
basis, was higher for 1996 than either of the previous two years due to an
increase in the average price of fuel. The average price of fuel increased from
$0.58 per gallon for 1994 to $0.60 per gallon for 1995 to $0.71 per gallon for
1996. This approximate 20% increase in the price per gallon of fuel accounts
for the 18% increase in fuel cost per ASM.
Maintenance expenses include all administrative costs of the maintenance
department as well as normal recurring maintenance performed during the year.
Expenses for engine overhaul and certain scheduled heavy maintenance procedures
are included in this cost. Most non-routine maintenance costs performed during
the
-49-
<PAGE>
suspension of operations are included in the nonrecurring expense line item.
Maintenance expenses for the year ended December 31, 1996 were higher, on a per
ASM basis, than both 1995 and 1994 due to the suspension of operations during
the second and third quarters of 1996 and the reduced level of service once
ValuJet was able to resume operations. ValuJet also had a lower utilization
rate on the aircraft it operated which results in the spreading of certain fixed
costs over fewer ASMs or block hours. In 1996, ValuJet maintained or paid
storage costs on many more aircraft than it was able to operate. Certain
maintenance administrative costs were also incurred during the period of the
suspension of operations with no ASMs being generated over which to spread these
costs.
Station operations expenses include all expenses incurred at the airports, as
well as station operations administration and liability insurance. Certain
facility rental expense related to non-operating stations as a result of the
suspension of operations are included in shutdown and other nonrecurring
expenses. Station operations expenses were higher, on a per ASM basis, for the
year ended December 31, 1996 than in 1995 and 1994 due largely to the suspension
of operations and the inefficiencies generated from restarting operations on a
limited basis. Many station facilities were not fully utilized during the
fourth quarter due to the limited operations. Another factor which contributed
to a higher 1996 station operations expense was an increase in insurance costs
as of October 1, 1996. Certain station operations administrative costs were
also incurred during the period of the suspension of operations with no ASMs
being generated over which to spread these costs.
Passenger services expenses include flight attendant wages and benefits and
catering expenses. Also included are the costs for flight attendant training
and flight attendant overnight expenses. The increase in passenger services
expenses for the year ended December 31, 1996, on a per ASM basis, over 1995 and
1994 is due to the restructuring of the compensation policy as it relates to
flight attendants. The flight attendants' salary levels were adjusted upward
and the regular quarterly bonus portion of their compensation was eliminated.
This change caused passenger services expense to be higher while reducing the
amount of bonus expense.
Marketing and advertising expenses include all advertising expenses and wages
and benefits for the marketing department. Marketing and advertising expenses
for the year ended December 31, 1996, as a percentage of revenue, were higher
than 1995 and lower than 1994. These expenses were higher in 1996 than 1995 due
to the additional advertising costs incurred at the resumption of operations
being spread over a reduced revenue base caused by lower service levels and load
factors. Certain marketing administrative costs were also incurred during the
period of the suspension of operations with no ASMs being generated over which
to spread these costs.
Sales and reservations expenses include all of the costs related to recording
a sale or reservation. These expenses include wages and benefits for
reservationists, rent, telecommunication charges, credit card fees and travel
agency commissions. Sales and reservations expenses for the year ended December
31, 1996 were 8.4% of revenue as compared to 8.5% for each of 1995 and 1994.
General and administrative expenses include the wages and benefits for
ValuJet's executive officers and various other administrative personnel. Also
included are costs for office supplies, legal expenses, bad debts, accounting
and other miscellaneous expenses. General and administrative costs for 1996
were higher than each of 1995 and 1994 due to the shift in compensation
structure to one based to a larger extent on base salaries and also due to
increased legal fees.
The amount of bonus expense for the year ended December 31, 1996 reflects the
change in salary structure as of September 1996 to a structure based less on
bonus and more on base salary and the fact that ValuJet had a net loss from the
second quarter 1996 through the end of the year. The amount charged to 1996
approximates the amount paid to those employees in the quarterly pool for the
first quarter of 1996. The actual amount to be paid and the form of such payout
are at the sole discretion of ValuJet's Board of Directors.
Depreciation expense includes depreciation on aircraft and ground equipment,
but does not include any amortization of start-up and route development costs as
all of these costs are expensed as incurred. Depreciation expense for the year
ended December 31, 1996 was higher than each of the previous two years as
additional aircraft and other property have been acquired. During 1996, ValuJet
made the decision to dispose of certain idled aircraft. Subsequent to the
decision to sell or lease out such aircraft, no depreciation was recorded on
aircraft held for sale. Depreciation on aircraft idled as a result of the
suspension of operations and reduced operations and not yet returned to service
has been recorded in shutdown and other nonrecurring expenses.
-50-
<PAGE>
Shutdown and other nonrecurring expenses include costs associated with the
loss of Flight 592 and excess operating costs related to the reduced schedule
from May 19, 1996 to June 17, 1996, the suspension of operations from June 17,
1996 to September 29, 1996 and the reduced schedule from September 30, 1996 to
December 31, 1996. Such costs consist of expenses directly related to the
accident and the ensuing extensive FAA review of ValuJet's operations including
legal fees, payments to the FAA, inspection related costs and maintenance in
excess of normal recurring maintenance. In addition, depreciation on grounded
aircraft, rental of abandoned or idled facilities and costs of personnel idled
as a result of the reduced and suspended operations from May through December
1996 are included in shutdown and other nonrecurring expenses. Personnel costs
include full wages, salaries and benefits that were provided to idled employees
during the reduction and suspension of operations.
A summary of such costs is as follows:
<TABLE>
<S> <C>
Maintenance $27,750,000
Legal and other consulting 8,843,000
Facilities rental 6,114,000
Wages, salaries and benefits, excluding maintenance 4,895,000
Depreciation 11,054,000
FAA remediation 2,000,000
Other 7,338,000
-----------
$67,994,000
===========
</TABLE>
ValuJet also incurred additional shutdown and nonrecurring expenses in the
first quarter of 1997 as a result of idled aircraft and facilities due to the
reduced level of service attributable to ValuJet's Agreement with the FAA.
No accrual was provided for costs to be incurred in future periods related to
aircraft depreciation and maintenance and rental costs associated with
temporarily idled facilities as such costs will be recognized as they are
incurred. There was no accrual for salaries and wages in connection with the
June 18, 1996 furlough of employees at December 31, 1996 as such employees were
paid through June 30, 1996 with no additional severance benefits provided.
Other expenses (income), net include interest income and interest expense as
well as certain property transactions. During the year ended December 31, 1996,
interest expense exceeded interest income by approximately $14,534,000 due to
increasing debt levels attributable to the acquisition of aircraft and the
completion of the issuance of $150.0 of million 10 1/4% Notes. During 1996,
ValuJet also recognized $13.0 million of income as an arrangement fee for
aircraft transfers, a $2.8 million gain from insurance recovery and a $3.9
million gain on the sale of aircraft.
QUARTER ENDED SEPTEMBER 30, 1997
The following is a description of the revenues and costs incurred by category
for the three months ended September 30, 1997 compared to the three months ended
June 30, 1997. Any comparison of the Company's results of operations for the
quarter ended September 30, 1997 with the quarter ended September 30, 1996 would
not be meaningful as the Company had only one day of operations during the
quarter ended September 30, 1996.
-51-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
June 30, 1997 September 30, 1997
--------------------------------- -------------------------------
Percent of Per Percent of Per
Amount Revenues ASM Amount Revenues ASM
------ ---------- ----- ------ ---------- -----
(000) (000)
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues $47,759 100.0% 6.82cents $56,413 100.0% 6.61cents
======= ===== ===== ======= ===== =====
Expense Category:
- ----------------
Flight operations $ 4,801 10.1% 0.69cents $ 5,094 9.0% 0.59cents
Aircraft fuel 10,716 22.4 1.53 13,521 24.0 1.58
Maintenance 10,534 22.1 1.50 16,266 28.8 1.91
Station operations 12,132 25.4 1.73 12,858 22.8 1.51
Passenger services 2,122 4.4 0.30 2,552 4.5 0.30
Marketing and advertising 2,875 6.0 0.41 2,888 5.1 0.34
Sales and reservations 3,723 7.8 0.53 4,544 8.1 0.53
General and administrative 3,347 7.0 0.48 3,129 5.6 0.37
Employee bonuses 0 0.0 0.00 0 0.0 0.00
Depreciation 7,362 15.4 1.05 8,261 14.6 0.97
Nonrecurring expenses 0 0.0 0.00 0 0.0 0.00
Other expenses, net 4,811 10.1 0.69 5,587 9.9 0.65
------- ----- ---- ------- ----- -----
Total expenses $62,423 130.7% 8.91cents $74,700 132.4% 8.75cents
======= ===== ==== ======= ===== =====
</TABLE>
OPERATING REVENUES
- ------------------
Total operating revenues for the quarter ended September 30, 1997 were
approximately $56.4 million as compared to $47.8 million for the quarter ended
June 30, 1997. The increase from second quarter 1997 to third quarter 1997 is a
result of the Company's increased service level during the third quarter of
1997. The Company flew 853 million ASMs during the third quarter of 1997 as
compared to 701 million ASMs during the second quarter of 1997. The Company's
load factors for the three month periods ending September 30, 1997 and June 30,
1997 were 51.6% and 54.9%, respectively. The Company believes that the lower
load factor in the third quarter 1997 is due to a lower load factor in September
1997. The Company's average fare was $62.39 for the three months ending
September 30, 1997 and $58.92 for the three months ending June 30, 1997.
EXPENSES
- --------
Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft fuel, maintenance expenses and
passenger services expenses. Expenses for hull insurance and compensation of
pilots are included in flight operations. Flight operations expenses were
lower, on a per ASM basis, for the quarter ended September 30, 1997 than the
quarter ended June 30, 1997 due to increased service levels over which to spread
the cost of hull insurance.
Aircraft fuel expenses include both the direct cost of the fuel as well as
the costs of delivering fuel into the aircraft. Fuel expense, on a per ASM
basis, was higher for the third quarter 1997 than the second quarter 1997 due to
an increase in fuel burn from 837 gallons per hour to 849 gallons per hour. The
average price of fuel remained constant at $0.67 per gallon.
Maintenance expenses include all administrative costs of the maintenance
department as well as normal recurring maintenance performed during the year.
Expenses for engine overhaul and certain scheduled heavy maintenance procedures
are included in this cost. Maintenance expenses for the quarter ended September
30, 1997 were higher, on a per ASM basis, than the quarter ended June 30, 1997
due to the timing of certain heavy maintenance procedures.
Station operations expense includes all expenses incurred at the airports, as
well as station operations administration and liability insurance. Station
operations expenses were lower, on a per ASM basis, for the third quarter 1997
than the second quarter 1997 due to increased service levels during the third
quarter 1997.
-52-
<PAGE>
Passenger services expenses include flight attendant wages and benefits and
catering expenses. Also included are the costs for flight attendant training
and flight attendant overnight expenses. Passenger services expenses remained
flat as a percentage of revenue and on a per ASM basis from second quarter 1997
to the third quarter 1997.
Marketing and advertising expenses include all advertising expenses and wages
and benefits for the marketing department. Marketing and advertising expenses
for the third quarter 1997, as a percentage of revenue, were lower than the
second quarter 1997 due to reduced advertising in the third quarter 1997 due to
a brand relaunch planned at the end of the third quarter 1997 with most
significant expenses scheduled to be incurred during the fourth quarter
1997.
Sale and reservations expenses include all of the costs related to recording
a sale or reservation. These expenses include wages and benefits for
reservationists, rent, telecommunication charges, credit card fees and travel
agency commissions. Sales and reservations expenses for the quarter ended
September 30, 1997 were 8.1% of revenue as compared to 7.8 % for the quarter
ended June 30, 1997. The increase from the second quarter 1997 to the third
quarter 1997 is due to additional costs incurred related to a change in
reservation systems used by the Company.
General and administrative expenses include the wages and benefits for the
Company's executive officers and various other administrative personnel. Also
included are costs for office supplies, legal expenses, bad debts, accounting
and other miscellaneous expenses. General and administrative costs for the
third quarter 1997 were lower, on a per ASM basis, than the second quarter 1997
due to the increased service levels during the third quarter 1997 over which to
spread these costs.
There was no expense recorded in the second or third quarter 1997 related to
bonuses as the Company did not have income. The actual amount to be paid and the
form of such payout are at the sole discretion of the Company's Board of
Directors.
Depreciation expense includes depreciation on aircraft and ground equipment,
but does not include any amortization of start-up and route development costs as
all of these costs are expensed as incurred. Depreciation expense for the
quarter ended September 30, 1997 was higher than the quarter ended June 30, 1997
due to the return of aircraft to operating specifications (previously classified
as assets held for sale) as well as additional purchases of property and
equipment during the third quarter 1997.
During the quarter ended September 30, 1997, interest expense exceeded
interest income by approximately $5.5 million due to increasing debt levels
attributable to the completion in August 1997 of the issuance of $80 million 10
1/2% senior secured notes due 2001. Also included in other expense, net for the
third quarter 1997 is a $225,000 gain on the sale of engines and $325,000 of
rebranding expenses (new signage, uniforms, etc.).
NINE MONTHS ENDED SEPTEMBER 30, 1997
Since the Company's operations were suspended for all but one day of third
quarter 1996, any comparison of the Company's operations for the nine months
ended September 30, 1997 with the nine months ended September 30, 1996
(reflecting only six months of active operations) would not be meaningful.
-53-
<PAGE>
COMPARISON OF QUARTERS ENDED JUNE 30, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1996 June 30, 1997
------------------------------- ------------------------------
Percent of Per Percent of Per
Amount Revenues ASM Amount Revenues ASM
-------- ---------- ----- -------- ----------- -----
(000) (000)
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues $ 81,217 100.00% 8.28cents $47,759 100.0% 6.82cents
======== ====== ===== ======= ===== =====
Expense Category:
- ----------------
Flight operations $ 5,415 6.7% 0.55cents $ 4,801 10.1% 0.69cents
Aircraft fuel 17,061 21.0 1.74 10,716 22.4 1.53
Maintenance 15,807 19.4 1.61 10,534 22.1 1.50
Station operations 14,749 18.2 1.51 12,132 25.4 1.73
Passenger services 3,632 4.5 0.37 2,122 4.4 0.30
Marketing and advertising 2,223 2.7 0.23 2,875 6.0 0.41
Sales and reservations 6,547 8.1 0.67 3,723 7.8 0.53
General and administrative 4,272 5.3 0.44 3,347 7.0 0.48
Employee bonuses (550) (0.7) (0.06) 0 0.0 0.00
Depreciation 6,695 8.2 0.68 7,362 15.4 1.05
Nonrecurring expenses 31,623 38.9 3.23 0 0.0 0.00
Other expenses, net (11,133) (13.7) (1.14) 4,811 10.1 0.69
-------- ------ ----- ------- ----- -----
Total expenses $ 96,341 118.6% 9.83cents $62,423 130.7% 8.91cents
======== ====== ===== ======= ===== =====
</TABLE>
OPERATING REVENUES
- ------------------
Total operating revenues for the quarter ended June 30, 1997 were
approximately $47.8 million as compared to $81.2 million for the quarter ended
June 30, 1996. The decrease from 1996 to 1997 is a result of ValuJet's reduced
service level during the second quarter of 1997. ValuJet flew 701 million ASMs
during the second quarter of 1997 as compared to 980 million ASMs during the
second quarter of 1996. ValuJet's load factors for the three month periods
ending June 30, 1997 and 1996 were 54.9% and 55.7%, respectively. ValuJet
believes that the lower load factor in 1997 is due in part to publicity related
to the accident and increased competition. ValuJet's average fare was $58.92
for the three months ending June 30, 1997 and $73.79 for the three months ending
June 30, 1996 due to ValuJet offering numerous sales during 1997.
EXPENSES
- --------
Flight operations expenses were higher, on a per ASM basis, for the quarter
ended June 30, 1997 than the quarter ended June 30, 1996 due to the higher cost
of hull insurance since October 1, 1996.
Fuel expense, on a per ASM basis, was lower for the second quarter 1997 than
the second quarter 1996 due to a decrease in the average price of fuel. The
average price of fuel decreased from $0.72 per gallon for the second quarter
1996 to $0.67 per gallon for the second quarter 1997. This approximate 7%
decrease in the price per gallon of fuel as well as a decrease in fuel burn per
block hour from 858 gallons to 837 gallons over the same period accounts for the
12% decrease in fuel cost per ASM.
Maintenance expenses for the quarter ended June 30, 1997 were lower, on a per
ASM basis, than the quarter ended June 30, 1996 due to the reduced level of
service during the second quarter 1997 and the timing of certain heavy
maintenance procedures. ValuJet also incurred substantial expenses during the
second quarter 1996 related to the FAA increased inspections.
-54-
<PAGE>
Station operations expenses were higher, on a per ASM basis, for the second
quarter 1997 than the second quarter 1996 due largely to the inefficiencies
generated from restarting operations on a limited basis. Many of the station
facilities were not fully utilized during the second quarter 1997 due to the
limited operation. Another factor which contributed to a higher 1997 station
operations expense was an increase in insurance costs as of October 1, 1996.
Insurance costs for the second quarter 1997 were .28 cents per ASM compared to
.08 cents per ASM for the second quarter 1996.
Passenger services expenses remained flat as a percentage of revenue from
second quarter 1996 to second quarter 1997 and decreased on a per ASM basis over
the same period as a result of the timing and amount of purchase of catering
supplies.
Marketing and advertising expenses for the second quarter 1997, as a
percentage of revenue, were higher than the second quarter 1996 due to the
additional advertising costs incurred at the resumption of operations into
various markets being spread over a reduced revenue base caused by lower service
levels and load factors.
Sales and reservations expenses for the quarter ended June 30, 1997 were 7.8%
of revenue as compared to 8.1% for the quarter ended June 30, 1996.
General and administrative costs for the second quarter 1997 were higher, on
a per ASM basis, than the second quarter 1996 due to the shift in compensation
structure to one based to a larger extent on base salaries and the reduced level
of ASMs over which to spread these costs.
There was no expense recorded in the second quarter 1997 related to bonuses
as ValuJet did not have income. The actual amount to be paid and the form of
such payout are at the sole discretion of ValuJet's Board of Directors.
Depreciation expense for the quarter ended June 30, 1997 was higher than the
quarter ended June 30, 1996 due to the return of aircraft to operating
specifications and to depreciation on non-performing assets being recorded in
the shutdown and other nonrecurring expenses line item for the second quarter
1996.
Shutdown and other nonrecurring expenses include costs associated with the
loss of Flight 592 and excess operating costs related to the reduced schedule
from May 19, 1996 to June 17, 1996 and the suspension of operations subsequent
to June 17, 1996. Such costs consist of expenses directly related to the
accident and the ensuing extensive FAA review of ValuJet's operations including
legal fees, payments to the FAA, inspection related costs and maintenance in
excess of normal recurring maintenance. In addition, depreciation on grounded
aircraft, rental of abandoned or idled facilities and costs of personnel idled
as a result of the reduced and suspended operations during May and June 1996 are
included in shutdown and other nonrecurring expenses. Personnel costs include
full wages, salaries and benefits that were provided to idled employees during
the reduction and suspension of operations.
<TABLE>
<CAPTION>
A summary of such costs is as follows: Quarter Ended June 30
1996 1997
---------------- -----------------
<S> <C> <C>
Maintenance $ 7,855,000 $ 0
Legal and other consulting 6,317,000 0
Facilities rental 4,109,000 0
Wages, salaries and benefits, excluding maintenance 3,916,000 0
Depreciation 1,480,000 0
FAA remediation 2,000,000 0
Other 5,946,000 0
----------- -----
$31,623,000 $ 0
=========== =====
</TABLE>
No accrual was provided for costs to be incurred in future periods related
to aircraft depreciation and maintenance and rental costs associated with
temporarily idled facilities as such costs were recognized as they were
-55-
<PAGE>
incurred. There was no accrual at June 30, 1996 for salaries and wages in
connection with the June 18, 1996 furlough of employees as such employees were
paid through June 30, 1996 with no additional severance benefits provided.
During the quarter ended June 30, 1997, interest expense exceeded interest
income by approximately $4,811,000 due to increasing debt levels attributable to
the completion in April 1996 of the issuance of $150 million 10 1/4% senior
notes due 2001.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------------------------------------
June 30, 1996 June 30, 1997
--------------------------------- ---------------------------------
Percent of Per Percent of Per
Amount Revenues ASM Amount Revenues ASM
-------- -------- ----- -------- -------- -----
(000) (000)
<S> <C> <C> <C> <C> <C> <C>
Total operating revenues $191,212 100.00% 8.25cents $ 84,687 100.0% 6.98cents
======== ====== ===== ======== ===== =====
Expense Category:
- ----------------
Flight operations $ 12,933 6.8% 0.56cents $ 8,904 10.5% 0.73cents
Aircraft fuel 39,137 20.4 1.69 19,852 23.4 1.64
Maintenance 31,419 16.4 1.35 24,640 29.1 2.03
Station operations 32,641 17.1 1.41 22,485 26.6 1.85
Passenger services 7,624 4.0 0.33 3,817 4.5 0.31
Marketing and advertising 6,507 3.4 0.28 5,227 6.2 0.43
Sales and reservations 15,442 8.1 0.67 6,801 8.0 0.56
General and administrative 8,161 4.3 0.35 6,143 7.2 0.51
Employee bonuses 1,245 .7 0.05 0 0.0 0.00
Depreciation 13,211 6.9 0.57 12,247 14.5 1.01
Nonrecurring expenses 31,623 16.5 1.36 9,338 11.0 0.77
Other expenses, net (10,576) (5.5) (0.46) 9,405 11.2 0.78
-------- ------ ----- -------- ----- -----
Total expenses $189,367 99.1% 8.16cents $128,859 152.2% 10.62cents
======== ====== ===== ======== ===== =====
</TABLE>
OPERATING REVENUES
- ------------------
Total operating revenues decreased approximately 56% ($106,525,000) from the
six months ended June 30, 1996 to the six months ended June 30, 1997. This
decrease was due to several factors. The average number of flights decreased
from 222 flights per day to 127 flights per day during the same period due to
reduced service levels attributable to the suspension of operations and FAA
approval process for aircraft and markets. Total available seat miles (ASMs)
decreased 48% from the six months ending June 30, 1996 to the six months ending
June 30, 1997 and revenue passenger miles (RPMs) decreased 50% during the same
period. The decreases in ASMs and RPMs were attributable to reduced service
levels subsequent to the accident.
EXPENSES
- --------
Expenses for flight operations per ASM increased from approximately .56c per
ASM for the six months ended June 30, 1996 to .73c per ASM for the six months
ended June 30, 1997 due to ValuJet's higher training costs during the first
quarter of 1997 and ValuJet's increased cost for hull insurance during the six
month period ending June 30, 1997. Hull insurance increased from .06 cents per
ASM for the first six months of 1996 to .19 cents per ASM for the first six
months of 1997.
Aircraft fuel cost decreased approximately 3% on a per ASM basis from the
first six months of 1996 to the first six months of 1997 primarily due to a
decrease in the fuel burn per block hour. ValuJet's average fuel cost
-56-
<PAGE>
increased from approximately $.70 per gallon for the six months ended June 30,
1996 to approximately $.71 per gallon for the six months ended June 30, 1997
while fuel burn per block hour decreased from 846 gallons to 837 gallons over
the same period. Fuel expenses were also impacted by additional ferrying and
positioning flights made necessary as a result of the FAA intensive
investigations during the second quarter of 1996.
Maintenance expenses were higher on a per ASM basis from the first six months
of 1996 to the first six months of 1997. Maintenance expenses in prior periods
were lower as a result of aircraft recently acquired by ValuJet entering service
immediately following a scheduled maintenance check, therefore, no scheduled
maintenance was required during the first several months of each aircraft's
operations. Due to ValuJet's use of a continuous overhaul program, ValuJet's
aircraft are generally scheduled for some level of overhaul procedures within
twelve months of the purchase date. ValuJet's maintenance expenses were also
negatively impacted by the number of aircraft which were put into heavy
maintenance during the first quarter of 1997 in anticipation of their return to
service.
Station operations expenses increased on a per ASM basis from the six months
ended June 30, 1996 to the six months ended June 30, 1997, primarily due to
inefficiencies in the use of ValuJet's station assets, primarily related to
airport gate usage. The second quarter 1997 costs were also higher, on a per
ASM basis, due to a substantial increase in liability insurance costs as of
October 1, 1996, from .08 cents per ASM for the first six months of 1996 to .21
cents per ASM for the first six months of 1997.
Passenger services expenses decreased from .33 cents per ASM to .31 cents per
ASM from the first six months of 1996 to the first six months of 1997.
Marketing and advertising expenses, as a percentage of revenues, increased
from 3.4% in the first six months of 1996 to 6.2% in the first six months of
1997 due to ValuJet halting all advertising as of May 11, 1996 and a lower
revenue base during the first six months of 1997 over which to spread these
costs.
Sales and reservations expenses remained flat from the six month period
ending June 30, 1996 to the six month period ending June 30, 1997, decreasing
from 8.1% of revenue to 8.0% of revenue.
General and administrative costs for the six months ending June 30, 1997 were
higher, on a per ASM basis, than the six months ending June 30, 1996 due to the
shift in compensation structure to one based to a larger extent on base salaries
and the reduced level of ASMs over which to spread these costs.
Depreciation expense for the six months ended June 30, 1997 was higher than
the six months ended June 30, 1996 due to the return of aircraft to operating
specifications and to depreciation on nonperforming assets being recorded in the
shutdown and other nonrecurring expenses line item for the second quarter 1996.
Shutdown and other nonrecurring expenses for the six months ended June 30,
1996, include costs associated with the loss of Flight 592 and excess operating
costs related to the reduced schedule from May 19, 1996 to June 17, 1996 and the
suspension of operations subsequent to June 17, 1996. Such costs consist of
expenses directly related to the accident and the ensuing extensive FAA review
of ValuJet's operations including legal fees, payments to the FAA, inspection
related costs and maintenance in excess of normal recurring maintenance. In
addition, depreciation on grounded aircraft, rental of abandoned or idled
facilities and costs of personnel idled as a result of the reduced and suspended
operations during May and June 1996 are included in shutdown and other
nonrecurring expenses. Personnel costs include full wages, salaries and
benefits that were provided to idled employees during the reduction and
suspension of operations.
-57-
<PAGE>
<TABLE>
<CAPTION>
A summary of such costs is as follows: Six Months Ended June 30
1996 1997
--------------------------------------
<S> <C> <C>
Maintenance $ 7,855,000 $7,300,000
Legal and other consulting 6,317,000 0
Facilities rental 4,109,000 0
Wages, salaries and benefits, excluding maintenance 3,916,000 0
Depreciation 1,480,000 2,038,000
FAA remediation 2,000,000 0
Other 5,946,000 0
----------- ----------
$31,623,000 $9,338,000
=========== ==========
</TABLE>
ValuJet incurred shutdown and nonrecurring expenses in the six months ended
June 30, 1997 as a result of idled aircraft and facilities due to the reduced
level of service attributable to ValuJet's agreement with the FAA and continued
excess maintenance associated with the extensive FAA inspections.
No accrual was provided for costs to be incurred in future periods related to
aircraft depreciation and maintenance and rental costs associated with
temporarily idled facilities as such costs were recognized as they were
incurred. There was no accrual at June 30, 1996 for salaries and wages in
connection with the June 18, 1996 furlough of employees as such employees were
paid through June 30, 1996 with no additional severance benefits provided.
During the six months ended June 30, 1997, interest expense exceeded interest
income by approximately $9,500,000 due to increasing debt levels attributable to
the issuance during April 1996 of $150 million of 10 1/4% senior notes due 2001.
AIRWAYS RESULTS OF OPERATIONS
The following discussion relates to the results of operations of Airways for
the periods indicated and does not reflect the Merger.
Airways generated operating (loss) income of $(12,122,000) and $1,494,000 for
the years ended March 31, 1997 ("1997") and March 31, 1996 ("1996"),
respectively, a reduction of $13,616,000. Pre-tax (loss) income, as a percentage
of total revenues, was (12.3%) in 1997 and 2.9% in 1996. The dramatic reduction,
year over year, is the result of four separate factors. First, demand in
AirTran's segment of the travel industry was negatively affected by the accident
on May 11, 1996 involving a ValuJet aircraft. Second, Airways initiated an
intensive and costly review of maintenance and other operations systems and
processes to enhance system safety, reliability and efficiency. Third, fuel
prices increased dramatically during the year. Lastly, Airways realigned its
route system partly in response to the entry into Orlando of other competing
major airlines and partly to leave underperforming markets.
Airways achieved operating income (loss) of $1,494,000 and ($6,421,000) for
the years ended 1996 and March 31, 1995 ("1995"), respectively, an improvement
of $7,915,000. Pre-tax income, as a percentage of total revenues, was 2.9% in
1996 and (66.2)% in 1995. The dramatic change, year over year, is principally
the result of AirTran's move from startup mode to full fledged operations.
AIRWAYS SELECTED OPERATING DATA FOR YEARS ENDED MARCH 31, 1997, 1996 AND
1995
The table below sets forth selected operating data for Airways for its fiscal
years ended March 31, 1997, 1996 and 1995.
-58-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Available seat miles (1) 1,426,873,000 974,642,000 180,480,000
Revenue passenger miles (2) 932,305,000 605,130,000 80,783,000
Load factor (3) 65.3% 62.1% 44.8%
Yield per revenue passenger mile (4) $ 0.107 $ 0.107 $ 0.098
Passenger enplanements 1,089,000 685,000 87,000
Departures 13,569 8,861 1,627
Miles 11,295,000 7,739,000 1,432,000
Block hours (5) 30,578 21,078 3,405
Average stage length (miles) (6) 832 873 880
Average daily aircraft utilization (hours) 8.4 8.9 4.9
Aircraft (end of period) 10 10 4
Full-time equivalent employees (end of period) 592 429 194
</TABLE>
__________
(1) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(2) The number of scheduled miles flown by revenue passengers.
(3) Revenue passenger miles divided by available seat miles.
(4) Passenger revenue divided by revenue passenger miles.
(5) The number of hours aircraft were flown as measured from the time of
pushback from the gate to the time of arrival at the next airport's gate.
(6) The average length of the routes flown on AirTran's scheduled route
system.
The table below sets forth the major components of operating revenue and
expenses per ASM for Airways as a comparison among the three years 1997,1996 and
1995.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Operating revenue:
Passenger $ 0.070 $0.067 $ 0.044
Charter 0.000 0.002 0.007
Other 0.002 0.001 0.003
------- ------ -------
Total operating revenue 0.072 0.070 0.053
------- ------ -------
Operating expenses:
Flight operations 0.032 0.024 0.036
Maintenance 0.018 0.012 0.016
Aircraft and traffic services 0.012 0.014 0.013
Reservations, sales, and marketing 0.012 0.012 0.010
General and administrative 0.004 0.003 0.011
Depreciation and amortization 0.003 0.002 0.003
------- ------ -------
Total operating expense 0.080 .067 0.089
------- ------ -------
Operating income $(0.008) $0.003 $(0.035)
======= ====== =======
</TABLE>
-59-
<PAGE>
AIRWAYS COMPARISON OF YEARS ENDED MARCH 31, 1997, 1996 AND 1995
OPERATING REVENUES
Total passenger revenues were $100,077,000 and $64,894,000 in 1997 and 1996,
an increase of $35,183,000 or 54.2%. The increase is a result of having the
entire fleet for twelve months of 1997 whereas in 1996, the fleet was building
up to that level through February 1996.
ASMs were 1,426,873,000 and 974,642,000 in 1997 and 1996, respectively, an
increase of 452,231,000 or 46.4%. This was principally the result of the growth
in departures and AirTran's fleet but was mitigated somewhat by shorter stage
lengths in 1997. Revenue Passenger Miles ("RPMs") were 932,305,000 and
605,130,000 in 1997 and 1996, respectively, an increase of 327,175,000 or 54.1%.
This was driven by the increased capacity and improved load factor in 1997. Load
factors were 65.3% and 62.1% in 1997 and 1996, respectively, an increase of 3.2
percentage points.
AirTran also had charter revenue which is derived from making its airplanes
available to charter operators when they would otherwise not be efficiently
used. Charter revenues were $402,000 and $1,692,000 in 1997 and 1996,
respectively, a decrease of $l,290,000 or 76.2%. Often when the fleet is
expanded and additional aircraft are delivered, there is a period of adjustment
for the schedule during which aircraft utilization would drop; during such
times, Airways endeavors to use the aircraft in charter operations to minimize
this cost. During 1996, four aircraft were delivered whereas none were
delivered during 1997 accounting for the reduction in 1997.
In addition, the consolidated operations include other revenues, principally
cancellation revenue, change fees, liquor sales and the sales of the FBO which,
collectively, were $2,144,000 and $1,775,000 in 1997 and 1996, respectively, an
increase of $369,000 or 20.8%. The increase in other revenues is the result of
increased sales by the FBO and reduced cancellation revenue for AirTran. The
FBO sold one of the aircraft that it had been holding for sale for $175,000 and
continued to market its inventory of spare parts successfully during 1997.
AirTran experienced lower cancellation revenue in 1997 as a result of offering
vouchers for later travel to passengers who otherwise would have had to forfeit
their fare.
Total passenger revenues were $64,894,000 and $7,896,000 in 1996 and 1995,
respectively. The increase of $56,998,000 or 721.9% in 1996 reflects the fact
that AirTran had just commenced scheduled operations in the third quarter of
1995.
ASMs were 974,642,000 and 180,480,000 in 1996 and 1995, respectively, an
increase of 794,162,000 or 440.0%. This was principally the result of the
growth in departures and AirTran's fleet. RPMs were 605,130,000 and 80,783,000
in 1996 and 1995, respectively, an increase of 524,347,000 or 649.1%. This was
the result of the increased ASMs as well as stronger load factors on existing
routes in 1996. Load factors were 62.1% and 44.8% in 1996 and 1995,
respectively, an increase of 17.3 percentage points.
Charter revenues were $1,692,000 and $1,241,000 in 1996 and 1995,
respectively, an increase of $451,000 or 36.3%. The increase reflects full year
operations and more aircraft during the year but the relatively small increase
also reflects the deliberate shift to scheduled service in 1996.
Other revenues were $1,775,000 and $470,000 in 1996 and 1995, respectively,
an increase of $1,305,000 or 277.7%. The increase in other revenues is
principally the result of full year operations.
OPERATING EXPENSES
Flight operations expense includes expenses related directly to the operation
of aircraft except for depreciation and amortization of aircraft and aircraft
improvements. Expenses for hull insurance, crew salaries and their overnight
expenses, aircraft fuel and flight operations administration are all included in
flight operations. Flight operations expenses were $45,507,000 and $26,913,000
in 1997 and 1996, respectively, an increase of $18,594,000 or 69.1%. Departures
were 13,569 and 8,861 in 1997 and 1996, respectively, an increase of 4,708
-60-
<PAGE>
or 53.1% which, together with the increased ASMs, drove a significant portion of
the increase in flight operations expense. Flight operations expense increased
significantly more than operating activity because of several factors. Fuel
prices escalated dramatically during 1997 causing fuel expense to increase by
$3,500,000 more than it otherwise would have. Also, Airways embarked upon a
program of intense scrutiny of its aircraft and its maintenance and operational
procedures during 1997. In order to facilitate that work without disrupting its
schedule of operations, Airways entered into wet leases of aircraft for use
during the periods when Airways' aircraft were not available. The wet leases
cost Airways $3,322,000.
Flight operations expenses were $26,913,000 and $6,429,000 in 1996 and 1995,
respectively, an increase of $20,484,000 or 318.6%. Departures were 8,861 and
1,627 in 1996 and 1995, respectively, an increase of 7,234 or 444.6% which,
together with the increased ASMs, drove the increase in flight operations
expense. Better aircraft utilization and reduced fleet ownership costs
mitigated the increase, year over year, in flight operations expense. AirTran
purchased four aircraft in 1996 which shifts fleet ownership costs to
depreciation from flight operations expense.
Maintenance expense includes all expenses related to the upkeep of aircraft.
Such expenses include labor, parts, supplies and contract maintenance. The
direct cost of airframe and engine overhauls are generally expensed and, for
leased aircraft, paid monthly to the lessors in the form of reserves. For owned
aircraft, AirTran reserves on a per flight hour basis for future maintenance
that becomes due in the ordinary course. These reserves are recorded on
AirTran's balance sheet each month as the aircraft are flown. The reserves are
then available for major overhauls when they occur. When aircraft are first
delivered to Airways and shortly thereafter, the cost of overhauls of engines
and airframes that may be required to render them fully serviceable is
capitalized and amortized over the period remaining until the next scheduled
overhaul. Maintenance expenses were $25,851,000 and $12,112,000 in 1997 and
1996, respectively, an increase of $13,739,000 or 113.4%. Maintenance expense
was dramatically higher during 1997 as a result of the following: Firstly,
block hours (which are a cost driver for maintenance) were 30,578 and 21,078 in
1997 and 1996, respectively, an increase of 9,500 or 45.1%. Secondly, Airways
invested heavily in overhauling engines, airframes and related equipment. Much
of its equipment has been substantially improved and serviceable lives extended.
To that extent, those expenditures were capitalized and are recorded in fixed
assets on the balance sheet. Nonetheless, $3,400,000 more was spent on repairs
that were identified and necessary in the circumstances but which did not
significantly extend the useful lives of the underlying assets. Those repairs
were charged to expense in 1997. Thirdly, to facilitate the engine overhauls,
Airways entered into short term leases for replacement engines which cost
Airways $950,000 more in 1997 than in 1996. Lastly, the previously mentioned
independent review of the aircraft and the maintenance procedures and records
cost Airways $2,700,000.
Maintenance expenses were $12,112,000 and $2,845,000 in 1996 and 1995,
respectively, an increase of $9,267,000 or 325.7%. Maintenance expense is a
semi-variable cost; facilities cost and administrative salaries are relatively
fixed while reserve expense is driven principally by block hours. Block hours
were 21,078 and 3,405 in 1996 and 1995, respectively, an increase of 17,673 or
519.0%. The increased block hours, year over year, contributed substantially to
the increased maintenance expense.
Aircraft and traffic servicing expense includes all expenses incurred at
airports, including landing fees, facilities rental, station labor, passenger
liability insurance, ground handling services and catering expenses. Aircraft
and traffic servicing expenses were $16,742,000 and $10,169,000 in 1997 and
1996, respectively, an increase of $6,573,000 or 64.6%. The increase is driven
largely by the increased number of flights, passengers, block hours and higher
load factors. As a consequence of Airways' extensive internal reviews and
renovations of aircraft, the operating reliability suffered during parts of
1997. This triggered the need to purchase alternative transportation, costing
$1,700,000 more in 1997, for passengers who would have otherwise not been able
to travel to their destinations.
Aircraft and traffic servicing expenses were $10,169,000 and $2,390,000 in
1996 and 1995, respectively, an increase of $7,779,000 or 325.5%. The increase
was driven by the increased number of flights, markets served, passengers, block
hours and higher load factors.
-61-
<PAGE>
Reservations and sales expense includes all sales, marketing and advertising
expenses as well as the cost of reservations. Reservation expense includes
salaries of reservations personnel, computer reservation system expenses and
travel agent commissions. Reservations and sales expenses were $16,739,000 and
$11,901,000 in 1997 and 1996, respectively, an increase of $4,838,000 or 40.7%.
Although travel agency commission, advertising expense and reservation expenses
increased, they did not increase proportionately with revenue. The increases
were mitigated by the shift of customer mix toward passengers booking directly
with AirTran on its toll-free 1-800-AIR-TRAN reservations line as opposed to a
travel agency. This reduced Airways' CRS fees and commissions by nearly
$1,000,000 compared to what they would have been if the shift in bookings had
not occurred. In addition, Airways' marketing department established several
cooperative advertising arrangements with other companies to moderate its
advertising expense in 1997.
Reservations and sales expenses were $11,901,000 and $1,830,000 in 1996 and
1995, respectively, an increase of $10,071,000 or 550.3%. The increase was due
to increased travel agent commissions, advertising and reservation activity
associated with higher passenger volume and increased sales of future tickets.
The increased activity was caused by the expansion of AirTran's service into new
markets and higher load factors on existing routes in 1996. AirTran had
passenger volume of 685,000 and 87,000 in 1996 and 1995, respectively, an
increase of 598,000 or 687.4%.
General and administrative expense includes the wages and benefits for
executive officers and various other administrative personnel. Also included
are costs for office supplies, legal expenses, accounting and miscellaneous
expenses. General and administrative expenses were $5,185,000 and $3,623,000 in
1997 and 1996, respectively, an increase of $1,562,000 or 43.1%. The principal
cause of the increased expense in 1997 was the continued development of
headquarters and administrative infrastructure to support AirTran's expanding
operation.
General and administrative expenses were $3,623,000 and $2,012,000 in 1996
and 1995, respectively, an increase of $1,611,000 or 80.1%. The principal cause
of the increased expense in 1996 was the development of headquarters and
administrative infrastructure to support AirTran's expanding operation. In
addition, AirTran introduced a program of profit sharing for all full time
employees during 1996 which, due to AirTran's profitability, contributed to the
increase.
Depreciation and amortization expenses include depreciation on equipment,
aircraft and aircraft improvements and amortization of leasehold improvements,
goodwill and aircraft and loan acquisition costs. Depreciation and amortization
expenses were $4,721,000 and $2,149,000 in 1997 and 1996, respectively, an
increase of $2,572,000 or 119.7%. Purchases of four aircraft largely completed
in the latter part of 1997, were the principal cause of the increase.
Depreciation and amortization expenses were $2,149,000 and $522,000 in 1996
and 1995, respectively, an increase of $1,627,000 or 311.7%. Purchases of
aircraft completed in the latter part of 1996 were the principal cause of the
increased depreciation expense.
AIRWAYS OVERVIEW OF THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 1997
Airways generated operating losses of $4,901,000 and $7,366,000 for the
quarters ended September 30, 1997 and 1996 respectively, a decrease in operating
loss of $2,465,000. Pre-tax loss, as a percentage of total revenues, was 22.8%
and 32.6% for the two quarters, respectively.
Airways generated operating losses of $5,075,000 and $7,848,000 for the six
months ended September 30, 1997 and 1996 respectively, a decrease in operating
loss of $2,773,000. Pre-tax loss, as a percentage of total revenues, was 11.4%
and 15.4% for the two six month periods, respectively.
AIRWAYS SELECTED OPERATING DATA FOR THREE AND SIX MONTH PERIODS ENDED SEPTEMBER
30, 1997
The table below sets forth selected operating data for the quarters ended
September 30, 1997 and 1996.
-62-
<PAGE>
<TABLE>
<CAPTION>
Quarters ended
-----------------------------------------------
September 30, September 30, Percentage
1997 1996 Change
-------------- -------------- ---------------
<S> <C> <C> <C>
Available seat miles (1) 345,341,000 380,846,000 (9.3)
Revenue passenger miles (2) 234,880,000 232,609,000 1.0
Load factor (3) 68.0% 61.1% 6.9
Yield per revenue passenger mile (4) $ 0.097 $ 0.096 1.0
Passenger enplanements 272,125 270,149 .7
Departures 3,846 3,558 8.1
Miles 2,725,821 3,029,864 (10.0)
Block Hours (5) 7,627 8,073 (5.5)
Average stage length (miles) (6) 709 852 (16.8)
Average daily aircraft utilization (hours) 8.0 8.8 (9.0)
Aircraft (end of period) 11 10 10.0
Full-time equivalent employees (end of period) 587 516 13.8
</TABLE>
The table below sets forth the same data for the six months ended September 30,
1997 and 1996.
<TABLE>
<CAPTION>
Six months ended
--------------------------------------------------
September 30, September 30, Percentage
1997 1996 Change
-------------- -------------- -----------------
<S> <C> <C> <C>
Available seat miles (1) 705,534,000 753,048,000 (6.3)
Revenue passenger miles (2) 480,029,000 497,099,000 (3.4)
Load factor (3) 68.0% 66.0% 2.0
Yield per revenue passenger mile (4) $ 0.101 $ 0.102 (1.0)
Passenger enplanements 559,841 573,257 (2.3)
Departures 7,777 6,864 13.3
Miles 5,584,495 5,981,377 (6.6)
Block Hours (5) 15,456 15,965 (3.2)
Average stage length (miles) (6) 718 871 (17.6)
Average daily aircraft utilization (hours) 7.5 8.7 (13.8)
Aircraft (end of period) 11 10 10.0
Full-time equivalent employees (end of period) 587 516 13.8
</TABLE>
___________
(1) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(2) The number of scheduled miles flown by revenue passengers.
(3) Revenue passenger miles divided by available seat miles. Year over year
percent change is measured only as percentage points difference.
(4) Passenger revenue divided by revenue passenger miles.
(5) The number of hours aircraft flown as measured from the time of pushback
from the gate to the time of arrival at the next airport's gate.
(6) The average length of the routes flown on AirTran's scheduled route
system.
-63-
<PAGE>
The table below sets forth the major components of operating revenue and
expenses per ASM for Airways:
<TABLE>
<CAPTION>
For the quarter For the six months
ended September ended September
------------------------------ ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenue:
Passenger $ .066 $ .058 $ .069 $ .068
Charter .000 .000 .001 .000
Other .002 .002 .002 .001
------ ------ ------ ------
Total operating revenue .068 .060 0.72 .069
------ ------ ------ ------
Operating expenses:
Flight operations .031 .031 .030 .031
Maintenance .019 .019 .017 .018
Aircraft and traffic servicing .011 .011 .011 .011
Reservations, sales, and marketing .012 .011 .012 .012
General and administrative .005 .005 .004 .004
Depreciation and amortization .006 .003 .005 .003
------ ------ ------ ------
Total operating expense .083 .080 .079 .079
------ ------ ------ ------
Operating loss $(.014) $(.019) $(.007) $(.010)
====== ====== ====== ======
</TABLE>
AIRWAYS RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996
OPERATING REVENUES
Total passenger revenues were $22,854,000 and $22,289,000 for the quarters
ended September 30, 1997 and 1996, respectively, an increase of $565,000 or
2.5%. The increase is due to a combination of 1% growth in revenue passenger
miles flown and 1% increase in the yield on each revenue passenger mile
flown.
Total passenger revenues were $48,404,000 and $50,846,000 for the six months
ended September 30, 1997 and 1996, respectively, a decrease of $2,442,000 or
4.8%. The decrease is due to the fact that the Easter Holidays fell in the
fourth quarter of fiscal year 1996 while it normally falls in April or the first
quarter of each fiscal year.
ASMs were 345,341,000 and 380,846,000 for the quarters ended September 30,
1997 and 1996, respectively, a decrease of 35,505,000 or 9.3%. This was
principally the result of AirTran's rescheduling of the aircraft to make one
available at all times to serve as a spare to maintain AirTran's completion
factors and reliability performance. Revenue Passenger Miles ("RPM's") were
234,880,000 and 232,609,000 for the quarters ended September 30, 1997 and 1996,
respectively, an increase of 2,271,000 or 1.0%. This was caused by sharply
higher load factors offset by the reduced capacity. Load factors were 68.0% and
61.1% for the quarters ended September 30, 1997 and 1996, respectively, an
increase of 6.9 percentage points.
AirTran also had charter revenue which is derived from making its airplanes
available to charter operators when they would otherwise not be efficiently
used. Charter revenues were $68,000 and $66,000 for the quarters ended
September 30, 1997 and 1996, respectively, an increase of $2,000 or 3.0%
Charter revenues were $630,000 and $89,000 during the six months ended
September 30, 1997 and 1996 respectively, an increase of $541,000 or 607.9%
primarily due to increased charter demand to Nassau, Bahamas.
In addition, the consolidated operations include other revenues, principally
cancellation revenue, change fees, liquor sales and the sales of the FBO which,
collectively, were $700,000 and $631,000 for the quarters ended September 30,
1997 and 1996, respectively, an increase of $69,000 or 10.9%.
-64-
<PAGE>
Other revenues were $1,640,000 and $1,063,000 for the six months ended
September 30, 1997 and 1996, an increase of $577,000 or 54.3%.
OPERATING EXPENSES
Flight operations expense includes expenses related directly to the
operation of aircraft except for depreciation and amortization of aircraft and
aircraft improvements. Expense for hull and liability insurance, crew salaries
and their overnight expenses, aircraft fuel and flight operations administration
are all included in flight operations. Flight operations expenses were
$10,536,000 and $11,741,000 for the quarters ended September 30, 1997 and 1996,
respectively, a decrease of $1,205,000 or 10.3%. The decrease in expense was
principally due to $1,100,000 of rent expense for aircraft leased by AirTran, on
a short term basis, during last year's second quarter to ensure the reliability
of its schedule. In addition, total block hours decreased by 5.5%, and fuel
prices were down year over year while payroll and insurance costs increased over
last year's second quarter.
Flight operations expenses were $21,017,000 and $23,522,000 for the six
months ended September 30, 1997 and 1996, respectively, a decrease of $2,505,000
or 10.6%. The decrease in expense was due to $1,700,000 of rent expense for
short term aircraft leases last year. Block hours decreased by 3.2%, accounting
for the remaining reduction in expense.
Maintenance expense includes all expenses related to the upkeep of aircraft.
Such expenses include labor, parts, supplies and contract maintenance. The
direct costs of airframe and engine overhauls are generally expensed and, for
leased aircraft, paid monthly to the lessors in the form of reserves. For owned
aircraft, AirTran reserves on a per flight hour basis for future maintenance
that becomes due in the ordinary course. These reserves are recorded on
AirTran's balance sheet each month as the aircraft are flown. The reserves are
then available for major overhauls when they occur. When aircraft are first
delivered to AirTran, and shortly thereafter, the cost of overhauls of engines
and airframes that may be required to render them fully serviceable is
capitalized and amortized over the period remaining until the next scheduled
overhaul. Maintenance expenses were $6,417,000 and $7,389,000 for the quarters
ended September 30, 1997 and 1996, respectively, a decrease of $972,000 or
13.2%. The decrease is the result of several factors, some increasing expense
and some decreasing:
. AirTran spent $1,175,000 more last year in connection with the extensive
reviews conducted on the aircraft and maintenance records by independent
consultants.
. Block hours (which normally are a cost driver for maintenance) were down
446 hours or 5.5% resulting in a decrease in maintenance expense.
. AirTran also invested heavily in engines, airframes and related equipment
during last year's second quarter and charged those costs to expense.
. On the other hand, in this year's second quarter, AirTran recorded
$600,000 of additional reserve expense related to heavy maintenance not
provided for by reserves on the balance sheet.
Maintenance expenses were $11,863,000 and $13,881,000 for the six months
ended September 30, 1997 and 1996, respectively, a decrease of $2,018,000 or
14.5%. The decrease is the result of several factors, some increasing expense
and some decreasing:
. AirTran spent $1,400,000 more last year on reviews of its aircraft and
records.
. Block hours were down 509 hours or 3.2%.
. AirTran also invested heavily in engines, airframes and related equipment
during last year's second quarter and charged those costs to
expense.
. AirTran recorded $600,000 of additional reserve expense.
Aircraft and traffic servicing expense includes all expenses incurred at
airports, including landing fees, facilities rental, station labor, ground
handling services and catering expenses. Aircraft and traffic servicing
expenses were $3,689,000 and $4,247,000 for the quarters ended September 30,
1997 and 1996, respectively, a decrease of $558,000 or 13.1%. Although AirTran
had 8.1% more flights during this year's second quarter, which increased some
expenses, the cost of interrupted trips for AirTran's passengers dropped by
$587,000 or
-65-
<PAGE>
85.1% from the prior year. The significant decrease is largely a consequence of
AirTran's improved operating performance, having completed over 99% of flights
in this year's second quarter. Last year, the extensive internal reviews and
renovations of aircraft that were taking place caused the interruptions.
Aircraft and traffic servicing expenses were $7,598,000 and $8,257,000 for
the six months ended September 30, 1997 and 1996, respectively, a decrease of
$659,000 or 8.0%. Although AirTran had 13.3% more flights during this year's six
months, the cost of interrupted trips for AirTran's passengers dropped by
$1,506,000 or 89.1% from the prior year.
Reservations, sales and marketing expense includes those departments' wages
and salaries, computer reservation system costs, communication expenses and
travel agency commissions. Reservations, sales and marketing expenses were
$4,143,000 and $4,167,000 for the quarters ended September 30, 1997 and 1996,
relatively unchanged from last year's second quarter.
Reservations, sales and marketing expenses were $8,494,000 and $9,356,000 for
the six months ended September 30, 1997 and 1996, respectively, a decrease of
$862,000 or 9.2%. This decrease was principally driven by a shift in the mix of
AirTran's business toward more direct reservations being made on AirTran's 1-
800-AIR-TRAN number as opposed to through travel agencies. This shift reduces
travel agency commissions and their charges for computer reservation services.
Additionally, AirTran's marketing dollars have been significantly more targeted
this year and have been augmented by cooperative advertising programs initiated
this year. Offsetting some of these decreases is a significant increase in
staffing costs in the reservations center to accommodate the increased demand.
General and administrative expense includes the wages and benefits for
Airways' executive officers and administrative personnel as well as costs for
the headquarters office, legal, accounting and miscellaneous expenses. General
and administrative expenses were $1,637,000 and $1,720,000 for the quarters
ended September 30, 1997 and 1996, respectively, a decrease of $83,000 or
4.8%.
General and administrative expenses were $3,039,000 and $2,639,000 for the
six months ended September 30, 1997 and 1996, respectively, an increase of
$400,000 or 15.2%. AirTran established a procurement function since the prior
year, charged to general and administrative expenses, which, together with
bringing legal counsel in-house, caused a sharp rise in administrative salary
expense. This was partially offset by lower outside legal fees and also lower
salary costs in maintenance as many of the procurement staffpersons were
transferred to general and administrative from maintenance.
Depreciation and amortization expense includes depreciation on equipment,
airframes, engines and aircraft modifications and amortization of leasehold
improvements, goodwill and loan acquisition costs. Depreciation and
amortization expense were $2,101,000 and $1,088,000 for the quarters ended
September 30, 1997 and 1996, respectively, an increase of $1,013,000 or 93.1%.
The increase is primarily due to the capitalization of portions of engine
overhaul costs incurred after an engine was acquired between overhaul intervals.
Property and equipment at September 30, 1997 and 1996, respectively, were
$48,455,000 and $43,890,000, an increase of $4,565,000 or 10.4%. More of the
fixed assets added during the past year have shorter useful lives. Largely,
they represent capitalized improvements to aircraft and engines which will
benefit AirTran until the next scheduled overhaul causing depreciation expense
to increase more rapidly than the underlying fixed assets.
Depreciation and amortization expense were $3,738,000 and $2,191,000 for the
six months ended September 30, 1997 and 1996, respectively, an increase of
$1,547,000 or 70.6% caused by the same additions to fixed assets.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1997, ValuJet used cash flow from
operations of approximately $3.7 million, primarily attributable to the $42.3
million net loss which was offset by various fluctuations in certain balance
sheet accounts. The Company also used cash of approximately
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$17.4 million to acquire property and equipment, which includes the purchase of
engines and rotable parts as well as deposits on the MD-95 aircraft. Cash was
generated from the disposal of property and equipment of approximately $3.2
million. Approximately $9.0 million of cash was used in financing activities
primarily due to debt repayment of approximately $81.7 million offset by the net
proceeds of the Notes of approximately $72.4 million . As of September 30 ,
1997, ValuJet had cash and cash equivalents of approximately $123.2 million and
working capital of approximately $112.8 million. Taking into account the Merger
on a pro forma basis, the Company would have had as of September 30, 1997, cash
and cash equivalents (exclusive of $10.0 million of restricted cash) of $128.4
million and working capital of $82.7 million.
ValuJet has contracted with the Boeing Company ("Boeing") for the purchase
of 50 MD-95 aircraft, at a cost of approximately $1.0 billion (subject to
adjustments for inflation), for delivery in 1999 to 2002. Approximately $7.6
million and $31.7 million of cash and notes payable will be paid in progress
payments during 1997 and 1998, respectively. The balance of the purchase price
after all progress payments is required to be paid or financed upon delivery of
each aircraft. If ValuJet exercises its option to acquire up to an additional
50 MD-95 aircraft, additional payments will be required. ValuJet may finance up
to 90% of the cost or appraised value of each of these aircraft. Although
Boeing has agreed to provide assistance with respect to the financing of
aircraft to be acquired, ValuJet will be required to obtain the financing from
other sources. ValuJet believes that with the assistance to be provided by
Boeing, aircraft related debt financing should be available when needed.
However, there is no assurance that ValuJet will be able to obtain sufficient
financing on attractive terms. If it is unable to do so, ValuJet could be
required to modify its aircraft acquisition plans or to incur higher than
anticipated financing costs, which could have a material adverse effect on
ValuJet's results of operations and cash flows.
ValuJet's compliance with Stage 3 noise requirements will require substantial
additional capital expenditures over the next several years. By December 31,
1999, all of ValuJet's aircraft must be brought into compliance with Stage 3
requirements. ValuJet intends to meet its Stage 3 noise requirement obligations
by installing hush kits on Stage 2 aircraft and acquiring Stage 3 aircraft.
ValuJet expects that FAA certified hush kits will cost approximately $2.3
million per aircraft or approximately $55.0 million for a fleet of 24 non-hushed
DC-9-30 aircraft as of September 30, 1997. Approximately $7.3 million of the
proceeds from ValuJet's sale of the Notes will be used to finance 80% of the
cost of four hush kits. ValuJet may be able to finance a portion of the cost of
the remaining hush kits to be acquired and plans to make the balance of
payments on these hush kits from cash flow from operations and from cash
reserves. ValuJet expects to pay the debt service on any such loans out of cash
flow generated from operations during the term of the financing. The phase-in
period for full compliance with Stage 3 (through December 31, 1999) and the
expected terms of financing, if available, should allow ValuJet to spread the
payments for Stage 3 compliance over a number of years.
Prior to August 1997, a substantial number of ValuJet's secured notes allowed
the lender to accelerate payment if specific financial ratios (concerning debt
to equity, net worth, fixed charge coverage and current ratio) were not
maintained. Although ValuJet was in violation of the fixed charge coverage
ratio as of December 31, 1996, ValuJet subsequently entered into agreements with
six of the seven affected lenders for a waiver or reset of this financial test
for each quarter in 1997. ValuJet made all payments under such secured debt
when due and no prepayment event was declared by any lender. In addition,
ValuJet believes that it may have failed to meet certain of the reset financial
maintenance covenants as of June 30, 1997. However, no such determination was
made as all such debt was repaid with the proceeds of the issuance of the Notes.
During August 1997, ValuJet completed the issuance of the Notes. Approximately
$68.5 million of the proceeds of the Notes was used to prepay and replace
secured debt, including debt to seven bank lenders whose secured aircraft loans
contained various financial maintenance covenants. As result of this new
financing, ValuJet no longer has any debt outstanding with financial maintenance
covenants.
As of September 30, 1997, ValuJet's debt related to asset financing totaled
approximately $93.0 million with respect to which ValuJet's aircraft and certain
other equipment are pledged as security. This
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amount includes the $80 million of the Notes and approximately $13 million of
other aircraft bank mortgage financings. In addition, ValuJet has $150.0 million
of 10 1/4% senior unsecured notes ("10 1/4% Senior Notes") outstanding. The
principal balances of the Notes and 10 1/4% Senior Notes are due in 2001 and
interest is payable semi-annually. ValuJet's debt (other than the 10 1/4% Senior
Notes and the Notes) has final maturities ranging from 1998 to 2001, with
scheduled debt amortization as follows: fourth quarter 1997 -- $1.6 million,
1998--$6.6 million, 1999--$3.0 million, 2000--$1.4 million, 2001--$400,000.
Certain of ValuJet's secured debt, excluding the Notes, bears interest at
fixed rates ranging from 8.0% to 9.78% per annum and is repayable in consecutive
monthly or quarterly installments over a two- to four year period. Certain
other notes have a variable rate of interest based on the London interbank
offered rate (LIBOR) plus 2.26% to 2.75%.
Although ValuJet Airlines owns all of its aircraft and does not have any
lease commitments relating to its aircraft fleet, AirTran has leased seven of
its 11 aircraft. In addition, Airways had approximately $9.4 million of debt
(other than debt to the Company) as of September 30, 1997.
Although ValuJet has sufficient cash assets to pay its recurring obligations
and debt service for an extended period of time, ValuJet's failure to resume
profitable operations may result in defaults under ValuJet's debt and the
acceleration of ValuJet's debt. In such event, there can be no assurance that
ValuJet would be able to satisfy all of its obligations on a timely basis.
The Company believes that the ValuJet name and image were significantly
impaired by the accident in May 1996, the subsequent suspension of operations
and the resulting adverse media exposure. As a result, the Company has
commenced the implementation of a program to enhance its image. In anticipation
of the Merger and to seek to increase revenue opportunities of both ValuJet
Airlines and AirTran, the parties entered into a Code Share Agreement and
License Agreement in September 1997. The Code Share Agreement permits the
airlines to use a single designator code in the Official Airline Guide and in
reservations systems. The License Agreement provides the Company the non-
exclusive use of the name "AirTran Airlines," AirTran's designator code "FL" and
AirTran's service marks. In order to begin to capitalize on this joint
marketing program, the Company's operating subsidiary, ValuJet Airlines, has
changed its name to AirTran Airlines, is repainting its aircraft with the
AirTran logo and is changing its marketing accordingly. In addition, the
Company is reconfiguring its aircraft to provide 16 business class seats in each
aircraft and will commence to offer advance seat selection beginning in fourth
quarter 1997. This program is being implemented during the second half of 1997
and is expected to result in the incurrence of up to $10 million of expenses for
advertising, promotion, aircraft repainting, the reconfiguration of aircraft to
add business class seating, new signage and new uniforms during the period.
In addition, the Company expects to incur an additional $4.0 million of
nonrecurring expenses in the fourth quarter of 1997 attributable to costs
associated with the reactivation into scheduled service of nine DC-9-30
aircraft. Additionally, the Company anticipates reporting larger than usual
maintenance expenditures in the fourth quarter resulting from aircraft
undergoing scheduled maintenance "C" checks.
As a result of the accident and suspension of operations, several class
action suits have been filed by stockholders against ValuJet and various
officers and directors alleging, among other things, misrepresentations under
applicable securities laws. The plaintiffs seek unspecified damages based upon
the decrease in market value of shares of ValuJet's stock. See "Business of
ValuJet -- Litigation." Although management of ValuJet intends to defend these
actions vigorously, any litigation contains elements of uncertainty and there
can be no assurance that ValuJet will not sustain material liability under such
or related lawsuits.
Numerous lawsuits have also been filed against ValuJet seeking damages
attributable to the deaths of those on Flight 592, and additional lawsuits are
expected. ValuJet's insurance carrier has assumed defense of these lawsuits
under a reservation of rights.
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As all claims are handled independently by ValuJet's insurance carrier,
ValuJet cannot reasonably estimate the amount of liability which might finally
exist. As a result, no accruals for losses and the related claim for recovery
from ValuJet's insurance carrier have been reflected in ValuJet's financial
statements. ValuJet maintains $750.0 million of liability insurance per
occurrence with a major group of independent insurers that provides facilities
for all forms of aviation insurance for many major airlines. Although ValuJet
believes, based on the information currently available to it, that such coverage
is sufficient to cover claims associated with this accident and that the
insurers have sufficient financial strength to pay claims, there can be no
assurance that the total amount of judgments and settlements will not exceed the
amount of insurance available therefor or that all damages awarded will be
covered by insurance.
Safe Harbor Statements. Statements made by the Company in this Prospectus
regarding the Company's ability to increase its service levels, to maintain its
low cost structure and to become profitable again and with respect to the effect
on the Company of litigation are forward-looking statements and are not
historical facts. Instead they are estimates or projections involving numerous
risks and uncertainties including, but not limited to, governmental approval of
increases in service by the Company, the utilization level of the Company's
aircraft, the level of those costs which are beyond the Company's control, the
effect of the Company's accounting policies, the Company's ability to hire and
retain qualified personnel under its new compensation program and the results of
pending lawsuits. These risks and uncertainties could potentially cause the
Company's implementation of additional service to be delayed or the Company's
costs to exceed present estimates. The Company disclaims any obligation to
update or correct any of its forward-looking statements.
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<PAGE>
BUSINESS OF VALUJET
GENERAL
ValuJet, through its wholly owned subsidiary, AirTran Airlines, Inc.
operates an affordable, no frills, limited frequency, scheduled airline serving
short haul markets primarily in the eastern United States. ValuJet believes that
its low cost, no frills philosophy allows it to offer among the lowest fares in
its markets and generate its own traffic by stimulating incremental demand with
fare conscious travelers.
ValuJet commenced flight operations in October 1993 with two DC-9 aircraft
serving three cities from Atlanta with eight flights per day. The success of
ValuJet's business model allowed it to grow rapidly. During 1995, ValuJet
achieved revenues of $367.8 million and net income of $67.8 million. Prior to
June 17, 1996, ValuJet offered service to 30 cities from Atlanta, Washington,
D.C. (Dulles Airport), Boston and Orlando and operated up to 320 flights per
peak day with its fleet of 51 aircraft.
ValuJet's operations were interrupted by the suspension of ValuJet's
service on June 17, 1996, pursuant to a consent order entered into with the FAA
following the accident involving Flight 592 on May 11, 1996 and the ensuing
extensive adverse media and intense FAA scrutiny into ValuJet's maintenance and
safety procedures.
Prior to ValuJet's resumption of service, ValuJet undertook a thorough
review of its operations, implemented several measures to respond to the
concerns that were raised by the FAA and reaffirmed its focus on the safety of
its aircraft and operations. These measures included: (i) creating a new
position for Senior Vice President of Maintenance and Engineering reporting
directly to the President of ValuJet Airlines; (ii) implementing intensified
performance, safety and compliance-assurance audits of key maintenance
subcontractors, together with revised procedures for qualification, inspection
and supervision of all maintenance contractors; (iii) creating an in-house
organization to supervise all engineering and maintenance planning functions;
(iv) instituting improved maintenance training procedures that require more
hours for initial DC-9 familiarization and orientation training, expanded
on-the-job and initial avionics training, mandatory recurrent training for all
ValuJet and outstation contract mechanics, and new courses for inspectors, lead
mechanics and maintenance managers; (v) reviewing thoroughly all aircraft prior
to reintroducing them into service, including, in each case, reconfirming
compliance with all Airworthiness Directives, correcting aircraft-specific FAA
inspection findings and performing special emphasis "B" checks; and (vi)
expanding training for customer service and station personnel.
Upon implementation of ValuJet's response outlined above and receipt of FAA
approval, ValuJet resumed limited operations with service between Atlanta and
four other cities as of September 30, 1996. ValuJet has continued to work with
the FAA since that time to recertify aircraft and expand its flight operations.
As of August 31, 1997, the FAA has approved 31 of ValuJet's DC-9 Series 30
aircraft for flight and ValuJet operates a total of 200 flights per peak day of
which 182 flights per peak day are between Atlanta and 23 other cities.
Additional service is offered between Washington, D.C. (Dulles Airport) and
Boston and Chicago and between Boston and Philadelphia.
As a result of the accident, the suspension of operations and subsequent
reduced service levels, ValuJet recorded net losses of $41.5 million for the
year ended December 31, 1996, and $42.3 million in the first nine months of
1997. ValuJet attributes these losses to substantial nonrecurring expenses
incurred in connection with the accident, the allocation of fixed costs over
fewer ASMs as a result of ValuJet's reduced flight operations, and lower
revenues resulting from reduced flight operations, lower load factors and
reduced average fares.
Since ValuJet resumed service on September 30, 1996, its principal
near-term objective has been to return to profitability by increasing flight
operations and regaining its low historic cost level per ASM. ValuJet's
operating cost per ASM was 6.77c for the year ended December 31, 1995, one of
the lowest in the airline industry. Although ValuJet's operating cost per ASM
(excluding those expenses classified as shutdown and other nonrecurring
expenses) increased to 10.24c in the first quarter of 1997, ValuJet reported
that its cost per ASM declined to 8.22c and 8.11c for the second and third
quarters of 1997, respectively, which it
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believes compares favorably with other airlines providing service in ValuJet's
markets. ValuJet's goal is to continue to reduce its cost per ASM through the
end of 1997.
Despite lower average fares, ValuJet's load factors during the period from
recommencement of operations on September 30, 1996, through April 30, 1997 have
been less than the load factors achieved by ValuJet during the same month in the
previous year, except for October 1996, during which ValuJet offered aggressive
fare discounts. Management believes that the lower load factors are
attributable to aggressive fare matching by ValuJet's competitors and as a
result of the accident involving Flight 592 and the suspension of operations.
The following reflects a comparison of ValuJet's load factor in each month
following recommencement of operations and the same month of the immediately
preceding year:
<TABLE>
<CAPTION>
Month Load Factor Month Load Factor
----- ------------ ----- ------------
<S> <C> <C> <C>
October 1996 72.1% October 1995 64.2%
November 1996 48.2% November 1995 66.7%
December 1996 56.0% December 1995 62.8%
January 1997 41.5% January 1996 48.5%
February 1997 55.7% February 1996 58.6%
March 1997 62.1% March 1996 65.3%
April 1997 59.7% April 1996 61.8%
</TABLE>
MERGER WITH AIRWAYS CORPORATION
On July 10, 1997, the Company entered into a merger agreement with Airways.
Under the merger agreement, the Company acquired Airways on November 17, 1997,
through a merger of Airways with and into the Company. In anticipation of the
Merger, the name of ValuJet Airlines has been changed to "AirTran Airlines."
Upon completion of the Merger, the Company changed its name to AirTran Holdings,
Inc. Airways' operating subsidiary (AirTran) will continue to operate under its
current name. The Company has announced that it will move its headquarters to
Airways' existing headquarters in Orlando, Florida. While the Company intends
to initially operate ValuJet Airlines and AirTran under separate operating
certificates, it may also merge these two operating subsidiaries at a later
date.
The Company believes that the Airways Acquisition will enable it to operate
more competitively and profitably in the eastern United States. Like ValuJet
Airlines, AirTran operates lower cost, used aircraft and targets fare conscious
leisure travelers with a limited flight frequency, no-frills product. Both
airlines rely on achieving and maintaining operating costs below industry
averages in order to offer low fares. The Company believes that the combined
entity can achieve significant financial and operating synergies and cost
savings in the first twelve months after the Merger by eliminating certain
redundant operations, reducing personnel and taking advantage of economies of
scale in maintenance operations and fuel purchasing. The 11 Boeing 737-200
aircraft operated by AirTran will provide increased revenue opportunities for
the Company through their longer flight range and greater seating capacity as
compared with the Company's DC-9 aircraft. The Company expects that the change
in name and product image that will accompany the Merger will further increase
its revenue opportunities. In addition, the Company believes that the Airways
Acquisition will afford it a competitive advantage in the consolidating airline
industry.
The purchase price paid by the Company in the Merger consisted of
approximately 9.1 million shares of common stock of the Company. The Merger
will also result in an increase in the consolidated debt of the Company of $9.4
million as of September 30, 1997 (which amount reflects the preexisting debt of
Airways), and the assumption by the Company on a consolidated basis of certain
off balance sheet operating lease obligations of Airways. In addition, as a
result of the Merger, a loan of $12.7 million from the Company to AirTran will
be converted into an intercompany loan. As part of the Merger, the Company will
acquire cash
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and cash equivalents and restricted cash held by Airways of approximately $15.2
million, as of September 30, 1997. The Company will also acquire all other
assets of Airways, including four Boeing 737's currently owned by Airways, three
of which are Stage 3 aircraft, Airways' fixed based operations, located in Grand
Rapids, Minnesota and Airways' hangar, located in Orlando, Florida. There can be
no assurance that the Company will be able to realize the expected benefits from
the Merger. See "Risk Factors -- Risks Associated with the Merger" and "Pro
Forma Condensed Combined Financial Information."
STRATEGY
In order to return to profitability and resume growth, ValuJet intends to
pursue a three-pronged strategy (i) to maintain its traditional cost and value
leadership in the markets that it serves, (ii) to reposition its brand image
with its target value-conscious customers to address the long-term adverse
effects of the May 1996 accident and the subsequent suspension of operations,
and (iii) to gradually expand capacity as market demand warrants.
ValuJet's strategy is to provide a safe, reliable, customer friendly
alternative for affordable air transportation. ValuJet's operating strategy is
based on its commitment to offer everyday low fares that stimulate demand from
leisure and fare conscious business travelers. The key elements in this
strategy are a simple fare structure and a competitive low cost structure based
on a ticketless distribution system, a fleet of low cost DC-9 aircraft and
relatively low labor costs. For the customer, "simple" means the service is
easy to understand and use, including a simplified fare structure, with everyday
low prices, simplified reservations and check-in procedures and a ticketless
process. In contrast, today's airline industry is characterized by complex
fares, schedules, reservations, check-in procedures and, in most cases, physical
ticketing.
ValuJet's service is intended to satisfy the basic air transportation needs
of ValuJet's targeted customers who are short haul leisure travelers visiting
friends and relatives or vacationing and fare conscious business travelers.
ValuJet believes that the basic air transportation needs of its targeted
customers can be satisfied by providing a limited number of flights per day
(currently up to nine frequencies), baggage service, in-flight beverages and the
ability to make advance reservations. ValuJet avoids what it believes to be
unnecessary and nonproductive costs such as meals, a frequent flyer program,
airport clubs and other amenities offered by many of its competitors.
ValuJet's pricing structure and affordable fares are intended to stimulate
new demand for air travel by leisure customers and fare conscious business
travelers who would have otherwise not traveled or used ground transportation.
ValuJet's simple fare system incorporates a predictable, "everyday low pricing"
fare structure designed to provide its customers with substantial savings over
its competitors based on walk up fares and further savings by purchasing seats
in advance or by flying during off peak times. ValuJet believes that it has
historically generated its own traffic through low fare market stimulation
rather than by pursuing the more traditional airline approach of competing for
market share with existing carriers.
ValuJet's thrifty and informal brand image has traditionally complemented
its position as the cost and value leader in its target markets. While ValuJet
believes that its basic business model remains viable, it believes that its name
and image have been significantly impaired by the accident in May 1996, the
subsequent suspension of operations and the resulting adverse media exposure.
As a result, ValuJet has commenced the implementation of a program to enhance
its image. In anticipation of the Merger and to seek to increase revenue
opportunities of both ValuJet Airlines and AirTran, the parties entered into a
Code Share Agreement and License Agreement in September 1997. The Code Share
Agreement permits the airlines to use a single designator code in the Official
Airline Guide and in reservations systems. The License Agreement provides
ValuJet the non-exclusive use of the name "AirTran Airlines," AirTran's
designator code "FL" and AirTran's service marks. In order to begin to
capitalize on this joint marketing program, ValuJet's operating subsidiary,
ValuJet Airlines, has changed its name to AirTran Airlines, is repainting its
aircraft with the AirTran logo and is changing its marketing accordingly. In
addition, ValuJet is reconfiguring its aircraft to provide 16 business class
seats in each aircraft and with commence to offer advance seat selection
beginning in fourth quarter 1997. This program is being implemented during the
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second half of 1997 and is expected to result in the incurrence of material
expenses during the period.
Once ValuJet reestablishes profitability and a favorable brand image,
ValuJet intends to pursue a prudent growth strategy. ValuJet has entered into a
contract with Boeing to purchase 50 new MD-95 aircraft, to be delivered from
1999 through 2002, with options to purchase an additional 50 aircraft. The MD-
95 will have 115 seats, consisting of 16 business class seats and 99 coach
seats. ValuJet estimates that the MD-95 aircraft, which have a slightly larger
seating capacity, increased fuel efficiency and lower maintenance costs than
ValuJet's DC-9 aircraft, will provide a cost per ASM lower than ValuJet's DC-9
fleet, even after taking into account the aircraft's higher acquisition cost.
ValuJet is the "launch" customer of the MD-95 aircraft. As the launch customer,
ValuJet anticipates that this contract will provide material value in terms of
acquisition cost and manufacturer financing assistance. ValuJet determined that
the MD-95 aircraft offers the optimum balance between operating cost and revenue
opportunity.
GEOGRAPHIC MARKET
ValuJet's markets are located predominantly in the eastern United States.
These markets are attractive to ValuJet due to the concentration of major
population centers within relatively short distances from Atlanta, historically
high air fares and the potential for attracting leisure customers who would
otherwise use ground transportation.
During 1996, the Atlanta Airport was the second busiest airport in the
United States, enplaning over 30 million passengers. Additionally, ValuJet
offers service to Florida markets as ValuJet believes that more than 20 million
people visit the Florida markets by automobile every year from Atlanta and other
points in the eastern United States.
In ValuJet's city selection process, ValuJet considers the amount of airport
charges, incentives offered by communities to be served, the ability to
stimulate air travel and competitive factors.
FARES, ROUTE SYSTEM AND SCHEDULING
ValuJet serves short haul markets (up to 1,000 miles) primarily from Atlanta
with a limited number of flights (up to nine round trips per destination per
day) offering basic air transportation at affordable fares. Service is provided
on all routes every day although more frequent service may be provided on peak
travel days.
ValuJet offers a range of fares based on advance purchases of 14 days, 7
days and "walk-up" fares. Within the 14 and 7 day fare types, ValuJet offers
off-peak and peak fares which are typically $10 to $30 higher based on day of
week and time of day traveled. Peak travel times are those designated by flight
by ValuJet; peak times are generally portions of the day or all day on
Thursdays, Fridays, Saturdays and Sundays. All ValuJet's fares are
nonrefundable, but can be changed prior to departure for a $30 fee. ValuJet's
fares are always purchased on a one-way basis. ValuJet's fares do not require
any minimum, maximum or day of week (e.g., Saturday night) stay. ValuJet's
simplified fare offerings, all for a single class of service, are in direct
contrast to prevalent pricing policies in the industry where there are typically
many different price offerings and restrictions for seats on any one flight.
ValuJet's published Atlanta fares for non-stop service range from $49 to $89
for off-peak one-way travel on a 14 day advance purchase basis and $119 to $159
for one-way travel on a "walk-up" basis. During the reintroduction of ValuJet's
service to markets previously served and during the introduction of service to
new markets, ValuJet generally offers introductory one-way fares for all flights
to or from Atlanta. In addition, ValuJet offers fare sales from time to time
(such as additional discounts for companion travelers) in order to seek to
generate additional traffic. There is recently passed legislation that imposes
taxes on domestic airline transportation equal to a per segment flown charge
(initially $1.00 to be increased to $3.00 by 2003) plus a percentage of the
ticket price (initially 9% to be decreased to 7.5% in 1999). Such taxes will
likely have a greater effect on leisure
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travelers. Since ValuJet relies to a large extent on leisure travelers, such tax
increase may affect ValuJet to a greater extent than ValuJet's competitors who
rely more heavily on business travelers. As of this time, ValuJet does not
expect to increase its fares to offset the effect of these taxes.
A majority of ValuJet's customers originate or terminate their travel on
ValuJet's non-stop service. One-stop connecting service is provided through
Atlanta between certain of the other cities served by ValuJet.
The following table sets forth certain information with respect to ValuJet's
route system based on ValuJet's schedule in effect as of September 3, 1997.
<TABLE>
<CAPTION>
Round Trip
Service Flights
Commencement Scheduled
Airport Served Date (a) On Peak Day (b)
-------------- ----------------- ---------------
<S> <C> <C>
Atlanta-
Akron/Canton, OH March 1997 3
Boston, MA.............. February 1997 3(c)
Chicago, IL (Midway).... October 1996 5
Dallas/Fort Worth, TX... April 1997 5
Flint, MI............... May 1997 3
Fort Lauderdale, FL..... September 1996 6
Fort Myers, FL.......... January 1997 2
Fort Walton Beach, FL... October 1996 2
Jacksonville, FL........ October 1996 4
Memphis, TN............. October 1996 4
Mobile, AL.............. October 1996 2
New Orleans, LA......... October 1996 3
Newport News, VA........ October 1996 3
Orlando, FL............. September 1996 6
Philadelphia, PA........ October 1996 4
Raleigh/Durham, NC...... October 1996 4
Savannah, GA............ October 1996 2
Tampa, FL............... September 1996 6
Washington DC (Dulles).. September 1996 9
West Palm Beach, FL..... December 1996 2
Washington, DC (Dulles)-
Atlanta, GA............. September 1996 9
Boston, MA.............. February 1997 4
Chicago, IL (Midway).... July 1997 3
- --------------------------
</TABLE>
(a) For markets served by ValuJet prior to the suspension of its operations, the
date indicated is the date ValuJet recommenced service.
(b) Peak day refers to the days of the week on which ValuJet provides the
greatest number of flights for the route shown.
(c) Does not include one-stop service through Washington, DC (Dulles) (up to
four round trips per peak day).
The Company also provides three round trips per peak day between Boston and
Philadelphia.
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The Company commenced service between Atlanta and Houston with three round
trips per peak day effective September 24, 1997. The Company announced that
service between Atlanta and New York's LaGuardia Airport will commence December
15, 1997.
Subject to the FAA's approval, ValuJet will consider the addition of other
markets and the provision of service between cities other than Atlanta. There
can be no assurance as to the timing of approvals of additional aircraft or
additional markets by the FAA which will depend upon the FAA's review of
ValuJet's operations. See "Risk Factors -- Accident/Suspension of Operations"
and "Risk Factors -- Federal Regulation."
ValuJet's aircraft scheduling strategy is directly related to the perceived
needs of its target market segments and the low fixed ownership costs of its
aircraft fleet. ValuJet's target customers are travelers visiting friends and
relatives, vacationers and small business travelers who are more price sensitive
than schedule or frequency sensitive. Since these customers are not typically
as time sensitive as business travelers, ValuJet's schedule provides for two to
nine frequencies per peak travel day in any given market.
ValuJet's low fixed aircraft ownership costs (depreciation plus interest
expense) provide ValuJet with flexibility to tailor capacity to demand. As a
result, on low demand travel days such as Tuesday and Wednesday, ValuJet reduces
total costs by operating a reduced schedule with fewer frequencies per market.
Conversely on peak days, ValuJet may add more frequencies to accommodate higher
demand. ValuJet generally keeps a number of its aircraft out of scheduled
service in order to provide operating spares and to rotate aircraft into routine
scheduled maintenance.
AIRCRAFT
As of August 31, 1997, ValuJet owned 42 DC-9 Series 30 aircraft. The Company
is in the process of reconfiguring its DC-9 fleet to 106 seats consisting of 16
business class seats and 90 coach seats. As of August 31, 1997, the FAA has
approved 31 of ValuJet's aircraft for operation by ValuJet. The addition of
aircraft to ValuJet's operations is subject to FAA and DOT approval. There can
be no assurance as to the timing or extent of any such subsequent approvals.
ValuJet's expansion is subject to FAA approval and could be affected by
heightened FAA scrutiny and ValuJet's ability to regain customer acceptance.
In order to simplify its operations and in light of the limited number of
aircraft ValuJet is authorized to operate, ValuJet has leased out three of its
aircraft under leases not longer than 18 months. Aircraft in excess of the
number ValuJet is authorized to operate will be stored until ValuJet receives
authorization to operate from the FAA and return them to service.
ValuJet has entered into a contract with Boeing to purchase 50 new MD-95
aircraft, to be delivered from 1999 through 2002, with options to purchase an
additional 50 aircraft. The MD-95 will have 115 seats, consisting of 16 business
seats and 99 coach seats. ValuJet estimates that the MD-95 aircraft, with a
slightly larger capacity, increased fuel efficiency and lower maintenance costs,
will provide a cost per ASM lower than ValuJet's existing DC-9 fleet, even after
including its higher acquisition cost. ValuJet is the "launch" customer of the
MD-95 aircraft. As the launch customer, ValuJet anticipates that this contract
will provide material value in terms of acquisition cost and manufacturer
financing assistance. ValuJet has determined that the MD-95 aircraft offers the
optimum balance for its purposes between operating cost and revenue
opportunity.
According to FAA rules, during 1997, each new entrant airline must have at
least 50% of its fleet in compliance with the FAA's Stage 3 noise level
requirements. The balance of such airlines' fleets must be brought into
compliance with Stage 3 noise level requirements in phases: 75% by December 31,
1998 and full compliance required by December 31, 1999. As of August 31, 1997,
only 18 of ValuJet's 42 aircraft meet the Stage 3 requirements. However, ValuJet
is in compliance with Stage 3 by virtue of the fact that 16 of ValuJet's 31
aircraft
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currently comply with these requirements. Of ValuJet's remaining 11 aircraft,
two comply with Stage 3 as of the date of this Prospectus. ValuJet intends to
meet the Stage 3 requirements by installing hush kits on certain of its Stage 2
aircraft and by acquiring additional Stage 3 aircraft. ValuJet expects that FAA
certified hush kits will cost approximately $2.3 million per aircraft or
approximately $55.0 million for a fleet of 24 non-hushed DC-9 aircraft.
Approximately $7.3 million of the proceeds from ValuJet's sale of the Notes will
be used to finance 90% of the cost of four hush kits. Although ValuJet has
sufficient cash reserves to fund the purchase of the remaining hush kits,
ValuJet intends to seek to finance a portion of the cost of the remaining hush
kits. If financing is obtained, ValuJet plans to pay for the nonfinanced portion
of the hush kits using cash flows generated from operations and from cash
reserves. ValuJet expects to pay the debt service on any such loans out of cash
flow generated from operations during the term of financing. The phase-in period
for full compliance with Stage 3 (through December 31, 1999) and the expected
terms of financing, if available, should allow ValuJet to spread the payments
for Stage 3 compliance over a number of years.
MAINTENANCE AND REPAIRS
Since ValuJet's fleet of DC-9 aircraft are all more than 20 years old, they
will require higher maintenance expenses than newer aircraft. ValuJet believes
that its aircraft are mechanically reliable and that in the long term the
estimated cost of maintenance to fly such aircraft will be within industry norms
for this aircraft type and age. Since the resumption of ValuJet's service in
September 1996, ValuJet has incurred higher maintenance expenses as a result of
costs incurred in connection with reactivating its aircraft. Amendments to FAA
regulations are under consideration which would require certain heavy
maintenance checks and other maintenance requirements for aircraft operating
beyond certain operational limits. ValuJet will be required to comply with such
proposals, if adopted, and with any other aging aircraft issues, regulations or
Airworthiness Directives, that may be promulgated in the future. There can be no
assurance that ValuJet's maintenance expenses (including costs to comply with
aging aircraft requirements) will fall within industry norms.
Five incidents involving ValuJet's aircraft during January through April
1996 (including one hard landing, one tail drag and three occasions on which
aircraft went off the runway) in which no injuries were sustained, the accident
involving Flight 592 and the suspension of ValuJet's operations have contributed
to a negative public perception as to the safety of ValuJet's aircraft and
operations. Extraordinary regulatory review of ValuJet's operations by the FAA
followed the May 1996 accident and various FAA findings ultimately resulted in
the consent order under which ValuJet's operations were suspended on June 17,
1996. In the consent order, the FAA alleged that ValuJet violated various
federal regulations relating to aircraft maintenance, maintenance manuals,
training, record keeping and reporting and ValuJet agreed to present a plan to
the FAA specifying the methods by which it would demonstrate to the FAA its
qualifications to hold an air carrier operating certificate. ValuJet
subsequently satisfied the FAA's requirements outlined in the consent order and
the FAA returned ValuJet's operating certificate to it on August 29, 1996.
ValuJet is likely to be subject to continuing regulatory scrutiny which could
affect ValuJet's operations, acquisition program and expansion plans
indefinitely.
Prior to the resumption of service, ValuJet implemented the following
additional steps to respond to the concerns that were expressed by the FAA and
reaffirmed its focus on the safety of its aircraft and operations: (i) creating
a new position for a Senior Vice President of Maintenance and Engineering, a new
position reporting directly to the President of ValuJet Airlines; (ii)
implementing intensified performance, safety and compliance-assurance audits of
key maintenance subcontractors, together with revised procedures for
qualification, inspection and supervision of all maintenance contractors; (iii)
creating an in-house organization to supervise all engineering and maintenance
planning functions; (iv) instituting improved maintenance training procedures
that require more hours for initial DC-9 familiarization and orientation
training, expanded on-the-job and initial avionics training, mandatory recurrent
training for all ValuJet and outstation contract mechanics, and new courses for
inspectors, lead mechanics and maintenance managers; (v) reviewing thoroughly
all aircraft prior to reintroducing them into service, including, in each case,
reconfirming compliance with all Airworthiness Directives, correcting aircraft-
specific FAA inspection findings and performing special emphasis "B" checks; and
(vi) expanding training for customer service and station personnel.
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Aircraft maintenance and repair consists of routine daily or "turn-around"
maintenance and major overhaul. Routine daily maintenance is performed at
Atlanta by ValuJet's employees or contract employees and by contractors at the
other cities served by ValuJet. Heavy maintenance and other work which require
hangar facilities are currently performed at three maintenance contractors. The
contractors are Zantop International Airlines, Inc. of Macon, Georgia, Aero
Corp. of Lake City, Florida and Pemco World Air Services of Dothan, Alabama.
ValuJet may replace these contractors or add additional contractors subject to
FAA approval. Other routine daily maintenance contractors are either other
airlines which operate DC-9 Series 30 aircraft or other maintenance companies
approved by the FAA, who in either case have employees qualified in DC-9 Series
30 aircraft maintenance.
The addition of MD-95 aircraft and Airways' Boeing 737-200 aircraft will
require greater inventories of spare parts and associated costs.
FUEL
The cost of jet fuel is an important expense for ValuJet. ValuJet estimates
that a 1c increase in fuel cost would increase ValuJet's fuel expenses by
approximately $59,000 per month, based on ValuJet's current fuel consumption
rate. This figure increases to $79,000 after consideration of Airways' recent
fuel consumption. Jet fuel costs are subject to wide fluctuations as a result of
sudden disruptions in supply, such as the effect of the invasion of Kuwait by
Iraq in August 1990. Due to the effect of world and economic events on the price
and availability of oil, the future availability and cost of jet fuel cannot be
predicted with any degree of certainty. Increases in fuel prices or a shortage
of supply could have a material adverse effect on ValuJet's operations and
operating results. ValuJet has not entered into any agreement which fixes the
price of fuel over any period of time.
A significant increase in the price of jet fuel would result in a
disproportionately higher increase in ValuJet's average total costs than its
competitors using more fuel efficient aircraft and whose fuel costs represent a
smaller portion of total costs. ValuJet would possibly seek to pass such a cost
increase to ValuJet's customers through a fare increase. There can be no
assurance that any such fare increase would not reduce the competitive advantage
ValuJet seeks by offering affordable fares.
ValuJet's fleet of DC-9 Series 30 aircraft are relatively fuel inefficient
compared to newer aircraft and industry averages. The primary reasons for this
inefficiency are aircraft size and engine technology. In management's opinion,
the lower ownership costs of the DC-9 aircraft more than compensate for this
relative fuel inefficiency. The MD-95 aircraft to be acquired by ValuJet are
expected to be more fuel efficient and should make ValuJet relatively less
susceptible to adverse effects attributable to fuel price changes.
DISTRIBUTION AND MARKETING
ValuJet's marketing efforts are vital to its success as it seeks to
stimulate new customer demand, generate the majority of its revenue through
consumer direct distribution channels and forgo traditional amenities. ValuJet
has targeted short haul travelers visiting friends and relatives, vacationing or
involved with fare conscious businesses. These are market segments which ValuJet
believes offer the greatest opportunity for stimulating new demand, selling
direct and not requiring traditional amenities. Based on a survey conducted by
ValuJet in 1994, a substantial majority of ValuJet's customers were traveling
for pleasure.
The primary objectives of ValuJet's marketing activities are to develop a
brand identity or personality which is visibly unique and easily contrasted with
its competitors and to communicate its service directly to potential customers.
When initiating service to a new market or restarting flights to previously
served markets, ValuJet typically makes extensive use of advertising, as well as
active public relations efforts, and focuses on the affordable fares to be
offered on an everyday basis.
ValuJet communicates regularly and frequently with potential customers
through the use of advertisements in newspapers, on radio and on billboards and
through toll-free telephone numbers. These communications feature
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<PAGE>
ValuJet's destinations, everyday affordable fares, ease of use (including its
simplified fare structure and ticketless travel process) and ValuJet's
reservations phone number.
ValuJet seeks to sell seats directly to the customer whenever possible.
ValuJet also sells seats through travel agents and pays customary sales
commissions, but without volume override increases. Information on its
customers' needs, travel patterns and identity is collected, organized and
stored by ValuJet's automated reservation system and can be used at a future
time for direct marketing efforts.
In June 1997, ValuJet signed participation agreements with two of the
leading travel agency computer reservation system ("CRS") vendors worldwide:
Sabre Travel Information Network Div. (SABRE) and Worldspan L.P. (WORLDSPAN).
These systems provide flight schedules and pricing information. However, flight
reservations made by travel agents can only be confirmed over the telephone with
ValuJet's reservations personnel. Beginning in the fourth quarter of 1997,
ValuJet's participation in these systems is expected to allow travel agents
participating in either of these two systems to electronically process a ValuJet
flight reservation without contacting ValuJet's reservations facility. These
agreements represent an effort by ValuJet to obtain the benefit of additional
distribution channels without compromising ValuJet's ticketless and direct form
of payment (credit card) practices.
ValuJet performs public relations and promotional activities in house.
Advertising is handled by an outside advertising agency.
In June 1997, ValuJet and Greyhound Lines, Inc. introduced "FlightLink"
which provides intermodal scheduled ground transportation between Atlanta's
Hartsfield International Airport and Dalton and Macon, Georgia as well as
Chattanooga, Tennessee. The operation uses modern 47-passenger air-conditioned
motor coach vehicles and provides up to six round-trip segments to each
destination. Customers connecting to/from ValuJet flights can take advantage of
FlightLink's reservations, baggage checking and flight check-in functions. By
using this service, customers avoid airport parking availability problems as
well as parking lot fees and are delivered to Hartsfield's North Terminal lower
level doors. Customers not connecting to ValuJet flights may also purchase
FlightLink reservations.
ValuJet and The Hertz Corporation operate a joint program under which
ValuJet's customers are able to reserve a Hertz rental car outside of Florida at
discounted rates when making a reservation for ValuJet's flights. Alamo Rent A
Car offers discounted car rental rates to ValuJet's customers in Florida.
Air travel in ValuJet's markets tends to be seasonal, with the highest
levels occurring during the winter months to Florida and the summer months to
the midwest/northeastern U.S. Advertising and promotional expenses may be
greater in lower traffic periods, as well as when entering a new market, in an
attempt to stimulate further air travel.
AUTOMATION
Automation is a key component of ValuJet's strategy. ValuJet's UNIX based
computer system has been specifically designed to implement ValuJet's
simplified, ticketless service and is an important component of ValuJet's
attempt to maintain its low cost structure, particularly as ValuJet grows.
ValuJet has designed its computer system to capture information in the
computer at its source, eliminating paper records whenever possible. These
entries are made by the reservation agents, eliminating subsequent data
processing entries. Once the initial data has been entered into the system, the
system updates various affected files and reports. ValuJet's software supports
all of ValuJet's operational areas (e.g., flight operations, maintenance,
accounting, marketing and personnel).
A key component of this system and ValuJet's low cost structure is the
"ticketless" environment. At the time of a sale/reservation, ValuJet provides
its customers with a confirmation number, similar to the systems used by hotels
and car rental agencies. At the airport, this information is available for
customer check-in, which typically
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requires only two to three key strokes by the gate agent and helps to alleviate
long lines and achieve a quicker turnaround of aircraft. After the flight has
departed, the computer posts passenger revenue from the passenger manifest
information.
In June 1997, ValuJet entered into an agreement for the Open Skies
reservation system which it expects will provide greater flexibility than the
system currently in use. Benefits expected from the Open Skies system include
improved mainframe and hardware performance and reliability, CRS (SABRE) booking
access, applications to improve unit revenue through enhanced data reporting and
software to facilitate Internet reservations booking and processing. ValuJet
expects to effect a transition to the new system during the second half of 1997.
There can be no assurance that ValuJet will not suffer losses of revenue during
the transition period or that ValuJet will be able to secure the benefits
sought.
Furthermore, ValuJet does not participate in the ARC, the airline industry
collection agent for travel agency sales. At the time of the reservation,
ValuJet identifies the travel agency making the booking and takes credit card
information. Each agency then receives a statement summarizing these
transactions. Although management believes that travel agencies are accustomed
to doing business through ARC, management believes that the cost savings
realized by avoiding the fees and revenue accounting costs inherent in the ARC
system justify not participating in ARC.
Because of its ticketless system and its non-participation in ARC, ValuJet's
customers are not able to transfer their reservations from ValuJet to other
airlines, for example in the event of an interruption of a Company flight or a
last minute change in their travel plans.
EMPLOYEES
As of August 31, 1997, ValuJet employed approximately 2,300 people.
Additional employees will be hired as ValuJet increases the number of aircraft
operated subject to FAA approval.
ValuJet has modified its compensation program, increasing employee base pay
for most workers and reducing reliance on variable performance bonuses as a
major component of the overall compensation package. Regular, periodic bonuses
have been eliminated.
Training, both initial and recurrent, is required for most employees. The
average training period for all new employees is approximately one to two weeks,
depending on classification. Both pilot training and mechanic training are
provided by professional training organizations, which may include other
airlines. ValuJet generally pays for recurrent training.
FAA regulations require pilots to be licensed as commercial pilots, with
specific ratings for aircraft to be flown, and to be medically certified as
physically fit. Licenses and medical certification are subject to periodic
continuation requirements including recurrent training and recent flying
experience. New hire pilots pay for their own initial training which includes an
airline transport pilot rating. Mechanics, quality-control inspectors and flight
dispatchers must be licensed and qualified for specific aircraft. Flight
attendants must have initial and periodic competency fitness training and
certification. Training programs are subject to approval and monitoring by the
FAA. Management personnel directly involved in the supervision of flight
operations, training, maintenance and aircraft inspection must meet experience
standards prescribed by FAA regulations. All of these employees are subject to
pre-employment and subsequent drug testing.
ValuJet's flight attendants have elected the Association of Flight
Attendants ("AFA") and ValuJet's mechanics have elected the International
Brotherhood of Teamsters (the "Teamsters") to represent them in negotiating
contracts with ValuJet. In April 1997, ValuJet reached an agreement with the
Teamsters. ValuJet does not expect that the unionization of its flight
attendants or mechanics will have a material adverse effect on its operating
costs or performance. However, until union contracts are negotiated, there can
be no assurance that this will be the case.
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ValuJet is unable to predict whether any of its other employees will elect
to be represented by a labor union or other collective bargaining unit. The
election by ValuJet's employees for representation in such an organization could
result in employee compensation and working condition demands that may affect
operating performance or expenses.
The AFA and a former flight attendant have filed a lawsuit against ValuJet
relating to alleged violatons under the Railway Labor Act. See " --
Litigation."
ValuJet from time to time considers alternative means of providing
compensation to its employees and ValuJet's method of determining compensation
is subject to possible change in the future.
AIRPORT OPERATIONS
Ground handling services typically can be placed in three categories--public
contact, underwing and complete ground handling. Public contact services involve
meeting, greeting and serving ValuJet's customers at the check-in counter, gate
and baggage claim area. Underwing ground handling services include, but are not
limited to, marshaling the aircraft into and out of the gate, baggage and mail
loading and unloading, as well as lavatory and water servicing, anti-icing and
deicing and certain services provided to the aircraft overnight. Complete ground
handling consists of public contact and underwing services combined.
All of ValuJet's ground handling services in Atlanta are conducted by
ValuJet's employees. At other airports, Company operations not conducted by
ValuJet's employees are contracted to other air carriers, ground handling
companies or fixed base operators.
INSURANCE
ValuJet carries customary levels of passenger liability insurance, aircraft
insurance for aircraft loss or damage and other business insurance. ValuJet is
exposed to potential catastrophic 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. See "Litigation" below. ValuJet is required by the DOT to carry
liability insurance on each of its aircraft. ValuJet currently maintains
liability insurance in the amount of $750 million per occurrence. Although
ValuJet currently believes its insurance coverage is adequate, there can be no
assurance that the amount of such coverage will not be changed or that ValuJet
will not be forced to bear substantial losses from accidents. Substantial claims
resulting from an accident in excess of related insurance coverage or not
covered by ValuJet's insurance could have a material adverse effect on ValuJet.
Moreover, any aircraft accident, even if fully insured, could cause and has
caused a public perception that some of ValuJet's aircraft are less safe or
reliable than other aircraft, which could have and has had a material adverse
effect on ValuJet's business. ValuJet's insurance premiums have increased
significantly since the accident on May 11, 1996.
SEASONALITY AND CYCLICALITY
ValuJet's operations are primarily dependent upon passenger travel demand
and, as such, may be subject to seasonal variations. Management believes that
the weakest travel periods will generally be during the months of January, May
and September. Leisure travel generally increases during the summer months and
at holiday periods.
The airline industry is highly volatile. General economic conditions
directly affect the level of passenger travel. Leisure travel is highly
discretionary and varies depending on economic conditions. While business travel
is not as discretionary, business travel generally diminishes during unfavorable
economic times as businesses tend to tighten cost controls.
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COMPETITION
The following table identifies airlines which provide non-stop service to
and from Atlanta and the cities indicated and the approximate number of daily
round trip flights scheduled to be flown by those other airlines as of September
1997.
<TABLE>
<CAPTION>
DAILY NON-STOP ROUND TRIPS
-------------------------------------
American/Northwest/
ATLANTA TO/FROM Delta USAir Others(a)
- --------------- -------- ----- ---------
<S> <C> <C> <C>
Akron/Canton, OH........... -- -- --
Boston, MA................. 10 -- --
Chicago, IL (Midway)(b).... -- -- 2
Dallas/Fort Worth, TX...... 17 14.5 --
Flint, MI.................. -- -- --
Fort Lauderdale, FL........ 9.5 -- --
Fort Myers, FL............. 7.5 -- --
Fort Walton Beach, FL...... -- -- 9
Jacksonville, FL........... 7 -- --
Memphis, TN................ 9.5 6 --
Mobile, AL................. 8 -- --
New Orleans, LA............ 9 -- --
Newport News, VA........... 5(c) -- --
Orlando, FL................ 14 -- --
Philadelphia, PA........... 9.5 6 --
Raleigh/Durham, NC......... 9 -- --
Savannah, GA............... 8 -- --
Tampa, FL.................. 10 -- --
Washington DC (Dulles)(d).. 6 -- 1
West Palm Beach, FL........ 9 -- 1
--- ----- ------
Total...................... 148 26.5 13
=== ===== ======
- ---------------------
</TABLE>
(a) Includes United Airlines and Kiwi. Also includes commuter affiliates of
major airlines which generally provide service with turboprop aircraft.
(b) Several major airlines operate daily flights to Chicago's O'Hare Airport
which are not reflected in the table above.
(c) Service provided by Delta to Norfolk, VA.
(d) Delta operates daily flights to Washington DC's National Airport which are
not reflected in the table above.
ValuJet currently provides service between Atlanta and other markets
generally within a 1,000 mile radius and other limited service from Washington,
D.C. (Dulles Airport), Boston, Chicago and Philadelphia. In the future, ValuJet
may add additional service between cities already served by ValuJet or may add
service to new markets. ValuJet's selection of markets depends on a number of
factors existing at the time service to such market is being considered.
Consequently, there can be no assurance that ValuJet will continue to provide
service to all of the markets listed above or that ValuJet will not provide
service to any other particular market.
With respect to ValuJet's one-stop service provided between markets served
on a connecting basis through Atlanta, ValuJet faces competition from numerous
airlines with varying degrees of flight frequency and marketing approaches. In
addition, ValuJet competes with numerous nonstop flights to many of its cities
from other airports in the same metropolitan areas as served by ValuJet (such as
Washington's National Airport and Chicago's O'Hare Airport).
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In October 1996, Delta Express, Delta's new-low-fare operation, commenced
nonstop service from Orlando to various midwest and northeast cities --
Hartford, CT / Springfield, MA / Boston, MA / Columbus, OH / Newark, NJ /
Washington, DC (Dulles) / Indianapolis, IN/ Philadelphia, PA / Louisville, KY /
and Providence, RI; plus Orlando to four other Florida cities -- Tampa, Ft.
Lauderdale, Ft. Myers and West Palm Beach. Delta Express discontinued service
to Philadelphia as of September 30, 1997, and commenced service to Islip, New
York, and Raleigh-Durham, North Carolina. Delta Express operates a dedicated
single class fleet of 25 Boeing 737-200 aircraft which are flown by pilots who
are paid less, fly longer hours and operate under more efficient work rules than
other Delta pilots.
Initially, Delta Express started service with 62 daily flights and has
increased daily departures to a total of 128 as of June 1997. A three-tiered
fare structure (21-day advance purchase, 7-day advance purchase and walk-up) is
offered in addition to advance seat selection and the SkyMiles frequent flyer
program. Fares offered by Delta Express compete with ValuJet's connecting fares
via Atlanta. However, Delta Express does not currently have any flights
operating to/from Atlanta and has not announced any current plans to operate
this service in the Atlanta area.
The identity of competing airlines and the number and character of the
flights flown changes from month to month, and while management believes
published schedules for the month of September 1997, upon which the foregoing
information was based, are representative of the competition ValuJet may face,
competing airlines and their flight schedules are subject to frequent change.
ValuJet may also face competition from other airlines which may begin
serving any of the markets it serves or plans to serve, from new low cost
airlines that may be formed to compete in the low fare market (including any
that may be formed by other major airlines) and from ground transportation
alternatives.
ValuJet believes that the most significant competitive factors among
airlines are price (fare levels), convenient departure times, flight frequency
and the availability of incentives such as a frequent flyer program. ValuJet
currently does not offer a frequent flyer program and typically offers limited
flight frequencies. There can be no assurances that ValuJet will not choose to
develop a frequent flyer program or join an existing program for competitive
reasons. Additionally, competitive factors include access to computerized
reservation and ticketing systems used by travel agents, dependability of
service, name recognition, airports served and the availability, quality and
convenience of other passenger services.
GOVERNMENT REGULATION
All interstate air carriers are subject to regulation by the DOT and the FAA
under the Federal Aviation Act of 1958, as amended (the "Aviation Act"). The
DOT's jurisdiction extends primarily to the economic aspects of air
transportation, while the FAA's regulatory authority relates primarily to air
safety, including aircraft certification and operations, crew licensing and
training and maintenance standards.
U.S. Department of Transportation
In general, the amount of economic regulation over interstate air carriers
in terms of market entry and exit, pricing and inter-carrier acquisitions and
agreements has been greatly reduced subsequent to enactment of the Deregulation
Act. As a result of that change in the regulatory structure, any company's entry
into the domestic air transportation business has been greatly simplified, and
the level of post-entry regulation to which an airline is subject has been
greatly reduced.
Each United States air carrier must obtain, and ValuJet has obtained a
Certificate of Public Convenience and Necessity issued by the DOT pursuant to
Section 401 of the Aviation Act. As a result of ValuJet's suspension of
operations on June 17, 1996, ValuJet was required to apply for recertification
by the DOT. The DOT issued a "show cause" order on August 29, 1996, reflecting
its preliminary determination that ValuJet had satisfied the DOT requirements
and issued its final order on September 26, 1996, approving ValuJet's return to
service.
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Each United States carrier must qualify as a United States citizen, which
requires that it be organized under the laws of the United States or a state,
territory or possession thereof, that its President and at least two-thirds of
its Board of Directors and other managing officers must be comprised of United
States citizens, that not more than 25% of its voting stock may be owned by
foreign nationals, and that the carrier not be otherwise subject to foreign
control.
U.S. Federal Aviation Administration
ValuJet has also obtained an operating certificate issued by the FAA
pursuant to Part 121 of the Federal Aviation Regulations. ValuJet's operating
certificate was surrendered to the FAA in connection with the consent order
dated June 17, 1996 and returned to ValuJet on August 29, 1996, after ValuJet
satisfied the requirements of the FAA in the consent order. In the consent
order, the FAA alleged that ValuJet violated various federal regulations
relating to aircraft maintenance, maintenance manuals, training, record keeping
and reporting and ValuJet agreed to present a plan to the FAA specifying the
methods by which it would demonstrate to the FAA its qualifications to hold an
air carrier operating certificate. Under the consent order, ValuJet suspended
operations and paid $2 million to the FAA to compensate it for the costs of the
special FAA inspections conducted and increases in the number of aircraft are
presently subject to FAA approval.
Since the recommencement of operations on September 30, 1996, ValuJet has
made approximately fifteen voluntary self disclosures to the FAA for
maintenance, operational and in-flight violations. Under the voluntary self
disclosure program, when a violation is detected, the air carrier promptly
discloses and remedies the violation. If the FAA accepts the remedy proposed by
the air carrier, the FAA will not impose civil penalties for the violation.
Minor penalties have been assessed with respect to certain of these self-
disclosures with all penalties totaling less than $40,000. To its knowledge,
ValuJet believes that it has disclosed all relevant items, but there can be no
assurance that ValuJet will not have other non-compliance items in the future.
Although ValuJet believes that the self-disclosed matters are relatively routine
in the airline business and does not believe that these items will result in
material adverse consequences to ValuJet, ValuJet does not have control over the
consequences that may be imposed by the FAA as a result of such items.
The FAA has jurisdiction over the regulation of flight operations generally,
including the licensing of pilots and maintenance personnel, the establishment
of minimum standards for training and maintenance and technical standards for
flight, communications and ground equipment. As required, ValuJet has effective
FAA certificates of airworthiness for all of the aircraft used in its
operations. ValuJet's flight personnel, flight and emergency procedures,
aircraft and maintenance facilities are subject to periodic inspections and
tests by the FAA. ValuJet's director of safety and regulatory compliance acts as
a liaison between ValuJet and the FAA, implementing any changes requested by the
FAA with respect to operating procedures or training programs and generally
ensuring proper compliance with aviation regulations applicable to ValuJet.
The DOT and FAA also have authority under the Aviation Safety and Noise
Abatement Act of 1979, as amended, under the Airport Noise and Capacity Act of
1990 ("ANCA") and, along with the Environmental Protection Agency, under the
Clean Air Act to monitor and regulate aircraft engine noise and exhaust
emissions. To ValuJet's knowledge, ValuJet's aircraft comply with all applicable
FAA noise control regulations (except as indicated below) and with current
emissions standards.
The ANCA requires the phase-out of Stage 2 airplanes (which meet less
stringent noise emission standards than later Stage 3 airplanes) in the
contiguous 48 states by December 31, 1999. In September 1991, the FAA
promulgated final rules establishing interim compliance dates of December 31,
1994, December 31, 1996 and December 31, 1998 for phasing out Stage 2 aircraft.
As of August 31, 1997, ValuJet's operating aircraft consisted of 31 aircraft, 16
of which comply with Stage 3. See "Business of ValuJet -- Aircraft" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Therefore, ValuJet must take
action to continually assure that its fleet will be in compliance with ANCA.
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Miscellaneous
All international service is subject to the regulatory requirements of the
appropriate authorities of the other country involved. ValuJet does not
currently provide any international service.
All air carriers are subject to certain provisions of the Communications Act
of 1934, as amended, because of their extensive use of radio and other
communication facilities, and are required to obtain an aeronautical radio
license from the Federal Communications Commission ("FCC"). To the extent
ValuJet is subject to FCC requirements, it has taken and will continue to take
all necessary steps to comply with those requirements.
ValuJet's operations may become subject to additional federal regulatory
requirements in the future under certain circumstances. ValuJet's labor
relations are covered under Title II of the Railway Labor Act of 1926, as
amended, and are subject to the jurisdiction of the National Mediation Board.
During a period of past fuel scarcity, air carrier access to jet fuel was
subject to allocation regulations promulgated by the Department of Energy. To
the extent ValuJet seeks to provide international air transportation in the
future, it will be required to obtain additional authority from the DOT and
become subject to regulatory requirements imposed by affected foreign
jurisdictions. ValuJet is also subject to state and local laws and regulations
at locations where it operates and the regulations of various local authorities
that operate the airports it serves.
PROPERTY
ValuJet leases approximately 40,500 square feet of office space at 1800
Phoenix Boulevard, Suite 126, Atlanta, Georgia 30349 for general corporate and
operational use (including Atlanta reservations) under a lease which expires
September 30, 1999 and ValuJet also leases approximately 15,000 square feet of
space for use as a training center under a lease that expires August 31, 1999.
ValuJet has signatory status on a lease of facilities at the Atlanta Airport,
which lease expires in the year 2010. ValuJet also maintains a separate
reservations center in leased premises in Savannah, Georgia (approximately 7,000
square feet) which lease expires in January 2000 and leases additional space in
Newport News, Virginia (approximately 20,000 square feet) which lease expires in
the year 2001. ValuJet is not currently using its leased premises in Newport
News, Virginia, and is seeking to sublease such space.
The check-in counters, gates and airport office facilities at each of the
airports ValuJet serves are leased from the appropriate airport authority or
subleased from other airlines. Such arrangements may include baggage handling,
station operations, cleaning and other services. If facilities at any additional
cities to be served by ValuJet are not available at acceptable rates, or if such
facilities cease to be available at acceptable rates, then ValuJet may choose
not to service such markets.
LITIGATION
Several stockholder class action suits have been filed against ValuJet and
certain of its present and former executive officers and Directors
("Defendants"). The consolidated lawsuits discussed below seek class
certification for all purchasers of stock in ValuJet during periods beginning on
or after June 1995 and ending on or before June 18, 1996, and are based on
allegedly misleading public statements made by ValuJet or omission to disclose
material facts in violation of federal securities laws. A total of 14
stockholder lawsuits have been filed against and served upon ValuJet between May
30, 1996 and July 26, 1996. Of these suits, 11 have been filed in the United
States District Court for the Northern District of Georgia and these suits have
been consolidated into a single action (In re ValuJet, Inc.). Another lawsuit
-------------------
filed in the United States District Court for the Middle District of Florida has
been transferred to the Northern District of Georgia and has been consolidated
into In re ValuJet, Inc. One additional class action stockholder lawsuit (Davis
------------------- -----
v. ValuJet Airlines, Inc., et al.) has been filed and served upon the
- ---------------------------------
Defendants. On November 10, 1997, the Court ordered this suit to be
consolidated into In re ValuJet, Inc.. All of the Defendants filed a joint
-------------------
Motion to Dismiss the Consolidated Amended Complaint on December 23, 1996. On
November 10, 1997, the Court denied this Motion
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<PAGE>
to Dismiss in part and granted it in part (dismissing the negligent
misrepresentations claims). Pursuant to a consent scheduling order submitted by
the parties, Defendants must now answer the Consolidated Amended Complaint by
January 16, 1998. On November 25, 1996, Plaintiffs filed their Motion for Class
Certification. On January 14, 1997, Defendants filed a "Notice of Stay of
Discovery and Other Proceedings," in which Defendants state that the filing of
their Motion to Dismiss has stayed the issue of class certification pursuant to
the Private Securities Litigation Reform Act. On November 10, 1997, the Court
ordered Defendants to respond to Plaintiffs' Motion for Class Certification.
Pursuant to a consent scheduling order submitted by the parties, Defendants have
until March 2, 1998, to respond. Two suits (Cohen et al. v. ValuJet, Inc., et
---------------------------------
al. and Hepler et al. v. ValuJet, Inc. et al.) have been filed in the State
- -- ------------------------------------
Court of Fulton County, Georgia. On December 23, 1996, all Defendants in both
actions, other than SabreTech, answered the Complaint and filed a Motion to
Dismiss the Complaint. On May 8, 1997, Plaintiffs responded to this motion.
Defendants are currently working on a reply brief for which no deadline has been
established. On May 2, 1997, the Court ordered the consolidation of these two
state court actions and now refers to them as Cohen, et al. v. ValuJet Airlines,
---------------------------------
Inc. Additionally, Defendant Timothy Flynn filed a Motion to Dismiss for lack of
- ---
personal jurisdiction. By consent of the parties, the Plaintiffs have until
December 12, 1997, to respond to this motion to dismiss. Although ValuJet denies
that it has violated any of its obligations under the federal securities laws,
there can be no assurance that ValuJet will not sustain material liability under
such or related lawsuits.
Numerous lawsuits have been filed against ValuJet seeking damages
attributable to the deaths of those on Flight 592, and additional lawsuits are
expected. Thus far, approximately 80 such lawsuits have been filed against
ValuJet Airlines, Inc. prior to September 22, 1997. Most of the cases were
initially removed to the federal court. That court, however, remanded the
majority of the actions to the state courts from which they originated and
retained jurisdiction over only seven cases. As a consequence, most of the cases
will proceed in state courts in Florida and Georgia. ValuJet's insurance carrier
has assumed defense of all of these suits under a reservation of rights against
third parties and ValuJet and has settled and paid approximately 47 claims as of
September 22, 1997, and is pursuing settlements in the balance of the claims. In
the remaining lawsuits, SabreTech has been named as a co-defendant as a result
of the role that it played in the accident. ValuJet maintains a $750 million
policy of liability insurance per occurrence. ValuJet believes that the coverage
will be sufficient to cover all claims arising from the accident.
In November 1997, ValuJet filed a suit in the Circuit Court of St. Louis
County, Missouri against SabreTech, seeking to hold SabreTech responsible for
the accident involving Flight 592. SabreTech is the maintenance contractor who
delivered oxygen generators without safety caps and in a mislabeled box for
shipment aboard Flight 592. The oxygen generators are believed to have caused
or contributed to the fire which resulted in the accident. The complaint seeks
indemnification against losses attributable to the lawsuits referred to above
and other damages that ValuJet suffered as a result of the accident.
In May 1997, SabreTech filed a Complaint for declaratory judgment and other
relief against ValuJet. The action seeks a determination that SabreTech is not
liable to ValuJet for the accident involving Flight 592 as a result of language
contained in certain of the contracts between the parties and that ValuJet is
liable to SabreTech for damages that it has suffered. ValuJet intends to
vigorously defend this lawsuit and to assert all claims it has against
SabreTech.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit
against ValuJet in State Court in Tennessee for breach of contract and a
declaratory judgment for an anticipatory breach. The Nashville Airport Authority
seeks damages of approximately $2.6 million. The dispute involves whether
ValuJet was entitled to exercise a termination right contained in its lease
agreement.
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<PAGE>
In May 1997, the State of Florida filed suit against ValuJet and its
insurers in the United States District Court for the Southern District of
Florida seeking recovery of costs incurred relating to the accident involving
Flight 592. ValuJet does not believe that it is obligated for such amounts and
has filed a motion to dismiss this lawsuit.
In November, 1997, the Association of Flight Attendants ("AFA") and a former
flight attendant filed suit in federal court in the Eastern District of Virginia
alleging that ValuJet had violated the Railway Labor Act. ValuJet believes that
it has not violated such act and has filed a motion to dismiss this action.
From time to time, ValuJet is engaged in litigation arising in the ordinary
course of its business. ValuJet does not believe that any such pending
litigation will have a material adverse effect on its results of operations or
financial condition.
Governmental Investigations
Several governmental inquiries and investigations have been launched in
connection with the loss of Flight 592, including investigations by the DOT, the
NTSB, the U.S. Attorney's Office in Atlanta, Georgia and Miami, Florida and
certain state agencies in Florida. Although ValuJet does not believe, based on
information currently available to it, that such investigations and inquiries
will result in any finding of criminal wrongdoing on its part, the
investigations have not yet been concluded and the possibility of such a finding
cannot be ruled out. ValuJet may also be assessed civil penalties in connection
with the accident and/or the results of ensuing investigations. Any such
findings or penalties could be material. In addition, it is possible that
ValuJet could be indirectly affected by negative publicity related to charges of
wrongdoing, if any, against others acting on behalf of ValuJet at the time of
the accident.
BUSINESS OF AIRWAYS
The following is a description of the business of Airways, with whom the
Company has merged as of November 17, 1997. The following description of the
business of Airways does not reflect any changes that may be implemented after
the Merger.
GENERAL
Airways, a Delaware corporation incorporated in 1995, is the parent Company
of AirTran, a domestic commercial airline providing direct scheduled passenger
air service from Orlando, Florida to 23 locations in the eastern United States.
AirTran, a Delaware corporation incorporated in September 1993, was acquired by
Mesaba Holdings, Inc. (formerly known as AirTran Corporation) from Conquest
Airlines Corporation in June 1994.
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AirTran began flying commercially in July 1994 with one Boeing 737-200
aircraft providing charter services and commenced scheduled flight operations in
October 1994. As of August 15, 1997, AirTran operated a fleet of 11 Boeing 737-
200 aircraft.
In addition to AirTran, Airways operates a fixed base operation in Grand
Rapids, Minnesota (the "FBO"), which provides private aircraft services,
maintenance, fueling, hangar facilities, flight instruction, aircraft parts
sales and other ground services to general aviation and government aircraft
fleets. The FBO began operations in 1944 and was previously owned by Mesaba
Aviation, Inc., a subsidiary of Mesaba Holdings, Inc. Airways currently operates
its FBO business under an FAA repair station certificate.
BUSINESS STRATEGY
AirTran's strategy is based on a commitment to customer service, reliability
and affordable service. AirTran's one-way fares currently range from $39 (for
flights between two of its outstations) to $219.
AirTran's affordable service strategy depends on maintaining competitive
operating cost levels. In the fiscal year ended March 31, 1997 ("fiscal 1997"),
AirTran's total cost per ASM was 8.04c, resulting in a 73% break-even load
factor. AirTran's fixed aircraft expenses (including hull insurance and
depreciation expense) were 9.6% of operating expenses during fiscal 1997.
FARES, ROUTE SYSTEM AND SCHEDULING
AirTran provides direct scheduled passenger air service between Orlando and
cities principally in the eastern half of the United States. AirTran's strategy
in developing its route system is to serve medium-sized cities from which direct
service to Orlando is not typically provided by the major airlines. This
strategy involves flying long stage lengths to medium-sized markets on a low
frequency basis. Stage lengths range from approximately 152 miles (for the
interstation flights between Kansas City and Omaha) to 1,140 miles and service
is provided to most markets on a one-flight-per-day schedule.
AirTran generally offers four fare levels in each of its markets. The number
of seats available at each fare level is set according to market conditions.
AirTran may also offer promotional fares in certain markets. Tickets are non-
refundable but travel dates can be changed prior to departure for a $35 fee. All
fares are sold on a one-way basis without any minimum, maximum or required
overnight stay. The following table shows the expansion of AirTran's scheduled
route system and fleet through September 30, 1997.
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<TABLE>
<CAPTION>
AS OF TOTAL NUMBER DEPARTURES
MONTH END OF AIRCRAFT PER MONTH SCHEDULED CITIES ADDED
- -----------------------------------------------------------------------------------------------------
FISCAL YEAR 1995:
<S> <C> <C> <C>
October 2 164 Orlando, Providence*, Hartford*, Huntsville*,
November 2 192 -
December 3 317 Ft. Lauderdale* and Islip*
January 3 326 -
February 3 266 Cincinnati, Albany, and Syracuse
March 4 362 Omaha
FISCAL YEAR 1996:
April 4 354 -
May 4 428 Nashville*
June 4 412 -
July 4 426 -
August 6 714 San Antonio*, Dayton, Birmingham*, and Buffalo
September 6 642 -
October 7 880 Dallas* , Greenville/Spartanburg, Kansas City and Norfolk
November 7 874 -
December 8 883 -
January 9 929 -
February 10 1,126 Allentown, Canton/Akron, and Rochester
March 10 1,223 Richmond
FISCAL YEAR 1997:
April 10 1,209 -
May 10 1,135 -
June 10 1,106 Greensboro
July 10 1,315 -
August 10 1,280 -
September 10 963 -
October 10 1,045 Chattanooga*
November 10 1,020 Toledo
December 10 1,034 Bloomington/Normal
January 10 1,060 -
February 10 1,075 Harrisburg*, Charleston* and Columbia*
March 10 1,437 Des Moines and Moline
FISCAL YEAR 1998:
April 10 1,357 -
May 10 1,290 -
June 10 1,245 -
July 10 1,284 -
August 11 1,199 -
September 11 1,365 Boston to Islip and Allentown
</TABLE>
* Service to these locations was subsequently discontinued.
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<PAGE>
The Company has recently announced that AirTran will commence service
between Knoxville and New York's LaGuardia Airport on December 15, 1997.
MAINTENANCE AND REPAIRS
Aircraft maintenance consists of routine maintenance and major overhauls.
Routine maintenance is performed in Orlando and at AirTran's newest maintenance
station in Greensboro, North Carolina by AirTran's employees. In other cities,
that work is performed by FAA-approved contractors. Major overhauls or heavy
checks are performed by a contractor approved by the FAA to work on Boeing 737-
200 aircraft.
AirTran's aircraft were manufactured between 1968 and 1985. AirTran
believes that its aircraft are mechanically reliable but that its maintenance
costs may be higher (including costs to comply with FAA aging aircraft
requirements and procedures) than maintenance costs associated with newer
fleets.
AirTran maintains an inventory of rotable aircraft parts and supplies for
routine maintenance and obtains parts for major overhauls from vendors and
manufacturers when needed. Due to the large number of 737 aircraft in
commercial operation, AirTran expects that a reliable supply of replacement
engines and parts will continue to be available at market prices.
AIRCRAFT
AirTran's fleet currently consists of seven leased and four owned Boeing
737-200 aircraft with average capacities of 126 passengers. The lease terms
range from three to seven years and require monthly lease payments of $45,000 to
$142,000 as well as reserve payments for major engine and airframe overhauls.
According to FAA rules, AirTran's fleet must comply with the FAA's Stage 3
noise level requirements on the same schedule as ValuJet. Six of AirTran's 11
aircraft currently meet Stage 3 requirements. AirTran intends to remain in
compliance with noise requirements through the acquisition of Stage 3 aircraft
and the installation of hush kits on Stage 2 aircraft presently in its fleet.
Hush kits certified by the FAA for the Boeing 737-200 aircraft are available at
an installed cost of approximately $1.5 million per aircraft.
FUEL
The cost of jet fuel, related taxes and fueling fees is AirTran's largest
operating expense, accounting for 19.5% of total operating costs in 1997. Jet
fuel costs are subject to wide fluctuations, primarily resulting from changes in
supply and the effects of world events. These changes make predicting the cost
of jet fuel difficult. Increases in fuel prices could have a materially adverse
effect on AirTran's operating results. AirTran has not entered into any fixed-
price or guaranteed delivery contracts for fuel.
AirTran's fleet is not as fuel efficient as competitors' fleets comprised
of newer, more fuel efficient jet aircraft. As a result, a significant increase
in the price of jet fuel would disproportionately affect AirTran's costs as
compared to such competitors. AirTran intends to pass on fuel cost increases
through increased fares, but there can be no assurance that AirTran's
competitive fare advantage would not be negatively impacted by such fare
increases.
INSURANCE
AirTran carries the types 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.
AirTran believes that this insurance is adequate in amount and risk covered.
There can be no assurance, however, that the insurance coverage would be
sufficient to protect AirTran adequately in the event of a catastrophic
accident.
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<PAGE>
SEASONALITY
Seasonal factors, primarily weather conditions and passenger demand, are
expected to affect AirTran's monthly passenger boardings. AirTran generally
experiences diminished demand in late spring, early fall and mid-winter.
COMPETITION AND INDUSTRY CONSIDERATIONS
AirTran's competition includes carriers with substantially greater
financial resources. Fare levels and passenger demand are negatively affected by
a number of factors, including the general state of the economy and intense fare
competition in the industry.
MARKETING
AirTran's marketing objective is to build on the growing awareness of its
service and benefits in the markets served. The message is focused on leisure
travelers and travel agents.
EMPLOYEES
As of August 31, 1997, Airways had 578 full-time equivalent employees.
Management personnel directly involved in the supervision of flight
operations, training, maintenance and aircraft inspection must meet certain
experience levels set by the FAA. Under FAA regulations, pilots are required to
be licensed as commercial pilots, with specific ratings for the type of aircraft
flown, and must also be medically certified as physically fit. In order to
maintain licenses and medical certifications, pilots must satisfy periodic
continuation requirements, including recurrent training and recent flying
experience. Mechanics, quality control inspectors and flight dispatchers must
also be licensed and qualified for specific aircraft. Flight attendants are
required to have initial and periodic competency fitness training and
certification. As required by FAA regulations, all of these employees must
undergo pre-employment and periodic drug testing as well as employment and
background checks. Airways is presently negotiating a collective bargaining
agreement with its mechanics and store clerks, who are represented by the
International Association of Machinists. Elections for union representation are
pending for Airways' pilots and flight attendants. Airways has not experienced
any work stoppages and believes that its employee relations are satisfactory.
AIRPORT OPERATIONS
AirTran's operations are based largely at the Orlando International
Airport, where it maintains its aircraft fleet. In Orlando, AirTran's employees
provide passenger services, catering and cleaning of the aircraft. All other
ground services are provided by contractors. In most other cities served by
AirTran, contractors, including major airlines, provide all ground handling
services, including passenger services. Ground handling services include
greeting and serving passengers at check-in, gate and baggage claim areas,
catering, guiding aircraft to and from gates, baggage handling services,
aircraft cleaning, lavatory and water servicing, de-icing and certain overnight
aircraft maintenance services. AirTran has at least one employee at each of the
cities it serves to promote sales and oversee its operations.
REAL PROPERTY
AirTran's principal executive offices are located two miles from the
Orlando International Airport in a leased facility consisting of approximately
11,500 square feet of office space. This facility houses the executive offices
of both Airways and AirTran as well as the general administrative staff,
reservations staff and computer systems of AirTran. The lease agreement for
this facility expires in October 1998 and requires monthly lease payments of
approximately $14,000. In January 1996, AirTran entered into a ground lease
with the Greater
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Orlando Aviation Authority expiring in 2016 and a purchase agreement with Page
AvJet Corporation to acquire an aircraft hangar of approximately 70,000 square
feet at the Orlando International Airport for its operations staff, including
flight operations and station operations, and its maintenance staff, records,
inventory and personnel training facilities. AirTran paid $3.6 million for the
hangar, improved the facilities and makes monthly ground lease payments of
approximately $8,900. The FBO's principal offices are located in one leased and
one owned facility at the Grand Rapids Itasca County Airport in Grand Rapids,
Minnesota.
MANAGEMENT
The following table contains the name, age and position with the Company of
each Executive Officer and Director of the Company. Their respective
backgrounds are described following the table.
<TABLE>
<CAPTION>
Name Age Position *
- ---- --- ----------
<S> <C> <C>
D. Joseph Corr 56 President and Chief Executive Officer and Director
Stephen C. Nevin 47 Senior Vice President - Finance and Chief Financial Officer
Thomas Kalil 61 Senior Vice President - Customer Service of Operating Subsidiaries
M. Ponder Harrison 36 Senior Vice President - Sales and Marketing of Operating Subsidiaries
Robert D. Swenson 43 Chairman of the Board
Don L. Chapman 58 Director
John K. Ellingboe 46 Director
Lewis H. Jordan 53 Director
Robert C. Pohlad 43 Director
Robert L. Priddy 51 Director
</TABLE>
* Unless otherwise indicated, the position indicated is that held with
ValuJet, Inc.
D. Joseph Corr joined the Company in November 1996 as President and Chief
Executive Officer of ValuJet Airlines. Mr. Corr was elected as a Director and
Executive Vice President of the Company in July 1997 and was elected as the
Company's President and Chief Executive Officer in November 1997. Since June
1990, Mr. Corr has also been the President and owner of Aircorr, Inc., an
aircraft repair business, and D. Joseph Corr, Inc., an investments and
management services firm. Prior to 1990, Mr. Corr served as Chairman, President
and Chief Executive Officer of Continental Airlines from December 1988 to
October 1989. From March 1986 to November 1988, Mr. Corr was Vice Chairman,
President and a Director of TransWorld Airways (TWA). Mr. Corr also served as
Chairman and Director of Ozark Airlines during 1986 and as Chairman and a
Director of Mid-Coast Aviation from 1986 to 1988.
Stephen C. Nevin joined the Company in May 1994 as its Senior Vice
President - Finance and Chief Financial Officer. From 1982 to April 1994, he
served as Vice President of the Aircraft Financing Group for McDonnell Douglas
Finance Corporation. From 1981 to 1982, he was Western Regional Manager,
Equipment
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Leasing for Integrated Resources, Inc., a real estate and equipment financing
Company. From 1977 to 1980, he was Senior Account Officer for Citicorp
Industrial Credit, a finance Company. He was District Sales Manager of Cessna
Aircraft Company, an aircraft manufacturer, from 1975 to 1977.
Thomas Kalil was elected as Senior Vice President - Customer Service of
ValuJet Airlines, Inc. in May 1995. Prior to joining the Company, Mr. Kalil was
employed by Continental Airlines from May 1987 until May 1995, in various
positions including Senior Vice President Airport Services and Senior Vice
President Customer Services. Continental Airlines filed for reorganization
under Chapter 11 of the federal bankruptcy laws in 1990. Prior to that, he
served in various customer service positions at Northwest, Republic and Southern
Airways during the period from 1960 to 1987.
M. Ponder Harrison has been employed as Vice President - Sales and
Marketing of ValuJet Airlines, Inc. since June 1993. In December 1996, he was
elected as Senior Vice President - Sales and Marketing of ValuJet Airlines, Inc.
Prior to joining the Company, he was employed by Delta Air Lines, Inc. from 1988
to June 1993 in various marketing positions, his last position being national
accounts manager, corporate marketing. He was also employed by Delta from 1983
to 1987.
Robert D. Swenson was elected as Chairman of the Board of the Company in
November 1997 pursuant to the terms of the Merger agreement. He served as
Chairman of the Board and Chief Executive Officer of Airways from April 1995
until November 1997 when Airways merged into the Company and served as Chairman
of the Board of AirTran from June 1994 until November 1997. From June 1994 to
January 1995, Mr. Swenson was President of AirTran. On July 11, 1996, the Board
of Directors of Airways and AirTran appointed him to the office of President of
Airways and President and Chief Executive Officer of AirTran. Mr. Swenson
served as a director, President and Chief Executive Officer of Mesaba Holdings,
Inc. and its subsidiary, Mesaba Aviation, Inc. from 1981 to 1995 and was
Chairman of the Board of Mesaba Holdings, Inc. and Mesaba Aviation, Inc. from
1986 to September 1995. Mr. Swenson also served as President of Mesaba's
predecessor from 1978 until March 1981. Mr. Swenson holds an Airline Transport
Pilot certificate with flight instructor privileges and is type rated in the
Fokker F-27 aircraft. Mr. Swenson was a member of the Board of Directors of the
Regional Airline Association from 1985 through 1988 and served as Treasurer of
the Association during 1987 and 1988. He was elected to serve as Vice Chairman
of the Board of Directors of the Association for 1992 and was elected Chairman
for 1993.
Don L. Chapman was elected as a Director of the Company in April 1994. He
has served as Chief Executive Officer of Tug Manufacturing Company, a Company
that manufactures ground support equipment for the airline industry, since he
acquired that Company in 1977. He also served as Chief Executive Officer of
Opti World, Inc., an optical superstore chain, from 1983 (when he founded that
Company) until 1995. From July 1991 to November 1992, he served as Chairman of
Winkler Products, a plastic cutlery manufacturer. He also serves as a director
of Longhorn Steaks (since 1992) and Omni Insurance Company (since 1993).
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John K. Ellingboe was elected as a Director of the Company in November 1997
pursuant to the terms of the Merger agreement. He served as a director of
Airways from April 1995 until November 1997 when Airways merged into the Company
and a director of AirTran from June 1994 until November 1997. Mr. Ellingboe
served as a director of Mesaba Holdings, Inc. from September 1990 to September
1995. Since June 1996, Mr. Ellingboe has been Chief Executive Officer of PMSA
Management Group, LLC, a management consulting firm. From October 1993 to May
1996, he was Senior Vice President, Business Development, General Counsel and
Secretary of Fingerhut Companies, Inc. From May 1990 to October 1993, he was
Vice President, General Counsel and Secretary of Fingerhut Companies, Inc.
Prior to 1990, he was an attorney in private practice.
Lewis H. Jordan has served as a Director of the Company since June 1993. He
served as President and Chief Operating Officer of the Company from June 1993
until November 1997. He also served as Chairman of the Board of ValuJet Airlines
from November 1996 until November 1997. He served as President and Chief
Operating Officer and as a director of Continental Airlines from August 1991 to
March 1993 and served as Executive Vice President of that Company from 1986 to
August 1991. From 1985 to 1986, he served as President and Chief Operating
Officer of Flying Tigers, an air cargo carrier, and was previously employed by
Flying Tigers as Executive Vice President and Chief Operating Officer from 1984
to 1985, as Senior Vice President - Operations from 1980 to 1982 and as Vice
President - Maintenance and Engineering from 1979 to 1980. From 1982 to 1984, he
served as Executive Vice President and Chief Operating Officer of Air Treads,
Inc., an aviation tire retreading, wheel and brake Company. From 1962 to 1979,
he held various positions with Southern Airways, his last position being
Assistant Vice President in charge of technical operations. Mr. Jordan has been
elected as a Director of the Company pursuant to an agreement with Messrs.
Priddy, Gallagher and Flynn under which Messrs. Priddy, Gallagher and Flynn have
agreed to vote their stock in the Company so as to elect Mr. Jordan as a
Director so long as he is employed by the Company.
Robert C. Pohlad was elected as a Director of the Company in November 1997
pursuant to the terms of the Merger agreement. He has served as President of
Pohlad Companies, a holding and management services company, since 1987. Since
1988 he has been Chief Executive Officer and a director of Delta Beverage Group,
Inc., a soft drink manufacturer and distributor. He also serves as a director
of Mesaba Holdings, Inc., a regional air carrier, Grow Biz International, Inc.
and North Central Life Insurance Company.
Robert L. Priddy has been actively employed by the Company since June 1993
and served as its Chairman of the Board until November 1997. He has served as a
Director of the Company since he participated in its founding in July 1992.
Prior to his involvement
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with the Company, Mr. Priddy founded Florida Gulf Airlines as a subsidiary of
Mesa Airlines, for which he served as president from December 1991 to April
1993. From July 1991 to January 1993, he also served as a director of Mesa
Airlines, Inc. From January 1988 to November 1991, he served as President and
Chief Executive Officer of Air Midwest, Inc., a regional airline headquartered
in Wichita, Kansas, for which he also served as a director from November 1987 to
November 1991. From 1979 to 1987, he served as Vice President and Chief
Financial Officer of Atlantic Southeast Airlines, Inc. ("ASA"), a regional
airline headquartered in Atlanta, Georgia, for which he also served as a
director from 1981 to 1987. He was one of three founding shareholders of ASA.
From 1966 to 1979, he worked for Southern Airways in various capacities, his
last responsibilities being manager of scheduling, pricing and market analysis.
He has also served as a director of Lukens Medical Corporation, a medical
supplies company, since 1995 and now serves as its Chairman of the Board.
CERTAIN TRANSACTIONS
Prior to August 1996, the Company contracted with Jordan Temporaries, Inc.
for temporary personnel and certain recruiting services. Lewis Jordan's
daughter is president and a part owner of Jordan Temporaries, Inc. Jordan
Temporaries provided the Company with flight attendants and ticket and gate
agents during 1996. The Company's expense to Jordan Temporaries for the
services of temporary personnel and recruiting services provided was
approximately $4.2 million for the year ending December 31, 1996. Management
believes that the rates paid to Jordan Temporaries were competitive with
alternative agencies which provide similar services and that the terms of
payment were at least as favorable as available from similar agencies. The
Company discontinued its relationship with Jordan Temporaries in August 1996.
The Company purchases ground support equipment from Tug Manufacturing
Corporation ("Tug") in which Don L. Chapman is an officer and 100% stockholder.
The amount of ground support equipment purchased by the Company from Tug was
approximately $328,000 during 1996. The Company intends to continue purchasing
such equipment from Tug so long as Tug's equipment meets the Company's quality,
price and time of delivery requirements. The Company began to purchase
equipment from Tug prior to Mr. Chapman being elected to the Company's Board of
Directors and management believes that its purchases from Tug are at competitive
prices and terms.
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF VALUJET
The following table sets forth, as of November 30, 1997, certain
information with respect to ValuJet's Common Stock owned beneficially by each
ValuJet director, by all executive officers and directors as a group and by each
person known by ValuJet to be a beneficial owner of more than 5% of the
outstanding Common Stock of ValuJet. Except as noted in the footnotes, each of
the persons listed has sole investment and voting power with respect to the
shares of ValuJet Common Stock included in the table.
<TABLE>
<CAPTION>
Number of Shares Percent
Name of Beneficial Owner Beneficially Owned (1) of Ownership (2)
- ------------------------ ---------------------- ----------------
<S> <C> <C>
Lewis H. Jordan (3).......................... 4,389,540 6.5%
Robert L. Priddy (4)......................... 4,140,000 6.4%
Robert D. Swenson (5)........................ 707,895 1.1%
D. Joseph Corr (6)........................... 150,000 *
Don L. Chapman (7)........................... 79,000 *
</TABLE>
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<TABLE>
<S> <C> <C>
John K. Ellingboe (8)........................ 29,620 *
Robert C. Pohlad............................. - -
All Executive Officers and Directors as a
group (10 persons) (2)(3)(4)(5)(6)(7)(8)(9).. 9,689,255 14.2%
</TABLE>
________________________________
* Less than 1%
(1) Information with respect to beneficial ownership is based upon information
furnished by each owner.
(2) The percent of outstanding Common Stock owned is determined by assuming
that in each case the person only, or group only, exercised his or its
rights to purchase all shares of Common Stock underlying presently
exercisable stock options.
(3) Includes options to purchase 3,040,000 shares of Common Stock which are
presently exercisable and also includes 100,000 shares owned by a trust
under which Mr. Jordan is a beneficiary. Mr. Jordan's address is 1800
Phoenix Boulevard, Suite 126, Atlanta, Georgia 30349.
(4) Includes options to purchase 640,000 shares of Common Stock which are
presently exercisable. Excludes 100,000 shares of Common Stock owned by Mr.
Priddy's daughter and son-in-law, with respect to which Mr. Priddy
disclaims any beneficial ownership. Mr. Priddy's address is 1800 Phoenix
Boulevard, Suite 126, Atlanta, Georgia 30349.
(5) Includes options to purchase 325,000 shares which are presently
exercisable. Includes 83,220 shares of Common Stock held by Mr. Swenson's
wife and 69,720 shares of Common Stock Mr. Swenson holds as custodian for
his minor children.
(6) Includes options to purchase 150,000 shares which are presently
exercisable.
(7) Includes 69,000 shares of Common Stock owned by a corporation in which Mr.
Chapman is an officer and sole stockholder and options to purchase 10,000
shares of Common Stock which are presently exercisable.
(7) Includes options to purchase 5,000 shares of Common Stock which are
presently exercisable and 20,000 shares of Common Stock owned by Mr.
Flynn's children. Mr. Flynn's address is 6900 Westcliff Drive, Suite 505,
Las Vegas, Nevada 89128.
(8) Includes options to purchase 8,000 shares which are presently
exercisable.
(9) In addition to outstanding shares of Common Stock owned by Executive
Officers not named in the table, also included are options to purchase
90,800, 31,000 and 38,200 shares of Common Stock by Stephen C. Nevin,
Thomas Kalil and M. Ponder Harrison, respectively, which are presently
exercisable.
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<PAGE>
DESCRIPTION OF COLLATERAL AIRCRAFT
COLLATERAL AIRCRAFT
The Collateral Aircraft consist of 24 McDonnell Douglas DC-9 series 30
aircraft. The aircraft were manufactured between 1967 and 1976 and have an
average number of take-off and landing cycles of aircraft of approximately
57,300. Seventeen of the Collateral Aircraft already comply with the Stage 3
noise requirements, hush kits having been already added. The remaining
Collateral Aircraft are Stage 2 aircraft. A portion of the proceeds of this
Offering will be applied to the purchase of hush kits for four of such Stage 2
aircraft.
In addition, three Pratt & Whitney JT8D-9A spare engines and four hush kits
to be installed on such aircraft (after their purchase by ValuJet Airlines) also
serve as collateral for the Notes.
APPRAISALS
The Company has obtained appraisals of the Collateral Aircraft from BK
Associates and AvSolutions. The appraisals estimate aggregate current fair
market value at $119.6 million and $112.5 million, respectively, and estimated
aggregate future market value in 2001 at $93.7 million and $87.7 million,
respectively. The following is a summary of the appraisals (the totals do not
add up due to rounding):
<TABLE>
<CAPTION>
Future Fair Market
Registration Date of Current Fair Market Appraised Value Appraised Value As of April 2001
----------------------------------- --------------------------------
Number Manufacture Stage AvSolutions BK Associates Average AvSolutions BK Associates Average
- ------------ ----------- ----- ----------- ------------- ------- ----------- ------------- -------
(dollars in millions) (dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
N921VV 1968 2 $ 2.5 $ 3.2 $ 2.8 $ 3.5 $ 3.8 $ 3.6
N922VV 1968 2 2.5 3.2 2.8 3.5 3.8 3.6
N923VV 1971 2 2.6 3.7 3.1 3.8 3.9 3.9
N924VV 1968 2 2.5 3.2 2.8 3.5 3.8 3.6
N925VV 1968 2 2.5 3.2 2.8 3.5 3.8 3.6
N930VV 1976 3 6.1 7.0 6.5 4.3 4.8 4.5
N931VV 1975 3 6.0 6.6 6.3 4.2 4.6 4.4
N932VV 1970 3 5.6 5.6 5.6 3.8 3.8 3.8
N933VV 1969 3 5.5 5.4 5.4 3.5 3.8 3.7
N934VV 1969 3 5.5 5.4 5.4 3.5 3.8 3.7
N935VV 1971 3 5.7 5.8 5.7 3.8 3.9 3.9
N936VV 1971 3 5.7 5.8 5.7 3.8 3.9 3.9
N937VV 1968 3 5.4 5.3 5.4 3.5 3.8 3.6
N938VV 1970 3 5.6 5.6 5.6 3.8 3.8 3.8
N939VV 1967 3 5.3 5.1 5.2 3.4 3.8 3.6
N945VV 1969 3 5.5 5.4 5.4 3.5 3.8 3.7
N946VV 1968 3 5.4 5.3 5.4 3.5 3.8 3.6
N947VV 1972 3 5.7 6.0 5.9 3.9 4.1 4.0
N948VV 1972 3 5.7 6.0 5.9 3.9 4.1 4.0
N949VV 1971 3 5.7 5.8 5.7 3.8 3.9 3.9
N960VV 1967 2 2.5 3.0 2.7 3.4 3.8 3.6
N965VV 1968 2 2.5 3.2 2.8 3.5 3.8 3.6
N966VV 1968 3 5.4 5.3 5.4 3.5 3.8 3.6
N967VV 1968 3 5.4 5.3 5.4 3.5 3.8 3.6
------ ------ ------ ----- ----- -----
TOTAL $112.5 $119.6 $116.1 $87.7 $93.7 $90.7
</TABLE>
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Current fair market value is the most likely trading price that, in the
opinion of the appraiser, may be generated for an aircraft under the market
conditions that are perceived to exist at the time in question. Current fair
market value assumes that the aircraft is valued for its highest, best use, that
the parties to the hypothetical sale transaction are willing, able, prudent and
knowledgeable, and under no unusual pressure for a prompt sale, and that the
transaction would be negotiated in an open and unrestricted market on an arm's
length basis, for cash or equivalent consideration, and given an adequate amount
of time for effective exposure to prospective buyers. Current market value also
assumes that an aircraft's physical condition is average for aircraft of its
type and age.
The appraised value of the Collateral Aircraft does not necessarily reflect
the price the Company would receive if it were to sell such aircraft. If, for
example, a distress sale were necessary to dispose of Collateral Aircraft
quickly, a substantial discount from the appraised value could be required.
In making their appraisals, the appraisers have not physically inspected
the Collateral Aircraft nor the related technical documentation, and have relied
solely on data provided by the Company for purposes of the appraisals. In making
the appraisals, the appraisers have made the following assumptions: (i) the
aircraft have "half-time" remaining to the next major overhauls or scheduled
shop visit on the aircraft's airframe or major components, (ii) the aircraft are
in compliance with all FAA airworthiness directives, (iii) the aircraft are in
current flight operations, (iv) the aircraft have no damage history, (v) the
aircraft are in average or better physical condition, and (vi) the aircraft are
sold for cash without seller financing. However, one of the Collateral Aircraft
is currently being stored and is not currently in the Company's flight
operations. Unless such aircraft is leased out or sold by the Company, the
Company intends to reactivate such aircraft into commercial service in the near
future.
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Outstanding Notes were issued under an Indenture dated as of August 13,
1997 (the ''Indenture'') among the Company, (sometimes referred to herein as the
"Guarantor"), the Subsidiary Guarantors (as defined herein) and The Bank of New
York, trustee (the ''Trustee''). The Exchange Notes will also be issued under
the Indenture, and the Indenture will be qualified under the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act") upon the effectiveness of the
Registration Statement of which this Prospectus is a part. The form and terms
of the Exchange notes will be same as the Outstanding Notes, except that the
issuance of the Exchange Notes has been registered under the Securities Act and
thus the Exchange Notes will not bear legends restricting their transferability.
The Exchange Notes will evidence the same indebtedness as the Outstanding Notes,
will be entitled to the benefits of the Indenture, and will be treated as a
single class under the Indenture with any Outstanding Notes will be considered
collectively to be a single class for all purposes of this "Description of the
Exchange Notes" (except under the caption "-Registration Covenant; Exchange
Offer'), all references herein to "Notes' shall be deemed to refer collectively
to the Outstanding Notes and any Exchange Notes, unless the context otherwise
requires,
The Notes are secured senior obligations of the Issuer, will be limited to
$80.0 million aggregate principal amount and will mature on April 15, 2001. The
Outstanding Notes bear interest at the rate of 10 1/2% per annum from August 13,
1997, the date of initial issuance. The Exchange Notes will bear interest at
the rate of 10 1/2%per annum from their date of issuance, except that holders
of Exchange Notes will also receive interest on April 15, 1998 from October 15,
1997, to the date of surrender of such Outstanding Notes in exchange for
Exchange Notes. Subject to the preceding sentence, payable in cash on April 15
and October 15 of each year, commencing April 1, 1998, to the holders of record
at the close of business on the preceding April 1 or October 1 (whether or not a
business day), as the case may be. Interest on the Notes will be computed on the
basis of a 360-day year of twelve 30-day months.
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<PAGE>
The interest rate on the Notes is subject to increase in certain
circumstances if the registered exchange offer is not consummated and a shelf
registration statement is not declared effective on a timely basis as described
under ''--Registration Rights.''
The principal of (and premium, if any) and interest on the Notes will be
payable, and the transfer of Notes will be registrable, at the office or agency
of the Issuer in The Borough of Manhattan, The City of New York. In addition,
payment of interest may, at the option of the Issuer, be made by check mailed to
the address of the Person entitled thereto as it appears in the Security
Register.
No service charge will be made for any registration of transfer or exchange
of Notes, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
REDEMPTION
The Notes will not be subject to any redemption at the option of the Issuer
and will not have the benefit of any sinking fund obligations.
GUARANTEES
The Notes are fully and unconditionally guaranteed by the Guarantor and all
existing Restricted Subsidiaries of the Guarantor (other than the Issuer), and
the Guarantor has agreed to cause any future Restricted Subsidiaries to fully
and unconditionally guarantee the Notes, in each case jointly and severally on a
senior basis (such guarantees, the ''Guarantees,'' such Restricted Subsidiary
guarantors, the ''Subsidiary Guarantors'' and, together with the Guarantor, the
''Guarantors''); provided that each such Restricted Subsidiary will cease to be
a Subsidiary Guarantor when it ceases to be a Restricted Subsidiary.
RANKING
The Notes are senior secured obligations of the Issuer and rank pari passu
in right of payment with all other existing and future unsubordinated
indebtedness of the Issuer. The Notes have the benefit of the security interests
described under ''--Security.'' The Notes are effectively subordinated to other
senior secured indebtedness of the Issuer with respect to the assets securing
such indebtedness. The Guarantees rank pari passu in right of payment with all
existing and future unsecured unsubordinated indebtedness of the Guarantors will
rank senior in right of payment to any future subordinated indebtedness. The
Guarantees are effectively subordinated to all existing and future secured
indebtedness of the Guarantors to the extent of the collateral securing such
indebtedness. See ''Risk Factors--Recent Operating Losses; Ability to Repay
Indebtedness At Maturity.'' In addition, the Notes and the Guarantees are
effectively subordinated to all liabilities (including trade payables) of the
Guarantors' subsidiaries (if any) that are not Subsidiary Guarantors.
SECURITY
As security for the Notes, the Issuer has granted to the Trustee for the
equal and ratable benefit of the Holders of the Notes a security interest in:
(i) all right, title and interest of the Issuer in and to the Aircraft, the
Engines and the hush kits and all warranties of any manufacturer with respect
thereto; (ii) all monies and securities deposited or required to be deposited
with the Trustee pursuant to any term of the Indenture or required to be held by
the Trustee thereunder; (iii) all policies covering loss or damage to the
Aircraft that are made payable to the Trustee; and (iv) all proceeds of the
foregoing.
Subject to the exception summarized in this paragraph, the Issuer will be
required to keep each Aircraft registered under the Aviation Act and to record,
or maintain the recordation of, the Indenture, among other documents, with
respect to each Aircraft under the Aviation Act. Such recordation of the
Indenture and other documents with respect to each Aircraft will give the
Trustee a first priority perfected security interest in the related Aircraft
wherever it is located in the United States or any of its territories and
possessions and, with certain
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<PAGE>
exceptions, in a limited number of other jurisdictions. In the event the Issuer
leases any Aircraft to a Permitted Air Carrier operating pursuant to a license
or authorization issued under the laws of a Permitted Country, the Issuer may,
subject to certain conditions, re-register an Aircraft under the laws of such
country. On or prior to such lease or change in the jurisdiction of registry,
the Trustee shall have received an opinion (or opinions) of counsel to the
effect that, among other things, the lien of the Indenture continues to be
perfected, the Indenture continues to be enforceable against the parties thereto
and the Trustee maintains its right to repossession thereunder, in each case
pursuant to applicable law. In the case of an Event of Default, the ability of
the Trustee to realize upon its security interest in an Aircraft could be
adversely affected as a legal or practical matter if the Aircraft is registered
or located outside of the United States. The Aircraft also may be operated by
the Issuer or by a lessee under lease in certain countries that are not
Permitted Countries. The extent to which the priority of the Trustee's security
interest would be recognized in such countries is uncertain, but the Issuer has
covenanted not to create or suffer to exist any other Liens except for certain
Permitted Liens.
Funds, if any, held from time to time by the Trustee with respect to any
Aircraft, including funds held as a result of an Event of Loss to such Aircraft
or an Asset Disposition of such Aircraft, so long as no Event of Default shall
have occurred and be continuing, will be invested and reinvested by the Trustee,
at the direction of the Issuer, in certain Permitted Investments. The Issuer
will pay the amount of any loss resulting from any such investment directed by
it.
Although the Indenture and other documents will give the Trustee a first
priority perfected security interest in the Aircraft, the protections of Section
1110 under Title 11 of the United States Bankruptcy Code will not be available.
Section 1110 grants special rights to parties who acquire security interests in
various aircraft-related transactions if such security interests are purchase
money security interests and the security interests are granted by a U.S.
certificated air carrier. Under Section 1110, the right of a party to repossess
an aircraft in compliance with the terms of the security agreement relating to
the aircraft will not be affected in a Chapter 11 bankruptcy reorganization case
by the automatic stay provisions of the Bankruptcy Code or any power of the
bankruptcy court to enjoin such repossession unless, within 60 days after
commencement of a Chapter 11 bankruptcy reorganization case, the debtor agrees,
with the court's approval, to perform its obligations under the security
agreement that are or thereafter become due and cures all outstanding defaults
(other than defaults relating to financial condition or bankruptcy). Because the
protections of Section 1110 will not be available, payments under the Notes
might be interrupted without the ability to repossess the Aircraft from the
Issuer or the ability of the Trustee to exercise its remedies under the Notes
may be adversely affected. See ''Risk Factors--Effect of Bankruptcy on Exercise
of Remedies.''
REGISTRATION RIGHTS
The Issuer and the Guarantors have entered into a registration rights
agreement (the ''Registration Rights Agreement'') pursuant to which they agreed
with the Initial Purchaser, for the benefit of the holders of the Notes, (i) to
file with the Commission, within 60 days following the Closing Date, a
registration statement (the ''Exchange Offer Registration Statement'') under the
Securities Act relating to an exchange offer (the ''Exchange Offer'') pursuant
to which securities (the ''Exchange Notes'') substantially identical to the
Notes (except that such securities will not bear legends restricting the
transfer thereof) would be offered in exchange for the then outstanding Notes
and (ii) to use their best efforts to cause the Exchange Offer Registration
Statement to become effective within 150 days following the Closing Date. The
Issuer and the Guarantors have further agreed to hold the Exchange Offer open
for at least 30 days (or longer if required by applicable law), and to issue
Exchange Notes for all outstanding Notes validly tendered and not withdrawn
before the expiration of the Exchange Offer.
Under positions enunciated by the staff of the Securities and Exchange
Commission (the ''Commission'') in no-action letters issued in Exxon Capital
Holdings Corp. and Morgan Stanley & Co. Inc., among others, the Exchange Notes
would in general be freely transferable after the Exchange Offer without further
registration under the Securities Act, except that broker-dealers
(''Participating Broker-Dealers'') receiving Exchange Notes in the Exchange
Offer will be subject to a prospectus delivery requirement with respect to
resale of those Exchange Notes. The Commission has in these no-action letters
taken the position that Participating Broker-Dealers may fulfill their
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<PAGE>
prospectus delivery requirements with respect to the Exchange Notes (other than
a resale of any unsold allotment from the original sale of the Notes) by
delivery of the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Rights Agreement, the Issuer and the
Guarantors are required to allow Participating Broker-Dealers to use the
prospectus contained in the Exchange Offer Registration Statement in connection
with the resale of such Exchange Notes. Each holder of the outstanding Notes who
wishes to exchange such outstanding Notes for Exchange Notes in the Exchange
Offer will be required to represent that any Exchange Notes to be received by it
will be acquired in the ordinary course of its business, that at the time of the
commencement of the Exchange Offer it has no arrangement with any Person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes and that it is not an ''affiliate'' of the Issuer (as defined
in Rule 405 of the Securities Act) or, if it is an affiliate, that it will
comply with all applicable registration and prospectus delivery requirements of
the Securities Act.
However, if the interpretations of the staff of the Commission do not
permit the Issuer and the Guarantors to effect the Exchange Offer, or under
certain other circumstances, the Issuer and the Guarantors have agreed to use
their best efforts to cause a shelf registration statement relating to resales
of the Notes (the ''Shelf Registration Statement'') to become effective and to
remain effective until the expiration of the time period referred to in Rule
144(k) under the Securities Act after the Closing Date or such shorter period
that will terminate when all Notes covered by the Shelf Registration Statement
have been sold pursuant thereto. The Issuer and the Guarantors will, in the
event of a shelf registration, provide to the Holders of the Notes copies of the
prospectus that is a part of the Shelf Registration Statement, notify such
Holders when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit resales of the Notes. A Holder
of Notes that sells such Notes pursuant to the Shelf Registration Statement
generally will be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Registration Rights
Agreement that are applicable to such a holder (including certain
indemnification obligations).
In the event that (a) neither the Exchange Offer Registration Statement nor
the Shelf Registration Statement has been filed with the Commission on or prior
to the 60th day following the Closing Date, (b) neither the Exchange Offer
Registration Statement nor the Shelf Registration Statement has been declared
effective on or prior to the 150th day following the Closing Date, (c) either
the Exchange Offer has not been consummated or a Shelf Registration Statement
has not been declared effective on or prior to the 180th day following the
Closing Date or (d) after the Shelf Registration Statement is declared
effective, such Registration Statement thereafter ceases to be effective or
usable (subject to certain exceptions) in connection with resales of Notes or
Exchange Notes in accordance with and during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (a)
through (d) a ''Registration Default''), interest (''Additional Interest'') will
accrue on the Notes and the Exchange Notes (in addition to the stated interest
on the Notes and the Exchange Notes) from and including the date on which any
such Registration Default shall occur to, but excluding the date on which all
Registration Defaults have been cured. The Additional Interest will accrue at a
rate of 0.50% per annum during the 90-day period immediately following the
occurrence of any Registration Default and shall increase by 0.50% per annum at
the end of each subsequent 90-day period, but in no event shall such rate exceed
1.50% per annum.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
COVENANTS RELATING TO THE AIRCRAFT
Registration and Maintenance. Pursuant to the Indenture, the Issuer is
obligated, at its expense, to cause each Aircraft to be duly registered, to pay
all costs of operating each Aircraft and to maintain, service and repair each
Aircraft so as to keep each Aircraft in as good operating condition as on the
Closing Date, ordinary wear and tear excepted, and in such condition as may be
necessary to enable the airworthiness certification thereof to be maintained in
good standing at all times (other than during temporary periods of repair,
maintenance, modification, storage or grounding) under the Aviation Act;
provided that in the event the Issuer leases the Aircraft in accordance
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with the terms of the Indenture to a Permitted Air Carrier organized and
operating under the laws of a Permitted Country, such lease shall provide that
the lessee shall (i) throughout the term of such lease, inspect, service,
repair, overhaul and test the Aircraft in compliance with such lessee's
maintenance program as approved by the applicable governmental authority and
maintain the airworthiness certification of such Aircraft in such Permitted
Country in good standing throughout the term of the lease; and (ii) return the
Aircraft at the end of the term of the lease in an operating condition the same
or better than the operating condition of the Aircraft when delivered to the
lessee (ordinary wear and tear excepted), and in such condition as to qualify
for a United States standard FAA certificate of airworthiness. The Issuer will
be obligated, at its expense, to replace, or cause to be replaced, all parts
(other than severable parts added at the option of the Issuer and obsolete or
unsuitable parts that the Issuer is permitted to remove to the extent described
below) that may from time to time be incorporated or installed in or attached to
any Aircraft and that may become worn out, lost, stolen, destroyed, seized,
confiscated, damaged beyond repair or rendered permanently unfit for use. The
Issuer will have the right to make such alterations and modifications in and
additions to (including removal of parts from) each Aircraft as the Issuer deems
desirable; provided that no such alteration, modification, addition or removal
shall materially diminish the value, utility or condition of such Aircraft in
the service in which it is operated by the Issuer or impair the airworthiness
thereof.
Possession, Lease and Transfer. The Issuer may lease any Aircraft or
Engine to a Permitted Air Carrier; provided that the Trustee shall have received
an opinion (or opinions) of counsel to the effect that, among other things, the
lien of the Indenture continues to be perfected, the Indenture continues to be
enforceable against the parties thereto and the Trustee maintains its right to
repossession thereunder, in each case pursuant to applicable law. In addition,
subject to certain limitations, the Issuer (and any permitted lessee) may (i)
transfer possession of any Aircraft pursuant to ''wet lease'' or similar
arrangements, in each case whereby the Issuer (or such permitted lessee)
maintains operational control of the Aircraft, (ii) transfer possession of any
Aircraft or the Engines, other than by lease, through transfers to the United
States Government and transfers in connection with maintenance or modifications;
(iii) transfer possession of the Engines and any parts from time to time
installed on any Aircraft or Engine other than by lease through transfers in
connection with interchange and pooling arrangements with certificated ''air
carriers'' within the meaning of the Aviation Act or FAA licensed repair
stations; or (iv) install one or more of the Engines on airframes owned,
mortgaged, leased or subject to conditional purchase by, the Issuer (or such
permitted lessee); provided that the rights of the parties to agreements related
thereto effectively provide that such Engines shall not become subject to the
lien of such agreement notwithstanding the installation thereof on such airframe
(and the Indenture shall provide for a reciprocal agreement for the benefit of
such parties that have so agreed that the Trustee shall not claim a lien on any
Engine installed on an Airframe). If any Aircraft is leased or the possession is
otherwise transferred, such Aircraft will remain subject to the lien of the
Indenture. No lease of any Aircraft shall be for a term in excess of five years
beyond the maturity of the Notes and the Issuer shall grant to the Trustee for
the equal and ratable benefit of the Holders of the Notes a security interest in
such lease; provided that at all times prior to an Event of Default (and at any
time thereafter when any such Event of Default has been cured or waived), the
Issuer (x) shall be entitled to receive and retain all payments made pursuant to
the lease; and (y) shall be entitled to exercise (to the exclusion of the
Trustee) all rights and remedies of the ''Lessor'' under the lease and grant
such consents, waivers and enter into such amendments to the lease as are
consistent with the provisions of the Indenture and as the Issuer may determine
appropriate in its discretion.
Liens. The Aircraft will be maintained by the Issuer free of any Liens,
other than the rights of the Trustee under the Indenture and certain Permitted
Liens, such as Liens for taxes either not yet due and payable or being contested
in good faith; suppliers', mechanics' and other similar Liens arising in the
ordinary course of business and either not yet due and payable or being
contested in good faith; certain judgment Liens whose enforcement has been
stayed; salvage and similar rights of insurers of the Aircraft, and certain
other Liens with respect to which the Issuer shall have provided a bond or other
security in an amount and under terms reasonably satisfactory to the Trustee.
Insurance. The Issuer will maintain, at its expense, all-risk aircraft
hull insurance covering the Aircraft and all-risk property damage insurance
covering Engines and parts, including while temporarily removed from an Aircraft
pending replacement, at all times in an amount not less than the aggregate
Initial Appraised Value of all of the Aircraft (as such aggregate appraised
value may be reduced from time to time in connection with an Asset
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Disposition permitted under the terms of the Indenture); provided that in no
event will a Stage 3 Aircraft be insured for less than $5.5 million or a Stage 2
Aircraft be insured for less than $3.0 million. See ''--Limitation on Certain
Asset Dispositions.'' All policies covering loss or damage to such Aircraft
shall be made payable to the Trustee for any Event of Loss to an Aircraft and
for that portion, if any, of damage not constituting an Event of Loss to an
Aircraft in excess of $900,000, which amount will be applied to repair of such
aircraft in accordance with the Indenture. The Issuer may self-insure a portion
of these risks by means of deductible or premium adjustment provisions in
insurance policies in such reasonable amounts as are then applicable to other
similar owned aircraft in the Issuer's fleet, but in no case will the self-
insurance (including the self-insurance for public liability and property damage
referred to below) with respect to all of the aircraft in the Issuer's fleet
(including the Aircraft) exceed, for any policy period, 7.5% of Consolidated Net
Worth (during the preceding calendar year) of all aircraft in which the Company
carries insurance. The Issuer is also permitted a deductible per occurrence not
in excess of the prevailing standard market deductible for similar aircraft in
the case of damage to such Aircraft not constituting an Event of Loss to such
Aircraft. In addition, the Issuer will, at its expense, maintain public
liability and property damage insurance (exclusive of manufacturer's product
liability insurance) with respect to each Aircraft in amounts that are not less
than the public liability and property damage insurance applicable to similar
aircraft in the Issuer's fleet. The Issuer may also self-insure a portion of
these risks by means of deductible or premium adjustment provisions in insurance
policies which are subject to the same limitation with respect to the aggregate
amount of self-insurance as that set forth in the third sentence of this
paragraph for insurance for risks of loss or damage to such Aircraft. The Issuer
is also permitted a deductible per occurrence not in excess of the prevailing
standard market deductible for similar aircraft. To the extent that a lessee of
an Aircraft maintains insurance policies which name the Trustee as loss payee
and which comply with the terms of the Indenture, the Issuer will not be
required to maintain such insurance coverage. The Trustee and the Issuer will be
named as insured parties under all insurance policies required with respect to
such Aircraft. If and to the extent that the Issuer or a lessee operates the
Aircraft (A) on routes where it maintains war risk insurance in effect with
respect to other similar equipment or (B) on routes where the custom in the
industry is to carry such insurance, the Issuer or such lessee shall maintain
such insurance with respect to the Aircraft in an amount not less than the
Initial Appraised Value of the Aircraft; provided that in no event will a Stage
3 Aircraft be insured for less than $5.5 million or a Stage 2 Aircraft be
insured for less than $3.0 million. Unless the Aircraft is operated or used
under a contract with the United States Government pursuant to which the United
States Government assumes liability for damage or loss to such Aircraft and to
other property or persons, the Issuer may not operate or locate any such
Aircraft outside the United States and Canada (i) in any war zone or recognized
or, in the Issuer's reasonable judgment, threatened area of hostilities, unless
such Aircraft is covered by war risk insurance, or (ii) in any area excluded
from the insurance coverage required by the Indenture.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
(a) Limitation on Guarantor Debt. The Guarantor may not Incur any Debt
unless either (A) at the time of the Incurrence of such Debt, the Notes have
been rated Investment Grade or (B) immediately after giving effect to the
Incurrence of such Debt and the receipt and application of the proceeds thereof,
the Consolidated Cash Flow Ratio for the four full fiscal quarters next
preceding the Incurrence of such Debt, calculated on a pro forma basis as if
such Debt had been Incurred and the proceeds thereof had been received and so
applied at the beginning of such four full fiscal quarters, would be greater
than 2.50 to 1.
Without regard to the foregoing limitation, the Guarantor may Incur the
following Debt:
(i) Debt under Bank Credit Agreements in an aggregate principal amount
at any one time outstanding not in excess of the Bank Debt Limit;
(ii) Debt represented by the Notes;
(iii) Debt outstanding on the date of the Indenture;
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(iv) Debt owed by the Guarantor to any Wholly Owned Restricted
Subsidiary of the Guarantor; provided, however, that upon either (A) the
transfer or other disposition by such Wholly Owned Restricted Subsidiary of
any Debt so permitted to a Person other than the Guarantor or another
Wholly Owned Restricted Subsidiary of the Guarantor or (B) such Wholly
Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted
Subsidiary, the provisions described in this Clause (iv) will no longer be
applicable to such Debt and such Debt will be deemed to have been incurred
at the time of such transfer or other disposition or such cessation;
(v) Aircraft Acquisition Debt;
(vi) Debt Incurred in connection with an acquisition of property
which Debt (a) constitutes a part of the purchase price of such property or
(b) is Incurred prior to, at the time of or within 180 days after the
acquisition of such property for the purpose of financing any part of the
purchase price thereof and which property was not owned by the Guarantor or
a Restricted Subsidiary of the Guarantor prior to such purchase; provided,
however, the principal amount of such Debt does not exceed 80% of the
purchase price of such property and provided further that the aggregate
principal amount of all Debt Incurred pursuant to the provisions described
under this Clause (vi) and Clause (v) under ''Limitation on Subsidiary Debt
and Preferred Stock'' below, or all such Debt refinanced pursuant to Clause
(viii) below or Clause (x) under ''Limitation on Subsidiary Debt and
Preferred Stock'' below, does not exceed $10.0 million at any one time
outstanding;
(vii) Debt (other than the Notes) Incurred to finance the acquisition
and installation after June 30, 1997 of Stage 3 hush kit units, which Debt
is Incurred prior to, at the time of or within 180 days after the
acquisition of such hush kit units and which hush kit units were not owned
by the Guarantor or a Restricted Subsidiary of the Guarantor prior to such
acquisition; provided that the aggregate principal amount of all Debt
Incurred pursuant to the provisions described under this Clause (vii) and
Clause (viii) under ''Limitation on Subsidiary Debt and Preferred Stock''
below, or all such Debt refinanced pursuant to Clause (viii) below or Clause
(x) under ''Limitation on Subsidiary Debt and Preferred Stock'' below, does
not exceed $53.0 million at any one time outstanding;
(viii) Debt Incurred to renew, extend, refund or otherwise refinance
any Debt referred to in Clauses (ii) through (vii) above; provided,
however, that in each case the principal amount of the Debt so Incurred
does not exceed the principal amount of the Debt so renewed, extended,
refunded or otherwise refinanced thereby plus the amount of any premium
required to be paid in connection with such refinancing pursuant to the
terms of the Debt refinanced or the amount of any premium reasonably
determined by the Guarantor as necessary to accomplish such refinancing by
means of a tender offer or privately negotiated repurchase, plus the
expenses of the Guarantor incurred in connection with such refinancing;
provided further that (A) in the case of any refinancing of Debt which is
pari passu to the Notes, the refinancing Debt is made pari passu to the
Notes or is subordinated in right of payment to the Notes and, in the case
of any refinancing of Debt which is subordinated in right of payment to the
Notes, the refinancing Debt is subordinated in right of payment to the
Notes to substantially the same or a greater extent than the Debt being
refinanced is so subordinated and (B) the refinancing Debt (x) does not
provide for any payments of principal of such Debt to be made by the
Guarantor or any Restricted Subsidiary of the Guarantor, for as long as any
of the Notes are outstanding, at the stated maturity thereof, by way of a
sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof (including any redemption,
retirement or repurchase which is contingent upon events or circumstances,
but excluding any retirement required by virtue of acceleration of such
Debt upon an event of default thereunder) (collectively, ''Mandatory
Payments''), in each case prior to the final stated maturity of the Debt
being refinanced or of the Notes, whichever is earlier (unless the Debt
being refinanced by its terms requires, without being subject to any
contingency, that payments of the principal thereof be made on one or more
specified dates prior to the final stated maturity thereof (''Scheduled
Payments'') and, on every date on which a Mandatory Payment would be due,
the total amount of all Mandatory Payments that would be due on or before
such date would not exceed the total amount of all Scheduled Payments that
(absent such
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refinancing) would be due on or before such date and after the refinancing
Debt is Incurred), and (y) does not permit, for as long as any Notes are
outstanding, redemption or other retirement of such Debt at the option of
the holder thereof prior to the final stated maturity of the Debt being
refinanced or of the Notes, whichever is earlier, other than a redemption
or other retirement at the option of the holder of such Debt on terms and
in circumstances that are substantially similar to those on and in which
the Debt being refinanced may be redeemed or otherwise retired;
(ix) Debt consisting of Permitted Interest Rate, Currency and Fuel
Protection Agreements; and
(x) Debt not otherwise permitted to be Incurred pursuant to Clauses
(i) through (ix) above, which, together with any other outstanding Debt
Incurred pursuant to this Clause (x), has an aggregate principal amount not
in excess of $45.0 million at any one time outstanding.
(b) Limitation on Subsidiary Debt and Preferred Stock. The Guarantor may
not permit any Restricted Subsidiary of the Guarantor to Incur, issue or suffer
to exist any Debt or any Preferred Stock except:
(i) Debt or Preferred Stock issued to and held by the Guarantor or a
Wholly Owned Restricted Subsidiary of the Guarantor; provided, however,
that upon either (x) the transfer or other disposition by the Guarantor or
such Wholly Owned Restricted Subsidiary of any Debt or Preferred Stock so
permitted to a Person other than the Guarantor or another Wholly Owned
Restricted Subsidiary of the Guarantor or (y) such Wholly Owned Restricted
Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary, the
provisions of this Clause (i) will no longer be applicable to such Debt or
Preferred Stock and such Debt or Preferred Stock will be deemed to have
been Incurred or issued at the time of such transfer or other disposition
or such cessation;
(ii) Debt Incurred or Preferred Stock issued by a Person prior to the
time such Person becomes a Restricted Subsidiary of the Guarantor (including
by way of a merger or consolidation with another Restricted Subsidiary of
the Guarantor), which Debt or Preferred Stock was not Incurred or issued in
anticipation of and was outstanding prior to such transaction;
(iii) Debt or Preferred Stock issued and outstanding on the date of
the Indenture;
(iv) Aircraft Acquisition Debt;
(v) Debt Incurred in connection with an acquisition of property
which Debt (a) constitutes a part of the purchase price of such property or
(b) is Incurred prior to, at the time of or within 180 days after the
acquisition of such property for the purpose of financing any part of the
purchase price thereof and which property was not owned by the Guarantor or
a Restricted Subsidiary of the Guarantor prior to such purchase; provided,
however, the principal amount of the Debt does not exceed 80% of the
purchase price of such property and provided further that the aggregate
principal amount of all Debt Incurred pursuant to the provisions described
under this Clause (v) and Clause (vi) of the second paragraph under
''Limitation on Guarantor Debt'' above, or all such Debt refinanced
pursuant to Clause (x) below or Clause (viii) under the ''Limitation on
Guarantor Debt'' above, does not exceed $10.0 million at any one time
outstanding.
(vi) Debt consisting of Permitted Interest Rate, Currency and Fuel
Protection Agreements, provided that any such interest rate or currency
protection agreements are effected with respect to Debt Incurred to finance
the purchase price of aircraft;
(vii) Debt consisting of Guarantees of Debt Incurred by the Guarantor
under Bank Credit Agreements in an aggregate principal amount at any one
time outstanding not in excess of the Bank Debt Limit;
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(viii) Debt (other than the Notes) Incurred to finance the acquisition
and installation after June 30, 1997 of Stage 3 hush kit units, which Debt
is Incurred prior to, at the time of or within 180 days after the
acquisition of such hush kit units and which hush kit units were not owned
by the Guarantor or a Restricted Subsidiary of the Guarantor prior to such
acquisition; provided that the aggregate principal amount of all Debt
Incurred pursuant to the provisions described under this Clause (viii) and
Clause (vii) under ''Limitation on Guarantor Debt'' above, or all such Debt
refinanced pursuant to Clause (x) below or clause (viii) under ''Limitation
on Guarantor Debt'' above, does not exceed $53.0 million at any one time
outstanding;
(ix) Debt consisting of Guarantees of the Notes Incurred by any
Restricted Subsidiary upon such Person becoming a Restricted Subsidiary;
and
(x) Debt or Preferred Stock which is exchanged for, or the proceeds
of which are used to refund or otherwise refinance, any Debt or Preferred
Stock permitted to be outstanding pursuant to Clauses (ii) through (ix)
above (or any extension or renewal thereof); provided, however, that in
each case the aggregate principal amount, in the case of Debt, or
liquidation preference, in the case of Preferred Stock, does not exceed the
principal amount or liquidation preference of the Debt or Preferred Stock,
as the case may be, so exchanged or refinanced plus the amount of any
premium required to be paid in connection with such exchange or refinancing
pursuant to the terms of the Debt or Preferred Stock being exchanged or
refinanced or the amount of any premium reasonably determined by the
Guarantor as necessary to accomplish such exchange or refinancing by means
of a tender offer or privately negotiated repurchase, plus the expenses of
the Guarantor incurred in connection with such exchange or refinancing;
provided further that such exchange or refinancing Debt or Preferred Stock
by its terms, or by the terms of any agreement or instrument pursuant to
which such Debt or Preferred Stock is issued, (x) does not provide for
payments of principal or liquidation value to be made by the Guarantor or
any Restricted Subsidiary of the Guarantor, for as long as any of the Notes
are outstanding, at the stated maturity of such Debt or final redemption
date, if any, of such Preferred Stock, by way of a sinking fund applicable
to such Debt or Preferred Stock or by way of any mandatory redemption,
defeasance, retirement or repurchase of such Debt or Preferred Stock
(including any redemption, retirement or repurchase which is contingent
upon events or circumstances, but excluding any retirement required by
virtue of acceleration of such Debt or Preferred Stock upon an event of
default thereunder) (collectively, ''Subsidiary Mandatory Payments''), in
each case prior to the final stated maturity or final redemption date (if
any) of the Debt or Preferred Stock, respectively, being exchanged or
refinanced and the final stated maturity of the Notes, whichever is earlier
(unless the outstanding Debt or Preferred Stock being exchanged or
refinanced by its terms requires, without being subject to any contingency,
that payments of the principal or liquidation value thereof be made on one
or more specified dates prior to the final stated maturity or final
redemption date thereof (''Subsidiary Scheduled Payments'') and, on every
date on which a Subsidiary Mandatory Payment would be due, the total amount
of all Subsidiary Mandatory Payments that would be due on or before such
date would not exceed the total amount of all Subsidiary Scheduled Payments
that (absent such exchange or refinancing) would be due on or before such
date and after the exchange or refinancing Debt is Incurred or Preferred
Stock is issued), and (y) does not permit, for as long as any Notes are
outstanding, redemption or other retirement of such Debt or Preferred Stock
at the option of the holder thereof prior to the final stated maturity or
final redemption date (if any) of the outstanding Debt or Preferred Stock,
respectively, being exchanged or refinanced and the final stated maturity
of the Notes, whichever is earlier, other than a redemption or other
retirement at the option of the holder of such Debt or Preferred Stock on
terms and in circumstances that are substantially similar to those on and
in which the outstanding Debt or Preferred Stock being exchanged or
refinanced may be redeemed or otherwise retired.
(c) Limitation on Liens. The Guarantor may not, and may not permit any
Restricted Subsidiary of the Guarantor to, Incur any Lien on any property of the
Guarantor or any of its Restricted Subsidiaries, now owned or hereafter
acquired, to secure any Debt without making, or causing such Restricted
Subsidiary to make, effective provision for securing the Notes (and, if the
Guarantor may so determine, any other Debt of the Guarantor or of such
Subsidiary that is not subordinate in right of payment to the Notes) (x) equally
and ratably with (or prior to)
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such Debt will be so secured or (y) in the event such Debt is subordinate in
right of payment to the Notes, prior to such Debt as to such property for as
long as such Debt will be so secured.
The foregoing restrictions will not apply to the following liens
(collectively "Permitted Lien"):
(i) Liens securing only the Notes;
(ii) Liens in favor of only the Guarantor and its Restricted
Subsidiaries; provided, however, that upon either (a) the assignment or
other transfer by any such Restricted Subsidiary of any such permitted Lien
in its favor to a Person other than the Guarantor or another Restricted
Subsidiary of the Guarantor or (b) such Restricted Subsidiary ceasing to be
a Restricted Subsidiary, the provisions described in this Clause (ii) will
no longer be applicable to such Lien and such Lien will be deemed to have
been Incurred at the time of such transfer or other disposition or such
cessation;
(iii) any Lien existing on the date of the Indenture as long as such
Lien does not extend to any property that is not subject to such Lien, and
does not secure any Debt that is not secured by such Lien, on such date;
(iv) any Lien on aircraft to secure Aircraft Acquisition Debt, which
Lien is Incurred when such Debt is Incurred;
(v) Liens to secure Debt Incurred for the purpose of financing all
or any part of the purchase price of the property subject to such Liens;
provided, however, that (a) the principal amount of any Debt secured by
such a Lien does not exceed 80% of such purchase price, (b) such Lien does
not extend to or cover any other property other than such item of property
and any improvements on such item and (c) the incurrence of such Debt is
permitted by the provisions described under "Limitation on Guarantor
Debt" or "Limitation on Subsidiary Debt and Preferred Stock" above;
(vi) Liens on property existing immediately prior to the acquisition
thereof (and not Incurred in anticipation of the financing of such
acquisition), provided that the Debt secured by such Lien is otherwise
permitted to be Incurred under the Indenture;
(vii) any interest in or title of a lessor to any property subject to
a Capital Lease Obligation which is otherwise permitted under the
Indenture;
(viii) Liens on property of the Guarantor or any of its Restricted
Subsidiaries in favor of the United States of America or any state thereof,
or any instrumentality of either, to secure certain payments pursuant to
any contract or statute;
(ix) Liens for taxes or assessments or other governmental charges or
levies which are being contested in good faith and for which adequate
reserves are being maintained to the extent required by generally accepted
accounting principles;
(x) title exceptions, easements and other similar Liens that are
not consensual and that do not materially impair the use of the property
subject thereto;
(xi) Liens to secure obligations under workmen's compensation laws
or similar legislation, including Liens with respect to judgments which are
not currently dischargeable;
(xii) warehousemen's, materialmen's and other similar Liens for sums
being contested in good faith and with respect to which adequate reserves
are being maintained to the extent required by generally accepted
accounting principles;
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(xiii) Liens Incurred to secure the performance of statutory
obligations, surety or appeal bonds, performance or return-of-money bonds
or other obligations of a like nature incurred in the ordinary course of
business;
(xiv) Liens (a) on an aggregate of four DC-9 aircraft to secure Debt
of up to $3.0 million per aircraft, which is permitted to be Incurred under
the "Limitation on Guarantor Debt" or the "Limitation on Subsidiary Debt
and Preferred Stock" covenants, Incurred to finance the acquisition and
installation after June 30, 1997 of Stage 3 hush kit units on other
aircraft and (b) on an aircraft to secure Debt, which is permitted to be
Incurred under the "Limitation on Guarantor Debt" or the "Limitation on
Subsidiary Debt and Preferred Stock" covenants, Incurred to finance the
acquisition and installation after June 30, 1997 of Stage 3 hush kit units
on such aircraft; and
(xv) any Liens securing Debt Incurred to extend, renew, refinance or
refund secured Debt which is permitted to be Incurred under Clause (viii)
of the "Limitation on Guarantor Debt" or Clause (x) of the "Limitation
on Subsidiary Debt and Preferred Stock" covenants; provided such Liens do
not extend to any property other than the property securing the Debt being
extended, renewed, refinanced or refunded.
(d) Limitation on Restricted Payments. The Guarantor (i) may not, directly
or indirectly, declare or pay any dividend, or make any distribution, of any
kind or character (whether in cash, property or securities) in respect of its
Capital Stock or to the holders thereof (excluding any dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire its
Capital Stock (other than Disqualified Stock)); (ii) may not, and may not permit
any Restricted Subsidiary of the Guarantor to, purchase, redeem or otherwise
acquire or retire for value (a) any Capital Stock of the Guarantor or any
Related Person of the Guarantor or (b) any options, warrants or other rights to
acquire, or any securities convertible or exchangeable into, shares of Capital
Stock of the Guarantor or any Related Person of the Guarantor; (iii) may not
make, or permit any Restricted Subsidiary of the Guarantor to make, any
Investment that is not a Permitted Investment; and (iv) may not, and may not
permit any Restricted Subsidiary of the Guarantor to, redeem, defease (whether
legal, covenant or other defeasance), repurchase, retire or otherwise acquire or
retire for value, prior to any scheduled maturity, repayment or sinking fund
payment, 10 1/4% Notes or any Debt of the Issuer or any Guarantor that is
subordinate in right of payment to the Notes or the Guarantees (each of the
transactions described in Clauses (i) through (iv) being a "Restricted
Payment"), if:
(1) an Event of Default, or an event that with the lapse of time or
the giving of notice, or both, would constitute an Event of Default, shall
have occurred and be continuing,
(2) the Guarantor would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the most recently ended four full fiscal
quarter period for which internal financial statements are available
immediately preceding the date of such Restricted Payment, not have been
permitted to Incur at least $1.00 of additional Debt pursuant to the
Consolidated Cash Flow Ratio test described in the first paragraph under
"Limitation on Guarantor Debt" above, or
(3) upon giving effect to such Restricted Payment, the aggregate of
all Restricted Payments (excluding Restricted Payments referred to in
Clause (ii) of the next succeeding paragraph and Recovered Restricted
Payments) from the date of the Indenture (the amount, if other than in
cash, determined in good faith by the Board of Directors) exceeds the sum
of: (a) 50% of the Consolidated Net Income for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing prior to the date of the Indenture through the end of the
Guarantor's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (provided
that, if such Consolidated Net Income for such period is negative, 100% of
such deficit for such period will be taken into account for this purpose);
and (b) 100% of the aggregate net cash proceeds from the issuance or sale
(other than to a Restricted Subsidiary of the Guarantor) of Capital Stock
(other than Disqualified Stock) of the Guarantor and options, warrants or
other rights to acquire Capital Stock (other than Disqualified Stock) of
the
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Guarantor and the principal amount of Debt of the Guarantor that has been
converted into or exchanged for Capital Stock (other than Disqualified
Stock) of the Guarantor after the date of the Indenture.
The foregoing covenant will not be violated by reason of (i) the payment of
any dividend within 60 days after declaration thereof if at the declaration date
such payment would have complied with the foregoing covenant; (ii) any
refinancing of Debt permitted pursuant to Clause (viii) of the second paragraph
under "Limitation on Guarantor Debt" above or any refinancing or exchange of
Debt or Preferred Stock permitted pursuant to Clause (x) under "Limitation on
Subsidiary Debt and Preferred Stock" above; (iii) any purchase, redemption or
other acquisition or retirement for value of Capital Stock of the Guarantor or
Debt with the proceeds of, or in exchange for, shares of Capital Stock (other
than Disqualified Stock) of the Guarantor; (iv) the repurchase of 10 1/4% Notes
or any Debt of the Issuer or any Guarantor that is subordinate in right of
payment to the Notes or the Guarantees in connection with an Asset Disposition
or Change of Control; provided that the Issuer shall have made an Offer to
Purchase the Notes, and shall have accepted and paid for any Notes properly
tendered in connection therewith, in each case in accordance with the terms of
the Indenture; (v) Investments acquired as a capital contribution to the
Guarantor or in exchange for Capital Stock (other than Disqualified Stock) of
the Guarantor; provided, however, that the amount of any such capital
contribution or Investment acquired in exchange of Capital Stock shall not be
added to the aggregate amount available to the Guarantor to make Restricted
Payments as calculated under clause (3)(b) of the preceding paragraph; and (vi)
the repurchase of 10 1/4% Notes in an aggregate principal amount not to exceed
$35.0 million.
(e) Limitations Concerning Distributions by Subsidiaries, etc. The
Guarantor may not, and may not permit any Restricted Subsidiary of the Guarantor
to, suffer to exist any consensual encumbrance or restriction on the ability of
any Restricted Subsidiary of the Guarantor (i) to pay, directly or indirectly,
dividends or make any other distributions in respect of its Capital Stock or pay
any Debt or other obligation owed to the Guarantor or any other Restricted
Subsidiary of the Guarantor; (ii) to make loans or advances to the Guarantor or
any Restricted Subsidiary of the Guarantor; or (iii) to transfer any of its
property to the Guarantor or any Restricted Subsidiary of the Guarantor except,
in any such case, any encumbrance or restriction:
(a) pursuant to any agreement in effect on the date of the Indenture,
(b) pursuant to an agreement relating to any Debt Incurred by such
Subsidiary prior to and outstanding on the date on which such Subsidiary
became a Subsidiary of the Guarantor (including by reason of a merger or
consolidation with another Subsidiary of the Guarantor), provided that such
Debt was not Incurred in anticipation of becoming a Subsidiary,
(c) pursuant to an agreement which has been entered into for the
pending sale or disposition of all or substantially all of the Capital
Stock or assets of such Subsidiary, provided that such restriction
terminates if such transaction is consummated or abandoned and if such
agreement is terminated,
(d) pursuant to customary non-assignment provisions in leases or
purchase agreements entered into in the ordinary course of business, or
(e) pursuant to an agreement effecting a renewal, extension,
refinancing or refunding of Debt Incurred pursuant to an agreement referred
to in Clause (a) or (b) above; provided, however, that the provisions
relating to such encumbrance or restriction contained in such renewal,
extension, refinancing or refunding are no more restrictive in any material
respect than the provisions contained in the agreement it replaces, as
determined in good faith by the Board of Directors.
(f) Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Guarantor will not, and will not permit any Restricted
Subsidiary of the Guarantor to, issue, transfer, convey, sell, lease or
otherwise dispose of any Capital Stock of or other ownership interests in such
or any other Restricted Subsidiary, or options, warrants or other rights to
acquire, or securities convertible into or exchangeable for, such Capital Stock
or other ownership interests, to any Person (other than the Guarantor or a
Wholly Owned Restricted Subsidiary)
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unless such transfer, conveyance, sale, lease or other disposition is of all the
Capital Stock of and other ownership interests in such Restricted Subsidiary and
the Net Available Proceeds from such sale, assignment, transfer or conveyance
(including from the sale of any marketable cash equivalents received therein),
less any Reinvested Amounts, are applied in accordance with Clause (iii) of the
covenant described under "Limitation on Certain Asset Dispositions."
(g) Limitation on Transactions with Affiliates and Related Persons. The
Guarantor may not, and may not permit any Restricted Subsidiary of the Guarantor
to, directly or indirectly, enter into any transaction (including the purchase,
sale, lease or exchange of property, the rendering of any service or the making
of any loan or advance) after the date of the Indenture with any Affiliate or
Related Person unless (i) such Affiliate or Related Person is (both before and
after such transaction) a Wholly Owned Restricted Subsidiary of the Guarantor;
or (ii) the terms of the transaction are no less favorable to the Guarantor or
such Subsidiary than those that could be obtained in a comparable arm's-length
transaction with an entity that is not an Affiliate or a Related Person and are
in the best interests of the Guarantor or such Subsidiary; provided that, for
any transaction (or series of related transactions) in which the total
consideration given or to be provided by the Guarantor or such Subsidiary in or
pursuant to such transaction (or series) (including cash, the fair value of non-
cash property and the assumption of Debt) exceeds or will exceed $5.0 million, a
majority of the members of the Board of Directors who are disinterested with
respect to such transaction (or series) shall determine that such transaction
(or series) satisfies the criteria set forth in Clause (ii) above and shall
evidence such determination by a Board Resolution filed with the Trustee.
(h) Limitation on Certain Asset Dispositions. The Guarantor may not make,
and may not permit any Restricted Subsidiary of the Guarantor to make, any Asset
Disposition in one or more related transactions unless: (i) the Guarantor (or
such Subsidiary, as the case may be) receives consideration at the time of such
disposition at least equal to the fair market value of the shares or the assets
disposed of, as determined by the Board of Directors or Chief Financial Officer
of the Guarantor in good faith and evidenced by a resolution of the Board of
Directors or a certificate of the Chief Financial Officer filed with the
Trustee; (ii) at least 75% of the consideration received by the Guarantor (or
such Subsidiary) consists of cash or readily marketable cash equivalents or the
assumption of Debt or other obligations of the Guarantor or any Restricted
Subsidiary (other than Debt or any other obligation subordinate in right of
payment to the Notes) relating to such assets and release of the Guarantor and
its Restricted Subsidiaries from all liability on such Debt or other
obligations; and (iii) all Net Available Proceeds from such disposition
(including from the sale of any marketable cash equivalents received therein),
less any Reinvested Amounts, are applied by the Guarantor (or such Subsidiary as
the case may be) within 180 days of such disposition (1) first, to the repayment
(in whole or in part) of unsubordinated Debt then outstanding under any
agreements or instruments which would require such application or which would
prohibit payments pursuant to Clause (2) following; (2) second, to the extent of
any remaining Net Available Proceeds after giving effect to Clause (1) ("Excess
Proceeds"), to purchases of outstanding Notes pursuant to an Offer to Purchase
at a purchase price equal to 100% of their principal amount plus accrued
interest to the date of purchase; and (3) third, to the extent of any remaining
Net Available Proceeds following completion of such Offer to Purchase, to any
other use as determined by the Guarantor which is not otherwise prohibited by
the Indenture.
Notwithstanding the foregoing, the Issuer will not be required to purchase
Notes pursuant to the requirements described in Clause (iii) (2) of the
preceding paragraph if the Net Available Proceeds (less Reinvested Amounts)
available for use to make an Offer to Purchase Notes, together with all Net
Available Proceeds (less Reinvested Amounts) from prior Asset Dispositions which
were available for use to make an Offer to Purchase, but were not so used
pursuant to the provisions described in this paragraph, are less than $10.0
million. Notwithstanding the foregoing, if any Restricted Subsidiary in which a
Reinvested Amount is invested becomes an Unrestricted Subsidiary thereafter,
then such change in status will be deemed to be an Asset Disposition with Net
Available Proceeds of cash in an amount equal to such Reinvested Amount, and
such an amount of cash will be applied pursuant to Clause (iii) above (subject
to this paragraph).
Any Offer to Purchase required by the provisions described above will be
effected by the sending of the written terms and conditions thereof (the "Offer
Document"), by first class mail, to Holders of the Notes within
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90 business days after the aggregate amount of Excess Proceeds exceeds $10.0
million. The contents of the Offer to Purchase and the requirements that a
Holder must satisfy to tender any Note pursuant to such Offer to Purchase are
substantially the same as those described below under "Change of Control."
The provisions described in this subsection will not apply to any Asset
Disposition that constitutes a transfer, conveyance, sale, lease or other
disposition of (x) all or substantially all the properties and assets of the
Issuer or the Guarantor subject to the provisions described under "Mergers,
Consolidations and Certain Sales and Purchases of Assets" or (y) Collateral
subject to the provisions described under "Limitation on Collateral Sales."
(i) Limitation on Collateral Sales; Event of Loss. The Issuer will not
transfer, convey, sell, lease (other than leases and transfers of possession
permitted under "Covenants Relating to the Aircraft") or otherwise dispose of
(a "Sale") any Aircraft or Engine unless (i) the Issuer receives (x)
consideration, consisting solely of cash, at the time of such Sale at least
equal to the fair market value of the Aircraft or Engine disposed of (determined
by the Chief Financial Officer of the Issuer in good faith) or (y) a Stage 3
Aircraft or Engine or, in the case of a Sale of any Stage 2 Aircraft or Engine
only, a Stage 2 Aircraft or Engine, as the case may be, of the same or a more
advanced model and having a value (determined by the Chief Financial Officer of
the Issuer in good faith) and utility at least equal to, and in as good
operating condition and repair and as airworthy as, the Aircraft or Engine
subject to the Sale, assuming such Aircraft or Engine, as the case may be, was
in the condition and repair required by the Indenture immediately prior to such
Sale. If the Issuer consummates a Sale for cash, or if an Event of Loss occurs,
with respect to any Aircraft or Engine, the Trustee will receive and hold, and
if received by the Issuer, the Issuer will pay over to the Trustee, the proceeds
of such Sale or Event of Loss; provided that if the amount of such proceeds is
less than the Initial Appraised Value of such Aircraft or Engine, the Issuer
shall pay to the Trustee an additional amount equal to the difference between
such proceeds and the Initial Appraised Value. The Issuer may, within 365 days
after such Sale or Event of Loss, subject to the lien of the Indenture,
substitute a Stage 3 aircraft or engine or, in the case of a Sale of a Stage 2
aircraft or engine only, a Stage 2 Aircraft or Engine, of the same or a more
advanced model and having a value (determined by the Chief Financial Officer of
the Issuer in good faith) and utility at least equal to, and in as good
operating condition and repair and as airworthy as, the Aircraft or Engine
subject to the Sale or Event of Loss, assuming such Aircraft or Engine was in
the condition and repair required by the Indenture immediately prior to the
occurrence of such Sale or Event of Loss, and the Trustee shall, upon receipt of
evidence of such substitution, pay to the Issuer the proceeds of such Sale or
Event of Loss and any related additional amounts held by it. In the event the
Issuer elects not to replace such Aircraft (or in the event such Aircraft or
Engine is not replaced within 365 days after such Sale or Event of Loss), the
Trustee will refund to the Issuer, and the Issuer will be required to apply, an
amount equal to the proceeds received from such Sale or Event of Loss, together
with any additional amounts paid to the Trustee by the Issuer with respect to
the difference between the amount of such proceeds and the Initial Appraised
Value of such Aircraft, to purchase Notes in the open market; provided that with
respect to the proceeds of any Sale of or Event of Loss to an Aircraft, in no
event shall the Issuer be required to so apply, and the Issuer shall be
permitted to retain, amounts, if any, in excess of the Initial Appraised Value
of such Aircraft unless such Aircraft was a Stage 2 Aircraft at the date such
Initial Appraised Value was determined (or an Aircraft substituted for such
Aircraft under the Indenture) and such Aircraft (or such substituted Aircraft)
subsequently became a Stage 3 Aircraft, in which case the maximum amount the
Issuer would be required to so apply will be the Initial Appraised Value of such
Aircraft plus $2.3 million. Notwithstanding the foregoing, if the Issuer
consummates a Sale, or an Event of Loss occurs, with respect to an Engine alone,
the Issuer must replace such Engine with another engine of the same or an
improved model of the same or another manufacturer and suitable for installation
and use on the Aircraft, and having a value and utility at least equal to and in
as good operating condition as, the Engine subject to the Sale or Event of Loss,
assuming such Engine was of the value and utility and in the condition and
repair required by the Indenture immediately prior to the occurrence of such
Sale or Event of Loss. Any cash received in connection with a Sale or an Event
of Loss shall be held by the Trustee and invested in Permitted Collateral
Investments until applied in accordance with this covenant. Upon payment to the
Trustee of the proceeds from the Sale or an Event of Loss with respect to an
Aircraft, together with any additional amounts paid to the Trustee by the Issuer
in respect of the difference between the amount of such proceeds and the Initial
Appraised Value of such Aircraft, as required by this "Limitation on Collateral
Sales" covenant, the lien of the Indenture with respect to such Aircraft (but
not the proceeds with respect thereto) shall terminate.
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(j) Provision of Financial Information. Whether or not the Guarantor is
required to be subject to Section 13(a) or 15(d) of the Exchange Act, or any
successor provision thereto, the Guarantor will file with the Commission the
annual reports, quarterly reports and other documents which the Guarantor would
have been required to file with the Commission pursuant to such Section 13(a) or
15(d) or any successor provision thereto if the Guarantor were so required, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Guarantor would have been required
so to file such documents if the Guarantor were so required. The Guarantor will
also in any event (a) within 15 days of each Required Filing Date (i) transmit
by mail to all Holders, as their names and addresses appear in the Security
Register, without cost to such Holders, and (ii) file with the Trustee, copies
of the annual reports, quarterly reports and other documents (excluding
exhibits) which the Guarantor would have been required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act or any
successor provisions thereto if the Guarantor were required to be subject to
such Sections and (b) if filing such documents by the Guarantor with the
Commission is not permitted under the Exchange Act, promptly upon written
request supply copies of such documents to any prospective Holder.
(k) Unrestricted Subsidiaries. The Guarantor at any time may designate any
Subsidiary as an "Unrestricted Subsidiary," whereupon (and until such Person
ceases to be an Unrestricted Subsidiary) such Person and each other Person that
is then or thereafter becomes a Subsidiary of such Person will be deemed to be
an Unrestricted Subsidiary. In addition, the Guarantor may at any time terminate
the status of any Subsidiary as an Unrestricted Subsidiary, whereupon such
Subsidiary and each other Subsidiary of the Guarantor (if any) of which such
Subsidiary is a Subsidiary will cease to be an Unrestricted Subsidiary.
Notwithstanding the foregoing, no change in the status of a Subsidiary of
the Guarantor from a Restricted Subsidiary to an Unrestricted Subsidiary or vice
versa will be effective, and no Person may otherwise become a Restricted
Subsidiary, if (i) the Consolidated Cash Flow Ratio for the four full fiscal
quarters of the Guarantor next preceding the effective date of such purported
change or other event, calculated on a pro forma basis as if such change or
other event had been effective at the beginning of such period, would be less
than 2.50 to 1, (ii) in the case of any change in status of such a Subsidiary
from a Restricted Subsidiary to an Unrestricted Subsidiary, the aggregate of all
Restricted Payments on and after the date of the Indenture (excluding Restricted
Payments referred to in Clause (ii) of the last paragraph under "Limitation on
Restricted Payments" and Recovered Restricted Payments), plus the greater of
the book value and the fair market value of all assets of such Restricted
Subsidiary prior to such change, would exceed the amount specified in Clause (3)
of the first paragraph under "Limitation on Restricted Payments" above, (iii)
in the case of any change in status of such a Subsidiary from an Unrestricted
Subsidiary to a Restricted Subsidiary, such Subsidiary could not then Incur or
issue, pursuant to the covenant described under "Limitation on Subsidiary Debt
and Preferred Stock," all Debt and Preferred Stock as to which it is then
obligated or the issuer at such time or (iv) such change or other event would
otherwise result (after the giving of notice or the lapse of time, or both) in
an Event of Default. In addition and notwithstanding the foregoing, no
Subsidiary of the Guarantor may become an Unrestricted Subsidiary, and the
status of any Subsidiary as an Unrestricted Subsidiary will be deemed to have
been immediately terminated (with the effect described in the preceding
paragraph) at any time when, (i) such Subsidiary (A) has outstanding Debt that
is Unpermitted Debt or (B) owns or holds any Capital Stock of or other ownership
interests in, or a Lien on any property of, the Guarantor or any of its
Subsidiaries that is not an Unrestricted Subsidiary or (ii) the Guarantor or any
Subsidiary of the Guarantor that is not an Unrestricted Subsidiary (A) provides
credit support for, or a Guaranty of, any Debt of such Subsidiary (including any
undertaking, agreement or instrument evidencing such Debt) or (B) is directly or
indirectly liable for any Debt of such Subsidiary. Any such termination
otherwise prohibited by the restrictions described in the first sentence of this
paragraph will be deemed to result in a default under the Indenture.
"Unpermitted Debt" means any Debt of a Subsidiary of the Guarantor if (x) a
default thereunder (or under any instrument or agreement pursuant to or by which
such Debt is issued, secured or evidenced), or any right that the holders
thereof may have to take enforcement action against such Subsidiary or its
property, would permit (whether or not after the giving of notice or the lapse
of time or both) the holders of any Debt of the Guarantor or a Subsidiary of the
Guarantor that is not an Unrestricted Subsidiary to declare the same due and
payable prior to the date on which it otherwise would have become due and
payable or otherwise to take any enforcement action against the Guarantor or any
such other Subsidiary or (y) such Debt is secured by a Lien on any property of
the Guarantor or any of its Subsidiaries that is not an Unrestricted Subsidiary.
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Upon the designation of any Restricted Subsidiary as an Unrestricted
Subsidiary, an amount equal to the greater of the book value and the fair market
value of all assets of such Restricted Subsidiary prior to such change will be
deemed to be a Restricted Payment for purposes of calculating the aggregate
amount for Restricted Payments under the covenant "Limitation on Restricted
Payments."
Each Person that is or becomes a Subsidiary of the Guarantor will be deemed
to be a Restricted Subsidiary at all times when it is a Subsidiary of the
Guarantor that is not an Unrestricted Subsidiary. Each Person that is or becomes
a Wholly Owned Subsidiary of the Guarantor shall be deemed to be a Wholly Owned
Restricted Subsidiary at all times when it is a Wholly Owned Subsidiary of the
Guarantor that is not an Unrestricted Subsidiary.
(l) Change of Control. Within 30 days following the date of the
consummation of a transaction that results in a Change of Control (as defined
below), the Issuer will commence an Offer to Purchase all outstanding Notes, at
a purchase price equal to 101% of their aggregate principal amount plus accrued
interest to the date of purchase. Such obligation will not continue after a
discharge of the Issuer and the Guarantors or defeasance from their obligations
with respect to the Notes. See "--Defeasance."
A "Change of Control" will be deemed to have occurred in the event that,
after the date of the Indenture, (i) any Person, or any Persons acting together
that would constitute a "group" (a "Group"), for purposes of Section 13(d)
of the Exchange Act, together with any Affiliates or Related Persons thereof
(other than any employee stock ownership plan), beneficially owns 50% or more of
the total voting power of all classes of Voting Stock of the Guarantor, (ii) any
Person or Group, together with any Affiliates or Related Persons thereof,
succeeds in having a sufficient number of its nominees elected to the Board of
Directors of the Guarantor such that such nominees, when added to any existing
director remaining on the Board of Directors of the Guarantor after such
election who is an Affiliate or Related Person of such Person or Group, will
constitute a majority of the Board of Directors of the Guarantor, (iii) there
occurs any transaction or series of related transactions, and the beneficial
owners of the Voting Stock of the Guarantor immediately prior to such
transaction (or series) do not, immediately after such transaction (or series),
beneficially own Voting Stock representing more than 50% of the voting power of
all classes of Voting Stock of the Guarantor (or in the case of a transaction
(or series) in which another entity becomes a successor to the Guarantor, of the
successor entity) or (iv) the Guarantor shall cease to own 100% of the
outstanding Capital Stock of the Issuer; provided that the foregoing shall not
apply with respect to any such Person or Group referred to in Clause (i) or (ii)
above, which consists exclusively, or to any transaction (or series) referred to
in Clause (iii) above if at least 50% of such voting power is beneficially owned
immediately thereafter by any Person or Group, which consists exclusively, of
any one or more Permitted Holders and their Affiliates (while they are such).
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes resulting from a Change of Control (or any Asset
Disposition).
On or before the thirtieth day following any Change of Control, an Offer
Document will be sent, by first class mail, to Holders of the Notes, accompanied
by such information regarding the Guarantor and its Subsidiaries as the Issuer
in good faith believes will enable such Holders to make an informed decision
with respect to the Offer to Purchase, which at a minimum will include (a) the
most recent annual and quarterly financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the documents required to be filed with the Trustee pursuant to the
"Provision of Financial Information" covenant (which requirements may be
satisfied by delivery of such documents together with the Offer to Purchase),
(b) a description of material developments in the Guarantor's business
subsequent to the date of the latest of such financial statements referred to in
Clause (a) (including a description of the events requiring the Issuer to make
the Offer to Purchase), (c) if applicable, appropriate pro forma financial
information concerning the Offer to Purchase and the events requiring the Issuer
to make the Offer to Purchase and (d) any other information required by
applicable law to be included therein. The Offer Document will contain all
instructions and materials necessary to enable Holders of the Notes to tender
Notes pursuant to the Offer to Purchase. The Offer Document will also state
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(i) that a Change of Control has occurred (or, if the offer to purchase is
delivered in connection with an Asset Disposition, that an Asset Disposition has
occurred) and that the Issuer will Offer to purchase the Holder's Notes, (ii)
the Expiration Date of the Offer Document, which will be, subject to any
contrary requirements of applicable law, not less than 30 days or more than 60
days after the date of such Offer Document, (iii) the Purchase Date for the
purchase of Notes which will be within five Business Days after the Expiration
Date, (iv) the aggregate principal amount of Notes to be purchased (including,
if less than 100%, the manner by which such purchase has been determined
pursuant to the Indenture) and the purchase price, and (v) a description of the
procedure which a Holder must follow to tender all or any portion of the Notes.
To tender any Note, a Holder must surrender such Note at the place or
places specified in the Offer Document prior to the close of business on the
Expiration Date (such Note being, if the Issuer or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Issuer and the Trustee duly executed by, the Holder thereof
or his attorney duly authorized in writing). Holders will be entitled to
withdraw all or any portion of Notes tendered if the Issuer (or its Paying
Agent) receives, not later than the close of business on the Expiration Date, a
telegram, telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of the Note the Holder tendered, the certificate
number of the Note the Holder tendered and a statement that such Holder is
withdrawing all or a portion of his tender. Any portion of a Note tendered must
be tendered in an integral multiple of $1,000 principal amount.
The Indenture does not contain any other change of control provisions.
MERGERS, CONSOLIDATIONS AND CERTAIN SALES AND PURCHASES OF ASSETS
Neither the Guarantor nor the Issuer (i) may consolidate with or merge into
any other Person or permit any other Person to consolidate with or merge into
the Guarantor or any Restricted Subsidiary of the Guarantor (in a transaction in
which such Subsidiary remains a Restricted Subsidiary); (ii) may, directly or
indirectly, in one or a series of transactions, transfer, convey, sell, lease or
otherwise dispose of all or substantially all of its properties and assets;
(iii) may, and neither may permit any Restricted Subsidiary of the Guarantor to,
acquire Capital Stock of or other ownership interests in any other Person such
that such other Person becomes a Restricted Subsidiary; and (iv) may, and
neither may permit any Restricted Subsidiary of the Guarantor to, purchase,
lease or otherwise acquire all or substantially all of the properties and assets
of any Person or any existing business (whether existing as a separate entity,
subsidiary, division, unit or otherwise) of any Person, unless, in each case
(i), (ii), (iii) and (iv) above: (1) immediately before and after giving effect
to such transaction (or series) and treating any Debt Incurred by the Guarantor
or a Subsidiary of the Guarantor as a result of such transaction (or series) as
having been Incurred by the Guarantor or such Subsidiary at the time of the
transaction (or series), no Event of Default or event that with the passing of
time or the giving of notice, or both, will constitute an Event of Default shall
have occurred and be continuing, (2) in a transaction (or series) in which the
Guarantor or the Issuer does not survive or in which the Guarantor or the Issuer
transfers, conveys, sells, leases or otherwise disposes of all or substantially
all of its properties and assets, the successor entity is a corporation,
partnership, limited liability Company or trust and is organized and validly
existing under the laws of the United States of America, any State thereof or
the District of Columbia and expressly assumes, by a supplemental indenture
executed and delivered to the Trustee in form satisfactory to the Trustee, all
the obligations under the Indenture of the Guarantor or the Issuer, as the case
may be; (3) immediately after giving effect to such transaction (or series), the
Guarantor or the Issuer or the successor entity would have a Consolidated Net
Worth equal to or greater than 90% of the Consolidated Net Worth of the
Guarantor or the Issuer, as the case may be, immediately prior to such
transaction (or series); (4) immediately after giving effect to such transaction
(or series) the Consolidated Cash Flow Ratio of the Guarantor or, if applicable,
the successor entity for the four full fiscal quarters immediately preceding
consummation of such transaction (or series), determined on a pro forma basis as
if such transaction (or series) had taken place at the beginning of such four
full fiscal quarters, shall be not less than 2.50 to 1; (5) if, as a result of
any such transaction, property or assets of the Guarantor or any Subsidiary of
the Guarantor would become subject to a Lien prohibited by the "Limitation on
Liens" covenant, the Guarantor or the successor entity will have secured the
Notes as required by such covenant; , and (6) the Guarantor or the Issuer, as
the case may be, has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel as specified in the Indenture. Notwithstanding the foregoing,
the Airways
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Acquisition will be exempt from the restrictions of the "Mergers,
Consolidations and Certain Sales and Purchases of Assets" covenant and any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Guarantor or another Restricted Subsidiary.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Aircraft" means each of the Airframes, together with the Engines
relating thereto and hush kits, if any, installed thereon, upon which the
Trustee has been granted a security interest and mortgage lien by the Issuer
pursuant to the Indenture, and any airframes which may from time to time be
substituted for such Airframes pursuant to the terms of the Indenture.
"Aircraft Acquisition Debt" means Debt Incurred by the Company or any of
its Restricted Subsidiaries either (i) in connection with an acquisition of
aircraft, related engines or spare engines which Debt either constitutes part of
the purchase price of such aircraft, engine or spare engines, as the case may
be, or is Incurred prior to, at the time of or within 270 days (or 365 days if
such acquisition involves a purchase of an MD-95 aircraft, related engine or
spare engine from the manufacturer thereof) after the acquisition of such
equipment for the purpose of financing or refinancing part of the purchase price
thereof, and which equipment was not owned by the Company or a Restricted
Subsidiary of the Company prior to such purchase; provided, however, that in
either case (A) the proportion (expressed as a percentage) of such Debt to the
purchase price or appraised value of such equipment at the time of such
financing does not exceed 80% (or, with respect to Debt Incurred to acquire MD-
95 aircraft, related engines and spare engines, 90%), and (B) other than in the
case of financing of MD-95 aircraft, related engines and spare engines, after
giving effect to the Incurrence of such Debt and the acquisition of such
equipment, the Company's Consolidated Net Worth is not less than $150.0 million
or (ii) which is a Restricted Lease Obligation relating solely to an aircraft,
related engine or spare engine that was not owned by the Company or a Restricted
Subsidiary of the Company more than 270 days prior to such Incurrence; provided,
however, that, other than in the case of financing of MD-95 aircraft, related
engines or spare engines, after giving effect to the Incurrence of such Debt the
Company's Consolidated Net Worth is not less than $150.0 million.
"Airframes" means each of the 17 Stage 3 DC-9 aircraft and each of the
seven Stage 2 DC-9 aircraft (except Engines or engines from time to time
installed on such aircraft) initially pledged to secure the Issuer's obligations
under the Indenture and the Notes, and any aircraft (except Engines or engines
from time to time installed on such aircraft) which may from time to time be
substituted for such aircraft (except Engines or engines from time to time
installed on such aircraft) pursuant to the Indenture.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person (including as part of a Sale and Lease
Back Transaction and in a consolidation or merger or other sale of any
Restricted Subsidiary with, into or to another Person in a transaction in which
such Subsidiary ceases to be a Subsidiary of such Person, but excluding a
disposition by a Subsidiary of such Person to such Person or a Wholly Owned
Restricted Subsidiary or by such Person to a Wholly Owned Restricted Subsidiary
and excluding a Permitted Aircraft Lease by such Person) of (i) shares of
Capital Stock (other than directors' qualifying shares) or other ownership
interests of a Restricted Subsidiary, (ii) all or substantially all of the
assets of such Person or any Restricted Subsidiary representing a division or
line of business, (iii) aircraft or (iv) other assets or rights of such Person
or any Restricted Subsidiary outside of the ordinary course of business
consistent with past practice.
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"Aviation Act" means the Federal Aviation Act of 1958, as amended, and
the applicable regulations thereunder.
"Bank Credit Agreements" means one or more credit agreements between the
Guarantor and one or more commercial banks named therein as lenders providing
for term borrowings and/or revolving borrowings, including all related notes,
collateral documents, instruments and agreements executed in connection
therewith, in each case as may be amended, supplemented or restated from time to
time and including any replacement, extension, modification or renewal thereof.
"Bank Debt Limit" means $50.0 million, provided that if (a) any one or
more Bank Credit Agreements are entered into or amended, supplemented, restated,
replaced, extended, modified or renewed at any time so as to establish the
aggregate amount of term borrowings and/or revolving borrowings permitted under
the Bank Credit Agreements to be outstanding at any one time to be an amount in
excess of $50.0 million (such amount, the "Adjusted Bank Debt Limit"; such
excess amount, the "Excess Amount"; and such event, a "Bank Debt Limit
Adjustment") and (b) at the time of such Bank Debt Limit Adjustment, and
assuming on a pro forma basis that borrowings in an amount equal to the Excess
Amount or $50.0 million, whichever is less, had been Incurred under the Bank
Credit Agreements at the beginning of, and remained outstanding during, the most
recently ended four full fiscal quarter period for which internal financial
statements are available immediately preceding the date of the Bank Debt Limit
Adjustment, the Guarantor would have been permitted to Incur at least $1.00 of
additional Debt pursuant to the Consolidated Cash Flow Ratio test described in
the first paragraph under the covenant "Limitation on Guarantor Debt," then
the Bank Debt Limit shall be the Adjusted Bank Debt Limit or $100.0 million,
whichever is less.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles. The amount of any such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with generally
accepted accounting principles, and the stated maturity of such obligation shall
be the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated, whether voting or
nonvoting) in equity of such Person.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow Available for Fixed Charges" of any Person means
for any period the Consolidated Net Income for such period increased by the sum
of (i) Consolidated Interest Expense of such Person for such period, plus (ii)
Consolidated Income Tax Expense deducted in determining the Consolidated Net
Income of such Person for such period, plus (iii) the consolidated depreciation
and amortization expense deducted in determining the Consolidated Net Income of
such Person for such period, plus (iv) Consolidated Rent Expense, plus (v) other
non-cash charges of such Person for such period deducted from consolidated
revenues in determining Consolidated Net Income for such period, minus (vi) non-
cash items of such Person for such period increasing consolidated revenues in
determining Consolidated Net Income for such period.
"Consolidated Cash Flow Ratio" of any Person means for any period the
ratio of (i) Consolidated Cash Flow Available for Fixed Charges of such Person
for such period to (ii) the sum of (A) Consolidated Interest Expense of such
Person for such period plus (B) Consolidated Rent Expense of such Person for
such period, plus
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(C) the annual interest expense (including the amortization of debt discount)
with respect to any Debt proposed to be Incurred by such Person or its
Restricted Subsidiaries, minus (D) Consolidated Interest Expense of such Person
to the extent included in Clause (ii)(A) with respect to any Debt that will no
longer be outstanding as a result of the Incurrence of the Debt proposed to be
Incurred, plus (E) the annual interest expense (including the amortization of
debt discount) with respect to any other Debt Incurred by such Person or its
Restricted Subsidiaries since the end of such period to the extent not included
in Clause (ii)(A) minus (F) Consolidated Interest Expense of such Person to the
extent included in Clause (ii)(A) with respect to any Debt that no longer is
outstanding as a result of the Incurrence of the Debt referred to in Clause
(ii)(E); provided, however, that in making such computation, the Consolidated
Interest Expense of such Person attributable to interest on any Debt bearing a
floating interest rate shall be computed on a pro forma basis as if the rate in
effect on the date of computation had been the applicable rate for the entire
period; and provided further that, in the event such Person or any of its
Restricted Subsidiaries has made acquisitions of a division or line of business
not in the ordinary course of business (including acquisitions of other Persons
by merger, consolidation or purchase of Capital Stock) or Asset Dispositions
during or after such period, such computation shall be made on a pro forma basis
as if the acquisitions or Asset Dispositions had taken place on the first day of
such period.
"Consolidated Income Tax Expense" of any Person means for any period the
consolidated provision for income taxes of such Person and its Consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles.
"Consolidated Interest Expense" of any Person means for any period the
consolidated interest expense included in a consolidated income statement
(without deduction of interest income) of such Person and its Consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the portion of any rental
obligation in respect of any Capital Lease Obligation allocable to interest
expense in accordance with generally accepted accounting principles; (ii) the
amortization of Debt discounts; (iii) any payments or fees with respect to
letters of credit, bankers' acceptances or similar facilities; (iv) fees with
respect to interest rate swap or similar agreements, fuel hedging or similar
agreements or foreign currency hedge, exchange or similar agreements; (v)
Preferred Stock dividends declared and paid or payable in cash; (vi) the portion
of the rental obligation in respect of any Sale and Leaseback Transaction
allocable to interest expense (determined as if such obligation were a Capital
Lease Obligation); and (vii) interest in respect of any Debt that is guaranteed
or secured by the Guarantor or any of its Restricted Subsidiaries.
"Consolidated Net Income" of any Person means for any period the
consolidated net income (or loss) of such Person and its Consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom (a) the
net income (or loss) of any Person acquired by such Person or a Subsidiary of
such Person in a pooling-of-interests transaction for any period prior to the
date of such transaction, (b) the net income (but not net loss) of any
Consolidated Subsidiary of such Person that is subject to restrictions that
prevent the payment of dividends or the making of distributions to such Person
to the extent of such restrictions, (c) the net income (or loss) of any Person
that is not a Consolidated Subsidiary of such Person except to the extent of the
amount of dividends or other distributions actually paid to such Person by such
other Person during such period, (d) gains or losses on Asset Dispositions by
such Person or its Consolidated Subsidiaries, (e) all extraordinary gains and
extraordinary losses, (f) the cumulative effect of changes in accounting
principles in the year of adoption of such changes and (g) the tax effect of any
of the items described in Clauses (a) through (f) above.
"Consolidated Net Worth" of any Person means, as of any date, the
consolidated stockholders' equity of such Person and its subsidiaries (or in the
case of the Guarantor, Restricted Subsidiaries) as of such date, as determined
on a consolidated basis in accordance with generally accepted accounting
principles, less amounts attributable to Disqualified Stock of such Person,
provided that calculations of the foregoing will not give effect to, with
respect to the Guarantor and its Restricted Subsidiaries, adjustments following
the date of the Indenture to the accounting books and records of the Guarantor
and its subsidiaries in accordance with Accounting Principles
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Board Opinions Nos. 16 and 17 (or successor opinions thereto) or otherwise
resulting from the acquisition of control of the Guarantor by another Person.
"Consolidated Rent Expense" of any Person means for any period the
consolidated rent expense attributable to Restricted Lease Obligations and
included in a consolidated income statement (without deduction of any rental
income and without duplication for any amount included in Consolidated Interest
Expense) of such Person and its Consolidated Subsidiaries for such period
determined in accordance with generally accepted accounting principles.
"Consolidated Subsidiaries" of any Person means, as of any date or for
any period, all other Persons that would be accounted for as consolidated
Persons in such Person's financial statements in accordance with generally
accepted accounting principles as of such date or for such period, as the case
may be; provided that, for any particular period (or portion thereof) during
which any Subsidiary was an Unrestricted Subsidiary, "Consolidated
Subsidiaries" will exclude such Subsidiary for such period (or portion thereof)
during which it was an Unrestricted Subsidiary.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(but excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business), (v) every Restricted Lease Obligation of such
Person, (vi) the maximum fixed redemption or repurchase price of Disqualified
Stock of such Person at the time of determination, (vii) every payment
obligation of such Person under interest rate swap or similar agreements, fuel
hedging or similar agreements or foreign currency hedge, exchange or similar
agreements at the time of determination and (viii) every obligation of the type
referred to in Clauses (i) through (vii) of another Person and all dividends of
another Person the payment of which, in either case, such Person has Guaranteed
or for which such Person is responsible or liable, directly or indirectly,
jointly or severally, as obligor, guarantor or otherwise.
"Disqualified Stock" of any Person means any Capital Stock of such Person
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final Stated Maturity of the Notes.
"Engines" means, for each of the 17 Stage 3 DC-9 Airframes and seven
Stage 2 DC-9 Airframes, each of two JT8D-9 engines relating thereto, as
specified in the Indenture, three spare JT8D-9 engines and any engines which may
from time to time be substituted for such engines pursuant to the Indenture.
"Event of Loss" means, with respect to an Aircraft or Engine, any of the
following events: (i) payment of an insurance settlement with respect to such
property on the basis of any actual or constructive total loss; (ii) destruction
or damage beyond repair; (iii) theft or disappearance for a period in excess of
120 days; (iv) the condemnation or taking of title to such Aircraft or Airframe
by the United States government or any foreign government or instrumentality or
agency thereof; (v) the requisition or taking of such Aircraft or Airframe by a
foreign government or instrumentality or agency for a continuous period of more
than six months; or (vi) with respect to an Engine only, the requisition for use
by any government or the divestiture of title resulting from installation of
such Engine on an airframe leased to the Issuer or purchased by the Issuer
subject to a conditional sale agreement, in either case under circumstances
where the Trustee's security interest in such engine is adversely affected
thereby. An Event of Loss with respect to the Aircraft will be deemed to have
occurred if an Event of Loss occurs with respect to the Airframe of such
Aircraft. An Event of Loss in respect of an Engine will not be an Event of Loss
in respect of an Airframe.
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"Guaranty" by any Person means any obligation, contingent or otherwise,
of such Person guaranteeing any Debt of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, and including, without
limitation, any obligation of such Person (i) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Debt or to purchase (or to
advance or supply funds for the purchase of) any security for the payment of
such Debt, (ii) to purchase property, securities or services for the purpose of
assuring the holder of such Debt of the payment of such Debt, or (iii) to
maintain working capital, equity capital or other financial statement condition
or liquidity of the primary obligor so as to enable the primary obligor to pay
such Debt (and ''Guaranteed'' and ''Guaranteeing'' shall have meanings
correlative to the foregoing); provided, however, that the Guaranty by any
Person shall not include endorsements by such Person for collection or deposit,
in either case, in the ordinary course of business.
"Incur" means, with respect to any Debt or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
or the recording, as required pursuant to generally accepted accounting
principles or otherwise, of any such Debt or other obligation on the balance
sheet of such Person (and "Incurrence" and "Incurred" shall have meanings
correlative to the foregoing), provided, however, that a change in generally
accepted accounting principles that results in an obligation of such Person that
exists at such time becoming Debt shall not be deemed an incurrence of such
Debt.
"Initial Appraised Value" with respect to any Aircraft means the average
of two independent appraisals of the "Current Fair Market Value" of such
aircraft obtained by the Issuer from BK Associates and AvSolutions in connection
with this Offering.
"Interest Rate, Currency and Fuel Protection Agreement" of any Person
means any interest rate protection agreement (including interest rate swaps,
caps, floors, collars and other types of interest hedging agreements), any
currency protection agreement (including foreign exchange contracts, currency
swap agreements and other types of currency hedging arrangements) and any
aircraft fuel price protection or similar hedging agreements.
"Investment" by any Person in any other Person means (i) any direct or
indirect loan, advance or other extension of credit or capital contribution to
or for the account of such other Person (by means of any transfer of cash or
other property to any Person or any payment for property or services for the
account or use of any Person, or otherwise), (ii) any direct or indirect
purchase or other acquisition of any Capital Stock, bond, note, debenture or
other debt or equity security or evidence of Debt, or any other ownership
interest, issued by such other Person, whether such acquisition is from such or
any other Person, (iii) any direct or indirect issuance by such Person of a
Guaranty of any obligation of or for the account of such other Person or (iv)
any other investment of cash or other property by such Person in or for the
account of such other Person.
"Investment Grade" means, with respect to any corporate debt securities
at any time, that such securities are rated both Baa3 or higher (or the
equivalent thereof) by Moody's Investors Service, Inc. and BBB- or higher (or
the equivalent thereof) by Standard & Poor's Ratings Services at such time.
"Lien" means, with respect to any property or assets, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement or title exception, encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including any
conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or readily marketable cash equivalents received (including by way of sale
or discounting of a note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquire of Debt or other obligations relating to such properties or assets or
received in any other noncash form) therefrom by such Person, net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
Incurred and all federal, state, provincial, foreign and local taxes required to
be accrued as a liability as a consequence of such Asset
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Disposition, (ii) all payments made by such Person or its Restricted
Subsidiaries on any Debt that is secured by such assets in accordance with the
terms of any Lien upon or with respect to such assets or that must, by the terms
of such Lien, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law, be repaid out of the proceeds from such Asset
Disposition, (iii) all distributions and other payments made to minority
interest holders in Restricted Subsidiaries of such Person or joint ventures as
a result of such Asset Disposition and (iv) appropriate amounts to be provided
by such Person or any Restricted Subsidiary thereof, as the case may be, as a
reserve in accordance with generally accepted accounting principles against any
liabilities associated with such assets and retained by such Person or any
Restricted Subsidiary thereof, as the case may be, after such Asset Disposition,
including, liabilities under any indemnification obligations and severance and
other employee termination costs associated with such Asset Disposition, in each
case as determined by the Board of Directors, in its good faith judgement
evidenced by a resolution of the Board of Directors filed with the Trustee;
provided, however, that any reduction in such reserve within twelve months
following the consummation of such Asset Disposition will be treated for all
purposes of the Indenture and the Notes as a new Asset Disposition at the time
of such reduction with Net Available Proceeds equal to the amount of such
reduction.
"pari passu," when used with respect to the ranking of any Debt of any
Person in relation to other Debt of such Person, means that each such Debt (a)
either (i) is not subordinated in right of payment to any other Debt of such
Person or (ii) is subordinate in right of payment to the same Debt of such
Person as is the other and is so subordinate to the same extent and (b) is not
subordinate in right of payment to the other or to any Debt of such Person as to
which the other is not so subordinate.
"Permitted Air Carrier" means (i) a United States "air carrier" within
the meaning of the Aviation Act or (ii) an air carrier which, among other
things, (A) is duly organized and operating pursuant to a license or
authorization issued under the laws of any Permitted Country and (B) will
perform or cause to be performed maintenance, preventive maintenance and
inspections for such Aircraft, Airframe or any Engine or engine in accordance
with standards which are approved by the Aeronautical Authority in the country
of registration of the Aircraft.
"Permitted Collateral Investments" means (i) securities either issued
directly or fully guaranteed or insured by the government of the United States
of America or any agency or instrumentality thereof maturing within one year
from the date of acquisition; (ii) time deposits and certificates of deposit of
any U.S. commercial bank or U.S. branch of a foreign bank, in each case having
capital and surplus in excess of $500.0 million and having outstanding long-term
debt rated A or better (or the equivalent thereof) by Standard & Poor's Ratings
Services or A2 or better (or the equivalent thereof) by Moody's Investors
Service, Inc. and maturing within six months from the date of acquisition; and
(iii) commercial paper rated A-1 or the equivalent thereof by Standard & Poor's
Ratings Services or P-1 or the equivalent thereof by Moody's Investors Service,
Inc. and maturing within six months from the date of acquisition.
"Permitted Country" means any of the foreign countries set forth in the
"Schedule of Permitted Countries" to the Indenture.
"Permitted Holder" means Robert L. Priddy, Maurice J. Gallagher, Jr.,
Lewis H. Jordan, Stephen C. Nevin, Thomas Kalil, Don L. Chapman and Timothy P.
Flynn.
"Permitted Interest Rate, Currency and Fuel Protection Agreement" of any
Person means any Interest Rate, Currency and Fuel Protection Agreement entered
into with one or more financial institutions in the ordinary course of business
that is designed to protect such Person (i) against fluctuations in interest
rates or currency exchange rates with respect to Debt permitted to be Incurred
under the Indenture, or in the case of currency protection agreements, against
currency fluctuations with respect to any receivable or liability the amount
payable of which is determined by reference to a foreign currency in the
ordinary course of business; provided that, in any such case, such interest rate
or currency protection agreement shall have a notional amount no greater than
the principal amount of the Debt, receivable or liability being hedged thereby;
and (ii) in the case of fuel hedging agreements, against fluctuations in market
prices of aircraft fuels.
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"Permitted Aircraft Lease" by any Person means a lease of aircraft owned
by such Person to a third party on terms which permit the lessor to reacquire
possession of such aircraft, with good and marketable title thereto free and
clear of any adverse claim in favor of the lessee, upon a material breach of
such lease by the lessee.
"Permitted Investments" means (i) Investments in (including a Guaranty of
any obligation of) the Guarantor or any Person that is, or as a consequence of
such Investment becomes, a Restricted Subsidiary of the Guarantor (provided that
any such Guaranty will cease to be a Permitted Investment and will be deemed to
be Incurred when such Restricted Subsidiary ceases to be a Restricted Subsidiary
or such obligation is assumed by any Person other than a Restricted Subsidiary),
(ii) securities either issued directly or fully guaranteed or insured by the
government of the United States of America or any agency or instrumentality
thereof having maturities of not more than one year from the date of
acquisition, (iii) time deposits and certificates of deposit, having maturities
of not more than one year from the date of deposit or issuance, as the case may
be, of any U.S. commercial bank or U.S. branch of a foreign bank, in each case
having capital and surplus in excess of $500.0 million and having a peer group
rating of C or better (or the equivalent thereof) by Thompson BankWatch, Inc. or
outstanding long-term debt rated A- or better (or the equivalent thereof) by
Standard & Poor's Ratings Services or A3 or better (or the equivalent thereof)
by Moody's Investors Service, Inc., (iv) commercial paper rated A-2 (or the
equivalent thereof) by Standard & Poor's Ratings Services or P-2 (or the
equivalent thereof) by Moody's Investors Service, Inc., and in each case
maturing within nine months from the date of issuance, (v) corporate debt
securities rated Investment Grade, (vi) any Investment in a Person that is
engaged in the airline or related businesses, in an aggregate amount from the
date of the Indenture not to exceed $35.0 million; provided that the amount
available under this clause (vi) may be increased from time to time by an amount
equal to the net reduction of an Investment in a Person made under this clause
(vi) through a cash payment to the Issuer, the Guarantor or any Restricted
Subsidiary by such Person, or through the forgiveness of Debt of the Issuer, the
Guarantor or any Restricted Subsidiary to such Person (except, in either case,
to the extent such payment or proceeds are included in the calculation of
Consolidated Net Income), not to exceed, in each case, the amount of such
Permitted Investment previously made by the Guarantor or any Restricted
Subsidiary in such Person and (vii) Permitted Interest Rate, Currency and Fuel
Protection Agreements.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"Recovered Restricted Payment" means (i) a Guaranty that, when Incurred,
constitutes a Restricted Payment, but only to the extent that the obligations of
the Guarantor and its Restricted Subsidiaries in respect of such Guaranty are
discharged for consideration given by the Guarantor and its Restricted
Subsidiaries in an amount less than the amount of such Restricted Payment and
such discharge is not included in Consolidated Net Income of the Guarantor, or
(ii) a loan that, when made, constitutes a Restricted Payment, but only to the
extent that such loan is repaid to the Guarantor and the Restricted Subsidiaries
in cash without restriction and is not included in Consolidated Net Income of
the Guarantor.
"Reinvested Amounts," with respect to any Asset Disposition, means
amounts invested within 180 days after such Asset Disposition in assets that are
related to the business of the Guarantor and its Restricted Subsidiaries and,
upon consummation of such investment, are owned by the Guarantor or any of its
Restricted Subsidiaries.
"Related Person" of any Person means any other Person owning (a) 5% or
more of the outstanding Common Stock of such Person or (b) 5% or more of the
Voting Stock of such Person.
"Restricted Lease Obligation" of any Person means either (i) a Capital
Lease Obligation of such Person or (ii) the obligation to pay rent or other
payment amounts under a lease of (or other Debt arrangements conveying the right
to use) real or personal property of such Person, except, for purposes of this
Clause (ii), for (x) any such lease (or Debt arrangement) relating solely to
property other than aircraft under which such rent or other payment amounts do
not exceed $250,000 on an annualized basis and (y) gate, ticket counter and
other airport facility leases.
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"Restricted Subsidiary" means a Subsidiary of the Guarantor that is not
an Unrestricted Subsidiary; and on the date of the Indenture includes all of the
Guarantor's existing Subsidiaries on such date.
"Sale and Leaseback Transaction" means an arrangement with any lender or
investor or to which such lender or investor is a party providing for the
leasing by a Person of any property or asset of such Person which has been or is
being sold or transferred by such Person to such lender or investor or to any
person to whom funds have been or are to be advanced by such lender or investor
on the security of such property or asset. The stated maturity of such
arrangement shall be the date of the last payment of rent or any other amount
due under such arrangement prior to the first date on which such arrangement may
be terminated by the lessee without payment of a penalty.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person and
one or more Subsidiaries thereof, (ii) a partnership of which such Person, or
one or more other Subsidiaries of such Person or such Person and one or more
other Subsidiaries thereof, directly or indirectly, is the general partner and
has the power to direct the policies, management and affairs thereof or (iii)
any other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
interest and power to direct the policies, management and affairs thereof.
"10 1/4% Notes" means the 10 1/4% senior notes due 2001 issued pursuant
to an indenture dated as of April 17, 1996, among ValuJet, the guarantors
specified therein and Bank of Montreal Trust Company, as Trustee, as amended.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act) as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"Unrestricted Subsidiary" means a Subsidiary of the Guarantor that is
deemed by the Guarantor to be an Unrestricted Subsidiary and is not terminated
as an Unrestricted Subsidiary by the Guarantor, in each case in accordance with
the provisions in the Indenture described under the caption "Certain Covenants-
- -Unrestricted Subsidiaries."
"Voting Stock" of any Person means Capital Stock of such Person that
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay any interest on any Note when due, continued for 30 days; (b) failure to pay
principal of (or premium, if any, on) any Note when due; (c) failure to purchase
Notes required to be purchased pursuant to an Offer to Purchase as described
under the "Limitation on Certain Asset Dispositions" covenant and under
"Change of Control" or pursuant to the "Limitation on Collateral Sales"
covenant; (d) failure to perform or comply with the provisions described under
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"Mergers, Consolidations and Certain Sales and Purchases of Assets"; (e)
failure to perform any other covenant or warranty of the Guarantor or the Issuer
in the Indenture, continued for 45 days after written notice as provided in the
Indenture; (f) a default or defaults under the terms of any instruments
evidencing or securing, or of any agreements pursuant to which there may be
issued, Debt of the Guarantor or any Restricted Subsidiary of the Guarantor
having an outstanding principal amount of $10.0 million individually or in the
aggregate, which Debt now exists or is hereafter Incurred, which default or
defaults (i) result in the acceleration of the payment of such indebtedness,
(ii) constitute the failure to pay all or any part of such indebtedness at the
final stated maturity thereof (after expiration of any applicable grace period)
or (iii) constitute the failure to pay when due at any time all or any part of
such indebtedness under a single instrument or agreement that evidences or
secures, or pursuant to which there may be issued, Debt having an outstanding
principal amount of $16.0 million or more (after expiration of any applicable
grace period); (g) the rendering of a final judgment or judgments (not subject
to appeal) against the Guarantor or any of its Subsidiaries in an aggregate
amount in excess of $15.0 million which remains unstayed, undischarged or
unbonded for a period of 60 days thereafter; (h) certain events of bankruptcy,
insolvency or reorganization affecting the Guarantor or any Restricted
Subsidiary of the Guarantor; (i) failure to procure and maintain property and
liability insurance in accordance with the provisions of the Indenture
continuing, in the case of maintaining such insurance, until the earlier of (x)
30 days after notice to the Issuer or the Trustee of the lapse or cancellation
of such insurance and (y) the date such lapse or cancellation is effective as to
the Trustee; (j) operation of any Aircraft after the insurance required by the
Indenture had been canceled; and (k) except as provided in the Indenture, the
Trustee does not have at all times a first priority perfected security interest
in the Aircraft or the Issuer or any Guarantor asserts in writing that the
security arrangements under the Indenture are not in full force and effect.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such Holders
have offered to the Trustee reasonable indemnity. Subject to such provisions for
the indemnification of the Trustee, the Holders of a majority in aggregate
principal amount of the Outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee.
If an Event of Default (other than an Event of Default of the type
described in Clause (h) above) occurs and is continuing, either the Trustee or
the Holders of at least 25% in aggregate principal amount of the outstanding
Notes may accelerate the maturity of all Notes, and if an Event of Default of
the type described in Clause (h) above occurs, the principal of and any accrued
interest on the Notes then outstanding will become immediately due and payable;
provided, however, that after such acceleration, but before a judgment or decree
based on acceleration, the Holders of a majority in aggregate principal amount
of outstanding Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the non-payment of accelerated
principal, have been cured or waived as provided in the Indenture. For
information as to waiver of defaults, see "Modification and Waiver."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder has
previously given to the Trustee written notice of a continuing Event of Default
and unless also the Holders of at least 25% in aggregate principal amount of the
outstanding Notes have made written request, and offered reasonable indemnity,
to the Trustee to institute such proceeding as trustee, and the Trustee has not
received from the Holders of a majority in aggregate principal amount of the
outstanding Notes a direction inconsistent with such request and has failed to
institute such proceeding within 60 days. However, such limitations do not apply
to a suit instituted by a Holder of a Note for enforcement of payment of the
principal of (and premium, if any) or interest on such Note on or after the
respective due dates expressed in such Note.
The Guarantor will be required to furnish to the Trustee annually a
statement as to the performance by the Guarantor and its Restricted Subsidiaries
of certain of their obligations under the Indenture and as to any default in
such performance.
122
<PAGE>
DEFEASANCE
The Indenture will provide that (A) if applicable, the Issuer and the
Guarantors will be discharged from any and all obligations in respect of the
outstanding Notes or (B) if applicable, the Guarantor and the Issuer may omit to
comply with certain restrictive covenants, and that such omission will not be
deemed to be an Event of Default under the Indenture and the Notes, in either
case (A) or (B) upon irrevocable deposit with the Trustee, in trust, of money
and/or U.S. Government Obligations that will provide money in an amount
sufficient in the opinion of a nationally recognized firm of independent
certified public accountants to pay the principal of, and premium, if any, and
each installment of interest, if any, on the outstanding Notes. With respect to
Clause (B), the obligations under the Indenture other than with respect to such
covenants and the Events of Default other than the Event of Default relating to
such covenants above will remain in full force and effect. Such trust may only
be established if, among other things (i) with respect to Clause (A), the Issuer
has received from, or there has been published by, the Internal Revenue Service
a ruling or there has been a change in law, which in the Opinion of Counsel
provides that Holders of the Notes will not recognize gain or loss for Federal
income tax purposes as a result of such deposit, defeasance and discharge and
will be subject to Federal income tax on the same amount, in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred; or, with respect to Clause (B), the Issuer has
delivered to the Trustee an Opinion of Counsel to the effect that the Holders of
the Notes will not recognize gain or loss for Federal income tax purposes as a
result of such deposit and defeasance and will be subject to Federal income tax
on the same amount, in the same manner and at the same times as would have been
the case if such deposit and defeasance had not occurred; (ii) no Event of
Default (or event that with the passing of time or the giving of notice, or
both, will constitute an Event of Default) shall have occurred or be continuing;
(iii) the Issuer has delivered to the Trustee an Opinion of Counsel to the
effect that such deposit shall not cause the Trustee or the trust so created to
be subject to the Investment Company Act of 1940; and (iv) certain other
customary conditions precedent are satisfied.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Issuer,
the Guarantors and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the outstanding Notes, provided, however, that no
such modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (b) reduce the
principal amount of (or the premium, if any), or interest on, any Note, (c)
change the place or currency of payment of principal of (or premium, if any), or
interest on, any Note, (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any Note, (e) reduce the above-
stated percentage of outstanding Notes necessary to modify or amend the
Indenture, (f) reduce the percentage of aggregate principal amount of
outstanding Notes necessary for waiver of compliance with certain provisions of
the Indenture or for waiver of certain defaults, (g) modify any provisions of
the Indenture relating to the modification and amendment of the Indenture or the
waiver of past defaults or covenants, except as otherwise specified, (h)
following the mailing of an Offer to Purchase with respect to an Offer, modify
the Indenture with respect to an Offer as described under the "Limitation on
Certain Asset Dispositions" covenant and under "Change of Control" in a
manner adverse to the Holders thereof, or (i) create any lien on the property
subject to the Indenture ranking prior to, or on a parity with, the security
interest created by the Indenture except such as are permitted by the Indenture
or deprive any Holder of Notes of the benefit of the lien of the Indenture.
The Holders of a majority in aggregate principal amount of the outstanding
Notes may waive compliance by the Company with certain restrictive provisions of
the Indenture. The Holders of a majority in aggregate principal amount of the
outstanding Notes may waive any past default under the Indenture, except a
default in the payment of principal (or premium, if any) or interest.
123
<PAGE>
UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE EXCHANGE OF NOTES
The following summary of all material federal income tax consequences of
the exchange of Notes is based on the opinion of Ellis, Funk, Goldberg, Labovitz
& Dokson, P.C., counsel to the Company, which opinion has been filed as an
exhibit to the Registration Statement. Such opinion is based upon the provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), the final,
temporary and proposed regulations promulgated thereunder, and administrative
rulings and judicial decisions in effect as of the date hereof, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. The following summary is not binding on the Internal Revenue
Service ("IRS") and there can be no assurance that the IRS will take a similar
view with respect to the tax consequences described below. No ruling has been or
will be requested by the Company from the IRS on any tax matters relating to the
Notes or the Exchange Offer. This discussion is for general information only and
does not purport to address the possible federal income tax consequences or any
state, local or foreign tax consequences of the acquisition, ownership and
disposition of the Notes or the Exchange Notes other than the exchange of
Outstanding Notes for Exchange Notes in this Exchange Offer.
This summary deals only with Holders that will hold Notes as capital assets
and does not address tax considerations applicable to investors that may be
subject to special tax rules, such as banks, tax exempt organizations, insurance
companies, dealers in securities or currencies, persons that will hold Notes as
a position in a "straddle" for tax purposes, persons that hold Notes that are a
hedge or that are hedged against currency risks or that are part of a conversion
transaction, or persons that have a "functional currency" other than the U.S.
dollar. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
APPLICATION OF THE FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION.
The exchange of the Outstanding Notes for Exchange Notes pursuant to the
Exchange Offer should not be treated as an "exchange" because the Exchange Notes
should not be considered to differ materially in kind or extent from the
Outstanding Notes. Rather, the Exchange Notes received by a holder of the
Outstanding Notes should be treated as a continuation of the Outstanding Notes
in the hands of such holder. As a result, there should be no federal income tax
consequences to holders exchanging the Outstanding Notes for the Exchange Notes
pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Based on positions taken by the staff of the Commission set forth in no-
action letters issued to Exxon Capital Holdings Corp. and Morgan Stanley & Co.
Inc., among others, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for Outstanding Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Notes directly from the
Company, or (iii) broker-dealers who acquired Notes as a result of market-making
or other trading activities) without compliance with the registration and
prospectus delivery provisions for the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders' business,
and such holders are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of such Exchange Notes; provided that broker-dealers ("Participating Broker-
Dealers") receiving Exchange Notes in the Exchange Offer will be subject to a
prospectus delivery requirement with respect to resales of such Exchange Notes.
To date, the staff of the Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as the exchange
pursuant to the Exchange Offer (other than a resale of an unsold allotment from
the sale of the Outstanding Notes to the Initial Purchaser thereof) with the
Prospectus contained in the Exchange Offer Registration Statement. Pursuant to
the Registration Rights Agreement, the Company has agreed to permit
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use this Prospectus in
124
<PAGE>
connection with the resale of such Exchange Notes. The Company has agreed that,
for a period of 90 days after the Exchange Offer has been consummated, it will
make this Prospectus, and any amendment or supplement to this Prospectus,
available to any broker-dealer that requests such documents in the Letter of
Transmittal.
Each holder of Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer - Terms and
Conditions of the Letter of Transmittal." In addition, each holder who is a
broker-dealer and who receives Exchange Notes for its own account in exchange
for Outstanding Notes that were acquired by it as a result of market-making
activities or other trading activities, will be required to acknowledge that it
will deliver a prospectus in connection with any resale by it of such Exchange
Notes.
Holders who tender Outstanding Notes in the Exchange Offer with the
intention to participate in a distribution of the Exchange Notes may not rely
upon the Morgan Stanley or similar no-action letters.
--------------
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any such Exchange Notes. The Letter
of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Outstanding Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act, as
set forth in the Registration Rights Agreement.
LEGAL MATTERS
Certain legal matters regarding the validity of the Exchange Notes offered
hereby and the United States federal income tax consequences of the Exchange
Offer will be passed upon for the Company by Ellis, Funk, Goldberg, Labovitz &
Dokson, P.C., Atlanta, Georgia. Certain shareholders of Ellis, Funk, Goldberg,
Labovitz & Dokson, P.C. own approximately 23,600 shares of common stock of the
Company.
EXPERTS
The consolidated financial statements of ValuJet, Inc. at December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
SUPPLEMENTAL GUARANTOR FINANCIAL STATEMENTS
The Issuer is offering to exchange $80,000,000 of registered 10 1/2% Senior
Secured Notes Due 2001 (the "Exchange Notes") for its unregistered notes which
were issued on August 13, 1997 in the same amount and upon substantially the
same terms. As with the unregistered notes, the Exchange Notes will be
unconditionally
125
<PAGE>
guaranteed on a senior basis by ValuJet, Inc., AirTran Airways, Inc. and all of
the subsidiaries of the Issuer (the "Guarantors"). All operations of the Company
are conducted by AirTran Airlines, Inc. and AirTran Airways, Inc. which are
wholly owned subsidiaries of the Company, and all of the subsidiaries of AirTran
Airlines, Inc. All of the subsidiary Guarantors are wholly owned direct or
indirect subsidiaries of the Company and there are no direct or indirect
subsidiaries of the Company that are not Guarantors. The Exchange Notes and the
guarantees will rank pari passu in right of payment with all other existing and
future unsubordinated indebtedness of the Issuer and the Guarantors,
respectively, and will rank senior in right of payment to any future
indebtedness of the Issuer and the Guarantors, respectively, to the extent of
the Collateral or with respect to indebtedness that may be subordinated thereto.
Separate financial statements of the Issuer are not presented because the
Company and the subsidiary Guarantors will be obligated on or will guarantee the
Exchange Notes on a full, unconditional and joint and several basis and
management of the Company has determined that separate financial statements
would not be material to investors. Summarized financial information of the
Issuer and its subsidiaries is included in a footnote to the December 31, 1996
audited financial statements of the Company in accordance with the disclosure
provisions of the Securities Act of 1933 for filings involving the guarantee of
securities by a parent.
126
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VALUJET, INC.
<TABLE>
<CAPTION> PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS--YEARS ENDED DECEMBER 31,
1996, 1995 AND 1994
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets--December 31, 1996 and 1995................ F-3
Consolidated Statements of Operations--Years Ended December 31, 1996,
1995 and 1994......................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity--Years Ended
December 31,
1996, 1995 and 1994................................................... F-5
Consolidated Statements of Cash Flows--Years Ended December 31, 1996,
1995 and 1994......................................................... F-6
Notes to Consolidated Financial Statements--December 31, 1996.......... F-7
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996
Consolidated Balance Sheets - December 31, 1996 and September 30, 1997
(Unaudited)........................................................... F-20
Consolidated Statements of Operations - Three months ended September 30,
1996 and 1997 (Unaudited)
Nine months ended September 30, 1996 and 1997 (Unaudited)......... F-22
Consolidated Statements of Cash Flows - Nine months ended September 30,
1996 and 1997 (Unaudited)............................................. F-24
Condensed Notes to Unaudited Consolidated Interim Financial Statements. F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
ValuJet, Inc.
We have audited the accompanying consolidated balance sheets of ValuJet,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ValuJet, Inc.
at December 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
February 10, 1997, except for
Note 4 as to which the date is
March 27, 1997
F-2
<PAGE>
VALUJET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $150,012,695 $127,947,096
Accounts receivable, less allowance of $838,000
and $405,000 at December 31, 1996 and 1995,
respectively.................................... 7,014,702 12,074,394
Income tax receivable............................ 36,440,653 --
Inventories of parts and supplies................ 6,607,307 4,016,266
Prepaid expenses................................. 8,066,792 4,758,205
Deferred tax asset............................... -- 401,621
Assets held for disposition...................... 42,060,242 --
Other current assets............................. 839,040 589,986
------------ ------------
Total current assets........................... 251,041,431 149,787,568
Property and equipment:
Flight equipment................................. 126,829,882 153,513,693
Other property and equipment..................... 65,662,504 40,472,604
Deposits on flight equipment purchase contracts.. 14,534,895 21,801,525
------------ ------------
207,027,281 215,787,822
Less accumulated depreciation.................... (44,455,397) (18,834,231)
------------ ------------
162,571,884 196,953,591
Debt issuance costs................................ 3,573,561 --
------------ ------------
Total assets................................... $417,186,876 $346,741,159
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 3,221,542 $ 6,721,754
Accrued liabilities.............................. 22,718,555 35,866,095
Air traffic liability............................ 3,813,583 22,221,133
Income taxes payable............................. -- 24,957
Deferred tax liability........................... 1,298,400 --
Current maturities of long-term debt............. 33,246,302 21,430,984
Debt on assets held for disposition.............. 18,188,222 --
------------ ------------
Total current liabilities...................... 82,486,604 86,264,923
Long-term debt less current maturities............. 193,271,800 87,607,149
Deferred income taxes payable...................... 18,028,835 10,803,856
Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized shares--5,000,000 Issued and
outstanding shares--none at December 31, 1996
and 1995....................................... -- --
Common stock, $.001 par value:
Authorized shares--1,000,000,000 Issued and
outstanding--54,875,610 and 54,556,020 at
December 31, 1996 and 1995, respectively....... 54,876 54,556
Additional paid-in capital....................... 77,236,447 74,433,062
Retained earnings................................ 46,108,314 87,577,613
------------ ------------
Total stockholders' equity..................... 123,399,637 162,065,231
------------ ------------
Total liabilities and stockholders' equity..... $417,186,876 $346,741,159
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues:
Passenger.......................... $209,707,346 $352,574,954 $129,551,344
Cargo.............................. 2,968,863 4,874,449 --
Other.............................. 6,960,023 10,307,975 4,349,966
------------ ------------ ------------
Total operating revenues......... 219,636,232 367,757,378 133,901,310
Operating expenses and other, net:
Flight operations.................. 16,478,712 16,272,833 6,967,015
Aircraft fuel...................... 46,691,296 55,812,838 21,774,936
Maintenance........................ 49,500,163 47,330,009 14,862,239
Station operations................. 42,018,389 49,931,088 20,197,983
Passenger services................. 8,878,835 10,363,538 3,941,749
Marketing and advertising.......... 8,426,358 8,988,656 6,546,043
Sales and reservations............. 18,377,843 31,155,592 11,325,162
General and administrative......... 13,659,237 10,617,312 5,038,897
Employee bonus..................... 1,245,000 14,382,000 5,146,039
Depreciation....................... 17,550,596 15,147,647 3,555,426
Arrangement fee for aircraft
transfers......................... (13,036,294) -- --
Gain on insurance recovery......... (2,814,785) (1,093,527) --
Gain on sale of property........... (3,934,576) -- --
Shutdown and other nonrecurring
expenses.......................... 67,994,000 -- --
------------ ------------ ------------
Total operating expenses and
other, net...................... 271,034,774 258,907,986 99,355,489
------------ ------------ ------------
Operating (loss) income.............. (51,398,542) 108,849,392 34,545,821
Interest expense (income):
Interest expense................... 22,186,349 6,579,020 2,388,240
Interest income.................... (7,652,592) (5,555,160) (1,422,955)
------------ ------------ ------------
Total interest expense, net...... 14,533,757 1,023,860 965,285
------------ ------------ ------------
(Loss) income before income taxes.... (65,932,299) 107,825,532 33,580,536
Income tax (benefit) expense......... (24,463,000) 40,062,934 12,848,556
------------ ------------ ------------
Net (loss) income.................... $(41,469,299) $ 67,762,598 $ 20,731,980
============ ============ ============
Net (loss) income per share.......... $ (0.76) $ 1.13 $ 0.44
============ ============ ============
Weighted average shares outstanding.. 54,702,000 59,793,000 47,620,000
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
---------------------------------- ---------------------------------
NOTES
ADDITIONAL ADDITIONAL RECEIVABLE RETAINED TOTAL
PAID-IN- PAID-IN- FROM COMMON EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL STOCK SALE (DEFICIT) EQUITY
---------- -------- ------------ ---------- --------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,
1993........... 3,250,000 $ 32,500 $ 11,826,244 22,300,000 $ 223,000 $ 4,302,028 $(324,010) $ (916,965) $ 15,142,797
Payments on
notes
receivable from
common stock
sale and
offering
expenses
related to
issuance of
common stock... -- -- -- -- -- (8,858) 124,000 -- 115,142
Conversion of
preferred
stock.......... (3,250,000) (32,500) (11,826,244) 13,000,000 130,000 11,728,744 -- -- --
Issuance of
common stock to
employees...... -- -- -- 39,680 396 (396) -- --
Issuance of
common stock,
net of issuance
costs.......... -- -- -- 6,000,000 60,000 16,904,743 -- -- 16,964,743
Exercise of
warrants for
common stock... -- -- -- 1,000,000 10,000 1,190,000 -- -- 1,200,000
Issuance of
common stock
for exercise of
options........ -- -- -- 8,000 80 1,253 -- -- 1,333
Exercise of
warrants for
common stock... -- -- -- 10,422,300 104,224 38,856,528 -- -- 38,960,752
Exchange of
warrants for
common stock... -- -- -- 447,160 4,472 (4,472) -- -- --
Net income...... -- -- -- -- -- -- -- 20,731,980 20,731,980
---------- -------- ------------ ---------- --------- ----------- --------- ------------ ------------
BALANCE AT
DECEMBER 31,
1994........... -- -- -- 53,217,140 532,172 72,969,570 (200,010) 19,815,015 93,116,747
Issuance of
common stock
for exercise of
options........ -- -- -- 28,000 280 10,171 -- -- 10,451
Issuance of
common stock
for exercise of
options........ -- -- -- 1,309,000 13,090 373,111 -- -- 386,201
Issuance of
common stock
under stock
purchase plan.. -- -- -- 1,880 18 39,206 -- -- 39,224
Change in par
value.......... -- -- -- -- (491,004) 491,004 -- -- --
Accrued
compensation
related to
stock options.. -- -- -- -- -- 550,000 -- -- 550,000
Payments on
notes
receivable from
common stock
sale........... -- -- -- -- -- -- 200,010 -- 200,010
Net income...... -- -- -- -- -- -- -- 67,762,598 67,762,598
---------- -------- ------------ ---------- --------- ----------- --------- ------------ ------------
BALANCE AT
DECEMBER 31,
1995........... -- -- -- 54,556,020 54,556 74,433,062 -- 87,577,613 162,065,231
Issuance of
common stock
for exercise of
options........ -- -- -- 310,810 311 835,862 -- -- 836,173
Issuance of
common stock
under stock
purchase plan.. -- -- -- 8,770 9 113,493 -- -- 113,502
Accrued
compensation
related to
stock options.. -- -- -- -- -- 1,854,030 -- -- 1,854,030
Net loss........ -- -- -- -- -- -- -- (41,469,299) (41,469,299)
---------- -------- ------------ ---------- --------- ----------- --------- ------------ ------------
BALANCE AT
DECEMBER 31,
1996........... -- $ -- $ -- 54,875,600 $ 54,876 $77,236,447 $ -- $ 46,108,314 $123,399,637
========== ======== ============ ========== ========= =========== ========= ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................. $ (41,469,299) $ 67,762,598 $ 20,731,980
Adjustments to reconcile net
(loss) income to cash (used in)
provided by operating activities:
Depreciation and amortization... 29,164,596 15,147,647 3,548,426
Provision for uncollectible
accounts....................... 3,637,589 3,159,935 1,043,902
Deferred income taxes........... 8,925,000 7,390,070 3,012,165
Gain on disposal of flight
equipment...................... (6,749,361) (1,093,527) --
Changes in operating assets and
liabilities:
Accounts receivable............ 1,422,103 (7,705,398) (6,285,616)
Other current assets........... (6,148,682) (6,644,002) (1,218,142)
Accounts payable and accrued
liabilities................... (14,354,877) 23,738,400 16,921,695
Air traffic liability.......... (18,407,550) 12,614,252 7,361,035
Income taxes payable........... (36,465,610) (581,559) 606,516
------------- ------------- ------------
Net cash (used in) provided by
operating activities............. (80,446,091) 113,788,416 45,721,961
INVESTING ACTIVITIES
Purchases of property and equip-
ment............................. (127,570,815) (142,128,206) (61,969,880)
Proceeds from disposal of
equipment........................ 97,598,198 3,000,000 --
------------- ------------- ------------
Net cash used in investing
activities....................... (29,972,617) (139,128,206) (61,969,880)
FINANCING ACTIVITIES
Notes receivable.................. -- 5,500,000 (5,500,000)
Payment received on notes
receivable from common stock
sale............................. -- 200,010 50,000
Issuance of long-term debt........ 224,497,189 73,707,688 40,612,884
Proceeds from sale of common
stock............................ 949,675 435,876 56,961,546
Payment of long-term debt......... (92,962,557) (11,634,230) (4,045,580)
------------- ------------- ------------
Net cash provided by financing
activities....................... 132,484,307 68,209,344 88,078,850
------------- ------------- ------------
Net increase in cash and cash
equivalents...................... 22,065,599 42,869,554 71,830,931
Cash and cash equivalents at
beginning of year................ 127,947,096 85,077,542 13,246,611
------------- ------------- ------------
Cash and cash equivalents at end
of year.......................... $ 150,012,695 $ 127,947,096 $ 85,077,542
============= ============= ============
Cash paid for income taxes........ $ 4,041,000 $ 32,770,000 $ 9,215,000
============= ============= ============
Cash paid for interest............ $ 19,412,000 $ 6,592,000 $ 2,155,000
============= ============= ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reorganization and Principles of Consolidation
ValuJet Airlines, Inc. was originally incorporated on July 10, 1992 under
the name of Charter Way, Inc. In May 1993, the Company changed its name to
ValuJet Airlines, Inc. As a result of a merger between ValuJet Airlines, Inc.
and VJET Acquisition, Inc. on October 19, 1995, ValuJet Airlines, Inc. became
a wholly-owned subsidiary of ValuJet, Inc. ValuJet, Inc. was incorporated on
July 17, 1995 by ValuJet Airlines, Inc. as its wholly-owned subsidiary.
ValuJet, Inc. formed VJET Acquisition, Inc. as its wholly-owned subsidiary.
Pursuant to a Plan and Agreement of Merger ("the Merger"), VJET Acquisition,
Inc. was merged into ValuJet Airlines, Inc. with ValuJet Airlines, Inc. being
the surviving corporation. In connection with the Merger, each outstanding
share of Common Stock, $.01 par value per share, of ValuJet Airlines, Inc. was
converted into and became the right to receive one share of Common Stock,
$.001 par value per share, of ValuJet, Inc., and the shares of Common Stock of
VJET Acquisition, Inc. owned by ValuJet, Inc. were converted into shares of
Common Stock of ValuJet Airlines, Inc. The shares of Common Stock of ValuJet,
Inc. owned by ValuJet Airlines, Inc. were canceled. Therefore, the then
current stockholders of ValuJet Airlines, Inc. became stockholders of ValuJet,
Inc. and ValuJet Airlines, Inc. became a wholly-owned subsidiary of ValuJet,
Inc. Each of the former stockholders of ValuJet Airlines, Inc. has exactly the
same proportionate interest in ValuJet, Inc. as they had in ValuJet Airlines,
Inc. prior to the Merger.
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Description of Business
The Company offers affordable, no-frills, point-to-point scheduled air
transportation and cargo service, serving short-haul markets primarily in the
eastern United States.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results inevitably will differ from
those estimates, and such differences may be material to the consolidated
financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable are due primarily from major credit card processors and
travel agents. These receivables are unsecured. The Company provides an
allowance for doubtful accounts equal to the estimated losses expected to be
incurred in the collection of accounts receivable.
F-7
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories of Parts and Supplies
Inventories of flight equipment, expendable parts, materials and supplies
are carried at the lower of cost or market using the first-in, first-out
method (FIFO). These items are charged to expense when issued for use.
Allowances for obsolescence are provided over the estimated useful life of the
related aircraft and engines, for spare parts expected to be on hand at the
date aircraft are retired from service.
Property and Equipment
Property and equipment is stated on the basis of cost. Flight equipment is
depreciated to its residual values, estimated at 20%, using the straight-line
method over seven to ten years. Other property and equipment is depreciated
over three years.
Interest Capitalized
Interest attributable to funds used to finance the acquisition of new
aircraft is capitalized as an additional cost of the related asset. Interest
is capitalized at the Company's weighted average interest rate on long-term
debt or, where applicable, the interest rate related to specific borrowings.
Capitalization of interest ceases when the asset is placed in service. In
1996, approximately $1,212,000 of interest cost was capitalized. No interest
was capitalized in 1995 or 1994.
Aircraft and Engine Maintenance
The Company accounts for airframe and aircraft engine overhaul costs using
the direct-expensing method. Overhauls are performed on a continuous basis and
the cost of overhauls and routine maintenance costs for aircraft and engine
maintenance are charged to maintenance expense as incurred.
Advertising Costs
Advertising costs are charged to expense in the period the costs are
incurred. Advertising expense was approximately $6,261,000, $8,038,000 and
$5,507,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Revenue Recognition
Passenger and cargo revenue is recognized when transportation is provided.
Transportation purchased but not yet used is included in air traffic
liability.
Arrangement Fee for Aircraft Transfers
During 1996, the Company sold its contractual purchase commitments with
respect to certain aircraft to other entities for approximately $17,000,000
which, net of related deposits, resulted in income of approximately
$13,000,000. This amount is reflected as Arrangement Fee for Aircraft
Transfers in the accompanying statement of operations. The Company has no
further obligations with respect to these purchase commitments.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
Preoperating Costs
The cost of routine development of new routes and the pre-operating cost
incurred in connection with aircraft acquisitions are charged to expense as
incurred.
F-8
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to officers,
directors, key employees and consultants of the Company with an exercise price
equal to or below the fair value of the shares at the date of grant. The
Company accounts for stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees, and accordingly, recognizes
compensation expense only if the market price of the underlying stock exceeds
the exercise price of the stock option on the date of grant.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, which provides an
alternative to APB Opinion No. 25 in accounting for stock-based compensation
issued to employees. However, the Company will continue to account for stock-
based compensation in accordance with APB Opinion No. 25.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of
common and preferred shares outstanding and dilutive common stock equivalents
during the periods.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common and preferred stock issued for consideration below the initial
public offering ("IPO") price of $3.125 per share and stock options and
warrants issued with exercise prices below the IPO price during the twelve-
month period preceding the initial filing of the Registration Statement
("Cheap Stock") have been included in the calculation of common shares, using
the treasury stock method, as if they were outstanding for all periods prior
to the effective date of the IPO.
In accordance with APB Opinion No. 15, supplemental income per share data
for 1994 is presented for comparability purposes. The following income per
share is calculated excluding the effects of Cheap Stock issued during the
twelve months immediately preceding the effective date of the Company's IPO.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Net income per share......................................... $0.42
=====
</TABLE>
Impact of Recently Issued Accounting Standards
In March 1995, the FASB 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, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the discounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1996, and the effect of
adoption was not material.
During 1996, as a result of the accident involving Flight 592 and the
consent order with the FAA which requires the Company to reestablish
operations with up to 15 aircraft and subjects further expansion of the
Company's operations to FAA and DOT approval, the Company plans to sell
certain of its aircraft with a carrying amount of approximately $42 million.
Those aircraft which the Company has decided to sell have been classified in
the balance sheet as assets held for disposition and are stated at the lower
of carrying amount or fair value less cost to sell. The Company began
marketing the aircraft to potential buyers and plans to sell the aircraft
during 1997. At December 31, 1996, the fair value, as estimated by the current
market value, less cost to sell exceeded the carrying amount of such aircraft.
F-9
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform to the current year presentation.
2. COMMITMENTS AND CONTINGENCIES
On May 11, 1996, the Company suffered a tragic loss involving Flight 592.
The accident resulted in extensive media coverage calling into question the
safety of low-fare airlines in general and the Company in particular, despite
the fact that the cause of the accident is still under investigation by the
National Transportation Safety Board. In response to the accident, the Federal
Aviation Administration (FAA) conducted an extraordinary review of the
Company's operations. As a result, the Company significantly reduced its
schedule between May 19, 1996 and June 17, 1996, and on June 17, 1996 entered
into a consent order with the FAA under which the Company agreed to several
matters including the suspension of operations until such time as the Company
was able to satisfy the FAA as to its various regulatory compliance concerns
and the payment of $2,000,000 to the FAA to compensate it for the cost of the
special inspections. The Company satisfied the FAA's requirements and received
FAA clearance during August 1996. The Company received its determination of
fitness from the Department of Transportation on September 25, 1996 and
restarted operations on September 30, 1996. See Note 9 regarding charges
associated with the accident and related suspension of operations.
As a result of the above mentioned events, numerous lawsuits were filed
against the Company seeking damages attributable to the deaths of those on
Flight 592. Thus far, a total of approximately 50 such lawsuits have been
filed against ValuJet Airlines, Inc. Most of the cases were initially removed
to the federal court. That court, however, remanded the majority of the
actions to the state courts from which they originated and retained
jurisdiction for only seven cases. As a consequence, most of the cases will
proceed in state courts in Florida and Georgia. In 36 of these lawsuits, a
third party maintenance contractor has been named as a co-defendant. The
Company's insurance carrier has assumed defense of these suits under a
reservation of rights. As all claims are handled independently by the
Company's insurance carrier, the Company cannot reasonably estimate the amount
of liability which might finally exist. As a result, no accruals for losses
and the related claim for recovery from the Company's insurance carrier have
been reflected in the Company's financial statements. The Company maintains
$750 million of liability insurance, per occurrence, with a major group of
independent insurers that provide facilities for all forms of aviation
insurance for many major airlines.
Although the Company believes, based on the information currently available
to it, that such coverage will be sufficient to cover all claims arising out
of the loss of Flight 592 and that the insurers have sufficient financial
strength to pay claims, there can be no assurance that the total amount of
judgments and settlements will not exceed the Company's insurance limit or
that all damages awarded will be covered by insurance.
Several stockholder class action suits have been filed against the Company
and certain of its executive officers ("Defendants"). The consolidated
lawsuits seek class certification for all purchasers of stock in the Company
during periods beginning on or after June 1995 and ending on or before June
18, 1996, and are based on allegedly misleading public statements made by the
Company or failure to disclose material facts in violation of federal
securities laws. A total of 14 stockholder lawsuits were filed against the
Company. Of these suits, 11 were filed in the United States District Court for
the Northern District of Georgia and these suits have been consolidated into a
single action (In re: ValuJet, Inc.). Another lawsuit filed in the United
States District Court for the Middle District of Florida has been transferred
to the Northern District of Georgia and has been consolidated into In re:
ValuJet, Inc. All of the Defendants filed a joint Motion to Dismiss the
Consolidated Amended Complaint on December 23, 1996. The Plaintiffs' response
to this motion to Dismiss is due on May 9, 1997. On November 25, 1996,
Plaintiffs filed their Motion for Class Certification. On January 14, 1997,
Defendants filed a "Notice of Stay of Discovery and Other Proceedings", in
which Defendants state that the
F-10
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
filing of their Motion to Dismiss has stayed the issue of class certification
pursuant to the Private Securities Litigation Reform Act. By consent of the
parties, Defendants are not currently obligated to respond to Plaintiffs'
Motion for Class Certification, and if the Court decides that the issue of
class certification is not stayed by the Private Securities Litigation Reform
Act, the Defendants have 30 days from the date of such decision to respond to
Plaintiffs' Motion for Class Certification. Two suits (Cohen et al. v.
ValuJet, Inc., et al. and Hepler et al. v. ValuJet, Inc. et al.) have been
filed in the State Court of Fulton County, Georgia. On December 23, 1996, all
Defendants in both actions, other than a third party contractor, answered the
Complaint and filed a Motion to Dismiss the Complaint. Additionally, a
director named in the suits filed a Motion to Dismiss for lack of personal
jurisdiction. By consent of the parties, the Plaintiffs have until May 9,
1997, to respond to these motions to dismiss. The Company denies that it has
violated any of its obligations under the federal securities laws and believes
that meritorious defenses exist in the lawsuits.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit
against the Company in State Court in Tennessee for breach of contract and a
declaratory judgment for an anticipatory breach. The Nashville Airport
Authority seeks damages of approximately $2.6 million. The dispute involves
whether the Company was entitled to exercise a termination right contained in
its lease agreement. Management believes the ultimate resolution will not have
a materially adverse effect on the Company's financial position or results of
operations.
From time to time, the Company is engaged in litigation arising in the
ordinary course of business. The Company does not believe that any such
pending litigation will have a material adverse effect on its results of
operations or financial condition.
At December 31, 1996, the Company's contractual commitments consisted
primarily of scheduled aircraft acquisitions. The Company has entered into a
contract with a major aircraft manufacturer to purchase 50 new aircraft, to be
delivered from 1999 to 2002, with options to purchase another 50 aircraft.
Aggregate funding needed for these and all other aircraft commitments was
approximately $1 billion at December 31, 1996. Approximately $162 million of
this amount is required to be paid in progress payments due from 1995 to 2001.
After progress payments, the balance of the total purchase price must be paid
or financed upon delivery of each aircraft. While the major aircraft
manufacturer is required to provide credit support for a limited portion of
third party financing, the Company will be required to obtain financing from
other sources relating to these deliveries. If the Company exercises its
option to acquire up to an additional 50 aircraft, additional payments could
be required beginning in 1997. In conjunction with these contractual
commitments, the Company has made refundable deposits of approximately
$13,008,000 at December 31, 1996.
Future required deposits for aircraft progress payments as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997......................................................... $ 7,567,000
1998......................................................... 31,655,000
1999......................................................... 35,512,000
2000......................................................... 44,874,000
2001......................................................... 29,565,000
------------
$149,173,000
============
</TABLE>
F-11
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
By December 31, 1999, all of the Company's aircraft must be brought into
compliance with the FAA's Stage 3 noise requirements. The Company intends to
meet its Stage 3 noise requirement obligations by installing hush kits on
Stage 2 aircraft and acquiring Stage 3 aircraft. The Company expects that FAA
certified hush kits will cost approximately $55,000,000 for its aircraft not
currently meeting such requirements.
3. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Accrued bonuses...................................... $ -- $12,017,001
Accrued maintenance.................................. 7,710,207 4,700,000
Other................................................ 15,008,348 19,149,094
----------- -----------
$22,718,555 $35,866,095
=========== ===========
</TABLE>
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
Senior notes..................................... $150,000,000 $ --
Promissory notes for aircraft and other
equipment....................................... 94,706,324 109,038,133
------------ ------------
244,706,324 109,038,133
Less current maturities.......................... 33,246,302 21,430,984
Less debt on assets held for disposition......... 18,188,222 --
------------ ------------
$193,271,800 $ 87,607,149
============ ============
</TABLE>
During April 1996, the Company closed a private offering of $150,000,000
principal amount of 10 1/4% Senior Notes due 2001. In October 1996, the
Company exchanged the unregistered Notes for Registered 10 1/4% Senior Notes
due 2001. Interest on the Senior Notes is payable semi-annually on April 15
and October 15.
The promissory notes relate to aircraft financing and bear interest at rates
ranging from 7.43% to 10.18% per annum, and principal and interest payments
are due in monthly or quarterly installments over four to seven year terms on
a mortgage-style amortization based on the delivery date of the aircraft.
Certain of these notes, with an aggregate unpaid principal balance of
approximately $14.3 million as of December 31, 1996, have a variable rate of
interest based on the London interbank offered rate (LIBOR) (5.5% at December
31, 1996) plus 1.85% to 3% (1.85% at December 31, 1996) based on the Company's
compliance with specific financial ratios concerning leverage and fixed charge
coverage. Certain other of these notes have a variable rate of interest based
on LIBOR plus a range of 1.20% to 2.75%.
A substantial portion of the secured notes require prepayment if specific
financial ratios (concerning debt to equity, net worth, fixed charge coverage
and current ratio) are not maintained. At December 31, 1996, the Company was
in violation of the fixed charge coverage ratio covenant related to
approximately $66,103,000 of this secured debt. In March 1997, certain of the
Company's secured lenders agreed to waive the fixed charge coverage ratio
covenant at December 31, 1996 and to waive or reduce the required fixed charge
coverage ratio through December 31, 1997. As a result, management believes it
will meet all loan covenant requirements on such debt totalling $47,151,000
through December 31, 1997. Accordingly, amounts payable under these secured
debt agreements, excluding current maturities and debt on assets held for
disposition, are classified as long-term in the accompanying consolidated
balance sheet. The Company remains in violation of the fixed charge coverage
ratio for $18,952,000 of secured debt. As a result, such debt has been
classified as current maturities or debt on assets held for disposition, where
appropriate, in the accompanying consolidated balance sheet. No prepayment
requests have been made related to such debt. The Company's aircraft, engines
and computer and telephone equipment totalling approximately $155,157,000
serve as collateral on secured debt.
F-12
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future statutory long-term debt principal payments at December 31, 1996 were
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997............................................................ $ 21,457,302
1998............................................................ 23,124,833
1999............................................................ 20,552,472
2000............................................................ 15,536,446
2001............................................................ 162,885,469
Thereafter...................................................... 1,149,802
------------
$244,706,324
============
</TABLE>
5. LEASES
The Company leases facilities from local airport authorities or other
carriers, as well as office space. These leases are operating leases and have
terms from one month to fourteen years.
Total rental expense charged to operations for facilities and office space
for the years ended December 31, 1996, 1995 and 1994 was approximately
$15,824,000, $12,516,000, and $4,726,000, respectively.
Future minimum lease payments under non-cancelable operating leases with
initial terms in excess of one year at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1997............................................................. $ 5,076,000
1998............................................................. 4,922,000
1999............................................................. 4,750,000
2000............................................................. 4,131,000
2001............................................................. 3,954,000
Thereafter....................................................... 34,597,000
-----------
$57,430,000
===========
</TABLE>
6. STOCKHOLDERS' EQUITY
During 1993, the Company issued 1,200,000 shares of common stock to an
officer of the Company and 300,000 shares to a consultant in exchange for
notes receivable of $200,010 and $50,000, respectively. During 1996 and 1995,
the notes receivable were repaid in full.
In conjunction with a private placement offering during 1993, the Company
issued 250,000 Preferred Stock purchase warrants to the placement agent which
entitled the holder to acquire shares of Preferred Stock at a price of $4.80
per share. These warrants were exercised for common stock during the year
ended December 31, 1994.
Also, during 1993, the Company issued 260 units ("Units"), each consisting
of 12,500 shares of convertible Series A Preferred Stock ("Preferred Stock")
and warrants to purchase 50,000 shares of common stock, or 3,250,000 shares of
Preferred Stock and 13,000,000 warrants to purchase common stock, for
$11,858,744, net of issuance costs of $1,141,351. Each warrant entitled the
holder to purchase shares of common stock at a price of $3.75 per share on or
before December 31, 1995. The warrants were callable by the Company at $.0125
per share if the closing bid price of the Company's common stock was greater
than or equal to $5 per share for a period of fifteen consecutive trading days
and if the common stock issuable upon exercise of warrants was then covered by
an effective registration statement filed with the Securities and Exchange
Commission. In addition, in conjunction with a sale of common stock in 1993,
the Company issued 1,000,000 warrants to purchase
F-13
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock at a price of $3.75 per share. In October 1994, the Company
called the 14,000,000 warrants outstanding at that date. Pursuant to the
Company's exchange offer, 10,422,300 warrants for common stock were exercised
for $3.75 per share resulting in proceeds of approximately $38,960,000, net of
expenses. The remaining 3,577,700 warrants for common stock were exchanged for
447,160 shares of common stock, in accordance with the Company's exchange
offer.
On July 6, 1994, the Company closed an initial public offering of 6,000,000
shares of its common stock, generating proceeds of approximately $17 million,
net of underwriting discounts and commissions, and other expenses. Concurrent
with the closing of the Company's IPO, all of the Company's Preferred Stock
was automatically converted into common stock on a one-for-four basis.
On June 28, 1994, the Company issued 39,680 shares of common stock to a
trust for the benefit of its employees at the IPO date. These shares were
valued at the IPO price of $3.12 per share and compensation expense related to
these shares will be recognized over the vesting period of three years from
the issuance date. At the end of the vesting term, the shares will be divided
among the employees employed at the IPO date remaining with the Company at the
end of the three year vesting period. Approximately 33,000 of these shares had
been earned as of December 31, 1996.
During 1995, the Company announced two separate two-for-one stock splits
effected in the form of stock dividends. The stock splits were payable on
April 10, 1995 and November 21, 1995 to stockholders of record as of the close
of business on March 24, 1995 and November 6, 1995, respectively. All
references in the consolidated financial statements to shares, per share
amounts and stock plans have been retroactively restated to reflect the stock
splits.
7. STOCK OPTION PLANS
In 1993, the Company established the ValuJet Airlines, Inc. 1993 Incentive
Stock Option Plan (the "1993 Plan") whereby up to 4,800,000 options may be
granted to officers, directors and key employees to purchase shares of common
stock at prices not less than the fair value of the shares on the dates of
grant. With respect to individuals owning more than 10% of the voting power of
all classes of the Company's stock, the exercise price per share shall not be
less than 110% of the fair value of the shares on the date of grant.
On March 31, 1994, the Company established the ValuJet Airlines, Inc. 1994
Stock Option Plan (the "1994 Plan") whereby up to 4,000,000 incentive stock
options or non-qualified options may be granted to officers, directors, key
employees and consultants of the Company.
On January 30, 1996, the Company established the ValuJet, Inc. 1996 Stock
Option Plan (the "1996 Plan") whereby up to 5,000,000 incentive stock options
or non-qualified options may be granted to officers, directors, key employees
and consultants of the Company.
Vesting and term of all options is determined by the Board of Directors and
may vary by optionee; however, the term may be no longer than ten years from
the date of grant.
At December 31, 1996, the vesting of 1,504,000 stock options with a weighted
average exercise price of $0.85 granted to two executive officers was
accelerated such that they became fully vested on that date. Such stock
options represented all of the nonvested stock options held by the two
executive officers.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by Statement 123, which also requires that the information
be determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair
F-14
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions
for 1996 and 1995, respectively: risk-free interest rates of 7.3% and 6.4%; no
dividend yields; volatility factors of the expected market price of the
Company's common stock of .625 for 1996 and 1995; and a weighted-average
expected life of the options of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
A summary of stock option activity under the above-described plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES PRICE RANGE AVERAGE PRICE
---------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1993........ 3,880,000 $ 0.17 $0.17
Granted........................... 2,240,000 1.00 - 3.75 2.90
Exercised......................... (8,000) 0.17 0.17
Canceled.......................... (92,000) 0.17 - 3.13 1.63
----------
Balance at December 31, 1994........ 6,020,000 0.17 - 3.75 1.16
Granted........................... 1,175,600 3.75 - 23.19 5.67
Exercised......................... (1,337,000) 0.17 - 3.13 0.33
Canceled.......................... (239,200) 0.17 - 12.19 3.42
----------
Balance at December 31, 1995........ 5,619,400 0.17 - 23.19 2.20
Granted........................... 1,406,000 3.75 - 23.19 15.99
Exercised......................... (310,010) 0.17 - 3.13 2.68
Canceled.......................... (91,860) 0.17 - 12.19 5.91
----------
Balance at December 31, 1996........ 6,623,530 0.17 - 23.19 5.06
==========
Exercisable at December 31, 1996.... 4,336,430
==========
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.17 2,516,000 6.50 $ 0.17 2,452,000 $ 0.17
$ 1.00 - $ 5.13 2,603,230 7.69 $ 3.52 1,315,230 $ 2.68
$ 8.50 - $15.00 570,000 9.62 $10.23 15,600 $13.43
$18.38 - $23.19 934,300 8.82 $19.35 553,600 $18.40
--------- ---------
6,623,530 7.60 $ 5.06 4,336,430 $ 3.21
========= =========
</TABLE>
F-15
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Pro forma net income (loss)....................... $(44,880,415) $67,193,721
Pro forma earnings (loss) per share:.............. (0.82) 1.14
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
1999.
The weighted-average fair value of options granted during 1996 and 1995 with
option prices equal to the market price on the date of grant was $7.82 and
$4.00, respectively. The weighted-average fair value of options granted during
1996 and 1995 with option prices less than the market price of the stock on
the date of grant was $10.13 and $2.73, respectively.
At December 31, 1996, the Company had reserved a total of 12,144,190 shares
of common stock for future issuance upon exercise of stock options.
8. INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Current:
Federal.............................. $(31,311,000) $30,389,736 $ 8,387,121
State................................ (2,077,000) 2,283,128 1,449,270
------------ ----------- -----------
Total current.......................... (33,388,000) 32,672,864 9,836,391
Deferred:
Federal.............................. 10,614,000 6,313,839 2,694,773
State................................ (1,689,000) 1,076,231 317,392
------------ ----------- -----------
Total deferred......................... 8,925,000 7,390,070 3,012,165
------------ ----------- -----------
$(24,463,000) $40,062,934 $12,848,556
============ =========== ===========
</TABLE>
A reconciliation of the provision for income taxes (benefit) to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Tax at statutory rate... $(23,076,000) $37,738,937 $11,648,639
State taxes, net of fed-
eral benefit........... (2,448,000) 2,183,583 1,330,254
Other................... 1,061,000 140,414 233,576
Valuation reserve....... -- -- (363,913)
------------ ----------- -----------
$(24,463,000) $40,062,934 $12,848,556
============ =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
F-16
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Prepaid insurance................................. $ 2,687,180 $ 1,210,775
Depreciation...................................... 19,584,784 10,919,065
Gain on involuntary conversion.................... 1,484,100 --
----------- -----------
Total deferred tax liabilities...................... 23,756,064 12,129,840
Deferred tax assets:
Accrued liabilities............................... 770,463 1,181,489
State operating loss carryforwards................ 2,035,751 --
Non qualified stock options....................... 929,956 --
Other............................................. 692,659 546,116
----------- -----------
Total deferred tax assets........................... 4,428,829 1,727,605
----------- -----------
Net deferred tax liability.......................... $19,327,235 $10,402,235
=========== ===========
</TABLE>
Various subsidiaries of the Company have state operating loss carryforwards
of approximately $3,100,000 with expiration dates through the year 2011.
9. SHUTDOWN AND OTHER NONRECURRING EXPENSES
Shutdown and other nonrecurring expenses include costs associated with the
loss of Flight 592 and excess operating costs related to the reduced schedule
from May 19, 1996 to the June 17, 1996 shutdown, the suspension of operations
from June 17, 1996 to September 29, 1996 and the reduced schedule from
September 30, 1996 to December 31, 1996. Such costs consist of expenses
directly related to the accident and the ensuing extensive FAA review of the
Company's operations including legal fees, payments to the FAA, inspection
related costs and unusual maintenance in excess of normal recurring
maintenance. In addition, depreciation on grounded aircraft, rental of vacated
or idled facilities and costs of personnel idled as a result of the reduced
and suspended operations from May through December, 1996 are included in
shutdown and other nonrecurring expenses. Personnel costs include full wages,
salaries and benefits that were provided to idled employees during the
reduction and suspension of operations.
A summary of such costs is as follows for the year ended December 31, 1996:
<TABLE>
<S> <C>
Maintenance..................................................... $27,750,000
Legal and other consulting...................................... 8,843,000
Facilities rental............................................... 6,114,000
Wages, salaries and benefits, excluding maintenance............. 4,895,000
FAA remediation................................................. 2,000,000
Depreciation.................................................... 11,054,000
Other........................................................... 7,338,000
-----------
$67,994,000
===========
</TABLE>
No accrual was provided for costs to be incurred in future periods related
to aircraft depreciation and maintenance and rental costs associated with
temporarily idled facilities as such costs will be recognized as they are
incurred. There is no accrual for salaries and wages in connection with the
June 18, 1996 furlough of employees at December 31, 1996 as such employees
were paid through June 30, 1996 with no additional severance benefits
provided.
F-17
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS
The Company has utilized temporary employees provided by a temporary agency
which is partially owned by the daughter of one of the Company's officers.
This arrangement was terminated during 1996. Amounts recorded as expense
related to this agency were approximately $4,223,000, $12,663,000, and
$5,140,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Accounts payable to this agency was approximately $370,703 at December 31,
1995. No amounts were due at December 31, 1996.
11. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company maintains cash and cash equivalents with
various high credit-quality financial institutions or in short-duration high
quality debt securities. The Company periodically evaluates the relative
credit standing of those financial institutions that are considered in the
Company's investment strategy. Concentration of credit risk with respect to
accounts receivable is limited due to the large number of customers comprising
the Company's customer base.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable: The carrying amounts reported
in the balance sheet for accounts receivable and accounts payable
approximate their fair value.
Long-term debt: The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and
cash equivalents....... $150,012,695 $150,012,695 $127,947,096 $127,947,096
Accounts receivable, net
of allowance........... 7,014,702 7,014,702 12,074,394 12,074,394
Accounts payable........ 3,221,036 3,221,036 6,721,754 6,721,754
Long-term debt.......... 244,706,324 219,326,000 109,038,133 110,973,000
</TABLE>
12. EMPLOYEE BENEFIT PLANS
Effective April 1, 1995, the Company adopted the ValuJet Airlines, Inc.
401(k) Plan (the "Plan"), a defined contribution benefit plan which qualifies
under Section 401(k) of the Internal Revenue Code. All employees of the
Company are eligible to participate in the Plan. Participants may contribute
up to 15% of their base salary to the Plan. Contributions to the Plan by the
Company are discretionary. No employer contributions were made in 1996 or
1995.
Effective May 16, 1995, the Company formed the 1995 Employee Stock Purchase
Plan (the "Stock Plan") whereby employees who complete twelve months of
service are eligible to make quarterly purchases of the Company's common stock
at up to a 15% discount from the market value on the offering date. The
discount rate
F-18
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
is determined by the Board of Directors before each offering date. The Company
is authorized to issue up to 4,000,000 shares of common stock under this plan.
During 1996 and 1995, the employees purchased a total of 8,770 and 1,880
shares at an average price of $12.94 and $20.86 per share, respectively, which
represented a 5% discount from the market price on the offering dates.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
-------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1996:
Operating revenues.................. $109,995 $ 81,217 $ 311 $ 28,113
Operating income (loss)............. 17,525 (11,581) (29,946) (27,397)
Net income (loss)................... 10,667 (9,574) (21,945) (20,617)
Net income (loss) per share......... .18 (.18) (.40) (.38)
</TABLE>
<TABLE>
<CAPTION>
QUARTER
---------------------------------
FIRST SECOND THIRD FOURTH
------- ------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1995:
Operating revenues....................... $60,747 $86,913 $109,296 $110,801
Operating income......................... 14,581 27,086 36,672 30,511
Net income............................... 9,071 16,860 22,661 19,171
Net income per share..................... .15 .28 .38 .32
</TABLE>
14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's $150,000,000 of 10 1/4% Senior Notes issued during 1996 are
fully and unconditionally guaranteed on a joint and several basis by ValuJet
Airlines, Inc., a wholly-owned subsidiary of the Company, and all its
subsidiaries ("Guarantors"). All of the operations of the Company are
conducted by ValuJet Airlines, Inc. and its subsidiaries. All of the
Guarantors are wholly-owned or indirect subsidiaries of the Company, and there
are no direct or indirect subsidiaries of the Company that are not Guarantors.
Separate financial statements of the Guarantors are not presented because all
of the Company's subsidiaries guarantee the Senior Notes on a full,
unconditional and joint and several basis.
Summarized financial information of ValuJet Airlines, Inc. and its
subsidiaries is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Current assets.............................................. $246,041,431
Non-current assets.......................................... 162,571,884
Current liabilities......................................... 81,743,233
Non-current liabilities..................................... 207,167,474
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Operating revenues.......................................... $219,636,232
Operating loss.............................................. (51,398,542)
Loss before income taxes.................................... (65,932,299)
Net loss.................................................... (41,469,299)
</TABLE>
F-19
<PAGE>
VALUJET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(NOTE) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $150,012,695 $123,209,923
Accounts receivable, less allowance
of $838,000 and $1,291,000 at December 31, 1996
and September 30, 1997, respectively............ 7,014,702 7,774,890
Notes receivable................................. 0 12,700,000
Inventories of parts............................. 6,607,307 7,812,121
Prepaid expenses................................. 8,066,792 688,491
Income taxes receivable.......................... 36,440,653 12,684,240
Assets held for disposition...................... 42,060,242 0
Other current assets............................. 839,040 1,763,661
------------ ------------
Total current assets............................... 251,041,431 166,633,326
Property and equipment, at cost
Flight equipment................................. 126,829,882 174,671,425
Other property and equipment..................... 65,662,504 67,455,689
Deposits on flight equipment
purchase contracts.............................. 14,534,895 19,442,895
------------ ------------
207,027,281 261,570,009
Less allowance for depreciation.................. (44,455,397) (66,372,100)
------------ ------------
162,571,884 195,197,909
Debt issuance costs................................ 3,573,561 10,344,740
------------ ------------
Total assets....................................... $417,186,876 $372,175,975
============ ============
</TABLE>
- --------
Note:The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. See condensed notes to
financial statements.
F-20
<PAGE>
VALUJET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(NOTE) (UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 3,221,542 $ 3,652,706
Accrued liabilities............................... 22,718,555 31,701,436
Air traffic liability............................. 3,813,583 8,912,432
Deferred tax liability............................ 1,298,400 485,400
Current maturities of long-term debt.............. 33,246,302 9,125,000
Debt on assets held for sale...................... 18,188,222 0
------------ ------------
Total current liabilities........................... 82,486,604 53,876,974
Long-term debt less current maturities.............. 193,271,800 233,833,268
Deferred income taxes payable....................... 18,028,835 3,046,835
Stockholders' equity:
Common stock, $.001 par value:
1,000,000,000 shares authorized: issued and
outstanding--54,875,610 at December 31, 1996 and
55,005,740 at September 30, 1997................. 54,876 55,006
Additional paid-in capital........................ 77,236,447 77,600,497
Retained earnings................................. 46,108,314 3,763,395
------------ ------------
Total stockholders' equity.......................... 123,399,637 81,418,898
------------ ------------
Total liabilities and stockholders' equity.......... $417,186,876 $372,175,975
============ ============
</TABLE>
- --------
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. See condensed notes to
financial statements.
F-21
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Operating revenues:
Passenger....................................... $ 16,890 $ 53,569,962
Cargo........................................... 0 582,203
Other........................................... 294,029 2,261,112
------------ ------------
Total operating revenues.......................... 310,919 56,413,277
Operating expenses and other, net:
Flight operations............................... 339,049 5,094,049
Aircraft fuel................................... 45,000 13,521,439
Maintenance..................................... 6,748,554 16,265,898
Station operations.............................. 253,672 12,857,477
Passenger services.............................. 2,692 2,552,467
Marketing and advertising....................... 415,891 2,888,417
Sales and reservations.......................... 52,957 4,543,931
General and administrative...................... 2,784,562 3,129,216
Employee bonus.................................. 0 0
Depreciation.................................... 85,047 8,260,604
Arrangement fee for aircraft transfers.......... (1,175,000) 0
Gain on sale of assets.......................... (2,334,678) (224,945)
Rebranding expenses............................. 0 325,077
Shutdown and other nonrecurring expenses........ 23,039,576 0
------------ ------------
Total operating expenses and other, net........... 30,257,322 69,213,630
------------ ------------
Operating loss.................................... (29,946,403) (12,800,353)
Interest expense (income):
Interest expense................................ 7,198,351 7,131,350
Interest income................................. (2,274,930) (1,644,463)
------------ ------------
Total interest expense, net....................... 4,923,421 5,486,887
------------ ------------
Loss before income taxes.......................... (34,869,824) (18,287,240)
Provision for income taxes........................ (12,925,000) (3,675,000)
------------ ------------
Net loss.......................................... ($21,944,824) ($14,612,240)
============ ============
Net loss per share................................ ($0.40) ($0.27)
============ ============
Weighted average shares outstanding............... 54,690,157 54,984,451
============ ============
</TABLE>
See accompanying notes.
F-22
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Operating revenues:
Passenger...................................... $183,547,708 $ 133,877,328
Cargo.......................................... 2,707,764 1,709,284
Other.......................................... 5,267,744 5,514,043
------------ -------------
Total operating revenues......................... 191,523,216 141,100,655
Operating expenses:
Flight operations.............................. 13,271,766 13,998,252
Aircraft fuel.................................. 39,182,578 33,373,347
Maintenance.................................... 38,167,172 40,905,713
Station operations............................. 32,894,975 35,342,716
Passenger services............................. 7,626,481 6,369,631
Marketing and advertising...................... 6,922,628 8,115,476
Sales and reservations......................... 15,495,002 11,344,657
General and administrative..................... 10,945,982 9,272,145
Employee bonus................................. 1,245,000 0
Depreciation................................... 13,296,135 20,507,926
Arrangement fee for aircraft transfers......... (13,036,294) 0
Gain from insurance recovery................... (2,814,785) 0
Gain on sale of assets......................... (2,334,678) (274,545)
Rebranding expenses............................ 0 325,077
Shutdown and other nonrecurring expenses....... 54,662,986 9,338,000
------------ -------------
Total operating expenses......................... 215,524,948 188,618,395
------------ -------------
Operating (loss)................................. (24,001,732) (47,517,740)
Interest expense (income):
Interest expense............................... 15,822,366 19,854,122
Interest income................................ (6,799,164) (4,912,943)
------------ -------------
Total interest expense, net...................... 9,023,202 14,941,179
------------ -------------
Loss before income taxes......................... (33,024,934) (62,458,919)
Provision for income taxes....................... (12,173,000) (20,114,000)
------------ -------------
Net loss......................................... ($20,851,934) ($42,344,919)
============ =============
Net loss per share............................... ($0.38) ($0.77)
============ =============
Weighted average shares outstanding.............. 54,646,157 54,922,522
============ =============
</TABLE>
See accompanying notes.
F-23
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Operating activities:
Net loss........................................ ($ 20,851,934) ($42,344,919)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation.................................. 22,199,949 23,356,441
Provision for uncollectible accounts.......... 3,187,931 2,181,299
Gain from disposal of assets.................. (5,149,463) (274,545)
Deferred income taxes......................... 0 (14,982,000)
Changes in operating assets and liabilities:
Accounts receivable......................... 4,523,838 ( 2,941,487)
Notes receivable............................ 0 (12,700,000)
Other current assets........................ (3,176,650) 5,248,866
Accounts payable and accrued liabilities.... (19,360,555) 10,717,969
Air traffic liability....................... (19,508,594) 5,098,849
Income taxes payable........................ (14,647,451) 22,943,413
------------- -------------
Net cash used in operating activities........... (52,782,929) (3,696,114)
Investing activities:
Proceeds from disposal of equipment............. 75,801,874 3,216,853
Purchases of property and equipment............. (135,225,048) (17,357,941)
------------- -------------
Net cash used in investing activities........... (59,423,174) (14,141,088)
Financing activities:
Issuance of long-term debt...................... 222,694,800 72,418,306
Proceeds from sale of common stock.............. 2,528,653 364,180
Payment of long-term debt....................... (61,978,247) (81,748,056)
------------- -------------
Net cash provided by (used in) financing activi-
ties........................................... 163,245,206 (8,965,570)
------------- -------------
Net increase (decrease) in cash and cash equiva-
lents.......................................... 51,039,103 (26,802,772)
Cash and cash equivalents at beginning of peri-
od............................................. 127,947,096 150,012,695
------------- -------------
Cash and cash equivalents at end of period...... $ 178,986,199 $ 123,209,923
============= =============
</TABLE>
See accompanying notes.
F-24
<PAGE>
VALUJET, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
interim financial statements contain all adjustments necessary to present
fairly the Company's financial position as of September 30, 1997 and December
31, 1996, the results of operations for the three and nine month periods ended
September 30, 1997 and September 30, 1996, and cash flows for the nine month
periods ended September 30, 1997 and September 30, 1996. The adjustments made
are of a normal recurring nature. Certain information and footnote disclosures
normally included in the annual financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission for Form 10-Q. It is suggested that these unaudited interim
financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Annual Report on Form 10-K
filed by the Company with the Securities and Exchange Commission on March 31,
1997, and amendments thereto.
The results of operations for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results to be
expected for the full fiscal year.
B. NET INCOME PER COMMON SHARE
Net income per share is based on the weighted average number of common
shares outstanding and common stock equivalents during the periods. Common
stock equivalents include shares issuable upon the assumed exercise of stock
options using the treasury stock method when dilutive. See Note G.
C. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Senior notes due 2001.............................. $150,000,000 $150,000,000
Senior secured notes due 2001...................... 0 80,000,000
Promissory notes due 1998 through 2001............. 94,706,324 12,958,268
Less current maturities............................ (33,246,302) (9,125,000)
Less debt on assets held for sale.................. (18,188,222) 0
------------ ------------
$193,271,800 $233,833,268
============ ============
</TABLE>
In August, 1997, the Company completed the private placement of $80 million
of 10 1/2% senior secured notes due April 15, 2001. All of the Company's
secured debt with financial maintenance covenants was repaid with a portion of
the proceeds of this offering. Certain aircraft, together with the installed
engines related thereto, three spare engines and four hush kits after their
purchase by AirTran Airlines serve as collateral for the senior secured notes.
Interest on the Company's $150 million senior notes and $80 million senior
secured notes is payable semi-annually on April 15 and October 15 at 10 1/4%
and 10 1/2%, respectively, per annum. Certain other debt bears interest at
fixed rates ranging from 8.0% to 9.78% per annum and is repayable in
consecutive monthly or quarterly installments over a two-to four-year period.
Certain other notes have a variable rate of interest based on the London
interbank offered rate (LIBOR) plus 2.26% to 2.75%.
D. COMMITMENTS AND CONTINGENCIES
On May 11, 1996, the Company suffered a tragic loss involving Flight 592.
The accident resulted in extensive media coverage calling into question the
safety of low-fare airlines in general and the Company in particular. In
response to the accident, the Federal Aviation Administration (FAA) conducted
an extraordinary
F-25
<PAGE>
VALUJET, INC.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS--(CONTINUED)
review of the Company's operations. On June 17, 1996 the Company entered into
a consent order with the FAA under which the Company agreed to several matters
including the suspension of operations until such time as the Company was able
to satisfy the FAA as to various regulatory compliance concerns and the
payment of $2,000,000 to the FAA to compensate it for the cost of the special
inspections. The Company satisfied the FAA's requirements and received FAA
clearance during August 1996. The Company received its determination of
fitness from the Department of Transportation on September 25, 1996 and
restarted operations on September 30, 1996. See Note H regarding charges
associated with the accident and related shutdown of operations.
As a result of the above mentioned events, several class action suits have
been filed by shareholders against the Company and various officers alleging,
among other things, misrepresentations regarding the Company's safety. The
plaintiffs seek unspecified damages based upon the decrease in market value of
shares of the Company's stock. Management intends to defend these actions
vigorously and believes that the suits are without merit. While any litigation
contains elements of uncertainty, management presently believes, based on the
information available to it and discussions with outside counsel, that the
outcome of each such proceeding or claim which is pending or known to be
threatened, or all of them combined, will not have a material adverse effect
on the results of operations or the financial position of the Company.
Numerous lawsuits have also been filed against the Company seeking damages
attributable to the deaths of those on Flight 592, and additional lawsuits are
expected. The Company's insurance carrier has assumed defense of these
lawsuits under a reservation of rights and is providing the defense of such
claims. As all claims are handled independently by the Company's insurance
carrier, the Company cannot reasonably estimate the amount of liability which
might finally exist. As a result, no accruals for losses and the related claim
for recovery from the Company's insurance carrier have been reflected in the
Company's financial statements. The Company maintains $750 million of
liability insurance, per occurrence, with a major group of independent
insurers that provide facilities for all forms of aviation insurance for many
major airlines. Although the Company believes, based on the information
currently available to it, that such coverage is sufficient to cover claims
arising out of the loss of Flight 592 and that the insurers have sufficient
financial strength to pay claims, there can be no assurance that the total
amount of judgments and settlements will not exceed the amount of insurance
available therefor or that all damages awarded will be covered by insurance.
In May 1997, SabreTech filed a Complaint for declaratory judgment and other
relief against the Company. The action seeks a determination that SabreTech is
not liable to the Company for the accident involving Flight 592 as a result of
language contained in certain of the contracts between the parties and that
the Company is liable to SabreTech for damages that it has suffered. The
Company intends to vigorously defend this lawsuit and to assert all claims it
has against SabreTech.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit
against the Company in State Court in Tennessee for breach of contract and a
declaratory judgment for an anticipatory breach. The Nashville Airport
Authority seeks damages of approximately $2.6 million. The dispute involves
whether the Company was entitled to exercise a termination right contained in
its lease agreement. Management believes the ultimate resolution will not have
a material adverse effect on the Company's financial position or results of
operations.
In May 1997, the State of Florida filed suit against the Company and its
insurers in the United States District Court for the Southern District of
Florida seeking recovery of costs incurred relating to the accident involving
Flight 592. The Company does not believe that it is obligated for such amounts
and has filed a motion to dismiss this lawsuit.
From time to time, the Company is engaged in litigation arising in the
ordinary course of business. The Company does not believe that any such
pending litigation will have a material adverse effect on its results of
operations or financial condition.
F-26
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
E. PROPOSED MERGER
On July 10, 1997, the Company entered into a merger agreement with Airways
Corporation ("Airways"). Under the merger agreement (which remains subject to,
among other things, shareholder approval by both companies), the Company will
acquire Airways through a merger of Airways with and into the Company (the
"Merger"). The purchase price to be paid by the Company in the Merger will
consist of approximately 9.1 million shares of Common Stock of the Company.
Upon completion of the Merger, the Company intends to change its name to
AirTran Holdings, Inc. In connection with the merger, the Company has loaned
Airways $12,700,000, which bears interest at 10% to 12% per annum and is due
in December 1997 (if the merger is consummated) or March 1998 (if the merger
is not consummated by November 30, 1997).
F. ASSETS HELD FOR DISPOSITION
During 1996, as a result of the loss of Flight 592 and the consent order
with the FAA which required the Company to reestablish operations with up to
15 aircraft and subjected further expansion of the Company's operations to FAA
and DOT approval, the Company's management decided to sell or lease certain of
its aircraft. Those aircraft which the Company decided to sell were removed
from operations and were classified in the balance sheet as assets held for
disposition and were stated at the lower of carrying amount or fair value less
cost to sell. Such aircraft were available for sale and an active sales
program was initiated. The fair value, as estimated by the current market
value of these aircraft, less cost to sell exceeded the carrying amount of
such aircraft.
At June 30, 1997, as a result of the pending merger with Airways and the
resulting opportunities for the Company to expand its services, the Company's
management decided to make the remaining aircraft classified as assets held
for disposition available for a return to its operating specifications. Each
of AirTran Airlines (formerly ValuJet Airlines) and AirTran Airways , Inc.
(Airways' operating subsidiary) has the necessary authority to conduct flight
operations, including a Certificate of Public Convenience and Necessity from
the DOT and an operating certificate from the FAA. All remaining aircraft
classified as assets held for disposition were reclassified to flight
equipment at their carrying amount at June 30, 1997 and will continue to be
depreciated over their remaining depreciable lives.
G. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997 the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, "Earnings per Share", which will
change the current method of computing earnings per share. The new standard
requires presentation of "basic earnings per share" and "diluted earnings per
share" amounts, as defined. SFAS No. 128 will be effective for the Company's
quarter and year ending December 31, 1997, and, upon adoption, all prior-
period earnings per share data presented shall be restated to conform with the
provisions of the new pronouncement. Application earlier than the Company's
quarter ending December 31, 1997 is not permitted.
Pro forma basic and diluted earnings per share for the three months and nine
months ended September 30, 1996 and 1997 calculated under the provisions of
SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Basic earnings per share........ $ (0.40) $ (0.27) $ (0.38) $ (0.77)
Diluted earnings per share...... (0.40) (0.27) $ (0.38) (0.77)
</TABLE>
F-27
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation of each Registrant incorporated in Nevada
provide that directors of such Registrant will not be personally liable for
monetary damages to such Registrant for certain breaches of their fiduciary duty
as directors to the fullest extent allowable by Nevada law. Under current
Nevada law, directors would remain liable for: (i) acts or omissions which
involve intentional misconduct, fraud or a knowing violation of law, and (ii)
approval of certain illegal dividends or redemptions. In appropriate
circumstances, equitable remedies or nonmonetary relief, such as an injunction,
will remain available to a stockholder seeking redress from any such violation.
In addition, the provision applies only to claims against a director arising out
of his role as a director and not in any other capacity (such as an officer or
employee of the Registrant).
Each Registrant incorporated in Nevada also has the obligation, pursuant to
such Registrant's By-laws, to indemnify any director or officer of the
Registrant for all expenses incurred by them in connection with any legal action
brought or threatened against such person for or on account of any action or
omission alleged to have been committed while acting in the course and scope of
the person's duties, if the person acted in good faith and in a manner which the
person reasonably believed to be in or not opposed to the best interests of the
Registrant, and with respect to criminal actions, had no reasonable cause to
believe the person's conduct was unlawful, provided that such indemnification is
made pursuant to then existing provisions of Nevada General Corporation Law at
the time of any such indemnification.
The Partnership Agreement of each Registrant which is a Georgia partnership,
provides that to the fullest extent permitted by law, such Registrant shall
indemnify and shall hold the General Partner, each and every Authorized Agent of
the Partnership, and the Limited Partner acting consistently with the
Partnership Agreement harmless from any loss or damage, including, without
limitation, reasonable legal fees and court costs, incurred by them by reason of
anything they may do or refrain from doing hereafter for and on behalf of such
Registrant and in furtherance of its best interests, specifically including any
such act or failure to act which is attributable, in whole or in part, to the
negligence of the party being indemnified, but specifically excluding any such
act or failure to act which is primarily attributable to the gross negligence or
willful misconduct of such party.
The Registration Rights Agreement filed as Exhibit 4.2 hereto contains
certain provisions pursuant to which certain officers, directors and controlling
persons of the Company may be entitled to be indemnified by the Initial
Purchasers and other holders of Notes.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration
Statement:
3.1 Articles of Incorporation of ValuJet, Inc. (1)
3.2 Bylaws of ValuJet, Inc. (1)
4.1 Indenture dated as of August 13, 1997 among the Issuer, the Guarantors
and The Bank of New York, as Trustee (2)
4.2 Registration Rights Agreement dated as of August 13, 1997 among the
Issuer, the Company and UBS Securities LLC. (2)
4.3 Form of Exchange Note
5.1 Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
8.1 Tax Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
12.1 Computation of ratio of earnings to fixed charges.
II-1
<PAGE>
23.1 Consent of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C. (included in
Exhibits 5.1 and 8.1)
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (included on signature pages).
25.1 Statement of Eligibility of Trustee. (2)
99.1 Form of Transmittal Letter. (2)
99.2 Form of Notice of Guaranteed Delivery. (2)
___________________________________
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4, registration number
33-95232, filed with the Commission on August 1, 1995, and amendments
thereto.
(2) Previously filed.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) (i) The undersigned Registrant hereby undertakes:
(A) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(1) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(2) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(3) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement.
(B) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(C) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unissued at the
termination of the offering.
(ii) Each undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
ValuJet, Inc. annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(iii) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such
II-2
<PAGE>
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) Each undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) Each undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
Company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia on the 4th day of December, 1997.
AIRTRAN AIRLINES, INC.
By: /s/ D. Joseph Corr
-----------------------------------------
D. Joseph Corr, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia on the 4th day of December, 1997.
/s/ D. Joseph Corr President (principal executive officer)
- ---------------------------
D. Joseph Corr and Director
/s/ Stephen C. Nevin Senior Vice President-Finance
- ---------------------------
Stephen C. Nevin (principal financial officer)
/s/ David W. Lancelot Controller (principal accounting officer)
- ---------------------------
David W. Lancelot
/s/ Robert L. Priddy Director
- ---------------------------
Robert L. Priddy
/s/ Robert D. Swenson Director
- ---------------------------
Robert D. Swenson
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia on the 4th day of December, 1997.
AIRTRAN HOLDINGS, INC.
By: D. Joseph Corr
-------------------------------
D. Joseph Corr, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on the 4th day of December,
1997.
/s/ D. Joseph Corr President (principal executive officer)
- -----------------------------
D. Joseph Corr and Director
/s/ Stephen C. Nevin Senior Vice President-Finance
- -----------------------------
Stephen C. Nevin (principal financial officer)
/s/ David W. Lancelot Controller (principal accounting
- -----------------------------
David W. Lancelot officer)
/s/ Don L. Chapman Director
- -----------------------------
Don L. Chapman
/s/ John K. Ellingboe Director
- -----------------------------
John K. Ellingboe
/s/ Lewis H. Jordan Director
- -----------------------------
Lewis H. Jordan
/s/ Robert C. Pohlad Director
- -----------------------------
Robert C. Pohlad
/s/ Robert L. Priddy Director
- -----------------------------
Robert L. Priddy
/s/ Robert D. Swenson Director
- -----------------------------
Robert D. Swenson
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia on the 4th day of December, 1997.
AIRTRAN AIRWAYS, INC.
By: /s/ D. Joseph Corr
----------------------------------------
D. Joseph Corr, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on the 4th day of December,
1997.
/s/ D. Joseph Corr President (principal executive officer)
- ---------------------------
D. Joseph Corr and Director
/s/ Stephen C. Nevin Senior Vice President - Finance (principal
- ---------------------------
Stephen C. Nevin financial officer) and Director
/s/ David W. Lancelot Controller (principal accounting officer)
- ---------------------------
David W. Lancelot
/s/ John K. Ellingboe Director
- ---------------------------
John K. Ellingboe
/s/ Lewis H. Jordan Director
- ---------------------------
Lewis H. Jordan
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia on the 4th day of December, 1997.
VALUJET INVESTMENT CORP.
By: /s/ D. Joseph Corr
---------------------------------------
D. Joseph Corr, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on the 4th day of December,
1997.
/s/ D. Joseph Corr President (principal executive officer)
- ------------------------
D. Joseph Corr and Director
/s/ Leslie C. Head Secretary/Treasurer (principal financial
- ------------------------
Leslie C. Head and accounting officer)
/s/ Robert L. Priddy Director
- ------------------------
Robert L. Priddy
/s/ Lewis H. Jordan Director
- ------------------------
Lewis H. Jordan
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia on the 4th day of December, 1997.
VALUJET CAPITAL CORP.
By: /s/ D. Joseph Corr
---------------------------------------
D. Joseph Corr, President
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on the 4th day of December,
1997.
/s/ D. Joseph Corr President (principal executive
- --------------------------
D. Joseph Corr officer) and Director
/s/ Leslie C. Head Secretary/Treasurer (principal financial
- --------------------------
Leslie C. Head and accounting officer) and Director
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia on the 4th day of December, 1997.
VALUJET MANAGEMENT CORP.
By: /s/ D. Joseph Corr
---------------------------------------
D. Joseph Corr, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on the 4th day of December,
1997.
/s/ D. Joseph Corr President(principal executive officer)
- ----------------------------
D. Joseph Corr and Director
/s/ Leslie C. Head Secretary/Treasurer (principal financial
- ----------------------------
Leslie C. Head and accounting officer) and Director
/s/ Lewis H. Jordan Director
- ----------------------------
Lewis H. Jordan
/s/ Robert L. Priddy Director
- ----------------------------
Robert L. Priddy
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia on the 4th day of December, 1997.
VALUJET I, LTD.
By: /s/ Robert L. Priddy
---------------------------------------
Robert L. Priddy, President
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on the 4th day of December,
1997.
/s/ Robert L. Priddy President (principal executive
- ----------------------------
Robert L. Priddy officer) and Director
/s/ Leslie C. Head Secretary/Treasurer (principal accounting
- ----------------------------
Leslie C. Head officer)
/s/ D. Joseph Corr Director
- ----------------------------
D. Joseph Corr
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Pre-
Effective Amendment No. 1 to Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia on the 4th day of
December, 1997.
VALUJET II, LTD.
By: /s/ Robert L. Priddy
---------------------------------------
Robert L. Priddy, President
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on the 4th day of December,
1997.
/s/ Robert L. Priddy President (principal executive
- --------------------------------
Robert L. Priddy officer) and Director
/s/ Leslie C. Head Secretary/Treasurer (principal accounting
- --------------------------------
Leslie C. Head officer)
/s/ D. Joseph Corr Director
- --------------------------------
D. Joseph Corr
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Pre-
Effective Amendment No. 1 to Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia on the 4th day of
December, 1997.
VALUJET CORPORATE PARTNERS, L.P.
By: /s/ D. Joseph Corr
---------------------------------------
D. Joseph Corr, President and Chief
Executive Officer of ValuJet
Management Corp., General Partner
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on the 4th day of December,
1997.
/s/ D. Joseph Corr President (principal executive officer)
- -------------------------------
D. Joseph Corr and Director of ValuJet Management Corp.,
General Partner
/s/ Leslie C. Head Secretary/Treasurer (principal financial
- -------------------------------
Leslie C. Head and accounting officer) of ValuJet
Management Corp., General Partner
/s/ Lewis H. Jordan Director of ValuJet Management
- -------------------------------
Lewis H. Jordan Corp., General Partner
/s/ Robert L. Priddy Director of ValuJet Management Corp.,
- -------------------------------
Robert L. Priddy General Partner
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Atlanta, State of Georgia on the 4th day of December, 1997.
VALUJET RESERVATION PARTNERS, L.P.
By: /s/ D. Joseph Corr
---------------------------------------
D. Joseph Corr, President and Chief
Executive Officer of ValuJet Management
Corp., General Partner
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on the 4th day of December,
1997.
/s/ D. Joseph Corr President (principal executive officer) and
- ------------------------------
D. Joseph Corr Director of ValuJet Management Corp.,
General Partner
/s/ Leslie C. Head Secretary/Treasurer (principal financial
- ------------------------------
Leslie C. Head and accounting officer) of ValuJet
Management Corp., General Partner
/s/ Lewis H. Jordan Director of ValuJet Management Corp.,
- ------------------------------
Lewis H. Jordan General Partner
/s/ Robert L. Priddy Director of ValuJet Management Corp.,
- ------------------------------
Robert L. Priddy General Partner
II-13
<PAGE>
EXHIBIT 4.3
FORM OF EXCHANGE NOTE
<PAGE>
A-2
AIRTRAN AIRLINES, INC.
10 1/2% Senior Secured Note due 2001
U.S. $______________
No. _______ CUSIP No.______
AIRTRAN AIRLINES, INC., a Nevada corporation (herein called the
"Company", which term includes any successor Person under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
______________, or registered assigns, the principal sum of ____________________
Dollars on April 15, 2001, at the office or agency of the Company referred to
below, and to pay interest thereon on October 15, 1997 and semi-annually
thereafter, on April 15 and October 15 in each year, from August 13, 1997, or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, at the rate of 10 1/2% per annum, until the principal hereof
is paid or duly provided for, and (to the extent lawful) to pay on demand
interest on any overdue interest at the rate borne by the Notes from the date on
which such overdue interest becomes payable to the date payment of such interest
has been made or duly provided for. The interest so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as provided in
said Indenture, be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on the Regular Record
Date for such interest, which shall be the April 1 or October 1 (whether or not
a Business Day), as the case may be, next preceding such Interest Payment Date.
Any such interest not so punctually paid or duly provided for shall forthwith
cease to be payable to the Holder on such Regular Record Date, and such
defaulted interest, and (to the extent lawful) interest on such defaulted
interest at the rate borne by the Notes, may be paid to the Person in whose name
this Note (or one or more Predecessor Notes) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to Holders of Notes not
less than 10 days prior to such Special Record Date, or may be paid at any time
in any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon such notice as
may be required by such exchange, all as more fully provided in said Indenture.
The due and punctual payment of (and premium, if any) and interest on
this Note payable by the Company is irrevocably and unconditionally guaranteed,
to the extent set forth in the Indenture, by each of the Guarantors.
<PAGE>
A-3
Payment of the principal of (and premium, if any, on) and interest on
this Note will be made at the office or agency of the Company maintained for
that purpose in The City of New York, or at such other office or agency of the
Company as may be maintained for such purpose, in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts; provided, however, that payment of interest may be
made at the option of the Company (i) by check mailed to the address of the
Person entitled thereto as such address shall appear on the Note Register or
(ii) by wire transfer to an account maintained by the payee located in the
United States, provided that appropriate written wire instructions have been
provided prior to the relevant record date.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee or the Authenticating Agent referred to on the reverse hereof by
manual signature, this Note shall not be entitled to any benefit under the
Indenture, or be valid or obligatory for any purpose.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
AIRTRAN AIRLINES, INC.
By___________________________________
Name:
Title:
AIRTRAN HOLDINGS, INC., as Guarantor
By___________________________________
Name:
Title:
AIRTRAN AIRWAYS, INC.
By___________________________________
Name:
Title:
VALUJET MANAGEMENT CORP.,
as Guarantor
By___________________________________
Name:
Title:
<PAGE>
A-5
VALUJET CORPORATE
PARTNERS, L.P., as Guarantor
By___________________________________
Name:
Title:
VALUJET RESERVATION
PARTNERS, L.P., as Guarantor
By___________________________________
Name:
Title:
VALUJET INVESTMENT CORP.,
as Guarantor
By___________________________________
Name:
Title:
VALUJET CAPITAL CORP.,
as Guarantor
By___________________________________
Name:
Title:
<PAGE>
A-6
VALUJET I, LTD., as Guarantor
By___________________________________
Name:
Title:
VALUJET II, LTD., as Guarantor
By___________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Notes referred to in the within-mentioned
Indenture.
THE BANK OF NEW YORK,
Trustee
By:__________________________________
Authorized Signatory
_______________________
Dated:
<PAGE>
[Reverse of Note]
This Note is one of a duly authorized issue of securities of the
Company designated as its 10 1/2% Senior Secured Notes due 2001 (the "Notes"),
limited (except as otherwise provided in the Indenture referred to below) in
aggregate principal amount to $80,000,000, which may be issued under an
indenture (the "Indenture") dated as of August 13, 1997, among the Company, each
of the Guarantors party thereto and The Bank of New York, as trustee and
collateral trustee (the "Trustee" and the "Collateral Trustee," respectively,
which terms include any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties, obligations
and immunities thereunder of the Company, the Trustee and the Holders of the
Notes, and of the terms upon which the Notes are, and are to be, authenticated
and delivered.
On or before each payment date, the Company shall deliver or cause to
be delivered to the Trustee or the Paying Agent an amount in dollars sufficient
to pay the amount due on such payment date.
Upon the occurrence of a Change of Control, the Company will be
required to make an offer to purchase on the Purchase Date all outstanding Notes
at a purchase price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the date of
purchase, in accordance with the Indenture. Holders of Notes that are subject
to an offer to purchase will receive an offer from the Company pursuant to the
Indenture prior to any related Purchase Date.
If an Event of Default shall occur and be continuing, the principal of
all the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
The Indenture contains provisions for defeasance at any time of (a)
the entire indebtedness of the Company on this Note and (b) certain restrictive
covenants and the related Defaults and Events of Default, upon compliance by the
Company with certain conditions set forth therein, which provisions apply to
this Note.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders under the Indenture and the Notes at any
time by the Company and the Trustee with the consent of the Holders of a
specified percentage in aggregate principal amount of the Notes at the time
Outstanding. Additionally, the Indenture permits, without notice to or consent
of any Holder, the amendment thereof (a) to evidence the succession of another
person to the Company as obligor under the Indenture and the Notes, (b) to add
to the covenants of the Company for the benefit of the Holders of Notes or to
surrender any right or power conferred upon the Company by the Indenture, (c) to
add Events of Default for the
<PAGE>
A-8
benefit of the Holders of Notes, (d) to secure the Notes pursuant to the
provisions described in Section 1012 or 801 of the Indenture or otherwise, (e)
to provide for the acceptance of appointment by a successor Trustee, (f) to cure
any ambiguity, defect or inconsistency in the Indenture; provided such action
does not adversely affect the interests of Holders of Notes in any material
respect, or (g) to supplement any of the provisions of the Indenture to the
extent necessary to permit or facilitate defeasance and discharge of the Notes;
provided that such action shall not adversely affect the interests of the
Holders of Notes in any material respect.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, any
Guarantor or any other obligor on the Notes (in the event such Guarantor or
other obligor is obligated to make payments in respect of the Notes), which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed, subject to the subordination provisions of the
Indenture.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registerable on the Note
Register of the Company, upon surrender of this Note for registration of
transfer at the office or agency of the Company maintained for such purpose in
The City of New York, duly endorsed by, or accompanied by a written instrument
of transfer in form satisfactory to the Company and the Note Registrar duly
executed by, the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Notes, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, the Notes are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same. No
service charge shall be made for any registration of transfer or exchange or
redemption of Notes, but the Company may require payment of a sum sufficient to
pay all documentary, stamp or similar issue or transfer taxes or other
governmental charges payable in connection therewith.
Prior to the time of due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note is registered as the owner hereof
for all purposes, whether or not this Note be overdue, and neither the Company,
the Trustee nor any agent shall be affected by notice to the contrary.
THIS NOTE AND THE INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.
<PAGE>
A-9
Interest on this Note shall be computed on the basis of a 360-day year
of twelve 30-day months.
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
<PAGE>
EXHIBIT 5.1
December 3, 1997
AirTran Airlines, Inc.
1800 Phoenix Boulevard, Suite 126
Atlanta, Georgia 30349
Re: Registration Statement on Form S-4, File No. 333-37487
Ladies and Gentlemen:
We have acted as counsel for AirTran Airlines, Inc., a Nevada corporation (the
"Company"), in connection with the preparation and filing of a registration
statement on Form S-4, File No. 333-37487 (the "Registration Statement"), with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended. The Registration Statement relates to the exchange of up to an
aggregate principal amount of $80,000,000 of the Company's 10 1/2% Senior
Secured Notes Due 2001 (the "Exchange Notes") for up to an aggregate principal
amount of $80,000,000 of its outstanding 10 1/2% Senior Secured Notes Due 2001.
Capitalized terms used but not defined herein shall have the meanings as set
forth in the Registration Statement.
This letter is governed by, and shall be interpreted in accordance with, the
Legal Opinion Accord (the "Accord") of the American Bar Association Section of
Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, and this letter
should be read in conjunction with the Accord. Notwithstanding anything in the
Accord to the contrary, the Accord shall not be deemed to limit or otherwise
qualify any of the express qualifications, exceptions and limitations that are
set forth herein, each of which shall be cumulative of the Accord.
In connection with this opinion, we have relied as to matters of fact, without
investigation, upon certificates of public officials and others and upon
affidavits, certificates and written statements of directors, officers and
employees of, and the accountants for, the Company. We have also examined
originals or copies, certified or otherwise identified to our satisfaction, of
such instruments, documents and records as we have deemed relevant and necessary
to examine for the purpose of this opinion, including (a) the Registration
Statement, (b) the Articles of Incorporation of the Company, (c) the By-laws of
the Company, (d) the minutes of meetings of the Board of Directors of the
Company, (e) the Indenture for the Notes, and (f) the Form of Exchange Note.
In connection with this opinion, we have assumed the accuracy and completeness
of all documents and records that we have reviewed, the genuineness of all
signatures, the due authority of the parties signing such documents, the
authenticity of the documents submitted to us as originals and the conformity to
authentic original documents of all documents submitted to us as certified,
conformed or reproduced copies. We have further assumed that:
(i) All natural persons involved in the transactions contemplated by the
Registration Statement (the "Offering") and the Indenture have sufficient
legal capacity to enter into and perform their respective obligations under
the Indenture and to carry out their roles in the Offering.
<PAGE>
AirTran Airlines, Inc.
December __, 1997
Page 2
(ii) Each party involved in the Offering other than the Company
(collectively the "Other Parties") has satisfied all legal requirements
that are applicable to it to the extent necessary to make the Indenture
enforceable against it.
(iii) Each of the Other Parties has complied with all legal requirements
pertaining to its status as such related to its rights to enforce the
Indenture against the Company.
The opinions set forth below are limited to the laws of the State of Georgia and
the federal laws of the United States of America. We are not members of the
state bar of New York, and we are not experts on the laws of such state.
Further, we note that the Exchange Notes provide that they are to be governed by
the laws of the State of New York. For purposes of this letter, we have assumed
with your consent that, notwithstanding their express terms, the Exchange Notes
will be governed by the laws of the State of Georgia (without giving effect to
its conflicts of laws principles). We express no opinion on what laws will
actually govern the Exchange Notes.
Based upon and subject to the foregoing, it is our opinion that:
(1) The Company is a corporation duly incorporated and existing under the
laws of the State of Nevada.
(2) The Exchange Notes covered by the Registration Statement, when executed
in the manner set forth in the Indenture and issued and delivered in the manner
set forth in the Registration Statement, will be legally issued, will be binding
obligations of, and will be enforceable against the Company.
The General Qualifications apply to the opinions set forth above.
We hereby consent to the reference to our name in the Registration
Statement under the caption "Legal Matters" and further consent to the filing of
this opinion as Exhibit 5 to the Registration Statement.
Very truly yours,
ELLIS, FUNK, GOLDBERG, LABOVITZ
& DOKSON, P.C.
By : /s/ Robert B. Goldberg
---------------------------
Robert B. Goldberg
<PAGE>
EXHIBIT 8.1
December 3, 1997
AirTran Airlines, Inc.
1800 Phoenix Boulevard, Suite 126
Atlanta, Georgia 30349
Ladies and Gentlemen:
We have acted as counsel for AirTran Airlines, Inc., a Nevada corporation (the
"Company"), in connection with the offer by the Company to exchange (the
"Exchange Offer") its 10 1/2 Senior Secured Notes Due 2001 (the "Exchange
Notes"), for all outstanding 10 1/2% Senior Secured Notes Due 2001 (the
"Outstanding Notes"). This letter will confirm that we have advised the Company
with respect to certain United States federal income tax consequences of the
Exchange Offer, as described in the discussion set forth under the caption
"United States Federal Income Tax Consequences of the Exchange of Notes" in the
Prospectus included in the Registration Statement on Form S-4 (the "Registration
Statement"), filed on this date with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "Act"). Unless
otherwise defined, capitalized terms used herein shall have the respective
meanings ascribed to them in the Registration Statement.
We have based our opinions set forth in this letter on the provisions of the
Internal Revenue Code of 1986, as presently amended (the "Code"), existing
Treasury regulations thereunder (the "Regulations"), published rulings and
practices of the Internal Revenue Service (the "Service") and court decisions.
It should be noted that the federal income tax consequences discussed in this
letter might be modified by legislative, judicial or administrative action at
any time, and such action might be applied retroactively or otherwise in a
manner that might alter such tax consequences.
Based on the assumptions and subject to the qualifications and limitations set
forth therein, (i) we adopt the discussion set forth under the caption "United
States Federal Income Tax Consequences of the Exchange of Notes" in the
Registration Statement as our opinion with respect to the material United States
federal income tax consequences of the Exchange Offer, and (ii) in our opinion
such discussion accurately describes the material United States federal income
tax consequences of the exchange of the Notes. Such discussion is limited to
the material United States federal income tax consequences discussed therein,
and it does not purport to discuss all possible federal income tax consequences
or any state, local or foreign tax consequences, of the exchange of the Notes.
Except as stated above, we express no opinion with respect to any other matter.
We are furnishing this opinion to you solely in connection with the Exchange
Offer, and this opinion is not to be relied upon, circulated, quoted, or
otherwise referred to for any other purpose.
<PAGE>
AirTran Airlines, Inc.
December __, 1997
Page 2
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement, to the use of our name in the Registration Statement and
to the reference to us and this opinion letter in the Registration Statement.
By giving such consent, we do not thereby admit that we are "experts" with
respect to this letter, as that term is used in the Act, or the rules and
regulations of the SEC thereunder.
Very truly yours,
ELLIS, FUNK, GOLDBERG, LABOVITZ
& DOKSON, P.C.
By : /s/ Robert B. Goldberg
-------------------------------
Robert B. Goldberg
<PAGE>
EXHIBIT 12
Statement Re: Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Period from
Inception
(July 10,
1992) to Year Ended Nine Months Ended
December 31, December 31 September 30
1992 1993 1994 1995 1996 1996 1997
------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except ratios)
Pretax income (loss) from
continuing operations $ (23) $(894) $33,581 $107,826 $(65,932) $(33,025) $(62,459)
Interest - 112 2,388 6,579 22,186 15,822 19,854
Interest portion of rental expense - 45 1,575 4,172 5,275 2,936 3,166
------------------------------------------------------- ---------------------
Earnings $ (23) $(737) $37,544 $118,577 $(38,471) $(14,267) $(39,439)
======================================================== ====================
Interest $ - $ 112 $ 2,388 $ 6,579 $ 22,186 $ 15,822 $ 19,854
Interest portion of rental expense - 45 1,575 4,172 5,275 2,936 3,166
------------------------------------------------------- ---------------------
Fixed Charges $ - $ 157 $ 3,963 $ 10,751 $ 27,461 $ 18,758 $ 23,020
======================================================= =====================
Ratio of Earnings to Fixed Charges - (1) -(1) 9.5x 11.0x -(1) -(1) -(1)
======================================================= =====================
</TABLE>
(1) For the periods ended December 31, 1992, 1993, and 1996 and for the nine
months ended September 30, 1996 and 1997, the Company's earnings were
insufficient to cover fixed charges by $23,000, $894,000, $65,932,000,
$33,025,000 and $62,459,000 respectively.
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 10, 1997, except for Note 4 as to which the
date is March 27, 1997, included in the Registration Statement (Form S-4) and
related Prospectus of AirTran Holdings, Inc. (formerly ValuJet, Inc.) for the
registration of $80,000,000 of AirTran Airlines, Inc.'s 10 1/2 % Senior Secured
Notes due 2001.
We also consent to the incorporation by reference therein of our report dated
February 10, 1997, except for Note 4 as to which the date is March 27, 1997,
with respect to the financial statement schedule of ValuJet, Inc. for the years
ended December 31, 1996, 1995 and 1994 included in the Annual Report (Form 10-K)
for 1996 filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Atlanta, Georgia
December 1, 1997
