[MIDWAY AIRLINES LOGO APPEARS HERE]
1998-1 PASS THROUGH TRUSTS
PASS THROUGH CERTIFICATES, SERIES 1998-1
OFFER TO EXCHANGE PASS THROUGH CERTIFICATES SERIES 1998-1,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING PASS THROUGH CERTIFICATES, SERIES 1998-1
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON APRIL 2, 1999, UNLESS EXTENDED.
We hereby offer, upon the terms and conditions described in this Prospectus, to
exchange all of our outstanding Pass Through Certificates, Series 1998-1 ("OLD
CERTIFICATES") for our registered Pass Through Certificates, Series 1998-1
("NEW CERTIFICATES"). The terms of the New Certificates are identical to the
terms of the Old Certificates, except that the New Certificates are registered
under the Securities Act of 1933, as amended, and, therefore, are generally
freely tradeable. We sometimes refer to the Old Certificates and the New
Certificates collectively as the "CERTIFICATES".
Each Certificate represents a fractional undivided interest in one of the four
Midway Airlines 1998-1 Pass Through Trusts we formed in August 1998 to acquire
equipment notes expected to be issued in connection with the financing of eight
new Canadair Regional Jet Series 200-ER aircraft which we expect to lease or
acquire. The Old Certificates were issued in four classes in the amounts and
bearing interest and having expected final distribution dates as set forth in
the table below. New Certificates of the same class will be issued in respect
of Old Certificates tendered for exchange.
<TABLE>
<CAPTION>
PASS THROUGH PRINCIPAL INTEREST FINAL EXPECTED
CERTIFICATES AMOUNT RATE DISTRIBUTION DATE
- -------------------------- ------------------- ---------- ------------------
<S> <C> <C> <C>
1998-1A ................ $ 58,426,000.00 7.14% January 2, 2015
1998-1B ................ 25,266,000.00 8.14 January 2, 2013
1998-1C ................ 15,055,475.59* 8.92 January 2, 2006
1998-1D ................ 5,502,000.00 8.86 January 2, 2003
</TABLE>
---------
* We originally issued $20,528,000 principal amount of Class C
Certificates. On January 2, 1999, we repaid $5,472,524.41 principal amount
of the Class C Certificates in accordance with the terms of the Class C
Trust.
TERMS OF THE EXCHANGE OFFER
o The Exchange Offer expires at 5:00 p.m. New York City time on April 2,
1999, unless extended.
o All outstanding Old Certificates that are validly tendered and not
validly withdrawn will be exchanged for New Certificates.
o Tenders of Old Certificates may be withdrawn at any time prior to the
expiration of the Exchange Offer.
o The Exchange Offer is not subject to any condition, other than that the
Exchange Offer not violate applicable law or any applicable interpretation
of the Staff of the Securities and Exchange Commission.
o The Company and the Trusts will not receive any proceeds from the
Exchange Offer.
o The exchange of Old Certificates for New Certificates will not be a
taxable event for U.S. federal income tax purposes.
o If you fail to tender your Old Certificates, you will continue to hold
unregistered securities and your ability to transfer them could be
adversely affected.
o No public market currently exists for the Certificates. We do not intend
to list the New Certificates on any securities exchange and, therefore, no
active public market is anticipated.
---------------
SEE "RISK FACTORS" COMMENCING ON PAGE 14 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------
THE DATE OF THIS PROSPECTUS IS MARCH 4, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
------------
<S> <C>
Where You Can Get More Information ................................................... ii
Note Regarding Forward-Looking Statements ............................................ ii
Summary .............................................................................. 1
Risk Factors ......................................................................... 14
The Exchange Offer ................................................................... 23
Certain Federal Income Tax Consequences .............................................. 30
Use of Proceeds ...................................................................... 32
Capitalization ....................................................................... 32
Selected Financial and Operating Data and Glossary ................................... 33
Management's Discussion and Analysis of Financial Condition and Results of Operations 37
Business ............................................................................. 46
Management ........................................................................... 55
Description of the New Certificates .................................................. 56
Description of the Deposit Agreements ................................................ 71
Description of the Escrow Agreements ................................................. 72
Description of the Liquidity Facilities .............................................. 73
Description of the Intercreditor Agreement ........................................... 76
Description of the Aircraft and the Appraisals ....................................... 79
Description of the Equipment Notes ................................................... 82
ERISA Considerations ................................................................. 98
Plan of Distribution ................................................................. 100
Legal Matters ........................................................................ 101
Experts .............................................................................. 101
Index to Audited Financial Statements ................................................ F-1
Index of Certain Defined Terms .................................................. Appendix I
Appraisal Reports ............................................................... Appendix II
</TABLE>
---------------
Brand names and trademarks appearing in this Prospectus are the property of
their holders.
---------------
i
<PAGE>
WHERE YOU CAN GET MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "COMMISSION"). You
may read and copy any of the information we file with the Commission at the
Commission's public reference rooms at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C., at 7 World Trade Center, 13th Floor, New York, New York 10048
and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of filed documents can also be obtained by mail from the
Public Reference Section of the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. You may call the Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. Filed documents are also available to the public at the
Commission's web site at http://www.sec.gov.
In the event that we are no longer required to do so, we have agreed to
file with the Commission (unless the Commission will not accept such a filing)
and provide to the Trustee and the holders of Certificates annual reports and
the information, documents and other reports otherwise required pursuant to
Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT").
We have filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), covering the New
Certificates to be issued in the Exchange Offer. As permitted by the
Commission's rules, this Prospectus omits certain information included in the
Registration Statement. For further information pertaining to the Certificates,
we refer you to the Registration Statement, including its exhibits. Any
statement made in this Prospectus concerning the contents of any contract,
agreement or other document is not necessarily complete. If we have filed any
such contract, agreement or other document as an exhibit to the Registration
Statement, you should read the exhibit for a more complete understanding of the
document or matter involved. Each statement regarding a contract, agreement or
other document is qualified in its entirety by reference to the actual
document. You may review and obtain a copy of this Registration Statement as
set forth in the first paragraph above.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Commission allows us to "incorporate by reference" the information
contained in documents we file with the Commission (File No. 1-9329), which
means that we can disclose important information to you by referring you to
those documents. The information incorporated by reference is considered to be
part of this Prospectus, and later information that we file with the Commission
will automatically update and supersede this information. We incorporate by
reference our Annual Report on Form 10-K for the year ended December 31, 1998,
as amended by the Form 10-K/A filed on March 2, 1999, and any future filings we
make with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act.
You may request a copy of our filings, at no cost, by writing or
telephoning our Corporate Secretary at the following address:
Midway Airlines Corporation
300 West Morgan Street, Suite 1200
Durham, North Carolina 27701
(919) 956-4800
NOTE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS SUCH TERM
IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) ABOUT OUR
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS THAT ARE BASED ON OUR
CURRENT AND FUTURE EXPECTATIONS. YOU CAN FIND MANY OF THESE STATEMENTS BY
LOOKING FOR WORDS SUCH AS "ESTIMATE," "PROJECT," "BELIEVE," "ANTICIPATE,"
"INTEND," "EXPECT" AND SIMILAR EXPRESSIONS. SUCH STATEMENTS REFLECT OUR CURRENT
VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED UNDER "RISK FACTORS," THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING
STATEMENTS. YOU ARE CAUTIONED THAT NO FORWARD-LOOKING STATEMENT IS A GUARANTEE
OF FUTURE PERFORMANCE AND YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS.
WE DO NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS WHICH MAY CAUSE
ACTUAL RESULTS TO DIFFER FROM THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS PROSPECTUS.
ii
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(This Page Intentionally Left Blank)
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED IN THIS PROSPECTUS,
BUT DOES NOT CONTAIN ALL MATERIAL FEATURES OF THE EXCHANGE OFFER. IT MAY NOT
CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. WE URGE YOU TO
CAREFULLY READ AND REVIEW THE ENTIRE PROSPECTUS BEFORE MAKING ANY DECISION TO
PARTICIPATE IN THE EXCHANGE OFFER. EXCEPT AS OTHERWISE REQUIRED BY THE CONTEXT,
REFERENCES IN THIS PROSPECTUS TO "WE," "US," "MIDWAY" OR THE "COMPANY" MEAN
MIDWAY AIRLINES CORPORATION. WE PURCHASED THE MIDWAY NAME FROM MIDWAY AIRLINES,
INC., A CARRIER WHICH SOUGHT BANKRUPTCY PROTECTION IN 1991. WE ARE OTHERWISE
NOT AFFILIATED OR IN ANY WAY CONNECTED WITH MIDWAY AIRLINES, INC. FOR PURPOSES
OF ANY PRO FORMA FINANCIAL INFORMATION PROVIDED HEREIN, IT IS ASSUMED THAT THE
EIGHT AIRCRAFT TO BE FINANCED WITH THE PROCEEDS FROM THE SALE OF THE OLD
CERTIFICATES WILL BE LEASED AIRCRAFT, OF WHICH SIX LEASED AIRCRAFT HAVE BEEN
FINANCED AS OF THE DATE OF THIS PROSPECTUS. THE TERM "OLD CERTIFICATES" REFERS
TO THE MIDWAY AIRLINES PASS THROUGH CERTIFICATES, SERIES 1998-1 THAT WERE
ISSUED ON AUGUST 13, 1998. THE TERM "NEW CERTIFICATES" REFERS TO THE MIDWAY
AIRLINES PASS THROUGH CERTIFICATES, SERIES 1998-1 WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT AND ARE BEING OFFERED IN EXCHANGE FOR THE OLD
CERTIFICATES. THE TERM "CERTIFICATES" REFERS TO THE OLD CERTIFICATES AND NEW
CERTIFICATES COLLECTIVELY. CERTAIN CAPITALIZED TERMS USED HEREIN ARE DEFINED
ELSEWHERE IN THIS PROSPECTUS ON THE PAGES INDICATED IN THE "INDEX OF CERTAIN
DEFINED TERMS" ATTACHED HERETO AS APPENDIX I.
THE EXCHANGE OFFER
On August 13, 1998, Trusts formed by us completed the private offering of
$109,722,000 principal amount of Pass Through Certificates, Series 1998-1.
In connection with the sale of the Old Certificates we entered into a
Registration Rights Agreement in which we agreed, among other things, to
deliver to you this Prospectus and to complete the Exchange Offer on or prior
to March 11, 1999. As a holder of outstanding Old Certificates, you are
entitled to exchange in the Exchange Offer your Old Certificates for a new
series of Certificates with substantially identical terms which have been
registered under the Securities Act. If the Exchange Offer is not completed on
or prior to March 11, 1999, the interest rate on the Certificates will be
increased by 0.5% per year until the time that the Exchange Offer is
consummated. You should read the discussion under the heading " -- Summary of
Terms of the New Certificates" and "Description of the New Certificates" for
further information regarding the registered Certificates.
We believe that the New Certificates issued in the Exchange Offer may be
resold by you without compliance with the registration and prospectus delivery
provisions of the Securities Act, subject to certain conditions. Following the
Exchange Offer, any Old Certificates held by you that are not exchanged in the
Exchange Offer will continue to be subject to the existing restrictions on
transfer on the Old Certificates and, except in certain circumstances, we will
have no further obligation to you to provide for registration under the
Securities Act of transfers of outstanding Old Certificates held by you. You
should read the discussion under the headings " -- Summary of the Exchange
Offer" and "The Exchange Offer" for further information regarding the Exchange
Offer and the resale of Certificates.
THE COMPANY
We are a jet airline operator serving 19 destinations in 12 states from
our hub at Raleigh-Durham International Airport ("RDU"), where we currently
carry more passengers and operate more flights than any other airline. We focus
on attracting and retaining business travelers by providing frequent non-stop
service from RDU to major business destinations, maintaining a high level of
service and offering American Airlines, Inc. ("AMERICAN") AAdvantage(R)
frequent flyer miles. We currently operate one of the youngest all jet fleets
in the United States with ten 98-seat Fokker F-100s, 11 50-seat Canadair
Regional Jets ("CRJS") and one 148-seat Airbus A320. We have added the 11 CRJs
to our fleet in the period from December 1997 through January 1999. To further
serve our market niche, we have firm orders for 12 additional CRJs to be
delivered by March 2000. We also have options to acquire up to 17 additional
CRJs with delivery dates for the first seven of these aircraft extending over a
one-year period beginning in the first half of 2000 and with the delivery dates
for the remaining ten of these aircraft beginning in March 2002. We intend to
remove from service two Fokker F-100s in the first half of 1999 at the end of
their lease term and the Airbus A320 in June 1999. We anticipate that the 12
additional CRJs on firm order will expand our capacity as measured by departing
seats by 15%, taking into account the aircraft to be removed from service as
described above. We intend to use these new CRJs to serve our existing
destinations with greater frequency and to enter new routes, providing our
customers with more non-stop jet destinations.
In March 1995, we moved our base of operations from Chicago to RDU
following American's reduction in service in the Raleigh-Durham market. Our
success to date at RDU has been driven by rapid market growth, our efficient
cost structure and our ability to serve routes with regional jets, among other
factors. The Raleigh-Durham area is rapidly expanding,
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with air travel having grown by an average of 9% per year from 1991 to 1997,
compared to 5% for the United States as a whole. The area is home to three
major universities, the state capital and Research Triangle Park, a 6,850-acre
business center with more than 130 high technology and other research oriented
companies. We believe that the area's growing business community offers
opportunities for expansion at RDU with regional jets and yet does not generate
sufficient passenger volume to attract significant competition from low fare,
low cost airlines. RDU offers modern facilities with room for us to grow. We
sublease or have options to sublease 19 of the 27 gates at one of RDU's two
terminals, Terminal C. The remaining eight gates in Terminal C are used or
controlled by American and Corporate Airlines, our code sharing commuter
partner. Substantially all of the gates at RDU's other terminal are currently
occupied.
We maintain a significant relationship with American. Part of this
relationship includes contractual arrangements with American that allow us to
offer AAdvantage(R) miles to, and accept AAirpass(R) tickets, American first
class upgrades and AAdvantage(R) reward travel from, our passengers. We also
contract with American for important services, including yield management,
maintenance, ground handling and fueling. We believe the relationship benefits
American as well, by building customer loyalty through the use of AAdvantage(R)
miles by our customers, by providing sublease revenues to help offset
American's lease payments at RDU and by providing revenue through our use of
various American services.
In February 1997, we completed a recapitalization (the
"RECAPITALIZATION"), resulting in a change in ownership and management. Robert
R. Ferguson III, former chief executive officer of Continental Airlines, Inc.,
was named Chairman of the Board, President and Chief Executive Officer of the
Company. The Recapitalization resulted in reductions of approximately $12
million in annual expenses, including (i) a decrease in aircraft rent expense,
(ii) a decrease in facility rentals, (iii) a decrease in the cost of certain
services and (iv) a reduction in net interest expense. In addition to the
Recapitalization, we had previously discontinued flying certain unprofitable
long-haul routes. Since the Recapitalization, we have experienced a significant
improvement in operating performance and financial condition. We believe that
our improved results are attributable to the benefits realized from the
Recapitalization, route restructuring, improved yield management, increased
passenger demand and a generally strong economic environment.
In December 1997, we completed an initial public offering of our common
stock at $15.50 per share. Of the 4,830,000 shares of common stock sold,
2,699,320 were sold by us and the remaining 2,130,680 shares were sold by
certain of our stockholders. We received approximately $37.7 million from our
sale of shares after deducting underwriters' discount and offering expenses.
Our executive offices are located at 300 West Morgan Street, Suite 1200,
Durham, North Carolina 27701, and our telephone number at that location is
(919) 956-4800.
OPERATING STRATEGY
The principal elements of our operating strategy are:
o ATTRACT HIGH-YIELDING LOCAL BUSINESS TRAVELERS. Based on 1998 data, our
average scheduled passenger fare revenue for each mile a scheduled revenue
passenger is carried (our yield) was higher than the yields of many other
jet operators. To attract high-yielding passengers, we have designed our
operations to serve the needs of business travelers flying to and from
Raleigh-Durham. We have developed relationships with major corporations
located in the Raleigh-Durham area, and we offer these business travelers
frequent non-stop jet service, as well as an attractive, high quality
in-flight product and AAdvantage(R) frequent flyer miles. We believe this
focus on the needs of business travelers has produced a loyal customer base
and a higher percentage of business travelers than other carriers.
o MAINTAIN HIGH QUALITY OPERATIONS. Because our business customers require
consistent, dependable performance, we are committed to meeting the highest
operational standards. Our completion factor (percent of scheduled flights
actually operated) and on-time performance rate (percent of flights
arriving within 15 minutes of schedule) were 99.0% and 84.0% for the full
year ended December 31, 1998, respectively, and 99.0% and 83.4% for the
full year ended December 31, 1997, respectively; we believe that these
performance levels were higher than those of the major carriers during the
same periods. We achieved these performance measures by operating one of
the youngest all jet fleets in the United States, with an average age of
2.6 years as of December 31, 1998, by maintaining spare aircraft to ensure
a high completion factor and through our commitment to high quality
maintenance, including the use of vendors such as American and affiliates
of Bombardier Inc. and of Rolls-Royce plc ("ROLLS-ROYCE").
o PROVIDE QUALITY CUSTOMER SERVICE. We seek to generate a high degree of
loyalty and customer preference by providing high quality in-flight
amenities and customer service. We emphasize customer service from
reservation to destination and offer tangible amenities such as greater leg
room, leather seating (on all aircraft except our single A320), gourmet
coffee, quality snacks and a quiet, modern all jet fleet.
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o CONTINUE TO REDUCE OPERATING COSTS. Because of our focus on business
travelers and premium service, our small aircraft and our relatively short
average stage length, our yield and our cost per available seat mile are
higher than industry averages. We are committed to maintaining a
competitive cost structure and have identified a number of cost reduction
opportunities. In addition to the cost savings resulting from the
Recapitalization, we have entered into new maintenance contracts, reduced
dependence on third-party vendors for flight reservation call handling,
reduced the cost of credit card processing and reduced certain insurance
costs. We have also lowered the travel agency base commission rate and
implemented an automated voice-response flight information system. Although
the introduction of regional jet aircraft will shorten average stage
length, we believe it should result in additional cost benefits, including
greater economies of scale and more efficient utilization of facilities and
personnel.
GROWTH STRATEGY
We believe that RDU is relatively under-served with respect to non-stop
flights. To address this need and to better serve our core business customers,
since December 1997 we placed in service 11 recently acquired 50-seat CRJs. We
have firm orders for 12 additional CRJs, which are scheduled to be delivered in
1999 and early 2000. We also have options to acquire up to 17 additional CRJs
with delivery dates for the first seven of these aircraft extending over a
one-year period beginning in the first half of 2000 and with the delivery dates
for the remaining ten of these aircraft beginning in March 2002.
The principal elements of our growth strategy are:
o INCREASE FREQUENCIES TO CURRENT MARKETS. Our market share and route
profitability are greatest on routes where we offer the same or better
frequency and timing of flights compared to our competitors. Our core
customers are business travelers who generally pay higher fares and select
an airline primarily based on convenience of schedule. Introduction of the
new CRJs has enabled us to increase frequency and offer more convenient
scheduling to current markets, without necessarily increasing overall
capacity in these markets. With the delivery of the 11 new CRJs, we have
increased frequency to Boston, Ft. Lauderdale, Hartford, Newark, Orlando,
Philadelphia, Stewart/Newburgh and Tampa.
o INCREASE NUMBER OF MARKETS SERVED. We have identified a number of new
market opportunities that we believe can support service primarily on an
"origination and destination" (I.E., local passenger) basis. We intend to
begin service from RDU to several of the most attractive of these markets
with the future delivery of the CRJs. In addition, we believe that existing
demand on a number of routes currently served with 19-seat turboprop
aircraft by our code sharing commuter partner, Corporate Airlines, can
support 50-seat CRJ service. We believe that most customers have a strong
preference for jet service, and will often pay a premium or choose a
connecting flight to avoid flying on turboprop aircraft. We anticipate
attracting these customers with the introduction of the CRJs in these
markets. Four of the new CRJs have been utilized to initiate service to
Columbus, Ohio, Indianapolis, Indiana, Jacksonville, Florida and New
Orleans, Louisiana. Available CRJ aircraft time has also been used to
initiate supplemental (one round-trip per day) CRJ service to Charleston,
Columbia and Myrtle Beach, South Carolina, all of which are served by
Corporate Airlines at other times of the day.
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SUMMARY OF TERMS OF CERTIFICATES (1)
<TABLE>
<CAPTION>
CLASS A
CERTIFICATES
---------------------
<S> <C>
Aggregate Face Amount $58,426,000
Ratings:
Moody's ....................................... Baa1
Standard & Poor's ............................. A-
Initial Loan to Aircraft Value
(cumulative) (2) .............................. 36.7%
Expected Principal Distribution Window
(in years) .................................... 1.4-16.4
Initial Average Life (in years) ................ 11.1
Regular Distribution Dates ..................... January 2
and July 2
Final Expected Distribution Date ............... January 2, 2015
Final Legal Distribution Date .................. July 2, 2016
ss. 1110 Protection (3) ........................ Yes
3 semiannual
Liquidity Facility Coverage .................... interest payments
Initial Liquidity Facility Amount at July 2,
1999 (4) ...................................... $6,695,620
<CAPTION>
CLASS B CLASS C CLASS D
CERTIFICATES CERTIFICATES CERTIFICATES
--------------------- --------------------- ------------------
<S> <C> <C> <C>
Aggregate Face Amount $25,266,000 $20,528,000 $5,502,000
Ratings:
Moody's ....................................... Ba1 Ba3 B2
Standard & Poor's ............................. BBB- BB- B
Initial Loan to Aircraft Value
(cumulative) (2) .............................. 52.6% 65.5% 69.0%
Expected Principal Distribution Window
(in years) .................................... 1.4-14.4 0.4-7.4 1.4-4.4
Initial Average Life (in years) ................ 8.8 3.4 3.1
Regular Distribution Dates ..................... January 2 January 2 January 2
and July 2 and July 2 and July 2
Final Expected Distribution Date ............... January 2, 2013 January 2, 2006 January 2, 2003
Final Legal Distribution Date .................. July 2, 2014 July 2, 2007 January 2, 2003
ss. 1110 Protection (3) ........................ Yes Yes Yes
3 semiannual 3 semiannual
Liquidity Facility Coverage .................... interest payments interest payments None
Initial Liquidity Facility Amount at July 2,
1999 (4) ...................................... $3,274,474 $2,127,339 NA
</TABLE>
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(1) To date, the Trusts have purchased $82,122,000 principal amount of
Equipment Notes to finance a portion of the purchase price of the six
Aircraft leased to date by Midway. The following summary is based on the
actual terms of these outstanding Equipment Notes as well as the expected
terms of the Equipment Notes expected to be issued to finance a portion of
the purchase price of the remaining two Aircraft which Midway intends to
lease. On January 2, 1999, we repaid $5,472,524.41 principal amount of the
Class C Certificates in accordance with the terms of the Class C Trust.
(2) Determined as of July 2, 1999 assuming that all Aircraft are delivered
prior to such date, that the maximum principal amount of Equipment Notes
has been issued with respect to all Aircraft and that the expected
principal payments with respect to such Equipment Notes have been paid.
The Mandatory Economic Terms require that the initial loan to Aircraft
value for each Aircraft as of its delivery date be not in excess of 36.7%
in the case of the Series A Equipment Notes, 52.6% in the case of the
Series B Equipment Notes, 65.5% in the case of the Series C Equipment
Notes and 69.0% in the case of the Series D Equipment Notes.
(3) Following delivery of the related Aircraft, the benefits of Section 1110 of
the Bankruptcy Code ("SECTION 1110") will be available to the Loan
Trustees.
(4) For each Class of Certificates (other than the Class D Certificates), the
amount of the Liquidity Facility covers three successive semiannual
interest payments or, in the case of the initial period, the 18-month
period following the Issuance Date (without regard to any future payments
of principal on such Certificates), except that the Liquidity Facilities
with respect to each Trust will not cover interest payable by the
Depositary on the Deposits relating to such Trust. The scheduled payments
of interest on the Equipment Notes held by a Trust and on the Deposits
relating to such Trust, taken together, will be sufficient to pay accrued
interest on the outstanding Certificates issued by such Trust at the rate
per annum applicable thereto. In aggregate for Class A, B and C
Certificates, the amount of the Liquidity Facilities at July 2, 1999, the
first Regular Distribution Date after the expected Delivery Period
Termination Date, assuming that Equipment Notes in the maximum principal
amount with respect to all Aircraft are acquired by the Trusts and that no
interest or principal due on July 2, 1999 is paid, will be $12,097,433.
See "Description of the Liquidity Facilities."
4
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CASH FLOW STRUCTURE
Set forth below is a diagram illustrating the structure of the
Certificates and certain cash flows.
<TABLE>
<S> <C> <C>
Midway Airlines Corporation
Lease Rental Payments Assigned
by Lessors on Leased
Aircraft and Mortgage payments
on Owned Aircraft
Loan Trustees
for Leased aircraft and owned Aircraft
Excess Rental Payments Series A Series B Series C Series D
Equipment Equipment Equipment Equipment
Notes Notes Notes Notes
Lessors for
Leased Aircraft
Equipment Note
Payments on all Aircraft
Advances and
Depositary (2) Subordination Reimbursements Liquidity
(if any) Providers(3)
Interest Principal, Premium (if any)
Payments on and Interest Distributions
Deposits
Escrow Pass Through Pass Through Pass Through Pass Through
Agent Trustee for Trustee for Trustee for Trustee for
Class A Trust Class B Trust Class C Trust Class D Trust
Holders of Holders of Holders of Holders of
Class A Class B Class C Class D
Certificates Certificates Certificates Certificates
</TABLE>
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(1) Each Leased Aircraft will be subject to a separate Lease and a related
Indenture; each Owned Aircraft will be subject to a separate Indenture.
(2) Funds held as Deposits relating to each Trust will be withdrawn to purchase
Equipment Notes on behalf of such Trust from time to time during the
Delivery Period as each Aircraft is delivered to us. If any funds remain
as Deposits with respect to any Trust at the Delivery Period Termination
Date, such funds will be withdrawn by the Escrow Agent and distributed to
the holders of the Certificates issued by such Trust, together with
accrued and unpaid interest thereon and a Deposit Make-Whole Premium
payable by us with respect to the remaining Deposits applicable to such
Trust. However, we are not obligated to pay the premium with respect to
unused Deposits attributable to the failure of an Aircraft to be delivered
prior to the Delivery Period Termination Date due to any reason not caused
by our fault or negligence. No interest will accrue with respect to the
Deposits after they have been fully withdrawn. See "Description of the
Deposit Agreements."
(3) The initial amount of the Liquidity Facilities for each Trust (other than
the Class D Trust), taken together, will cover three consecutive
semiannual interest payments with respect to the Certificates issued by
such Trust, except that the Liquidity Facilities will not cover interest
payable by the Depositary on the Deposits relating to such Trust. The
scheduled payments of interest on the Equipment Notes and on the Deposits
relating to a Trust, taken together, will be sufficient to pay an amount
equal to accrued interest on the outstanding Certificates of such Trust at
the applicable rate per annum. See "Description of the Liquidity
Facilities."
5
<PAGE>
SUMMARY OF THE EXCHANGE OFFER
Securities Offered.............. $104,249,475.59 aggregate principal amount
of Pass Through Trust Certificates, Series
1998-1 which have been registered under the
Securities Act (the "NEW CERTIFICATES").
Registration Rights Agreement... You are entitled to exchange your Old
Certificates for registered New Certificates
with substantially identical terms. The
Exchange Offer is intended to satisfy this
right. After the Exchange Offer is complete,
you will no longer be entitled to any
exchange or registration rights with respect
to your Old Certificates. Under certain
circumstances, certain holders of outstanding
Old Certificates may require us to file a
shelf registration statement under the
Securities Act.
The Exchange Offer.............. We are offering to exchange $1,000
principal amount of New Certificates for each
$1,000 principal amount of outstanding Old
Certificates which were issued by us in
August 1998 in a private offering. In order
to be exchanged, an outstanding certificate
must be properly tendered and accepted. All
outstanding certificates that are validly
tendered and not validly withdrawn will be
exchanged.
As of this date, there is $104,249,475.59
principal amount of Old Certificates
outstanding, of which $58,426,000 are Class
A Certificates, $25,266,000 are Class B
Certificates, $15,055,475.59 are Class C
Certificates and $5,502,000 are Class D
Certificates. If you elect to participate in
the Exchange Offer, you will receive New
Certificates of the same class as your Old
Certificates. We will issue the New
Certificates on or promptly after the
expiration of the Exchange Offer.
Resale of the New Certificates... Based on the interpretations by the Staff
of the Commission, as set forth in no-action
letters issued to certain third parties
unrelated to us, we believe that the New
Certificates issued in the Exchange Offer may
be offered for resale, resold and otherwise
transferred by you without compliance with
the registration and prospectus delivery
provisions of the Securities Act provided
that:
o the New Certificates issued in the Exchange
Offer are being acquired by you in the
ordinary course of your business;
o you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to
participate in the distribution of the New
Certificates issued to you in the Exchange
Offer; and
o you are not an "affiliate" of our company.
However, the Commission has not considered
the Exchange Offer in the context of a
no-action letter and we cannot be sure the
Staff of the Commission would make a similar
determination with respect to the Exchange
Offer as in such other circumstances. If our
belief is inaccurate and you transfer any
New Certificate issued to you in the
Exchange Offer without delivering a
prospectus meeting the requirements of the
Securities Act or without an exemption of
your New Certificate from such requirements,
you may incur liability under the Securities
Act. We do not assume, or indemnify you
against, such liability.
Each broker-dealer that is issued New
Certificates in the Exchange Offer for its
own account in exchange for Old
Certificates, which were acquired by such
broker-dealer as a result of market-making
or other trading activities, must
acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act in connection
6
<PAGE>
with any resale of the New Certificates
issued in the Exchange Offer. A
broker-dealer may use this Prospectus for an
offer to resell, resale or other retransfer
of the New Certificates, issued to it in the
Exchange Offer for a period of 90 days
following the Expiration Date.
The Exchange Offer is not being made to, nor
will we accept surrenders for exchange from,
holders of Old Certificates in any
jurisdiction in which this Exchange Offer or
the acceptance thereof would not be in
compliance with the applicable securities or
"blue sky" laws of such jurisdiction.
Expiration Date.................. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on April 2, 1999, unless
extended, in which case the term "Expiration
Date" shall mean the latest date and time to
which we extend the Exchange Offer.
Conditions to the
Exchange Offer.................. The Exchange Offer is subject to certain
customary conditions, which may be waived by
us. The Exchange Offer is not conditioned
upon any minimum principal amount of Old
Certificates being tendered.
Procedures for Tendering
Old Certificates................ If you wish to tender your certificates for
exchange pursuant to the Exchange Offer you
must transmit to FMB Bank (the successor in
interest to The First National Bank of
Maryland), as Exchange Agent, on or before
the Expiration Date:
either
o a properly completed and duly executed
Letter of Transmittal, which accompanies
this Prospectus, or a facsimile of the
Letter of Transmittal, together with your
Old Certificates and any other required
documentation, to the Exchange Agent at the
address set forth in this Prospectus under
the heading "The Exchange Offer -- Exchange
Agent," and on the front cover of the
Letter of Transmittal; or
o a computer generated message transmitted by
means of The Depository Trust Company's
Automated Tender Offer Program system and
received by the Exchange Agent and forming
a part of a confirmation of book entry
transfer in which you acknowledge and agree
to be bound by the terms of the Letter of
Transmittal.
If either of these procedures cannot be
satisfied on a timely basis, then you should
comply with the guaranteed delivery
procedures described below.
By executing the Letter of Transmittal, you
will make certain representations to us,
including that:
o any New Certificates which you receive will
be acquired in the ordinary course of
business;
o you have no arrangements or understanding
with any person or entity to participate in
the distribution of the New Certificates;
o you are not an affiliate of our company
(or, if you are an affiliate, you will
comply with any applicable registration and
prospectus delivery requirements of the
Securities Act);
o if you are not a broker-dealer, you are
not engaged in, and you do not intend to
engage in, a distribution of the New
Certificates; and o if you are a
broker-dealer, you will receive the New
Certificates for your own account in
exchange for Old Certificates that were
acquired as a result of market-making or
other trading activities and you
acknowledge that you will be required to
deliver a prospectus in connection with any
resale of the New Certificates.
7
<PAGE>
See "The Exchange Offer -- Purpose and Effect
of the Exchange Offer."
Special Procedures for
Beneficial Owners............... If you are a beneficial owner whose Old
Certificates are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee and you wish to
tender your Old Certificates in the Exchange
Offer, you should contact such registered
holder promptly and instruct such registered
holder to tender on your behalf. If you wish
to tender on your own behalf, you must, prior
to completing and executing the Letter of
Transmittal and delivering your certificates,
either make appropriate arrangements to
register ownership of the Old Certificates in
your 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... If you wish to tender your Old Certificates
and time will not permit the documents
required by the Letter of Transmittal to
reach the Exchange Agent prior to the
Expiration Date, or the procedure for
book-entry transfer cannot be completed on a
timely basis, you must tender your Old
Certificates according to the guaranteed
delivery procedures described in this
Prospectus under the heading "The Exchange
Offer -- Guaranteed Delivery Procedures."
Acceptance of Old Certificates and
Delivery of New Certificates.... Subject to certain conditions (as described
more fully in "The Exchange Offer --
Conditions"), we will accept for exchange any
and all Old Certificates which are validly
tendered in the Exchange Offer and not
withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date.
Withdrawal Rights............... You may withdraw the tender of your Old
Certificates at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date,
subject to compliance with the procedures for
withdrawal described in this Prospectus under
the heading "The Exchange Offer -- Withdrawal
of Tenders."
Certain U.S. Federal Income
Tax Consequences................ The exchange of Old Certificates for New
Certificates will generally not be a taxable
exchange for U.S. federal income tax
purposes. We believe you will not recognize
any taxable gain or loss or any interest
income as a result of such exchange. See
"Certain Federal Income Tax Consequences."
Exchange Agent.................. FMB Bank (the successor in interest to The
First National Bank of Maryland), the Trustee
under the Trusts pursuant to which the Old
Certificates were issued, is serving as the
Exchange Agent. The address, telephone number
and facsimile number of the Exchange Agent
are set forth in this Prospectus under the
heading "The Exchange Offer --
Exchange Agent."
Consequences of Failure to
Exchange Old Certificates....... If you do not exchange your Old
Certificates for New Certificates pursuant to
the Exchange Offer, you will continue to be
subject to the restrictions on transfer
provided in the Old Certificates and in the
Trusts governing the Old Certificates. In
general, the Old Certificates 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. We do not currently
plan to register the Old Certificates for
resale under the Securities Act.
See "The Exchange Offer" for more detailed information concerning the Exchange
Offer.
8
<PAGE>
SUMMARY OF TERMS OF THE NEW CERTIFICATES
The Exchange Offer relates to the exchange of up to $104,249,475.59
aggregate principal amount of New Certificates for up to an equal principal
amount of outstanding Old Certificates. The form and terms of the New
Certificates are the same as the form and terms of the outstanding Old
Certificates, except that the New Certificates will be registered under the
Securities Act, and, therefore, the New Certificates will not be subject to
certain transfer restrictions, registration rights and certain provisions
providing for an increase in the interest rate of the outstanding Old
Certificates under certain circumstances relating to the registration of the
New Certificates. The New Certificates issued in the Exchange Offer will
evidence the same debt as the outstanding certificates and the New Certificates
of each class are governed by the same Trust as the Old Certificates of such
class.
Trusts.......................... We formed four separate Pass Through Trusts
(the "CLASS A TRUSTS," the "CLASS B TRUSTS,"
the "CLASS C TRUSTS" and the "CLASS D
TRUSTS," which we collectively refer to as
the "TRUSTS") pursuant to separate Pass
Through Trust Agreements entered into between
us and FMB Bank (the "TRUSTEE"), as trustee
under each Trust.
Certificates Offered............ The Old Certificates are, and the New
Certificates will be, pass through
certificates issued by each Trust,
representing fractional undivided interests
in such Trust. We refer to the Certificates
issued by the Class A Trust, the Class B
Trust, the Class C Trust and the Class D
Trust as "CLASS A CERTIFICATES," "CLASS B
CERTIFICATES," "CLASS C CERTIFICATES" and
"CLASS D CERTIFICATES," respectively.
Use of Proceeds................. We will not receive any proceeds from the
Exchange Offer. The proceeds from the sale of
the Old Certificates will be used by the
Trustees to purchase Equipment Notes to be
used in connection with the financing of a
portion of the purchase price of eight new
CRJ aircraft (the "AIRCRAFT"). As of the date
of this Prospectus, six the Aircraft have
been delivered to, and leased by us, and the
remaining two Aircraft are scheduled to be
delivered to us on or before June 30, 1999.
We intend to lease these two Aircraft,
although we may choose to purchase them
instead. Pending utilization of such proceeds
to purchase Equipment Notes, the proceeds
from the sale of the Old Certificates of each
Trust have been deposited with the Depositary
on behalf of the Escrow Agent for the benefit
of the Certificateholders of such Trust.
Escrow Receipts................. The holders of the Certificates are
entitled to certain rights with respect to
the Deposits. Such rights are evidenced by
escrow receipts ("ESCROW RECEIPTS") which are
affixed to each Certificate. Any transfer
(including any exchange in the Exchange
Offer) of a Certificate will have the effect
of transferring the corresponding rights in
the affixed Escrow Receipt.
Trust Property.................. The property of each Trust (the "TRUST
PROPERTY") will include (i) subject to the
Intercreditor Agreement, Equipment Notes
issued, at our election in connection with
the delivery of each Aircraft during the
Delivery Period, either (a) on a nonrecourse
basis by an Owner Trustee in each separate
leveraged lease transaction with respect to
each Leased Aircraft to finance a portion of
the purchase price of such Leased Aircraft by
the Owner Trustee, in which case the
applicable Leased Aircraft will be leased to
us, or (b) on a recourse basis by us in
connection with each separate secured loan
transaction with respect to each Owned
Aircraft to finance a portion of the purchase
price of such Owned Aircraft purchased by us,
(ii) the rights of such Trust to acquire
Equipment Notes under the Note Purchase
Agreement, (iii) the rights of such Trust
under the related Escrow Agreement to request
the Escrow Agent to withdraw from the
Depositary funds sufficient
9
<PAGE>
to enable such Trust to purchase Equipment
Notes on the delivery of each Aircraft
during the Delivery Period, (iv) the rights
of such Trust under the Intercreditor
Agreement (including all monies receivable
in respect of such rights), (v) (except for
the Class D Trust) all monies receivable
under the Liquidity Facilities for such
Trust and (vi) funds from time to time
deposited with the Trustee in accounts
relating to such Trust. Rights with respect
to Deposits or under the Escrow Agreement
relating to a Trust, except for the right to
request withdrawals for the purchase of
Equipment Notes, will not constitute Trust
Property of such Trust. The Equipment Notes
with respect to each Leased Aircraft will be
issued in four series under an indenture
(each, a "LEASED AIRCRAFT INDENTURE")
between the applicable Owner Trustee and the
indenture trustee thereunder (the "LEASED
AIRCRAFT TRUSTEE"). The Equipment Notes with
respect to each Owned Aircraft will be
issued in four series under an indenture
(the "OWNED AIRCRAFT INDENTURE" and,
together with the other Owned Aircraft
Indentures and the Leased Aircraft
Indentures, the "INDENTURES") between us and
the indenture trustee thereunder (the "OWNED
AIRCRAFT TRUSTEE" and, together with the
other Owned Aircraft Trustees and the Leased
Aircraft Trustees, the "LOAN TRUSTEES"). The
Class A Trust, the Class B Trust, the Class
C Trust and the Class D Trust each will
acquire, pursuant to a Note Purchase
Agreement (the "NOTE PURCHASE AGREEMENT"),
the series of Equipment Notes issued with
respect to each of the Aircraft having an
interest rate equal to the interest rate
applicable to the Certificates issued by
such Trust. The maturity dates of the
Equipment Notes acquired by each Trust will
occur on or before the final expected
Regular Distribution Date applicable to the
Certificates issued by such Trust.
Ranking......................... With respect to each Aircraft, if we are
unable at any time to pay (or in the case of
Leased Aircraft, to make payments under the
related Lease to allow the Owner Trustee to
pay) in full amounts due to the related Loan
Trustee, such Loan Trustee may have
insufficient funds to pay in full all
principal and interest then due under the
related Equipment Notes. In such event, all
amounts due under the Series A Equipment
Notes will be paid before any payments are
made on the Series B Equipment Notes, all
amounts due under the Series B Equipment
Notes will be paid before any payments are
made on the Series C Equipment Notes and all
amounts due under the Series C Equipment
Notes will be paid before any payments are
made on the Series D Equipment Notes. Under
the Intercreditor Agreement, in the event the
Subordination Agent has insufficient funds to
pay all amounts due to all
Certificateholders, amounts due under the
Class A Certificates will be paid before any
payments are made on the Class B
Certificates, amounts due under the Class B
Certificates will be paid before any payments
are made under the Class C Certificates and
amounts due under the Class C Certificates
will be paid before any payments are made
under the Class D Certificates. As a result,
holders of Class A Certificates are more
likely to receive payment of all principal
and interest then due than are holders of
Class B Certificates, holders of Class B
Certificates are more likely to receive
payment of all principal and interest then
due than are holders of Class C Certificates,
and holders of Class C Certificates are more
likely to receive payment of all principal
and interest then due than are holders of
Class D Certificates.
10
<PAGE>
Certificates; Denominations..... The New Certificates of each Trust will be
issued in a minimum denomination of $100,000
and in integral multiples of $1,000 in excess
thereof. See "Description of the New
Certificates -- General."
Regular Distribution Dates...... January 2 and July 2, commencing January 2,
1999.
Special Distribution Dates...... Any business day on which a Special Payment
is to be distributed.
Record Dates.................... The fifteenth day preceding a Regular
Distribution Date or a Special Distribution
Date.
Distributions................... All payments of principal, Make-Whole
Premium and interest received by the Trustee
on the Equipment Notes held in each Trust
will be distributed by the Trustee (in the
case of the Equipment Notes) or by the Paying
Agent (in the case of interest on the
Deposits) to the holders of the Certificates
(the "CERTIFICATEHOLDERS") of such Trust on
the Regular Distribution Dates referred to
above, subject to the provisions of the
Intercreditor Agreement. Assuming payments on
the Equipment Notes are made when due and the
Equipment Notes are not prepaid or redeemed,
the Final Expected Distribution Date for each
Class of Certificates will be as set forth on
the cover page of this Prospectus. Payments
on the Equipment Notes held in each Trust are
scheduled to be received in specified amounts
by the Trustee of such Trust on January 2 and
July 2 of each year, commencing on the first
such date to occur after the initial issuance
thereof. Payments of principal, Make-Whole
Premium and interest resulting from the
early redemption or purchase (if any) of the
Equipment Notes held in any Trust will be
distributed on a Special Distribution Date
after not less than 20 days' notice from the
Trustee to the Certificateholders of such
Trust, subject to the provisions of the
Intercreditor Agreement.
Rating of the Certificates...... The Certificates and the related Escrow
Receipts are rated by Moody's and Standard &
Poor's, as set forth below. Standard & Poor's
has indicated that its rating applies to a
unit consisting of Certificates representing
the Trust Property and Escrow Receipts
initially representing undivided interests in
certain rights to $109,722,000 of Deposits.
Amounts deposited under the Escrow Agreements
are not our property and are not entitled to
the benefits of Section 1110 of the U.S.
Bankruptcy Code. Neither the Certificates nor
the Escrow Receipts may be separately
assigned or transferred.
<TABLE>
<CAPTION>
CERTIFICATES MOODY'S STANDARD & POOR'S
- ------------------ --------- ------------------
<S> <C> <C>
Class A .......... Baa1 A-
Class B .......... Ba1 BBB-
Class C .......... Ba3 BB-
Class D .......... B2 B
</TABLE>
A rating is not a recommendation to
purchase, hold or sell Certificates,
inasmuch as such rating does not address
market price or suitability for a particular
investor. There can be no assurance that
such ratings will not be lowered or
withdrawn by a Rating Agency if, in the
opinion of such Rating Agency, circumstances
(including the downgrading of us or the
Liquidity Provider) so warrant. See "Risk
Factors -- Factors Related to the
Certificates and the Exchange Offer --
Ratings of the Certificates."
11
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following summary financial data are derived from our audited
financial statements. The data should be read in conjunction with "Selected
Financial and Operating Data and Glossary -- Glossary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1996(1) 1997 1998
------------- ------------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total operating revenues ................................................... $ 180,034 $ 186,275 $ 211,439
Operating expenses:
Wages, salaries and related costs ........................................ 24,619 25,757 31,822
Aircraft fuel ............................................................ 27,300 21,499 19,623
Aircraft and engine rentals .............................................. 34,113 30,495 29,927
Commissions .............................................................. 13,728 13,978 15,071
Maintenance, materials and repairs ....................................... 17,930 15,760 16,603
Other rentals and landing fees ........................................... 12,711 9,812 9,640
Depreciation and amortization ............................................ 1,346 1,999 6,162
Other operating expenses ................................................. 54,603 51,108 54,047
Impairment of long-lived assets (2) ...................................... 16,941 -- --
Equipment retirement charges (3) ......................................... -- -- 2,413
Recapitalization (4) ..................................................... -- 750 --
--------- ---------- ----------
Total operating expenses ................................................ 203,291 171,158 185,308
--------- ---------- ----------
Operating income (loss) .................................................... (23,257) 15,117 26,131
Income (loss) before extraordinary gain .................................... (24,264) 8,925 24,159
Extraordinary gain (5) ..................................................... -- 15,969 --
--------- ---------- ----------
Net income (loss) .......................................................... (24,264) 24,894 14,981
Preferred dividends ........................................................ -- -- --
--------- ---------- ----------
Net income (loss) available for common stockholders ........................ $ (24,264) $ 24,894 $ 14,981
========= ========== ==========
PER SHARE AMOUNTS (6):
Basic earnings per share:
Income before extraordinary gain ........................................ $ 1.47 $ 1.75
Extraordinary gain ...................................................... 2.64 --
---------- ----------
Net income .............................................................. $ 4.11 $ 1.75
========== ==========
Weighted average shares used in computing basic earnings per share ....... 6,059,051 8,574,972
========== ==========
Diluted earnings per share:
Income before extraordinary gain ........................................ $ 1.24 $ 1.54
Extraordinary gain ...................................................... 2.22 --
---------- ----------
Net income .............................................................. $ 3.46 $ 1.54
========== ==========
Weighted average shares used in computing diluted earnings per share ..... 7,193,794 9,731,527
========== ==========
</TABLE>
(Footnotes on next page)
12
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------
1996 (1) 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA (7) ...................... $ (3,525) $ 18,533 $ 37,942
EBITDAR (7) ..................... 30,588 49,028 67,869
Cash flows provided by (used in):
Operating activities ........... 5,784 8,765 20,894
Investing activities ........... (2,614) (25,219) (8,872)
Financing activities ........... 4,836 60,158 (17,795)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
SELECTED OPERATING STATISTICS (8):
Available seat miles (000s) ....................... 1,758,560 1,387,864 1,544,945
Revenue passenger miles (000s) .................... 998,959 875,752 1,008,567
Load factor ....................................... 56.8% 63.1% 65.3%
Break-even load factor (9) ........................ 59.2% 57.5% 56.8%
Yield (cents) ..................................... 17.37 20.44 20.38
Cost per available seat mile (cents) (10) ......... 10.66 12.28 11.97
Aircraft (average during period) .................. 13.7 13.0 18.1
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1998
-------------------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, restricted cash and short-term investments ...... $ 58,248
Working capital ......................................................... 32,880
Equipment and property, net ............................................. 103,007
Total assets ............................................................ 203,581
Long-term debt and capital lease obligations (net of current maturities) 78,764
Stockholders' equity .................................................... 70,463
</TABLE>
- -------
(1) The Company reclassified certain balances to reflect classifications in the
1997 and 1998 financial statements.
(2) The Company recorded an impairment loss of $16.9 million from certain
long-lived assets, primarily intangible assets, that were determined by
Company management to be impaired in accordance with SFAS 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." See Note 2 of Notes to Financial Statements.
(3) "The Company recorded equipment retirement charges related to the return of
four Fokker and one Airbus aircraft to their lessors. See Note 2 of Notes
to Financial Statements.
(4) The Company recorded a one-time charge related to the Recapitalization of
$0.75 million in 1997. See Note 13 of Notes to Financial Statements.
(5) Extraordinary gain includes one-time gains recognized in connection with
the Recapitalization. See Notes 11 and 13 of Notes to Financial Statements.
(6) Since the Company was recapitalized in February 1997 and all prior capital
stock was canceled at that time, per share amounts prior to 1997 are not
meaningful and thus are not presented.
(7) EBITDA represents income before income taxes, dividends and extraordinary
item plus interest expense (net of accreted interest), depreciation,
amortization, impairment of long-lived assets, equipment retirement charges
and recapitalization expense. EBITDAR represents income before income
taxes, dividends and extraordinary item plus interest expense (net of
accreted interest), depreciation, amortization, impairment of long-lived
assets, equipment retirement charges, recapitalization expense and aircraft
and engine rentals. EBITDA and EBITDAR are presented because each is a
widely accepted financial indicator of a company's ability to incur and
service debt. However, EBITDA and EBITDAR should not be considered in
isolation, as a substitute for net income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity.
(8) For definitions of the airline operating terms used in this table, see
"Selected Financial and Operating Data and Glossary -- Glossary."
(9) "Break-even load factor" as represented above excludes impairment of
long-lived assets, equipment retirement charges and recapitalization
expenses divided by the product of available seat miles and yield. Had
impairment of long-lived assets, equipment retirement charges and
recapitalization expenses been included for the years ended December 31,
1996, 1997 and 1998 the break-even load factor would have been 64.6%, 57.8%
and 57.6%, respectively.
(10) "Cost per available seat mile" as represented above excludes impairment of
long-lived assets, equipment retirement charges and recapitalization
expenses, divided by available seat miles. Had impairment of long-lived
assets, equipment retirement charges and recapitalization expenses been
included for the years ended December 31, 1996, 1997 and 1998 cost per
available seat mile would have been 11.6 cents, 12.3 cents and 12.1 cents,
respectively.
13
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING FACTORS IN EVALUATING US AND OUR BUSINESS
BEFORE DECIDING WHETHER TO ACCEPT THE EXCHANGE OFFER. THE RISK FACTORS SET
FORTH BELOW (OTHER THAN " -- RISK FACTORS RELATING TO THE CERTIFICATES AND THE
EXCHANGE OFFER -- CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS
OF THE OLD CERTIFICATES") ARE GENERALLY APPLICABLE TO THE OLD CERTIFICATES AS
WELL AS THE NEW CERTIFICATES. THIS PROSPECTUS CONTAINS, IN ADDITION TO
HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD
CAUSE OR COULD CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
FACTORS RELATED TO THE COMPANY AND THE INDUSTRY
INDUSTRY CONDITIONS AND COMPETITION
Our business, as is typical in the airline industry generally, is
characterized by low gross profit margins and high fixed costs. The expenses of
each flight do not vary significantly with the number of passengers carried
and, therefore, a relatively small change in the number of passengers, or in
average fare or traffic mix (the ratio of typically high-yielding business
passengers to typically low-yielding leisure passengers), could have a
disproportionate effect on an airline's operating and financial results.
Accordingly, a minor shortfall from expected revenue levels could have a
material adverse effect on our results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The airline industry is highly competitive and is particularly susceptible
to price discounting because airlines incur only nominal costs to provide
service to passengers occupying otherwise unsold seats. We currently compete on
some routes with both major and regional carriers and with discount carriers.
Such carriers have greater financial resources than we do, and some of our
competitors have lower unit costs than we do. In addition, the industry has
experienced and continues to experience substantial restructuring as most
established carriers have implemented varying strategies in pursuit of
profitability, including consolidation to expand operations and increase market
strength, establishing lower cost airlines within airlines, such as Shuttle by
United, Delta Express and the recently introduced Metrojet by US Airways, Inc.,
and by entering into alliance arrangements, such as those being proposed
between US Airways and American. Because these restructurings have only
recently begun to appear in the marketplace or, in some cases, have not yet
been implemented, we cannot predict what effect, if any, these activities will
have on our business, financial condition and results of operations. However,
the proposed US Airways-American alliance could have a material adverse effect
on our business, financial condition and results of operations, either by
limiting or restricting the extension or expansion of our relationship with
American or by extending American's AAdvantage(R) program participation to
persons flying US Airways and its affiliates. Furthermore, the introduction of
service or discounted fares by a major U.S. airline or one of its low cost
affiliates in markets served by us could also have an adverse impact upon our
business, financial condition and results of operations. Since late 1997, we
have experienced, and we anticipate that we will continue to experience,
increased competition in the Raleigh-Durham market. See " -- Agreements with
American Airlines."
SIGNIFICANT DEPENDENCE ON RALEIGH-DURHAM MARKET
Our growth has focused and will continue to focus on adding flights to and
from our Raleigh-Durham base of operations, established in March 1995. Because
all of our current flights have Raleigh-Durham as the origin or destination, we
remain highly dependent upon the Raleigh-Durham market. Our growth strategy
continues to emphasize the Raleigh-Durham hub. A reduction in our share of the
Raleigh-Durham market or reduced passenger traffic to or from Raleigh-Durham
could have a material adverse effect on our financial condition and results of
operations. In addition, our dependence on a single hub and on a route network
operating largely on the East Coast makes our business more susceptible to
adverse weather conditions along the East Coast than some of our competitors
that may be better able to spread weather-related risks over larger route
systems. For example, in September 1996, Hurricane Fran severely disrupted air
travel in the Raleigh-Durham area for one week and adversely affected our
operating results for that month. Similarly, in the third quarter of 1998 the
effects of hurricanes Bonnie and Georges adversely affected our operating
results for the quarter. See "Business."
CONCENTRATION OF ROUTES
We derive a substantial majority of our operating income from a small
number of our routes. Any circumstance causing a reduction in demand on such
routes or the introduction of increased competitive pressures on such routes
could have a material adverse effect on our financial condition and results of
operations.
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<PAGE>
IMPLEMENTATION OF GROWTH STRATEGY
Our growth strategy involves increasing the frequency of flights to
markets we currently serve and increasing the number of markets served. Opening
new markets requires us to commit a substantial amount of resources, both
before the new services commence and throughout the early phases of the new
operation. There can be no assurance that these efforts will be successful. In
addition, in order to effect our growth strategy, we may also need to obtain
additional slots at certain destinations. See "Business -- Growth Strategy."
There can be no assurance that we will be able to identify and successfully
establish new markets, or that we will be able to obtain additional slots on a
timely basis or at commercially reasonable prices, if at all. Our failure to
implement our growth strategy could have a material adverse effect on our
financial condition and results of operations.
LEVERAGE
We have a large amount of indebtedness when compared to the equity of our
stockholders. At December 31, 1998, our long-term debt and capital lease
obligations, including current portion, accounted for 54.4% of our total
capitalization. See "Capitalization." As of December 31, 1998, we had minimum
operating and capital lease obligations through the year ending December 31,
2014 aggregating approximately $320 million. In addition, we estimate that our
aircraft rental expenses will increase by approximately $11 million to $12
million per year as a result of our lease financing of the Aircraft as
contemplated by this Prospectus. These costs will be in addition to the
approximately $19.7 million in total aircraft ownership and lease expenses
incurred by us on an annual basis (excluding the lease payments on the two
F-100 aircraft which we intend to remove from service in the first half of 1999
and the Airbus A320 which we intend to remove from service in June 1999, each
at the end of their respective lease terms). This increase could materially
adversely affect our results of operations. The degree to which we are
leveraged, as well as our rent expense, could have significant consequences to
you, including the following: (i) our ability to obtain additional financing
for working capital and other purposes could be limited; (ii) a substantial
portion of our cash flow will be required to service our obligations in respect
of the Certificates and rent expense, diverting such cash from our operations;
and (iii) we will be more vulnerable to adverse changes in general economic and
industry conditions and we may be less able to withstand competitive pressures
than our competitors that are less highly leveraged. Our ability to make
scheduled principal and interest payments on or to refinance our obligations
underlying the Certificates and our other debt obligations will depend upon our
future operating performance and cash flow, which are in turn dependent upon
prevailing economic conditions and financial, competitive, regulatory, business
and other factors, many of which are beyond our control. There can be no
assurance that our cash flows will be sufficient for the payment of our debt
and lease obligations. If we are unable to meet interest, principal or lease
payments, we could be required to seek renegotiation of such payments or obtain
additional equity or debt financing. To the extent we finance our activities
with additional debt, we may become subject to certain financial and other
covenants that may restrict our ability to pursue our growth strategy. There
can be no assurance that any such efforts would be successful or timely or that
we could obtain any such financing or refinancing on acceptable terms.
AGREEMENTS WITH AMERICAN AIRLINES
We offer, through an agreement with American, frequent flyer benefits on
all but two of our current routes. In addition, we have the right to offer
American frequent flyer benefits on an additional 45 routes that we do not now
serve. However, routes that we select as part of our growth strategy may
include routes that are not covered by our agreement with American. There can
be no assurance that we will be able to offer AAdvantage(R) frequent flyer
benefits to our customers after the April 30, 2001 expiration of our current
contract with American. Furthermore, American may terminate this agreement
under several circumstances, including (i) our commencement of a new frequent
flyer program or our participation in another frequent flyer program, (ii) any
person or group becoming the owner of 20% or more of our outstanding voting
securities or any "Disqualified Investor" becoming the owner of 10% or more of
our outstanding voting securities, (iii) our making a significant acquisition
or (iv) our entering into any marketing-oriented collaborative agreement with
another airline which American reasonably believes would likely materially
adversely affect American's interests or objectives under any of its or its
affiliates' agreements with us. "Disqualified Investor" is defined as (i) any
other airline or airline-related services company, (ii) any person or entity
offering a frequent traveler program or (iii) any person or entity that
American believes would likely, by virtue of its affiliation with us,
materially adversely affect American's interests or objectives under any of its
or its affiliates' agreements with us. In addition, American may terminate our
sublease of the RDU facility and one other service agreement that we have with
American if any person or group acquires 30% or more of our voting securities.
Finally, if we pay any dividends or make any other cash or asset distribution
to our stockholders without American's consent at any time prior to our payment
in full of a certain promissory note to American, then American may terminate
the RDU facility sublease, our right to offer AAdvantage(R) frequent flyer
benefits, our license of the yield management system and one other
15
<PAGE>
service agreement that we have with American. We believe that our participation
in the AAdvantage(R) program is a significant factor in our ability to attract
and retain passengers, and that the loss of AAdvantage(R) program
participation, the extension of the AAdvantage(R) program participation to
persons flying US Airways or other airlines or the termination by American of
our RDU sublease could have a material adverse effect on our business,
financial condition and results of operations. See "Business -- Sales and
Marketing -- Pricing and Yield Management," " -- American Relationship" and "
- -- Facilities."
DEPENDENCE ON LEASED SLOTS
We lease 70% of our slots at New York's LaGuardia Airport and 75% of our
slots at Washington, D.C.'s Ronald Reagan National Airport from third party
airlines pursuant to leases that are each currently scheduled to expire in
April 2000. Although we have leased slots for six-month intervals, consistent
with industry practice, at LaGuardia Airport continuously from November 1993 to
April 1998, when we entered into a longer term lease, and at National Airport
continuously from March 1995 to January 1999, when we entered into a longer
term lease, there can be no assurance that we will be able to renew or replace
these leases. Our routes between RDU and LaGuardia Airport and National Airport
are among our most important, and, as a result, an inability to renew or
replace these leases could have a material adverse effect on our financial
condition and results of operations. See "Business -- Government Regulation --
Slots."
HISTORY OF OPERATING LOSSES AND ACCESS TO ADDITIONAL CAPITAL
We began commercial flight operations in 1993 and incurred substantial
losses through September 30, 1996. The June 16, 1996 report of independent
public accountants with respect to our financial statements as of and for the
year ended December 31, 1995 contained a going concern qualification. Although
our historical results reflect profitability on a quarterly basis for the last
nine quarters, there can be no assurance that we will continue to be profitable
in the future. We do not currently have lines of credit or any other
arrangements to provide liquidity. In the event that current sources are not
adequate, we will be required to access external financing. There can be no
assurance that such additional financing will be available to us or, if
available, that it can be obtained on acceptable terms. In the absence of such
financing, we could be forced to dispose of assets under circumstances that
might not be favorable to realizing the highest price for such assets.
GOVERNMENT REGULATION
We are subject to regulation by the U.S. Department of Transportation (the
"DOT"), the Federal Aviation Administration (the "FAA") and certain other
governmental agencies. The DOT principally regulates economic issues affecting
air service such as air carrier certification and fitness, insurance, consumer
protection and competitive practices. The FAA primarily regulates flight
operations, in particular matters affecting air safety, such as airworthiness
requirements for aircraft and pilot and flight attendant certification. We
believe we are in compliance with all requirements necessary to maintain in
good standing our operating authority granted by the DOT and our air carrier
operating certificate issued by the FAA. Additional laws and regulations have
been proposed from time to time that could significantly increase the cost of
our airline operations by, for instance, imposing additional requirements or
restrictions on operations. There can be no assurance that we will continue to
be able to comply with all present and future rules and regulations or that the
cost of continued compliance will not have a material adverse effect on our
results of operations.
In September 1997, the Civil Aviation Security Division of the FAA
conducted an investigation of our compliance with certain regulations requiring
us to verify the accuracy of background information provided by our employees
who have access to secure airport areas. The investigation will likely result
in the finding of violations of these regulations. While we are unable to
determine whether the FAA will pursue an assessment as a result of the findings
of this investigation, or what the amount of any such assessment might be, an
assessment could have a material adverse effect on our results of operations.
The FAA also has authority to issue maintenance directives and other
mandatory orders relating to, among other things, inspection of aircraft and
engines, fire retardant and smoke detection devices, increased security
precautions, collision and windshear avoidance systems, noise abatement and the
mandatory removal and replacement of aircraft parts that have failed or may
fail in the future. Depending upon the scope of the FAA's order, these
requirements may cause us to incur substantial, unanticipated expenses.
We are also subject to numerous other federal and state laws and
regulations relating to protection of the environment, radio communications,
labor relations, equal employment opportunity and other matters. See "Business
- -- Government Regulation."
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<PAGE>
DEPENDENCE ON LIMITED AIRCRAFT TYPES
Our existing fleet of 22 aircraft comprises ten Fokker F-100 aircraft, 11
CRJs and one Airbus A320. We have firm orders for 12 additional CRJs to be
delivered by March 2000. We also have options to acquire up to 17 additional
CRJs with delivery dates for the first seven of these aircraft extending over a
one-year period beginning in the first half of 2000 and with the delivery dates
for the remaining ten of these aircraft beginning in March 2002. We intend to
remove from service two Fokker F-100s in the first half of 1999 at the end of
their lease term and the Airbus A320 in June 1999. This dependence on two
aircraft types for substantially all of our flights could have a material
adverse effect on us in the event of a government directive prohibiting or
restricting the use of one of these aircraft type or in the case of adverse
public perception of one of these aircraft types. See "Business -- Services --
Fleet."
MAINTENANCE OF DISCONTINUED AIRCRAFT
Ten of our current 22 aircraft are Fokker F-100s. Fokker Aircraft B.V., a
Dutch corporation ("FOKKER"), entered into insolvency proceedings in March 1996
and ceased operations. As a result, the Fokker F-100 is no longer being
manufactured. We believe that the cost of maintaining aircraft that are no
longer manufactured generally exceeds the cost of those that continue to be
produced. Vendors and suppliers of key parts are generally fewer in number and
their products more expensive, and engineering is not as readily available. Our
inability to obtain parts and servicing on a timely and cost-effective basis
could have a material adverse effect on our financial condition and results of
operations. See "Business -- Services -- Fleet" and " -- Maintenance and
Support."
LIMITED NUMBER OF AIRCRAFT
We have a fleet of 22 jet aircraft, 17 of which are leased and five of
which, all CRJs, are owned. Each F-100 lessor is an affiliate or subsidiary of
Daimler Chrysler A.G. and the lessor of our one Airbus A320 aircraft is
Aircraft 373, Inc., a subsidiary of UniCapital Corporation. The limited number
of aircraft we operate involves financial risks not present for larger carriers
that are able to spread their operating costs over more equipment and routes.
In addition, each F-100 lessor has the right to terminate its lease on six
months' prior notice, provided that no lease can be terminated if it would
result in a fourth termination of any F-100 lease in any 12-month period,
including scheduled terminations. Finally, in the event aircraft are removed
from service for unscheduled maintenance, repairs or other reasons, any
resulting interruption in service could materially and adversely affect our
service, reputation and profitability. See "Business -- Services -- Fleet."
AIRCRAFT FUEL
Because fuel costs constitute a significant portion of our total expenses
(approximately 13.4%, 12.6%, and 10.5% for the years ended December 31, 1996,
1997 and 1998, respectively), significant changes in fuel costs will materially
affect our results of operations. We have not entered into long-term fuel
purchases to assure the supply of fuel or hedging agreements to assure the
price of fuel. Fuel prices continue to be susceptible to political events and
other factors that can affect the supply of fuel, and we cannot predict near or
long-term fuel prices. In the event of a fuel supply shortage resulting from a
disruption of oil imports or otherwise, higher fuel prices or curtailment of
scheduled service could result. A one cent increase in the cost per gallon of
fuel, based on our fuel consumption levels for the year ended December 31,
1998, would have increased operating expenses by approximately $350,000 per
year. There can be no assurance that increases in the price of fuel can be
offset by higher fares.
AIRCRAFT PURCHASE OBLIGATION
Pursuant to a March 1995 purchase agreement, we are obligated to purchase
four Airbus A320 aircraft with deliveries in 2005 and 2006. We also have an
agreement to acquire one spare engine for these A320 aircraft. See "Business --
Services -- Fleet." Our current strategy does not anticipate the use of this
type of aircraft. Accordingly, we must either restructure or sell our rights
under this purchase agreement or accept delivery of the four A320 aircraft.
There can be no assurance that we will be able to restructure or sell our
rights under this purchase agreement. If we are required to take delivery of
these aircraft or if we incur significant financial expense in lieu of taking
delivery, our financial position and results of operations could be materially
adversely affected.
DEPENDENCE ON KEY PERSONNEL
Our management and operations are dependent upon the efforts of our
Chairman of the Board, President and Chief Executive Officer, Robert R.
Ferguson III, and a small number of management and operating personnel. We do
not maintain key-man life insurance on any executive officer. The loss of the
services of key members of management could have an adverse impact on our
business. See "Management."
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<PAGE>
SEASONALITY AND CYCLICALITY
Our financial results are sensitive to seasonal variations in traffic. The
highest levels of traffic and revenue are generally realized in the second
quarter and the lowest levels of traffic and revenue are generally realized in
the third quarter. Given our high fixed costs, such seasonality affects our
profitability from quarter to quarter.
The following table sets forth certain unaudited quarterly financial data
for each of the past twelve quarters in the period ended December 31, 1998.
Operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
1996(1) 1997
------------------------------------------------- -----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
(DOLLARS IN THOUSANDS) ------------ ------------- ------------ --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues......... $49,441 $ 45,933 $39,899 $44,761 $47,853 $47,238 $43,122 $48,062
Operating income
(loss) (2) ............... ($ 6,876) $ 1,865 ($ 2,853) $ 1,548 $ 3,880 $ 6,443 $ 2,807 $ 2,737
Income (loss) before
extraordinary
gain ..................... ($ 7,226) ($ 15,608) ($ 2,492) $ 1,062 $ 1,342 $ 3,916 $ 1,722 $ 1,945
Net income (loss) ......... ($ 7,226) ($ 15,608) ($ 2,492) $ 1,062 $16,614 $ 3,916 $ 1,722 $ 2,641
<CAPTION>
1998
------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
(DOLLARS IN THOUSANDS) ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues......... $50,521 $55,708 $49,471 $55,739
Operating income
(loss) (2) ............... $ 6,566 $ 9,440 $ 3,962 $ 8,576
Income (loss) before
extraordinary
gain ..................... $ 3,855 $ 5,298 $ 2,375 $ 3,453
Net income (loss) ......... $ 3,855 $ 5,298 $ 2,375 $ 3,453
</TABLE>
- -------
(1) Certain 1996 amounts were reclassified to reflect classifications in the
December 31, 1997 and 1998 audited financial statements.
(2) Excludes impairment of long-lived assets, recapitalization expenses and
equipment retirement charges. Had impairment of long-lived assets,
recapitalization expenses and equipment retirement charges been included,
operating income (loss) for each of the three-month periods ended June 30,
1996, March 31, 1997, December 31, 1997 and December 31, 1998 would have
been ($15,076), $2,655, $3,212 and $6,163, respectively.
In addition, the airline industry is highly sensitive to general economic
conditions. Because a substantial portion of airline travel (both business and
leisure) is discretionary, the industry tends to experience adverse financial
results during general economic downturns. Any general reduction in airline
passenger traffic may materially and adversely affect our results of
operations, particularly since current industry traffic patterns are based in
part on substantial stimulation of discretionary air travel.
LABOR RELATIONS
Our pilots and fleet service (ramp) employees are represented by labor
unions. The pilots' representative, Air Line Pilots Association ("ALPA"), was
elected in December 1997, and the ramp employees' representative, International
Association of Machinists & Aerospace Workers, AFL-CIO, was elected in June
1998. Prior to those times, none of our employees were represented by a union.
Although we believe mutually acceptable agreements can be reached with the
unions representing such employees, we only recently began negotiations and,
therefore, the ultimate outcome of such negotiations is unknown at this time.
In a December 1998 representation election the Association of Flight
Attendants, AFL-CIO ("AFA") obtained the votes necessary to represent our
flight attendants. On December 18, 1998, we filed a motion with the National
Mediation Board ("NMB") alleging union interference with the election. In
February 1999, the NMB found that AFA had made misrepresentations during the
December 1998 election campaign but nevertheless certified AFA as the
representative of the Company's flight attendants. Midway has not yet
determined whether to seek judicial review of the NMB decision. Union
representation of any of our employees could result in employee compensation
and working condition demands that may increase our operating expenses. See
"Business -- Employees and Labor Relations."
CONTROL BY EXISTING STOCKHOLDERS
James H. Goodnight, Ph.D., and John P. Sall currently own approximately
31.9% and 15.5%, respectively, of our outstanding shares of Common Stock,
without giving effect to the shares that may be issued upon the exercise of
outstanding warrants and stock options. Although we are not aware of any
arrangement or understanding, contractual or otherwise, that obligates Dr.
Goodnight and Mr. Sall to act in concert with respect to the Company, such
level of stock ownership by Dr. Goodnight and Mr. Sall may allow them to elect
all of their designees to the Board of Directors and to control the outcome of
virtually all matters submitted for a vote of our stockholders. The combined
equity interests of Dr. Goodnight and Mr. Sall in Midway may have the effect of
making certain transactions more difficult or of delaying, deferring or
preventing a change in control of the Company.
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<PAGE>
FACTORS RELATED TO THE CERTIFICATES AND THE EXCHANGE OFFER
APPRAISALS AND REALIZABLE VALUE OF AIRCRAFT
The appraised value of each Aircraft is based upon the lesser of the
average and median value of such Aircraft as appraised by the Appraisers (the
"APPRAISALS"). The Appraisals are based on various assumptions and
methodologies, which vary among the Appraisers. The assumptions and
methodologies used in preparing each of the Appraisals are discussed in the
summaries of the Appraisers' reports with respect to the Appraisals included in
Appendix II hereto. Other appraisals that are prepared based on different
assumptions or methodologies may result in valuations that are significantly
different from those contained in the Appraisals. An appraisal is only an
estimate of value and should not be relied upon as a measure of realizable
value. The proceeds realized upon the sale of any Aircraft may be less than the
appraised value thereof. Appraisals are estimates of values as of future
delivery dates. In addition, the value of the Aircraft in the event of the
exercise of remedies under the applicable Indenture will depend on market and
economic conditions at the time, the availability of buyers, the condition of
the Aircraft, whether the Aircraft are sold separately or together and other
factors. Accordingly, there can be no assurance that the proceeds realized upon
any such exercise with respect to the Equipment Notes and the Aircraft pursuant
to the applicable Indenture would be as appraised or sufficient to satisfy in
full payments due on the Equipment Notes issued thereunder or the Certificates.
See "Description of the Aircraft and the Appraisals."
The Equipment Notes issued with respect to any Aircraft are not
cross-collateralized with respect to any other Aircraft. Therefore, upon an
Indenture Default, even if the Aircraft as a group could be sold for more than
the total amounts payable in respect of all of the outstanding Equipment Notes,
if one Aircraft were sold for less than the total amount payable in respect of
the related Equipment Notes there would not be sufficient proceeds to pay all
Classes of Certificates in full.
MAINTENANCE
We are responsible for the maintenance, service, repair and overhaul of
the Aircraft, but only to the extent described in the Leases or an Owned
Aircraft Indenture. Our failure (or the failure of any Sublessee or Permitted
Lessee) to adequately maintain, service, repair or overhaul an 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
Equipment Notes and, therefore, the Certificateholders. Under the Leases or any
Owned Aircraft Indenture, the applicable maintenance standards will vary
depending upon the jurisdiction in which an Aircraft is registered and whether
an Aircraft is leased or subleased. Notwithstanding compliance by us (or any
Sublessee or Permitted Lessee) with our obligations under the Leases or an
Owned Aircraft 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 us of our obligations under the Leases or an Owned Aircraft Indenture. See
"Description of the Equipment Notes -- The Leases and Certain Provisions of the
Owned Aircraft Indentures."
INSURANCE
We are responsible for the maintenance of public liability, property
damage and all-risk aircraft hull insurance on the Aircraft to the extent
described in the Leases. Our failure to adequately insure the Aircraft, or the
retention of self-insurance amounts (E.G., uninsured deductibles), 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 Equipment Notes and,
therefore, the Certificateholders.
With respect to required insurance, we may, in the case of public
liability, property damage and all-risk hull insurance, maintain insurance
having deductibles subject to certain maximum amounts. See "Description of the
Equipment Notes -- The Leases and Certain Provisions of the Owned Aircraft
Indentures -- Insurance."
REPOSSESSION
The Leases and the Owner Aircraft Indentures do not contain any general
geographic restriction on our (or any Sublessee's or Permitted Lessee's)
ability to operate the Aircraft. Although we have no current intention to do
so, we are permitted, upon compliance with the applicable Lease or an Owned
Aircraft Indenture, as the case may be, to register an Aircraft in foreign
jurisdictions and to sublease an Aircraft. While the Loan Trustees' rights and
remedies in the event of a default under the applicable Leases or an Owned
Aircraft Indenture include the right to repossess an Aircraft, it may be
difficult, expensive and time-consuming to obtain possession of an Aircraft,
particularly when an Aircraft located outside the United States has been
registered in a foreign jurisdiction or is subleased 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 re-export of the Aircraft, which
may be subject to delays and to political
19
<PAGE>
risk. When a defaulting Sublessee or other permitted transferee is the subject
of a bankruptcy, insolvency or similar event, such as protective
administration, additional limitations may apply.
Furthermore, certain jurisdictions may accord higher priority to certain
other liens or third-party rights over the Aircraft. These factors could limit
the benefits of the security interest in an Aircraft.
As permitted under the Leases, at any time an Airframe subject to a Lease
might not be equipped with Engines subject to the same Lease and Engines
subject to a Lease might not be on an Airframe subject to that Lease. As a
result, notwithstanding our agreement in the Leases to transfer title to the
Lessor of engines not owned by the applicable Owner Trustee that are attached
to repossessed Aircraft, at the time of obtaining repossession it could be
difficult, expensive and time-consuming to assemble an Aircraft consisting of
an Airframe and the Engines subject to the same Lease.
PRIORITY OF DISTRIBUTIONS; SUBORDINATION
Certain provisions of the Intercreditor Agreement, which provide for the
subordination of the Class B Certificates to the Class A Certificates, the
subordination of the Class C Certificates to the Class B Certificates and the
subordination of the Class D Certificates to the Class C Certificates, may
result in the holders of the subordinated classes of Certificates receiving
less than the full amount due to them after the occurrence of a payment default
under any Equipment Note or a Triggering Event, even if all of the Equipment
Notes are eventually paid in full.
Pursuant to the Intercreditor Agreement to which the Trusts, the
Subordination Agent and the Liquidity Provider are parties, on each
Distribution Date, so long as no Triggering Event has occurred, all payments
received by the Subordination Agent will be distributed in the following order:
(1) payment of the Liquidity Expenses and Liquidity Obligations to the
Liquidity Provider and, if applicable, to replenish Cash Collateral Accounts;
(2) payment of Expected Distributions to the holders of Class A Certificates;
(3) payment of Expected Distributions to the holders of Class B Certificates;
(4) payment of Expected Distributions to the holders of Class C Certificates;
(5) payment of Expected Distributions to the holders of Class D Certificates;
and (6) payment of certain fees and expenses of the Subordination Agent and the
Trustees.
However, upon the occurrence of a Triggering Event and at all times
thereafter, all payments received by the Subordination Agent in respect of the
Equipment Notes and certain other payments will be distributed under the
Intercreditor Agreement in the following order: (1) to reimburse the
Subordination Agent, each Trustee, the Liquidity Provider and any
Certificateholder, as the case may be, for the payment of Administration
Expenses; (2) to the Liquidity Provider in payment of Liquidity Expenses,
Liquidity Obligations and, so long as no Performing Note Deficiency exists, to
replenish Cash Collateral Accounts; (3) to reimburse the Subordination Agent,
each Trustee and each Certificateholder, as the case may be, for the payment of
Certain Taxes and Fees; (4) to pay Adjusted Expected Distributions to the
holders of Class A Certificates; (5) to pay Adjusted Expected Distributions to
the holders of Class B Certificates; (6) to pay Adjusted Expected Distributions
to the holders of Class C Certificates; (7) to pay Adjusted Expected
Distributions to the holders of Class D Certificates; (8) the balance shall be
held in the Collection Account until the next Distribution Date; and (9) if all
Classes of Certificates have been paid in full, the balance, if any, shall be
distributed to the Certificateholders of the related Trust.
Accordingly, the priority of distributions after a Triggering Event will
have the effect in certain circumstances of distributing payments received in
respect of one or more junior series of Equipment Notes to more senior Classes
of Certificates. If this should occur, the interest accruing on the remaining
Equipment Notes would be less than the interest accruing on the remaining
Certificates because the Certificates would have a greater proportion of high
interest rate junior classes. As a result of this possible interest shortfall,
the holders of one or more junior Classes of Certificates may not receive the
full amount due them after a Triggering Event even if all the Equipment Notes
are eventually paid in full.
CONTROL OVER COLLATERAL; SALE OF COLLATERAL
Pursuant to the Intercreditor Agreement, the Trustees and the Liquidity
Provider have agreed that, with respect to any Indenture at any given time, the
Loan Trustee will be directed (a) in taking, or refraining from taking, any
action thereunder by the holders of at least a majority of the outstanding
principal amount of the Equipment Notes issued thereunder (provided that, for
so long as the Subordination Agent is the registered holder of the Equipment
Notes, the Subordination Agent shall act with respect to this clause (a) in
accordance with the directions of the Trustees representing holders of
Certificates representing an undivided interest in such principal amount of
Equipment Notes) as long as no Indenture Default has occurred and is continuing
thereunder and (b) subject to certain conditions, in exercising remedies
thereunder (including accelerating such Equipment Notes or foreclosing the lien
on the Aircraft securing such Equipment Notes) insofar as an Indenture Default
has occurred and is continuing by the Controlling Party. See "Description of
the New Certificates -- Indenture Defaults and Certain Rights Upon an Indenture
Default" for a description of the rights of the Certificateholders
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of each Trust to direct the respective Trustee. Notwithstanding the foregoing,
the Liquidity Provider with the greatest amount of unreimbursed Liquidity
Obligations payable to it under the Liquidity Facilities has the right to elect
to become the Controlling Party with respect to any such Indenture at any time
from and including the date which is 18 months after the earlier of (i) the
acceleration of the Equipment Notes under such Indenture and (ii) the date on
which the entire available amount under any Liquidity Facility has been drawn
(for any reason other than a Downgrade Drawing or a Non-Extension Drawing) and
remains unreimbursed and (iii) the date on which the entire amount of any
Downgrade Drawing or Non-Extension Drawing has become an Applied Drawing or
Applied Non-Extension Drawing, as the case may be, if, in any such case, at the
time of such election all Liquidity Obligations have not been paid in full. For
purposes of giving effect to the foregoing, the Trustees (other than the
Controlling Party) shall irrevocably agree (and the Certificateholders (other
than the Certificateholders represented by the Controlling Party) shall be
deemed to agree by virtue of their purchase of Certificates) to exercise their
voting rights as directed by the Controlling Party.
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions of the last sentence of this paragraph, sell all (but not less than
all) of the Equipment Notes issued under such Indenture to any person. The
market for Equipment Notes at the time of the existence of any Indenture
Default may be very limited, and there can be no assurance as to the price at
which they could be sold. If the Controlling Party sells any such Equipment
Notes for less than their outstanding principal amount, certain
Certificateholders will receive a smaller amount of principal distributions
than anticipated and will not have any claim for the shortfall against us, any
Owner Trustee, any Owner Participant or any Trustee. So long as any
Certificates are outstanding, during nine months after the earlier of (x) the
acceleration of the Equipment Notes under any Indenture or (y) our bankruptcy
or insolvency, without the consent of each Trustee, (a) no Aircraft subject to
the lien of such Indenture or such Equipment Notes may be sold if the net
proceeds from such sale would be less than the Minimum Sale Price for such
Leased Aircraft or such Equipment Notes, and (b) with respect to any Leased
Aircraft, the amount and payment dates of rentals payable by us under the Lease
for such Leased Aircraft may not be adjusted if, as a result of such adjustment
the discounted present value of all such rentals would be less than 75% of the
discounted present value of the rentals payable by us under such Lease before
giving effect to such adjustment, in each case, using the weighted average
interest rate of the Equipment Notes outstanding under such Indenture as the
discount rate.
The Equipment Notes will not be cross-collateralized (except in certain
cases, if any, where the related Owner Participant and we agree to
cross-collateralization) and, consequently, proceeds from the sale of an
Aircraft in excess of the amounts due on Equipment Notes related to such
Aircraft will not be available to cover losses, if any, on any other Equipment
Notes.
RATINGS OF THE CERTIFICATES
It was a condition to the issuance of the Certificates that the Class A
Certificates be rated "Baa1" by Moody's Investors Service, Inc. ("MOODY'S") and
"A-" by Standard & Poor's Ratings Group ("STANDARD & POOR'S" and together with
Moody's, the "RATING AGENCIES"), the Class B Certificates be rated "Ba1" by
Moody's and "BBB-" by Standard & Poor's, the Class C Certificates be rated
"Ba3" by Moody's and "BB-" by Standard & Poor's, and the Class D Certificates
be rated "B2" by Moody's and "B" by Standard & Poor's. A rating is not a
recommendation to purchase, hold or sell Certificates, inasmuch as such rating
does not address market price or suitability for a particular investor. We
cannot assure you that a rating will remain unchanged for any given period of
time or that a rating will not be lowered or withdrawn entirely by a Rating
Agency if in its judgment circumstances in the future (including the
downgrading of Midway, the Depositary or the Liquidity Provider) so warrant.
The rating of the Certificates is based primarily on the default risk of the
Equipment Notes and the Depositary, the availability of the Liquidity
Facilities for the holders of the Class A, Class B and Class C Certificates,
the collateral value provided by the Aircraft and the subordination in right of
payment under the Intercreditor Agreement of the Class B Certificates to the
Class A Certificates, of the Class C Certificates to the Class B Certificates
and of the Class D Certificates to the Class C Certificates. The foregoing
ratings address the likelihood of timely payment of interest (at the nondefault
rate) when due on the Certificates and the ultimate payment of principal of the
Certificates by the Final Legal Distribution Date. Such ratings do not address
the possibility of a PTC Event of Default or an Indenture Default or other
circumstances (such as an Event of Loss) which could result in the payment of
the outstanding principal amount of the Certificates prior to the Final
Expected Distribution Date. Standard & Poor's has indicated that its rating
applies to a unit consisting of Certificates representing the Trust Property
and Escrow Receipts initially representing undivided interests in certain
rights to $109,722,000 of Deposits. Amounts deposited under the Escrow
Agreements, which currently total $27,600,000, are not our property and are not
entitled to the benefits of Section 1110 of the U.S. Bankruptcy Code. Neither
the Certificates nor the Escrow Receipts may be separately assigned or
transferred.
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The reduction, suspension or withdrawal of the ratings of the Certificates
will not, in and of itself, constitute an Event of Default.
OWNER PARTICIPANT; REVISIONS TO AGREEMENTS
We have obtained the commitments of two separate companies to act as the
Owner Participant with respect to leveraged leases for the two remaining
Aircraft to be delivered, although there can be no assurance that these
companies will actually close the contemplated transactions. Such Owner
Participants may request revisions to the forms of the Participation Agreement,
the Lease and the Leased Aircraft Indenture that are contemplated by the Note
Purchase Agreement, so that the terms of such agreements applicable to any
particular Leased Aircraft may differ from the description of such agreements
contained in this Prospectus. However, under the Note Purchase Agreement, the
terms of such agreements are required to (i) contain the Mandatory Document
Terms and (ii) not vary the Mandatory Economic Terms. In addition, we are
obligated (i) to certify to the Trustee that any such modifications do not
materially and adversely affect the Certificateholders and (ii) to obtain
written confirmation from each Rating Agency that the use of versions of such
agreements modified in any material respect will not result in a withdrawal,
suspension or downgrading of the rating of any Class of Certificates. See
"Description of the New Certificates -- Obligation to Purchase Equipment
Notes."
UNUSED DEPOSITS
The Trustees' obligations to purchase the Equipment Notes issued with
respect to each Aircraft are subject to satisfaction of certain conditions at
the time of delivery, as set forth in the Note Purchase Agreement. See
"Description of the New Certificates -- Obligation to Purchase Equipment
Notes." Since the Aircraft are scheduled for delivery from time to time during
the Delivery Period, no assurance can be given that all such conditions will be
satisfied at the time of delivery for each Aircraft. Moreover, since the
Aircraft will be newly manufactured, their delivery as scheduled is subject to
delays in the manufacturing process and to Bombardier's right to postpone
deliveries under its agreement with us. Depending on the circumstances of the
financing of each Aircraft, the maximum aggregate principal amount of Equipment
Notes may not be issued. If any funds remain as Deposits with respect to any
Trust at the Delivery Period Termination Date, they will be withdrawn by the
Escrow Agent for such Trust and distributed, with accrued and unpaid interest
thereon, to the Certificateholders of such Trust, together with a Deposit
Make-Whole Premium; PROVIDED THAT, if any Aircraft is not delivered by the
manufacturer prior to the Delivery Period Termination Date due to any reason
not occasioned by our fault or negligence, no Deposit Make-Whole Premium will
be paid with respect to the unused Deposits to be distributed as a result of
such failure to deliver. Since the maximum principal amount of Equipment Notes
may not be issued with respect to an Aircraft and, in any such case, the Series
C and Series D Equipment Notes are more likely not to be issued in the maximum
principal amount as compared to the other Equipment Notes, it is more likely
that a distribution of unused Deposits will be made with respect to the Class C
and Class D Certificates as compared to the other Certificates. See
"Description of the Deposit Agreements -- Unused Deposits."
ABSENCE OF A PUBLIC MARKET FOR THE CERTIFICATES
The Old Certificates were issued to, and we believe are currently owned
by, a relatively small number of beneficial owners. The Old Certificates have
not been registered under the Securities Act or under any applicable state
securities laws and will continue to be subject to restrictions on
transferability to the extent that they are not exchanged for the New
Certificates. Although the New Certificates will generally be permitted to be
resold or otherwise transferred by the holders (who are not our affiliates)
without compliance with the registration requirements under the Securities Act,
they will constitute a new issue of securities with no established trading
market. We have been advised by Morgan Stanley Dean Witter and Credit Suisse
First Boston that they presently intend to make a market in the New
Certificates, as permitted by applicable laws and regulations. However, they
are not obligated to do so and any market-making activity will be subject to
the limits imposed by the Securities Act and the Exchange Act and may be
limited during the Exchange Offer. We have not applied, nor do we intend to
apply, for listing of the New Certificates on any securities exchange or for
quotation of the New Certificates on the National Association of Securities
Dealers Automated Quotations System or otherwise. Accordingly, no assurance can
be given that an active public or other market will develop for the New
Certificates or the Old Certificates or as to the liquidity of or the trading
market for the New Certificates or the Old Certificates. If an active public
market does not develop, the market price and liquidity of the New Certificates
may be adversely affected.
If a public trading market develops for the New Certificates, future
trading prices of such securities will depend on many factors, including, among
other things, prevailing interest rates, our results of operations and the
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including our financial
condition, the New Certificates may trade at a discount.
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Notwithstanding the registration of the New Certificates in the Exchange
Offer, holders who are our "affiliates" (as defined under Rule 405 under the
Securities Act) may publicly offer for sale or resell the New Certificates only
in compliance with the provisions of Rule 144 under the Securities Act.
Each broker-dealer that receives New Certificates for its own account in
exchange for Old Certificates, where such Old Certificates 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 New Certificates. See "Plan of Distribution."
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF THE OLD
CERTIFICATES
We intend for the Exchange Offer to satisfy our registration obligations
under the Registration Rights Agreement. If the Exchange Offer is consummated,
we do not intend to file further registration statements for the sale or other
disposition of Old Certificates. Consequently, following completion of the
Exchange Offer, holders of Old Certificates seeking liquidity in their
investment would have to rely on an exemption to the registration requirements
under applicable securities laws, including the Securities Act, with respect to
any sale or other disposition of the Old Certificates. To the extent that Old
Certificates are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Old Certificates could be
adversely affected. See "The Exchange Offer."
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the issuance of the Old Certificates pursuant to a
Purchase Agreement dated as of August 6, 1998, between the Company and Morgan
Stanley Dean Witter and Credit Suisse First Boston (the "INITIAL PURCHASERS"),
the Initial Purchasers and their respective assignees became entitled to the
benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company is obligated to use
its best efforts to (i) file the Registration Statement of which this
Prospectus is a part for a registered exchange offer with respect to an issue
of new certificates identical in all material respects to the Old Certificates
by December 11, 1998, (ii) cause the Registration Statement to become effective
under the Securities Act by February 9, 1999, (iii) cause the Registration
Statement to remain effective until the closing of the Exchange Offer, (iv)
upon the effectiveness of the Registration Statement, offer to the holders of
the Old Certificates the opportunity to exchange their Old Certificates for a
like principal amount of New Certificates, which would be issued without a
restrictive legend and may be reoffered and resold by the holder without
restrictions or limitations under the Securities Act (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), subject, in the case of certain broker-dealers, to
any requirement that they comply with the prospectus delivery requirements
referred to below and (v) consummate the Exchange Offer by March 11, 1999. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The Exchange Offer
is being made to satisfy the contractual obligations of the Company under the
Registration Rights Agreement. Unless the context requires otherwise, the term
"HOLDER" with respect to the Exchange Offer means any person in whose name the
Old Certificates are registered or any other person who has obtained a properly
completed bond power from the registered holder or any person whose Old
Certificates are held of record by The Depository Trust Company who desires to
deliver such Old Certificates by book-entry transfer at The Depository Trust
Company.
The Company has not requested, and does not intend to request, an
interpretation by the Staff of the Commission with respect to whether the New
Certificates issued pursuant to the Exchange Offer in exchange for the Old
Certificates may be offered for sale, resold or otherwise transferred by any
Holder without compliance with the registration and prospectus delivery
provisions of the Securities Act. Based on an interpretation by the Staff of
the Commission set forth in no-action letters issued to third parties,
including EXXON CAPITAL HOLDINGS CORPORATION (available April 13, 1989) and
MORGAN STANLEY & CO. INCORPORATED (available June 5, 1991), the Company
believes that New Certificates issued pursuant to the Exchange Offer in
exchange for Old Certificates may be offered for resale, resold and otherwise
transferred by any Holder of such New Certificates (other than any such Holder
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act and except in the case of broker-dealers, as set forth below)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Certificates are acquired in the
ordinary course of such Holder's business and such Holder has no arrangement or
understanding with any person to participate in the distribution of such New
Certificates. Since the Commission has not considered the Exchange Offer in the
context of a no-action letter, there can be no assurance that the Staff of the
Commission would make a similar determination with respect to the Exchange
Offer. If the Company's belief is inaccurate and a Holder transfers New
Certificates without delivering a prospectus meeting the requirements of the
Securities Act or without an exemption from such requirements, a Holder may
incur
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liability under the Securities Act. The Company will not assume, or indemnify
any Holder against, such liability. Any Holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the New
Certificates could not rely on such interpretation by the Staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Certificates for its own account in
exchange for Old Certificates, where such Old Certificates 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 New Certificates. See "Plan of Distribution."
By tendering in the Exchange Offer, each Holder of Old Certificates, other
than a broker-dealer, will make certain representations, including
representations that (i) the New Certificates acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such New Certificates, whether or not such person is such Holder,
(ii) neither the Holder of Old Certificates nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such New Certificates, (iii) if the Holder is not a broker-dealer, or is a
broker-dealer but will not receive New Certificates for its own account in
exchange for Old Certificates, neither the Holder nor any such other person is
engaged in or intends to participate in the distribution of such New
Certificates and (iv) neither the Holder nor any such other person is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act. If the tendering Holder is a broker-dealer that will receive New
Certificates for its own account in exchange for Old Certificates that were
acquired as a result of market-making activities or other trading activities,
it will be required to acknowledge that it will deliver a prospectus in
connection with any resale of such New Certificates. In addition, the Holder
must acknowledge that if it participates in the Exchange Offer for the purpose
of distributing the New Certificates (a) it must, in the absence of an
exemption therefrom, comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Certificates and cannot rely on the no-action letters referenced above and (b)
failure to comply with such requirements in such instance could result in such
Holder incurring liability under the Securities Act for which such Holder is
not indemnified by the Company. Further, by tendering in the Exchange Offer,
each Holder that may be deemed an "affiliate" (as defined under Rule 405 of the
Securities Act) of the Company will represent to the Company that such Holder
understands and acknowledges that the New Certificates may not be offered for
resale, resold or otherwise transferred by that Holder without registration
under the Securities Act or an exemption therefrom.
Following the consummation of the Exchange Offer, Holders of the Old
Certificates who did not tender their Old Certificates will not have any
further registration rights under the Registration Rights Agreement and will
not have any right to increased interest as a result of a failure to register
such Old Certificates, and such Old Certificates will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
such Old Certificates could be adversely affected. See "Risk Factors -- Factors
Related to the Certificates and the Exchange Offer -- Consequences of the
Exchange Offer on Non-Tendering Holders of the Old Certificates."
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 any and all Old
Certificates validly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Company will issue $1,000 principal
amount of New Certificates of the same class in exchange for each $1,000
principal amount of outstanding Old Certificates accepted in the Exchange
Offer. Holders may tender some or all of their Old Certificates pursuant to the
Exchange Offer. However, Old Certificates may be tendered only in integral
multiples of $1,000.
The form and terms of the New Certificates are the same as the form and
terms of the Old Certificates except that (i) the New Certificates bear a
different CUSIP number from the Old Certificates, (ii) the New Certificates
have been registered under the Securities Act and therefore will not bear
legends restricting the transfer thereof and (iii) the holders of the New
Certificates will not be entitled to certain rights under the Registration
Rights Agreement, including the provisions providing for an increase in the
interest rate on the Old Certificates in certain circumstances relating to the
timing of the Exchange Offer, all of which rights will terminate upon
consummation of the Exchange Offer. The New Certificates will evidence the same
debt as the Old Certificates and will be entitled to the benefits of the
applicable Trust.
As of the date of this Prospectus, $104,249,475.59 aggregate principal
amount of the Old Certificates was outstanding. Solely for reasons for
administration (and for no other purpose), the Company has fixed the close of
business on February 24, 1999, as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially. Only a registered holder of the Old
Certificates may participate in the Exchange Offer. There will be no fixed
record date for determining registered holders of the Old Certificates entitled
to participate in the Exchange Offer.
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The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Certificates being tendered. However, the Exchange Offer is
subject to certain customary conditions which may be waived by the Company. See
" -- Conditions."
The Company shall be deemed to have accepted validly tendered Old
Certificates when, as and if the Company has given oral or written notice
thereof to the Exchange Agent. The Exchange Agent will act as agent for the
tendering Holders for the purpose of receiving the New Certificates and
delivering the New Certificates to the Holders. If any tendered Old
Certificates are not accepted for exchange because of an invalid tender, the
occurrence of certain other events set forth herein or otherwise, any such
unaccepted Old Certificates will be returned, without expense, to the tendering
Holder thereof as soon as practicable after the Expiration Date. See " --
Acceptance of Old Certificates for Exchange; Delivery of New Certificates."
Holders who tender Old Certificates 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
Old Certificates pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
April 2, 1999, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. Notwithstanding any extension of
the Exchange Offer, if the Exchange Offer is not consummated by March 11, 1999,
the interest rate borne by the Equipment Notes and passed through to the
Certificateholders is subject to increase until the Exchange Offer is
consummated.
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 an announcement thereof, each prior to 9:00 a.m., New York City time,
on the next business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Certificates, to extend the Exchange Offer or to terminate
the Exchange Offer if any of the conditions set forth below under " --
Conditions" 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 written notice thereof to the registered Holders. 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, depending
upon the significance of the amendment and the manner of disclosure to the
registered Holders, the Company will extend the Exchange Offer to the extent
required by law.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE NEW CERTIFICATES
The New Certificates will bear interest at the applicable per annum rate
for such Trust set forth on the cover page of this Prospectus from their date
of issuance. Holders of Old Certificates that are accepted for exchange will
receive, in cash, accrued interest thereon from January 2, 1999, the date of
the last payment of interest on the Old Certificates, to, but not including,
the date of issuance of the New Certificates. Such interest will be paid with
the first interest payment on the New Certificates on July 2, 1999.
Accordingly, holders of Old Certificates that are accepted for exchange will
not receive interest that is accrued but unpaid on such Old Certificates at the
time of tender. Interest on the Old Certificates accepted for exchange will
cease to accrue upon issuance of the New Certificates.
Interest on the New Certificates will be payable semi-annually on each
January 2 and July 2, commencing July 2, 1999.
PROCEDURES FOR TENDERING OLD CERTIFICATES
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Certificates and any other required documents, to the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date. To be tendered
effectively, the Old Certificates, Letter of
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Transmittal and other required documents must be received by the Exchange Agent
at the address set forth below under " -- Exchange Agent" prior to 5:00 p.m.,
New York City time, on the Expiration Date. Delivery of the Old Certificates
may be made by book-entry transfer through The Depository Trust Company's
Automated Tender Offer Program ("ATOP"), for which the transaction will be
eligible, in accordance with the procedures described below. Confirmation of
such book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the
Company the representations set forth above in the fourth paragraph under the
heading "Purpose and Effect of the Exchange Offer".
The tender by a Holder and the acceptance thereof by the Company will
constitute 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 THE OLD CERTIFICATES AND THE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT, INCLUDING
DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY (AS DEFINED BELOW) AND ANY
ACCEPTANCE OF AN AGENT'S MESSAGE TRANSMITTED THROUGH ATOP, IS AT THE ELECTION
AND RISK OF EACH 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 OLD CERTIFICATES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Only a Holder of Old Certificates may tender such Old Certificates in the
Exchange Offer. Any beneficial owner whose Old Certificates 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 to tender on such beneficial owner's behalf.
See "Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Owner" included with the Letter of Transmittal. If such
beneficial owner wishes to tender on his own behalf, such beneficial owner
must, prior to completing and executing the Letter of Transmittal and
delivering his Old Certificates, either make appropriate arrangements to
register ownership of the Old Certificates 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.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Certificates tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. If signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by 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 (an "ELIGIBLE INSTITUTION").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Certificates listed therein, such Old Certificates
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 Old
Certificates with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Certificates 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.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect
to the Old Certificates at the book-entry transfer facility, The Depository
Trust Company (the "BOOK-ENTRY TRANSFER FACILITY"), for the purpose of
facilitating the Exchange Offer, and, subject to the establishment thereof, any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of the Old Certificates by
causing such Book-Entry Transfer Facility to transfer such Old Certificates
into the Exchange Agent's account with respect to the Old Certificates in
accordance with the Book-Entry Transfer Facility's procedures for such
transfer. Although delivery of the Old Certificates may be effected through
book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee or an Agent's Message in
connection with a book-entry transfer and all other required documents must in
each case be transmitted to and received or confirmed by the Exchange Agent at
its address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
26
<PAGE>
time period provided under such procedures. Delivery of documents to the
Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
The term "AGENT'S MESSAGE" means a message transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part of
the confirmation of a book-entry transfer, which states that the Book-Entry
Transfer Facility has received an express acknowledgment from the participants
in the Book-Entry Transfer Facility described in such Agent's Message, stating
the aggregate principal amount of Old Certificates which have been tendered by
such participants pursuant to the Exchange Offer and that such participants
have received this Prospectus and the Letter of Transmittal and agree to be
bound by the terms of this Prospectus and the Letter of Transmittal and the
Company may enforce such agreement against such participants.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Certificates and withdrawal of tendered
Old Certificates 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 Old Certificates not property tendered or
any Old Certificates 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 Old
Certificates. 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 Old Certificates must be cured
within such time as the Company shall determine. Neither the Company, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Old Certificates will not be deemed to have
been made until such defects or irregularities have been cured or waived. Any
Old Certificates 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 addition, the Company reserves the right in its sole discretion,
subject to the provisions of the Pass Through Trust Agreements, to (i) purchase
or make offers for any Old Certificates that remain outstanding subsequent to
the Expiration Date or, as set forth under " -- Conditions," to terminate the
Exchange Offer in accordance with the terms of the Registration Rights
Agreement and (ii) to the extent permitted by applicable law, purchase Old
Certificates in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Certificates and (i) whose Old
Certificates are not immediately available, (ii) who cannot deliver their Old
Certificates, the Letter of Transmittal or any other required documents to the
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer 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 certificate
number(s) of such Old Certificates and the principal amount of Old
Certificates tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days
after the Expiration Date, the Letter of Transmittal (or a facsimile
thereof), together with the certificate(s) representing the Old
Certificates (or a confirmation of book-entry transfer of such Old
Certificates into the Exchange Agent's account at the Book-Entry Transfer
Facility) 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 a
facsimile thereof), as well as the certificate(s) representing all
tendered Old Certificates in proper form for transfer (or a confirmation
of book-entry transfer of such Old Certificates into the Exchange Agent's
account at the Book-Entry Transfer Facility) and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent
within three 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 Old Certificates according to the
guaranteed delivery procedures set forth above.
27
<PAGE>
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Certificates may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date. Withdrawal of tendered Old Certificates will be deemed a rejection of the
Exchange Offer.
To withdraw a tender of Old Certificates in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Certificates to be withdrawn (the "DEPOSITOR"),
(ii) identify the Old Certificates to be withdrawn (including the certificate
number(s) and principal amount of such Old Certificates, or, in the case of Old
Certificates transferred by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility to be credited), (iii) be signed by
the Holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Certificates were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee register the transfer of such Old Certificates
into the name of the person withdrawing the tender and (iv) specify the name in
which any such Old Certificates are to be registered, if different from that of
the Depositor. A PURPORTED NOTICE OF WITHDRAWAL WHICH LACKS ANY OF THE REQUIRED
INFORMATION WILL NOT BE AN EFFECTIVE WITHDRAWAL OF A TENDER PREVIOUSLY MADE.
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 Old Certificates so withdrawn
will be deemed not to have been validly tendered for purposes of the Exchange
Offer and no New Certificates will be issued with respect thereto unless the
Old Certificates so withdrawn are validly retendered. Any Old Certificates
which have been tendered but which are not accepted for exchange will be
returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Certificates may be retendered by
following one of the procedures described above under " -- Procedures for
Tendering Old Certificates" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept for exchange, or to exchange New Certificates for,
any Old Certificates, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Old Certificates, if:
(a) any law, statute, rule, regulation or interpretation by the Staff of the
Commission is proposed, adopted or enacted which, in the judgment of the
Company, might materially impair the ability of the Company to proceed
with the Exchange Offer or materially impair the contemplated benefits of
the Exchange Offer to the Company; or
(b) there shall occur a change in the current interpretation by the Staff of
the Commission which permits the New Certificates issued pursuant to the
Exchange Offer in exchange for Old Certificates to be offered for resale,
resold and otherwise transferred by Holders thereof (other than
broker-dealers and any such 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 provisions of
the Securities Act provided that such New Certificates are acquired in
the ordinary course of such Holders' business and such Holders have no
arrangement or understanding with any person to participate in the
distribution of such New Certificates; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old
Certificates and return all tendered Old Certificates to the tendering Holders,
(ii) extend the Exchange Offer and retain all Old Certificates tendered prior
to the expiration of the Exchange Offer, subject, however, to the rights of
Holders to withdraw such Old Certificates (see " -- Withdrawal of Tenders") or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Old Certificates which have not been withdrawn. If
any waiver by the Company constitutes a material change to the Exchange Offer,
the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered Holders, and, depending
upon the significance of the waiver and the manner of disclosure to the
registered Holders, the Company will extend the Exchange Offer to the extent
required by law.
28
<PAGE>
The foregoing conditions are for the sole benefit of the Company and may
be waived by the Company, in whole or in part, in its sole discretion, although
the Company has no current intention of doing so. Any determination made by the
Company concerning an event, development or circumstance described or referred
to above will be final and binding on all parties.
ACCEPTANCE OF OLD CERTIFICATES FOR EXCHANGE; DELIVERY OF NEW CERTIFICATES
Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, all Old Certificates properly tendered will be accepted, promptly after
the Expiration Date, and the New Certificates will be issued promptly after
acceptance of the Old Certificates. See " -- Conditions." For purposes of the
Exchange Offer, Old Certificates shall be deemed to have been accepted for
exchange when, as and if the Company has given oral or written notice thereof
to the Exchange Agent.
In all cases, issuance of New Certificates for Old Certificates that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Old Certificates
or a timely confirmation of book-entry transfer of such Old Certificates 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 Old Certificates are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer or if Old Certificates
are submitted for a greater principal amount than the Holder desires to
exchange, such unaccepted or nonexchanged Old Certificates will be returned
without expense to the tendering Holder thereof (or, in the case of Old
Certificates tendered by book-entry transfer procedures described above, such
nonexchanged Old Certificates 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.
EXCHANGE AGENT
FMB Bank (the successor in interest to The First National Bank of
Maryland), the Trustee under the Trusts, has been appointed as Exchange Agent
for 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:
<TABLE>
<S> <C>
BY REGISTERED, CERTIFIED OR OVERNIGHT MAIL OR BY HAND: BY FACSIMILE:
FMB Bank (410) 244-4236
25 South Charles Street Confirm: (800) 624-4116
Mail Code 101-591 Attention: Robert D. Brown
Baltimore, MD 21201
Attention: Robert D. Brown
Corporate Trust Administration
</TABLE>
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 brokers 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 and pay other
registration expenses, including fees and expenses of the Trustee, filing fees,
legal and accounting fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the
exchange of the Old Certificates pursuant to the Exchange Offer. If, however,
certificates representing the New Certificates or the Old Certificates 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 the Old Certificates tendered, or if tendered Old Certificates 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 the Old Certificates pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered Holder or
any other person) 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.
29
<PAGE>
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement and
Holders of Old Certificates who do not tender their Old Certificates will not
have any further registration rights under the Registration Rights Agreement or
otherwise. Accordingly, any Holder of Old Certificates that does not exchange
that Holder's Old Certificates for New Certificates will continue to hold the
untendered Old Certificates and will be entitled to all the rights and
limitations applicable thereto under the applicable Trust, except to the extent
such rights or limitations, by their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
The Old Certificates that are not exchanged for New Certificates pursuant
to the Exchange Offer will remain restricted securities. Accordingly, such Old
Certificates may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) pursuant to an effective registration statement under the
Securities Act, (iii) so long as the Old Certificates are eligible for resale
pursuant to Rule 144A, to a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act in a transaction meeting the requirements of
Rule 144A, (iv) outside the United States to a foreign person pursuant to the
exemption from the registration requirements of the Securities Act provided by
Regulation S thereunder, (v) to an institutional accredited investor that,
prior to such transfer, furnishes to The First National Bank of Maryland, as
Trustee, a signed letter containing certain representations and agreements
relating to the restrictions on transfer of the Old Certificates evidenced
thereby (the form of which letter can be obtained from such Trustee) or (vi)
pursuant to another available exemption from the registration requirements of
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States.
Accordingly, if any Old Certificates are tendered and accepted in the
Exchange Offer, the trading market for the untendered Old Certificates could be
adversely affected. See "Risk Factors -- Factors Related to the Certificates
and the Exchange Offer -- Consequences of the Exchange Offer on Non-Tendering
Holders of the Old Certificates."
TERMINATION OF CERTAIN RIGHTS
Holders of the Certificates will not be entitled to certain rights under
the Registration Rights Agreement following the consummation of the Exchange
Offer. The rights that will terminate are the right (i) to have the Company
file with the Commission and use its best efforts to have declared effective a
shelf registration statement to cover resales of the Old Certificates by the
Holders thereof and (ii) to receive additional interest if the registration
statement of which this Prospectus is a part or the shelf registration
statement are not filed with, or declared effective by, the Commission within
certain specified time periods or the Exchange Offer is not consummated within
a specified time period.
OTHER
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to accept. Holders of the Old Certificates are urged
to consult their financial and tax advisors in making their own decision on
what action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the respective dates as of
which information is given herein. The Exchange Offer is not being made to (nor
will tenders be accepted from or on behalf of) Holders of Old Certificates in
any jurisdiction in which the making of the Exchange Offer or the acceptance
thereof would not be in compliance with the laws of such jurisdiction. However,
the Company may, at its discretion, take such action as it may deem necessary
to make the Exchange Offer in any such jurisdiction and extend the Exchange
Offer to Holders of Old Certificates in such jurisdiction. In any jurisdiction
the securities laws or blue sky laws of which require the Exchange Offer to be
made by a licensed broker or dealer, the Exchange Offer is being made on behalf
of the Company by one or more registered brokers or dealers which are licensed
under the laws of such jurisdiction.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "CODE"), applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "IRS") will not take a
contrary view, and no ruling from the IRS has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conditions set forth
herein. Any such changes or interpretations may or may not be retroactive
30
<PAGE>
and could affect the tax consequences to Holders. Certain Holders of the Old
Certificates (including insurance companies, tax exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) may be subject to special
rules not discussed below. This summary does not describe any tax consequences
arising under the laws of any state, locality or taxing authority other than
the United States. EACH HOLDER OF AN OLD CERTIFICATE SHOULD CONSULT HIS, HER OR
ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING SUCH
HOLDER'S OLD CERTIFICATES FOR NEW CERTIFICATES, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
The issuance of the New Certificates to Holders of the Old Certificates
pursuant to the terms set forth in this Prospectus should not constitute a
recognition event for Federal income tax purposes. Consequently, no gain or
loss should be recognized by Holders of the Old Certificates upon receipt of
the New Certificates. For purposes of determining gain or loss upon the
subsequent sale or exchange of the New Certificates, a Holder's basis in the
New Certificates should be the same as such Holder's basis in the Old
Certificates exchanged therefor. Holders should be considered to have held the
New Certificates from the time of their original acquisition of the Old
Certificates.
31
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement.
The Company will not receive any cash proceeds from the issuance of the New
Certificates offered hereby. In consideration of issuing the New Certificates
contemplated in this Prospectus, the Company will receive the Old Certificates
in like principal amount, the form and terms of which are the same as the form
and terms of the New Certificates (which replace the Old Certificates), except
as otherwise described herein. The Old Certificates surrendered in exchange for
the New Certificates will be retired and canceled and cannot be reissued.
The $109,722,000 of proceeds from the sale of the Old Certificates were
deposited with the Depositary on behalf of the applicable Escrow Agent for the
benefit of the Certificateholders of such Trust. At February 1, 1999,
$82,122,000 of the proceeds had been used by the Trusts to purchase Equipment
Notes issued by Owner Trustees to finance a portion of the purchase price of
four Aircraft leased to Midway. It is expected that the remaining $27,600,000
of proceeds will be used to purchase Equipment Notes during the Delivery Period
issued, at Midway's election, either (i) by each Owner Trustee to finance a
portion of the purchase price of the Leased Aircraft or (ii) by Midway to
finance a portion of the purchase price of the Owned Aircraft.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1998. It is anticipated that the lease of the eight Aircraft being
financed with the proceeds from the sale of the Old Certificates will be
treated for accounting purposes as operating leases and, accordingly, will not
affect the capitalization of the Company. However, should the Company purchase,
rather than lease, one or more of the Aircraft, the Company's long-term debt
and capital lease obligations will increase by an amount equal to the amount
borrowed, less any current portion thereof. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources." This table should be read in conjunction with the Financial
Statements of the Company, the notes thereto and the other financial data
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------
ACTUAL
------------------
(IN THOUSANDS)
<S> <C>
Current portion of long-term debt and capital lease obligations ..................... $ 5,349
Long-term debt and capital lease obligations, less current portion .................. 78,764
Stockholders' equity:
Preferred Stock, par value $.01 per share; 12,000,000 shares authorized ........... --
Common Stock, par value $.01 per share, 25,000,000 shares authorized; 8,602,395
shares issued and outstanding at December 31, 1998 ............................... 86
Additional paid-in capital ........................................................ 51,032
Retained earnings ($51.1 million of accumulated deficit eliminated in the
quasi-reorganization on June 30, 1997) ........................................... 19,345
--------
Total stockholders' equity ....................................................... 70,463
--------
Total capitalization ............................................................ $154,576
========
</TABLE>
32
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA AND GLOSSARY
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data are derived from the audited
financial statements of the Company. The data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEAR ENDED DECEMBER 31,
---------------------- ---------------------------------------------------
DECEMBER 31, 1994(1) 1995(1) 1996(2) 1997 1998
---------------------- ------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Passenger ................................. $ 14,662 $ 118,568 $ 173,541 $179,000 $205,566
Other ..................................... 1,213 4,034 6,493 7,275 5,873
--------- --------- --------- -------- --------
Total operating revenues ................. 15,875 122,602 180,034 186,275 211,439
Operating expenses:
Wages, salaries and related costs ......... 3,659 19,874 24,619 25,757 31,822
Aircraft fuel ............................. 3,514 16,782 27,300 21,499 19,623
Aircraft and engine rentals ............... 5,328 30,889 34,113 30,495 29,927
Commissions ............................... 1,205 9,382 13,728 13,978 15,071
Maintenance, materials and repairs ........ 1,383 13,551 17,930 15,760 16,603
Other rentals and landing fees ............ 1,760 11,924 12,711 9,812 9,640
Depreciation and amortization ............. 334 2,056 1,346 1,999 6,162
Other operating expenses .................. 7,548 43,769 54,603 51,108 54,047
Restructuring (3) ......................... 4,900 6,004 -- -- --
Impairment of long-lived assets (4) ....... -- -- 16,941 -- --
Equipment retirement charges (5) .......... -- -- -- -- 2,413
Recapitalization (6) ...................... -- -- -- 750 --
--------- --------- --------- -------- --------
Total operating expenses ................. 29,631 154,231 203,291 171,158 185,308
--------- --------- --------- -------- --------
Operating income (loss) ..................... (13,756) (31,629) (23,257) 15,117 26,131
Interest income (expense) -- net ............ (29) (413) (1,841) 114 (1,972)
Other income (expense) ...................... (29) (222) 834 -- --
--------- --------- --------- -------- --------
Total other income (expense) ................ (58) (635) (1,007) 114 (1,972)
--------- --------- --------- -------- --------
Income (loss) before income taxes and
extraordinary gain ........................ (13,814) (32,264) (24,264) 15,231 24,159
Income tax expense .......................... -- -- -- 6,306 9,178
--------- --------- --------- -------- --------
Income (loss) before extraordinary gain ..... (13,814) (32,264) (24,264) 8,925 14,981
Extraordinary gain (7) ...................... -- -- -- 15,969 --
--------- --------- --------- -------- --------
Net income (loss) ........................... (13,814) (32,264) (24,264) 24,894 14,981
Preferred dividends ......................... (600) (1,440) -- -- --
--------- --------- --------- -------- --------
Net income (loss) available for common
stockholders .............................. $ (14,414) $ (33,704) $ (24,264) $ 24,894 $ 14,981
========= ========= ========= ======== ========
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997 1998
------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
PER SHARE AMOUNTS (8):
Basic earnings per share:
Income before extraordinary gain ..................................... $ 1.47 $ 1.75
Extraordinary gain ................................................... 2.64 --
---------- ----------
Net income ........................................................... $ 4.11 $ 1.75
========== ==========
Weighted average shares used in computing basic earnings per share..... 6,059,051 8,574,972
========== ==========
Diluted earnings per share:
Income before extraordinary gain ..................................... $ 1.24 $ 1.54
Extraordinary gain ................................................... 2.22 --
---------- ----------
Net income ........................................................... $ 3.46 $ 1.54
========== ==========
Weighted average shares used in computing diluted earnings per
share ................................................................ 7,193,794 9,731,527
========== ==========
OTHER FINANCIAL DATA:
EBITDA (9) .............................................................. $ (23,485) $ (3,525) $ 18,533 $ 37,942
EBITDAR (9) ............................................................. 7,404 30,588 49,028 67,869
Cash flows provided by (used in):
Operating activities .................................................. (805) 5,784 8,765 20,894
Investing activities .................................................. (6,876) (2,614) (25,219) (8,872)
Financing activities .................................................. 3,571 4,836 60,158 (17,795)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SELECTED OPERATING STATISTICS (10):
Available seat miles (000s) ................ 1,387,921 1,758,560 1,387,864 1,544,945
Revenue passenger miles (000s) ............. 692,681 998,959 875,752 1,008,567
Load factor ................................ 49.9% 56.8% 63.1% 65.3%
Break-even load factor (11) ................ 60.8% 59.2% 57.5% 56.8%
Yield (cents) .............................. 17.12 17.37 20.44 20.38
Cost per available seat mile (cents) (12) .. 10.70 10.66 12.28 11.97
Aircraft (average during period) ........... 11.0 13.7 13.0 18.1
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------
1994 1995(13) 1996(13) 1997(13) 1998(13)
----------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, restricted cash and short-term
investments ................................................... $ 6,909 $ 2,799 $ 12,805 $ 58,071 $ 58,248
Working capital ................................................ (2,745) (41,117) (42,198) 20,826 32,880
Equipment and property, net .................................... 1,861 9,258 6,669 46,574 103,007
Total assets ................................................... 35,982 56,010 38,384 139,810 203,581
Long-term debt and capital lease obligations (net of current
maturities) ................................................... 2,018 7,307 11,704 39,187 78,764
Stockholders' equity (deficit) (14) ............................ 16,586 (18,385) (40,569) 48,486 70,463
</TABLE>
- -------
(1) Does not reflect any possible adjustment due to the prior period
adjustment. See Note 14 of Notes to the Financial Statements. The net
income statement impact of any restatement for the 5 months ended
December 31, 1994 and the year ended December 31, 1995 would be an
approximately $1.3 million increase in the net loss.
(2) The Company reclassified certain balances to reflect classifications in
the 1997 and 1998 financial statements.
(3) The Company recorded restructuring charges for the five months ended
December 31, 1994 of $4.9 million, related to the Company's decision to
move from Chicago to RDU and in 1995 of $6.0 million related to the
return of four A320 aircraft and other related one-time charges.
34
<PAGE>
(4) The Company recorded an impairment loss of $16.9 million from certain
long-lived assets, primarily intangible assets, that were determined by
Company management to be impaired in accordance with SFAS 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." See Note 2 of Notes to Financial Statements.
(5) The Company recorded equipment retirement charges related to the return
of four Fokker and one Airbus aircraft to their lessors. See Note 2 of
Notes to Financial Statements.
(6) The Company recorded a one-time charge of $0.75 million in 1997 related
to the Recapitalization. See Note 13 of Notes to Financial Statements.
(7) Extraordinary gain includes one-time gains recognized in connection with
the Recapitalization. See Notes 11 and 13 of Notes to Financial
Statements.
(8) Since the Company was recapitalized in February 1997 and all prior
capital stock was cancelled at that time, per share amounts prior to 1997
are not meaningful and thus are not presented.
(9) EBITDA represents income before income taxes, dividends and extraordinary
item plus interest expense (net of accreted interest), depreciation,
amortization, restructuring expense, impairment of long-lived assets,
equipment retirement charges and recapitalization expense. EBITDAR
represents income before income taxes, dividends and extraordinary item
plus interest expense (net of accreted interest), depreciation,
amortization, restructuring expense, impairment of long-lived assets,
equipment retirement charges, recapitalization expense and aircraft and
engine rentals. EBITDA and EBITDAR are presented because each is a widely
accepted financial indicator of a company's ability to incur and service
debt. However, EBITDA and EBITDAR should not be considered in isolation,
as a substitute for net income or cash flow data prepared in accordance
with generally accepted accounting principles or as a measure of a
company's profitability or liquidity.
(10) For definitions of the airline operating terms used in this table, see "
-- Glossary."
(11) "Break-even load factor" as represented above excludes restructuring,
impairment of long-lived assets, equipment retirement charges and
recapitalization expenses divided by the product of available seat miles
and yield. Had restructuring, impairment of long-lived assets, equipment
retirement charges and recapitalization expenses been included for the
years ended December 31, 1995, 1996, 1997, and 1998 the break-even load
factor would have been 63.3%, 64.6%, 57.8%, and 57.6%, respectively.
(12) "Cost per available seat mile" as represented above excludes
restructuring, impairment of long-lived assets, equipment retirement
charges and recapitalization expenses, divided by available seat miles.
Had restructuring, impairment of long-lived assets, equipment retirement
charges and recapitalization expenses been included for the years ended
December 31, 1995, 1996, 1997, and 1998 cost per available seat mile
would have been 11.1 cents, 11.6 cents, 12.3 cents, and 12.1 cents,
respectively.
(13) Reflects prior period adjustment. See Note 14 of Notes to Financial
Statements.
(14) As a result of the Recapitalization, the Company approved a corporate
readjustment of the Company's accounts in the form of a
quasi-reorganization which was effected on June 30, 1997. As a result,
$51.1 million of accumulated deficit was eliminated. See Note 1 of Notes
to Financial Statements.
35
<PAGE>
GLOSSARY
Certain of the terms included in this section and elsewhere in this
Prospectus have the meanings indicated below:
<TABLE>
<S> <C>
Aircraft (average during period) ........... The average number of aircraft owned or leased during the period.
Aircraft utilization ....................... The average number of block hours operated in scheduled service per day
per aircraft for the total fleet of aircraft.
Available seat miles (ASMs) ................ The number of seats available for scheduled passengers multiplied by the
number of miles those seats were flown.
Average fare ............................... The average fare paid by a revenue passenger.
Average seats per departure ................ The average number of available seats per departing aircraft.
Average stage length ....................... The average number of miles flown per flight.
Block hour ................................. The total time an aircraft is in motion from brake release at the origination to
brake application at the destination.
Break-even load factor ..................... The load factor at which scheduled passenger revenues would have been
equal to operating plus non-operating expenses/(income) (holding yield
constant).
Cost per available seat mile (CASM) ........ Operating expenses plus non-operating expenses/(income) divided by ASMs.
Departure .................................. A scheduled aircraft flight.
Fuel price per gallon ...................... The average price per gallon of jet fuel for the fleet (including fueling
charges).
Load factor ................................ RPMs divided by ASMs.
Onboard passengers ......................... The number of revenue passengers carried.
Revenue passenger miles (RPMs) ............. The number of miles flown by revenue passengers.
Revenue per available seat mile (RASM) ..... Total operating revenues divided by ASMs.
Yield ...................................... The average scheduled passenger fare revenue for each mile a scheduled
revenue passenger is carried.
</TABLE>
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS, THE NOTES THERETO AND THE OTHER FINANCIAL DATA INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
RESULTS OF OPERATIONS
For the year ended December 31, 1998 the Company's net income was $15.0
million. Excluding the unusual items discussed below, net income was $16.5
million, up 85% from the net income of $8.9 million for the year ended December
31, 1997. Operating income rose 73% in 1998 to $26.1 million from $15.1 million
in 1997. Revenue for 1998 was up 14% over 1997 to $211.4 million. Excluding the
equipment retirement and special recapitalization charges, the Company's
operating margin increased to 13.5% in 1998 from 8.5% in 1997.
UNUSUAL ITEMS
YEAR ENDED DECEMBER 31, 1998
o $2.4 million equipment retirement charge related to the retirement of
five aircraft, two of which left the fleet in 1998. (The Company
anticipates that it will incur an additional $1.5 million in charges in
the first half of 1999 as it retires the additional two F100s and one
Airbus A320.)
YEAR ENDED DECEMBER 31, 1997
o Extraordinary gain of $16.0 million and a special recapitalization charge
of $0.75 million related to the February 1997 recapitalization of the
company.
Earnings per diluted share for the year ended December 31, 1998 amounted to
$1.54 ($1.69 excluding unusual items) compared to $3.46 ($1.24 excluding
unusual items) for the year ended December 31, 1997.
SELECTED OPERATING DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1996 (1) 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Available seat miles (000s) .............. 1,387,921 1,758,560 1,387,864 1,544,945
Revenue passenger miles (000s) ........... 692,681 998,959 875,752 1,008,567
Load factor .............................. 49.9% 56.8% 63.1% 65.3%
Break-even load factor (2) ............... 60.8% 59.2% 57.5% 56.8%
Departures ............................... 24,403 29,192 26,898 35,990
Block Hours .............................. 38,933 48,682 42,867 55,783
Passenger revenue per available seat mile
(cents) ................................. 8.54 9.87 12.90 13.31
Yield (cents) ............................ 17.12 17.37 20.44 20.38
Average fare ............................. $ 89 $ 99 $ 108 $ 103
Cost per available seat mile (cents) (2) . 10.70 10.66 12.28 11.97
Onboard passengers ....................... 1,338,438 1,742,957 1,660,140 1,995,117
Average seats per departure .............. 108 104 101 88
Average stage length (miles) ............. 532 571 524 475
Aircraft (average during period) ......... 11.0 13.7 13.0 18.1
Aircraft utilization (hours per day) ..... 9.9 9.8 9.0 8.4
Fuel price per gallon (cents) ............ 69.0 80.6 73.4 57.3
</TABLE>
- -------
(1) Certain amounts were reclassified to reflect classifications in the 1997
and 1998 audited financial statements.
(2) Excludes restructuring, impairment of long-lived assets, recapitalization
expenses and equipment retirement charges.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
CAPACITY. In 1998, the Company produced 1.545 billion ASMs, an increase of
157 million or 11.3% from 1997. The increase in ASM production was attributable
to 33.8% more departures (to 35,990), offset somewhat by a 9.4% shorter average
stage length (to 475 miles) and 12.9% fewer seats per departure (to 88 seats).
These changes resulted from the addition throughout 1998 of ten, 50-seat CRJs,
which added frequency to shorter routes and began flying new shorter haul
routes, as well as the Company's cancellation of service on certain longer haul
routes.
37
<PAGE>
OPERATING REVENUES. The Company's operating revenues increased 13.5% to
$211.4 million for the year ended December 31, 1998 from $186.3 million for the
year ended December 31, 1997. The increase is attributable to a 20.2% increase
in the number of passengers boarded to 1.995 million from 1.660 million offset
by a 4.6% decrease in average fare paid to $103 from $108. Passenger revenue
per ASM increased 3.3% to 13.3 cents per ASM due to a 2.2 percentage point
increase in load factor to 65.3% partially offset by a 0.3% decrease in yield
(revenue per RPM) to 20.4 cents. Cargo revenue increased 9.5% to $2.1 million
for the year ended December 31, 1998 from $1.9 million for the year ended
December 31, 1997. The increase is due to increased mail and other cargo
carried during 1998. Other revenue decreased 13.5% to $2.7 million for the year
ended December 31, 1998 from $4.3 million for the year ended December 31, 1997,
due primarily to the revenue sharing agreement with the Company's commuter
affiliate.
OPERATING EXPENSES. The Company's operating expenses increased 8.3% to
$185.3 million for the year ended December 31, 1998 from $171.2 million for the
year ended December 31, 1997. Total expenses increased primarily due to
increases in number of employees, wages, commissions, depreciation expense, and
the recording of $2.4 million of equipment retirement charges in 1998 partially
offset by reduction in fuel prices in 1998 and the absence of the special
recapitalization charge which was reflected in 1997. Total operating expense
per ASM decreased 2.8% to 12.00 cents from 12.34 cents. Excluding the one-time
charges for the Recapitalization in 1997 and the equipment retirement charges
in 1998, operating expense per ASM decreased 3.7% to 11.84 cents from 12.29
cents. This decrease is attributable to the reduction in fuel prices and the
spreading of the Company's fixed costs over the larger, more cost-efficient ASM
base discussed above in "Capacity", offset by increases in wages and salaries
and related costs, including profit sharing, and depreciation expenses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1998
------------------------------ -----------------------------
PERCENT OF COST PER PERCENT OF COST PER
TOTAL EXPENSES ASM (CENTS) TOTAL EXPENSES ASM (CENTS)
---------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Wages, salaries and related costs ...................... 15.1% 1.86 17.0% 2.06
Aircraft fuel .......................................... 12.6% 1.55 10.5% 1.27
Aircraft and engine rentals ............................ 17.8% 2.20 16.0% 1.94
Commissions ............................................ 8.2% 1.01 8.0% 0.98
Maintenance, materials and repairs ..................... 9.2% 1.14 8.9% 1.07
Other rentals and landing fees ......................... 5.7% 0.71 5.1% 0.62
Depreciation and amortization .......................... 1.2% 0.14 3.3% 0.40
Other operating expenses ............................... 29.9% 3.68 28.8% 3.50
----- ----- ----- -----
Sub-total operating expenses before recapitalization
charge and equipment retirement charge ............... 99.7% 12.29 97.6% 11.84
----- ----- ----- -----
Equipment retirement charges ........................... 0.0% 0.00 1.3% 0.16
Recapitalization charge ................................ 0.4% 0.05 0.0% 0.00
----- ----- ----- -----
Total operating expenses ............................... 100.1% 12.34 98.9% 12.00
----- ----- ----- -----
Other (income)expenses ................................. ( 0.1%) (0.01) 1.1% 0.13
----- ------ ----- -----
Total expenses ......................................... 100.0% 12.33 100.0% 12.13
===== ====== ===== =====
</TABLE>
Wages, salaries and related costs increased $6.1 million or 23.5% to $31.8
million for the year ended December 31, 1998 from $25.8 million for the year
ended December 31, 1997. The increase is attributable to increased staffing
associated with the addition of new aircraft throughout the year, annual wage
increases for all personnel and general hiring to fill specific needs within
the Company throughout 1997 and 1998. Included in the 1998 expense are
discretionary bonuses amounting to $2.4 million versus $1.2 million in 1997.
Wages, salaries and related cost per ASM increased 0.20 cents or 10.8% to 2.06
cents. The increase in unit costs is attributable to the items noted above as
well as the changes noted in "Capacity".
Aircraft fuel expense decreased 8.7% to $19.6 million for the year ended
December 31, 1998 from $21.5 million for the year ended December 31, 1997. The
decrease was due to a 21.9% decrease in the average fuel price per gallon to
57.3 cents from 73.4 cents, partially offset by the 16.8% increase in gallons
of fuel consumed. Aircraft fuel expense per ASM decreased 18.1% to 1.27 cents
because of the fuel price reduction.
Aircraft and engine rental expense decreased 1.9% to $29.9 million for the
year ended December 31, 1998 from $30.5 million for the year ended December 31,
1997. The decrease in expense is attributable to the lower lease rates for the
F-100s after the Recapitalization in February 1997, the return of two F-100s in
late 1998, and the reduced use of leased spare engines, offset by rent expense
on five new, leased CRJs. Aircraft and engine rentals expense per ASM decreased
11.8% to
38
<PAGE>
1.94 cents from 2.20 cents. The decrease in cost per ASM primarily resulted
from the 11.3% increase in ASMs discussed above in "Capacity", largely flown on
five owned CRJs which did not incur lease expense.
Commission expense increased 7.8% to $15.1 million for the year ended
December 31, 1998 from $14.0 million for the year ended December 31, 1997. This
was due to the 14.8% increase in passenger revenues partially offset by a
decrease of travel agency revenues as a percent of passenger revenue to 65.7%
from 69.2% and a reduction in commission rate paid from 10% to 8%. Commission
expense per ASM decreased 3.0% to 0.98 cents from 1.01 cents, primarily driven
by the decrease of travel agency revenues as a percent of passenger revenue and
the reduction in commission rate paid offset somewhat by the 3.2% increase in
passenger revenue per available seat mile to 13.3 cents from 12.9 cents.
Maintenance, materials and repairs expense increased 5.3% to $16.6 million
for the year ended December 31, 1998 from $15.8 million in the year ended
December 31, 1997. The expense increase is largely attributable to the 30.1%
increase in block hours of aircraft operations offset by reductions in Fokker
maintenance rates and the impact of the acquisition of new CRJs with initially
low maintenance costs. Maintenance, materials and repairs expense per ASM
decreased 6.1% to 1.07 cents from 1.14 cents.
Other rentals and landing fees expense decreased 1.8% to $9.6 million for
the year ended December 31, 1998 from $9.8 million for the year ended December
31, 1997. Other rentals and landing fees expense per ASM decreased 12.7% to
0.62 cents from 0.71 cents, due to decreased rents at certain facilities, lower
landing fees for the relatively lighter CRJ aircraft and lower landing fees at
RDU partially offset by increased landings.
Depreciation and amortization expense increased 208.3% to $6.2 million for
the year ended December 31, 1998 from $2.0 million for the year ended December
31, 1997. Depreciation and amortization expense per ASM increased 185.7% to
0.40 cents from 0.14 cents in the year ended December 31, 1997. During 1998 the
Company increased its investment in fixed assets by $62.6 million, including
the acquisition of five owned CRJs, the acquisition of an inventory of F100
parts, two newly acquired F100 spare engines, and CRJ parts to provision the
new fleet type.
Other operating expense increased 5.8% to $54.0 million for the year ended
December 31, 1998 from $51.1 million for the year ended December 31, 1997.
Other operating expenses consist primarily of facility rentals, reservations,
ground handling, advertising, general and administrative expense and insurance.
The increase in expense is attributable to the 33.8% increase in departures and
20.2% increase in passengers, partially offset by savings in insurance and
marketing expenses. Other operating expense per ASM decreased 4.9% to 3.50
cents from 3.68 cents in 1997.
Interest income increased $2.4 million to $4.2 million for year ending
December 31, 1998 due to higher average cash balances throughout the year.
Interest expense increased $4.4 million to $6.1 million due to the debt service
on the five owned CRJs and the Fokker spare engine loans. Net interest expense
per ASM for year ending December 31, 1998 was 0.13 cents compared to net
interest income per ASM of 0.01 cents in the comparable prior period.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
CAPACITY. In 1997, the company produced 1.388 billion ASMs, a reduction of
371 million or 21.1% from 1996. The reduction in ASM production was
attributable to 7.9% fewer departures (to 26,898), an 8.2% shorter average
stage length (to 524 miles) and 2.9% fewer seats per departure (to 101 seats).
These changes resulted from the Company's cancellation of service on certain
longer haul routes and the decision to return four (relatively larger) Airbus
A320 aircraft to their lessors, which were made to better position the Company
by concentrating on profitable operations and operations deemed to have a
higher future return. This change in capacity resulted in higher costs per ASM
for the majority of the Company's operating costs, as more particularly
described below.
OPERATING REVENUES. The Company's operating revenues increased 3.5% to
$186.3 million for the year ended December 31, 1997 from $180.0 million for the
year ended December 31, 1996. The increase is attributable to a 9.1% increase
in average fare paid to $108 from $99 offset by a 4.8% decline in the number of
passengers boarded to 1.66 million from 1.74 million. Revenue per ASM increased
31.1% to 13.4 cents per ASM due to a 17.2% increase in yield (revenue per RPM)
to 20.4 cents combined with a 6.3 percentage point increase in load factor to
63.1%.
OPERATING EXPENSES. The Company's operating expenses decreased 15.8% to
$171.2 million for the year ended December 31, 1997 from $203.3 million for the
year ended December 31, 1996. Total expenses declined primarily due to the
reduction in the scope of the Company's operations and the benefits realized
through the Recapitalization, partially offset by increases in wage expense.
Total operating expense per ASM increased 6.7% to 12.34 cents from 11.56 cents.
Excluding the one-time charge for the Recapitalization in 1997 and charges for
recognition of the impairment of long-lived assets in 1996 in accordance with
SFAS No. 121, operating expense per ASM increased 15.9% to 12.29 cents from
10.6 cents. This increase
39
<PAGE>
is attributable to the spreading of the Company's fixed costs over the smaller,
less cost-efficient ASM base discussed above in "Capacity", as well as the cost
impact of the 31.1% increase in unit revenues. The increase in revenue per ASM
drives related increases in passenger and revenue-related costs, the impact of
which was to raise operating expense per ASM by approximately 0.5 cents.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 (1) 1997
-------------------- -----------------------
PERCENT PERCENT
OF COST OF COST
TOTAL PER ASM TOTAL PER ASM
EXPENSES (CENTS) EXPENSES (CENTS)
---------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Wages, salaries and related costs ............................................ 12.0% 1.40 15.1% 1.86
Aircraft fuel ................................................................ 13.4% 1.55 12.6% 1.55
Aircraft and engine rentals .................................................. 16.7% 1.94 17.8% 2.20
Commissions .................................................................. 6.7% 0.78 8.2% 1.01
Maintenance, materials and repairs ........................................... 8.8% 1.02 9.2% 1.14
Other rentals and landing fees ............................................... 6.2% 0.72 5.7% 0.71
Depreciation and amortization ................................................ 0.7% 0.08 1.2% 0.14
Other operating expenses ..................................................... 26.7% 3.11 29.9% 3.68
----- ----- ----- -----
Sub-total operating expenses before recapitalization charges and impairment of
long-lived assets ........................................................... 91.2% 10.60 99.7% 12.29
----- ----- ----- -----
Impairment of long-lived assets .............................................. 8.3% 0.96 -- --
Recapitalization charges ..................................................... -- -- 0.4% 0.05
----- ----- ----- -----
Total operating expenses ..................................................... 99.5% 11.56 100.1% 12.34
----- ----- ----- -----
Other (income) expense ....................................................... 0.5% 0.06 ( 0.1)% (0.01)
----- ----- ----- ------
Total expenses ............................................................... 100.0% 11.62 100.0% 12.33
===== ===== ===== ======
</TABLE>
- -------
(1) Certain 1996 amounts were reclassified to reflect classifications in the
1997 and 1998 audited financial statements.
Wages, salaries and related costs increased $1.2 million or 4.6% to $25.8
million for the year ended December 31, 1997 from $24.6 million for the year
ended December 31, 1996. The increase is attributable to increased staffing
associated with the addition of new aircraft at year end, annual increases for
all personnel and general hiring to fill specific needs within the Company
throughout 1997. Included in the 1997 amounts are discretionary bonuses
amounting to $1.2 million or an average of 5.4% of each employee's annual
compensation. Wages, salaries and related cost per ASM increased 0.46 cents or
32.8% to 1.86 cents. The increase in unit costs is attributable to the items
noted above as well as the changes noted in "Capacity."
Aircraft fuel expense decreased 21.2% to $21.5 million for the year ended
December 31, 1997 from $27.3 million for the year ended December 31, 1996. The
decrease was due to an 8.9% decrease in the average fuel price per gallon to
73.4 cents from 80.6 cents and the 11.9% reduction in block hours. Aircraft
fuel expense per ASM remained stable at 1.55 cents because the fuel price
reduction was offset by the fewer number of relatively more fuel efficient
A320s in the fleet along with shorter stage lengths which increases fuel
consumption on a unit cost basis.
Aircraft and engine rental expense decreased 10.6% to $30.5 million for
the year ended December 31, 1997 from $34.1 million for the year ended December
31, 1996. The decrease in expense is attributable to the 5.1% decrease in the
average number of aircraft to 13.0 from 13.7 and the lower lease rates for the
F-100s after the Recapitalization in February 1997. Aircraft and engine rentals
expense per ASM increased 13.4% to 2.20 cents from 1.94 cents. The increase in
cost per ASM resulted from the 21.1% decrease in ASMs discussed above in
"Capacity," partially offset by the overall decrease in lease rates.
Commissions expense increased 1.8% to $14.0 million for the year ended
December 31, 1997 from $13.7 million for the year ended December 31, 1996. This
was due to the 3.5% increase in operating revenues offset by a decrease of
travel agency revenues as a percent of passenger revenue to 69.2% from 71.4%.
Commissions expense per ASM increased 29.5% to 1.01 cents from 0.78 cents,
primarily driven by the 31.1% increase in revenue per available seat mile to
13.4 cents from 10.2 cents.
40
<PAGE>
Maintenance, materials and repairs expense decreased 12.1% to $15.8
million for the year ended December 31, 1997 from $17.9 million in the year
ended December 31, 1996. The expense decrease is largely attributable to the
11.9% reduction in block hours of aircraft operations. Maintenance, materials
and repairs expense per ASM increased 11.8% to 1.14 cents from 1.02 cents due
to the return of the four relatively more maintenance efficient A320s to their
lessors in 1996.
Depreciation and amortization expense increased 48.5% to $2.0 million for
the year ended December 31, 1997 from $1.3 million for the year ended December
31, 1996. Depreciation and amortization expense per ASM increased 75% to 0.14
cents from 0.08 cents in the year ended December 31, 1996. During 1997, the
Company increased its investment in fixed assets by $41.8 million, including
the two CRJs delivered in December (which had a minimal impact on depreciation
expense for the year) and the acquisition of an inventory of F-100 parts.
Other operating expense decreased 9.5% to $60.9 million for the year ended
December 31, 1997 from $67.3 million for the year ended December 31, 1996.
Other operating expenses consist primarily of landing fees and facility
rentals, reservations, ground handling, advertising, general and administrative
expense and insurance. The decrease in expense is attributable to the 7.9%
decrease in departures and 4.8% decrease in passengers, as well as expenses
related to unusually bad weather in the winter of 1996 and Hurricane Fran in
September 1996. Other operating expense per ASM increased 14.6% to 4.39 cents
from 3.83 cents. The increase in cost per ASM is the result of the items noted
above and the decrease in ASMs discussed in "Capacity" above.
In the last quarter of 1997, the Company fully reserved a receivable of
$1.6 million due from a business partner. The Company made certain other
adjustments in the last quarter of 1997 related to physical inventory
adjustments, changes in estimates related to the special recapitalization
charges and the extraordinary gain. The net increase (decrease) of the
adjustments is as follows:
<TABLE>
<CAPTION>
INCOME BEFORE
EXTRAORDINARY GAIN NET INCOME
-------------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Physical inventory adjustments ........... $ 706 $ 424
Accounts receivable reserve .............. (1,551) (931)
Special recapitalization charges ......... 475 285
Extraordinary gain ....................... -- 676
-------- ------
Total .................................... $ (370) $ 454
======== ======
</TABLE>
SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS
As is common in its industry, the Company experiences seasonal factors
during certain periods of the year that have combined in the past to reduce the
Company's traffic, profitability and cash generation as compared to the
remainder of the year. The highest levels of traffic and revenue are generally
realized in the second quarter and the lowest levels of traffic and revenue are
generally realized in the third quarter. Given the Company's high proportion of
fixed costs, such seasonality affects the Company's profitability from quarter
to quarter. In addition, many of the Company's areas of operations experience
adverse weather during the winter, causing a greater percentage of the
Company's flights to be canceled and/or delayed than in other quarters. See
"Risk Factors -- Factors Related to the Company and the Industry -- Seasonality
and Cyclicality."
41
<PAGE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------
(DOLLARS IN THOUSANDS) MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues .............. $ 47,853 $ 47,238 $ 43,122 $ 48,062
Operating income (loss) (1) ..... $ 3,880 $ 6,443 $ 2,807 $ 2,737
Income (loss) before
extraordinary gain ............ $ 1,342 $ 3,916 $ 1,722 $ 1,945
Net income (loss) ............... $ 16,614 $ 3,916 $ 1,722 $ 2,641
ASMs (000s) ..................... 366,944 343,933 331,190 345,797
RPMs (000s) ..................... 221,157 219,355 212,443 222,797
Load factor ..................... 60.3% 63.8% 64.1% 64.4%
Break-even load factor (1) ...... 55.2% 54.8% 59.7% 60.6%
Yield (cents) ................... 20.81 20.81 19.40 20.69
PRASM (cents) (2) ............... 12.54 13.27 12.44 13.52
CASM (cents) (1) ................ 11.98 11.86 12.15 13.11
Aircraft (average during
period) ....................... 13.0 13.0 13.0 13.0
<CAPTION>
1998
---------------------------------------------------
(DOLLARS IN THOUSANDS) MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues .............. $ 50,521 $ 55,708 $ 49,471 $ 55,739
Operating income (loss) (1) ..... $ 6,566 $ 9,440 $ 3,962 $ 8,576
Income (loss) before
extraordinary gain ............ $ 3,855 $ 5,298 2,375 $ 3,453
Net income (loss) ............... $ 3,855 $ 5,298 2,375 $ 3,453
ASMs (000s) ..................... 373,166 387,752 389,544 394,483
RPMs (000s) ..................... 232,067 261,474 256,411 258,615
Load factor ..................... 62.2% 67.4% 65.8% 65.6%
Break-even load factor (1) ...... 54.0% 56.4% 61.3% 55.9%
Yield (cents) ................... 21.15 20.73 18.78 20.93
PRASM (cents) (2) ............... 13.15 13.98 12.36 13.72
CASM (cents) (1) ................ 11.82 12.09 11.84 12.10
Aircraft (average during
period) ....................... 15.1 17.2 18.5 21.0
</TABLE>
- -------
(1) Excludes recapitalization expenses and equipment retirement charges.
(2) Passenger revenue per ASM has been restated to reflect the change in
formula to use passenger revenue instead of total revenue.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's working capital improved during the year ended December 31,
1998 compared to the year ended December 31, 1997. As of December 31, 1998, the
Company had cash, restricted cash, and short-term investments of $58.2 million
and working capital of $32.9 million compared to $58.1 million and $20.8
million, respectively, as of December 31, 1997. During the year ended December
31, 1998, cash, restricted cash and short-term investments increased $0.2
million from December 31, 1997, reflecting net cash provided by operating
activities of $27.6 million (excluding changes in restricted cash), net cash
used in investing activities of $9.6 million (excluding purchases and sales of
short-term investments), and net cash used in financing activities of $17.8
million. During the year ended December 31, 1998, net cash provided by
operating activities was primarily due to net income, net cash used in
investing activities was due to purchases of equipment and property and
equipment purchase deposits, and net cash used in financing activities reflects
repayment of long-term debt. During the year ended December 31, 1997, cash,
restricted cash and short-term investments increased $45.3 million, reflecting
net cash provided by operating activities of $9.6 million (net of changes in
restricted cash), net cash used in investing activities of $24.5 million
(excluding purchases and sales of short-term investments), and net cash
provided by financing activities of $60.2 million. During the year ended
December 31, 1997, net cash provided by operating activities was primarily due
to net income partially offset by increases in operating assets, net cash used
in investing activities was due to purchases of equipment and aircraft purchase
deposits, and net cash provided by financing activities was due to the proceeds
of the Recapitalization and the Company's initial public offering.
CAPITAL RESOURCES
Since the February 1997 Recapitalization, the Company has been able to
generate sufficient funds from operations to meet its working capital
requirements and does not currently have any lines of credit. The Company
believes that the working capital available from ongoing operations, combined
with financing for the purchase of the spare engines for the CRJ fleet and the
standby financing for the 12 additional CRJ aircraft to be delivered in 1999
and 2000, will be sufficient to meet its anticipated requirements for capital
expenditures and other cash requirements for the foreseeable future.
In August 1998, the Company completed an offering of $109,722,000 of the
Old Certificates. The Certificates are not direct obligations of, or guaranteed
by, the Company and therefore are not included in the Company's financial
statements. The cash proceeds from the sale of the Old Certificates, which were
deposited with the Escrow Agent, enable the Company to finance (through either
leveraged leases or secured debt financings) the debt portion of eight CRJ
aircraft, the last of which is scheduled to be delivered in June 1999. The
Company has arranged for equity participation for the first six CRJ aircraft,
two of which were delivered in September 1998 and one in each of October 1998,
November 1998, December 1998 and January 1999. The Company has obtained
commitments for equity participation for the remaining two CRJs to be
42
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financed in part with the proceeds of the sale of the Old Certificates,
although there can be no assurance that such commitments will close. As of the
date of this Prospectus, approximately $27.6 million of proceeds remain on
deposit. If any funds remain as deposits at September 30, 1999 (or earlier
under certain circumstances), such funds will be distributed back to the
Certificateholders.
CAPITAL EXPENDITURES
The Company's cash outflows for capital expenditures in the year ended
December 31, 1998 and 1997 were $7.3 million and $7.3 million, respectively,
excluding financed purchases. Debt financed purchases in the year ended
December 31, 1998 and 1997 were $53.8 million and $34.5 million, respectively.
In September 1997 the Company agreed to acquire 10 Canadair CRJ aircraft
between December 1997 and December 1998, and took options on 20 more aircraft
which would be delivered 10 each in 1999 and 2000. Of the 20 options, the first
three were exercised in April 1998, seven were exercised in September 1998 and
three more were exercised in December 1998; eleven of these CRJs have been
delivered and placed in service as of January 31, 1999. Several financing
alternatives have been arranged for the firm orders, including standby or
long-term lease financing, and short-term bridge financing. The Company expects
to arrange a combination of third party debt and leveraged lease financing for
the remaining CRJs, but will use the standby lease financing in the event that
it cannot arrange more attractive financing from third party sources. For each
aircraft that is purchased (as opposed to leased), the Company anticipates an
initial cash outlay of approximately $4 million. Leveraged leases were
finalized in September for the sixth and seventh CRJ aircraft which were
delivered in September, in November 1998 for the eighth and ninth CRJ aircraft
which were received in October 1998 and November 1998, respectively, in
December 1998 for the tenth aircraft which was received in December 1998 and in
January 1999 for the eleventh aircraft which was received in January 1999.
The Company expects to arrange financing for two spare CRJ engines the
Company has agreed to acquire. To support its operation of F-100 aircraft, in
August 1998, the Company purchased a refurbished Rolls Royce Tay 650-15 Engine
which was funded from working capital plus certain bank debt and a new spare
Rolls Royce Tay 650-15 engine which was financed through a lease purchase
obligation. The Company expects to arrange financing for telecommunications
equipment and office furnishings associated with the move to the new
headquarters facility.
The Company's fixed costs will increase significantly with the
introduction of the CRJs. Based on the current interest rate environment, the
Company estimates that its fixed charges will increase by approximately $18.0
to $19.5 million per year as a result of its debt-financed purchase or
leveraged lease financing of the 12 remaining CRJs on firm order and those CRJs
recently delivered. However, depending upon the financing method ultimately
chosen, the Company's balance sheet liabilities may or may not increase.
OTHER FINANCING
The Company has significant lease obligations for aircraft that are
classified as operating leases and therefore not reflected as liabilities on
the Company's balance sheet. The remaining terms of such leases range from less
than three months to approximately seventeen years. The Company's total rent
expense for the year ended December 31, 1998 and 1997 under all non-cancelable
aircraft operating leases was approximately $29.3 million and $29.1 million,
respectively.
YEAR 2000
State of Readiness:
The Company's Year 2000 Project has been designed to ensure that the
Company's computer systems and embedded operating systems will function
properly beyond 1999. The Project which the Company has developed involves five
phases: Inventory, Assessment, Remediation, Contingency Planning and Testing.
The Inventory Phase is essentially completed. During the Inventory Phase,
the Company identified six business-critical functions which rely heavily on
computer or embedded systems for safe or reliable operations. These six
functions include the operation of aircraft, the operation of the Company's
computer reservation system and related telephone systems, the transmission and
reconciliation of credit card and travel agency sales receipts and collection
of money, the operation of the Company's yield management systems, the
operation of the Company's aircraft dispatch and air traffic control systems as
they communicate with the FAA's air traffic controllers and other agencies and
the utilization of certain time-sensitive crew qualification and tracking
systems, and aircraft maintenance control and planning systems.
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The Assessment Phase of the Company's Year 2000 Project first began with a
detailed review of these six critical functions and the applicable systems used
by the Company or its vendors in performing these functions. This review has
concluded and the results are as follows:
o With respect to its aircraft, the Company has received assurances and
warranties that the embedded technology in such aircraft and parts will
process date data correctly in the Year 2000. The manufacturers and
suppliers of these aircraft and parts have provided the Company with
regular updates of their investigation and testing of the component
systems for Year 2000 compliance. To date, the information provided by
these sources has not identified any aircraft or parts in the Company's
projected Year 2000 fleet which are not now Year 2000 compliant.
o With respect to its yield management systems and its computer reservation
system, each of these systems is operated and maintained by American
Airlines, Inc. and/or its affiliate, The SABRE Group. The SABRE Group has
stated that the computer reservation system is now Year 2000 compliant,
with only testing of minor sub-systems remaining to be completed. The
Company's computer reservation system has, in fact, begun taking
reservations for travel in the Year 2000. The SABRE Group has also stated
that substantially all of its core systems are either completed or in the
final testing phases of its Year 2000 Project.
o With respect to its telephone systems, the Company recently purchased a
new phone switch and related systems/ equipment scheduled for
installation into its headquarters and reservations center in February
1999. The new products and systems have been warranted as Year 2000
compliant. The Company intends to begin testing and utilizing these new
products and systems during the second quarter of 1999.
o With respect to the systems used in the transmission and reconciliation
of credit card and travel agency sales, the Company is reliant upon the
systems of the credit card companies, the systems used by industry
clearing houses and reporting agencies to transact business with travel
agencies and credit card companies and the systems used by the Company's
revenue accounting vendor. The Company has received written assurances
from its revenue accounting vendor that its systems are Year 2000
compliant and that it successfully completed Year 2000 testing in
September 1998. The testing included the successful conversion of date
data from the industry clearing houses and reporting agencies allowing
the revenue accounting vendor to process transactions with these third
parties. The Company has reviewed information made available by the
credit card companies (such as MasterCard and American Express) and these
companies have stated that cardmembers should not experience any problems
using cards with expiration dates of the Year 2000 or beyond.
o With respect to its primary maintenance control and planning system, the
Company has determined that this system is not Year 2000 compliant. The
Company and its third party consultants are currently working on the
upgrade of this system and the Company intends to complete this upgrade
in a timely manner. The Company has developed a contingency plan to
utilize in the event that the current system fails to timely become Year
2000 compliant. With respect to its crew qualification and tracking
systems, the vendor has warranted the systems should be Year 2000
compliant when operated on an appropriate platform. The Company has been
using these systems on its current platform and the systems are properly
recording Year 2000 events.
o With respect to the Company's aircraft dispatch and related air traffic
control systems, the Company is largely dependent upon the systems
operated by certain governmental entities such as the FAA that provide
the aviation industry inflight management and control. The Company is
reviewing and will continue to review the Year 2000 information and
readiness reports issued by these entities.
During the Inventory Phase, the Company also identified a number of other
Company functions which require the use of computer systems for operation, but
which are not business-critical. These functions include the preparation of
financial books and records, the scheduling of crew and aircraft, the
processing of payroll and similar functions. The Company has made an initial
Year 2000 assessment with respect to approximately 75% of these systems and it
intends to complete the assessment and remediation/replacement of any
non-compliant, non-business-critical systems, if any, by the end of the second
quarter of 1999.
The Company's System-Testing Phase has already begun with respect to its
business critical functions. The Company's computer reservation and crew
qualification and tracking systems have already been tested and are working as
Year 2000 compliant. The Company has limited or no ability to independently
test the systems of third parties which support its operations and must rely on
testing completed and reported by these third parties. To the extent possible,
testing of the Company's systems which support its operations will be completed
in a timely manner.
44
<PAGE>
Although the Contingency Planning Phase of the Company's Year 2000 Project
has commenced in a number of select areas, it has not yet been completed. The
Company believes that most of its business-critical and other functions can be
performed manually or without aid of computer systems, but that the performance
of these functions will be materially impacted should certain systems fail to
operate past 1999. To the extent reasonably possible, the Company intends to
develop contingency plans to ensure continued operations in the event certain
systems fail to operate after 1999.
Costs of Compliance:
The total costs of the Company's Year 2000 Project are expected to be
immaterial and will be funded through cash from operations. To date, the
Company has incurred less than $100,000 in connection with the Project, all of
which has been expensed as incurred. The cost of the Company's Year 2000
Project is limited by the substantial outsourcing of its systems, the relative
youth of the Company and its operating systems and the purchase of new
technology which was otherwise required in connection with the construction of
its headquarters and reservations center. The costs of the Company's Year 2000
Project and the date on which the Company believes it will be completed are
based on management's best estimates and include assumptions regarding
third-party modification plans. Accordingly, there can be no assurance that
these estimates will be achieved and actual results could differ materially
from those anticipated.
Risks of Non-Compliance:
The Company believes that its Year 2000 Project will be completed prior to
there being any material impact on the operations of the Company, and that,
with modifications to its existing software and systems and/or conversions to
new software, the Year 2000 issue will not pose significant operational
problems for its computer systems. However, there can be no assurance that the
systems of third parties on which the Company's business relies (including
those of its customers, its suppliers or the FAA) will be modified on a timely
basis. The Company's business, financial condition or results of operations
could be materially adversely affected by the failure of its systems or those
operated by other parties to operate properly beyond 1999. To the extent
possible, the Company will be developing and executing contingency plans
designed to allow continued operation in the event of failure of the Company's
or third parties' systems. These contingency plans have not yet been
established and the Company has not yet determined the reasonably estimated
worst case scenario. The Company intends to analyze these issues as part of its
ongoing Year 2000 Project.
45
<PAGE>
BUSINESS
Midway was incorporated under the laws of the State of Delaware in 1983 as
Jet Express Inc. and renamed Midway Airlines Corporation in November 1993 in
connection with its commencement of jet operations. The Company is an all jet
aircraft operator serving 19 destinations in 12 states from its hub at RDU in
North Carolina, where it currently carries more passengers and operates more
flights than any other airline. The Company focuses its operations to attract
and retain business travelers by providing frequent non-stop service from RDU
to major business destinations, maintaining a high level of service and
offering American's AAdvantage(R) frequent flyer miles. The Company currently
operates one of the youngest all jet fleets in the United States with ten
98-seat Fokker F-100s, 11 Canadair Regional Jets ("CRJS") and one 148-seat
Airbus A320. Eleven CRJs were delivered to the Company in the period from
December 1997 through January 1999. To further serve its market niche, the
Company has firm orders for 12 additional CRJs to be delivered by March 2000.
The Company also has options to acquire up to 17 additional CRJs with delivery
dates for the first seven of these aircraft extending over a one-year period
beginning in the first half of 2000 and with delivery dates for the remaining
ten of these aircraft beginning in March 2002. The Company has removed from
service two F-100s. The Company intends to remove from service at the end of
their lease terms two additional F-100s in the first half of 1999 and the A320
in June 1999. The Company anticipates that the 12 additional CRJs will expand
the Company's capacity as measured by departing seats by 15%, taking into
account the aircraft to be removed from service as described above. They will
be utilized to serve existing Midway destinations with greater frequency and to
enter new routes, providing Midway's customers more non-stop jet destinations.
In March 1995, the Company moved its base of operations from Chicago to
RDU following American's reduction in service in the Raleigh-Durham market. RDU
offers modern facilities with room for the Company to grow. The Company
subleases or has options to sublease 19 of the 27 gates at one of RDU's two
terminals, Terminal C. The remaining eight gates in Terminal C are used or
controlled by American and Corporate Airlines, Midway's code sharing commuter
partner. Substantially all of the gates at RDU's other terminal are occupied.
The Company maintains a significant relationship with American. Part of
this relationship includes contractual arrangements with American that allow
Midway to offer AAdvantage(R) miles to, and accept AAirpass(R) tickets,
American first class upgrades and AAdvantage(R) reward travel from, its
passengers. Midway also contracts with American for important services,
including yield management, maintenance, ground handling and fueling. Midway
believes the relationship benefits American as well, by building customer
loyalty through the use of AAdvantage(R) miles by Midway customers, by
providing sublease revenues to help offset American's lease payments at RDU and
by providing revenue through Midway's use of various American services.
In February 1997, the Company completed the Recapitalization, resulting in
a change in ownership and management. The Recapitalization resulted in
reductions of approximately $12 million in annual expenses, including a
decrease in aircraft rent expense, a decrease in facility rentals, a decrease
in the cost of certain services and a reduction in net interest expense. In
addition to the Recapitalization, the Company discontinued flying certain
unprofitable long-haul routes. Since the Recapitalization, the Company has
experienced a significant improvement in operating performance and financial
condition. The Company believes that its improved results are attributable to
the benefits realized from the Recapitalization, route restructuring, improved
yield management, increased capacity and passenger demand and a generally
strong economic environment.
In December 1997, the Company completed an initial public offering of its
common stock at $15.50 per share. Of the 4,830,000 shares of common stock sold,
2,699,320 shares were sold by the Company and the remaining 2,130,680 shares
were sold by selling stockholders. Proceeds to the Company, net of
underwriters' discount and offering expenses, were approximately $37.7 million.
OPERATING STRATEGY
The principal elements of the Company's operating strategy are:
o ATTRACT HIGH-YIELDING LOCAL BUSINESS TRAVELERS. Based on 1998 data, the
Company's yields were higher than the yields of many other jet operators.
To attract high-yielding passengers, the Company has designed its
operations to serve the needs of business travelers flying to and from
Raleigh-Durham. The Company has developed relationships with major
corporations located in the Raleigh-Durham area, and offers these
business travelers frequent non-stop jet service, as well as an
attractive, high quality in-flight product and AAdvantage(R) frequent
flyer miles. The Company believes this focus on the needs of business
travelers has produced a loyal customer base and a higher percentage of
business travelers than other carriers. See "Selected Financial and
Operating Data and Glossary -- Glossary" for the definition of "yield."
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<PAGE>
o MAINTAIN HIGH QUALITY OPERATIONS. Because the Company's business
customers require consistent, dependable performance, Midway is committed
to meeting the highest operational standards. The Company's completion
factor (percent of scheduled flights actually operated) and on-time
performance rate (percent of flights arriving within 15 minutes of
schedule) were 99.0% and 84.0% for the year ended December 31, 1998,
respectively, and 99.0% and 83.4% for the year ended December 31, 1997,
respectively; the Company believes these performance levels were higher
than those of the major carriers during the same periods. The Company
achieved these performance measures by (i) operating one of the youngest
all jet fleets in the United States, with an average age of 2.6 years as
of December 31, 1998, (ii) maintaining spare aircraft to ensure a high
completion factor and (iii) using high quality maintenance providers such
as American and affiliates of Bombardier Inc. and of Rolls-Royce.
o PROVIDE QUALITY CUSTOMER SERVICE. The Company seeks to generate a high
degree of loyalty and customer preference by providing high quality
in-flight amenities and customer service. The Company emphasizes customer
service from reservation to destination and offers tangible amenities
such as greater leg room, leather seating (on all aircraft except the
Company's single A320), gourmet coffee, quality snacks and a quiet,
modern all-jet fleet.
o CONTINUE TO REDUCE OPERATING COSTS. Because of its focus on business
travelers and premium service, its small aircraft and its relatively
short average stage length, the Company operates with yields and a cost
per available seat mile that are higher than industry averages. The
Company is committed to maintaining a competitive cost structure and has
identified a number of cost reduction opportunities. In addition to the
cost savings resulting from the Recapitalization, the Company has entered
into new maintenance contracts, reduced dependence on third-party vendors
for flight reservation call handling, reduced the cost of credit card
processing and reduced certain insurance costs. The Company has also
lowered the travel agency base commission rate and implemented an
automated voice-response flight information system. Although the
introduction of regional jet aircraft will shorten average stage length,
the Company believes it should result in additional cost benefits,
including greater economies of scale and more efficient utilization of
facilities and personnel.
GROWTH STRATEGY
The Company believes that RDU is relatively under-served with respect to
non-stop flights. To address this need and to better serve its core business
customers since December 1997, the Company has placed in service 11 recently
acquired 50-seat CRJs. The Company has firm orders for 12 additional CRJs,
which are scheduled to be delivered in 1999 and early 2000. The Company has
options to acquire up to 17 additional CRJs with delivery dates for the first
seven of these aircraft extending over a one-year period beginning in the first
half of 2000 and with the delivery dates for the remaining ten of these
aircraft beginning in March 2002.
The principal elements of the Company's growth strategy are:
o INCREASE FREQUENCIES TO CURRENT MARKETS. The Company's market share and
route profitability are greatest on routes where it offers the same or
better frequency and timing of flights compared to its competitors. The
Company's core customers are business travelers who generally pay higher
fares and select an airline primarily based on convenience of schedule.
Introduction of the new CRJs has enabled the Company to increase
frequency and offer more convenient scheduling to current markets,
without necessarily increasing overall capacity in these markets. With
the delivery of the new CRJs, the Company has increased frequency to
Boston, Ft. Lauderdale, Hartford, Newark, Stewart/ Newburgh, Orlando,
Philadelphia and Tampa.
o INCREASE NUMBER OF MARKETS SERVED. The Company has identified a number of
new market opportunities that it believes can support service primarily
on an "origination and destination" (I.E., local passenger) basis. The
Company intends to begin service from RDU to several of the most
attractive of these markets with the future delivery of the CRJs. In
addition, the Company believes that existing demand on a number of routes
currently served with 19-seat turboprop aircraft by Midway's code sharing
commuter partner, Corporate Airlines, can support 50-seat CRJ service.
The Company believes that most customers have a strong preference for jet
service, and will often pay a premium or choose a connecting flight to
avoid flying on turboprop aircraft. The Company anticipates attracting
these customers with the introduction of the CRJs in these markets. Four
of the new CRJs were utilized to initiate service to Columbus, Ohio,
Indianapolis, Indiana, Jacksonville, Florida and New Orleans, Louisiana.
Available CRJ aircraft time has also been used to initiate supplemental
(one round-trip per day) CRJ service to Charleston, Columbia and Myrtle
Beach, South Carolina, all of which are served by Corporate Airlines at
other times of the day.
47
<PAGE>
RALEIGH-DURHAM MARKET
The Company believes that it is well positioned to benefit from the
rapidly expanding Raleigh-Durham area. Raleigh-Durham's metropolitan population
is approximately 1.1 million, and is home to three major universities, the
state capital and Research Triangle Park, a 6,850-acre business center with
more than 130 high technology and other research-oriented companies, employing
over 37,000 people. In 1996, the median household effective buying income in
the Raleigh-Durham metropolitan area was 8.9% higher than the national average.
In December 1997, the unemployment rate was 1.7%, compared with 4.4%
nationwide, among the lowest in standard metropolitan statistical areas in the
nation.
The Company currently carries more passengers and operates more flights at
RDU than any other airline. Air travel at RDU has grown by an average of 9% per
year from 1991 to 1997, compared to 5% for the United States as a whole. In
fact, the RDU market is 32% larger than when American had its hub at RDU. The
Company believes that the area's growing business community offers
opportunities for expansion at RDU with regional jets. RDU offers modern
facilities with room for the Company to grow. The Company subleases or has
options to sublease 18 of the 26 gates at the newer of RDU's two terminals,
Terminal C. Substantially all of the gates at RDU's other terminal are
currently occupied.
SERVICES
ROUTES AND SCHEDULE
The Company currently provides non-stop service from RDU to the following
19 cities: Atlanta, Georgia; Boston, Massachusetts; Charleston, South Carolina;
Columbia, South Carolina; Columbus, Ohio; Ft. Lauderdale, Florida; Hartford,
Connecticut; Indianapolis, Indiana; Jacksonville, Florida; Myrtle Beach, South
Carolina; Newark, New Jersey; New Orleans, Louisiana; New York, New York;
Orlando, Florida; Philadelphia, Pennsylvania; Stewart/Newburgh, New York;
Tampa, Florida; Washington, D.C.; and West Palm Beach, Florida. The Company
believes that business travelers select an airline primarily based on
convenience of schedule, with a strong preference for frequent, non-stop
service. Midway believes that three flights per business day is the minimum
service pattern necessary to successfully serve its core business customers,
and therefore currently offers between three and six flights per business day
in all but two of its all jet markets. The introduction of the CRJs has allowed
the Company to increase frequency in several markets without necessarily
increasing overall capacity in these markets.
HIGH QUALITY CUSTOMER SERVICE
The Company has consistently promoted, and been recognized by its
customers for, quality customer service that distinguishes Midway from other
airlines. Midway believes it has attained its superior level of customer
service through the efforts of its professional and personable employees and
the provision of amenities such as greater leg room, leather seating (on all
aircraft except the Company's single A320), gourmet coffee, quality snacks and
a quiet, modern all jet fleet. Although the Company is not required to report
on-time statistics and baggage delivery performance, it consistently ranks high
relative to the nation's ten largest airlines that do report these statistics
to the DOT. For example, for the 12 months ended December 31, 1998, using DOT
statistics and statistics compiled from its own reports, Midway's on-time
performance and baggage delivery performance exceeded that of all major
carriers.
MAINTENANCE AND SUPPORT
The Company is dedicated to providing the highest level of maintenance
quality and reliability. The Company's emphasis on high quality maintenance is
evidenced by its experienced maintenance management, extensive and recurrent
mechanic training and selection of high quality maintenance providers. The
Company performs all low level checks (below "C" Check) and non-routine
maintenance at RDU or at a maintenance facility in Orlando, Florida. Major
inspections and overhauls of the airframes and engines are conducted by
contract vendors whose work and procedures are closely monitored by Midway
maintenance management personnel. The contract vendors currently engaged by the
Company to perform major inspections of the airframe and to perform engine
overhauls include American and affiliates of Bombardier Inc. and of
Rolls-Royce.
SALES AND MARKETING
PRICING AND YIELD MANAGEMENT
The Company's strategy is designed to result in premium yields. The
Company believes its efforts to identify favorable markets and provide premium
non-stop service enables it to generate a high degree of loyalty among its
passengers and to attract a large percentage of business travelers on its
flights. Pursuant to an agreement with American, the Company began implementing
a version of American's yield management system in 1996, and it became fully
operational in February 1997.
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The system is one of the most advanced yield management systems worldwide, and
has enabled Midway to significantly enhance its ability to maximize revenues.
Midway's license to use the system and to obtain system related services from
American personnel currently extends through August 2001, and may be extended
thereafter at market terms or may be perpetually licensed by Midway for a fixed
price.
DISTRIBUTION
Midway sells approximately 66% of its tickets through travel agents, a
level that the Company believes is comparable to the percentage of travel
agency sales made by many other airlines. Travel agents receive commissions
from airlines based on the price of the tickets they sell. In 1995, many
airlines began limiting or capping the amount of commissions they would pay to
agents for certain higher priced tickets and in September 1997, several major
carriers lowered their base commission rate from 10% to 8%. At the time Midway
elected not to lower its base commission rate to 8%, but to further study its
base commission rate and its impact on sales growth. In March 1998, following
analysis, the Company elected to lower its base commission rate to 8% with no
cap.
Midway pays additional commissions, referred to as "overrides", to some
travel agencies in connection with special revenue programs. The Company
believes these override programs result in incremental revenue to the Company.
Special services offered include Midway's full-time staffing of the "Carolina
Desk" within its sales department to answer questions or otherwise attend to
the needs of these important customers. The Company believes that the
combination of higher available commissions, the development of relationships
between these travel agents and senior management and the devotion of resources
to meet the needs of these agencies has resulted in strong support of Midway by
travel agencies.
CORPORATE RELATIONSHIPS
The Company believes that it receives a substantial share of travel from
the local Raleigh-Durham business community on the routes that it serves. The
Company believes that this success is in part a result of its significant
efforts to meet the demands of its core business customers, its established
relationships with many local, national and international corporations in the
Raleigh-Durham area and the support it receives as the "hometown" airline.
Discounts are offered to a limited number of corporations in exchange for a
premium share of their travel. Employees of some of these corporations may also
be offered discounts for leisure weekend travel on flights that would otherwise
operate with empty seats. This program, called "Midway Weekend Madness", has
helped build loyalty in the Raleigh-Durham market. Midway sales agents visit
customers on a regular basis to solicit their input and to answer questions.
Each sales manager is supported by a help desk staffed full time by employees
trained to meet these customers' needs.
AMERICAN RELATIONSHIP
The Company maintains a significant relationship with American. Part of
this relationship includes contractual arrangements with American that allow
Midway to offer AAdvantage(R) miles to, and accept AAirpass(R) tickets and
American first class upgrades from, its passengers. Midway also contracts with
American for important services, including yield management, maintenance,
ground handling and fueling. Midway believes the relationship benefits American
as well, by building customer loyalty through the use of AAdvantage(R) miles by
Midway customers, by providing sublease revenues to help offset American's
lease payments at RDU and by providing revenue through Midway's use of various
American services.
FREQUENT FLYER PROGRAM
Midway has been a partner in American's AAdvantage(R) frequent flyer
program since March 1995. Upon its arrival at RDU, Midway's participation in
this program quickly facilitated its access to a large and loyal group of
AAdvantage(R) members in the Raleigh-Durham area and along the East Coast. For
payment of a per-mile fee, the Company is able to offer its passengers the
ability to obtain award mileage on every current flight (other than those to
and from Columbus, Ohio and Indianapolis, Indiana) and AAdvantage(R) award
certificates can be redeemed for travel on Midway, American or other
AAdvantage(R) partners. Midway's contract with American, which extends through
April 30, 2001, gives the Company the ability to offer AAdvantage(R) miles on
several additional routes, though the Company may add new routes in the near
future without having the ability to offer AAdvantage(R) miles. The ability to
offer AAdvantage(R) miles on additional routes and the extension of the term of
the agreement are the subject of ongoing discussions between the Company and
American. The Company believes its participation in the AAdvantage(R) program
gives it access to a flexible and extremely powerful marketing tool. However,
due to the potential limitations of the agreement (including the number of
additional markets and the term of the agreement), the Company may in the
future choose to develop its own frequent flyer program.
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American may terminate this agreement under several circumstances,
including (i) commencement by the Company of a new frequent flyer program or
its participation in another frequent flyer program, (ii) any person or group
becoming the owner of 20% or more of the outstanding voting securities of the
Company or any "Disqualified Investor" becoming the owner of 10% or more of the
outstanding voting securities of the Company, (iii) the Company making a
significant acquisition or (iv) the Company entering into any
marketing-oriented collaborative agreement with another airline which American
reasonably believes would likely materially adversely affect American's
interests or objectives under any of its or its affiliates' agreements with the
Company. "Disqualified Investor" is defined as (i) any other airline or
airline-related services company, (ii) any person or entity offering a frequent
traveler program or (iii) any person or entity that American believes would
likely, by virtue of its affiliation with the Company, materially adversely
affect American's interests or objectives under any of its or its affiliates'
agreements with the Company. In addition, American may terminate its sublease
to the Company of the RDU facility, Midway's license of the yield management
system and one other service agreement that Midway has with American if any
person or group acquires 30% or more of the voting securities of Midway.
Finally, if the Company pays any dividends or makes any other cash or asset
distribution to its stockholders without American's consent at any time prior
to the Company's payment in full of a certain promissory note to American, then
American may terminate the RDU facility sublease, the AAdvantage(R)
Participating Carrier Agreement, Midway's license of the yield management
system and one other service agreement that Midway has with American. See "Risk
Factors -- Factors Related to the Company and the Industry -- Agreements with
American Airlines."
MARKETING
The Company markets its services through listings in computer reservations
systems and the Official Airline Guide; through advertising and promotions in
newspapers, magazines, billboards and radio; and through direct contact with
travel agencies, corporate travel departments, wholesalers and consolidators.
The Company maintains a nationwide toll-free telephone number for use by
passengers to make reservations and purchase tickets and has sales
representatives assigned to all regions where Midway operates. The service mark
"Feel Like Flying Again" was adopted in 1995 when the Company began RDU
operations to communicate a level of service that is reminiscent of flying when
airlines generally provided higher quality service than is perceived today.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1998, the Company had the number of full time
equivalent employees in the categories listed below:
<TABLE>
<S> <C>
Flight Operations ................ 212
Inflight ......................... 146
Passenger Services ............... 281
Maintenance ...................... 65
Reservations & Marketing ......... 136
Accounting & Finance ............. 26
Administrative ................... 59
---
Total ............................ 925
===
</TABLE>
The Railway Labor Act ("RLA") governs the labor relations of employers and
employees engaged in the airline industry. Comprehensive provisions are set
forth in the RLA establishing the right of airline employees to organize and
bargain collectively along craft or class lines and imposing a duty upon air
carriers and their employees to exert every reasonable effort to make and
maintain collective bargaining agreements. The RLA contains detailed procedures
which must be exhausted before a lawful work stoppage can occur.
The Company's pilots and fleet service (ramp) employees are represented by
labor unions. The pilots' representative, Air Line Pilots Association, was
elected in December 1997, and the ramp employees' representative, International
Association of Machinists & Aerospace Workers, AFL-CIO, was elected in June
1998. Prior to those times, none of the Company's employees were represented by
a union. Although the Company believes mutually acceptable agreements can be
reached with the unions representing such employees, it has only recently begun
negotiations and, therefore, the ultimate outcome of such negotiations is
unknown at this time. In a December 1998 representation election the
Association of Flight Attendants, AFL-CIO ("AFA") obtained the votes necessary
to represent Midway's flight attendants. On December 18, 1998, the Company
filed a motion with the National Mediation Board (the "NMB") alleging union
interference with the election. In February 1999, the NMB found that AFA had
made misrepresentations during the December 1998 election campaign but
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nevertheless still certified AFA as the representative of the Company's flight
attendants. Midway has not yet determined whether to seek judicial review of
the NMB decision. See "Risk Factors -- Factors Related to the Company and the
Industry -- Labor Relations."
The Company believes its management and employees have a good
relationship. Management, including the Company's President and Chief Executive
Officer, meet with pilots, flight attendants, customer service agents and other
employees on a routine basis to discuss Company objectives as well as more
specific labor related issues such as scheduling, compensation and work rules.
Management believes it has addressed pilot and other employee concerns in a
timely and responsive manner.
GOVERNMENT REGULATION
GENERAL
The Company is subject to the jurisdiction of and regulation by the DOT,
the FAA and certain other governmental agencies. The DOT principally regulates
economic issues affecting air service such as air carrier certification and
fitness, insurance, authorization of proposed scheduled and charter operations,
consumer protection and competitive practices. In 1993, the Company was granted
a Certificate of Public Convenience and Necessity pursuant to Section 401 of
the Federal Aviation Act authorizing it to engage in air transportation. The
DOT has authority to investigate and institute proceedings to enforce its
economic regulations and may in certain circumstances assess civil penalties,
revoke operating authority and seek criminal sanctions.
The FAA primarily regulates flight operations, in particular matters
affecting air safety, such as airworthiness requirements for aircraft, and
pilot and flight attendant certification. The FAA requires each carrier to
obtain an operating certificate and operations specifications authorizing the
carrier to operate to specific airports using specified equipment. All of the
Company's aircraft must have and maintain certificates of airworthiness issued
by the FAA. The Company holds an FAA air carrier operating certificate under
Part 121 of the Federal Aviation Regulations. The FAA has the authority to
modify, suspend temporarily or revoke permanently the authority of the Company
or its licensed personnel, after notice and a hearing, for failure to comply
with regulations promulgated by the FAA and to assess civil penalties for such
failures.
In September 1997, the Civil Aviation Security Division of the FAA
conducted an investigation of the Company's compliance with certain regulations
requiring the Company to verify the accuracy of background information provided
by its employees who have access to secure airport areas. This investigation
will likely result in the finding of violations of these regulations. The
Company revised its background check procedures during the course of the FAA's
investigation and then obtained and verified the necessary background
information of those employees who had been identified by the FAA as having
insufficient background check documentation. While the Company is unable to
determine whether the FAA will pursue an assessment as a result of the findings
of this investigation, the Company believes that such an assessment would not
have a material effect on the Company.
In August 1998, the Compliance and Enforcement Branch of the Drug
Abatement Division of the FAA conducted an inspection of the Company's
compliance with certain regulations related to its alcohol and drug testing
programs. In September 1998, the FAA notified the Company that it was
investigating alleged violations discovered during the August 1998 inspection.
The Company responded to these alleged violations in October 1998 and has
received no further correspondence from the FAA in this respect. The Company is
unable to determine whether the FAA's investigation will result in the finding
of violations of these regulations and, if so, whether the FAA will pursue an
assessment as a result of any such findings or what the amount of any such
assessment might be. The Company believes that any such assessment would not
have a material effect on the Company.
The FAA also has authority to issue maintenance directives and other
mandatory orders relating to, among other things, inspection of aircraft and
engines, fire retardant and smoke detection devices, increased security
precautions, collision and windshear avoidance systems, noise abatement and the
mandatory removal and replacement of aircraft parts that have failed or may
fail in the future.
The Company is regulated by the Environmental Protection Agency and state
and local agencies with respect to the protection of the environment and to the
discharge of materials into the environment. At its aircraft line maintenance
facilities, the Company uses materials that are regulated as hazardous under
federal and state law. The Company maintains programs to protect the safety of
its employees who use these materials and to manage and dispose of any waste
generated by the use of these materials, and believes that it is in substantial
compliance with all applicable laws and regulations.
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In addition, the Immigration and Naturalization Service, the U.S. Customs
Service, and the Animal and Plant Health Inspection Service of the Department
of Agriculture have jurisdiction over inspection of the Company's aircraft,
passengers and cargo to ensure the Company's compliance with U.S. immigration,
customs and import laws.
The Company is also subject to other federal and state laws and
regulations relating to protection of the environment, radio communications,
labor relations, equal employment opportunity and other matters.
SAFETY
The Company has never had an accident, and is dedicated to ensuring its
customers' safety. The FAA monitors the Company's compliance with maintenance,
flight operations and safety regulations, maintains representatives on-site and
performs frequent spot inspections, and the Company believes it has a strong
and open relationship with its regional FAA office. The Company believes it is
in compliance with all requirements necessary to maintain in good standing its
operating authority granted by the DOT and its air carrier operating
certificate issued by the FAA. A modification, suspension or revocation of any
of the Company's DOT or FAA authorizations or certificates could have a
material adverse effect upon the Company.
SLOTS
The FAA's regulations currently limit the availability of, and permit the
buying, selling, trading and leasing of, certain airline slots, including those
at Chicago's O'Hare, New York's LaGuardia and Kennedy International and
Washington, D.C.'s Ronald Reagan National airports. A slot is an authorization
to take off or land at the designated airport within a specified time window.
Midway uses ten slots at New York's LaGuardia Airport, three of which are owned
and seven of which are leased from a third party airline. Midway uses eight
slots at Washington, D.C.'s Ronald Reagan National Airport, two of which are
owned and six of which are leased from a different third party airline.
Although the Company's slot leases at each of National Airport in Washington
D.C. and LaGuardia Airport in New York are currently scheduled to expire in
April 2000, the Company believes it will be able to renew these leases on terms
that will be acceptable to the Company. See "Risk Factors -- Factors Related
to the Company and the Industry -- Dependence on Leased Slots."
The FAA's slot regulations require the use of each slot at least 80% of
the time, measured on a bimonthly basis. Failure to meet this utilization
threshold without a waiver from the FAA, which is granted only under
exceptional circumstances, subjects the slot to recall by the FAA. In addition,
the slot regulations provide that slots may be withdrawn by the FAA at any time
without compensation to the carrier holding or operating the slot to meet the
DOT's operational needs, such as providing slots for international carriers or
essential air transportation.
FOREIGN OWNERSHIP
Pursuant to law and the regulations of the DOT, the Company must be
effectively controlled by United States citizens. In this regard, the Company's
President and at least two-thirds of the Company's Board of Directors must be
United States citizens and not more than 25% of the Company's voting stock may
be owned by foreign nationals (although subject to DOT approval the percent of
foreign economic ownership may be as high as 49%).
FUEL
The cost of fuel is a significant operating expense, constituting
approximately 13.4%, 12.6% and 10.5% of total expenses for the years ended
December 31, 1996, 1997 and 1998, respectively. Historically, jet fuel costs
have been subject to wide fluctuations as a result of sudden disruptions in
supply. Jet fuel availability is also subject to periods of market surplus and
shortage. Because of the effect of such events on price and availability of
oil, the cost and future availability of jet fuel cannot be predicted with any
degree of certainty. See "Risk Factors -- Factors Related to the Company and
the Industry -- Fuel."
The Company's fuel requirements are met by approximately a dozen different
suppliers. The Company contracts with these suppliers as fuel is needed, and
the terms vary as to price and quantity. The Company has not entered into any
agreement that fixes the price of fuel over any period of time.
COMPETITION
The airline industry is highly competitive and the Company competes with
other air carriers on many of its routes. Nearly all of these carriers have
greater financial resources than the Company, and most of them have lower unit
costs than the Company. Furthermore, the introduction of service or discounted
fees by a major U.S. airline or one of its low cost affiliates in markets
served by the Company could have an adverse impact upon its business, financial
condition and results
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<PAGE>
of operations. Since late 1997, the Company has experienced, and likely will
continue to experience, increased competition in the Raleigh-Durham market. See
"Risk Factors -- Factors Related to the Company and the Industry -- Industry
Conditions and Competition."
INSURANCE
In the opinion of management, the Company maintains insurance policies of
types customary in the industry and in amounts management believes are adequate
to meet DOT requirements and to protect the Company and its property against
material loss. The policies principally provide coverage for public liability,
passenger liability, baggage and cargo liability, property damage, including
coverage for loss or damage to its flight equipment, and worker's compensation
insurance. There can be no assurance, however, that the amount of insurance
carried by the Company will be sufficient to protect it from material loss.
FLIGHT EQUIPMENT
Midway operates a fleet of ten Fokker F-100s, one Airbus A320, and 11
Canadair CRJs, with an average age of 2.6 years. The F-100s are configured with
eight first class seats and 90 coach seats, the A320 is configured with ten
first class seats and 138 coach seats, and the CRJs are configured with 50
single class seats. All of the aircraft meet Stage 3 noise requirements imposed
by federal law. The Company believes that its young all-jet fleet gives it a
significant advantage in attracting and retaining business travelers and
improves its reliability statistics. The Company's fleet at January 31, 1999
was as follows:
<TABLE>
<CAPTION>
OWNED LEASED TOTAL AVERAGE AGE
------- -------- ------- ------------
<S> <C> <C> <C> <C>
A320s ................ -- 1 1 3.6
CRJs ................. 5 6 11 0.5
F-100s ............... -- 10 10 4.6
</TABLE>
The Company has firm orders for 12 additional newly manufactured CRJ-200ER
Canadair Regional Jet aircraft, all of which are scheduled to be delivered by
March 2000. The Company intends to lease two of these Aircraft using the
remaining proceeds from the sale of the Old Certificates. Midway also has
options to acquire up to 17 additional CRJ-200ER aircraft, with delivery dates
for the first seven of these aircraft extending over a one-year period
beginning in the first half of 2000 and with the delivery dates for the
remaining ten of these aircraft beginning in March 2002. Pursuant to an
agreement with GE Aircraft Engines, a division of General Electric
International, Inc., the Company has agreed to purchase two CF34-3B1 spare
engines to support the operation of the ten CRJ-200ER aircraft.
The Company's lease of its one Airbus A320 is scheduled to terminate in
June 1999. The Company does not plan to renew the lease.
The mix of Midway's fleet between 98-seat F-100s and 50-seat CRJs should
allow the Company to meet expected passenger volumes while maintaining a
competitive cost structure, and should enhance the Company's ability to more
efficiently match its aircraft to its route network requirements. The relative
uniformity of the fleet should also minimize training and maintenance costs
(after the June 1999 retirement of the one A320).
The Company's ten F-100 leases expire in one group of two and two groups
of four during the following date ranges: March 1999-May 1999, October
2003-January 2004, and January 2013, respectively. Each F-100 lessor has the
right to terminate its lease on six months' prior notice, provided that no
lease can be terminated if it would result in a fourth termination of any F-100
lease in any 12-month period, including scheduled terminations. This staggered
schedule of lease expirations combined with the Company's options to acquire up
to 17 additional CRJs will give the Company the ability to continually evaluate
and change the size and composition of its fleet over time as necessary to take
advantage of changing market conditions. To support its operation of F-100
aircraft the Company purchased a refurbished Rolls Royce Tay 650-15 Engine in
August 1998 and took delivery of a new lease financed, spare Rolls Royce Tay
650-15 Engine in early April 1998.
Pursuant to a March 1995 purchase agreement, Midway is obligated to
purchase four Airbus A320 aircraft with deliveries in 2005 and 2006. The Airbus
purchase agreement also gives Midway an option to purchase up to four
additional Airbus A320 or A319 aircraft with delivery dates in 2007. To support
the operation of the four A320 aircraft, the Company also agreed to purchase
one IAE V2527-A5 spare engine scheduled for delivery in November 2005 from
International Aero Engines AG ("IAE"). The IAE engine purchase agreement gives
Midway an option to purchase one additional spare engine for delivery in
November 2006. The purchase of the A320s and the associated spare engine may
not fit with the Company's
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current strategy. The Company is considering several alternatives with respect
to the A320s, including restructuring its agreement with Airbus or selling its
positions.
FACILITIES
Of the 27 gates at the newer of RDU's two terminals, Terminal C, the
Company currently subleases 14 gates through February 2013 and has options
expiring in August 1999 to sublease through February 2013 five additional
gates. The Company's corporate headquarters and reservations facility are
located in Durham, where it subleases approximately 30,000 square feet of
space. The Durham facility sublease expires on July 31, 1999. The Company has
entered into a lease for headquarters and reservations space in Morrisville,
North Carolina, approximately one mile from RDU. The Company expects to occupy
this space in the second quarter of 1999. The Company also occupies space in
Orlando, Florida, where it performs aircraft maintenance.
At most airports other than RDU, Midway obtains the use of gates as part
of third party ground handling contracts.
LITIGATION
The Company is a party to routine litigation incidental to its business.
Management believes that none of this litigation is likely to have a material
adverse effect on the Company's consolidated financial position or results of
operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table contains the name, age and position with the Company
of each executive officer and director as of February 1, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- ----- -------------------------------------------------------------
<S> <C> <C>
Robert R. Ferguson III ......... 49 Chairman of the Board, President and Chief Executive Officer
Mark Coleman ................... 51 Senior Vice President -- Sales and Marketing
Jonathan S. Waller ............. 38 Senior Vice President, General Counsel and Secretary
Steven Westberg ................ 44 Senior Vice President and Chief Financial Officer
J. Carl Ziegler ................ 38 Chief Information Officer
Dan Ryan ....................... 37 Vice President -- Customer Service
Thomas Duffy, Jr. .............. 42 Vice President -- Maintenance
Gary Marsh ..................... 57 Vice President -- Operations
Florence Shaughnessy-Cox ....... 43 Vice President -- Inflight
Gregory Harding-Brown .......... 43 Director
W. Greyson Quarles ............. 57 Director
Gregory J. Robitaille .......... 35 Director
Howard Wolf .................... 64 Director
</TABLE>
INDIVIDUAL BACKGROUND INFORMATION
ROBERT R. FERGUSON III has served as Chairman of the Board, President and
Chief Executive Officer of the Company since February 1997. From October 1994
to February 1997, Mr. Ferguson served as President of Belmont Aviation, L.L.C.,
an aviation consulting firm. Prior to that, he held various executive positions
at Continental Airlines, Inc., last serving as Chief Executive Officer,
President and Director from August 1991 to October 1994. Mr. Ferguson also
serves on the Board of Directors of Capital Cargo International Airlines, Inc.,
an air freight corporation ("CAPITAL CARGO").
MARK COLEMAN has served as Senior Vice President of Sales and Marketing of
the Company since April 1998. Mr. Coleman has 30 years airline experience with
Western Pacific Airlines, Trans World Airlines and America West Airlines.
JONATHAN S. WALLER has served as Senior Vice President, General Counsel
and Secretary of the Company since July 1995. From April 1989 to July 1995, Mr.
Waller was an attorney in private practice with the Chicago, Illinois law firm
of Rosenberg & Liebentritt, becoming a partner of the firm in January 1994.
STEVEN WESTBERG has served as Senior Vice President and Chief Financial
Officer of the Company since December 1995. Mr. Westberg held various positions
at Continental Airlines, Inc. from 1991 to February 1995, last serving as Vice
President of Corporate Planning. From February 1995 to December 1995, Mr.
Westberg served as Vice President of Belmont Aviation, L.L.C., an aviation
consulting firm. Mr. Westberg also serves on the Board of Directors of Capital
Cargo.
J. CARL ZIEGLER has served as Chief Information Officer of the Company
since November 1997. Mr. Ziegler worked for SAS Institute Inc., UNIXware
Technology Group, Inc., and DBStar Inc. for 13 years.
DAN RYAN has 10 years of experience with American and Wings West Airlines
and has served as Vice President of Customer Service of the Company since April
1998 and in other positions with the Company since August 1996.
THOMAS DUFFY, JR. has served as Vice President -- Maintenance of the
Company since August 1995. Prior to that time, Mr. Duffy was Director of
Maintenance from August 1993. From May 1992 until August 1993, Mr. Duffy served
as Manager of Maintenance Sales with Triad International Maintenance Co.
GARY MARSH has served as Vice President -- Operations of the Company since
July 1998. Prior to that time, Mr. Marsh served as Vice President of Operations
for USAirways Express/Allegheny Airlines from December 1993 to July 1998. From
November 1978 to December 1993, Mr. Marsh started as a line pilot and
ultimately served as Vice President -- Operations for Air Wisconsin.
FLORENCE SHAUGHNESSY-COX has served as Vice President -- Inflight since
September 1998. Prior to that time, since March 1997, Ms. Cox served as the
Company's Director of Inflight. From August 1993 until July 1995, Ms. Cox
served as the Company's Quality Assurance Coordinator for inflight services and
as an instructor of inflight services. Ms. Cox did not work from July 1995 to
March 1997.
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GREGORY HARDING-BROWN is the retired co-founder of Pegasus Aviation Group,
a commercial jet aircraft lessor with other operations in the areas of aircraft
maintenance, engine leasing and aircraft parts sales, where he worked from
December 1990 to November 1997. Mr. Harding-Brown has been a director of the
Company since August 1998.
W. GREYSON QUARLES has served as Chief Financial Officer of SAS Institute,
Inc., a computer software corporation, since 1982 and has been a director of
the Company since February 1997.
GREGORY J. ROBITAILLE has been employed by Equity Group Investments, Inc.,
which is an affiliate of Zell/Chilmark Fund L.P. since October 1995. From
September 1991 to September 1995, he served as a Vice President of the
Corporate Finance Department of Rauscher Pierce Refsnes, Inc., an investment
banking firm. Mr. Robitaille has served as a Director of the Company since
February 1997.
HOWARD WOLF has been a Senior Partner of the law firm of Fulbright &
Jaworski L.L.P. for more than the last five years and has served as a director
of the Company since February 1997. Mr. Wolf also serves on the Board of
Directors for Offshore Logistics, Inc., a company that operates helicopters
world-wide; Tuskar Resources plc, an oil and gas company; and International Tool
& Supply plc, an oil and gas service and supply company. Mr. Wolf serves as an
Advisory Director of Frost National Bank and as Chairman of the Board of
Trustees of The Institute for Rehabilitation and Research, a not-for- profit
hospital.
BOARD OF DIRECTORS
The Company's Board of Directors consists of three classes of directors.
Class I Directors will serve until the 2001 Annual Meeting of Shareholders or
until their successors shall be duly elected and qualified. Messrs. Ferguson
and Quarles are Class I Directors. Class II Directors will serve until the 1999
Annual Meeting of Shareholders or until their successors shall be duly elected
and qualified. Messrs. Robitaille and Wolf are Class II Directors. Class III
Directors will serve until the 2000 Annual Meeting of Shareholders or until
their successors shall be duly elected and qualified. Mr. Harding-Brown is a
Class III Director.
DESCRIPTION OF THE NEW CERTIFICATES
The Old Certificates were issued, and the New Certificates will be issued,
pursuant to four separate Pass Through Trust Agreements, each dated as of
August 13, 1998, between Midway and the Trustee. The terms of the New
Certificates and the Old Certificates will be substantially identical to each
other, except for transferability. Under the terms of the Pass Through Trust
Agreements, the covenants and events of default will apply equally to the New
Certificates and the Old Certificates and the New Certificates and the Old
Certificates will be treated as one class for all actions to be taken by the
holders thereof and for determining their respective rights under the Pass
Through Trust Agreements. The terms of the New Certificates include those set
forth in the Pass Through Trust Agreements and those made a part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended and as in
effect on the date of the Indenture (the "TRUST INDENTURE ACT"). The following
summary describes certain terms of the Certificates and the Pass Through Trust
Agreements. The statements under this caption are a summary and do not purport
to be complete, make use of terms as defined in the Pass Through Trust
Agreements and are qualified in their entirety by reference to all of the
provisions of the Certificates, the Pass Through Trust Agreements, the Deposit
Agreements, the Escrow Agreements, the Intercreditor Agreement and the Note
Purchase Agreement. Except as otherwise indicated, the following summary
relates to each of the Trusts and the Certificates issued by each Trust. The
terms and conditions governing each of the Trusts are substantially the same,
except as described under "Subordination" below and except that the principal
amount, the interest rate, scheduled repayments of principal and maturity date
applicable to the Equipment Notes held by each Trust and the Final Expected
Distribution Date applicable to each Trust differ. Citations to the relevant
sections of the Pass Through Trust Agreements appear below in parentheses
unless otherwise indicated. A copy of each Pass Through Trust Agreement has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part. The Old Certificates and the New Certificates are referred to herein
collectively as the "Certificates".
GENERAL
The New Certificates of each Trust will be issued in fully registered form
only and will be subject to the provisions described below under "Book-Entry;
Delivery and Form." Each Certificate represents a fractional undivided interest
in the Trust created by the Pass Through Trust Agreement pursuant to which such
Certificate is issued. The Trust Property of each Trust will consist of (i)
subject to the Intercreditor Agreement, Equipment Notes acquired under the Note
Purchase Agreement and issued, at Midway's election in connection with the
financing of each Aircraft during the Delivery Period, either (a) on a
nonrecourse basis by the trustees of separate owner Trusts (each, an "OWNER
TRUSTEE") in connection with separate
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<PAGE>
leveraged lease transactions with respect to each Aircraft to finance a portion
of the purchase price of such Aircraft by the Owner Trustee, in which case the
applicable Aircraft will be leased to Midway (collectively, the "LEASED
AIRCRAFT"), or (b) on a recourse basis by Midway in connection with separate
secured loan transactions with respect to each Aircraft to finance a portion of
the purchase price of such Aircraft by Midway (collectively, the "OWNED
AIRCRAFT"), (ii) the rights of such Trust to acquire Equipment Notes under the
Note Purchase Agreement, (iii) the rights of such Trust under the applicable
Escrow Agreement to request the Escrow Agent to withdraw from the Depositary
funds sufficient to enable such Trust to purchase Equipment Notes on the
delivery of each Aircraft during the Delivery Period, (iv) the rights of such
Trust under the Intercreditor Agreement (including all monies receivable in
respect of such rights), (v) all monies receivable under the Liquidity Facility
for such Trust and (vi) funds from time to time deposited with the Trustee in
accounts relating to such Trust. Certificates will represent pro rata shares of
the Equipment Notes and other property held in the related Trust and will be
issued only in minimum denominations of $100,000 and integral multiples of
$1,000 in excess thereof. (Section 3.01)
On the Transfer Date, each of the Trusts established on August 13, 1998
(the "ORIGINAL TRUSTS") will transfer and assign all of its assets and rights
to a substantially identical newly created successor trust with substantially
identical terms (each, a "SUCCESSOR TRUST"). The institution acting as Trustee
of each of the Original Trusts (each, an "ORIGINAL TRUSTEE") will also act as
Trustee of the corresponding Successor Trust (each, a "NEW TRUSTEE"), and the
New Trustee will assume the obligations of the related Original Trustee under
each transaction document to which such Original Trustee was a party. Upon the
effectiveness of such transfer, assignment and assumption, each of the Original
Trusts will be liquidated and each of the Certificates will represent the same
percentage interest in the Successor Trust as it represented in the Original
Trust immediately prior to such transfer, assignment and assumption. The
"TRANSFER DATE" means the earlier of (i) the first business day after September
30, 1999 or, if later, the fifth business day after the Delivery Period
Termination Date and (ii) the fifth business day after the occurrence of a
Triggering Event. Unless the context otherwise requires, all references in this
Prospectus to the Trusts, the Trustees, the Pass Through Trust Agreements and
similar terms shall be applicable to the Original Trusts until the
effectiveness of such transfer, assignment and assumption and thereafter shall
be applicable to the Successor Trusts. See " -- Liquidation of Original
Trusts."
Pursuant to the Escrow Agreement applicable to each Trust, the
Certificateholders of such Trust as holders of the Escrow Receipts affixed to
each Certificate are entitled to certain rights with respect to the Deposits
relating to such Trust. Accordingly, any transfer of a Certificate will have
the effect of transferring the corresponding rights with respect to the
Deposits, and rights with respect to the Deposits may not be separately
transferred by Certificateholders. Rights with respect to the Deposits and the
Escrow Agreement relating to a Trust, except for the right to request
withdrawals for the purchase of Equipment Notes, will not constitute Trust
Property of such Trust.
The Certificates represent interests in the respective Trusts and all
payments and distributions thereon will be made only from the Trust Property.
(Section 3.10) The Certificates do not represent an interest in or obligation
of Midway, the Trustee, any of the Loan Trustees or Owner Trustees in their
individual capacities, any Owner Participant or any affiliate of any thereof.
The existence of each Trust will not limit the liability that
Certificateholders of such Trust would otherwise incur if such holders owned
directly the corresponding Equipment Notes or incurred directly the obligations
of such Trust.
SUBORDINATION
Pursuant to the Intercreditor Agreement to which the Trusts, the
Subordination Agent and the Liquidity Provider are parties, on each Regular
Distribution Date or Special Distribution Date (each, a "DISTRIBUTION DATE"),
so long as no Triggering Event shall have occurred, all payments received by
the Subordination Agent will be distributed in the following order:
(1) payment of certain Liquidity Obligations to the Liquidity Provider
and, if applicable, to replenish Cash Collateral Accounts;
(2) payment of Expected Distributions to the holders of Class A
Certificates;
(3) payment of Expected Distributions to the holders of Class B
Certificates;
(4) payment of Expected Distributions to the holders of Class C
Certificates;
(5) payment of Expected Distributions to the holders of Class D
Certificates; and
(6) payment of certain fees and expenses of the Subordination Agent and
the Trustee.
Upon the occurrence of a Triggering Event and at all times thereafter, all
payments received by the Subordination Agent in respect of the Equipment Notes
and certain other payments will be distributed in the following order:
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(1) to reimburse the Subordination Agent, each Trustee and each
Certificateholder, as the case may be, for the payment of Administration
Expenses;
(2) to the Liquidity Provider in payment of Liquidity Obligations and, so
long as no Performing Note Deficiency exists, to replenish Cash Collateral
Accounts;
(3) to reimburse the Subordination Agent, each Trustee and each
Certificateholder, as the case may be, for the payment of Certain Taxes and
Fees;
(4) to pay Adjusted Expected Distributions to the holders of Class A
Certificates;
(5) to pay Adjusted Expected Distributions to the holders of Class B
Certificates;
(6) to pay Adjusted Expected Distributions to the holders of Class C
Certificates;
(7) to pay Adjusted Expected Distributions to the holders of Class D
Certificates;
(8) the balance shall be held in the Collection Account until the next
Distribution Date; and
(9) if all Classes of Certificates have been paid in full, the balance,
if any, shall be distributed to the Certificateholders of the related
Trust.
For purposes of calculating Expected Distributions or Adjusted Expected
Distributions with respect to the Certificates of any Trust, any premium paid
on the Equipment Notes held in such Trust that has not been distributed to the
Certificateholders of such Trust (other than such premium or a portion thereof
applied to the payment of interest on the Certificates of such Trust or the
reduction of the Pool Balance of such Trust) shall be added to the amount of
Expected Distributions or Adjusted Expected Distributions.
The priority of distributions after a Triggering Event will have the
effect in certain circumstances of distributing payments received in respect of
one or more junior series of Equipment Notes to more senior Classes of
Certificates. If this should occur, the interest accruing on the remaining
Equipment Notes would be less than the interest accruing on the remaining
Certificates because the Certificates would have a greater proportion of high
interest rate junior classes. As a result of this possible interest shortfall,
the holders of one or more junior Classes of Certificates may not receive the
full amount due them after a Triggering Event even if all the Equipment Notes
are eventually paid in full.
Payments in respect of the Deposits relating to a Trust will not be
subject to the subordination provisions of the Intercreditor Agreement.
For purposes hereof:
"ADJUSTED EXPECTED DISTRIBUTIONS" means with respect to the Certificates
of any Class on any Current Distribution Date the sum of (x) the amount of
accrued and unpaid interest on such Certificates (excluding interest, if any,
payable with respect to Deposits relating to such Trust) plus (y) the greater
of:
(A) the difference between (x) the Pool Balance of such Certificates as
of the immediately preceding Distribution Date (or, if the Current
Distribution Date is the first Distribution Date, the original aggregate
face amount of the Certificates of such Trust) and (y) the Pool Balance of
such Certificates as of the Current Distribution Date, calculated on the
basis that (1) the principal of the Non-Performing Equipment Notes held in
such Trust has been paid in full and such payments have been distributed to
the holders of such Certificates, (2) the principal of the Performing
Equipment Notes has been paid when due (but without giving effect to any
acceleration of Performing Equipment Notes) and has been distributed to the
holders of such Certificates and (3) the principal of any Equipment Note
formerly held in such Trust that has been sold pursuant to the
Intercreditor Agreement has been paid in full and such payment has been
distributed to the holders of such Certificates, but without giving effect
to any reduction in the Pool Balance as a result of any distribution
attributable to Deposits occurring after the immediately preceding
Distribution Date (or, if the Current Distribution Date is the first
Distribution Date, occurring after the initial issuance of the Certificates
of such Trust); or
(B) the amount of the excess, if any, of (i) the Pool Balance of such
Class of Certificates as of the immediately preceding Distribution Date
(or, if the Current Distribution Date is the first Distribution Date, the
original aggregate face amount of the Certificates of such Trust), less the
amount of the Deposits for such Class of Certificates as of such preceding
Distribution Date (or, if the Current Distribution Date is the first
Distribution Date, the original aggregate amount of the Deposits for such
Class of Certificates) other than any portion of such Deposits thereafter
used to acquire Equipment Notes pursuant to the Note Purchase Agreement,
over (ii) the Aggregate LTV Collateral Amount for such Class of
Certificates for the Current Distribution Date;
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provided that, until the date of the initial LTV Appraisals, clause (B) above
shall not be applicable.
"AGGREGATE LTV COLLATERAL AMOUNT" means for any Class of Certificates for
any Distribution Date the sum of the applicable LTV Collateral Amounts for each
Aircraft minus the Pool Balance for each Class of Certificates, if any, senior
to such Class after giving effect to any distribution of principal on such
Distribution Date on such senior Class or Classes.
"APPRAISED CURRENT MARKET VALUE" of any Aircraft means the lower of the
average or the median of the most recent three LTV Appraisals (as defined
herein) of such Aircraft. After a Triggering Event occurs and any Equipment
Note becomes a Non-Performing Equipment Note, the Subordination Agent will be
required to obtain LTV Appraisals to determine the Appraised Current Market
Value and additional LTV Appraisals on or prior to each anniversary of the date
of such initial LTV Appraisals; provided that, if the Controlling Party (as
defined herein) reasonably objects to any LTV Appraisals, the Controlling Party
shall have the right to obtain or cause to be obtained substitute LTV
Appraisals (including any LTV Appraisals based upon physical inspection of the
Aircraft).
"EXPECTED DISTRIBUTIONS" means, with respect to the Certificates of any
Trust on any Distribution Date (the "CURRENT DISTRIBUTION DATE"), the sum of
(x) accrued, due and unpaid interest on such Certificates (excluding interest,
if any, payable with respect to Deposits relating to such Trust) and (y) the
difference between (A) the Pool Balance of such Certificates as of the
immediately preceding Distribution Date (or, if the Current Distribution Date
is the first Distribution Date, the original aggregate face amount of the
Certificates of such Trust) and (B) the Pool Balance of such Certificates as of
the Current Distribution Date, calculated on the basis that (1) the principal
of the Equipment Notes held in such Trust has been paid when due (whether at
stated maturity, upon redemption, prepayment, acceleration or otherwise) and
such payments have been distributed to the holders of such Certificates and (2)
the principal of any Equipment Note formerly held in such Trust that has been
sold pursuant to the Intercreditor Agreement has been paid in full and such
payments have been distributed to the holders of such Certificates, but without
giving effect to any reduction in the Pool Balance as a result of any
distribution attributable to Deposits occurring after the immediately preceding
Distribution Date (or, if the Current Distribution Date is the first
Distribution Date, occurring after the initial issuance of the Certificates of
such Trust). In certain circumstances, the Make-Whole Premium will be included
as part of Expected Distributions.
"LIQUIDITY OBLIGATIONS" means the obligation to reimburse the Liquidity
Provider for each Interest Drawing under any Liquidity Facility and any other
amounts owing to the Liquidity Provider under each Liquidity Facility and
certain other agreements.
"LTV APPRAISAL" means a current fair market value appraisal (which may be
a "desktop" appraisal) performed by an Appraiser or any other nationally
recognized appraiser on the basis of an arm's-length transaction between an
informed and willing purchaser under no compulsion to buy and an informed and
willing seller under no compulsion to sell, both parties having knowledge of
all relevant facts.
"LTV COLLATERAL AMOUNT" of any Aircraft, for any Class of Certificates for
any Distribution Date, means the lesser of (i) the LTV Ratio (as defined
herein) for such Class of Certificates multiplied by the Appraised Current
Market Value of such Aircraft (or with respect to any such Aircraft which has
suffered an Event of Loss under and as defined in the relevant Lease, in the
case of a Leased Aircraft, or relevant Indenture, in the case of an Owned
Aircraft, the amount of the insurance proceeds paid to the related Loan Trustee
in respect thereof to the extent then held by such Loan Trustee (and/or on
deposit in the Special Payments Account) or payable to such Loan Trustee in
respect thereof) and (ii) the outstanding principal amount of the Equipment
Notes secured by such Aircraft, after giving effect to any principal payments
of such Equipment Notes on or before such Distribution Date.
"LTV RATIO" means for the Class A Certificates 36.7%, for the Class B
Certificates 52.6%, for the Class C Certificates 65.5% and for the Class D
Certificates 69.0%.
"PERFORMING EQUIPMENT NOTES" are Equipment Notes with respect to which
there is no payment default (without giving effect to any acceleration
thereof); provided that in the event of a bankruptcy proceeding involving
Midway under Title 11 of the United States Code (the "BANKRUPTCY CODE"), (i)
any payment default existing during the 60-day period under Section
1110(a)(1)(A) of the Bankruptcy Code (or such longer period as may apply under
Section 1110(b) of the Bankruptcy Code) (the "SECTION 1110 PERIOD") shall not
be taken into consideration, unless during the Section 1110 Period the trustee
in such proceeding or Midway refuses to assume or agree to perform its
obligations under the Lease related to such Equipment Notes (in the case of a
Leased Aircraft) or under the Owned Aircraft Indenture (in the case of the
Owned Aircraft) and (ii) any payment default occurring after the date of the
order of relief in such proceeding shall not be taken into consideration if
such payment default is cured under Section 1110(a)(1)(B) of the Bankruptcy
Code before the later of 30 days after the date of such default or the
expiration of the Section 1110 Period.
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<PAGE>
"PERFORMING NOTE DEFICIENCY" exists at any time that less than 65% of the
then aggregate outstanding principal amount of all Equipment Notes are
Performing Equipment Notes.
"TRIGGERING EVENT" means (x) the incurrence of an Indenture Default under
all Indentures resulting in a PTC Event of Default with respect to the most
senior Class of Certificates then outstanding, (y) the acceleration of, or a
failure to pay at final maturity, all of the oustanding Equipment Notes or (z)
certain bankruptcy or insolvency events involving Midway.
PAYMENTS AND DISTRIBUTIONS
Payments of principal, Make-Whole Premium (if any) and interest with
respect to the Equipment Notes or other Trust Property held in each Trust will
be distributed by the Paying Agent (in the case of the Deposits) or by the
Trustee (in the case of Trust Property of such Trust) to Certificateholders of
such Trust on each Regular Distribution Date or as soon thereafter as receipt
of such payments is confirmed, except in the case of certain types of Special
Payments.
The Deposits held with respect to each Trust and Equipment Notes held in
each Trust will accrue interest at the applicable rate per annum for
Certificates issued by such Trust set forth on the cover page of this
Prospectus, payable on January 2 and July 2 of each year commencing January 2,
1999 (or, in the case of Equipment Notes issued after such date, commencing the
first such date to occur after the initial issuance thereof), and such interest
payments will be passed through to Certificateholders of such Trust on each
such date until the final Distribution Date for such Trust, in each case,
subject, in the case of payments on the Equipment Notes, to the Intercreditor
Agreement. Interest is calculated on the basis of a 360-day year consisting of
twelve 30-day months. Payments of interest on the Certificates issued by each
Trust (other than the Class D Trust) are supported by a separate Liquidity
Provider for the benefit of the holders of such Certificates in an amount
sufficient to pay interest thereon at the Stated Interest Rate for such Trust
on three successive Regular Distribution Dates except that the Liquidity
Facilities with respect to such Trust will not cover interest payable by the
Depositary on the Deposits relating to such Trust. Notwithstanding the
subordination provisions of the Intercreditor Agreement, the Liquidity Facility
for any Class of Certificates does not provide for drawings thereunder to pay
principal of or interest or Make-Whole Premium on the Certificates of any other
Class. Therefore, only the holders of the Certificates to be issued by a
particular Trust will be entitled to receive and retain the proceeds of
drawings under the Liquidity Facility for such Trust. See "Description of the
Liquidity Facilities."
Payments of principal on the Equipment Notes held in each Trust are
scheduled to be received by the Trustee on January 2 and July 2 in certain
years depending upon the terms of the Equipment Notes held in such Trust,
subject to the Intercreditor Agreement. Scheduled payments of interest and
principal on the Equipment Notes are herein referred to as "SCHEDULED
PAYMENTS," and January 2 and July 2 of each year are herein referred to as
"REGULAR DISTRIBUTION DATES." See "Description of the Equipment Notes --
Principal and Interest Payments." The "FINAL EXPECTED DISTRIBUTION DATE" for
each Class of Certificates is set forth on the cover page of this Prospectus.
The "FINAL LEGAL DISTRIBUTION DATE" for each of the Class A, B, C and D
Certificates is July 2, 2016, July 2, 2014, July 2, 2007 and January 2, 2003,
respectively.
The Paying Agent with respect to each Escrow Agreement will distribute on
each Regular Distribution Date to the Certificateholders of the Trust to which
such Escrow Agreement relates all Scheduled Payments received in respect of the
related Deposits, the receipt of which is confirmed by the Paying Agent on such
Regular Distribution Date. The Trustee of each Trust will distribute, subject
to the Intercreditor Agreement, on each Regular Distribution Date to the
Certificateholders of such Trust all Scheduled Payments, the receipt of which
is confirmed by the Trustee on such Regular Distribution Date. Each
Certificateholder of each Trust will be entitled to receive a pro rata share of
any distribution in respect of Scheduled Payments of interest on the Deposits
relating to such Trust and, subject to the Intercreditor Agreement, of
principal and interest made on the Equipment Notes held in such Trust. Each
such distribution of Scheduled Payments will be made by the applicable Paying
Agent or Trustee of each Trust to the Certificateholders of record of such
Trust on the Record Date applicable to such Scheduled Payment subject to
certain exceptions. (Sections 4.01 and 4.02; Escrow Agreement, Section 2.03).
If a Scheduled Payment is not received by the Trustee on a Regular Distribution
Date but is received within five days thereafter, it will be distributed to
such holders of record on the date received. If it is received after such
five-day period, it will be treated as a Special Payment (as defined below) and
distributed as described below.
Any payment in respect of, or any proceeds of, any Equipment Note or the
Trust Indenture Estate under (and as defined in) each Indenture other than a
Scheduled Payment (each, a "SPECIAL PAYMENT") will be distributed on, in the
case of an early redemption or a purchase of the Equipment Notes relating to
any Aircraft, the date of such early redemption or purchase (which shall be a
business day), and otherwise on the business day specified for distribution of
such Special Payment pursuant to a notice delivered by the Trustee as soon as
practicable after the Trustee has received funds for such Special Payment, in
each case subject to the Intercreditor Agreement. Any unused Deposits to be
distributed after the Delivery
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Period Termination Date or the occurrence of a Triggering Event, together with
accrued and unpaid interest thereon and any premium payable by Midway (each,
also a "SPECIAL PAYMENT"), will be distributed on a date 35 days after the
Paying Agent has received notice of the event requiring such distribution (also
a "SPECIAL DISTRIBUTION DATE") unless such date is within 10 days before or
after a Regular Distribution Date, in which case such Special Payment shall be
made on such Regular Distribution Date. Each Paying Agent, in the case of the
Deposits, and each Trustee, in the case of Trust Property or any premium
payable by Midway in connection with certain distributions of unused Deposits,
will mail a notice to the Certificateholders of the applicable Trust stating
the scheduled Special Distribution Date, the related Record Date, the amount of
the Special Payment and the reason for the Special Payment. In the case of a
redemption or purchase of the Equipment Notes held in the related Trust or any
distribution of unused Deposits after the Delivery Period Termination Date or
the occurrence of a Triggering Event, such notice will be mailed not less than
15 days prior to the date such Special Payment is scheduled to be distributed,
and in the case of any other Special Payment, such notice will be mailed as
soon as practicable after the Trustee has confirmed that it has received funds
for such Special Payment. (Section 4.02(c); Escrow Agreement, Sections 1.03 and
2.06) Each distribution of a Special Payment, other than a final distribution,
on a Special Distribution Date for any Trust will be made by the Trustee to the
Certificateholders of record of such Trust on the Record Date applicable to
such Special Payment. See " -- Indenture Defaults and Certain Rights Upon an
Indenture Default" and "Description of the Equipment Notes -- Redemption."
Each Pass Through Trust Agreement requires that the Trustee establish and
maintain, for the related Trust and for the benefit of the Certificateholders
of such Trust, one or more accounts (the "CERTIFICATE ACCOUNT") for the deposit
of payments representing Scheduled Payments on the Equipment Notes held in such
Trust. Each Pass Through Trust Agreement also requires that the Trustee
establish and maintain, for the related Trust and for the benefit of the
Certificateholders of such Trust, one or more accounts (the "SPECIAL PAYMENTS
ACCOUNT") for the deposit of payments representing Special Payments, which
account shall be non-interest-bearing except in certain circumstances where the
Trustee may invest amounts in such account in certain permitted investments.
(Sections 4.01 and 4.04) Pursuant to the terms of each Pass Through Trust
Agreement, the Trustee is required to deposit any Scheduled Payments relating
to the applicable Trust received by it in the Certificate Account of such Trust
and to deposit any Special Payments so received by it in the Special Payments
Account of such Trust. (Section 4.01) All amounts so deposited will be
distributed by the Trustee on a Regular Distribution Date or a Special
Distribution Date, as appropriate. (Section 4.02)
Each Escrow Agreement requires that the Paying Agent establish and
maintain, for the benefit of the Receiptholders, one or more accounts (the
"PAYING AGENT ACCOUNT"), which shall be non-interest bearing. Pursuant to the
terms of the Escrow Agreement, the Paying Agent is required to deposit interest
on Deposits relating to such Trust and any unused Deposits withdrawn by the
Escrow Agent in the Paying Agent Account. All amounts so deposited will be
distributed by the Paying Agent on a Regular Distribution Date or Special
Distribution Date, as appropriate.
Distributions by the Trustee from the Certificate Account or the Special
Payments Account of each Trust on a Regular Distribution Date or a Special
Distribution Date in respect of Certificates issued by such Trust in definitive
form will be made to each Certificateholder of record of such Certificates on
the applicable Record Date. (Section 4.02) The final distribution for each
Trust, however, will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee for such Trust specified in
the notice given by the Trustee of such final distribution. The Trustee will
mail such notice of the final distribution to the Certificateholders of such
Trust, specifying the date set for such final distribution and the amount of
such distribution. (Section 11.01) See "Termination of the Trusts."
Distributions in respect of Certificates issued in global form will be made as
described in " -- Book-Entry; Delivery and Form" below.
If any Regular Distribution Date or Special Distribution Date is not a
business day, distributions scheduled to be made on such Regular Distribution
Date or Special Distribution Date will be made on the next succeeding business
day without additional interest.
POOL FACTORS
The "POOL BALANCE" for each Trust or for the Certificates issued by any
Trust indicates, as of any date, the original aggregate face amount of the
Certificates of such Trust less the aggregate amount of all payments made in
respect of the Certificates of such Trust or in respect of Deposits relating to
such Trust other than payments made in respect of interest or Make-Whole
Premium thereon or reimbursement of any costs and expenses in connection
therewith. The Pool Balance for each Trust as of any Regular Distribution Date
or Special Distribution Date shall be computed after giving effect to any
special distribution with respect to unused Deposits, the payment of principal,
if any, on the Equipment Notes or other Trust Property held in such Trust and
the distribution thereof to be made on that date.
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<PAGE>
The "POOL FACTOR" for each Trust as of any Regular Distribution Date or
Special Distribution Date is the quotient (rounded to the seventh decimal
place) computed by dividing (i) the Pool Balance by (ii) the original aggregate
face amount of the Certificates of such Trust. The Pool Factor for each Trust
as of any Regular Distribution Date or Special Distribution Date shall be
computed after giving effect to any special distribution with respect to unused
Deposits, the payment of principal, if any, on the Equipment Notes or other
Trust Property held in such Trust and the distribution thereof to be made on
that date. The Pool Factor for each Trust was 1.0000000 on August 13, 1998, the
date of issuance of the Certificates (the "ISSUANCE DATE"); thereafter, the
Pool Factor for each Trust will decline as described herein to reflect
reductions in the Pool Balance of such Trust. The amount of a
Certificateholder's pro rata share of the Pool Balance of a Trust can be
determined by multiplying the par value of the holder's Certificate of such
Trust by the Pool Factor of such Trust as of the applicable Regular
Distribution Date or Special Distribution Date. Notice of the Pool Factor and
the Pool Balance for each Trust will be mailed to Certificateholders of such
Trust on each Regular Distribution Date and Special Distribution Date.
The following table sets forth an illustrative aggregate principal
amortization schedule for the Equipment Notes held in each Trust (the "ASSUMED
AMORTIZATION SCHEDULE") and resulting Pool Factors with respect to such Trust,
based on the actual amortization schedule of the $82,122,000 of Equipment Notes
issued with respect to the six Aircraft currently leased by Midway and the
expected amortization schedule of the $27,600,000 of Equipment Notes expected
to be issued to finance the additional two Aircraft to be financed with the
proceeds from the sale of the Old Certificates. The actual aggregate principal
amortization schedule applicable to a Trust and the resulting Pool Factors with
respect to such Trust may differ from those set forth below, since the
amortization schedule for the Equipment Notes issued with respect to the two
Aircraft not yet acquired by Midway may vary from such illustrative
amortization schedule so long as it complies with the Mandatory Economic Terms.
In addition, the table set forth below assumes that each Aircraft is delivered
in the month scheduled for its delivery (see "Description of the Aircraft and
the Appraisals -- The Appraisals" for the delivery schedule), that Equipment
Notes in the maximum principal amount in respect of all of the Aircraft are
purchased by the Trusts and that no early redemption or purchase, or default in
the payment of principal, in respect of any Equipment Notes occurs. Actual
circumstances may vary from these assumptions, which would result in
differences in the aggregate principal amortization schedule applicable to a
Trust and in the resulting Pool Factors.
<TABLE>
<CAPTION>
CLASS A CLASS B
TRUST TRUST
EQUIPMENT EQUIPMENT
NOTES CLASS A NOTES CLASS B
SCHEDULED TRUST SCHEDULED TRUST
PAYMENTS OF EXPECTED PAYMENTS OF EXPECTED
DATE PRINCIPAL POOL FACTOR PRINCIPAL POOL FACTOR
- ----------------- ---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
January 2, 1999 $ 0.00 1.0000000 $ 0.00 1.0000000
July 2, 1999 0.00 1.0000000 0.00 1.0000000
January 2, 2000 1,726,268.19 0.9704538 728,014.99 0.9711860
January 2, 2001 1,753,600.20 0.9404397 758,907.01 0.9411493
January 2, 2002 1,753,600.20 0.9104257 758,906.99 0.9111126
January 2, 2003 1,753,600.21 0.8804117 758,907.00 0.8810759
January 2, 2004 1,753,600.20 0.8503976 758,907.00 0.8510392
January 2, 2005 1,753,600.18 0.8203836 2,378,739.19 0.7568914
January 2, 2006 1,753,600.20 0.7903695 4,581,998.89 0.5755410
January 2, 2007 1,753,600.20 0.7603555 3,766,092.84 0.4264833
January 2, 2008 1,753,600.20 0.7303415 3,826,238.13 0.2750450
January 2, 2009 4,685,205.66 0.6501510 1,857,570.74 0.2015245
January 2, 2010 7,258,097.66 0.5259239 0.00 0.2015245
January 2, 2011 7,795,400.98 0.3925004 0.00 0.2015245
January 2, 2012 8,183,554.67 0.2524334 189,904.17 0.1940083
January 2, 2013 4,117,777.25 0.1819548 4,901,813.04 0.0000000
January 2, 2014 8,154,615.48 0.0423832 0.00 0.0000000
January 2, 2015 2,476,278.53 0.0000000 0.00 0.0000000
<CAPTION>
CLASS C CLASS D
TRUST TRUST
EQUIPMENT EQUIPMENT
NOTES CLASS C NOTES CLASS D
SCHEDULED TRUST SCHEDULED TRUST
PAYMENTS OF EXPECTED PAYMENTS OF EXPECTED
DATE PRINCIPAL POOL FACTOR PRINCIPAL POOL FACTOR
- ----------------- ------------------ ------------- ---------------- --------------
<S> <C> <C> <C> <C>
January 2, 1999 $ 5,472,524.41 0.7334117 $ 0.00 1.0000000
July 2, 1999 1,509,669.86 0.6598697 0.00 1.0000000
January 2, 2000 2,031,946.45 0.5608856 145,035.70 0.9736395
January 2, 2001 541,980.25 0.5344836 1,967,541.69 0.6160346
January 2, 2002 19,227.85 0.5335469 2,918,660.26 0.0855620
January 2, 2003 2,935,939.48 0.3905257 470,762.35 0.0000000
January 2, 2004 3,920,194.22 0.1995576 0.00 0.0000000
January 2, 2005 2,855,358.55 0.0604618 0.00 0.0000000
January 2, 2006 1,241,158.90 0.0000000 0.00 0.0000000
January 2, 2007 0.00 0.0000000 0.00 0.0000000
January 2, 2008 0.00 0.0000000 0.00 0.0000000
January 2, 2009 0.00 0.0000000 0.00 0.0000000
January 2, 2010 0.00 0.0000000 0.00 0.0000000
January 2, 2011 0.00 0.0000000 0.00 0.0000000
January 2, 2012 0.00 0.0000000 0.00 0.0000000
January 2, 2013 0.00 0.0000000 0.00 0.0000000
January 2, 2014 0.00 0.0000000 0.00 0.0000000
January 2, 2015 0.00 0.0000000 0.00 0.0000000
</TABLE>
The actual schedule of principal payments and the resulting schedule of
Pool Balances and Pool Factors may change from that set forth above. In
addition, the Pool Factor and Pool Balance of each Trust will be recomputed if
there has been an early redemption, purchase, or a default in the payment of
principal or interest in respect of one or more issues of the Equipment Notes
held in a Trust, as described in " -- Indenture Defaults and Certain Rights
Upon an Indenture Default" and "Description of the Equipment Notes --
Redemption", or a special distribution attributable to unused Deposits after
the Delivery Period Termination Date or the occurrence of a Triggering Event,
as described in "Description of the Deposit Agreements." In the event of (i)
any such change in the repayment schedule with respect to any Aircraft or (ii)
any such
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redemption, purchase or default, the Pool Factors and the Pool Balances of each
Trust so affected will be recomputed after giving effect thereto and notice
thereof will be mailed to the Certificateholders of such Trust promptly after
the Delivery Period Termination Date in the case of clause (i) and promptly
after the occurrence of any event described in clause (ii).
OBLIGATION TO PURCHASE EQUIPMENT NOTES
The Trustees are obligated to purchase the Equipment Notes issued with
respect to the Aircraft during the Delivery Period, subject to the terms and
conditions of the Note Purchase Agreement. Under the Note Purchase Agreement,
Midway agreed to finance each Aircraft in the manner provided therein and in
connection therewith will have the option of entering into a leveraged lease
financing or a secured debt financing with respect to each Aircraft. The Note
Purchase Agreement provides for the relevant parties to enter into (i) with
respect to each Leased Aircraft, a Participation Agreement, a Lease and a
Leased Aircraft Indenture relating to the financing of such Leased Aircraft and
(ii) with respect to each Owned Aircraft, a Participation Agreement and an
Owned Aircraft Indenture relating to the financing of such Owned Aircraft. The
financing of an Aircraft may not take place on the date such Aircraft is
actually delivered from the manufacturer, provided that such financing will
occur prior to the Delivery Period Termination Date. The description of such
agreements in this Prospectus is based on the forms of such agreements to be
utilized pursuant to the Note Purchase Agreement. In the case of a Leased
Aircraft, the terms of the agreements actually entered into may differ from the
forms of such agreements and, consequently, may differ from the description of
such agreements contained in this Prospectus. See "Risk Factors -- Risk Factors
Relating to the Certificates and the Exchange Offer -- Owner Participant;
Revisions to Agreements." However, under the Note Purchase Agreement, the terms
of such agreements are required to (i) contain the Mandatory Document Terms and
(ii) not vary the Mandatory Economic Terms. In addition, Midway is obligated
(i) to certify to the Trustees that any such modifications do not materially
and adversely affect the Certificateholders (provided that the Note Purchase
Agreement provides that, among other terms, the shortening of certain grace
periods for Events of Loss and Events of Default is not materially adverse to
the Certificateholders) and (ii) to obtain written confirmation from each
Rating Agency that the use of versions of such agreements modified in any
material respect will not result in a withdrawal, suspension or downgrading of
the rating of any Class of Certificates. Further, under the Note Purchase
Agreement, it is a condition precedent to the obligation of each Trustee to
purchase the Equipment Notes related to the financing of an Aircraft that no
Triggering Event shall have occurred. The Trustees have no right or obligation
to purchase Equipment Notes after the Delivery Period Termination Date.
The "MANDATORY ECONOMIC TERMS," defined in the Note Purchase Agreement,
require, among other things, that:
(i) the maximum principal amount of all the Equipment Notes issued with
respect to an Aircraft not exceed the maximum principal amount of Equipment
Notes indicated for each such Aircraft as set forth in "Description of the
Equipment Notes -- General" under the column "Maximum Principal Amount of
Equipment Notes";
(ii) the initial loan to aircraft value with respect to an Aircraft (with
the value of any Aircraft for these purposes to equal the value for such
Aircraft set forth in "Description of the Equipment Notes -- General" under
the column "APPRAISED VALUE"), not exceed 36.7% in the case of Series A
Equipment Notes, 52.6% in the case of Series B Equipment Notes, 65.5% in
the case of Series C Equipment Notes, and 69.0% in the case of the Series D
Equipment Notes;
(iii) the initial average life of the Series A Equipment Notes not extend
beyond 11.8 years, of the Series B Equipment Notes not extend beyond 10.8
years, of the Series C Equipment Notes not extend beyond 5.5 years and of
the Series D Equipment Notes not extend beyond 3.6 years, in each case from
the Issuance Date;
(iv) as of the first Regular Distribution Date immediately following the
Delivery Period Termination Date (or if earlier, the date of the occurrence
of a Triggering Event), and after giving effect to any Regular
Distributions required to be made on such date, the average life of the
Class A Certificates, the Class B Certificates, the Class C Certificates
and the Class D Certificates shall not extend beyond, respectively, 11.3
years, 10.3 years, 5.0 years and 3.1 years from the Issuance Date (computed
without regard to the acceleration of any Equipment Notes and after giving
effect to any special distribution on the Certificates thereafter required
in respect of unused Deposits);
(v) the final maturity date of (a) the Series A Equipment Notes not be in
excess of 16.4 years after the Issuance Date, (b) the Series B Equipment
Notes not be in excess of 14.4 years after the Issuance Date, (c) the
Series C Equipment Notes not be in excess of 9.4 years after the Issuance
Date and (d) the Series D Equipment Notes not be in excess of 4.4 years
after the Issuance Date;
(vi) the original aggregate principal amount of all of the Equipment
Notes of each Series shall not exceed the original aggregate face amount of
the Certificates issued by the corresponding Trust;
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(vii) the interest rate and the January 2 and July 2 payment dates with
respect to the Equipment Notes may not be changed;
(viii) basic rent and termination values under the related Lease must be
sufficient to pay amounts due with respect to the related Equipment Notes;
(ix) the amounts payable under the all-risk aircraft hull insurance
maintained with respect to each Aircraft must be sufficient to pay the
applicable termination value, subject to certain rights of self-insurance;
and
(x) (a) the past due rate in the related Indenture and the related
Lease;
(b) the Make-Whole Premium payable under the related Indenture;
(c) the provisions relating to the prepayment and purchase of
Equipment Notes in the related Indentures;
(d) the minimum liability insurance amount on such Leased Aircraft in
the related Lease; and
(e) the indemnification of the Loan Trustee, Subordination Agent,
Liquidity Providers, Trustees, Escrow Agents and registered holders of the
Equipment Notes with respect to certain taxes and expenses,
in each case, must be provided as set forth in the form of Participation
Agreement, Lease and Indenture, as the case may be (or in the case of
clause (d), may be in a greater amount, or in the case of clause (e), may
provide for modifications to such indemnification provisions so long as
such modifications are not materially adverse to the Loan Trustee,
Subordination Agent, Liquidity Providers or the Trustees).
The "MANDATORY DOCUMENT TERMS" prohibit modifications in any material
adverse respect to certain specified provisions of the Indentures, the Leases
and the Participation Agreements. In the case of the Indentures, such
provisions include:
(i) the Granting Clause of the Indentures so as to deprive the holders of
a first priority security interest in the Aircraft, the Lease and certain
of Midway's rights under its purchase agreement with the Aircraft
manufacturer;
(ii) certain provisions relating to the issuance, prepayment, purchase,
payments and ranking of the Equipment Notes (including the obligations to
pay the Make-Whole Premium in certain circumstances);
(iii) certain provisions regarding Indenture Events of Default, remedies
relating thereto and rights of the related Owner Trustee and related Owner
Participant in such circumstances;
(iv) certain provisions relating to any replaced airframe or engines with
respect to an Aircraft; and
(v) the provision that New York law will govern the Indentures.
In the case of the Lease, such provisions include the obligations of
Midway to:
(i) pay basic rent and termination value to the Loan Trustee;
(ii) furnish certain opinions with respect to a replacement airframe;
and
(iii) consent to the assignment of the related Lease by the Owner Trustee
as collateral under the Indenture, as well as modifications which will
either alter the provision that New York law will govern the Lease or will
deprive the Loan Trustee of rights expressly granted to it under the
Leases.
In the case of the Participation Agreement, such provisions include:
(i) certain conditions to the obligations of the Loan Trustee to
participate in the purchase price of these Aircraft by releasing the debt
portion thereof from the Deposit Account, involving good title to such
Aircraft, obtaining a certificate of airworthiness with respect to such
Aircraft, entitlement to the benefits of Section 1110 of the Bankruptcy
Code with respect to such Aircraft and filings of certain documents with
the Federal Aviation Administration;
(ii) certain provisions regarding the obligation of Midway to record the
Indenture with the Federal Aviation Administration and to maintain such
Indenture as a first-priority perfected mortgage on the related Aircraft;
(iii) certain provisions requiring the delivery of legal opinions; and
(iv) the provision that New York law will govern the Participation
Agreement.
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Notwithstanding the foregoing, any such Mandatory Document Term may be
modified to correct or supplement any such provision which may be defective or
to cure any ambiguity or correct any mistake, unless such action will
materially adversely affect the interests of the Subordination Agent, the
Liquidity Providers, the Loan Trustee or the Certificateholders.
REPORTS TO CERTIFICATEHOLDERS
On each Regular Distribution Date and Special Distribution Date, the
applicable Paying Agent and Trustee will include with each distribution of a
Scheduled Payment or Special Payment, respectively, to Certificateholders of
the related Trust a statement, giving effect to such distribution to be made on
such Regular Distribution Date or Special Distribution Date, setting forth the
following information (per $1,000 aggregate principal amount of Certificate for
such Trust, as to (i), (ii), (iii), (iv) and (v) below):
(i) the aggregate amount of such funds distributed on such Distribution
Date under the Pass Through Trust Agreement and the Escrow Agreement,
indicating the amount allocable to each source;
(ii) the amount of such distribution under the Pass Through Trust
Agreement allocable to principal and the amount allocable to Make-Whole
Premium (including any premium paid by Midway with respect to unused
Deposits) (if any);
(iii) the amount of such distribution under the Pass Through Trust
Agreement allocable to interest; and
(iv) the amount of such distribution under the Escrow Agreement allocable
to interest;
(v) the amount of such distribution under the Escrow Agreement allocable
to unused Deposits (if any); and
(vi) the Pool Balance and the Pool Factor for such Trust. (Section 4.03)
With respect to the Certificates registered in the name of Cede, as
nominee for The Depository Trust Company ("DTC"), on the record date prior to
each Distribution Date, the applicable Trustee will request from DTC a
Securities Position Listing setting forth the names of all participants in DTC
who are credited with ownership of such Certificates ("DTC PARTICIPANTS")
reflected on DTC's books as holding interests in the Certificates on such
record date. On each Distribution Date, the applicable Paying Agent and Trustee
will mail to each such DTC Participant the statement described above and will
make available additional copies as requested by such DTC Participant for
forwarding to holders of Certificates.
In addition, after the end of each calendar year, the applicable Trustee
will prepare for each Certificateholder of each Trust at any time during the
preceding calendar year a report containing the sum of the amounts determined
pursuant to clauses (i), (ii), (iii), (iv), (v) and (vi) above with respect to
the Trust for such calendar year or, in the event such person was a
Certificateholder during only a portion of such calendar year, for the
applicable portion of such calendar year, and such other items as are readily
available to such Trustee and which a Certificateholder shall reasonably
request as necessary for the purpose of such Certificateholder's preparation of
its U.S. federal income tax returns. (Section 4.03) Such report and such other
items shall be prepared on the basis of information supplied to the applicable
Trustee by the DTC Participants and shall be delivered by such Trustee to such
DTC Participants to be available for forwarding by such DTC Participants to
Certificate Owners in the manner described above. See " -- Book-Entry; Delivery
and Form."
With respect to the Certificates issued in definitive form, the applicable
Paying Agent and Trustee will prepare and deliver the information described
above to each Certificateholder of record of each Trust as the name of such
Certificateholder appears on the records of the registrar of the Certificates.
INDENTURE DEFAULTS AND CERTAIN RIGHTS UPON AN INDENTURE DEFAULT
Since the Equipment Notes issued under each Indenture will be held in more
than one Trust, a continuing event of default (an "INDENTURE DEFAULT") under
any such Indenture would affect the Equipment Notes held by each Trust. There
are no cross-default provisions in the Indentures or Leases in effect at any
time when the related Equipment Notes are outstanding (except if agreed to with
the Owner Participant). Consequently, events resulting in an Indenture Default
under any particular Indenture may or may not result in an Indenture Default
under any other Indenture. If an Indenture Default occurs under less than all
of the Indentures, notwithstanding the treatment of Equipment Notes issued
under any Indenture under which an Indenture Default has occurred, payments of
principal and interest on the Equipment Notes issued pursuant to the remaining
Indentures with respect to which an Indenture Default has not occurred will
continue to be distributed to the holders of the Certificates as originally
scheduled, subject to the Intercreditor Agreement. See "Description of the
Intercreditor Agreement -- Priority of Distributions."
With respect to each Leased Aircraft, the applicable Owner Trustee and
Owner Participant will, under the related Indenture, have the right under
certain circumstances to cure Indenture Defaults that result from the
occurrence of a Lease Event
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of Default under the related Lease. If the Owner Trustee or the Owner
Participant exercises any such cure right, the Indenture Default will be deemed
to have been cured.
In the event that the same institution acts as Trustee of multiple Trusts,
in the absence of instructions from the Certificateholders of any such Trust,
such Trustee could be faced with a potential conflict of interest upon an
Indenture Default. In such event, each Trustee has indicated that it would
resign as Trustee of one or all such Trusts, and a successor trustee would be
appointed in accordance with the terms of the applicable Pass Through Trust
Agreement. FMB Bank is the initial Trustee under each Trust.
Upon the occurrence and continuation of any Indenture Default under any
Indenture, the Controlling Party may accelerate and sell all (but not less than
all) of the Equipment Notes issued under such Indenture to any person, subject
to certain limitations. The proceeds of such sale will be distributed pursuant
to the provisions of the Intercreditor Agreement. Any proceeds received by the
applicable Trustee upon any such sale shall be deposited in the applicable
Special Payments Account and shall be distributed to the Certificateholders of
such Trust on a Special Distribution Date. (Sections 4.01 and 4.02) The market
for Equipment Notes at the time of the existence of any Indenture Default may
be very limited, and there can be no assurance as to the price at which they
could be sold. If such Trustee sells any such Equipment Notes for less than
their outstanding principal amount, certain Certificateholders will receive a
smaller amount of principal distributions than anticipated and will not have
any claim for the shortfall against Midway, any Owner Trustee, any Owner
Participant, any Trustee or any Liquidity Provider.
Any amount, other than Scheduled Payments received on a Regular
Distribution Date, distributed to the Trustee of any Trust by the Subordination
Agent on account of the Equipment Notes or other Trust Property held in such
Trust following an Indenture Default under any Indenture shall be deposited in
the Special Payments Account for such Trust and shall be distributed to the
Certificateholders of such Trust on a Special Distribution Date. (Section 4.02)
In addition, if, following an Indenture Default under any Leased Aircraft
Indenture, the applicable Owner Participant or Owner Trustee exercises its
option to redeem or purchase the outstanding Equipment Notes issued under such
Leased Aircraft Indenture, the price paid by such Owner Trustee for the
Equipment Notes issued under such Leased Aircraft Indenture and distributed to
such Trust by the Subordination Agent shall be deposited in the Special
Payments Account for such Trust and shall be distributed to the
Certificateholders of such Trust on a Special Distribution Date. (Section 4.02)
Any funds representing payments received with respect to any defaulted
Equipment Notes held in a Trust, or the proceeds from the sale of any Equipment
Notes, held by such Trustee in the Special Payments Account for such Trust
shall, to the extent practicable, be invested and reinvested by such Trustee in
Permitted Investments pending the distribution of such funds on a Special
Distribution Date. (Section 4.04) "PERMITTED INVESTMENTS" are defined as
obligations of the United States or agencies or instrumentalities thereof the
payment of which is backed by the full faith and credit of the United States
and which mature in not more than 60 days or such lesser time as is required
for the distribution of any such funds on a Special Distribution Date or any
mutual fund the portfolio of which is limited to such obligations. (Section
1.01)
Each Pass Through Trust Agreement provides that the Trustee of the related
Trust shall, within 90 days after the occurrence of any default known to the
Trustee, give to the Certificateholders of such Trust notice, transmitted by
mail, of all uncured or unwaived defaults with respect to such Trust known to
it, PROVIDED that, except in the case of default in the payment of principal,
premium, if any, or interest on any of the Equipment Notes or other Trust
Property held in such Trust, the applicable Trustee shall be protected in
withholding such notice if it in good faith determines that the withholding of
such notice is in the interests of such Certificateholders. (Section 7.02)
Each Pass Through Trust Agreement contains a provision entitling the
Trustee of the related Trust, subject to the duty of such Trustee during a
default to act with the required standard of care, to be offered reasonable
security or indemnity by the holders of the Certificates of such Trust before
proceeding to exercise any right or power under such Pass Through Trust
Agreement at the request of such Certificateholders. (Section 7.03(e))
In certain cases, the holders of the Certificates of a Trust evidencing
fractional undivided interests aggregating not less than a majority in interest
of such Trust may on behalf of the holders of all the Certificates of such
Trust waive any past default under the related Pass Through Trust Agreement or,
if the Trustee of such Trust is the Controlling Party, may direct the Trustee
to instruct the applicable Loan Trustee to waive any past Indenture Default
with respect to such Trust and thereby annul any direction given by all such
holders to such Loan Trustee with respect thereto, except (i) a default in the
deposit of any Scheduled Payment or Special Payment or in the distribution
thereof, (ii) a default in payment of the principal, Make-Whole Premium, if
any, or interest with respect to any of the Equipment Notes held in such Trust
and (iii) a default in respect of any covenant or provision of the related Pass
Through Trust Agreement that cannot be modified or amended without the consent
of each Certificateholder of such Trust affected thereby. (Section 6.05) Each
Indenture will provide that,
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with certain exceptions, the holders of the majority in aggregate unpaid
principal amount of the Equipment Notes issued thereunder may on behalf of all
such holders waive any past default or Indenture Default thereunder.
Notwithstanding the foregoing provisions of this paragraph, however, pursuant
to the Intercreditor Agreement, only the Controlling Party will be entitled to
waive any such past default or Indenture Default.
PURCHASE RIGHTS OF CERTIFICATEHOLDERS
Upon the occurrence and during the continuation of a Triggering Event,
with ten days' written notice to the Trustee and each other Certificateholder
of the same Class, (i) the Class B Certificateholders shall have the right to
purchase all, but not less than all, of the Class A Certificates, (ii) the
Class C Certificateholders shall have the right to purchase all, but not less
than all, of the Class A and the Class B Certificates and (iii) the Class D
Certificateholders shall have the right to purchase all, but not less than all,
of the Class A, Class B and Class C Certificates, in each case at a purchase
price equal to the Pool Balance of the relevant Class or Classes of
Certificates plus accrued and unpaid interest thereon to the date of purchase
without Make-Whole Premium but including any other amounts due to the
Certificateholders of such Class or Classes. In each case, if, prior to the end
of the ten-day period, any other Certificateholder of the same Class notifies
the purchasing Certificateholder that the other Certificateholder wants to
participate in such purchase, then such other Certificateholder may join with
the purchasing Certificateholder to purchase the Certificates pro rata based on
the interest in the Trust held by each Certificateholder. (Section 6.01(b))
PTC EVENT OF DEFAULT
A "PTC EVENT OF DEFAULT" is defined under each Pass Through Trust
Agreement as the failure to pay: (i) the outstanding Pool Balance of the
applicable Class of Certificates within 10 business days after the Final Legal
Distribution Date for such Class or (ii) interest due on such Certificates
within 10 business days after any Distribution Date (unless, except in the case
of the Class D Certificates, the Subordination Agent shall have made an
Interest Drawing with respect thereto in an amount sufficient to pay such
interest and shall have distributed such amount to the Certificateholders
entitled thereto). (Section 1.01) Any failure to make expected principal
distributions on any Class of Certificates on any Regular Distribution Date
(other than the Final Legal Distribution Date) will not constitute a PTC Event
of Default with respect to such Certificates. A PTC Event of Default with
respect to the most senior outstanding Class of Certificates resulting from an
Indenture Default under all Indentures will constitute a Triggering Event. See
"Description of the Intercreditor Agreement -- Priority of Distributions" for a
discussion of the consequences of the occurrence of a Triggering Event.
MERGER, CONSOLIDATION AND TRANSFER OF ASSETS
Midway is prohibited from consolidating with or merging with or into any
other corporation or transferring or leasing all or substantially all of its
assets as an entirety to any other corporation unless, among other things, (i)
the surviving successor or transferee corporation shall (a) be a "CITIZEN OF
THE UNITED STATES" as defined in Section 40102(a)(15) of Title 49 of the United
States Code, as amended, relating to aviation (the "TRANSPORTATION CODE"), (b)
be a United States certificated air carrier so long as such status is a
condition of entitlement to the benefits of Section 1110 of the U.S. Bankruptcy
Code and (c) expressly assume all of the obligations of Midway contained in the
Pass Through Trust Agreements, the Indentures, the Participation Agreements and
the Leases, and any other operative documents; and (ii) Midway shall have
delivered a certificate and an opinion or opinions of counsel indicating that
such transaction complies with such conditions. (Section 5.02)
The Pass Through Trust Agreements do not, and the Indentures will not,
contain any covenants or provisions which assure the applicable Trustee or
Certificateholders of protection in the event of a highly leveraged
transaction, including transactions effected by management or affiliates, which
may or may not result in a change in control of Midway.
MODIFICATIONS OF THE PASS THROUGH TRUST AGREEMENTS AND CERTAIN OTHER AGREEMENTS
Each Pass Through Trust Agreement contains provisions permitting the
execution of amendments or supplements to such Pass Through Trust Agreement or,
if applicable, to the Deposit Agreements, the Escrow Agreements, the Note
Purchase Agreement or any Liquidity Facility, without the consent of the
holders of any of the Certificates of such Trust, (i) to evidence the
succession of another corporation to Midway and the assumption by such
corporation of Midway's obligations under such Pass Through Trust Agreement or
the Note Purchase Agreement, (ii) to add to the covenants of Midway for the
benefit of holders of such Certificates or to surrender any right or power in
such Pass Through Trust Agreement conferred upon Midway, (iii) to correct or
supplement any provision of such Pass Through Trust Agreement, the Deposit
Agreements, the Escrow Agreements, the Note Purchase Agreement, the
Intercreditor Agreement or any Liquidity Facility which may be
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defective or inconsistent with any other provision of such Pass Through Trust
Agreement, the Deposit Agreements, the Escrow Agreements, the Note Purchase
Agreement, the Intercreditor Agreement or any Liquidity Facility, as
applicable, or to cure any ambiguity or to modify any other provisions with
respect to matters or questions arising thereunder, PROVIDED such action shall
not materially adversely affect the interests of the holders of such
Certificates, or, as provided in the Intercreditor Agreement, to give effect to
or provide for a Replacement Facility, (iv) to comply with any requirement of
the Commission, any applicable law, rules or regulations of any exchange or
quotation system on which the Certificates are listed, or any regulatory body,
(v) to modify, eliminate or add to the provisions of such Pass Through Trust
Agreements, the Deposit Agreements, the Escrow Agreements, the Intercreditor
Agreement, the Note Purchase Agreement or any Liquidity Facility to such extent
as shall be necessary to qualify or continue the qualification of such Pass
Through Trust Agreement under the Trust Indenture Act, or any similar successor
federal statute, and to add to such Pass Through Trust Agreement, the Deposit
Agreements, the Escrow Agreements, the Intercreditor Agreement, the Note
Purchase Agreement or any Liquidity Facility such provisions as may be
expressly permitted by the Trust Indenture Act, and (vi) to evidence and
provide for the acceptance of appointment under such Pass Through Trust
Agreement, the Deposit Agreements, the Escrow Agreements, the Intercreditor
Agreement, the Note Purchase Agreement or any Liquidity Facility of a successor
Trustee and to add or change any of the provisions of such Pass Through Trust
Agreement, the Deposit Agreements, the Escrow Agreements, the Intercreditor
Agreement, the Note Purchase Agreement or any Liquidity Facility as shall be
necessary to provide for or facilitate the administration of the Trusts under
the Pass Through Trust Agreements by more than one Trustee, provided that in
each case, such modification or supplement does not adversely affect the status
of the Trust as a grantor trust under Subpart E, Part I of Subchapter J of
Chapter 1 of Subtitle A of the Code for U.S. federal income tax purposes.
(Section 9.01)
Each Pass Through Trust Agreement also contains provisions permitting the
execution, with the consent of the holders of the Certificates of the related
Trust evidencing fractional undivided interests aggregating not less than a
majority in interest of such Trust, of amendments or supplements adding any
provisions to or changing or eliminating any of the provisions of such Pass
Through Trust Agreement, the Deposit Agreements, the Escrow Agreements, the
Intercreditor Agreement, the Note Purchase Agreement or any Liquidity Facility
to the extent applicable to such Certificateholders or of modifying the rights
and obligations of such Certificateholders under such Pass Through Trust
Agreement, the Deposit Agreements, the Escrow Agreements, the Intercreditor
Agreement, the Note Purchase Agreement or any Liquidity Facility, except that
no such amendment or supplement may, without the consent of the holder of each
Certificate so affected thereby, (a) reduce in any manner the amount of, or
delay the timing of, any receipt by the Trustee (or, with respect to the
Deposits, the Receiptholders) of payments with respect to the Deposits, the
Equipment Notes held in such Trust or distributions in respect of any
Certificate related to such Trust, or change the date or place of any payment
in respect of any Certificate, or make distributions payable in coin or
currency other than that provided for in such Certificates, or impair the right
of any Certificateholder of such Trust to institute suit for the enforcement of
any such payment when due, (b) permit the disposition of any Equipment Note
held in such Trust, except as provided in such Pass Through Trust Agreement, or
otherwise deprive such Certificateholder of the benefit of the ownership of the
applicable Equipment Notes, (c) alter the priority of distributions specified
in the Intercreditor Agreement in a manner materially adverse to such
Certificateholders, (d) reduce the percentage of the aggregate fractional
undivided interests of the Trust provided for in such Pass Through Trust
Agreement, the consent of the holders of which is required for any such
supplemental trust agreement or for any waiver provided for in such Pass
Through Trust Agreement, (e) modify any of the provisions relating to the
rights of the Certificateholders in respect of the waiver of Events of Default
or receipt of payment or (f) adversely affect the status of any Trust as a
grantor trust under Subpart E, Part I of Subchapter J of Chapter 1 of Subtitle
A of the Code for U.S. federal income tax purposes. (Section 9.02)
In the event that a Trustee, as holder (or beneficial owner through the
Subordination Agent) of any Equipment Note in trust for the benefit of the
Certificateholders of the relevant Trust or as Controlling Party under the
Intercreditor Agreement, receives (directly or indirectly through the
Subordination Agent) a request for a consent to any amendment, modification,
waiver or supplement under any Indenture, any Participation Agreement, any
Lease, any Equipment Note or any other related document, the Trustee shall
forthwith send a notice of such proposed amendment, modification, waiver or
supplement to each Certificateholder of the relevant Trust as of the date of
such notice. The Trustee shall request from the Certificateholders a direction
as to (a) whether or not to take or refrain from taking (or direct the
Subordination Agent to take or refrain from taking) any action which a holder
of such Equipment Note or the Controlling Party has the option to take, (b)
whether or not to give or execute (or direct the Subordination Agent to give or
execute) any waivers, consents, amendments, modifications or supplements as a
holder of such Equipment Note or as Controlling Party and (c) how to vote (or
direct the Subordination Agent to vote) any Equipment Note if a vote has been
called for with respect thereto. Provided such a request for Certificateholder
direction shall have been made, in directing any action or casting any vote or
giving any consent as the holder of any Equipment Note (or in directing the
Subordination Agent in any of the foregoing), (i) other than as Controlling
Party, the Trustee shall vote for or give consent to any such action with
respect to such Equipment Note in the same
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proportion as that of (x) the aggregate face amount of all Certificates
actually voted in favor of or for giving consent to such action by such
direction of Certificateholders to (y) the aggregate face amount of all
outstanding certificates of the relevant Trust and (ii) as the Controlling
Party, the Trustee shall vote as directed in such Certificateholder direction
by the Certificateholders evidencing fractional undivided interests aggregating
not less than a majority in interest in the relevant Trust. For purposes of the
immediately preceding sentence, a Certificate shall have been "actually voted"
if the Certificateholder has delivered to the Trustee an instrument evidencing
such Certificateholder's consent to such direction prior to two Business Days
before the Trustee directs such action or casts such vote or gives such
consent. Notwithstanding the foregoing, but subject to certain rights of the
Certificateholders under the relevant Pass Through Trust Agreement and subject
to the Intercreditor Agreement, the Trustee may, in its own discretion and at
its own direction, consent and notify the relevant Loan Trustee of such consent
(or direct the Subordination Agent to consent and notify the relevant Loan
Trustee of such consent) to any amendment, modification, waiver or supplement
under the relevant Indenture, Participation Agreement or Lease, any relevant
Equipment Note or any other related document, if an Indenture Default under any
Indenture shall have occurred and be continuing, or if such amendment,
modification, waiver or supplement will not materially adversely affect the
interests of the Certificateholders. (Section 10.01)
LIQUIDATION OF ORIGINAL TRUSTS
At the Transfer Date, each of the Original Trusts will transfer and assign
all of its assets and rights to a Successor Trust with substantially identical
terms, except that (i) the Successor Trusts will not have the right to purchase
new Equipment Notes and (ii) Maryland law governs the Original Trusts and New
York law will govern the Successor Trusts. The Trustee of each of the Original
Trusts will also act as Trustee of the corresponding Successor Trust, and each
New Trustee will assume the obligations of the Original Trustee under each
transaction document to which such Original Trustee was a party. Upon the
effectiveness of such transfer, assignment and assumption, each of the Original
Trusts will be liquidated and each of the Certificates will represent the same
percentage interest in the Successor Trust as it represented in the Original
Trust immediately prior to such transfer, assignment and assumption. Unless the
context otherwise requires, all references in this Prospectus to the Trusts,
the Trustees, the Pass Through Trust Agreements and similar terms shall be
applicable with respect to the Original Trusts until the effectiveness of such
transfer, assignment and assumption and thereafter shall be applicable with
respect to the Successor Trusts. If for any reason such transfer, assignment
and assumption cannot be effected to any Successor Trust, the related Original
Trust will continue in existence until it is effected. The Original Trusts may
be treated as partnerships for U.S. federal income tax purposes. The Company
believes the Successor Trusts will be treated as grantor trusts.
TERMINATION OF THE TRUSTS
The obligations of Midway, if any, and the Trustee with respect to a Trust
will terminate upon the distribution to Certificateholders of such Trust of all
amounts required to be distributed to them pursuant to the applicable Pass
Through Trust Agreement and the disposition of all property held in such Trust.
The Trustee will send to each Certificateholder of record of such Trust notice
of the termination of such Trust, the amount of the proposed final payment and
the proposed date for the distribution of such final payment for such Trust.
The final distribution to any Certificateholder of such Trust will be made only
upon surrender of such Certificateholder's Certificates at the office or agency
of the applicable Trustee specified in such notice of termination. (Section
11.01)
THE TRUSTEE
The Trustee for each Trust is FMB Bank. With certain exceptions, the
Trustee makes no representations as to the validity or sufficiency of the Pass
Through Trust Agreements, the Certificates, the Equipment Notes, the
Indentures, the Leases or other related documents. (Sections 7.04 and 7.15) The
Trustee of any Trust shall not be liable, with respect to the Certificates of
such Trust, for any action taken or omitted to be taken by it in good faith in
accordance with the direction of the holders of a majority in principal amount
of outstanding Certificates of such Trust. Subject to certain provisions, the
Trustee shall be under no obligation to exercise any of its rights or powers
under any Pass Through Trust Agreement at the request of any holders of
Certificates issued thereunder unless there shall have been offered to the
Trustee reasonable indemnity. (Section 7.03(e)) Each Pass Through Trust
Agreement provides that the Trustee in its individual or any other capacity may
acquire and hold Certificates issued thereunder and, subject to certain
conditions, may otherwise deal with Midway and any Owner Trustee with the same
rights it would have if it were not the Trustee. (Section 7.05)
In addition to acting as Trustee, paying agent and registrar for the
certificates of each Trust, FMB Bank is acting as (i) Subordination Agent under
the Intercreditor Agreement (in such capacity, the "SUBORDINATION AGENT"), (ii)
as paying agent
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on behalf of the Escrow Agent in respect of each Trust (the "PAYING AGENT") and
(iii) Loan Trustee, Paying Agent and registrar for each series of Equipment
Notes.
BOOK-ENTRY; DELIVERY AND FORM
GENERAL
The New Certificates of each Trust will be represented by a single,
permanent global Certificate, in definitive, fully registered form without
interest coupons (the "GLOBAL CERTIFICATE") and will be deposited with the
Trustee as custodian for DTC and registered in the name of a nominee of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code and a "clearing agency"
registered pursuant to the provision of Section 17A of the Exchange Act. DTC
was created to hold securities for its participants and to facilitate the
clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and certain other organizations. Indirect access to the DTC system
is available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly ("INDIRECT PARTICIPANTS").
Upon the issuance of the Global Certificate, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Certificate to the
accounts of persons who have accounts with such depositary. Ownership of
beneficial interests in the Global Certificates will be limited to persons who
have accounts with DTC ("PARTICIPANTS") or persons who hold interests through
participants. Ownership of beneficial interests in the Global Certificate will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). The laws of some states require that certain
purchasers of securities take physical delivery of such securities. Such limits
and such laws may limit the market for beneficial interests in the Global
Certificate.
So long as DTC or its nominee is the registered owner or holder of the
Global Certificate, DTC or such nominee, as the case may be, will be considered
the sole record owner or holder of the Certificates represented by such Global
Certificate for all purposes under the related Pass Through Trust Agreements.
No beneficial owners of an interest in the Global Certificate will be able to
transfer that interest except in accordance with DTC's applicable procedures,
in addition to those provided for under the Pass Through Trust Agreements and,
if applicable, the Euroclear System or Cedel Bank, societe anonyme.
Payments of the principal of, premium, if any, and interest on the Global
Certificate will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither Midway, the Trustee nor any paying agent will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Global
Certificate or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
Midway expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Certificate
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial ownership interests in the principal amount of such
Global Certificate, as shown on the records of DTC or its nominee. Midway also
expects that payments by participants to owners of beneficial interests in such
Global Certificate held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Neither Midway nor the Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
The information contained herein concerning DTC and DTC's book-entry
system has been obtained from sources that Midway believes to be reliable, but
Midway takes no responsibility for the accuracy thereof.
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DEFINITIVE CERTIFICATES
New Certificates will be issued in definitive, fully registered form
without interest coupons ("DEFINITIVE CERTIFICATES") to the Certificateholders
or their nominees, rather than to DTC or its nominee, only if (i) Midway
advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as depository with respect to such
Certificates and Midway is unable to locate a qualified successor within 90
days of receipt of such notice or, (ii) after the occurrence of certain events
of default or other events specified in the Pass Through Trust Agreements,
Certificateholders with fractional undivided interests aggregating not less
than a majority in interest in such Trust advise the Trustee, Midway and DTC
through DTC participants in writing that the continuation of a book-entry
system through DTC (or a successor thereto) is no longer in the
Certificateholders' best interests.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify all Certificateholders
through DTC participants of the availability of Definitive Certificates. Upon
surrender by DTC of the certificates representing the Certificates and receipt
of instructions for re-registration, the Trustee will reissue the Certificates
as Definitive Certificates to Certificateholders.
Distributions of principal, premium, if any, and interest with respect to
Certificates will thereafter be made by the Trustee directly in accordance with
the procedures set forth in the Pass Through Trust Agreements, to holders in
whose names the Definitive Certificates were registered at the close of
business on the applicable Record Date. Such distributions will be made by
check mailed to the address of such holder as it appears on the register
maintained by the Trustee. The final payment on any Certificate, however, will
be made only upon presentation and surrender of such Certificate at the office
or agency specified in the notice of final distribution to Certificateholders.
DESCRIPTION OF THE DEPOSIT AGREEMENTS
The following summary describes all material terms of the Deposit
Agreements. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Deposit Agreements. The
provisions of the Deposit Agreements are substantially identical except as
otherwise indicated. A copy of each Deposit Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
GENERAL
Under the Escrow Agreements, the Escrow Agent with respect to each Trust
entered into a separate Deposit Agreement (each, a "DEPOSIT AGREEMENT") with
First Union National Bank (the "DEPOSITARY") pursuant to which the Depositary
established separate accounts into which the proceeds of the offering
attributable to the Old Certificates of such Trust were deposited (each, a
"DEPOSIT") on behalf of such Escrow Agent, from which the Escrow Agent, upon
request from the Trustee of such Trust, will make withdrawals and into which
such Trustee will make re-deposits during the Delivery Period. Pursuant to the
Deposit Agreement with respect to each Trust, on each Regular Distribution Date
the Depositary will pay to the Paying Agent on behalf of the applicable Escrow
Agent, for distribution to the Certificateholders of such Trust, an amount
equal to interest accrued on the Deposits relating to such Trust during the
relevant interest period at a rate per annum equal to the interest rate
applicable to the Certificates issued by such Trust. Upon each delivery of an
Aircraft during the Delivery Period, the Trustee for each Trust will request
the Escrow Agent relating to such Trust to withdraw from the Deposits relating
to such Trust funds sufficient to enable the Trustee of such Trust to purchase
the Equipment Note of the series applicable to such Trust issued with respect
to such Aircraft. Accrued but unpaid interest on all such Deposits withdrawn
will be paid on the next Regular Distribution Date. Any portion of any Deposit
withdrawn which is not used to purchase such Equipment Note will be
re-deposited by each Trustee into an account relating to the applicable Trust.
The Deposits relating to each Trust and interest paid thereon will not be
subject to the subordination provisions of the Intercreditor Agreement and will
not be available to pay any other amount in respect of the Certificates.
UNUSED DEPOSITS
The Trustees' obligations to purchase the Equipment Notes issued with
respect to each Aircraft are subject to satisfaction of certain conditions at
the time of delivery, as set forth in the Note Purchase Agreement. See
"Description of the New Certificates -- Obligation to Purchase Equipment
Notes." Since the Aircraft are scheduled for delivery from time to time during
the Delivery Period, no assurance can be given that all such conditions will be
satisfied at the time of delivery for each Aircraft. Moreover, since the
Aircraft will be newly manufactured, their delivery as scheduled is subject to
delays in the manufacturing process and to the Aircraft manufacturer's right to
postpone deliveries under its agreement with Midway. See "Description of the
Aircraft and Appraisals -- Deliveries of Aircraft." Depending on the
circumstances of the financing
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of each Aircraft, the maximum aggregate principal amount of Equipment Notes may
not be issued. If any funds remain as Deposits with respect to any Trust at the
end of the Delivery Period or, if earlier, upon the acquisition by such Trust
of the Equipment Notes with respect to all of the Aircraft (the "DELIVERY
PERIOD TERMINATION DATE"), they will be withdrawn by the Escrow Agent and
distributed, with accrued and unpaid interest thereon to the Certificateholders
of such Trust after at least 15 days' prior written notice, together with a
Deposit Make-Whole Premium; PROVIDED THAT, if any Aircraft is not delivered by
the manufacturer prior to the Delivery Period Termination Date due to any
reason not occasioned by Midway's fault or negligence, no Deposit Make-Whole
Premium will be paid with respect to the unused Deposits to be distributed as a
result of such failure to deliver. Since the maximum principal amount of
Equipment Notes may not be issued with respect to an Aircraft and, in any such
case, the Series C and Series D Equipment Notes are more likely not to be
issued in the maximum principal amount as compared to the other Equipment
Notes, it is more likely that a distribution of unused Deposits will be made
with respect to the Class C and Class D Certificates as compared to the other
Certificates.
"DEPOSIT MAKE-WHOLE PREMIUM" means, with respect to the distribution of
unused Deposits to holders of any Class of Certificates, as of any date of
determination, an amount equal to the excess, if any, of (a) the present value
of the excess of (i) the scheduled payment of principal and interest to
maturity of the Equipment Notes, assuming the maximum principal amount thereof
(the "MAXIMUM AMOUNT") on each remaining Regular Distribution Date for such
Class under the Assumed Amortization Schedule over (ii) the scheduled payment
of principal and interest to maturity of the Equipment Notes actually acquired
by the Trustee for such Class on each such Regular Distribution Date, such
present value computed by discounting such excess on a semiannual basis on each
Regular Distribution Date (assuming a 360-day year of twelve 30-day months)
using a discount rate equal to the Treasury Yield plus 170 basis points in the
case of the Class A Certificates, 270 basis points in the case of the Class B
Certificates and 350 basis points in the case of each of the Class C
Certificates and the Class D Certificates, over (b) the amount of such unused
Deposits to be distributed to the holders of such Certificates, plus accrued
and unpaid interest on such net amount to but excluding the date of
determination from and including the preceding Regular Distribution Date (or,
if such date of determination precedes the first Regular Distribution Date, the
date of issuance of the Certificates).
DISTRIBUTION UPON OCCURRENCE OF TRIGGERING EVENT
If a Triggering Event shall occur prior to the Delivery Period Termination
Date, the Escrow Agent for each Trust will withdraw any funds then held as
Deposits with respect to such Trust and cause such funds, with accrued and
unpaid interest thereon but without any premium, to be distributed to the
Certificateholders of such Trust by the Paying Agent on behalf of the Escrow
Agent, after at least 15 days' prior written notice. Accordingly, if a
Triggering Event occurs prior to the Delivery Period Termination Date, the
Trusts will not acquire Equipment Notes issued with respect to Aircraft
delivered after the occurrence of such Triggering Event.
DEPOSITARY
First Union National Bank ("FUNB") is acting as the Depositary. FUNB is a
wholly owned subsidiary of First Union Corporation and is a leading provider of
financial services to more than sixteen million retail and corporate clients
throughout the east coast and the nation. FUNB operates full service banking
offices in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New
York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and
Washington, D.C. FUNB's corporate headquarters are located in Charlotte, North
Carolina.
First Union Corporation, the parent company, is a publicly held
corporation organized in the United States, and its securities are listed on
the New York Stock Exchange.
FUNB has long-term unsecured debt ratings of Aa3 from Moody's and A+ from
Standard & Poor's and short-term unsecured debt ratings of P-1 from Moody's and
A-1 from Standard's & Poor's.
FUNB has executive offices at One First Union Center, Charlotte, North
Carolina 28288, (704) 374-2957. A copy of the Annual Report of First Union
Corporation for the year ended December 31, 1997 may be obtained from FUNB by
delivery of a written request to its Charlotte office, Attention: Investor
Relations.
DESCRIPTION OF THE ESCROW AGREEMENTS
The following summary describes all material terms of the Escrow
Agreements. The summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Escrow Agreements. The
provisions of the Escrow Agreements are substantially identical except as
otherwise indicated. A copy of each Escrow Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
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First Union Trust Company, as escrow agent for each Trust (each the
"ESCROW AGENT"), each Paying Agent, each Trustee and the Initial Purchasers
entered into a separate Escrow and Paying Agent Agreement (each, an "ESCROW
AGREEMENT") for the benefit of the Certificateholders of each Trust as holders
of the Escrow Receipts affixed thereto (in such capacity, a "RECEIPTHOLDER").
The cash proceeds of the offering of the Old Certificates of each Trust were
deposited on behalf of the Escrow Agent (for the benefit of Receiptholders)
with the Depositary as Deposits relating to such Trust. The Escrow Agent of
each Trust was given irrevocable instructions (i) to permit the Trustee of such
Trust to cause funds to be withdrawn from such Deposits on or prior to the
Delivery Period Termination Date for the purpose of enabling such Trustee to
purchase Equipment Notes on and subject to the terms and conditions of the Note
Purchase Agreement and (ii) to direct the Depositary to pay interest on the
Deposits accrued in accordance with the Deposit Agreement to the Paying Agent
for distribution to the Receiptholders.
Each Escrow Agreement requires that the Paying Agent establish and
maintain, for the benefit of the related Receiptholders, one or more Paying
Agent Account(s), which shall be non-interest-bearing. Pursuant to the terms of
the Escrow Agreement, the Paying Agent is required to deposit interest on
Deposits relating to each Trust and any unused Deposits withdrawn by the Escrow
Agent in the Paying Agent Account. All amounts so deposited will be distributed
by the Paying Agent on a Regular Distribution Date or Special Distribution
Date, as appropriate.
Upon receipt by the Depositary on behalf of the Escrow Agent of the cash
proceeds from the offering of the Old Certificates as described above, the
Escrow Agent will issue one or more Escrow Receipts which will be affixed by
the relevant Trustee to each Certificate. Each Escrow Receipt evidences a
fractional undivided interest in amounts from time to time deposited into the
Paying Agent Account and is limited in recourse to amounts deposited into such
Account. An Escrow Receipt may not be assigned or transferred except in
connection with the assignment or transfer of the Certificate to which it is
affixed. Each Escrow Receipt will be registered by the Escrow Agent in the same
name and manner as the Certificate to which it is affixed.
DESCRIPTION OF THE LIQUIDITY FACILITIES
The following summary describes certain terms of the Liquidity Facilities
and certain provisions of the Intercreditor Agreement relating to the Liquidity
Facilities. The summary does not purport to be complete and is qualified in its
entirety by reference to the provisions of the Liquidity Facilities and such
provisions of the Intercreditor Agreement. The provisions of the Liquidity
Facilities are substantially identical except as otherwise indicated. A copy of
each Liquidity Facility and the Intercreditor Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
GENERAL
With respect to the Certificates of each Trust (other than the Class D
Trust), the Subordination Agent entered into a revolving credit facility (each,
a "LIQUIDITY FACILITY") with the Liquidity Provider pursuant to which the
Liquidity Provider will make one or more advances ("INTEREST DRAWINGS") to the
Subordination Agent to pay interest on such Certificates subject to certain
limitations. The Liquidity Facility for any such Trust is intended to enhance
the likelihood of timely receipt by the Certificateholders of such Trust of the
interest payable on the Certificates of such Trust at the interest rate
(without any penalty or default margin) applicable to such Certificates (the
"STATED INTEREST RATES") therefor on three consecutive Regular Distribution
Dates. If interest payment defaults occur which exceed the amount covered by or
available under the Liquidity Facility for any such Trust, the
Certificateholders of such Trust will bear their allocable share of the
deficiencies to the extent that there are no other sources of funds. Although
ABN AMRO Bank N.V., acting through its Chicago branch (the "LIQUIDITY
PROVIDER"), is the Liquidity Provider for each such Trust, it may be replaced
by another entity with respect to one or more such Trusts under certain
circumstances. Therefore, the liquidity provider for any such Trust may be
different from the liquidity provider for any other Trust.
DRAWINGS
The initial stated amount available under the Liquidity Facilities for the
Class A Trust, the Class B Trust and the Class C Trust at July 2, 1999, the
first Regular Distribution Date after the expected Delivery Period Termination
Date, assuming that Equipment Notes in the maximum principal amount with
respect to all Aircraft are acquired by the Trusts and that no interest or
principal due on July 2, 1999 has been paid, will be $6,695,620, $3,274,474 and
$2,127,339, respectively. Except as otherwise provided below, the Liquidity
Facility for each Trust will enable the Subordination Agent to make Interest
Drawings thereunder promptly after any Distribution Date to pay interest then
due and payable on the Certificates of such Trust at the Stated Interest Rate
for such Trust to the extent that the amount, if any, available to the
Subordination
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Agent on such Distribution Date is not sufficient to pay such interest;
PROVIDED, HOWEVER, that the maximum amount available to be drawn under such
Liquidity Facility on any Distribution Date to fund any shortfall of interest
on such Certificates will not exceed the Required Amount for such Certificates.
The Liquidity Facility for any Trust does not provide for drawings thereunder
to pay for principal of or Make-Whole Premium on the Certificates of such Trust
or any interest on the Certificates of such Trust in excess of the Stated
Interest Rate or principal of or interest or Make-Whole Premium on the
Certificates of any other Trust. (Liquidity Facilities, Section 2.2;
Intercreditor Agreement, Section 3.6) In addition, the Liquidity Facilities
with respect to each Trust do not provide for drawings thereunder to pay any
amounts payable with respect to the Deposits relating to such Trust.
Each payment by the Liquidity Provider under each Liquidity Facility
reduces PRO TANTO the amount available to be drawn under such Liquidity
Facility, subject to reinstatement as hereinafter described. With respect to
any Interest Drawings under the Liquidity Facility for any Trust, upon
reimbursement of the Liquidity Provider in full for the amount of such Interest
Drawings plus interest thereon, the amount available to be drawn under such
Liquidity Facility in respect of interest on the Certificates of such Trust
shall be reinstated to the Required Amount of such Liquidity Facility,
provided, however, that such Liquidity Facility shall not be so reinstated at
any time after (i) the acceleration of all of the outstanding Equipment Notes
or (ii) both (A) a Triggering Event shall have occurred and (B) less than 65%
of the then aggregate outstanding principal amount of all Equipment Notes are
Performing Equipment Notes (Liquidity Facilities, Section 2.2(a)). The stated
amount of the Liquidity Facility for any Trust will be automatically reduced
from time to time to an amount equal to the next three successive interest
payments due on the Certificates of such Trust (without regard to expected
future payment of principal of such Certificates) at the Stated Interest Rate
for such Trust. (Liquidity Facilities, Section 2.4(a); Intercreditor Agreement,
Section 3.6(j)) The Liquidity Provider will be paid a fee on the average amount
available to be drawn under the initial Liquidity Facility.
If at any time the short-term unsecured debt rating of the Liquidity
Provider issued by any of the Rating Agencies is lower than the Threshold
Rating or, in the event the Liquidity Provider's short-term unsecured debt is
not rated by Moody's or Standard & Poor's, the long-term unsecured debt rating
of any Liquidity Provider issued by either Moody's or Standard & Poor's is
lower than the Threshold Rating, then the Liquidity Provider for such Trust or
Midway may arrange for a Replacement Facility (as defined below). In the event
that such Liquidity Facility is not replaced with a Replacement Facility within
the period specified in the Intercreditor Agreement after notice of the
downgrading and as otherwise provided in the Intercreditor Agreement, the
Subordination Agent shall request a drawing (the "DOWNGRADE DRAWING") in an
amount equal to all available and undrawn amounts thereunder and shall hold the
proceeds thereof in the Cash Collateral Account for such Trust as cash
collateral to be used for the same purposes and under the same circumstances as
cash payments of Interest Drawings under such Liquidity Facility would be used.
Such a Liquidity Provider may also arrange for a Replacement Facility at any
time after a Downgrade Drawing so long as such Downgrade Drawing has not been
reimbursed in full to such Liquidity Provider. (Liquidity Facilities, Section
2.6(c); Intercreditor Agreement, Section 3.6(c))
A "REPLACEMENT FACILITY" for any Trust means an irrevocable liquidity
facility in substantially the form of the initial Liquidity Facility for such
Trust, including reinstatement provisions, or, subject to certain conditions,
in such other form (which may include a letter of credit) as shall permit the
Rating Agencies to confirm in writing their respective ratings then in effect
for the Certificates (before downgrading of such ratings, if any, as a result
of the downgrading of the Liquidity Provider), in a face amount equal to the
Required Amount for such Trust and issued by a person having short-term
unsecured debt ratings issued by the applicable Rating Agencies or, in the
event the selected person's short-term unsecured debt is not rated by Moody's
or Standard & Poor's, long-term unsecured debt ratings issued by the applicable
Rating Agencies which are equal to or higher than the Threshold Rating.
(Intercreditor Agreement, Section 1.1)
"THRESHOLD RATING" means the short-term unsecured debt rating of P-1 by
Moody's and A-1 by Standard & Poor's or, in the event a person's short-term
unsecured debt is not rated by either Moody's or Standard & Poor's, the
long-term unsecured debt rating by Moody's and Standard & Poor's at least equal
to the initial rating by each of Moody's and Standard & Poor's on the Class A
Certificates. (Intercreditor Agreement, Section 1.1)
The Liquidity Facility for each Trust provides that the Liquidity
Provider's obligations thereunder will expire on the earliest of (i) August 12,
1999; (ii) the date on which the Subordination Agent delivers a certificate
certifying that all of the Certificates of such Trust have been paid in full;
(iii) the date on which the Subordination Agent delivers a certificate
certifying that a Replacement Facility has been substituted for such Liquidity
Facility; (iv) the date on which the Liquidity Provider makes the Final
Drawing; and (v) the date on which no amount is, or may (by reason of
reinstatement) become, available for drawing under such Liquidity Facility.
(Liquidity Facilities, Sections 1.1(a) and 2.4(b))
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The Intercreditor Agreement provides for the replacement of any Liquidity
Facility for any Trust (other than a Liquidity Facility which expires no
earlier than 15 days later than the related Final Legal Distribution Date) in
the event that such Liquidity Facility is not extended at least 25 days prior
to its then scheduled expiration date for a period of at least 364 days after
its then scheduled expiration date. In the event such Liquidity Facility is not
so extended or replaced by the 25th day prior to its then scheduled expiration
date, the Subordination Agent shall, prior to the scheduled expiration date of
such Liquidity Facility, request a drawing (the "NON-EXTENSION DRAWING") in an
amount equal to all available and undrawn amounts thereunder and hold the
proceeds thereof in the Cash Collateral Account for such Trust as cash
collateral to be used for the same purposes and under the same circumstances,
and subject to the same conditions, as cash payments of Interest Drawings under
such Liquidity Facility would be used. (Intercreditor Agreement, Section
3.6(d))
Midway may, under certain circumstances, arrange for a Replacement
Facility to replace the Liquidity Facility for any Trust. Under certain
circumstances, the Liquidity Provider may arrange for a replacement Liquidity
Facility in the event of any non-extension of the Liquidity Facility or a
downgrading of the Liquidity Provider. If such replacement facility is provided
at any time after the Downgrade Drawing or Non-Extension Drawing under such
Liquidity Facility, all funds on deposit in the relevant Cash Collateral
Account will be returned to the Liquidity Provider being replaced.
(Intercreditor Agreement, Section 3.6(e))
The Intercreditor Agreement provides that the Subordination Agent shall
hold the proceeds of a Final Drawing made in accordance with the provisions set
forth under " -- Liquidity Events of Default" below in the Cash Collateral
Account for the related Trust as cash collateral to be used for the same
purposes and under the same circumstances, and subject to the same conditions,
as cash payments of Interest Drawings under such Liquidity Facility would be
used. The Intercreditor Agreement further provides that the Subordination Agent
shall not fail to take any action which may be required to be taken by the
Subordination Agent in order to make a Final Drawing under a Liquidity
Facility. (Intercreditor Agreement, Section 3.6(i))
Drawings (other than a Final Drawing) under any Liquidity Facility will be
made by delivery by the Subordination Agent of a certificate in the form
required by such Liquidity Facility. Upon receipt of such a certificate, the
Liquidity Provider is obligated to make payment of the drawing requested
thereby in immediately available funds. Upon payment by the Liquidity Provider
of the amount specified in any drawing under any Liquidity Facility, the
Liquidity Provider will be fully discharged from its obligations under such
Liquidity Facility with respect to such drawing and will not thereafter be
obligated to make any further payments under such Liquidity Facility in respect
of such drawing to the Subordination Agent or any other person or entity who
makes a demand for payment in respect of interest (to which such drawing
relates) on the related Certificates.
REIMBURSEMENT OF DRAWINGS
Amounts drawn under any Liquidity Facility by reason of any Interest
Drawing or the Final Drawing will be immediately due and payable, together with
interest on the amount of such drawing, with respect to the period from the
date of its borrowing to (but excluding) the third business day following the
applicable Liquidity Provider's receipt of the notice of such Interest Drawing,
at the Base Rate plus 3.00% per annum, and thereafter at LIBOR for the
applicable interest period plus 3.00% per annum; provided, that the
Subordination Agent will be obligated to reimburse such amounts only to the
extent that the Subordination Agent has funds available therefor.
"BASE RATE" means a fluctuating interest rate per annum in effect from
time to time, which rate per annum shall at all times be equal to (a) the
weighed average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers, as
published for such day (or, if such day is not a business day, for the next
preceding business day) by the Federal Reserve Bank of New York, or if such
rate is not so published for any date that is a business day, the average of
the quotations for such day for such transactions received by the Liquidity
Provider from three Federal funds brokers of recognized standing selected by
it, plus (b) one-quarter of one percent ( 1/4 of 1%).
"LIBOR" means, with respect to any interest period, the average (rounded
upward, if necessary, to the next higher 1/16 of 1%) of the rates per annum at
which deposits in dollars are offered to major banks in the London interbank
market at approximately 11:00 A.M. (London time) two business days before the
first day of such interest period in an amount approximately equal to the
principal amount of the advance to which such interest period is to apply and
for a period of time comparable to such interest period.
The amount drawn under the Liquidity Facility for any Trust by reason of
the Downgrade Drawing or Non-Extension Drawing and deposited in the Cash
Collateral Account will be treated as follows: (i) such amount will be released
on any Regular Distribution Date to the Liquidity Provider to the extent that
such amount exceeds the Required Amount for such
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Trust; (ii) any portion of such amount withdrawn from the Cash Collateral
Account for such Certificates to pay interest on such Certificates will be
treated in the same way as Interest Drawings; and (iii) the balance of such
amount will be invested in certain eligible investments. A Downgrade Drawing
under any of the Liquidity Facilities (other than any portion thereof applied
to the payment of interest on the Certificates (any such applied amount being
an "APPLIED DOWNGRADE DRAWING")) will bear interest (x) at a rate equal to
LIBOR for the applicable Interest Period plus .60% per annum on the outstanding
amount from time to time of such Downgrade Drawing, and (y) from and after the
date, if any, on which it is converted into a Final Drawing as described below
under " -- Liquidity Events of Default," at a rate equal to LIBOR for the
applicable interest period (or, as described in the third preceding paragraph,
the Base Rate) plus 3.00% per annum; PROVIDED that the Subordination Agent will
be obligated to pay such amount only to the extent that the Subordination Agent
has funds available therefor. A Non-Extension Drawing under any of the
Liquidity Facilities (other than any portion thereof applied to the payment of
interest on the Certificates (any such applied amount being an "APPLIED
NON-EXTENSION DRAWING")) will bear interest (1) during the period from the date
of its borrowing to (but excluding) the date, if any, on which it is converted
into a Final Drawing as described below under " -- Liquidity Events of
Default", at a rate equal to LIBOR for the applicable interest period plus .60%
per annum on the outstanding amount from time to time of such Non-Extension
Drawing, and (2) thereafter, at a rate equal to LIBOR for the applicable
interest period (or, as described in the third preceding paragraph, the Base
Rate), plus 3.00% per annum; PROVIDED that the Subordination Agent will be
obligated to pay such amount only to the extent that the Subordination Agent
has funds available therefor. (Liquidity Facilities, Section 2.6)
LIQUIDITY EVENTS OF DEFAULT
Events of Default under each Liquidity Facility (each, a "LIQUIDITY EVENT
OF DEFAULT") consist of: (i) the acceleration of all the Equipment Notes, (ii)
the failure to pay all of the Equipment Notes at maturity or (iii) certain
bankruptcy or similar events involving Midway. (Liquidity Facilities, Section
1.1)
If (i) a Liquidity Event of Default shall have occurred and be continuing
or (ii) both (A) a Triggering Event shall have occurred and (B) less than 65%
of the then aggregate outstanding principal amount of all Equipment Notes are
Performing Equipment Notes, the Liquidity Provider may, in its discretion, make
a final advance ("FINAL DRAWING") of all available and undrawn amounts under
the related Liquidity Facility whereupon (i) the Liquidity Provider shall have
no further obligation to make advances under the Liquidity Facility, (ii) any
drawing remaining unreimbursed shall be automatically converted into a Final
Drawing under such Liquidity Facility and (iii) all amounts owing to the
Liquidity Provider shall automatically become accelerated. Notwithstanding the
foregoing, the Subordination Agent will be obligated to pay amounts owing to
the Liquidity Provider only to the extent of funds available therefor after
giving effect to the payments in accordance with the provisions set forth under
"Description of the Intercreditor Agreement -- Priority of Distributions."
(Liquidity Facilities, Sections 2.9 and 6.1)
Upon the circumstances described below under "Description of the
Intercreditor Agreement -- Intercreditor Rights," the Liquidity Provider may
become the Controlling Party with respect to the exercise of remedies under the
Indentures. (Intercreditor Agreement, Section 2.6(c))
LIQUIDITY PROVIDER
The initial Liquidity Provider is ABN AMRO Bank N.V., a bank organized
under the laws of the Netherlands, acting through its Chicago branch. ABN AMRO
Bank N.V. has short-term debt ratings of P-1 from Moody's and A-1+ from
Standard & Poor's.
DESCRIPTION OF THE INTERCREDITOR AGREEMENT
The following summary describes certain provisions of the Intercreditor
Agreement. The summary does not purport to be complete and is qualified in its
entirety by reference to the provisions of the Intercreditor Agreement, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
INTERCREDITOR RIGHTS
CONTROLLING PARTY
Pursuant to the Intercreditor Agreement, each Trustee and the Liquidity
Provider have agreed that, with respect to any Indenture at any given time, the
Loan Trustee will be directed (a) in taking, or refraining from taking, any
action thereunder by the holders of at least a majority of the outstanding
principal amount of the Equipment Notes issued thereunder (provided that, for
so long as the Subordination Agent is the registered holder of the Equipment
Notes, the Subordination Agent
76
<PAGE>
shall act with respect to this clause (a) in accordance with the directions of
the Trustees representing holders of Certificates representing an undivided
interest in such principal amount of Equipment Notes), so long as no Indenture
Default shall have occurred and be continuing thereunder and (b) after the
occurrence and during the continuance of an Indenture Default thereunder, in
taking, or refraining from taking, any action thereunder, including exercising
remedies thereunder (including acceleration of such Equipment Notes or
foreclosing the lien on the Aircraft securing such Equipment Notes), by the
Controlling Party. See "Description of the New Certificates -- Indenture
Defaults and Certain Rights Upon an Indenture Default" for a description of the
rights of the Certificateholders of each Trust to direct the respective
Trustee.
The Person who shall be the "CONTROLLING PARTY" with respect to any
Indenture shall be: (a) the Trustee for the Class A Trust; (b) upon payment of
Final Distributions to the holders of Class A Certificates, the Trustee for the
Class B Trust; (c) upon payment of Final Distributions to the holders of Class
B Certificates, the Trustee for the Class C Trust; and (d) upon payment of
Final Distributions to the holders of Class C Certificates, the Trustee for the
Class D Trust. Notwithstanding the foregoing, the Liquidity Provider with the
greatest amount of unreimbursed Liquidity Obligations payable to it under the
Liquidity Facilities shall have the right to elect to become the Controlling
Party with respect to any such Indenture at any time from and including the
date which is 18 months after the earliest of (i) the acceleration of the
Equipment Notes under such Indenture, (ii) the date on which the entire
available amount under any Liquidity Facility shall have been drawn (for any
reason other than a Downgrade Drawing or a Non-Extension Drawing) and remains
unreimbursed and (iii) the date on which the entire amount of any Downgrade
Drawing or Non-Extension Drawing shall have become an Applied Downgrade Drawing
or Applied Non-Extension Drawing, as the case may be, if, in any such case, at
the time of such election all Liquidity Obligations have not been paid in full.
For purposes of giving effect to the foregoing, the Trustee (other than the
Controlling Party) has irrevocably agreed (and the Certificateholders (other
than the Certificateholders represented by the Controlling Party) shall be
deemed to have agreed by virtue of their purchase of Certificates) to exercise
their voting rights as directed by the Controlling Party. (Intercreditor
Agreement, Section 2.6)
"FINAL DISTRIBUTIONS" means, with respect to the Certiticates of any Trust
on any Distribution Date, the sum of (x) the aggregate amount of all accrued,
due and unpaid interest on such Certificates (excluding interest payable on the
Deposits relating to such Trust) and (y) the Pool Balance of such Certificates
as of the immediately preceding Distribution Date (less the amount of the
Deposits for such Class of Certificates as of such preceding Distribution Date
other than any portion of such Deposits thereafter used to acquire Equipment
Notes pursuant to the Note Purchase Agreement).
SALE OF EQUIPMENT NOTES OR AIRCRAFT
Upon the occurrence and during the continuation of any Indenture Default
under any Indenture, the Controlling Party may accelerate and, subject to the
provisions of the immediately following sentence, sell all (but not less than
all) of the Equipment Notes issued under such Indenture to any person. So long
as any Certificates are outstanding, during nine months after the earlier of
(x) the acceleration of the Equipment Notes under any Indenture or (y) the
bankruptcy or insolvency of Midway, without the consent of each Trustee, (a) no
Aircraft subject to the lien of such Indenture or such Equipment Notes may be
sold if the net proceeds from such sale would be less than the Minimum Sale
Price for such Aircraft or such Equipment Notes, and (b) with respect to any
Leased Aircraft, the amount and payment dates of rentals payable by Midway
under the Lease for such Leased Aircraft may not be adjusted, if, as a result
of such adjustment, the discounted present value of all such rentals would be
less than 75% of the discounted present value of the rentals payable by Midway
under such Lease before giving effect to such adjustment, in each case, using
the weighted average interest rate of the Equipment Notes outstanding under
such Indenture as the discount rate. (Intercreditor Agreement, Section 4.1)
After a Triggering Event occurs and any Equipment Note ceases to be a
Performing Equipment Note, the Subordination Agent will be required to obtain
the LTV Appraisals for the Aircraft as soon as practicable and additional LTV
Appraisals on or prior to each anniversary of the date of such initial LTV
Appraisals; provided that, if the Controlling Party reasonably objects to the
appraised value of any Aircraft shown in any LTV Appraisal, the Controlling
Party shall have the right to obtain or cause to be obtained substitute LTV
Appraisals (including any LTV Appraisals based upon physical inspection of the
Aircraft).
"MINIMUM SALE PRICE" means, with respect to any Aircraft or the Equipment
Notes issued in respect of such Aircraft, at any time, the lesser of (x) 75% of
the Appraised Current Market Value of such Aircraft and (y) the aggregate
outstanding principal amount of such Equipment Notes, plus accrued and unpaid
interest thereon.
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PRIORITY OF DISTRIBUTIONS
So long as no Triggering Event shall have occurred, the payments in
respect of the Equipment Notes and certain other payments received on any
Distribution Date will be promptly distributed by the Subordination Agent on
such Distribution Date in the following order of priority.
(i) to pay the Liquidity Obligations (other than any interest accrued
thereon or the principal amount of any Drawing) (the "LIQUIDITY EXPENSES")
to the Liquidity Provider;
(ii) to pay interest accrued on the Liquidity Obligations to the Liquidity
Provider;
(iii) to pay or reimburse the Liquidity Provider for the Liquidity
Obligations and, if applicable, to replenish each Cash Collateral Account up
to the amount of interest payable on the related Class of Certificates at the
Stated Interest Rate therefor on the next three consecutive Regular
Distribution Dates (the "REQUIRED AMOUNT");
(iv) to pay Expected Distributions to the holders of Class A Certificates;
(v) to pay Expected Distributions to the holders of Class B Certificates;
(vi) to pay Expected Distributions to the holders of Class C Certificates;
(vii) to pay Expected Distributions to the holders of Class D
Certificates; and
(viii) to pay certain fees and expenses of the Subordination Agent and the
Trustees.
Subject to the terms of the Intercreditor Agreement, upon the occurrence
of a Triggering Event and at all times thereafter, all funds received by the
Subordination Agent in respect of the Equipment Notes and certain other
payments will be promptly distributed by the Subordination Agent in the
following order of priority:
(1) to reimburse (i) the Subordination Agent for any out-of-pocket costs
and expenses actually incurred by it in the protection of, or the
realization of value of, the Equipment Notes or any Trust Indenture Estate,
(ii) each Trustee for any amounts of the nature described in clause (i)
above, and (iii) the Liquidity Provider or any Certificateholder for
payments, if any, made by it to the Subordination Agent or any Trustee in
respect of clause (i) above (collectively, the "ADMINISTRATION EXPENSES");
(2) to the Liquidity Provider to pay all accrued and unpaid Liquidity
Expenses (including fees payable in respect of any Downgrade Drawing);
(3) to the Liquidity Provider to pay all accrued and unpaid interest on
the Liquidity Obligations (other than interest in respect of any Downgrade
Drawing) as provided in the Liquidity Facilities;
(4) to the Liquidity Provider (i) to pay in full all Liquidity
Obligations, whether or not then due (other than amounts payable pursuant
to clauses (2) and (3) above) and (ii) if applicable, so long as not less
than 65% of the then aggregate outstanding principal amount of all
Equipment Notes are Performing Equipment Notes, to replenish the Cash
Collateral Accounts up to the Required Amount for the related Class of
Certificates (with any excess over such Required Amount being distributed
to the Liquidity Providers to satisfy obligations in respect of
unreimbursed advances);
(5) to the Subordination Agent, any Trustee or any Certificateholder to
the extent required to pay certain fees, taxes, charges and other amounts
payable (collectively, "CERTAIN TAXES AND FEES");
(6) to pay Adjusted Expected Distributions to the holders of Class A
Certificates;
(7) to pay Adjusted Expected Distributions to the holders of Class B
Certificates;
(8) to pay Adjusted Expected Distributions to the holders of Class C
Certificates;
(9) to pay Adjusted Expected Distributions to the holders of Class D
Certificates;
(10) the balance shall be held in the Collection Account until the next
Distribution Date; and
(11) if all Classes of Certificates have been paid in full, the balance,
if any, shall be distributed to the Certificateholders of the related Trust.
Interest Drawings under the Liquidity Facility and withdrawals from the
Cash Collateral Account, in each case in respect of interest on the
Certificates of any Trust (other than the Class D Trust), will be distributed
to the Trustee for such Trust, notwithstanding the priority of distributions
set forth in the Intercreditor Agreement and otherwise described herein. All
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<PAGE>
amounts on deposit in the Cash Collateral Account for any Trust which are in
excess of the Required Amount for such Trust will be paid to the Liquidity
Provider.
VOTING OF EQUIPMENT NOTES
In the event that the Subordination Agent, as the registered holder of any
Equipment Note, receives a request for its consent to any amendment,
modification or waiver under such Equipment Note, the related Indenture, Lease,
Participation Agreement or other related document, if no Indenture Default with
respect thereto shall have occurred and be continuing, the Subordination Agent
shall request instructions for each Series of Equipment Notes from the Trustee
of the Trust which holds such Series of Equipment Notes. Each Trustee in turn
will request directions from Certificateholders of such Trust provided that the
Trustee is not required to request directions if such consent will not
adversely affect the Certificateholders or an Event of Default shall have
occurred and be continuing under the Pass Through Trust Agreement of such
Trust. If any Indenture Default shall have occurred and be continuing with
respect to such Indenture, the Subordination Agent will exercise its voting
rights as directed by the Controlling Party. No amendment, modification,
consent or waiver shall, without the consent of each Liquidity Provider, reduce
the amount of rent, supplemental rent or termination values payable by Midway
under any Lease or reduce the amount of principal or interest payable by Midway
under any Equipment Note issued under any Owned Aircraft Indenture.
(Intercreditor Agreement, Section 9.1)
THE SUBORDINATION AGENT
FMB Bank is the Subordination Agent under the Intercreditor Agreement.
Midway and its affiliates may from time to time enter into banking and trustee
relationships with the Subordination Agent and its affiliates. The
Subordination Agent's address is 25 South Charles Street, Baltimore, Maryland
21201, Attention: Corporate Trust Department.
The Subordination Agent may resign at any time, in which event a successor
Subordination Agent will be appointed as provided in the Intercreditor
Agreement. Either the Controlling Party or the Liquidity Provider may remove
the Subordination Agent for cause as provided in the Intercreditor Agreement.
In such circumstances, a successor Subordination Agent will be appointed as
provided in the Intercreditor Agreement. Any resignation or removal of the
Subordination Agent and appointment of a successor Subordination Agent does not
become effective until acceptance of the appointment by the successor
Subordination Agent.
DESCRIPTION OF THE AIRCRAFT AND THE APPRAISALS
THE AIRCRAFT
The Aircraft comprise eight CRJs. The Aircraft are designed to be in
compliance with Stage III noise level standards, which constitute the most
restrictive regulatory standards currently in effect in the United States for
aircraft noise abatement. The table below sets forth certain additional
information for the Aircraft.
<TABLE>
<CAPTION>
APPRAISED VALUE
------------------------------------------------
AIRCRAFT AIRCRAFT (DOLLARS)
AIRCRAFT ENGINE TAIL DELIVERY ------------------------------------------------
TYPE TYPE NUMBER DATE AISI MBA SH&E
- ----------- ------------- ----------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
CRJ-200ER GE CF34-3B1 N575ML September 1998 $21,100,000 $19,600,000 $19,700,000
CRJ-200ER GE CF34-3B1 N576ML September 1998 21,100,000 19,600,000 19,700,000
CRJ-200ER GE CF34-3B1 N577ML October 1998 21,200,000 19,680,000 19,800,000
CRJ-200ER GE CF34-3B1 N578ML November 1998 21,200,000 19,680,000 19,800,000
CRJ-200ER GE CF34-3B1 N579ML December 1998 21,250,000 19,720,000 19,900,000
CRJ-200ER GE CF34-3B1 N580ML January 1999 21,300,000 19,760,000 19,900,000
CRJ-200ER GE CF34-3B1 N581ML(1) April 1999(2) 21,450,000 19,860,000 20,100,000
CRJ-200ER GE CF34-3B1 N582ML(1) June 1999(2) 21,600,000 20,010,000 20,200,000
</TABLE>
- -------
(1) The tail number identified with respect to each Aircraft is a projection
only, based on the current manufacturing schedule of the manufacturer. A
different aircraft may actually be delivered to the Company by the
manufacturer on any delivery date and in such case such substituted
aircraft shall be an "Aircraft" for purposes of this Prospectus. In
addition, the financing of an Aircraft may not take place on the date such
Aircraft is actually delivered from the manufacturer, provided that such
financing will occur prior to the Delivery Period Termination Date.
(2) The dates for Aircraft reflect the scheduled delivery months under Midway's
purchase agreement. The actual delivery date for any such Aircraft may be
subject to delay by the manufacturer.
79
<PAGE>
DELIVERIES OF AIRCRAFT
The Note Purchase Agreement provides that the final delivery of the
Aircraft for purposes of purchase of Equipment Notes by the Trust must occur by
September 30, 1999 (the "DELIVERY PERIOD"); PROVIDED, HOWEVER, that if a labor
strike occurs at Bombardier prior to the scheduled expiration of the Delivery
Period, the expiration date of the Delivery Period will be extended by the
number of days that such strike continued in effect.
APPRAISED VALUE
The appraised values set forth in the foregoing chart were determined by
Aircraft Information Systems, Inc. ("AISI") as of June 26, 1998; Morten Beyer
and Agnew, Inc. ("MBA") as of June 26, 1998; and Simat, Helliesen & Eichner,
Inc. ("SH&E", and together with AISI and MBA, the "APPRAISERS") as of June 29,
1998. Each Appraiser was asked to provide its opinion as to the fair market
value of each Aircraft. As part of this process, all three Appraisers performed
"desk-top" appraisals without any physical inspection of the Aircraft. The
Appraisers have delivered letters summarizing their respective appraisals,
copies of which are annexed to this Prospectus as Appendix II.
An appraisal is only an estimate of value and should not be relied upon as
a measure of realizable value. In addition, 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 applicable
Indenture will depend on market and economic conditions, the availability of
buyers, the condition of the Aircraft, whether the Aircraft are sold separately
or together and other similar factors. Accordingly, there can be no assurance
that the proceeds realized upon any such exercise with respect to the Equipment
Notes and the Aircraft pursuant to the applicable Indenture would be as
appraised or sufficient to satisfy in full payments due on the Equipment Notes
issued thereunder or the Certificates. See "Risk Factors -- Factors Relating to
the Certificates and the Exchange Offer -- Appraisals and Realizable Value of
Aircraft."
LOAN TO AIRCRAFT VALUE RATIOS
The following table sets forth loan to Aircraft value ratios ("LTVS") for
each Class of Certificates as of July 2, 1999, the first Regular Distribution
Date that occurs after the expected Delivery Period Termination Date, and each
July 2 thereafter, based on the $82,122,000 of Equipment Notes issued in
respect of the six Aircraft delivered to date, assuming that Equipment Notes of
each series in the maximum principal amount for the remaining two Aircraft are
acquired by the Trusts prior to the Delivery Period Termination Date and after
giving effect to scheduled repayments of the Class C Certificates on or prior
to July 2, 1999. The LTVs for any Class of Certificates as of dates prior to
the Delivery Period Termination Date are not meaningful, since the Trust
Property will not include during such period all of the Equipment Notes
expected to be acquired by the Trusts. See "Description of the New Certificates
- -- General." The LTVs for each Class of Certificates were obtained for each
such Regular Distribution Date by dividing (i) the expected Pool Balance of
such Class of Certificates together in each case with the expected Pool Balance
of all other Classes of Certificates senior in right of payment to such Class
of Certificates under the Intercreditor Agreement determined immediately after
giving effect to the distributions expected to be made on such Regular
Distribution Date, by (ii) the assumed value of all the Aircraft (the "ASSUMED
AGGREGATE AIRCRAFT VALUE") on such Regular Distribution Date based on the
assumption set forth below. The Pool Balances and resulting LTVs are subject to
change if, among other things, the aggregate principal amount of the Equipment
Notes acquired by the Trusts is less than the maximum permitted by the
Mandatory Economic Terms, Equipment Notes with respect to any Aircraft are
purchased by the Trusts in other than the month currently scheduled for
delivery of such Aircraft or the amortization of the Equipment Notes differs
from the Assumed Amortization Schedule. See "Description of the New
Certificates -- Pool Factors."
The table contains forward-looking information that is based on the
assumption that the value of each Aircraft included in the Assumed Aggregate
Aircraft Value opposite the initial Regular Distribution Date depreciates by 3%
per year until the tenth year after the year of delivery of such Aircraft, by
4% per year thereafter until the fifteenth year after the year of such delivery
and by 5% per year thereafter. Other rates or methods of depreciation would
result in materially different LTVs and no assurance can be given (i) that the
depreciation rates and method assumed for the purpose of the table are the ones
most likely to occur or (ii) as to the actual future value of any Aircraft.
Many of the factors affecting the value of the Aircraft are discussed herein
under "Risk Factors -- Factors Relating to the Certificates and the Exchange
Offer -- Appraisals and Realizable Value of Aircraft."
The Equipment Notes issued with respect to any Aircraft are not
cross-collateralized with respect to any other Aircraft. Therefore, upon an
Indenture Default, even if the Aircraft as a group could be sold for more than
the total amounts payable in respect of all of the outstanding Equipment Notes,
if one Aircraft were sold for less than the total amount payable in respect of
the related Equipment Notes, there would not be sufficient proceeds to pay all
Classes of Certificates in full. See
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"Description of the Equipment Notes -- Loan to Value Ratios of Equipment Notes"
for additional information regarding LTVs for the Equipment Notes issued in
respect of each Aircraft, which may be more relevant in a default situation
than the aggregate values shown in the following table. Thus, the following
table should not be considered a forecast or prediction of expected or likely
LTVs but simply a mathematical calculation based on one set of assumptions.
<TABLE>
<CAPTION>
ASSUMED CLASS A CLASS B
AGGREGATE CERTIFICATES CLASS A CERTIFICATES
EQUIPMENT POOL CERTIFICATES POOL
DATE VALUE(1) BALANCE LTV BALANCE
- -------------- --------------- ------------------- -------------- -------------------
<S> <C> <C> <C> <C>
July 2, 1999 $159,100,000 $ 58,426,000.01 36.7% $ 25,265,999.99
July 2, 2000 154,327,000 56,699,731.82 36.7 24,537,985.00
July 2, 2001 149,554,000 54,946,131.62 36.7 23,779,077.99
July 2, 2002 144,781,000 53,192,531.42 36.7 23,020,171.00
July 2, 2003 140,008,000 51,438,931.21 36.7 22,261,264.00
July 2, 2004 135,235,000 49,685,331.01 36.7 21,502,357.00
July 2, 2005 130,462,000 47,931,730.83 36.7 19,123,617.81
July 2, 2006 125,689,000 46,178,130.63 36.7 14,541,618.92
July 2, 2007 120,916,000 44,424,530.43 36.7 10,775,526.08
July 2, 2008 116,143,000 42,670,930.23 36.7 6,949,287.95
July 2, 2009 111,370,000 37,985,724.57 34.1 5,091,717.21
July 2, 2010 105,006,000 30,727,626.91 29.3 5,091,717.21
July 2, 2011 98,642,000 22,932,225.93 23.2 5,091,717.21
July 2, 2012 92,278,000 14,748,671.26 16.0 4,901,813.04
July 2, 2013 85,914,000 10,630,894.01 12.4 0
July 2, 2014 30,100,000 2,476,278.53 8.2 0
July 2, 2015 0 0 NA 0
<CAPTION>
CLASS C CLASS D
CLASS B CERTIFICATES CLASS C CERTIFICATES CLASS D
CERTIFICATES POOL CERTIFICATES POOL CERTIFICATES
DATE LTV BALANCE LTV BALANCE LTV(2)
- -------------- -------------- ------------------- -------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
July 2, 1999 52.6% $ 13,545,805.70 61.1% $ 5,502,000.00 64.6%
July 2, 2000 52.6 11,513,859.25 60.1 5,356,964.30 63.6
July 2, 2001 52.6 10,971,879.00 60.0 3,389,422.61 62.2
July 2, 2002 52.6 10,952,651.15 60.2 470,762.35 61.0
July 2, 2003 52.6 8,016,711.67 58.4 0 NA
July 2, 2004 52.6 4,096,517.45 55.7 0 NA
July 2, 2005 51.4 1,241,158.90 55.2 0 NA
July 2, 2006 48.3 0 NA 0 NA
July 2, 2007 45.7 0 NA 0 NA
July 2, 2008 42.7 0 NA 0 NA
July 2, 2009 38.7 0 NA 0 NA
July 2, 2010 34.1 0 NA 0 NA
July 2, 2011 28.4 0 NA 0 NA
July 2, 2012 21.3 0 NA 0 NA
July 2, 2013 NA 0 NA 0 NA
July 2, 2014 NA 0 NA 0 NA
July 2, 2015 NA 0 NA 0 NA
</TABLE>
- -------
(1) No assurance can be given that such value represents the realizable value
of any Aircraft. See "Risk Factors -- Risk Factors Relating to the
Certificates and the Exchange Offer -- Appraisals and Realizable Value of
any Aircraft" and "Description of the Aircraft and the Appraisals."
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<PAGE>
DESCRIPTION OF THE EQUIPMENT NOTES
The statements under this caption are summaries and do not purport to be
complete. The summaries make use of terms defined in and are qualified in their
entirety by reference to all of the provisions of the Equipment Notes, the
Indentures, the Leases, the Participation Agreements, the Trust Agreements and
the Note Purchase Agreement. Except as otherwise indicated, the following
summaries relate to the Equipment Notes, the Indenture, the Lease, the
Participation Agreement and the Trust Agreement, as the case may be, relating
to each Aircraft. The provisions of such documents relating to any Leased
Aircraft may be modified, subject to the Mandatory Document Terms and the
Mandatory Economic Terms.
Under the Note Purchase Agreement, Midway has the option of entering into
a leveraged lease financing or a debt financing with respect to each Aircraft.
The Note Purchase Agreement provides for the relevant parties to enter into
either (i) with respect to each Leased Aircraft, a Participation Agreement, a
Lease and an Indenture (among other documents) relating to the financing of
such Aircraft and (ii) with respect to each Owned Aircraft, a Participation
Agreement and an Owned Aircraft Indenture relating to the financing of such
Owned Aircraft. The description of such agreements in the Prospectus is based
on the forms of such agreements annexed to the Note Purchase Agreement, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
The Company has entered into leveraged leases for the six Aircraft
delivered as of the date of this Prospectus and has obtained commitments from
prospective Owner Participants with respect to leveraged leases for the
remaining two Aircraft to be financed with the proceeds from the sale of the
Old Certificates, although there can be no assurance such commitments will
close. Such Owner Participants may request revisions to the forms of the
Participation Agreement, the Lease and the Leased Aircraft Indenture that are
contemplated by the Note Purchase Agreement, so that the terms of such
agreements applicable to any particular Leased Aircraft may differ from the
description of such agreements contained in the Prospectus. However, under the
Note Purchase Agreement, the terms of such agreements are required to (i)
contain the Mandatory Document Terms and (ii) not vary the Mandatory Economic
Terms. In addition, Midway will be obligated (i) to certify to the Trustees
that any such modifications do not materially and adversely affect the
Certificateholders (provided that the Note Purchase Agreement provides that,
among other terms, the shortening of certain grace periods for Events of Loss
and Events of Default is not materially adverse to the Certificateholders) and
(ii) to obtain written confirmation from each Rating Agency that the use of
versions of such agreements modified in any material respect would not result
in a withdrawal, suspension or downgrading of the ratings of any Class of
Certificates. See "Description of the Certificates -- Obligation to Purchase
Equipment Notes." Each Owner Participant will be required to satisfy certain
requirements, including having a minimum combined capital and surplus or net
worth.
GENERAL
The Equipment Notes will be issued in four series (the "SERIES A EQUIPMENT
NOTES," the "SERIES B EQUIPMENT NOTES," the "SERIES C EQUIPMENT NOTES" and the
"SERIES D EQUIPMENT NOTES" and collectively the "EQUIPMENT NOTES") in respect
of each of the Aircraft. Each Trust will purchase one series of Equipment Notes
such that all of the Equipment Notes held in each Trust will have an interest
rate equal to the interest rate applicable to the Certificates issued by such
Trust. All of the Equipment Notes held in each Trust will accrue interest at
the applicable rate per annum for such Trust, payable on January 2 and July 2
of each year, commencing on the first such date to occur after the initial
issuance thereof. The maturity dates of the Equipment Notes acquired by each
Trust will occur on or before the Final Expected Distribution Date (as
specified on the cover hereof) applicable to the Certificates issued by such
Trust. The Equipment Notes issued with respect to each Leased Aircraft will be
secured by a security interest in such Leased Aircraft and an assignment of
certain rights under the lease relating thereto (each, a "LEASE"), including
the right to receive rentals payable with respect to such Leased Aircraft by
Midway. The Equipment Notes issued with respect to each Owned Aircraft will be
secured by a security interest in such Owned Aircraft. Although neither the
Certificates nor the Equipment Notes issued with respect to the Leased Aircraft
are obligations of, or guaranteed by, Midway, the amounts unconditionally
payable by Midway for lease of the Leased Aircraft will be sufficient to pay in
full when due all amounts required to be paid on the Equipment Notes issued
with respect to the Leased Aircraft. The Equipment Notes issued with respect to
the Owned Aircraft will be direct obligations of Midway.
The Equipment Notes with respect to each Leased Aircraft will be issued
under a separate Leased Aircraft Indenture between First Union Trust Company,
National Association, as Owner Trustee of a trust for the benefit of the Owner
Participant who will be the beneficial owner of such Aircraft, and FMB Bank, as
Leased Aircraft Trustee. The Equipment Notes with respect to each Owned
Aircraft will be issued under a separate Owned Aircraft Indenture between
Midway and FMB Bank, as Owned Aircraft Trustee.
82
<PAGE>
The related Owner Trustee will lease each Leased Aircraft to Midway
pursuant to a separate Lease between such Owner Trustee and Midway with respect
to such Leased Aircraft. Under each Lease, Midway will be obligated to make or
cause to be made rental and other payments to the related Leased Aircraft
Trustee on behalf of the related Owner Trustee, which rental and other payments
will be at least sufficient to pay in full when due all payments required to be
made on the Equipment Notes issued with respect to such Leased Aircraft (other
than upon an acceleration of the Equipment Notes when no Lease Event of Default
has occurred). The Equipment Notes issued with respect to the Leased Aircraft
are not, however, direct obligations of, or guaranteed by, Midway. Midway's
rental obligations under each Lease and Midway's obligations under the
Equipment Notes issued with respect to each Owned Aircraft will be general
obligations of Midway.
Each beneficial owner of an Aircraft (the "OWNER PARTICIPANT") has the
right to sell, assign or otherwise transfer its interests as Owner Participant
in any of such leveraged leases, subject to the terms and conditions of the
relevant Participation Agreement and related documents.
Set forth below is certain information about the Equipment Notes expected
to be held in the Trusts and the Aircraft expected to secure such Equipment
Notes (assuming the delivery of the Aircraft and that all Class C Equipment
Notes and Class D Equipment Notes are issued to the applicable Trust):
<TABLE>
<CAPTION>
MAXIMUM PRINCIPAL
AIRCRAFT AIRCRAFT TAIL AIRCRAFT APPRAISED AMOUNT OF
TYPE NUMBER DELIVERY DATE VALUE(1) EQUIPMENT NOTES
- ------------- --------------- ---------------- --------------- ---------------------
<S> <C> <C> <C> <C>
CRJ-200ER N575ML September 1998 $ 19,700,000 $ 13,720,000(4)
CRJ-200ER N576ML September 1998 19,700,000 13,720,000(4)
CRJ-200ER N577ML October 1998 19,800,000 13,627,500(4)
CRJ-200ER N578ML November 1998 19,800,000 13,627,500(4)
CRJ-200ER N579ML December 1998 19,900,000 13,627,000(4)
CRJ-200ER N580ML January 1999 19,900,000 13,800,000(4)
CRJ-200ER N581ML(2) April 1999(3) 20,100,000 13,800,000(5)
CRJ-200ER N582ML(2) June 1999(3) 20,200,000 13,800,000(5)
</TABLE>
- -------
(1) The total of the appraised values of all the Aircraft reflects the sum of
the initial appraised value of each Aircraft as of its scheduled delivery
month. However, since the Aircraft will be delivered at different times
and may depreciate in value after initial delivery, such total does not
reflect the aggregate appraised value of the Aircraft subject to the
security interest of the Equipment Notes at any time. See " -- Loan to
Value Ratios of Equipment Notes."
(2) The tail number identified with respect to each Aircraft is a projection
only, based on the current manufacturing schedule of the manufacturer. A
different aircraft may actually be delivered to the Company by the
manufacturer on any delivery date and in such case such substituted
aircraft shall be an "Aircraft" for purposes of this Prospectus. In
addition, the financing of an Aircraft may not take place on the date such
Aircraft is actually delivered from the manufacturer, provided that such
financing will occur prior to the Delivery Period Termination Date.
(3) The dates for Aircraft delivery reflect the scheduled delivery months under
Midway's purchase agreement with the manufacturer. The actual delivery
date of any such Aircraft may be subject to delay by the manufacturer.
(4) Represents the principal amount of Equipment Notes issued with respect to
the delivered Aircraft.
(5) Reflects the initial maximum principal amount as of the date of original
issuance of the Equipment Notes, which principal amount may be less with
respect to an Aircraft depending on the circumstances of the financing of
such Aircraft. The aggregate principal amount of all of the Equipment
Notes will not exceed the aggregate face amount of the Certificates.
The appraised value of each Aircraft set forth above is based upon the
lesser of the average or median value of such Aircraft as appraised by the
following three independent appraisal and consulting firms as of the dates
indicated and projected as of the scheduled delivery month of each Aircraft:
AISI as of June 26, 1998; MBA as of June 26, 1998; and SH&E as of June 29,
1998.
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. In addition, the value
of the Aircraft in the event of the exercise of remedies under the applicable
Indenture will depend on market and economic conditions, the availability of
buyers, the condition of the Aircraft, whether the Aircraft are sold separately
or together and other factors. Accordingly, there can be no assurance that the
proceeds realized upon any such exercise with respect to the Equipment Notes
and the Aircraft pursuant to the applicable Indenture would be as appraised or
sufficient to satisfy in full payments due on the Equipment Notes issued
thereunder or the Certificates.
For a discussion of the assumptions and methodologies used in preparing
the appraisals, see "Risk Factors -- Factors Relating to the Certificates and
the Exchange Offer -- Appraisals and Realizable Value of Aircraft" and
"Description of the Aircraft and the Appraisals."
83
<PAGE>
SUBORDINATION
Series B Equipment Notes issued under any Indenture will be subordinated
in right of payment to Series A Equipment Notes issued under such Indenture;
any Series C Equipment Notes issued under such Indenture will be subordinated
in right of payment to such Series A Equipment Notes and such Series B
Equipment Notes; and any Series D Equipment Notes issued under such Indenture
will be subordinated in right of payment to such Series A Equipment Notes, such
Series B Equipment Notes and such Series C Equipment Notes. On each Equipment
Note payment date, (i) payments of interest and principal due on Series A
Equipment Notes issued under such Indenture will be made prior to payments of
interest and principal due on Series B Equipment Notes issued under such
Indenture, (ii) payments of interest and principal due on such Series B
Equipment Notes will be made prior to payments of interest and principal due on
any Series C Equipment Notes issued under such Indenture and (iii) payments of
interest and principal due on such Series C Equipment Notes will be made prior
to payments of interest and principal due on any Series D Equipment Notes
issued under such Indenture.
PRINCIPAL AND INTEREST PAYMENTS
Subject to the provisions of the Intercreditor Agreement, interest paid on
the Equipment Notes held in each Trust will be passed through to the
Certificateholders of such Trust on the dates and at the rate per annum set
forth on the cover page of this Prospectus until the final expected Regular
Distribution Date for such Trust. Subject to the provisions of the
Intercreditor Agreement, principal paid on the Equipment Notes held in each
Trust will be passed through to the Certificateholders of such Trust in
scheduled amounts on the dates set forth herein until the final expected
Regular Distribution Date for such Trust.
Interest will be payable on the unpaid principal amount of each Equipment
Note at the rate applicable to such Equipment Note on January 2 and July 2 in
each year, commencing on the first such date to occur after issuance thereof.
Such interest will be computed on the basis of a 360-day year of twelve 30-day
months.
Scheduled principal payments on the Equipment Notes will be made on
January 2 and July 2 in certain years, subject to certain adjustments, in
accordance with the principal repayment schedule set forth herein under
"Description of the Certificates -- Pool Factors."
If any date scheduled for any payment of principal, Make-Whole Premium (if
any) or interest with respect to the Equipment Notes is not a business day,
such payment will be made on the next succeeding business day without any
additional interest.
All payments of principal amount, interest, Make-Whole Premium, if any,
and other amounts to be made by the Owner Trustee with respect to Equipment
Notes issued in respect of a Leased Aircraft will be payable only from the
income and proceeds from the collateral pledged pursuant to the related
Indenture (the "TRUST INDENTURE ESTATE"). All payments of principal amount,
interest, Make-Whole Premium, if any, and other amounts to be made by Midway
with respect to Equipment Notes issued in respect of the Owned Aircraft will be
the direct obligation of Midway. In the case of each Equipment Note, each
payment of principal amount, Make-Whole Premium, if any, and interest or other
amounts due thereon will be applied in the following order: (i) to the payment
of accrued interest on such Equipment Note (as well as any interest on any
overdue principal amount, Make-Whole Premium, if any, and to the extent
permitted by law any interest) to the date of such payment; (ii) to the payment
of any other amount (other than the principal amount) due under the Indenture
or such Equipment Note; and (iii) to the payment of the principal amount of
such Equipment Note then due. (Indentures, Section 5.07)
REDEMPTION
The Equipment Notes issued under any Indenture will be redeemed as
provided below, at a price equal to the aggregate unpaid principal amount
together with accrued interest to, but not including, the date of redemption,
but without Make-Whole Premium, upon the occurrence of an Event of Loss to the
Aircraft subject to such Indenture, if such Aircraft is not replaced. If the
Aircraft subject to an Event of Loss is not replaced, all of the Equipment
Notes issued with respect to such Aircraft will be redeemed. (Indentures,
Section 6.02(a)(i) and (b))
The Equipment Notes relating to a Leased Aircraft may be redeemed, in
whole, on a Special Distribution Date, in connection with Midway's exercise of
its right to terminate the related Lease for obsolescence or surplus or to
purchase the Aircraft subject to such Lease. In connection with any such
termination or purchase, the amount to be paid by Midway under such Lease will
be at least equal to the aggregate unpaid principal amount of the related
Equipment Notes, together with accrued interest thereon to, but not including,
the date of redemption, plus the Make-Whole Premium thereon; PROVIDED that in
lieu of redeeming the Equipment Notes in connection with any such purchase of
an Aircraft, Midway may elect to assume all of the obligations of the relevant
Owner Trustee under the related Indenture pursuant to Section 2.11 of the
Indenture
84
<PAGE>
and Section 7.11 of the relevant Participation Agreement. In connection with
any such assumption of the Owner Trustee's obligations in respect of the
Equipment Notes, Midway shall enter into a supplemental indenture satisfactory
to the relevant Loan Trustee which contains amendments to the related
Indenture, in form and substance reasonably satisfactory to the Loan Trustee,
that incorporate therein such provisions from the related Lease and Indenture
as may be appropriate, including, without limitation, events of default
substantially identical in scope and effect to those set forth in such Lease
and covenants substantially identical to the covenants of Midway under the
related Indenture and under the related Lease. In addition, in connection with
any such assumption, Midway shall deliver an opinion of counsel to the effect
that, among other things, such assumption has been duly and validly effected.
Upon the effectiveness of such assumption, the Owner Trustee and the Owner
Participant will be released from further obligations under the related
Indenture and the related Participation Agreement. (Indentures, Sections
6.02(a)(ii) and 2.11; Participation Agreements, Section 7.11; Leases, Section
13(b)) See "The Leases -- Lease Termination" and "The Leases -- Renewal and
Purchase Options."
All of the Equipment Notes issued with respect to a Leased Aircraft may be
redeemed prior to maturity as part of a refinancing plan upon written notice to
the Loan Trustee and the holders of the Equipment Notes, at a price equal to
the aggregate unpaid principal amount thereof, together with accrued interest
to, but not including, the date of redemption, plus a Make-Whole Premium.
(Indentures, Section 6.02)
If notice of such redemption is given in connection with a termination of
the Lease, such notice is revocable and is deemed revoked in the event that the
Lease does not in fact terminate on the specified termination date. If notice
of such redemption is given in connection with a refinancing, it is revocable
on or prior to the proposed redemption date and shall be deemed revoked in the
event such refinancing does not occur. (Indentures, Sections 6.02(c) and 6.03)
Either the Owner Trustee or the Owner Participant may purchase or cause
the prepayment of all of the outstanding Equipment Notes issued under the
related Indentures applicable to a Leased Aircraft for the aggregate unpaid
principal amount, plus accrued and unpaid interest to the date of purchase or
prepayment, as the case may be. This option may be exercised upon (i) the
declaration by the applicable Loan Trustee that the Equipment Notes issued
under the Indenture applicable to such Leased Aircraft have become due and
payable following an Indenture Event of Default or the Loan Trustee's taking
action or notification by the Loan Trustee to the Owner Trustee that it intends
to take action to foreclose the lien or otherwise commence the exercise of any
significant remedy under the Indenture or Lease, or (ii) a continuing Lease
Event of Default. If the option is exercised in connection with a Lease Event
of Default continuing for less than 180 days, then the Make-Whole Premium will
be added to the purchase price or the prepayment amount, as the case may be.
(Indentures, Section 8.02)
The Equipment Notes issued with respect to an Owned Aircraft may be
redeemed, in whole but not in part, prior to maturity at the option of Midway
and the Equipment Notes issued with respect to any Leased Aircraft may be
redeemed, in whole but not in part, prior to maturity at the option of the
Owner Trustee (acting at the direction of Midway), in each case, upon not less
than 25 days' prior written notice and at a price equal to the aggregate unpaid
principal amount thereof, together with accrued interest to, but not including,
the date of redemption, plus a Make-Whole Premium. (Indentures, Section 6.02)
"MAKE-WHOLE PREMIUM" means, with respect to any Equipment Note, the amount
(as determined by an independent investment banker selected by Midway) by which
(a) the present value of the remaining scheduled payments of principal and
interest to maturity of such Equipment Note computed by discounting such
payments on a semiannual basis on each Payment Date (assuming a 360-day year of
twelve 30-day months) using a discount rate equal to the Treasury Yield (in the
case of each of the Series A Equipment Notes and the Series B Equipment Notes)
and the Treasury Yield plus 50 basis points (in the case of each of the Series
C Equipment Notes and the Series D Equipment Notes) EXCEEDS (b) the outstanding
principal amount of such Equipment Note plus accrued interest to the date of
redemption (other than any overdue portion thereof).
For purposes of determining the Make-Whole Premium, "TREASURY YIELD"
means, at the time of determination with respect to any Equipment Note, the
interest rate (expressed as a semiannual equivalent and as a decimal and, in
the case of United States Treasury bills, converted to a bond equivalent yield)
determined to be the per annum rate equal to the semiannual yield to maturity
for United States Treasury securities maturing on the Average Life Date (as
defined below) of such Equipment Note and trading in the public securities
markets either as determined by interpolation between the most recent weekly
average yield to maturity for two series of United States Treasury securities,
trading in the public securities markets, (A) one maturing as close as possible
to, but earlier than, the Average Life Date of such Equipment Note and (B) the
other maturing as close as possible to, but later than, the Average Life Date
of such Equipment Note, in each case as published in the most recent H.15 (519)
or, if a weekly average yield to maturity for United States Treasury securities
maturing on the
85
<PAGE>
Average Life Date of such Equipment Note is reported on the most recent H.15
(519), such weekly average yield to maturity as published in such H.15 (519).
"H.15 (519)" means the weekly statistical release designated as such, or any
successor publication, published by the Board of Governors of the Federal
Reserve System. The date of determination of a Make-Whole Premium shall be the
third business day prior to the applicable redemption date and the "MOST RECENT
H.15 (519)" means the H.15 (519) published prior to the close of business on
the third business day prior to the applicable redemption date.
"AVERAGE LIFE DATE" for any Equipment Note is the date which follows the
redemption date by a period equal to the Remaining Weighted Average Life of
such Equipment Note. "REMAINING WEIGHTED AVERAGE LIFE" on a given date with
respect to any Equipment Note is the number of days equal to the quotient
obtained by dividing (a) the sum of each of the products obtained by
multiplying (i) the amount of each then remaining scheduled payment of
principal of such Equipment Note by (ii) the number of days from and including
such prepayment date to but excluding the dates on which payment of principal
is scheduled to be made, by (b) the then outstanding principal amount of such
Equipment Note.
SECURITY
The Equipment Notes issued with respect to each Leased Aircraft will be
secured by (i) an assignment by the related Owner Trustee to the related Leased
Aircraft Trustee of such Owner Trustee's rights, except for certain limited
rights, under the Lease with respect to the related Aircraft, including the
right to receive payments of rent thereunder, (ii) a mortgage to such Leased
Aircraft Trustee of such Aircraft, subject to the rights of Midway under such
Lease, and (iii) an assignment to such Leased Aircraft Trustee of certain of
such Owner Trustee's rights under the purchase agreement between Midway and the
Aircraft manufacturer. Unless and until an Indenture Default with respect to a
Leased Aircraft has occurred and is continuing, the Leased Aircraft Trustee may
not exercise the rights of the Owner Trustee under the related Lease, except
the Owner Trustee's right to receive payments of rent due thereunder. The
assignment by the Owner Trustee to the Leased Aircraft Trustee of its rights
under the related Lease will exclude certain rights of such Owner Trustee and
the related Owner Participant, including the rights of the Owner Trustee and
the Owner Participant with respect to indemnification by Midway for certain
matters, insurance proceeds payable to such Owner Trustee in its individual
capacity or to such Owner Participant under public liability insurance
maintained by Midway under such Lease or by such Owner Trustee or such Owner
Participant, insurance proceeds payable to such Owner Trustee in its individual
capacity or to such Owner Participant under certain casualty insurance
maintained by such Owner Trustee or such Owner Participant under such Lease,
certain reimbursement payments made by Midway to such Owner Trustee and rights
of the Owner Trustee and the Owner Participant in respect of certain residual
and deficiency support agreements provided by the manufacturer and certain
governmental authorities. (Leased Aircraft Indenture, Granting Clause) The
Equipment Notes will not be cross-collateralized, and, consequently, the
Equipment Notes issued in respect of any one Aircraft will not be secured by
any of the other Aircraft or replacement aircraft therefor (as described in
"-- Certain Provisions of the Leases and the Owned Aircraft Indentures -- Events
of Loss") or the Leases related thereto.
The Equipment Notes issued with respect to each Owned Aircraft will be
secured by (i) a mortgage to the Owned Aircraft Trustee of such Aircraft and
(ii) an assignment to the Owned Aircraft Trustee of certain of Midway's rights
under its purchase agreement with the Aircraft manufacturer.
Funds, if any, held from time to time by the Loan Trustee with respect to
any Aircraft, including funds held as the result of an Event of Loss to such
Aircraft or, with respect to a Leased Aircraft, termination of the Lease, if
any, relating thereto, will be invested and reinvested by such Loan Trustee, at
the direction of Midway (unless an Event of Default shall have occurred and be
continuing) in investments described in the related Lease or, in the case of
the Owned Aircraft, the related Indenture.
LOAN TO VALUE RATIOS OF EQUIPMENT NOTES
The following table sets forth loan to Aircraft value ratios for the
Equipment Notes issued in respect of each Aircraft as of the Regular
Distribution Dates that occur after the scheduled date of original issuance of
such Equipment Notes, based on the $82,122,000 of Equipment Notes issued in
respect of the six Aircraft delivered to date, assuming that the Equipment
Notes in the maximum principal amount of $27,600,000 are issued in respect of
the remaining two Aircraft and after giving effect to the scheduled repayments
of Class C Certificates on or prior to July 2, 1999. These examples were
utilized by Midway in preparing the Assumed Amortization Schedule, although the
amortization schedule for the Equipment Notes issued with respect to an
Aircraft may vary from such assumed schedule so long as it complies with the
Mandatory Economic Terms. Accordingly, the schedules set forth below may not be
applicable in the case of any particular Aircraft. See "Description of the
Certificates -- Pool Factors." The LTV was obtained by dividing (i) the
outstanding principal balance as
86
<PAGE>
of each such Regular Distribution Date (after giving effect to the payments due
on such date) by (ii) the assumed value (the "ASSUMED AIRCRAFT VALUE") of the
Aircraft securing such Equipment Notes.
The table contains forward-looking information that is based on the
assumption that the value of each Aircraft set forth opposite the Initial
Regular Distribution Date depreciates by 3% per year until the tenth year after
the year of delivery of such Aircraft, by 4% per year thereafter until the
fifteenth year after the year of such delivery and by 5% per year thereafter.
Other rates or methods of depreciation would result in materially different
loan to Aircraft value ratios, and no assurance can be given (i) that the
depreciation rates and method assumed for the purposes of the table are the
ones most likely to occur or (ii) as to the actual future value of any
Aircraft. Thus the table should not be considered a forecast or prediction of
expected or likely loan to Aircraft value ratios but simply a mathematical
calculation based on one set of assumptions.
<TABLE>
<CAPTION>
AIRCRAFT AIRCRAFT
N575ML(1) N576ML(1)
------------------------------------------ -----------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT LOAN TO OUTSTANDING AIRCRAFT LOAN TO
BALANCE VALUE VALUE BALANCE VALUE VALUE
DATE (MILLIONS) (MILLIONS) RATIO (MILLIONS) (MILLIONS) RATIO
- ---------------- ------------- ------------ ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
July 2, 1999 $ 12.55 $ 19.70 63.7% $ 12.55 $ 19.70 63.7%
July 2, 2000 11.97 19.11 62.6 11.97 19.11 62.6
July 2, 2001 11.33 18.52 61.2 11.33 18.52 61.2
July 2, 2002 10.63 17.93 59.3 10.63 17.93 59.3
July 2, 2003 9.88 17.34 57.0 9.88 17.34 57.0
July 2, 2004 9.06 16.75 54.1 9.06 16.75 54.1
July 2, 2005 8.17 16.15 50.6 8.17 16.15 50.6
July 2, 2006 7.20 15.56 46.3 7.20 15.56 46.3
July 2, 2007 6.72 14.97 44.9 6.72 14.97 44.9
July 2, 2008 5.96 14.38 41.4 5.96 14.38 41.4
July 2, 2009 5.11 13.79 37.0 5.11 13.79 37.0
July 2, 2010 4.19 13.00 32.2 4.19 13.00 32.2
July 2, 2011 3.21 12.21 26.3 3.21 12.21 26.3
July 2, 2012 2.15 11.43 18.8 2.15 11.43 18.8
July 2, 2013 1.02 10.64 9.6 1.02 10.64 9.6
July 2, 2014 0.00 0.00 NA 0.00 0.00 NA
July 2, 2015 0.00 0.00 NA 0.00 0.00 NA
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT AIRCRAFT
N577ML(1) N578ML(1)
------------------------------------------ -----------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT LOAN TO OUTSTANDING AIRCRAFT LOAN TO
BALANCE VALUE VALUE BALANCE VALUE VALUE
DATE (MILLIONS) (MILLIONS) RATIO (MILLIONS) (MILLIONS) RATIO
- ---------------- ------------- ------------ ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
July 2, 1999 $ 12.55 $ 19.80 63.4% $ 12.59 $ 19.80 63.6%
July 2, 2000 11.97 19.21 62.3 12.01 19.21 62.5
July 2, 2001 11.33 18.61 60.9 11.37 18.61 61.1
July 2, 2002 10.65 18.02 59.1 10.69 18.02 59.3
July 2, 2003 9.90 17.42 56.8 9.94 17.42 57.0
July 2, 2004 9.09 16.83 54.0 9.13 16.83 54.2
July 2, 2005 8.21 16.24 50.6 8.24 16.24 50.8
July 2, 2006 7.26 15.64 46.4 7.29 15.64 46.6
July 2, 2007 6.60 15.05 43.9 6.65 15.05 44.2
July 2, 2008 5.80 14.45 40.2 5.86 14.45 40.5
July 2, 2009 4.94 13.86 35.7 4.99 13.86 36.0
July 2, 2010 4.02 13.07 30.7 4.07 13.07 31.1
July 2, 2011 3.02 12.28 24.6 3.07 12.28 25.0
July 2, 2012 1.95 11.48 17.0 2.00 11.48 17.4
July 2, 2013 0.80 10.69 7.5 0.85 10.69 8.0
July 2, 2014 0.00 0.00 NA 0.00 0.00 NA
July 2, 2015 0.00 0.00 NA 0.00 0.00 NA
</TABLE>
- -------
(1) This Aircraft has been delivered and the related Equipment Notes have been
issued.
87
<PAGE>
<TABLE>
<CAPTION>
AIRCRAFT AIRCRAFT
N579ML (1) N580ML (1)
------------------------------------------ -----------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT LOAN TO OUTSTANDING AIRCRAFT LOAN TO
BALANCE VALUE VALUE BALANCE VALUE VALUE
DATE (MILLIONS) (MILLIONS) RATIO (MILLIONS) (MILLIONS) RATIO
- ---------------- ------------- ------------ ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
July 2, 1999 $ 12.60 $ 19.90 63.3% $ 13.28 $ 19.90 66.7%
July 2, 2000 12.02 19.30 62.3 12.70 19.30 65.8
July 2, 2001 11.39 18.71 60.9 12.07 18.71 64.5
July 2, 2002 10.71 18.11 59.1 11.39 18.11 62.9
July 2, 2003 9.96 17.51 56.9 10.65 17.51 60.8
July 2, 2004 9.16 16.92 54.1 9.85 16.92 58.2
July 2, 2005 8.28 16.32 50.7 8.98 16.32 55.0
July 2, 2006 7.33 15.72 46.6 8.03 15.72 51.1
July 2, 2007 6.66 15.12 44.1 7.17 15.12 47.4
July 2, 2008 5.87 14.53 40.4 6.67 14.53 45.9
July 2, 2009 5.01 13.93 36.0 5.91 13.93 42.4
July 2, 2010 4.09 13.13 31.2 5.01 13.13 38.1
July 2, 2011 3.10 12.34 25.2 4.05 12.34 32.8
July 2, 2012 2.04 11.54 17.7 3.01 11.54 26.1
July 2, 2013 0.90 10.75 8.4 1.89 10.75 17.6
July 2, 2014 0.00 0.00 NA 0.69 9.95 6.9
July 2, 2015 0.00 0.00 NA 0.00 0.00 NA
</TABLE>
<TABLE>
<CAPTION>
AIRCRAFT AIRCRAFT
N581ML N582ML
------------------------------------------ -----------------------------------------
EQUIPMENT EQUIPMENT
NOTE ASSUMED NOTE ASSUMED
OUTSTANDING AIRCRAFT LOAN TO OUTSTANDING AIRCRAFT LOAN TO
BALANCE VALUE VALUE BALANCE VALUE VALUE
DATE (MILLIONS) (MILLIONS) RATIO (MILLIONS) (MILLIONS) RATIO
- ---------------- ------------- ------------ ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
July 2, 1999 $ 13.39 $ 20.10 66.6% $ 13.22 $ 20.20 65.4%
July 2, 2000 12.82 19.50 65.8 12.66 19.59 64.6
July 2, 2001 12.20 18.89 64.6 12.07 18.99 63.5
July 2, 2002 11.53 18.29 63.0 11.42 18.38 62.1
July 2, 2003 10.80 17.69 61.0 10.71 17.78 60.2
July 2, 2004 10.00 17.09 58.6 9.94 17.17 57.9
July 2, 2005 9.14 16.48 55.5 9.11 16.56 55.0
July 2, 2006 8.20 15.88 51.7 8.20 15.96 51.4
July 2, 2007 7.33 15.28 48.0 7.33 15.35 47.8
July 2, 2008 6.71 14.67 45.7 6.80 14.75 46.1
July 2, 2009 5.87 14.07 41.7 6.14 14.14 43.4
July 2, 2010 4.96 13.27 37.4 5.29 13.33 39.7
July 2, 2011 3.99 12.46 32.0 4.37 12.52 34.9
July 2, 2012 2.95 11.66 25.3 3.39 11.72 28.9
July 2, 2013 1.82 10.85 16.8 2.32 10.91 21.3
July 2, 2014 0.61 10.05 6.1 1.17 10.10 11.6
July 2, 2015 0.00 0.00 NA 0.00 0.00 NA
</TABLE>
- -------
(1) This Aircraft has been delivered and the related Equipment Notes have been
issued.
LIMITATION OF LIABILITY
The Equipment Notes issued with respect to the Leased Aircraft are not
direct obligations of, or guaranteed by, Midway, any Owner Participant or the
Leased Aircraft Trustees or the Owner Trustees in their individual capacities.
None of the Owner Trustees, the Owner Participants or the Leased Aircraft
Trustees, or any affiliates thereof, will be personally liable to any holder of
an Equipment Note or, in the case of the Owner Trustees and the Owner
Participants, to the Leased Aircraft Trustees for any amounts payable under the
Equipment Notes or, except as provided in each Leased Aircraft Indenture,
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for any liability under such Leased Aircraft Indenture. All payments of
principal of, premium, if any, and interest on the Equipment Notes issued with
respect to any Leased Aircraft (other than payments made in connection with an
optional redemption or purchase of Equipment Notes issued with respect to a
Leased Aircraft by the related Owner Trustee or the related Owner Participant)
will be made only from the assets subject to the lien of the Indenture with
respect to such Leased Aircraft or the income and proceeds received by the
related Leased Aircraft Trustee therefrom (including rent payable by Midway
under the Lease with respect to such Leased Aircraft).
The Equipment Notes issued with respect to the Owned Aircraft will be
direct obligations of Midway.
Except as otherwise provided in the Indentures, each Owner Trustee and
each Loan Trustee, in its individual capacity, will not be answerable or
accountable under the Indentures or under the Equipment Notes under any
circumstances except, among other things, for its own willful misconduct or
gross negligence. None of the Owner Participants will have any duty or
responsibility under any of the Leased Aircraft Indentures or the Equipment
Notes or the Leased Aircraft Trustees or to any holder of any Equipment Note.
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture include: (a) in the case of an
Indenture related to a Leased Aircraft, the occurrence of any Lease Event of
Default under the related Lease (other than the failure to make certain
indemnity payments and other payments to the related Owner Trustee or Owner
Participant unless a notice is given by such Owner Trustee that such failure
will constitute an Indenture Default), (b) the failure by the Owner Trustee in
the case of a Leased Aircraft Indenture (other than as a result of a Lease
Default or Lease Event of Default) or Midway, in the case of an Owned Aircraft
Indenture, to pay (A) any interest or principal or Make-Whole Premium, if any,
when due, under such Indenture or under any Equipment Note issued thereunder
continued for more than ten business days or (B) any other amounts for more
than thirty days, (c) in the case of a Leased Aircraft Indenture, any
representation or warranty made by the related Owner Trustee or Owner
Participant in such Indenture, the related Participation Agreement or certain
related documents furnished to the Loan Trustee pursuant thereto being false or
incorrect in any material respect when made and continuing to be material and
adverse to the interests of the holder of any Equipment Note and remaining
unremedied after notice and specified cure periods, (d) failure by the related
Owner Trustee or Owner Participant in the case of a Leased Aircraft Indenture
or Midway in the case of an Owned Aircraft Indenture to perform or observe
certain material covenants or obligations for the benefit of the Loan Trustee
or holders of Equipment Notes under such Indenture or certain related
documents, continued after notice and specified cure periods, or (e) the
occurrence of certain events of bankruptcy, reorganization or insolvency of the
related Owner Trustee or Owner Participant or Midway, as the case may be. There
are no cross-default provisions in the Indentures or the Leases in effect at
any time when the relevant Equipment Notes are outstanding. Consequently,
events resulting in an Indenture Default under any particular Indenture may or
may not result in an Indenture Default occurring under any other Indenture.
(Indentures, Section 7.01)
The Loan Trustee will give the holders of the Equipment Notes and, if
applicable, the Owner Trustee and the Owner Participant prompt written notice
of any Indenture Default of which the Loan Trustee has actual knowledge and, in
the case of an Indenture related to a Leased Aircraft, if the Indenture Default
results from a Lease Event of Default, it will give the holders of the
Equipment Notes, the Owner Trustee and the Owner Participant not less than ten
business days' prior written notice of the date on or after which the Loan
Trustee may commence the exercise of any remedy described in " -- Remedies"
below.
If Midway fails to make any semiannual basic rental payment due under any
Lease with respect to a Leased Aircraft, within a specified period after notice
from the Loan Trustee of such failure the applicable Owner Trustee or Owner
Participant may furnish to the Loan Trustee the amount due on the Equipment
Notes issued with respect to such Leased Aircraft, together with any interest
thereon on account of the delayed payment thereof, in which event the Loan
Trustee and the holders of outstanding Equipment Notes issued under such
Indenture may not exercise any remedies otherwise available under such
Indenture or such Lease as the result of such failure to make such rental
payment, unless the relevant Owner Trustee or Owner Participant has previously
cured the preceding three consecutive payment defaults or six total payment
defaults with respect to Basic Rent. (Indentures, Section 8.03)
The Owner Trustee and/or the Owner Participant also have certain rights,
but not obligations, to cure Indenture Defaults not resulting from the
nonpayment of Basic Rent.
In the case of a Leased Aircraft Indenture, if an Owner Trustee or Owner
Participant pays the amount due on the Equipment Notes to the Loan Trustee or
cures the Indenture Default, the Owner Trustee or Owner Participant will be
subrogated to the rights of the Loan Trustee and the holders of the Equipment
Notes in respect of the Rent which was overdue
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at the time of such payment, as well as interest payable by Midway on account
of its being overdue, and thereafter the Owner Trustee or the Owner
Participant, as the case may be, will be entitled to receive such overdue Rent
and interest thereon upon receipt by the Loan Trustee; PROVIDED, HOWEVER, that
(i) if the principal amount and interest on the Equipment Notes is due and
payable following an Indenture Default, such subrogation will, until the
principal amount of, interest on, Make-Whole Premium, if any, and all other
amounts due with respect to all Equipment Notes has been paid in full, be
subordinate to the rights of the Loan Trustee and the holders of the Equipment
Notes in respect of such payment of overdue Rent and interest and (ii) the
Owner Trustee will not be entitled to recover any such payments except pursuant
to the foregoing right of subrogation, by demand or suit for damages.
The holders of a majority in principal amount of the outstanding Equipment
Notes issued under any Indenture, by notice to the Loan Trustee, may on behalf
of all the holders and the Liquidity Providers waive any existing default and
its consequences under the Indenture with respect to such Aircraft, except a
default in the payment of the principal of, interest on, or Make-Whole Premium,
if any, on any such Equipment Notes or a default in respect of any covenant or
provision of such Indenture that cannot be modified or amended without the
consent of each holder of Equipment Notes affected thereby. (Indentures,
Section 7.11)
REMEDIES
Each Indenture provides that if an Indenture Default occurs and is
continuing, the related Loan Trustee may, and upon receipt of written demand
from the holders of a majority in principal amount of the Equipment Notes
outstanding under such Indenture shall, subject, in the case of a Leased
Aircraft Indenture, to the applicable Owner Participant's or Owner Trustee's
right to cure, as discussed above, declare the principal of all such Equipment
Notes issued thereunder immediately due and payable, together with all accrued
but unpaid interest thereon (without the Make-Whole Premium). The holders of a
majority in principal amount of Equipment Notes outstanding under such
Indenture may rescind any such declaration at any time before the sale or
disposition of the Trust Indenture Estate if (i) there has been paid to the
related Loan Trustee an amount sufficient to pay all principal and interest on
any such Equipment Notes, to the extent such amounts have become due otherwise
than by such declaration of acceleration and (ii) all other Indenture Defaults
under such Indenture (other than the nonpayment of principal that has become
due solely because of such acceleration) have been cured or waived.
(Indentures, Section 7.02(c))
Each Indenture provides that if an Indenture Default under such Indenture
has occurred and is continuing, the related Loan Trustee may exercise certain
rights or remedies available to it under such Indenture or under applicable
law, including, with respect to an Owned Aircraft Indenture, one or more
remedies under such Indenture with respect to the related Aircraft or, with
respect to a Leased Aircraft Indenture, one or more of the remedies under such
Indenture or (if the corresponding Lease has been declared in default) under
the related Lease. If an Indenture Default arises solely by reason of one or
more events or circumstances which constitute a Lease Event of Default, the
related Leased Aircraft Trustee's right to exercise remedies under a Leased
Aircraft Indenture is subject, with certain exceptions, to its having proceeded
to declare the Lease in default and commence the exercise one or more of the
dispossessory remedies under the Lease with respect to such Leased Aircraft;
PROVIDED that the requirement to exercise one or more of such remedies under
such Lease shall not apply in circumstances where such exercise has been
involuntarily stayed or prohibited by applicable law or court order for a
continuous period in excess of 60 days or such period as may be specified in
Section 1110(a)(1)(A) of the U.S. Bankruptcy Code, plus an additional period,
if any, resulting from (i) the trustee or debtor-in-possession in such
proceeding agreeing to perform its obligations under such Lease with the
approval of the applicable court and its continuous performance of such Lease
under Section 1110(a)(1)(A-B) of the U.S. Bankruptcy Code or such Leased
Aircraft Trustee's consent to an extension of such period, (ii) such Leased
Aircraft Trustee's failure to give any requisite notice, or (iii) Midway's
assumption of such Lease with the approval of the relevant court and its
continuous performance of the Lease as so assumed. See " -- Certain Provisions
of the Leases and the Owned Aircraft Indentures -- Lease Events of Default."
Such remedies may be exercised by the related Loan Trustee to the exclusion of
the related Owner Trustee, subject to certain conditions specified in such
Indenture, and Midway, subject to the terms of such Lease. Any Aircraft sold in
the exercise of such remedies will be free and clear of any rights of those
parties, including the rights of Midway under any Lease with respect to such
Aircraft; PROVIDED that no exercise of any remedies by the related Leased
Aircraft Trustee may affect the rights of Midway under any Lease unless a Lease
Event of Default has occurred and is continuing. (Leased Aircraft Indentures,
Sections 7.02 and 7.03; Leases, Section 17) The Owned Aircraft Indentures will
not contain such limitations on the Owned Aircraft Trustee's ability to
exercise remedies upon an Indenture Default under an Owned Aircraft Indenture.
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If the Equipment Notes issued in respect of one Aircraft are in default,
the Equipment Notes issued in respect of the other Aircraft may not be in
default, and, if not, no remedies will be exercisable under the applicable
Indentures with respect to such other Aircraft.
Section 1110 of the Bankruptcy Code provides in relevant part that, except
as described in the following sentence, the right of lessors, conditional
vendors and holders of security interests with respect to "equipment" (as
defined in Section 1110) to take possession of such equipment in compliance
with the provisions of a lease, conditional sale contract or security
agreement, as the case may be, is not affected by (a) the automatic stay
provision of the Bankruptcy Code, which provision enjoins repossessions by
creditors for the duration of the reorganization period, (b) the provision of
the Bankruptcy Code allowing the debtor-in-possession to use property of the
debtor during the reorganization period, (c) Section 1129 of the Bankruptcy
Code (which governs the confirmation of plans of reorganization in Chapter 11
cases) and (d) any power of the bankruptcy court to enjoin a repossession.
Section 1110 of the Bankruptcy Code provides in relevant part, however, that
the right of a lessor, conditional vendor or holder of a security interest to
take possession of an aircraft in the event of an event of default may not be
exercised for 60 days following the date of commencement of the reorganization
proceedings and may not be exercised at all if, within such 60 day period (or
such longer period consented to by the lessor, conditional vendor or holder of
a security interest), the debtor-in-possession agrees to perform the debtor's
obligations that become due on or after such date and cures all existing
defaults (other than defaults resulting solely from the financial condition,
bankruptcy, insolvency or reorganization of the debtor). "Equipment" is defined
in Section 1110, in part, as "an aircraft, aircraft engine, propeller,
appliance, or spare part (as defined in section 40102 of Title 49 of the United
States Code) that is subject to a security interest granted by, leased to, or
conditionally sold to a debtor that is a citizen of the United States (as
defined in section 40102 of Title 49 of the United States Code) holding an air
carrier operating certificate issued by the Secretary of Transportation
pursuant to chapter 447 of Title 49 of the United States Code for aircraft
capable of carrying 10 or more individuals or 6,000 pounds or more of cargo."
It is a condition to the Trustee's obligation to purchase Equipment Notes
with respect to each Aircraft that outside counsel to Midway, which is expected
to be Fulbright & Jaworski L.L.P., provide its opinion to the Trustees that, if
Midway were to become a debtor under Chapter 11 of the Bankruptcy Code, the
Owner Trustee, as lessor under each of the Leases, and the Loan Trustee of the
Leased Aircraft Indentures, as assignee of such Owner Trustee's rights under
each of the Leases pursuant to each of the related Indentures, and the Loan
Trustee under each Owned Aircraft Indenture, as holder of a security interest
in the related Owned Aircraft, would be entitled to the benefits of Section
1110 of the Bankruptcy Code with respect to the airframe and engines comprising
the related Aircraft, but such opinion may provide that such Owner Trustee or
any such Loan Trustee may not be entitled to such benefits with respect to any
replacement of an Aircraft after an Event of Loss in the future (the
consummation of which replacement is conditioned upon the contemporaneous
delivery of an opinion of counsel to the effect that the related Loan Trustee's
entitlement to Section 1110 benefits should not be diminished as a result of
such replacement) or with respect to the replacement of an engine in accordance
with the terms of the Lease (but Section 1110 would be available as to the
original airframe and engine(s) and might or might not be independently
available as to the replaced engine(s)). This opinion will be subject to
certain qualifications and assumptions including the assumptions that Midway is
and will continue to be a citizen of the United States holding an air carrier
operating certificate issued by the Secretary of Transportation pursuant to
chapter 447 of Title 49 of the United States Code for aircraft capable of
carrying 10 or more individuals or 6,000 pounds or more of cargo. See " --
Certain Provisions of the Leases and the Owned Aircraft Indentures -- Events of
Loss." The opinion will not address the availability of Section 1110 with
respect to the bankruptcy proceedings of any possible lessee of an Owned
Aircraft which may be leased by Midway, or of any sublessee of a Leased
Aircraft which may be subleased by Midway. For a description of certain
limitations on the Loan Trustee's exercise of rights contained in the
Indenture, see " -- Indenture Defaults, Notice and Waiver."
If an Indenture Default under any Indenture occurs and is continuing, any
sums held or received by the related Loan Trustee may be applied to reimburse
such Loan Trustee for any tax, expense or other loss incurred by it and to pay
any other amounts due to such Loan Trustee prior to any payments to holders of
the Equipment Notes issued under such Indenture. (Indentures, Section 5.03)
In the event of bankruptcy, insolvency, receivership or like proceedings
involving an Owner Participant, it is possible that, notwithstanding that the
applicable Aircraft is owned by the related Owner Trustee in trust, such
Aircraft and the related Lease and Equipment Notes might become part of such
proceeding. In such event, payments under such Lease or on such Equipment Notes
may be interrupted and the ability of the related Loan Trustee to exercise its
remedies under the related Indenture might be restricted, though such Loan
Trustee would retain its status as a secured creditor in respect of the related
Lease and the related Aircraft.
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MODIFICATION OF INDENTURES AND LEASES
Without the consent of holders of a majority in principal amount of the
Equipment Notes outstanding under any Indenture, the provisions of such
Indenture and any related Lease, Participation Agreement or Trust Agreement may
not be amended or modified, except to the extent indicated below.
Certain provisions of any Leased Aircraft Indenture, and of the Lease,
Participation Agreement and Trust Agreement related thereto, may be amended or
modified by the parties thereto without the consent of the relevant Loan
Trustee or any holders of the Equipment Notes outstanding under such Indenture,
subject to certain conditions. In the case of each Lease, such provisions
include, among others, provisions relating to (i) the return to the related
Owner Trustee of the related Aircraft at the end of the term of such Lease,
(ii) the renewal of such Lease and the option of Midway at the end of the term
of such Lease to purchase the related Aircraft, (iii) maintenance, operation
and use of the Aircraft and (iv) the list of countries in which a permitted
sublessee may be headquartered or in which an Aircraft may, in some
circumstances, be re-registered. (Indentures, Section 8.01)
Without the consent of the holder of each Equipment Note outstanding under
any Indenture affected thereby and the Liquidity Provider, no amendment of or
supplement to such Indenture may, among other things, (a) reduce the principal
amount of, or Make-Whole Premium, if any, or interest payable on, any Equipment
Notes issued under such Indenture or change the date on which or the priority
with respect to which any principal, Make-Whole Premium, if any, or interest is
due and payable, (b) create any security interest with respect to the property
prior to or PARI PASSU with the lien of such Indenture, except as provided in
such Indenture, or deprive any holder of an Equipment Note issued under such
Indenture of the benefit of the lien of such Indenture upon the property
subject thereto or (c) reduce the percentage in principal amount of outstanding
Equipment Notes issued under such Indenture necessary to modify or amend any
provision of such Indenture or to waive compliance therewith. (Indentures,
Section 13.02)
INDEMNIFICATION
Midway is required to indemnify each Loan Trustee, each Owner Participant,
each Owner Trustee, each Liquidity Provider, the Subordination Agent, the
Escrow Agent and each Trustee, but not the holders of Certificates, for certain
losses, claims and other matters. Midway will be required under certain
circumstances to indemnify each Owner Participant against the loss of
depreciation deductions and certain other benefits allowable for certain income
tax purposes with respect to the related Leased Aircraft.
The Loan Trustee is not under any obligation to take any action, risk
liability or expend its own funds under the Indenture if it has reasonable
grounds for believing that repayment of such funds or adequate indemnity
against such risk is not reasonably assured to it.
CERTAIN PROVISIONS OF THE LEASES AND THE OWNED AIRCRAFT INDENTURES
Each Leased Aircraft will be leased to Midway by the relevant Owner
Trustee under the relevant Lease. Each Owned Aircraft will be owned by Midway.
LEASE TERM RENTALS AND PAYMENTS
Each Leased Aircraft will be leased separately for a term commencing on
the date of the delivery of such Aircraft to the relevant Owner Trustee and
expiring not earlier than the latest maturity date of the Equipment Notes
issued pursuant to the related Indenture. Basic Rent payments for each Aircraft
are payable semiannually on each Lease Payment Date. Such payments, together
with certain other payments that Midway is obligated to make or cause to be
made under the related Lease, have been assigned by the Owner Trustee under the
related Indenture to provide the funds necessary to make payments of principal
and interest due or expected to be due from the Owner Trustee on the Equipment
Notes issued under such Indenture and Liquidity Obligations under the related
Liquidity Facility. In certain cases, the Basic Rent payments under the Leases
may be adjusted, but each Lease provides that under no circumstances will rent
payments by Midway be less than the scheduled payments on the related Equipment
Notes. (Leases, Section 3(f)) The balance of any such Basic Rent payment and
such other payments, after payment of amounts due or expected to be due on the
related Equipment Notes and certain other amounts, will be paid over to the
related Owner Trustee. (Indentures, Section 5.01) Midway's obligations to pay
rent and to make, or cause to be made, other payments under each Lease are
general unsecured obligations of Midway and will rank PARI PASSU in right of
payment with all other general unsecured indebtedness of Midway, and would be
senior in right of payment to any subordinated indebtedness of Midway if any
such subordinated indebtedness should exist. The
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rental obligations will also be effectively subordinated to any secured
indebtedness of Midway to the extent of the value of the assets securing such
indebtedness.
Semiannual payments of interest on the Equipment Notes issued by Midway
under an Owned Aircraft Indenture are payable on January 2 and July 2 of each
year, commencing on the first such date after issuance thereof. Semiannual
payments of principal under the Equipment Notes issued by Midway under an Owned
Aircraft Indenture are payable on January 2 and July 2 in certain years.
MAINTENANCE AND OPERATION
Each Owned Aircraft will be owned by Midway. Midway's obligations in
respect of each of the Leased Aircraft will be those of a lessee under a "net
lease." Accordingly, Midway is obligated to cause (x) each Leased Aircraft to
be duly registered in the name of the Owner Trustee (except to the extent the
relevant Owner Trustee or Owner Participant fails to meet applicable
citizenship requirements) and (y) each Owned Aircraft to be duly registered in
the name of Midway, and in each such case, to pay all costs of operating the
Aircraft and, at the expense of Midway, and to the extent set forth in such
Lease or Owned Aircraft Indenture, as the case may be, to maintain, service,
repair and overhaul the Aircraft (or cause the Aircraft to be maintained,
serviced, repaired and overhauled) so as to keep the Aircraft in such operating
condition as may be necessary to enable the airworthiness certification of such
Aircraft to be maintained in good standing at all times under the applicable
rules and regulations of the country of registry of the Aircraft, except during
temporary periods of grounding or during storage or the conduct of maintenance
procedures, in each case subject to certain limitations. Notwithstanding
anything to the contrary set forth above, Midway is also required to cause the
Aircraft to be maintained in accordance with maintenance standards at least
comparable to those required by the FAA or the central civil aviation authority
of the United Kingdom, France, Germany, Japan, the Netherlands or Canada.
(Leases, Section 5(d); Owned Aircraft Indentures, Section 4.01(d);
Participation Agreements, Section 6.03(b))
Midway will not (and will not permit any Sublessee, in the case of a
Leased Aircraft, or Permitted Lessee, in the case of an Owned Aircraft to) use
or operate any Aircraft in violation of any applicable law or in violation of
any airworthiness certificate, license or registration relating to the Aircraft
issued by any competent government authority unless (i) the validity thereof is
being contested in good faith and by appropriate proceedings which do not
involve a material danger of the sale, forfeiture or loss of the Airframe or
any Engine or (ii) it is not possible for Midway to comply with the laws of a
jurisdiction other than the United States (or other than any jurisdiction in
which the Aircraft is then registered) because of a conflict with the
applicable laws of the United States (or such jurisdiction in which the
Aircraft is then registered). (Leases, Section 5(c); Owned Aircraft Indentures,
Section 4.01(e))
Midway must make (or cause to be made) all alterations, modifications and
additions to each Airframe and Engine necessary to meet the applicable
standards of the FAA or any other applicable governmental authority of another
jurisdiction in which the Aircraft may be registered, provided that Midway may,
in good faith, contest the validity or application of any such standard in any
reasonable manner which does not materially adversely affect the Lessor (in the
case of a Leased Aircraft) or the lien of the Indenture. Midway (or any
Sublessee, in the case of a Leased Aircraft, or Permitted Lessee, in the case
of an Owned Aircraft) may add further parts and make other alterations,
modifications and additions to any Airframe or any Engine as Midway (or any
Sublessee, in the case of a Leased Aircraft, or Permitted Lessee, in the case
of an Owned Aircraft) may deem desirable in the proper conduct of its business,
including removal of parts, so long as such alterations, modifications or
additions do not (x) in Midway's reasonable judgment, diminish the value,
utility, condition or airworthiness of such Airframe or Engine below the value,
utility, condition or airworthiness thereof immediately prior to such
alteration, modification, addition or removal (assuming such Airframe or Engine
was maintained in accordance with the Lease or Owned Aircraft Indenture, as the
case may be), except that the value (but not the utility, condition or
airworthiness) of any Airframe or Engine may be reduced from time to time by
the value of the obsolete parts which are removed so long as the aggregate
value of such obsolete parts removed and not replaced shall not exceed $300,000
per Aircraft. In the case of a Leased Aircraft, title to parts incorporated or
installed in or added to such Airframe or Engine as a result of such
alterations, modifications or additions vest in the Owner Trustee subject to
certain exceptions. In certain circumstances, Midway (or any Sublessee, in the
case of a Leased Aircraft, or Permitted Lessee, in the case of an Owned
Aircraft) is permitted to remove parts which were added by Midway (or any
Sublessee, in the case of a Leased Aircraft, or Permitted Lessee in the case of
an Owned Aircraft) (without replacement) from an Airframe or Engine so long as
certain conditions are met and any such removal does not, among other things
specified in each Lease, materially diminish or impair the value, utility,
condition or airworthiness which such Airframe or Engine would have had at such
time had such addition, alteration or modification not occurred. (Leases,
Sections 7(a), 7(b), 7(c) and 7(d); Owned Aircraft Indentures, Sections
4.03(a), 4.03(b), 4.03(c) and 4.03(d))
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Except as set forth above, Midway is obligated to replace or cause to be
replaced all parts (other than severable parts added at the option of Midway or
unsuitable parts that Midway is permitted to remove to the extent described
above) that are incorporated or installed in or attached to any Airframe or any
Engine and become worn out, lost, stolen, destroyed, seized, confiscated,
damaged beyond repair or permanently rendered unfit for use. Any such
replacement parts become subject to the related Lease (in the case of a Leased
Aircraft) and the lien of the related Indenture in lieu of the part replaced.
(Leases, Sections 7(a) and 7(b); Owned Aircraft Indentures, Sections 4.03(a)
and 4.03(b))
REGISTRATION, SUBLEASING AND POSSESSION
Midway may, under certain circumstances, re-register an Aircraft in
certain jurisdictions outside the United States, subject to, among other
conditions and limitations specified in each Lease (in the case of a Leased
Aircraft) or Owned Aircraft Indenture (in the case of an Owned Aircraft) and
the related Participation Agreement, the lien of the related Indenture
continuing as a first priority security interest in the related Aircraft and
(in the case of a Leased Aircraft) Lease. Midway is also permitted, subject to
certain limitations, to sublease or lease, as the case may be, any Aircraft to
any United States certificated air carrier which is not subject to bankruptcy
or similar proceedings when the sublease or lease, as the case may be, begins,
to certain airframe or engine manufacturers or to certain foreign entities so
long as, in the case of any Leased Aircraft, the term of any such sublease does
not extend beyond the term of the Lease applicable to such Aircraft, subject to
certain exceptions. In addition, subject to certain limitations, Midway is
permitted to transfer possession of any Airframe or any Engine other than by
sublease or lease, as the case may be, including transfers of possession by
Midway or any Sublessee, in the case of a Leased Aircraft or Permitted Lessee,
in the case of an Owned Aircraft, in connection with certain interchange and
pooling arrangements, transfers to the United States government and any
instrumentality or agency thereof, and transfers in connection with maintenance
or modifications. There are no general geographical restrictions on Midway's
(or any Sublessee's, in the case of a Leased Aircraft, or Permitted Sublessee's
in the case of an Owned Aircraft) ability to operate the Aircraft. (Leases,
Section 5(a); Owned Aircraft Indentures, Section 4.01(a)). The extent to which
the relevant Loan Trustee's lien would be recognized in an Aircraft if such
Aircraft were located in certain countries is uncertain. See "Risk Factors --
Factors Relating to the Certificates and the Exchange Offer -- Repossession."
In addition, any exercise of the right to repossess an Aircraft may be
difficult, expensive and time-consuming, particularly when such Aircraft is
located outside the United States and has been registered in a foreign
jurisdiction or subleased to a foreign operator, and may be subject to the
limitations and requirements of applicable law, including the need to obtain
consents or approvals for deregistration or re-export of the Aircraft, which
may be subject to delays and political risk. When a defaulting Sublessee or
Permitted Lessee, as the case may be, or other permitted transferee is the
subject of a bankruptcy, insolvency or similar event such as protective
administration, additional limitations may apply.
In addition, in the case of a Leased Aircraft at the time of obtaining
repossession of the Aircraft under the related Lease or foreclosing on the lien
on the Aircraft under the related Indenture, an Airframe subject to such Lease
may not be equipped with Engines subject to the same Lease and, in such case,
Midway is required to deliver engines attached to such Airframe which shall be
of the same or improved model as the Engines (and, in any event, the two
engines returned shall be of the same model) and suitable for installation and
use on the Airframe, and be in as good an operating condition as, such Engines,
assuming such Engines were in the condition and repair required by the terms
hereof immediately prior to such termination. Notwithstanding Midway's
agreement in each Lease, in the event Midway fails to transfer title to engines
not owned by the Owner Trustee that are attached on repossessed Aircraft, it
could be difficult, expensive and time-consuming to assemble an Aircraft
consisting of an Airframe and Engines subject to the Lease. See "Risk Factors
- -- Factors Relating to the Certificates and the Exchange Offer --
Repossession."
LIENS
Midway is required to maintain each Aircraft free of any liens, other than
(i) the respective rights of Midway; (ii) the lien of the relevant Indenture,
and any other rights existing pursuant to the Operative Agreements related
thereto and, in the case of the Leased Aircraft, the rights of the Owner
Participant and Owner Trustee under the applicable Lease, Indenture and other
Operative Agreements; (iii) the rights of others in possession of the Aircraft
in accordance with the terms of the Lease or the Owned Aircraft Indenture
(including Sublessees and Permitted Lessees); (iv) certain other customary
liens permitted under such documents, including liens for taxes of Midway or
any Sublessee or Permitted Lessee, as the case may be, either not yet due or
being contested in good faith with due diligence and by appropriate proceedings
so long as such proceedings do not involve any material danger of the sale,
forfeiture or loss of such Airframe or any Engine; (v) materialmen's,
mechanics' and other similar liens arising in the ordinary course of Midway's
(or any Sublessee's or Permitted Lessee's) business securing obligations that
are not overdue, or are being contested in good faith by appropriate
proceedings not involving any material danger of the sale, forfeiture or loss
of such Airframe or Engines; (vi) judgment liens for which there
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has been served a stay of execution; (vii) salvage and similar rights of
insurers; (viii) certain liens attributable to the Loan Trustee, or in the case
of a Leased Aircraft, the Owner Participant or Owner Trustee; and (ix) any
other lien with respect to which Midway (or any Sublessee or Permitted Lessee)
has provided a bond or other security adequate in the reasonable opinion of, in
the case of a Leased Aircraft, the Owner Trustee or, in the case of an Owned
Aircraft, the Loan Trustee. (Leases, Section 10; Owned Aircraft Indentures,
Section 4.06)
INSURANCE
Subject to certain exceptions, Midway is obligated, at its or any
Sublessee's or Permitted Lessee's, as the case may be, expense, to maintain or
cause to be maintained on each Aircraft, with insurers of recognized
responsibility, public liability and property damage insurance (exclusive of
manufacturer's product liability insurance) and all-risk aircraft hull
insurance, in such amounts, covering such risks and in such form as Midway
customarily maintains with respect to other aircraft owned or operated by
Midway, in each case similar to such Aircraft; PROVIDED, HOWEVER, that, except
to the extent of any self-insurance, the all-risk hull insurance shall be at
least in an amount equal to the Termination Value (as specified in the
applicable Lease) of such Aircraft (except with respect to any Owned Aircraft,
in which case in an amount equal to the outstanding principal amount of the
related Equipment Notes plus six months interest). (Leases, Sections 9(a) and
9(b); Owned Aircraft Indentures, Sections 4.05(a) and 4.05(b))
Subject to certain exceptions, the policies covering loss of or damage to
an Aircraft shall be made payable, up to the Termination Value for such
Aircraft (in the case of a Leased Aircraft) or up to the amount of outstanding
principal of the Equipment Notes plus accrued interest (in the case of an Owned
Aircraft), to the related Loan Trustee for any loss involving proceeds in
excess of $2 million and the entire amount of any loss involving proceeds of $2
million or less and not involving an Event of Loss shall be paid to Midway,
except that in the event a Lease Event of Default (in the case of a Leased
Aircraft) or Indenture Event of Default (in the case of an Owned Aircraft) or a
payment default or certain bankruptcy defaults (a "SPECIFIED DEFAULT") occurs
and is continuing the relevant Loan Trustee can notify the insurers that all
insurance proceeds must be paid to the relevant Loan Trustee. (Leases, Section
9(c))
With respect to required insurance, Midway may, in addition to maintaining
normal deductibles, in the case of public liability and property damage
insurance and all-risk hull insurance, maintain self-insurance, by way of
deductible or otherwise, per occurrence or on a fleet-wide basis of not more
than $15 million. (Leases, Section 9(d); Owned Aircraft Indentures, Section
4.05(d))
In respect of each Aircraft, Midway is required to cause the relevant
Owner Trustee, if applicable, and Loan Trustee and certain other persons to be
included as additional insureds as their respective interests may appear under
all liability insurance policies required by the terms of the Lease or Owned
Aircraft Indenture, as the case may be, with respect to such Aircraft. (Leases,
Section 9(c); Owned Aircraft Indentures, Section 4.05(c))
Subject to certain customary exceptions, Midway may not operate (or permit
any Sublessee or Permitted Lessee to operate) any Aircraft in any area that is
excluded from coverage by any insurance policy in effect with respect to such
Aircraft and required by the Lease or owned Aircraft Indenture, as the case may
be. (Leases, Section 5(c); Owned Aircraft Indentures, Section 4.01(c))
Midway's obligation to provide any insurance required by each Lease or
Owned Aircraft Indenture, as the case may be, shall be satisfied if
indemnification from, or insurance provided by, the United States government
against the risks requiring such insurance under such Lease or Owned Aircraft
Indenture, when added to the amount of insurance against such risks otherwise
maintained by or for the benefit of Midway, has a combined effect substantially
the same as the amount of insurance against such risks otherwise required by
such Lease or the Owned Aircraft Indenture, as the case may be. (Leases,
Sections 9(a) and 9(b); Owned Aircraft Indentures, Sections 4.05(a) and
4.05(b))
LEASE TERMINATION
So long as no Event of Default shall be continuing, Midway may terminate
any Lease on any Termination Date occurring after the fifth anniversary of the
delivery date, if it determines that such Aircraft is obsolete or surplus to
Midway's equipment requirements and subject to certain other limitations
specified in such Leases. Upon payment of the Termination Value for such
Aircraft, which will be in an amount at least equal to the outstanding
principal amount of the related Equipment Notes and an amount equal to the
Make-Whole Premium, if any, payable on such date of payment, together with
certain additional amounts and together with all accrued and unpaid interest
thereon, the lien of the relevant Indenture shall be released, the relevant
Lease shall terminate, and the obligation of Midway thereafter to make
scheduled rent payments under such Lease shall cease. (Leases, Section 14;
Leased Aircraft Indentures, Section 6.02)
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RENEWAL AND PURCHASE OPTIONS
At the end of the term of each Lease after final maturity of the related
Equipment Notes and subject to certain conditions, Midway will have certain
options to renew such Lease for additional limited periods. In addition, Midway
will have the right at the end of the term of each Lease to purchase the
Aircraft subject thereto for an amount to be calculated in accordance with the
terms of such Lease. (Leases, Section 13)
Midway will also have the option to purchase the Aircraft subject to a
Lease on certain specified dates and upon the occurrence of certain events
prior to the end of the term of the Lease. In the event Midway exercises such a
purchase option in respect of an Aircraft, the purchase price therefor shall be
calculated in accordance with the provisions of the related Lease, but in any
event shall be sufficient to pay all principal of, Make-Whole Premium, if any,
on and interest on the related Equipment Notes in full and, upon payment
thereof, Midway shall acquire such Aircraft free of the lien of the related
Indenture, unless upon satisfaction of certain conditions Midway chooses to
assume on a full recourse basis all of such Owner Trustee's obligations in
respect of the related Equipment Notes and acquires the Aircraft subject to the
lien of the related Indenture. (Leases, Section 13(b); Leased Aircraft
Indentures, Sections 2.12 and 6.02; Participation Agreements, Section 7.11) See
"Description of the Equipment Notes -- Redemption."
EVENTS OF LOSS
If an Event of Loss occurs with respect to any Aircraft, Midway is
obligated either (i) so long as no Event of Default (in the case of a Leased
Aircraft) or Indenture Event of Default (in the case of an Owned Aircraft) is
continuing, to replace such Aircraft or (ii) to pay to the related Owner
Trustee or the Owned Aircraft Trustee, as the case may be, the applicable
Termination Value or the outstanding principal amount of the Equipment Notes
plus accrued interest, as the case may be, together with certain additional
amounts. If Midway elects to replace such Aircraft, it must do so no later than
180 days after the related Event of Loss, with an airframe or airframe and
engines (such airframe to be of the same or a comparable or improved model)
free and clear of all liens (other than permitted liens) and having a value and
utility at least equal to such airframe or engines, as the case may be,
comprising part of the Aircraft immediately prior to the Event of Loss,
assuming maintenance, condition and airworthiness thereof in accordance with
the relevant Lease or the Owned Aircraft Indenture, as the case may be. If
Midway elects to pay the Termination Value or the outstanding amount of
principal and interest, as the case may be, for such Aircraft or elects to
replace such Aircraft but fails to do so within the time periods specified
therefor, Midway must make such payment not later than the 180th day after the
Event of Loss. Upon making such payment with respect to a Leased Aircraft
together with all other amounts then due under the related Lease with respect
to such Aircraft, which in all circumstances will be at least sufficient to pay
in full as of the date of payment the principal amount of the related Equipment
Notes and all accrued and unpaid interest due thereon (but without any
Make-Whole Premium), the Lease for such Aircraft shall terminate and the
obligation of Midway to make the scheduled Basic Rent payments with respect
thereto shall cease. Upon making such payment with respect to an Owned
Aircraft, the Equipment Notes issued with respect to such Owned Aircraft will
be redeemed in full. (Leases, Sections 8(a); Owned Aircraft Indenture, Section
4.04(a); Indentures, Sections 5.02, 6.02 and 9.08)
If an Event of Loss occurs with respect to an Engine, Midway is required
to replace such Engine within 90 days from the date of such Event of Loss with
another engine, free and clear of all liens (other than permitted liens), of
the same or improved make and model and having a value and utility and in as
good operating condition as the Engine being replaced (assuming that such
Engine had been maintained in accordance with the Lease or the Owned Aircraft
Indenture, as the case may be). (Leases, Section 7(e); Owned Aircraft
Indenture, Section 4.03(e); Indentures, Section 9.08)
An "EVENT OF LOSS" with respect to an Aircraft, Airframe or any Engine
means any of the following events with respect thereto:
(i) theft or disappearance for a period in excess of 90 consecutive days;
(ii) destruction, damage beyond economic repair or rendition of such
property permanently unfit for normal use for any reason whatsoever;
(iii) any event which results in an insurance settlement with respect to
such property on the basis of an actual, constructive or compromised total
loss;
(iv) condemnation, confiscation or seizure of, or requisition of title to
or use of such property by any foreign government (or in the case of any
requisition of title, by the United States government) or any agency or
instrumentality thereof, for a period in excess of 180 consecutive days (or
30 consecutive days for the appropriation of title, or, in any
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of the cases in this clause (iv) with respect to a Leased Aircraft, such
shorter period ending on the expiration of the term of the Lease);
(v) with respect to a Leased Aircraft, condemnation, confiscation or
seizure of, or requisition of use of, such property by the Government for a
period extending beyond the term of the Lease (as the same may be extended
pursuant to the terms thereof), PROVIDED that no Event of Loss shall be
deemed to have occurred, and the term of the Lease shall be extended
automatically for a period of six months in the event that the Aircraft is
requisitioned by the Government pursuant to an activation under the CRAF
Program (as described below); and
(vi) as a result of any law, rule, regulation, order or other action by
the FAA or other governmental body having jurisdiction, the use of the
Aircraft or Airframe in the normal course of air transportation of
passengers shall have been prohibited by virtue of a condition affecting
all CRJ's equipped with engines of the same make and model as the Engines
for a period of 180 consecutive days (or, in the case of a Leased Aircraft,
beyond the end of the Term), unless the Lessee, prior to the expiration of
such 180-day period, shall be diligently carrying forward all necessary and
desirable steps to permit normal use of the Aircraft and shall within 12
months have conformed at least one CRJ aircraft (but not necessarily the
Aircraft) to the requirements of any such law, rule, regulation, order or
action, and shall be diligently pursuing conformance of the Aircraft in a
non-discriminatory manner.
An Event of Loss with respect to an Aircraft is deemed to have occurred if
an Event of Loss occurs with respect to the Airframe which is a part of such
Aircraft. (Leases, Section 8; Owned Aircraft Indentures, Section 4.04)
LEASE EVENTS OF DEFAULT
Lease Events of Default include: (i) failure by Midway to pay any payment
of Basic Rent, Termination Value or Supplemental Rent constituting any
Make-Whole Premium under such Lease within 10 days after the same shall have
become due; (ii) failure by Midway to pay Supplemental Rent (other than
Termination Value or any Make-Whole Premium) when due and such failure
continues for 30 days after Midway's receipt of written notice thereof (which
default may be declared in certain instances only by the Owner Participant);
(iii) failure by Midway to perform or observe any other covenant or agreement
to be performed or observed by it under the applicable Lease or any Operative
Agreement and such failure shall have continued unremedied for a period of 30
days after Midway shall have received written notice of such failure; PROVIDED,
HOWEVER, that no such failure shall constitute a Lease Event of Default so long
as such failure can be remedied, Midway is diligently proceeding to remedy such
failure, and such failure is remedied within 180 days of receipt of such
notice; (iv) any representation or warranty (other than tax representations and
warranties) made by Midway under the Operative Agreements shall have proved to
have been incorrect in any material respect when made, remains material when
discovered and is not cured within 30 days after notice to Midway of such
incorrectness by the Owner Trustee; (v) the occurrence of certain events of
bankruptcy, reorganization or insolvency of Midway; and (vi) failure by Midway
to carry and maintain (or cause to be carried and maintained) insurance on or
in respect of any Aircraft in accordance with the provisions of such Lease,
subject to certain exceptions and grace periods. (Leases, Section 16)
If a Lease Event of Default has occurred and is continuing and the Lease
has been declared to be in default, the Owner Trustee may, subject to certain
limitations relating to aircraft subject to the CRAF Program, exercise one or
more of the remedies provided in such Lease with respect to the related
Aircraft. Such remedies include the right to repossess and use or operate such
Aircraft, to sell or release such Aircraft free and clear of Midway's rights
and retain the proceeds and to require Midway to pay as liquidated damages any
accrued and unpaid Basic Rent plus an amount equal to the excess of the
Termination Value of such Aircraft over the net sale proceeds thereof plus
interest thereon or the excess of the Termination Value of such Aircraft over
the Fair Market Value of the Aircraft, plus interest thereon. (Leases, Section
17)
Indenture Defaults under the Owned Aircraft Indenture are discussed above
under " -- Indenture Defaults, Notice and Waiver." Remedies under the Owned
Aircraft Indenture are discussed above under " -- Remedies."
CERTAIN DEFINED TERMS UNDER THE LEASES
"BASIC RENT" means, for any Aircraft, the aggregate periodic rent payable
throughout the Basic Term for such Aircraft pursuant to the related Lease
subject to certain adjustments.
"CRAF PROGRAM" means the Civil Reserve Air Fleet Program administered by
the United States government.
"SUBLESSEE" means any sublessee permitted under a Lease from time to time.
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"SUPPLEMENTAL RENT" means (a) all amounts, liabilities, indemnities and
obligations which Midway assumes or agrees to pay under the Lease or under the
Participation Agreement or Tax Indemnity Agreement or any other Operative
Agreement to the Lessor, the Owner Participant, the Loan Trustee, the
Subordination Agent, any Liquidity Provider or others, including without
limitation payments of Termination Value, EBO Price and amounts calculated by
reference to Termination Value, any amounts of Make-Whole Premium payable under
the Indenture, and all amounts required to be paid by Midway under the
agreements, covenants, and indemnities contained in the Lease or in the
Participation Agreement or the Tax Indemnity Agreement or any other Operative
Agreement, but excluding Basic Rent, and (b) all amounts that the Owner Trustee
is obligated to pay in accordance with clause (b) of the last paragraph of
Section 2.04 of the Leased Aircraft Indenture.
CERTAIN DEFINED TERMS UNDER THE OWNED AIRCRAFT INDENTURES
"PERMITTED LESSEE" means any lessee permitted under an Owned Aircraft
Indenture from time to time.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on employee benefit plans subject to Title 1 of
ERISA ("ERISA PLANS"), and on those persons who are fiduciaries with respect to
ERISA Plans. Investments by ERISA Plans are subject to ERISA's general
fiduciary requirements, including, but not limited to, the requirement of
investment prudence and diversification and the requirement that an ERISA
Plan's investments be made in accordance with the documents governing the ERISA
Plan.
Section 406 of ERISA and section 4975 of the Code prohibit certain
transactions involving the assets of an ERISA Plan (as well as those of a plan
that is not subject to ERISA but which is subject to section 4975 of the Code,
such as individual retirement accounts (together with ERISA Plans, "PLANS"))
and certain persons (referred to as "PARTIES IN INTEREST" or "DISQUALIFIED
PERSONS") having certain relationships to such Plans, unless a statutory or
administrative exemption is applicable to the transaction. A party in interest
or disqualified person who engages in a prohibited transaction may be subject
to excise taxes and other penalties and liabilities under ERISA and the Code.
The Department of Labor has promulgated a regulation, 29 CFR Section
2510.3-101 (the "PLAN ASSET REGULATION"), describing what constitutes the
assets of a Plan with respect to the Plan's investment in an entity for
purposes of ERISA and section 4975 of the Code. Under the Plan Asset
Regulation, if a Plan invests (directly or indirectly) in a Certificate, the
Plan's assets will include both the Certificate and an undivided interest in
each of the underlying assets of the corresponding Trust, including the
Equipment Notes held by such Trust, unless it is established that equity
participation in the Trust by benefit plan investors (including but not limited
to Plans and entities whose underlying assets include Plan assets by reason of
an employee benefit plan's investment in the entity) is not "significant"
within the meaning of the Plan Asset Regulation. In this regard, the extent to
which there is equity participation in a particular Trust by, or on behalf of,
Plans will not be monitored. If the assets of a Trust are deemed to constitute
the assets of a Plan, transactions involving the assets of such Trust could be
subject to the prohibited transaction provisions of ERISA and section 4975 of
the Code unless a statutory or administrative exemption is applicable to the
transaction.
The fiduciary of a Plan that proposes to purchase and hold any
Certificates should consider, among other things, whether such purchase and
holding may involve (i) the direct or indirect extension of credit to a party
in interest or a disqualified person, (ii) the sale or exchange of any property
between a Plan and a party in interest or a disqualified person, or (iii) the
transfer to, or use by or for the benefit of, a party in interest or a
disqualified person, of any Plan assets. Such parties in interest or
disqualified persons could include, without limitation, Midway and its
affiliates, the Owner Participants, the Placement Agents, the Trustees, the
Escrow Agent, the Depositary, the Owner Trustees and the Liquidity Provider. In
addition, whether or not the assets of a Trust are deemed to be Plan assets
under the Plan Asset Regulation, if Certificates are purchased by a Plan and
Certificates of a subordinate Class are held by a party in interest or a
disqualified person with respect to such Plan, the exercise by the holder of
the subordinate Class of Certificates of its right to purchase the senior
Classes of Certificates upon the occurrence and during the continuation of a
Triggering Event could be considered to constitute a prohibited transaction
unless a statutory or administrative exemption were applicable. Depending on
the identity of the Plan fiduciary making the decision to acquire or hold
Certificates on behalf of a Plan, Prohibited Transaction Class Exemption
("PTCE") 91-38 (relating to investments by bank collective investment funds),
PTCE 84-14 (relating to transactions effected by a "qualified professional
asset manager"), PTCE 95-60 (relating to investments by an insurance company
general account), PTCE 96-23 (relating to transactions directed by an in-house
professional asset manager) or PTCE 90-1 (relating to investments by insurance
company pooled separate accounts) (collectively, the "CLASS EXEMPTIONS") could
provide an exemption from the prohibited transaction provision of ERISA and
section 4975 of the Code. However, there can
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be no assurance that any of these Class Exemptions or any other exemption will
be available with respect to any particular transaction involving the
Certificates.
Governmental plans and certain church plans, while not subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of ERISA and section 4975 of the Code, may nevertheless be subject
to state or other federal laws that are substantially similar to the foregoing
provisions of ERISA and the Code. Fiduciaries of any such plans should consult
with their counsel before purchasing any Certificates.
Any Plan fiduciary which proposes to cause a Plan to purchase any
Certificates should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and
section 4975 of the Code to such an investment, and to confirm that such
purchase and holding will not constitute or result in a non-exempt prohibited
transaction or any other violation of an applicable requirement of ERISA.
In addition to the Class Exemptions referred to above, an individual
exemption may apply to the purchase, holding and secondary market sale of Class
A Certificates by Plans, provided that certain specified conditions are met. In
particular, the Department of Labor has issued individual administrative
exemptions to the Initial Purchasers which are substantially the same as the
administrative exemption issued to Morgan Stanley & Co. Incorporated,
Prohibited Transaction Exemption 90-24 ET AL. (55 Fed. Reg. 20,548 (1990)), as
amended (the "UNDERWRITER EXEMPTION"). The Underwriter Exemption generally
exempts from the application of certain, but not all, of the prohibited
transaction provisions of Section 406 of ERISA and section 4975 of the Code
certain transactions relating to the initial purchase, holding and subsequent
secondary market sale of pass through certificates which represent an interest
in a trust that holds secured credit instruments that bear interest or are
purchased at a discount in transactions by or between business entities
(including equipment notes secured by leases) and certain other assets,
provided that certain conditions set forth in the Underwriter Exemption are
satisfied.
The Underwriter Exemption sets forth a number of general and specific
conditions which must be satisfied for a transaction involving the initial
purchase, holding or secondary market sale of certificates representing a
beneficial ownership interest in a trust to be eligible for exemptive relief
thereunder. In particular, the Underwriter Exemption requires that the
acquisition of certificates by a Plan be on terms that are at least as
favorable to the Plan as they would be in an arm's-length transaction with an
unrelated party; the rights and interests evidenced by the certificates not be
subordinated to the rights and interests evidenced by other certificates of the
same trust estate; the certificates at the time of acquisition by the Plan be
rated in one of the three highest generic rating categories by Moody's,
Standard & Poor's, Duff & Phelps Inc. or Fitch Investors Service, Inc.; and the
investing Plan be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act.
In addition, the trust corpus generally must be invested in qualifying
receivables, such as the Equipment Notes, but may not in general include a
pre-funding account (except for a limited amount of pre-funding which is
invested in qualifying receivables within a limited period of time following
the closing not to exceed three months).
With respect to the investment restrictions set forth in the Underwriter
Exemption, an investment in a Certificate will evidence both an interest in the
respective Original Trust as well as an interest in the Deposits held in escrow
by an Escrow Agent for the benefit of the Certificateholder. Under the terms of
the Escrow Agreement, the proceeds from the sale of the Old Certificates of
each Class were paid over by the Initial Purchasers to the Depositary on behalf
of the Escrow Agent (for the benefit of such Certificateholders as the holders
of the Escrow Receipts) and do not constitute property of the Original Trusts.
Under the terms of each Escrow Agreement, the Escrow Agent entered into the
Deposit Agreements with the Depositary and has been irrevocably instructed to
effect withdrawals upon the receipt of appropriate notice from the relevant
Trustee so as to enable such Trustee to purchase the identified Equipment Notes
on the terms and conditions set forth in the Note Purchase Agreement. Interest
on the Deposits relating to each Trust will be paid to the Certificateholders
of such Trust as Receiptholders through a Paying Agent appointed by the Escrow
Agent. Pending satisfaction of such conditions and withdrawal of such Deposits,
the Escrow Agent's rights with respect to the Deposits will remain plan assets
subject to the fiduciary responsibility and prohibited transaction provisions
of ERISA and section 4975 of the Code.
There can be no assurance that the Department of Labor would agree that
the Underwriter Exemption will be applicable to Class A Certificates in these
circumstances. In particular, the Department of Labor might assert that the
escrow arrangement is tantamount to an impermissible pre-funding rendering the
Underwriter Exemption inapplicable. In addition, even if all of the conditions
of the Underwriter Exemption are satisfied with respect to the Class A
Certificates, no assurance can be given that the Underwriter Exemption would
apply with respect to all transactions involving the Class A Certificates or
the assets of the Class A Trust. In particular, it appears that the Underwriter
Exemption would not apply to the purchase by Class B Certificateholders or
Class C Certificateholders of Class A Certificates in connection with the
exercise
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of their rights upon the occurrence and during the continuance of a Triggering
Event. Therefore, the fiduciary of a Plan considering the purchase of a Class A
Certificate should consider the availability of the exemptive relief provided
by the Underwriter Exemption, as well as the availability of any other
exemptions that may be applicable.
The Underwriter Exemption does not apply to the Class B, Class C or Class
D Certificates.
Each person who acquires or accepts a Certificate or an interest therein,
will be deemed by such acquisition or acceptance to have represented and
warranted that either: (i) no Plan assets have been used to purchase such
Certificate or an interest therein or (ii) the purchase and holding of such
Certificate or interest therein are exempt from the prohibited transaction
restrictions of ERISA and the Code pursuant to one or more prohibited
transaction statutory or administrative exemptions.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Certificates for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Certificates. 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 New Certificates received in
exchange for Old Certificates where such Old Certificates were acquired 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, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale.
The Company will not receive any proceeds from any sales of the New
Certificates by broker-dealers. New Certificates 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 New Certificates 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 New
Certificates. Any broker-dealer that resells the New Certificates that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such New Certificates
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of the New Certificates and any commissions
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. 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.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay certain expenses
incident to the Exchange Offer, other than commissions or concessions of any
brokers or dealers, and will indemnify the holders of the New Certificates
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives New
Certificates for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in this Prospectus untrue in any material respect or which
requires the making of any changes in this Prospectus in order to make the
statements herein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of this
Prospectus until the Company has amended or supplemented this Prospectus to
correct such misstatement or omission and has furnished copies of the amended
or supplemented Prospectus to such broker-dealer. If the Company shall give any
such notice to suspend the use of the Prospectus, it shall extend the 90-day
period referred to above by the number of days during the period from and
including the date of the giving of such notice to and including the date when
broker-dealers shall have received copies of the supplemented or amended
Prospectus necessary to permit resales of the New Certificates.
100
<PAGE>
LEGAL MATTERS
The validity of the New Certificates offered hereby has been passed upon
for Midway by Ober, Kaler, Grimes & Shriver, A Professional Corporation.
EXPERTS
The financial statements of the Company at December 31, 1998 and 1997 and
each of the years in the three year period ended December 31, 1998, 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 in the Registration Statement, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
101
<PAGE>
AUDITED FINANCIAL STATEMENTS
MIDWAY AIRLINES CORPORATION
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<TABLE>
<S> <C>
Report of Independent Auditors ....................... F-2
Audited Financial Statements
Balance Sheets ....................................... F-3
Statements of Operations ............................. F-4
Statements of Stockholders' Equity (Deficit) ......... F-5
Statements of Cash Flows ............................. F-6
Notes to Financial Statements ........................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Midway Airlines Corporation
We have audited the accompanying balance sheets of Midway Airlines
Corporation as of December 31, 1998 and 1997 and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 1998. 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 financial position of Midway Airlines Corporation
as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
----------------------------------------
Raleigh, North Carolina
January 29, 1999
F-2
<PAGE>
MIDWAY AIRLINES CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 48,736 $ 54,509
Restricted cash ..................................................... 9,512 2,811
Short-term investments .............................................. -- 751
Accounts receivable:
Credit cards and travel agencies (Note 14) ........................ 4,702 5,078
Other (net) ....................................................... 1,946 674
Inventories ......................................................... 2,916 2,109
Deferred tax asset .................................................. 457 --
Prepaids and other .................................................. 10,886 6,723
--------- --------
Total current assets ................................................. 79,155 72,655
Equipment and property:
Flight .............................................................. 107,143 45,348
Other ............................................................... 6,657 5,834
Less accumulated depreciation and amortization ...................... (10,793) (4,608)
--------- --------
Total equipment and property, net .................................... 103,007 46,574
Other noncurrent assets:
Equipment and aircraft purchase deposits ............................ 18,103 17,133
Aircraft lease deposits and other ................................... 3,316 3,448
--------- --------
Total other noncurrent assets ........................................ 21,419 20,581
--------- --------
Total assets ......................................................... $ 203,581 $139,810
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... 7,327 6,777
Accrued expenses .................................................... 5,732 4,324
Accrued income and excise taxes ..................................... 581 5,119
Advance ticket sales ................................................ 21,483 20,884
Other current liabilities ........................................... 5,803 5,709
Current maturities of long-term debt and capital lease obligations .. 5,349 9,016
--------- --------
Total current liabilities ............................................ 46,275 51,829
Noncurrent liabilities:
Long-term debt and capital lease obligations ........................ 78,764 39,187
Deferred tax liability .............................................. 7,022 --
Other ............................................................... 1,057 308
--------- --------
Total noncurrent liabilities ......................................... 86,843 39,495
--------- --------
Total liabilities .................................................... 133,118 91,324
Stockholders' equity:
Preferred stock ..................................................... -- --
Common stock ........................................................ 86 85
Additional paid-in-capital .......................................... 51,032 44,037
Retained earnings ($51.1 million of accumulated deficit eliminated
in the quasi-reorganization as of June 30, 1997) (Note 1) ......... 19,345 4,364
--------- --------
Total stockholders' equity ........................................... 70,463 48,486
--------- --------
Total liabilities and stockholders' equity ........................... $ 203,581 $139,810
========= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MIDWAY AIRLINES CORPORATION
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating revenues:
Passenger ............................................................... $ 205,566 $ 179,000 $ 173,541
Cargo ................................................................... 2,121 1,936 2,214
Contract and other ...................................................... 3,752 5,339 4,279
---------- ---------- ---------
Total revenues ........................................................... 211,439 186,275 180,034
Operating expenses:
Wages, salaries and related costs ....................................... 31,822 25,757 24,619
Aircraft fuel ........................................................... 19,623 21,499 27,300
Aircraft and engine rentals ............................................. 29,927 30,495 34,113
Commissions ............................................................. 15,071 13,978 13,728
Maintenance, materials and repairs ...................................... 16,603 15,760 17,930
Other rentals and landing fees .......................................... 9,640 9,812 12,711
Depreciation and amortization ........................................... 6,162 1,999 1,346
Other ................................................................... 54,047 51,108 54,603
Impairment of long-lived assets ......................................... -- -- 16,941
Equipment retirement charges ............................................ 2,413 -- --
Special recapitalization charges ........................................ -- 750 --
---------- ---------- ---------
Total operating expenses ................................................. 185,308 171,158 203,291
---------- ---------- ---------
Operating income (loss) .................................................. 26,131 15,117 (23,257)
Other income (expense):
Interest income ......................................................... 4,151 1,783 630
Interest expense ........................................................ (6,123) (1,669) (2,471)
Miscellaneous ........................................................... -- -- 834
---------- ---------- ---------
Total other income (expense) ............................................. (1,972) 114 (1,007)
---------- ---------- ---------
Income (loss) before income taxes and extraordinary gain ................. 24,159 15,231 (24,264)
Income tax expense ...................................................... 9,178 6,306 --
---------- ---------- ---------
Income (loss) before extraordinary gain ................................. 14,981 8,925 (24,264)
Extraordinary gain ...................................................... -- 15,969 --
---------- ---------- ---------
Net income (loss) ....................................................... $ 14,981 $ 24,894 $ (24,264)
========== ========== =========
Basic earnings per share:
Income before extraordinary gain ........................................ $ 1.75 $ 1.47
Extraordinary gain ...................................................... -- 2.64
---------- ----------
Net income .............................................................. $ 1.75 $ 4.11
========== ==========
Weighted average shares used in computing basic earnings per share ....... 8,574,972 6,059,051
========== ==========
Diluted earnings per share:
Income before extraordinary gain ........................................ $ 1.54 $ 1.24
Extraordinary gain ...................................................... -- 2.22
---------- ----------
Net income .............................................................. $ 1.54 $ 3.46
========== ==========
Weighted average shares used in computing diluted earnings per share ..... 9,731,527 7,193,794
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
MIDWAY AIRLINES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS
------------------------ ------------------------- PAID IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------------- -------- ---------------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ........ 1,080,000 $ 11 10,000,000 $ 100 $ 30,949 $ (48,118) $ (17,058)
Adjustments to record reduction
in credit card receivables and
advance ticket sales (Note 14) ... -- -- -- -- -- (1,327) (1,327)
--------- ----- ---------- ------ --------- --------- ---------
Balance at December 31, 1995, as
restated ........................... 1,080,000 11 10,000,000 100 30,949 (49,445) (18,385)
Issuance of common stock
warrants ......................... -- -- -- -- 40 -- 40
Reversal of preferred stock
dividends ........................ -- -- -- -- -- 2,040 2,040
Net loss ........................... -- -- -- -- -- (24,264) (24,264)
--------- ----- ---------- ------ --------- --------- ---------
Balance at December 31, 1996 ........ 1,080,000 11 10,000,000 100 30,989 (71,669) (40,569)
Cancellation of prior stock in
connection with recapitalization (1,080,000) (11) (10,000,000) (100) 111 -- --
Issuance of preferred stock ........ 3,728,693 37 -- -- 14,963 -- 15,000
Issuance of common stock ........... -- -- 2,130,682 21 8,551 -- 8,572
Issuance of common stock
warrants in connection with
debt restructuring ............... -- -- -- -- 1,571 -- 1,571
Contributed capital ................ -- -- -- -- 1,314 -- 1,314
Reclassification of accumulated
deficit pursuant to
quasi-reorganization ............. -- -- -- -- (51,139) 51,139 --
Conversion of preferred stock ...... (3,728,693) (37) 3,728,693 37 -- -- --
Issuance of common stock in
connection with initial public
offering ......................... -- -- 2,699,320 27 37,677 -- 37,704
Net income ......................... -- -- -- -- -- 24,894 24,894
---------- ----- ----------- ------ --------- --------- ---------
Balance at December 31, 1997 ........ -- -- 8,558,695 85 44,037 4,364 48,486
Issuance of common stock ........... -- -- 43,700 1 176 -- 177
Net operating loss carryforward
utilization credited to
additional paid-in capital
(Note 8) ......................... -- -- -- -- 6,819 -- 6,819
Net income ......................... -- -- -- -- -- 14,981 14,981
---------- ----- ----------- ------ --------- --------- ---------
Balance at December 31, 1998 ........ -- $ -- 8,602,395 $ 86 $ 51,032 $ 19,345 $ 70,463
========== ===== =========== ====== ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
MIDWAY AIRLINES CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ........................................................................ $ 14,981 $ 24,894 $ (24,264)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Impairment of long-lived assets ......................................................... -- -- 16,941
Depreciation and amortization ........................................................... 6,162 1,999 1,346
Capitalized interest on purchase deposits ............................................... (809) -- --
Deferral of expense payments ............................................................ -- -- 8,762
Special recapitalization charges ........................................................ -- 750 --
Extraordinary gain ...................................................................... -- (15,969) --
Provision for deferred income taxes ..................................................... 6,565 -- --
Loss on disposal of assets .............................................................. 21 -- --
Changes in operating assets and liabilities:
Restricted cash ....................................................................... (6,701) (811) --
Accounts receivable ................................................................... (896) (1,760) 9,172
Inventories ........................................................................... (807) (1,714) (99)
Prepaids and other .................................................................... (1,267) (226) (2,331)
Aircraft lease deposits and other ..................................................... 959 (462) (1,126)
Accounts payable and accrued expenses ................................................. 1,958 897 (1,089)
Accrued excise and income taxes ....................................................... (714) (1,505) 2,437
Advance ticket sales .................................................................. 599 2,708 1,131
Other current liabilities ............................................................. 94 243 (6,795)
Other noncurrent liabilities .......................................................... 749 (279) 1,699
---------- ---------- ---------
Net cash provided by operating activities ................................................ 20,894 8,765 5,784
INVESTING ACTIVITIES
Purchase of short-term investments ....................................................... -- (78,278) --
Sale of short-term investments ........................................................... 751 77,527 --
Purchase of equipment and property ....................................................... (7,332) (7,335) (1,692)
Aircraft and equipment purchase deposits ................................................. (19,752) (17,133) (922)
Refund of aircraft and equipment purchase deposits ....................................... 17,461 -- --
---------- ---------- ---------
Net cash used in investing activities .................................................... (8,872) (25,219) (2,614)
FINANCING ACTIVITIES
Issuance of common and preferred stock ................................................... 177 60,257 --
Proceeds from issuance of long-term debt ................................................. 1,800 -- 8,795
Repayment of long-term debt and capital lease obligations ................................ (20,326) (1,617) (3,959)
Accreted interest on long-term debt ...................................................... 554 1,518 --
---------- ---------- ---------
Net cash (used in) provided by financing activities ...................................... (17,795) 60,158 4,836
---------- ---------- ---------
(Decrease) increase in cash and cash equivalents ......................................... (5,773) 43,704 8,006
Cash and cash equivalents at beginning of year ........................................... 54,509 10,805 2,799
========== ========== =========
Cash and cash equivalents at end of year ................................................. $ 48,736 $ 54,509 $ 10,805
========== ========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid ............................................................................ $ 3,812 $ 125 $ 210
========== ========== =========
Income taxes paid ........................................................................ $ 6,610 $ 2,600 $ --
========== ========== =========
SCHEDULE OF NON-CASH ACTIVITIES
Issuance of debt in settlement of expenses ............................................... $ -- $ -- $ 14,934
========== ========== =========
Issuance of debt for equipment purchases ................................................. $ 53,824 $ 34,531 $ --
========== ========== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS AND BASIS OF PRESENTATION
Midway Airlines Corporation ("Midway" or the "Company"), a Delaware
corporation, is an air carrier providing primarily passenger service and to a
lesser extent, cargo and mail services. The Company began operations in
November 1993 and flies primarily to East Coast and Mid-West locations from its
hub at the Raleigh-Durham International Airport ("Raleigh-Durham"), currently
utilizing ten Fokker F-100 aircraft, ten Canadair Regional Jets ("CRJs")and one
Airbus A320 aircraft. The CRJs were added to the fleet beginning in December
1997 and their initial operations began in January 1998. The Company has firm
orders for thirteen additional CRJ's to be delivered during 1999 and the first
quarter of 2000. The Company has options to acquire up to seventeen additional
CRJs with delivery dates for the first seven of these aircraft extending over a
one year period beginning in the first half of 2000 and with delivery dates for
the remaining ten of these aircraft beginning in March 2002.
On February 11, 1997, the Company was recapitalized. Through the
recapitalization, debt was either extinguished or restructured, all of the
existing stock was canceled and new stock was issued, new terms for aircraft
leases and rent reductions for facilities were implemented, and agreements
reflecting revised maintenance arrangements were negotiated (Note 13).
On December 4, 1997, the Company completed an initial public offering of
its common stock at a price of $15.50 per common share. Proceeds to the
Company, net of underwriters discount and offering expenses, were $37.7 million
(Note 5).
QUASI-REORGANIZATION
As a result of the February 11, 1997 recapitalization, debt
restructurings, retention of a new chief executive officer, and new Board of
Directors, the Board of Directors approved a corporate readjustment of the
accounts in the form of a quasi-reorganization, which was effected on June 30,
1997.
A quasi-reorganization is an accounting procedure which results in
eliminating the accumulated deficit in retained earnings. This accounting
procedure is limited to a reclassification of accumulated deficit as a
reduction of paid-in capital. The Company believes the quasi-reorganization was
appropriate because on completion of the recapitalization, the debt
restructurings, and the installation of a new chief executive officer and Board
of Directors, the Company had substantially reduced its outstanding
indebtedness, had formulated revised operating plans and as a result thereof
would be able to devote its resources to its continuing operations. Because
assets had been stated at approximate fair values, the quasi-reorganization had
no effect on recorded assets.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during that
reporting period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, as a result of ongoing operating losses, the Company
evaluated the carrying value of its long-lived assets in accordance with SFAS
No. 121. SFAS No. 121 requires the evaluation of recoverability based on the
relationship of undiscounted cash flows to the carrying value of the long-lived
assets. As a result of this analysis, the Company determined that certain
long-lived assets were impaired. During 1996, the Company recorded an
impairment loss of $11.1 million to write down the goodwill from a 1994
acquisition and $5.8 million related to rotable aircraft parts and certain
purchase deposits. The impairment loss was determined by comparing the carrying
value of the Company's long-lived assets to the Company's estimates of fair
values of the assets.
F-7
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- CONTINUED
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents include investments with an original maturity of
three months or less or which may be redeemed without penalty at any time.
These investments are stated at cost, which approximates market value. In
addition, as of December 31, 1998 and 1997, approximately $9.5 million and $2.8
million, respectively, of cash was restricted as to withdrawal; these funds
serve as collateral to support letters of credit and a credit card holdback;
and are classified as restricted cash in the balance sheets.
SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid commercial paper,
corporate bonds, bankers' acceptances, certificates of deposit, eurodollar
deposits, and government securities. All mature between three months and one
year of the original investment date or can be redeemed without penalty within
one year or less. These investments are carried at cost, which approximates
market value.
CONCENTRATIONS
Midway's accounts receivable are primarily receivables from major credit
card companies, travel agencies, and other air carriers related to ticket sales
for passenger transportation. The Company does not believe it is subject to any
significant concentration of credit risk. The Company establishes an allowance
for doubtful accounts based upon factors surrounding credit risk. At December
31, 1998 and 1997, the allowance for doubtful accounts was approximately
$1,624,000 and $1,673,000, respectively.
Amounts charged by a related party vendor accounted for approximately
12.3%, 15.6% and 15% of operating expenses for the years ended December 31,
1998, 1997 and 1996, respectively. This vendor provided services related
primarily to maintenance, passenger services and subleasing of airport
facilities and certain aircraft landing slots. The Company does not believe,
however, that there is a significant risk associated with this vendor for the
services provided, as alternative sources are generally available at
commercially reasonable prices. Facilities are subleased from this vendor
pursuant to lease agreements covering various time periods (Note 4).
The Company maintains certain cash balances and investments with banks
which are in excess of insured limits. The Company does not believe that the
risk of loss is significant.
The Company purchases aircraft, rotable parts and expendable inventory, as
well as services, including heavy maintenance checks and training, from one
aircraft manufacturer. This manufacturer maintains certain consignment
inventory at the Company's facilities in Raleigh-Durham. Deposits are held by
the aircraft manufacturer for ordered aircraft until the delivery of the
aircraft, at which time the Company is refunded the deposits in full.
Management does not believe that there is a significant concentration of risk
associated with this vendor, due to the vendor's excellent credit rating.
INVENTORIES
The Company's inventories are carried at the lower of cost or market using
the first-in, first-out method. Inventories, which consist primarily of fuel,
consumable spare parts, materials and supplies relating to flight equipment,
are expensed as used.
EQUIPMENT AND PROPERTY
Equipment and property are stated at cost and consist primarily of CRJ
aircraft, rotable spare parts for aircraft, leasehold improvements, and
miscellaneous equipment used in aircraft operations. Equipment and property are
depreciated to estimated residual values using the straight-line method over
estimated useful lives of 16.5 years for CRJ aircraft, 5 to 16.5 years for
flight equipment and 3 to 5 years for other equipment. Depreciation expense
charged to operations was approximately $5.5 million, $1.8 million, and $1.1
million for the years ended December 31, 1998, 1997 and 1996, respectively.
Equipment and property also includes office equipment financed by capital
leases (Note 4).
F-8
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- CONTINUED
CAPITALIZED INTEREST
Interest on aircraft purchase deposits was capitalized at an amount
approximating the Company's incremental borrowing rate throughout 1998 for
similar type assets. All capitalized amounts are amortized over the term of the
respective long-term debt or lease obligations. The capitalized amount totaled
approximately $809,000 as of December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, debt and other liabilities approximate fair value at December
31, 1998 and 1997. At December 31, 1996, debt, other liabilities and warrants
were reflected at historical value. In connection with the February 11, 1997
recapitalization (Note 13), debt, other liabilities and warrants with an
aggregate carrying value of $16.5 million were settled for approximately $1.5
million.
HEDGED LOAN OBLIGATIONS
During December 1997, the Company entered into four Treasury Lock
transactions ("Treasury Locks") with Bombardier, Inc., based on a 10 year US
Treasury Benchmark (the "Treasury rate"), to substantially eliminate the
Company's exposure to interest rate fluctuations on long-term financing for the
purchase of five CRJ aircraft that were placed into service during the first
six months of 1998. The Treasury Lock arrangements contemplated that the
Company would receive or pay upon certain dates (the intended financing date
for each CRJ aircraft) an amount equal to the present value of the difference
between the interest cost of a financing entered into at the time of entry into
the Treasury Lock arrangements and the interest cost of the same financing
entered into at a later date. The effect of such arrangements was that the
Company essentially agreed to borrow at fixed rates over periods extending to
16.5 years. When the Treasury rate declined, the Company was obligated to
settle with the counterparty at the expiration of the Treasury Lock
arrangement. The Company is not a party to leveraged derivatives and does not
hold or issue financial instruments for speculative purposes.
The net cash amounts paid or received on the agreements are recorded and
recognized as an adjustment of interest expense over the life of the related
loans. During 1998, the Company settled the aforementioned Treasury Locks for
approximately $1.2 million.
AIRCRAFT AND ENGINE MAINTENANCE AND REPAIRS
Routine maintenance and repair costs for aircraft are charged to expense
when incurred, except for major airframe and engine maintenance. Depending on
the particular maintenance contract, these latter costs are either (i) expensed
on the basis of the number of hours flown or cycles incurred at contractual
rates or (ii) capitalized when incurred and amortized on a straight-line basis
over the period of time between overhauls.
MEDICAL SELF-INSURANCE
In June 1998, the Company replaced its medical self-insurance plan with a
traditionally insured medical plan. Prior to June 1, 1998, the Company provided
certain health and medical benefits to eligible employees, their spouses and
dependents pursuant to a benefit plan funded by the Company. Each participating
employee contributed to the Company's costs associated with such benefit plan.
The Company's obligation to fund this benefit plan and pay for these benefits
was capped through the Company's purchase of an insurance policy from a third
party insurer. The amount established as a reserve was intended to recognize
the Company's estimated obligations with respect to its payment of claims and
claims incurred but not yet reported under the benefit plan. Management
believes that the recorded liability for medical self-insurance at December 31,
1998 and 1997 is adequate to cover the losses and claims incurred, but these
reserves are necessarily based on estimates and the amount ultimately paid may
be more or less than such estimates. These estimates are based upon historical
information along with certain assumptions about possible unfiled claims for
reimbursement.
REVENUE RECOGNITION AND ADVANCE TICKET SALES
Passenger revenues are recognized when transportation services are
provided, rather than when a ticket is sold. The amount of ticket sales not yet
recognized as revenue is reflected as a liability in the accompanying balance
sheets as "advance ticket sales". Travel agency commissions are recognized as
expense when transportation is provided and the related revenue
F-9
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- CONTINUED
is recognized. The amount of commissions related to advance ticket sales is
included in "Prepaids and other" in the accompanying balance sheets.
FREQUENT FLYER PROGRAM
The Company participates in the American Airlines AAdvantage(R) frequent
flyer program, which allows members to earn mileage credits and redeem awards
at participating AAdvantage companies. Midway is billed monthly for AAdvantage
miles earned by its passengers participating in the program who fly on Midway.
The Company does not accrue any liability for award travel it may be required
to provide because the incremental cost of redemptions has not been, and is not
expected to be, material.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. The Company recognized
advertising expense of $4.0 million, $5.1 million, and $5.7 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under
the liability method, deferred tax assets and liabilities are determined based
on differences between the financial reporting and tax basis of assets and
liabilities.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share.
In accordance with SFAS 128, basic earnings per share is computed using
the weighted average number of shares of common stock outstanding and diluted
earnings per share is computed using the weighted average number of shares of
common stock and the dilutive effect of options and warrants outstanding, using
the "treasury stock" method.
At the time of the Company's initial public offering, a stock split of
682.9108392 for one was adopted and the holders of the Company's outstanding
preferred stock converted those into an equivalent number of common shares.
Since the Company was recapitalized in February 1997 and all prior capital
stock was canceled at that time, per share amounts prior to 1997 are not
meaningful and thus are not presented.
STOCK-BASED COMPENSATION
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Under the provisions of APB 25, no compensation expense is
recognized for stock or stock options issued at fair value.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), which provides an alternative to APB 25 in
accounting for stock-based compensation issued to employees. SFAS 123 provides
for a fair value based method of accounting for employee stock options and
similar equity instruments. However, for companies that continue to account for
stock-based compensation arrangements using APB 25, SFAS 123 requires
disclosure of the pro forma effect on net income (loss) and earnings (loss) per
share as if the fair value based method provided by SFAS 123 had been applied.
The Company accounts for stock-based compensation arrangements using APB 25 and
has adopted the pro forma disclosure requirements of SFAS 123 (Note 6).
EQUIPMENT RETIREMENT CHARGES
In 1998, management decided to return certain leased aircraft as the
leases expire in 1998 and 1999. The Company recorded return costs associated
with aircraft leases that expired in 1998 in the year ended December 31, 1998
and is amortizing expected return costs for leased aircraft for leases expiring
in 1999 over the remaining revenue producing term of the related leases.
Management expects $3.9 million in costs to be incurred to return these
aircraft. During the year ended
F-10
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- CONTINUED
December 31, 1998, the Company recorded $2.4 million in equipment retirement
charges, of which $1.8 million is recorded as a liability at December 31, 1998.
RECLASSIFICATIONS
Certain 1996 amounts in the accompanying financial statements have been
reclassified to conform to the 1997 and 1998 presentation. These
reclassifications had no effect on previously reported net income (loss) or
stockholders' equity (deficit).
3. LONG-TERM DEBT
The Company's long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
---------- ---------
<S> <C> <C>
6.9% to 7% secured notes payable, principal and interest payable semi-annually beginning
in
1998-1999 through 2014-2015 (a) ......................................................... $68,186 $ --
Variable rate notes payable, interest only at 30 day LIBOR plus 3%, due June 1998; 80%
refinanced
in February 1998 as 6.9% secured notes payable, principal and interest payments
commencing
August 1998 through August 2014 (a) ..................................................... -- 34,531
8% secured notes payable, principal and interest payments commencing February 1998 through
January 2004 (net of debt discount of $1,146, and $1,370 at December 31, 1998 and
December 31, 1997, respectively) (b) .................................................... 7,824 8,796
8% unsecured note payable, principal payments commencing February 1998 through January
2004
(net of debt discount of $1,146, and $1,370 at December 31, 1998 and December 31, 1997,
respectively) (c) ....................................................................... 4,032 4,499
Miscellaneous notes payable .............................................................. -- 6
6.9% lease purchase obligation, principal and interest payable monthly commencing April
1998
through March 2005 ...................................................................... 2,227 --
8.4% secured note payable, principal payments commencing September 1998, due August 2001 . 1,600 --
------- -------
83,869 47,832
Less -- amounts due within one year ...................................................... 5,206 8,883
------- -------
$78,663 $38,949
======= =======
</TABLE>
- -------
a) These notes are related to the purchase of CRJ aircraft. Each note is
collateralized by the related aircraft.
b) As a part of the recapitalization on February 11, 1997, a note payable of $9
million, plus accrued interest of $450,000 was converted into a note payable,
collateralized by first and second security interests in most of the Company's
assets. The note accreted interest until February 1998, when principal and
interest payments began.
c) As a part of the recapitalization on February 11, 1997, the notes payable
were restructured into long-term notes payable, accreting interest until
February 1998 when principal and interest payments began.
d) The Company is prohibited from paying dividends under the terms of certain
debt and lease agreements.
Certain of the Company's debt instruments prohibit the payment of
dividends until such debt has been repaid.
F-11
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. LONG-TERM DEBT -- CONTINUED
The aggregate principal maturities of long-term debt at December 31, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED:
- ------------------------------------
<S> <C>
1999 ............................. $ 5,206
2000 ............................. 5,592
2001 ............................. 5,876
2002 ............................. 5,875
2003 ............................. 6,358
Thereafter ....................... 54,962
-------
Principal balance ................ $83,869
=======
</TABLE>
Interest charged to expense was $6.1 million, $1.7 million and $2.5
million for the years ended December 31, 1998, 1997 and 1996, respectively. Of
these amounts, $106,000 in 1998 and $1.1 million in 1997 were accreted to the
principal balance of the related long-term debt.
4. LEASES
As of December 31, 1998, the Company leased ten Fokker F-100 aircraft,
five CRJ aircraft, and one Airbus Industries A320 aircraft under operating
leases with terms ranging from 4 to 18 years of which the remaining terms range
from 3 months to 16.5 years.
The Company's leases or subleases of gates at various airports, including
subleases for 14 gates at Raleigh-Durham Airport ("RDU"), expire at various
dates through 2013. The Company also leases 70% of its slots at New York's
LaGuardia Airport and 75% of its slots at Washington, D.C.'s National Airport
from certain airlines which are currently scheduled to expire in April 2000.
The Company currently subleases its corporate headquarters and reservation
facility in Durham, North Carolina under an operating lease agreement expiring
on July 31, 1999 with an option to extend the lease for one year. In 1998, the
Company entered into a new operating lease for a corporate headquarters and
reservation facility in Morrisville, North Carolina with an occupancy date in
the second quarter 1999. The new facility lease includes escalating rent
payments and a ten year term which expires December 31, 2008. Rent expense is
recognized on a straight-line basis over the lease term.
The Company leases certain furniture, machinery and equipment under
capital lease agreements that expire through 2000. Amortization expense of
$213,000, $149,000 and $109,000 is included in depreciation and amortization
expense in the statements of operations for the years ended December 31, 1998,
1997 and 1996, respectively.
Equipment and property includes the following amounts for capital leases
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Office equipment ...................... $ 669 $ 669
Less accumulated amortization ......... (523) (310)
------ ------
$ 146 $ 359
====== ======
</TABLE>
F-12
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. LEASES -- CONTINUED
At December 31, 1998, the future minimum lease payments required under
capital leases and operating leases that have initial or remaining
noncancelable lease terms in excess of one year are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
--------------------
CAPITAL AIRCRAFT OTHER TOTAL
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Year ended:
1999 ................................. $ 165 $ 28,583 $ 4,195 $ 32,943
2000 ................................. 104 24,443 2,980 27,527
2001 ................................. -- 24,443 2,659 27,102
2002 ................................. -- 24,268 2,674 26,942
2003 ................................. -- 21,993 2,689 24,682
Thereafter ........................... -- 158,648 21,967 180,615
----- -------- ------- --------
Total minimum lease payments .......... 269 $282,378 $37,164 $319,811
======== ======= ========
Amounts representing interest ......... (25)
-----
$ 244
=====
</TABLE>
Rent expense is recorded on a straight-line basis over the term of the
leases. Lease and rent expense charged to operations was approximately $36.6
million, $36.7 million, and $41.1 million for the years ended December 31,
1998, 1997 and 1996, respectively.
Under the terms of certain aircraft leases, the Company had security
deposits on each related aircraft, which totaled approximately $1.5 million and
$3.1 million at December 31, 1998 and 1997, respectively. Certain aircraft
leases also require the Company to make payments for maintenance based on block
hours and/or cycles. The Company incurred expenses of $6.5 million, $4.2
million and $4.3 million related to these payments for the years ended December
31, 1998, 1997 and 1996, respectively.
The Company currently leases 10 Fokker F-100 aircraft. Pursuant to the
terms of the leases, the lessor has the right to terminate its lease on six
months prior notice beginning September 15, 1998, provided that no lease can be
terminated if it would result in a fourth lease termination in any 12 month
period, including scheduled terminations. The Company plans to return two
Fokker F-100 aircraft in the first six months of 1999 upon lease termination.
The Company plans to return its single Airbus Industries A320 aircraft in
June 1999 upon lease termination.
5. STOCKHOLDERS' EQUITY (DEFICIT)
STOCK SPLIT
Prior to the initial public offering of the Company's common stock, the
Company's Board of Directors authorized a division of common shares at the rate
of 682.9108392 to one. All earnings per share, option prices, share values, and
other share information for the year ended December 31, 1997 have been restated
to reflect the stock split. Since the Company was recapitalized in February
1997 and all prior capital stock was canceled at that time, it is not
meaningful to present share information prior to 1997.
INITIAL PUBLIC OFFERING
On December 4, 1997, the Company completed an initial public offering of
4,830,000 shares of common stock (the "Offering"). Of the 4,830,000 shares,
2,699,320 shares were sold by the Company and 2,130,680 shares were sold by
certain selling shareholders. The Offering price was $15.50 per common share
resulting in gross offering proceeds of $74.9 million. Proceeds to the Company,
net of underwriting discounts, offering expenses and amounts to selling
shareholders, were $37.7 million. Two shareholders holding all the Company's
outstanding preferred stock exercised their right to convert those shares into
an equivalent number of common shares.
F-13
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. STOCKHOLDERS' EQUITY (DEFICIT) -- CONTINUED
RECAPITALIZATION
Effective with the recapitalization on February 11, 1997, the following
equity structure was established:
Up to 12 million shares of $.01 par value senior convertible preferred
stock with a $4.02 stated liquidation value per share were authorized, of which
3,728,693 shares were issued. Senior convertible preferred stockholders
("preferred stockholders") are entitled to dividends if any dividends are
declared or paid upon the common stock. Preferred stockholders are entitled to
70% of all votes in the aggregate. Senior convertible preferred stock may be
converted at any time at the election of the stockholder, on a basis of one
share of senior convertible preferred stock for one share of common stock. All
issued preferred shares were converted into an equal number of common shares
during 1997 and 12 million shares of preferred stock remain authorized.
Up to 25 million shares of $.01 par value common stock were authorized.
Common stockholders are entitled to one vote per share of stock held. Common
stockholders' rights are subordinate to those of preferred stockholders.
Warrants were issued for the purchase of 390,625 shares of $.01 par value
common stock for $0.0015 per share. The warrants were valued at $4.02 per
share, or $1.57 million, and expire on February 11, 2002. The warrants may be
exercised in whole or in part at any time prior to expiration. The Company has
reserved 390,625 shares of Common Stock for the possible exercise of these
warrants. None of the warrants have been exercised as of December 31, 1998.
In connection with the February 11, 1997 recapitalization, all of the
following series of stockholders' equity instruments were canceled and replaced
with the new equity structure (Note 13):
In connection with the 1994 acquisition by Zell/Chilmark, the previous
shareholders were granted junior preferred stock and approximately 10% of the
Company's outstanding common stock in return for their prior ownership
interests. Zell/ Chilmark received 480,000 shares of $.01 par value prior
preferred stock, with $50 stated liquidation value and 1 million shares
authorized, and approximately 90% of the Company's outstanding common stock for
an investment of $25 million. At December 31, 1996, there were 1 million shares
of prior preferred stock, $.01 par value, authorized and 480,000 shares issued
and outstanding. The Company's common stock consisted of Class A, Class B, and
Class C series, $.01 par value, common stock with 9 million, 2 million, and 25
million shares authorized, respectively. At December 31, 1996, there were
8,872,200, 0, and 1,127,800 shares of Class A, Class B, and Class C issued and
outstanding, respectively.
Prior preferred stockholders were entitled to cumulative dividends, which
accrued at $3 per share per year. At December 31, 1995, the Company had accrued
$2,040,000 of cumulative dividends. At December 31, 1996, the Company reduced
this accrual to $0 because the dividends were forgiven in connection with the
recapitalization.
Junior preferred stockholders were entitled to cumulative dividends, only
after the redemption of significantly all of the prior preferred stock, at a
rate of $.60 per share per year. At December 31, 1996, 600,000 shares of junior
preferred stock were authorized, issued and outstanding with $.01 par value and
$10 stated liquidation value. The junior preferred stock was canceled in
connection with the recapitalization.
Common stockholders rights were subordinate to those of preferred
stockholders. The Class A, Class B and Class C common stock was canceled in
connection with the recapitalization.
In conjunction with certain subordinated debt offerings during 1995 and
1996 (forgiven during the recapitalization (Note 13)), the Company issued
warrants to purchase 7.5 million shares of the Company's Class C common stock
at an initial exercise price of $.01 per share. These warrants were canceled in
connection with the recapitalization.
The following table presents each class of the Company's issued and
outstanding capital stock for the period subsequent to the February 1997
recapitalization:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------- ---------------------------
SHARES ISSUED PAR AMOUNT SHARES ISSUED PAR AMOUNT
--------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Common stock (1) ......... 8,602,395 $86,024 8,558,695 $85,587
</TABLE>
- -------
(1) Common stock, $.01 par value, 25,000,000 shares authorized.
The Company also has authorized 12 million shares of preferred stock, $.01
par value, none of which is issued.
F-14
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. STOCK OPTIONS
During 1997, the Company granted stock options to acquire 1,340,590 shares
of common stock to employees of the Company at prices not less than the fair
value at the date of grant. The options granted have seven to ten year terms
with some options vesting fifty percent immediately and twenty-five percent per
year over the two years subsequent to the grant date and others vesting twenty
percent per year over five years.
The following table summarizes common stock options granted at $4.02 and
$15.50 per share in connection with the Company's 1997 option plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
AVAILABLE OPTIONS PRICE
FOR GRANT OUTSTANDING EXERCISABLE PER SHARE
--------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Shares reserved for grant ............ 1,562,500 -- -- $ --
Granted ............................. (1,340,590) 1,340,590 -- 6.89
Became exercisable .................. -- -- 390,625 4.02
---------- --------- -------
Balance at December 31, 1997 ......... 221,910 1,340,590 390,625 6.89
Became exercisable .................. -- -- 293,703 6.11
Exercised ........................... -- (43,700) (43,700) 4.02
Canceled ............................ -- (91,224) -- 12.68
---------- --------- -------
Balance at December 31, 1998 ......... 221,910 1,205,666 640,628 $ 6.56
========== ========= =======
</TABLE>
The following summarizes information about the exercise prices of the
Company's stock options outstanding:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
EXERCISE PRICE 1998 1997
- ------------------------- ------------ ------------
<S> <C> <C>
$4.02 ................. 939,146 1,005,245
$15.50 ................ 266,520 335,345
------- ---------
1,205,666 1,340,590
========= =========
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS 123 (Note 2), and has been determined as if the Company had
accounted for its employee stock options using the fair value method provided
by that Statement. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
-------------
<S> <C>
Risk free interest rate .................. 6%
Expected dividend yield .................. 0%
Expected volatility ...................... 55.1%
Average expected life of options ......... 2-6 yrs.
</TABLE>
The contractual weighted-average life of the options at December 31, 1998
and 1997 was 7.66 and 7.75 years, respectively. The weighted-average grant date
fair value of options outstanding at December 31, 1998 and 1997 was
approximately $4.5 and $5.0 million, respectively. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the vesting period of the options.
F-15
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. STOCK OPTIONS -- CONTINUED
The Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Net income as reported ......... $ 14,981,000 $ 24,894,000
Pro forma net income .......... 14,164,000 23,701,000
Basic earnings per share:
As reported ................... $ 1.75 $ 4.11
Pro forma ..................... 1.65 3.91
Diluted earnings per share:
As reported ................... $ 1.54 $ 3.46
Pro forma ..................... 1.46 3.29
</TABLE>
7. EARNINGS PER SHARE OF COMMON STOCK
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 (1)
---------------- ----------------
<S> <C> <C>
Numerator:
Net income (2) ............................................................... $ 14,981,000 $ 24,894,000
Denominator:
Denominator for basic earnings per share -- weighted average shares .......... 8,574,972 6,059,051
Effect of dilutive securities (3):
Employee stock options ..................................................... 765,965 744,155
Warrants ................................................................... 390,590 390,588
------------ ------------
Dilutive common shares ....................................................... 1,156,555 1,134,743
Denominator for diluted earnings per share -- adjusted weighted average shares 9,731,527 7,193,794
------------ ------------
Basic earnings per share ...................................................... $ 1.75 $ 4.11
============ ============
Diluted earnings per share .................................................... $ 1.54 $ 3.46
============ ============
</TABLE>
- -------
(1) Options to purchase 335,345 shares of common stock at $15.50 per share were
outstanding during 1997 but were not included in the computation of
diluted earnings per share for the year ended December 31, 1997 because
the exercise price of the options was greater than the average market
price of the common shares and, therefore, the effect would be
antidilutive.
(2) Numerator for basic and diluted earnings per share.
(3) Shares calculated using the "Treasury Stock" Method under SFAS 128.
F-16
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. INCOME TAXES
The components of the Company's taxes on income are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Federal income taxes:
Current ................................ $2,391 $6,096
Deferred ............................... 6,008 --
------ ------
Total federal income taxes ............ $8,399 $6,096
------ ------
State income taxes:
Current ................................ $ 222 $ 210
Deferred ............................... 557 --
------ ------
Total state income taxes .............. $ 779 $ 210
------ ------
Total provision for income taxes ......... $9,178 $6,306
====== ======
</TABLE>
Differences between reported tax expense computed by applying the
statutory federal income tax rate to income (loss) before income taxes and
reported tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -----------------------
$ % $ % $ %
--------- --------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Computed tax expense ............................ $8,456 35.0 $5,331 35.0 $ (7,899) (34.0)
State taxes, net of federal benefit ............. 785 3.3 184 1.2 -- --
Permanent items and Other ....................... (63) (0.3) 64 .4 -- --
Valuation allowance for deferred tax assets ..... -- -- 727 4.8 7,899 34.0
------ ----- ------ ---- -------- ------
Reported tax expense ............................ $9,178 38.0 $6,306 41.4 $ -- --
====== ===== ====== ==== ======== ======
</TABLE>
Income taxes are calculated using the liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. Deferred income taxes arise from temporary
differences between the income tax basis and financial reporting basis of
assets and liabilities. The components of the Company's deferred taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets -- noncurrent
Operating loss carryforwards ........................ $ 14,417 $ 17,281
Accrued liabilities and other miscellaneous ......... 457 3,955
Valuation allowance ................................. (14,417) (21,236)
--------- ---------
Net deferred tax asset ............................... 457 --
Deferred tax liabilities -- noncurrent
Depreciation and amortization ....................... (7,022) --
--------- ---------
Net deferred taxes ................................... $ (6,565) $ --
========= =========
</TABLE>
As of December 31, 1998 and 1997, the Company had approximately $30.1
million and $51.0 million, respectively, of available net operating loss
carryforwards (NOLs) to offset future taxable income of the Company. The NOLs
expire by 2012 if not used. Under Section 382 of the Internal Revenue Code, as
amended, the Company's ability to utilize such loss carryforwards in any one
year, which were generated prior to a change in ownership may be limited or
eliminated as a result of the February 11, 1997 recapitalization.
The valuation allowance of $14.4 and $21.2 million at December 31, 1998
and 1997, respectively, was provided because, in the Company's assessment, it
is uncertain whether the net deferred tax assets will be realized due to the
recent ownership changes.
F-17
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. INCOME TAXES -- CONTINUED
Net operating loss carryforward tax benefits which originated prior to the
quasi-reorganization are credited to additional paid-in capital, when utilized,
in accordance with the provisions of Statement of Financial Accounting
Standards No. 109.
9. COMMITMENTS AND CONTINGENCIES
In the fourth quarter of 1998, the Company retired two F-100 aircraft at
the expiration of the related lease terms. The Company and the lessor disagree
as to the amount of certain life cycle costs required to maintain the aircraft
and as to the level of the Company's responsibility to pay for such costs. The
Company believes that it has met and exceeded its obligations. The lessor
believes that the Company has not met its obligations and that the Company owes
the lessor approximately $1.3 million in connection with the return of the
first F-100 aircraft and an unstated amount in connection with the return of
the second aircraft. The Company expects to negotiate with the lessor
concerning this dispute and further believes that, if necessary, it has
meritorious legal defenses to the lessor's claim. At this time, it is not
possible to predict the outcome of this dispute. The Company will be retiring
two other F-100 aircraft in the first half of 1999 and believes similar claims
may be asserted by the lessor with respect to each of those aircraft.
In August 1998, the Compliance and Enforcement Branch of the Drug
Abatement Division of the FAA conducted an inspection of the Company's
compliance with certain regulations related to its alcohol and drug testing
programs. In September 1998, the FAA notified the Company that it was
investigating alleged violations discovered during the August 1998 inspection.
The Company responded to these alleged violations in October 1998 and has
received no further correspondence from the FAA in this respect. The Company is
unable to determine whether the FAA's investigation will result in the finding
of violations of these regulations and, if so, whether the FAA will pursue an
assessment as a result of any such findings or what the amount of any such
assessment might be.
The Company has entered into a lease for new headquarters facilities
closer to the Raleigh-Durham airport. In conjunction with the lease, certain
contracts for the buildout and furnishing of the facility are expected to total
approximately $3 million, which will be amortized over periods of 3 to 7 years.
The move to the new facility is expected to take place in the second quarter of
1999.
The Company has firm orders for 12 additional newly manufactured CRJ-200ER
Canadair Regional Jet aircraft, all of which are scheduled to be delivered by
March 2000. Midway also has options to acquire up to 17 additional CRJs with
delivery dates for the first seven of these aircraft extending over a one year
period beginning in the first half of 2000 and with the delivery dates for the
remaining ten of these aircraft beginning in March 2002. For each aircraft that
is purchased (as opposed to leased), the Company anticipates an initial cash
outlay of approximately $4 million. Pursuant to an agreement with GE Aircraft
Engines, a division of General Electric International, Inc., the Company
intends to purchase two CF34-3B1 spare engines to support the operation of its
CRJ-200ER aircraft.
In September 1997, the Civil Aviation Security Division of the Federal
Aviation Administration ("FAA") conducted an investigation of the Company's
compliance with certain regulations requiring the Company to verify the
accuracy of background information provided by its employees who have access to
secure airport areas. The Company revised its background check procedures
during the course of the FAA's investigation and then obtained and verified the
necessary background information of those employees who had been identified by
the FAA as having insufficient background check documentation. This
investigation will likely result in the finding of violations of these
regulations. While the Company is unable to determine whether the FAA will
pursue an assessment as a result of the findings of this investigation, or what
the amount of any such assessment might be, an assessment could have a material
adverse effect on the Company's results of operations.
The Company has been named as a defendant in certain pending litigation.
The outcome of these matters cannot be predicted, but it is management's belief
that whatever the outcome, the results will not, either individually or in the
aggregate have a material adverse effect on the Company's financial position,
results of operations or cash flows.
In March 1995, Midway reached an agreement with Airbus for the acquisition
of four firm Airbus A320 and four option A319 or A320 aircraft with deliveries
beginning in 1998. Pursuant to the recapitalization, the delivery dates of
these aircraft have been moved to 2005 and later. The Company is required to
make deposits on the four firm aircraft in amounts to be
F-18
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. COMMITMENTS AND CONTINGENCIES -- CONTINUED
determined beginning in 2003. The Company is considering several alternatives
with respect to the A320s, including restructuring its agreement with Airbus or
selling its position.
The Company's pilots and fleet service (ramp) employees are represented by
labor unions. The pilots' representative, Air Line Pilots Association, was
elected in December 1997, and the ramp employees' representative, International
Association of Machinists & Aerospace Workers, AFL-CIO, was elected in June
1998. Prior to those times, none of the Company's employees were represented by
a union. Although the Company believes mutually acceptable agreements can be
reached with the unions representing such employees, it has only recently begun
negotiations and, therefore, the ultimate outcome of such negotiations is
unknown at this time. In a December 1998 representation election the
Association of Flight Attendants, AFL-CIO ("AFA") obtained the votes necessary
to represent Midway's flight attendants. On December 18, 1998 Midway filed a
motion with the National Mediation Board ("NMB") alleging that the AFA
interfered with the election. In February 1999 the NMB found that the AFA made
misrepresentations during the December 1998 election campaign but never-the-less
certified the AFA as the representative of Midway's flight attendants. No
determination has yet been made whether or not to seek judicial review of this
decision by the NMB. Although the Company believes mutually acceptable
agreements can be reached with the unions representing such employees, it has
only recently begun negotiations and, therefore, the ultimate outcome of such
negotiations is unknown.
10. BENEFIT PLANS
Effective October 1995, the Company established a savings plan (the
"Plan") pursuant to Section 401(k) of the Internal Revenue Code. All employees
were eligible for enrollment in the 401(k) Plan after six months of employment.
Effective April 1999, all employees who are not covered by a collective
bargaining agreement are eligible for enrollment in the 401(k) Plan after three
months of employment. The Company, at its discretion, may match up to 50% of
employee contributions up to a maximum of $1,000 in any given calendar year.
The Company made no contributions to the Plan for the years ended December 31,
1998, 1997 and 1996.
In January 1998, the Company announced its intention to distribute a
portion of its profits to employees. The Company has expensed $2.4 million for
such distributions for the year ended December 31, 1998.
11. RESTRUCTURING CHARGES
In December 1994, the Company reached a decision to relocate its main base
of operations from Chicago to Raleigh-Durham. The Company began operations at
Raleigh-Durham in March 1995. In conjunction with the decision to move, the
Company recorded a restructuring charge of $4.9 million for estimated exit
costs related to its Chicago Midway Airport headquarters. This liability was
settled for $1.2 million in the February 11, 1997 recapitalization. The
resulting extraordinary gain of $2.7 million is included in the extraordinary
gain reported for 1997.
12. TRANSACTIONS WITH RELATED PARTIES
In August of 1996, the then majority shareholder, Zell/Chilmark executed a
guaranty and pledge agreement in favor of a credit card intermediary (the
"Intermediary"). The execution of this guaranty and pledge agreement, and
Zell/Chilmark's deposit of $7 million with the Intermediary, allowed the
Intermediary to release $7 million of cash to Midway out of the credit card
holdback account maintained by the Intermediary in connection with its
processing of Midway's credit card sales. Midway executed a Subordinated Demand
Note to Zell/Chilmark in the event the Intermediary exercised its rights under
the guaranty and pledge agreement with respect to Zell/Chilmark's $7.0 million
cash collateral. Zell/Chilmark's guaranty and pledge agreement was terminated,
and Midway's note to Zell/Chilmark was canceled in connection with the
recapitalization on February 11, 1997 (Note 13). The Zell/Chilmark guaranty was
replaced by a letter of credit from the new majority owner. In February 1998,
the Company funded the credit card holdback and the letter of credit was
released.
Until the contract was canceled effective May 15, 1997, the Company
purchased certain reservation services from a related party. The expenses
incurred were approximately $850,000 and $2.1 million for the years ended
December 31, 1997 and 1996, respectively.
F-19
<PAGE>
MIDWAY AIRLINES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
12. TRANSACTIONS WITH RELATED PARTIES -- CONTINUED
The Company incurred legal expenses from a related party law firm totaling
approximately $362,000 and $445,000 for the years ended December 31, 1998 and
1997, respectively.
13. RECAPITALIZATION
On February 11, 1997, the Company was recapitalized. Through the
recapitalization, debt was either extinguished or restructured; all of the
existing stock was canceled and new stock was issued; new terms for aircraft
leases and rent reductions for facilities were implemented; and agreements
reflecting revised maintenance arrangements were negotiated. As a result of the
foregoing items and other related transactions, for the year ended December 31,
1997 the Company recorded an extraordinary gain of approximately $16.0 million
and recapitalization charges of approximately $750,000.
The following transactions were recorded as a result of the
recapitalization:
(a) All existing shares of capital stock were canceled. New shares of
capital stock were issued (a) to James H. Goodnight, Ph.D, for
consideration of $10.1 million in cash, (b) to John P. Sall for
consideration of $4.9 million in cash and (c) to Zell/Chilmark for
consideration of $7.0 million in cash. Additional shares of common stock
and a warrant to purchase common stock with an aggregate value of $3.1
million were issued to certain key vendors. Additionally, current assets
were reduced to settle various liabilities for amounts substantially less
than the carrying value at February 11, 1997.
(b) Agreements were negotiated to allow for approximately $3.4 million in
aircraft lease deposits to be offset against amounts owed to the holders of
those deposits. Equipment purchase deposits of $1.8 million were offset
against related current liabilities.
(c) Current debt, accrued lease expense, accrued prior restructuring
costs (Note 11) and related accrued interest totaling approximately $6.7
million were settled for amounts substantially less than the carrying value
at December 31, 1996. Additionally, $750,000 of expenses were incurred in
connection with the recapitalization.
(d) Long-term debt and related interest of approximately $10.9 million
were forgiven and current maturities of approximately $14.9 million were
restructured to long-term debt.
14. PRIOR PERIOD ADJUSTMENT
The accompanying financial statements have been restated in accordance
with Statement of Financial Accounting Standards No. 16 for revisions to
amounts recorded at December 31, 1995. The restatement adjusts 1995 accumulated
deficit, credit card receivables and advance ticket sales for revisions to the
previously recorded amounts. These revisions reduced credit card receivables
and advance ticket sales by $2,302,000 and $975,000, respectively.
This adjustment had no effect on the Company's previously reported results
of operations for 1996 and 1997.
F-20
<PAGE>
APPENDIX I
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<S> <C>
Adjusted Expected Distributions .......... 58
Administration Expenses .................. 78
Agent's Message .......................... 27
Aggregate LTV Collateral Amount .......... 59
Aircraft ................................. 9
AISI ..................................... 80
American ................................. 1
Applied Downgrade Drawing ................ 76
Applied Non-Extension Drawing ............ 76
Appraisals ............................... 19
Appraised Current Market Value ........... 59
Appraisers ............................... 80
Assumed Aggregate Aircraft Value ......... 80
Assumed Aircraft Value ................... 87
Assumed Amortization Schedule ............ 62
ATOP ..................................... 26
Available seat miles ("ASM") ............. 36
Average Life Date ........................ 86
Average stage length ..................... 36
Bankruptcy Code .......................... 59
Base Rate ................................ 75
Basic Rent ............................... 97
Break-even load factor ................... 36
Book-Entry Transfer Facility ............. 26
Certain Taxes and Fees ................... 78
Certificate Account ...................... 61
Certificateholders ....................... 11
Certificates ............................. 1
Class A Certificates ..................... 9
Class A Trust ............................ 9
Class B Certificates ..................... 9
Class B Trust ............................ 9
Class C Certificates ..................... 9
Class C Trust ............................ 9
Class D Certificates ..................... 9
Class D Trust ............................ 9
Class Exemptions ......................... 98
Code ..................................... 30
Commission ............................... ii
Company .................................. 1
Controlling Party ........................ 77
Cost per available seat mile ............. 36
CRAF Program ............................. 97
CRJ ...................................... 1
Current Distribution Date ................ 59
Definitive Certificates .................. 71
Delivery Period .......................... 80
Delivery Period Termination Date ......... 72
Deposit .................................. 71
Deposit Agreement ........................ 71
Deposit Make-Whole Premium ............... 72
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
Depositary ............................... 71
Depositor ................................ 28
Distribution Date ........................ 57
DOT ...................................... 16
Downgrade Drawing ........................ 74
DTC ...................................... 65
DTC Participants ......................... 65
Eligible Institution ..................... 26
Equipment Notes .......................... 82
ERISA .................................... 98
ERISA Plans .............................. 98
Escrow Agent ............................. 73
Escrow Agreement ......................... 73
Escrow Receipts .......................... 9
Event of Loss ............................ 96
Exchange Act ............................. ii
Exchange Agent ........................... 29
Expected Distributions ................... 59
Expiration Date .......................... 7
FAA ...................................... 16
Final Distributions ...................... 77
Final Drawing ............................ 76
Final Expected Distribution Date ......... 60
Final Legal Distribution Date ............ 60
Fokker ................................... 17
Global Certificate ....................... 70
H.15 (519) ............................... 86
Holder ................................... 23
Indenture Default ........................ 65
Indentures ............................... 10
Indirect participants .................... 70
Initial Purchasers ....................... 23
Intercreditor Agreement .................. 76
Interest Drawings ........................ 73
IRS ...................................... 30
Issuance Date ............................ 62
Lease .................................... 82
Lease Event of Default ................... 97
Leased Aircraft .......................... 57
Leased Aircraft Indenture ................ 10
Leased Aircraft Trustee .................. 10
LIBOR .................................... 75
Liquidity Event of Default ............... 76
Liquidity Expenses ....................... 78
Liquidity Facility ....................... 73
Liquidity Obligations .................... 59
Liquidity Provider ....................... 73
Load factor .............................. 36
Loan Trustees ............................ 10
LTVs ..................................... 80
LTV Appraisal ............................ 59
LTV Collateral Amount .................... 59
LTV Ratio ................................ 59
Make-Whole Premium ....................... 85
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
Mandatory Document Terms ................ 64
Mandatory Economic Terms ................ 63
Maximum Amount .......................... 72
MBA ..................................... 80
Midway .................................. 1
Minimum Sale Price ...................... 77
Moody's ................................. 21
New Certificates ........................ 1
New Trustee ............................. 57
Non-Extension Drawing ................... 75
Note Purchase Agreement ................. 10
Old Certificates ........................ 1
Original Trustee ........................ 57
Original Trusts ......................... 57
Owned Aircraft .......................... 57
Owned Aircraft Indenture ................ 10
Owned Aircraft Trustee .................. 10
Owner Participant ....................... 83
Owner Trustee ........................... 56
Participants ............................ 70
Pass Through Trust Agreements ........... 56
Paying Agent ............................ 70
Paying Agent Account .................... 61
Performing Equipment Notes .............. 59
Performing Note Deficiency .............. 60
Permitted Lessee ........................ 98
Pool Balance ............................ 61
Pool Factor ............................. 62
PTC Event of Default .................... 67
PTCE .................................... 98
Rating Agencies ......................... 21
RDU ..................................... 1
Recapitalization ........................ 2
Receiptholder ........................... 73
Regular Distribution Dates .............. 60
Remaining Weighted Average Life ......... 86
Replacement Facility .................... 74
Required Amount ......................... 78
Revenue passenger miles ................. 36
Rolls-Royce ............................. 2
Scheduled Payments ...................... 60
Section 1110 ............................ 4
Section 1110 Period ..................... 59
Securities Act .......................... ii
Series A Equipment Notes ................ 82
Series B Equipment Notes ................ 82
Series C Equipment Notes ................ 82
Series D Equipment Notes ................ 82
SH&E .................................... 80
Special Distribution Date ............... 61
Special Payment ......................... 61
Special Payments Account ................ 61
Standard & Poor's ....................... 21
Stated Interest Rates ................... 73
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C>
Sublessee ...................... 97
Subordination Agent ............ 69
Successor Trust ................ 57
Supplemental Rent .............. 98
Threshold Rating ............... 74
Transfer Date .................. 57
Transportation Code ............ 67
Treasury Yield ................. 85
Triggering Event ............... 60
Trust Indenture Act ............ 56
Trust Indenture Estate ......... 84
Trust Property ................. 9
Trustee ........................ 9
Trusts ......................... 9
Underwriter Exemption .......... 99
Yield .......................... 36
</TABLE>
A-4
<PAGE>
APPENDIX II
APPRAISAL REPORTS
(AIRCRAFT
INFORMATION
SERVICES, INC. logo)
26 June 1998
Mr. Steven Westberg
SVP and CFO
Midway Airlines
300 West Morgan Street, Suite 1200
Durham, NC 27701
Subject: AISI Sight Unseen Future Delivery Base Value Appraisal
Eight New 1998 and 1999 Canadair RJ-200ER Aircraft
Reference: (a) AISI File No. A8S043BCR.
(b) Facsimile Letter, Paone, Morgan Stanley to AISI, 18 June 1997
Dear Mr. Westberg:
As requested in reference (b) letter, Aircraft Information Services, Inc. (AISI)
is pleased to offer Midway Airlines our opinion of the sight unseen base value
of new Canadair RJ-200ER aircraft with maximum takeoff gross weight of 51,000
pounds, equipped with GE CF34-3B1 engines in a 50 passenger configuration with
dual flight management, communication and navigation systems, typically equipped
for short to medium range domestic overland commercial operations, to be
delivered in 1998 and 1999.
1. METHODOLOGY AND DEFINITIONS
The historical standard term of reference for commercial aircraft value has been
'half-life fair market value' of an 'average' aircraft. However, 'fair market
value' could mean a fair value in the given market or a value in a hypothetical
'fair' or balanced market, and the two definitions are not equivalent. Recently,
the term 'base value' has been created to describe the theoretical balanced
market condition and to avoid the potentially misleading term 'fair market
value' which has now become synonymous with the term 'current market value' or a
'fair' value in the actual current market. AISI value definitions are consistent
with those of the International Society of Transport Aircraft Trading (ISTAT) of
01 January 1994; AISI is a member of that organization and employs an ISTAT
Certified and Senior Certified Aircraft Appraiser.
HEADQUARTERS, 26072 MERIT CIRCLE, SUITE 123, LAGUNA HILLS, CA 92653
TEL:714-582-8888 FAX:714-582-8887 E-MAIL:[email protected]
<PAGE>
(logo)
26 June 1998
AISI File: A8S043BCR
Page - 2 -
AISI defines a 'base value' as that of a transaction between equally willing and
informed buyer and seller, neither under compulsion to buy or sell, for a single
unit cash transaction with no hidden value or liability, and with supply and
demand of the sale item roughly in balance. Base values are typically given for
aircraft in 'new' condition, 'average half-life' condition, or in a specifically
described condition unique to a single aircraft at a specific time. An 'average'
aircraft is an operable airworthy aircraft in average physical condition and
with average accumulated flight hours and cycles, with clear title and standard
unrestricted certificate of airworthiness, and registered in an authority which
does not represent a penalty to aircraft value or liquidity, with no damage
history and with inventory configuration and level of modification which is
normal for its intended use and age. AISI assumes average condition unless
otherwise specified in this report. 'Half-life' condition assumes that every
component or maintenance service which has a prescribed interval that determines
its service life, overhaul interval or internal between maintenance services, is
at a condition which is one-half of the total interval. It should be noted that
AISI and ISTAT value definitions apply to a transaction involving a single
aircraft, and that transactions involving more than one aircraft are often
executed at considerable and highly variable discounts to a single aircraft
price, for a variety of reasons relating to an individual buyer or seller.
AISI defines a 'current market value' or 'fair market value' as that which
reflects the real market conditions, whether at, above or below the base value
conditions. Assumption of a single unit sale and definitions of aircraft
condition, buyer/seller qualifications and type of transaction remain unchanged
from that of base value. Current market value takes into consideration the
status of the economy in which the aircraft is used, the status of supply and
demand for the particular aircraft type, the value of recent transactions and
the opinions of informed buyers and sellers. Current market value assumes that
there is no short term time constraint to buy or sell.
AISI encourages the use of base values to consider historical trends, to
establish a consistent baseline for long term value comparisons and future value
considerations, or to consider how actual market values vary from theoretical
base values. Base values are less volatile than current market values and tend
to diminish regularly with time. Base values are normally inappropriate to
determine near term values. AISI encourages the use of current market values to
consider the probable near term value of an aircraft.
<PAGE>
(logo)
26 June 1998
AISI File No. A8S043BCR
Page - 3 -
2. BASE VALUE
The AISI new Base Values are presented below subject to the assumptions,
definitions and disclaimers herein.
NEW CANADAIR RJ-200ER, DOMESTIC COMMERCIAL 50 PASSENGER AIRCRAFT
- -------------------------------------------------------------------------------
Delivery Date Number of Aircraft New Base Value Current US Dollars
- -------------------------------------------------------------------------------
Sep 1998 2 $21,100,000
- -------------------------------------------------------------------------------
Nov 1998 2 $21,200,000
- -------------------------------------------------------------------------------
Dec 1998 1 $21,250,000
- -------------------------------------------------------------------------------
Jan 1999 1 $21,300,000
- -------------------------------------------------------------------------------
Apr 1999 1 $21,450,000
- -------------------------------------------------------------------------------
Jul 1999 1 $21,600,000
- -------------------------------------------------------------------------------
Unless ortherwise agreed by Aircraft Information Services, Inc. (AISI) in
writing, this report shall be for the sole use of the client/addressee. This
report is offered as a fair and unbiased assessment of the subject aircraft or
equipment. AISI has no past, present, or anticipated future interest in the
subject aircraft or equipment. The conclusions and opinions expressed in this
report are based on published information, information provided by others,
reasonable interpretations and calculations thereof and are given in good faith.
Such conclusions and opinions are judgments that reflect conditions and values
which are current at the time of this report. The values and conditions reported
upon are subject to any subsequent change. AISI shall not be liable to any party
for damages arising out of reliance or alleged reliance on this report, or for
any parties action or failure to act as a result of reliance or alleged reliance
on this report.
Sincerely,
AIRCRAFT INFORMATION SERVICES, INC.
/s/ John D. McNicol
- ---------------------
John D. McNicol
VICE PRESIDENT
APPRAISALS & FORECASTS
<PAGE>
MORTEN BEYER & AGNEW
- -------------------------------------------------------------------------------
AVIATION CONSULTING FIRM
APPRAISAL OF EIGHT CRJ-200ER
AIRCRAFT
JUNE 26, 1998
PREPARED FOR:
MIDWAY AIRLINES
WASHINGTON, D.C. LONDON
8180 GREENSBORO DRIVE LAHINCH 62, LASHMERE
SUITE 1000 COPTHORNE
MCLEAN, VIRGINIA 22102 WEST SUSSEX
PHONE + 703 847 6598 PHONE + 44 1342 716248
FAX + 703 734 1474 FAX + 44 1342 718967
<PAGE>
- --------------------------------------------------------------------------------
I. INTRODUCTION AND EXECUTIVE SUMMARY
- --------------------------------------------------------------------------------
Morten Beyer and Agnew, Inc. (MBA), has been retained by Midway Airlines to
determine the Current Base Value (CBV) of 8 Canadair RJ-200 aircraft in their
present configuration as passenger aircraft. The aircraft are further
identified in Section II of this report.
In performing this valuation we did not inspect the aircraft or their historical
maintenance documentation, and we relied solely on information provided to us by
Morgan Stanley. Based on the information set forth further in this report, it is
our opinion that the CBV of the total value of aircraft in this portfolio is
$157,910,000 with their respective individual values noted in Section IV.
MBA uses the definition of certain terms, such as CMV and Base Value (BV), as
promulgated by the International Society of Transport Aircraft Trading (ISTAT),
a non-profit association of management personnel from banks, leasing companies,
airlines, manufacturers, appraisers, brokers, and others who have a vested
interest in the commercial aviation industry.
ISTAT defines CMV as the appraiser's opinion of the most likely trading price
that may be generated for an aircraft under market conditions that are perceived
to exist at the time in question. Market Value (MV) 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.
The ISTAT definition of Base Value (BV) has, essentially, the same elements of
MV except that the market circumstances are assumed to be in a reasonable state
of equilibrium. Thus, BV pertains to an idealized aircraft and market
combination, but will not necessarily reflect the actual CMV of the aircraft in
question. BV is founded in the historical trend of values and is generally used
to analyze historical values or to project future values.
1
MBA
<PAGE>
- --------------------------------------------------------------------------------
II. AIRCRAFT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CRJ-200ER DATE OF MFR. ENGINE TYPE
- --------------------------------------------------------------------------------
1 9/98 CF34-3B1
- --------------------------------------------------------------------------------
2 9/98
- --------------------------------------------------------------------------------
3 11/98
- --------------------------------------------------------------------------------
4 11/98
- --------------------------------------------------------------------------------
5 12/98
- --------------------------------------------------------------------------------
6 1/99
- --------------------------------------------------------------------------------
7 4/99
- --------------------------------------------------------------------------------
8 7/99
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
III. CURRENT MARKET CONDITIONS
- --------------------------------------------------------------------------------
The RJ is an outgrowth of the CL-601 Challenger biz-jet design, which has been
grown to 50 seats and reengined to make the first small sized regional jetliner
(discounting the failed VFW-614 design of 20 years ago). The RJ directly
challenges the primacy of the 50-70 seat turboprops in the longer haul feed
markets into major hubs and primary cities as well. The RJ has been one of the
unqualified success stories of jet aircraft design in decades. It has a
significant lead over its rival Brazilian counterpart and its operators have
reported record improvement in traffic and profits with its operations.
Lead-orderer COMAIR plans a 100% RJ-100 fleet as soon as sufficient units can be
delivered. It is MBA's opinion that the RJ will be economically competitive on
flights of 200 miles and over, and will enjoy a very significant competitive
advantage over turboprops, particularly in business markets.
Results at COMAIR and Sky West support this hypothesis, as load factors have
soared and new markets penetrated with surprising success over the last 3 years.
MBA 2
<PAGE>
The RJ makes it technically possible to bypass the hubs of the major carriers
while serving thin routes. The added bonus is the range; the aircraft can reach
1,000 miles, which no doubt will be extended as more powerful engines are
developed.
Canadair has launched the RJ-700, a 70 seat derivative of its highly successful
RJ-100/200 50-seater. The 70 seat market is a much more bloody arena, with
competition from the ATR-72, DHC-8-400 (turboprops) and the AI (R) 70/80,
F.28/.70/.100 and the Boeing/Douglas MD-95 (now the B-717). The basic economic
opportunity offered by the RJ-100 and the Embraer 145 exists in the 50 seat
market ie: major hub bypass. However, the major airlines are closer to being
able to offer their own hub bypass options. Delta, United and now USAirways have
discount operations which bypass their own hubs. We therefore are less
enthusiastic about the 70-seat 'RJs'. Used 737s, DC-9s, and F.100s can offer far
lower fares and greater comfort in potential 70-seat markets.
ECONOMICS
The Canadair RJ is a relatively expensive aircraft operated under the standard
assumptions of the MBA Model. Thus, it must be confined to smaller, thinner
markets serving secondary cities where loads are smaller but yields are high. In
view of its potential for bypassing hubs, it should attract those passengers to
whom time is important, and who are willing to pay to avoid hub-hassle.
MBA 3
<PAGE>
- --------------------------------------------------------------------------------
IV. VALUATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CRJ-200ER DATE OF MFR. CURRENT BASE VALUE
$(000s)
- --------------------------------------------------------------------------------
1 9/98 19.60
- --------------------------------------------------------------------------------
2 9/98 19.60
- --------------------------------------------------------------------------------
3 11/98 19.68
- --------------------------------------------------------------------------------
4 11/98 19.68
- --------------------------------------------------------------------------------
5 12/98 19.72
- --------------------------------------------------------------------------------
6 1/99 19.76
- --------------------------------------------------------------------------------
7 4/99 19.86
- --------------------------------------------------------------------------------
8 7/99 20.01
- --------------------------------------------------------------------------------
Total $157,910,000
- --------------------------------------------------------------------------------
In developing the CBV of these aircraft, MBA did not inspect the aircraft or its
historical maintenance documentation. Therefore, we used certain assumptions
that are generally accepted industry practice to calculate the value of an
aircraft when more detailed information is not available. The principal
assumptions are as follows (for each aircraft):
1. The aircraft is in new condition.
2. The overhaul status of the airframe, engines, landing gear and other
major components are of new delivery.
3. The historical maintenance documentation will be maintained to
acceptable international standards.
4. The specifications of the aircraft are those most common for an
aircraft of its type and vintage.
5. The aircraft will be in a standard airline configuration.
6. The aircraft is current as to all Airworthiness Directives and
Service Bulletins.
7. Its modification status will be comparable to that most common for
an aircraft of its type and vintage.
8. Its utilization will be comparable to industry averages.
9. No accounting was made for lease obligations or terms of ownership.
MBA 4
<PAGE>
- --------------------------------------------------------------------------------
V. COVENANTS
- --------------------------------------------------------------------------------
This report has been prepared for the exclusive use of Midway Airlines/Morgan
Stanley and shall not be provided to other parties by MBA without the express
consent of Midway Airlines/Morgan Stanley.
MBA certifies that this report has been independently prepared and that it fully
and accurately reflects MBA's opinion as to the Current Base Value. MBA further
certifies that it does not have, and does not expect to have, any financial or
other interest in the subject or similar aircraft.
This report represents the opinion of MBA as to the Current Base Value of the
subject aircraft and is intended to be advisory only in nature. Therefore, MBA
assumes no responsibility or legal liability for any actions taken or not taken
by Midway Airlines/Morgan Stanley or any other party with regard to the subject
aircraft. By accepting this report, all parties agree that MBA shall bear no
such responsibility or legal liability.
PREPARED BY:
/s/ Bryson P. Monteleone
- -------------------------
Bryson P. Monteleone
Manager of Operations
REVIEWED BY:
/s/ Morten S. Beyer
- ------------------------
Morten S. Beyer
Chairman and CEO
ISTAT Certified Senior Appraiser
MBA 5
<PAGE>
Simat, Helliesen & Eichner, Inc. Tel: +1-212-682-8455
90 Park Avenue Fax: +1-212-986-1825
New York, New York 10016 Email: [email protected]
United States of America
(SH&E logo)
June 29, 1998
Mr. Steven Westberg
Senior Vice President & Chief Financial Officer
Midway Airlines
300 West Morgan Street, Suite 1200
Durham, NC 27701
RE: VALUE OPINION OF EIGHT CANADAIR RJ-200ER AIRCRAFT
Dear Mr. Westberg:
Simat, Helliesen & Eichner, Inc., ("SH&E") was retained by Midway Airlines (the
"Client") to determine the Base Value ("BV") for eight Canadair RJ-200ER
aircraft (the "Subject Aircraft"). The Subject Aircraft specifications can be
found in Appendix 1.
SH&E has determined the following values for the Subject Aircraft:
Subject Aircraft Base Values ($Mil)
AIRCRAFT EXPECTED DELIVERY BASE
TYPE DATE(1) VALUE
CRJ-200ER September 1998 $19.7
CRJ-200ER September 1998 $19.7
CRJ-200ER November 1998 $19.8
CRJ-200ER November 1998 $19.8
CRJ-200ER December 1998 $19.9
CRJ-200ER January 1999 $19.9
CRJ-200ER April 1999 $20.1
CRJ-200ER June 1999 $20.2
SH&E VALUATION METHODOLOGY
Since SH&E was formed in 1963, the firm has appraised virtually every major
commercial jet and turboprop aircraft models and has also appraised many general
aviation and corporate aircraft models. SH&E's appraisals are performed
according to the International Society of Transport Aircraft Trading (ISTAT)
principles of appraisal practice and code of ethics. SH&E's staff includes two
appraisers certified by ISTAT.
- ------------------------
1 The Subject Aircraft have not yet been manufactured or delivered to Midway
Airlines.
NEW YORK BOSTON LONDON AMSTERDAM BRUSSELS
<PAGE>
(SH&E logo)
Mr. Steven Westberg
June 29, 1998
Page 2
The SH&E valuation approach starts by determining a half-life value. The term
"half-life" represents an aircraft whose major components (e.g. airframe,
engines, landing gear and APU) have used 50 percent of the time between
scheduled or expected overhauls. This initial appraisal can then be adjusted,
positively or negatively, for each individual unit to reflect the aircraft's
maintenance status relative to the next overhaul. In most cases, the Base Value
of an aircraft assumes its physical condition is average for an aircraft of its
type and age and its maintenance time status is at half-life or benefiting from
an above-average maintenance status if it is new or nearly new, as the case may
be. SH&E half-life values are determined on a semi-annual basis by reviewing
recent past sales, aircraft availability trends, technological aspects,
environmental constraints and maintenance requirements.
In the case of new aircraft, the above half-life values are automatically
adjusted upwards to reflect the fact that the aircraft has the full span of
maintenance overhaul intervals available. Consequently, SH&E's initial
depreciation of new aircraft is considerably greater than for a used aircraft,
thereby accounting for both the change in its maintenance status and its
intrinsic depreciation.
BASE VALUE DEFINITION
The Base Value (BV) is the appraiser's opinion of the price at which an aircraft
would change hands between a willing buyer and a willing seller, neither being
under compulsion to buy or sell, and both having knowledge of all relevant
facts. An aircraft's BV is founded in the historical trend of values and in the
protection of value trends, and presumes and arm's-length, cash transaction.
Since BV pertains to a somewhat idealized aircraft and market combination, it
may not necessarily reflect the actual value of the aircraft in question, but is
a nominal starting value to which adjustments may be applied to determine an
actual value.
The BV of each aircraft is derived from SH&E's aircraft valuation models. The
SH&E BV models provide trend lines derived from known transactions, econometric
factors affecting aircraft values and aircraft economic life estimates. Because
it is related to long-term market trends, the BV definition is normally applied
to analyses of historical values and projections of residual values.
DESCRIPTION OF THE AIRCRAFT
The Canadair Regional Jet (RJ) is a twin turbine regional aircraft that
Bombardier developed from the fuselage of the Challenger 601 corporate aircraft.
The Canadair RJ-100 series was formally launched in March 1989 and was first
delivered to Lufthansa CityLine in October 1992. Bombardier also developed an
extended range variant, the RJ-100ER, which was first delivered in March 1993.
The RJ-100 series is powered by General Electric CF34-3A1 engines and carries a
maximum of 50 passengers. The RJ-100 has a maximum takeoff weight (MTOW) of
47,750
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Mr. Steven Westberg
June 29, 1998
Page 3
pounds and range of 980 nautical miles (nm). The RJ-100ER has a MTOW of 51,000
pounds and a range of 1,620 nm.
Production of the RJ-200 series was announced in 1995 and the first aircraft of
the series was delivered to Tyrolean Airways in January 1996. The RJ-200
fuselage is identical to the earlier -100 series, although with more powerful
CF34-3B1 engines that improve performance. Subsequent variations of the RJ-200
series are the -200ER (Extended Range) and the -200LR (Long Range). The RJ-200
series specifications are similar to the RJ-100 series with the exception of the
RJ-200LR, which has a MTOW of 53,000 pounds and a range of 2,005 nm.
As of April 1998 a total of 239 Canadair Regional Jets were operated worldwide
ASSUMPTIONS
SH&E used information supplied by Midway Airlines, Morgan Stanley and
Bombardier, together with in-house data accumulated through other recent studies
of aircraft transactions. Specific assumptions included the following:
o SH&E assumed that the Subject Aircraft wil meet all of the specifications
and performance standards for Canadair RJ-200ER aircraft.
o SH&E assumed that all normally required maintenance will be performed,
including compliance with all Airworthiness Directives and Service
Bulletins.
o SH&E assumed that all applicable manufacturer's warranties will be fully
transferable to a potential purchaser.
o SH&E assumed that a minimum of 60 Canadair RJ-200ER aircraft will be
produced to maintain aircraft values. As of April 1998, Bombardier had
delivered 15 of the Subject Aircraft and has 32 orders and 47 options
outstanding.
o SH&E assumed that the Subject Aircraft will be certified for operations
under the U.S. Federal Aviation Administration, a successor agency or a
comparable authority.
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Mr. Steven Westberg
June 29, 1998
Page 4
LIMITATIONS
SH&E's opinions are based upon historical relationships and expectations that
it believes are reasonable. Some of the underlying assumptions, including those
described above are detailed explicitly or implicitly elsewhere in this report,
and may not materialize because of unanticipated events and circumstances.
SH&E's opinion could, and would, vary materially, should any of the above
assumptions prove to be inaccurate.
The opinions expressed herein are not given as an inducement or endorsement for
any financial transaction. They are prepared for the exclusive use of the
addressee and the addressee may not provide this report to other parties,
including third parties, without SH&E's written consent.
SH&E accepts no responsibility for damages, if any, that may result from
decisions made or actions taken by third parties that may be based upon this
report. In accepting this report the Client agrees to indemnify and hold SH&E
harmless against all losses, claims and costs arising as a result of this report
except when attributable to SH&E's gross negligence or willful misconduct.
This report reflects SH&E's expert opinion and best judgment based upon the
information available to it at the time of its preparation. SH&E does not have,
and does not expect to have, any financial interest in the appraised property.
Yours Sincerely,
/s/ Clive G. Medland
- ---------------------
Clive G. Medland
Vice President
ISTAT Senior Appraiser
cc: Bruce Paone, Morgan Stanley
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[SH&E] Logo
APPENDIX 1
SUBJECT AIRCRAFT SPECIFICATIONS
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AIRCRAFT TYPE CRJ-200ER
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Passenger Capacity 50
Maximum Range (nm) 1,645
Normal Cruise Speed (kts) 424
Engine Type CF34-3B1
Fuel Burn per Hour (lbs) 2,180
Length Overall 87ft 10in
Wing Span 69ft 7in
Maximum Cabin Height 6ft 2in
Centerline Cabin Width 8ft 5in
Maximum Takeoff Gross Weight (lbs) 51,000
Maximum Landing Weight (lbs) 47,000
Operating Empty Weight (lbs) 30,292
Maximum Zero Fuel Weight (lbs) 44,000
Maximum Payload (lbs) 13,708
Operating Ceiling (ft) 41,000
FAR Part 36 Noise Compliance Stage III
Takeoff Noise Level (EPNdB) 78.6
Approach Noise Level (EPNdB) 82.2
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