<PAGE>
As filed with the Securities and Exchange Commission on October 15, 1997
Registration No. 333-33837
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
VALUJET, INC.
(Exact name of registrant as specified in its charter)
--------------
<TABLE>
<S> <C> <C>
Nevada 4512 58-2189551
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1800 PHOENIX BOULEVARD
SUITE 126
ATLANTA, GEORGIA 30349
(770) 907-2580
(Address, including zip code, and telephone number
including area code, of registrant's principal executive offices)
Copies to:
<TABLE>
<S> <C> <C>
Michael D. Acks Robert B. Goldberg, Esq. Christopher C. Cleveland, Esq.
1800 Phoenix Boulevard, Ellis, Funk, Goldberg, Labovitz & Dokson, P.C. Briggs and Morgan
Suite 126 3490 Piedmont Road, Suite 400 2400 IDS Center
Atlanta, Georgia 30349 Atlanta, Georgia 30305 Minneapolis, Minnesota 55402
(770) 907-2580 (404) 233-2800 (612) 334-8489
(Name, address,
including zip code, and
telephone number
including area code, of
agent for service)
</TABLE>
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
possible after this Registration Statement becomes effective and all other
conditions to the merger (the "Merger") of Airways Corporation with and into
the Registrant pursuant to the Plan of Reorganization and Agreement of Merger
described in the enclosed Joint Proxy Statement/Prospectus have been satisfied
or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value per share........ 9,629,937(1) $5.72 (2) $55,071,202 (2) $16,688.24 (3)
- -------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) The number of shares of the Registrant's Common Stock being registered
hereunder is equal to the number of such shares required to consummate the
Merger pursuant to the provisions of the Plan of Reorganization and
Agreement of Merger based on the number of shares of Common Stock of
Airways Corporation outstanding as of the date of filing of this
Registration Statement and the number of options to purchase Airways
Common Stock expected to be vested as of the date of the Merger.
(2) Pursuant to Rule 457(f)(l), the registration fee is based on the average
of the high and low prices reported on The NASDAQ National Market for the
common stock of the Registrant on August 13, 1997 ($5.72).
(3)Previously paid.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
VALUJET, INC.
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF
REGULATION S-K, SHOWING THE LOCATION
IN THE PROSPECTUS OF THE ITEMS ON FORM S-4
<TABLE>
<CAPTION>
NAME AND CAPTION IN FORM
S-4 CAPTION OR LOCATIONS IN PROSPECTUS
------------------------ ----------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
Item 1 Forepart of the Outside Front Cover Page of Prospectus
Registration Statement
and Outside Front Cover
Page of Prospectus
Item 2 Inside Front and Outside Inside Front Cover Page; Available Information;
Back Cover Pages of Outside Back Cover Page
Prospectus
Item 3 Risk Factors, Ratios of Summary; Risk Factors
Earnings to Fixed
Charges and Other
Information
Item 4 Terms of the Transaction Summary; The Merger
Item 5 Pro Forma Financial Pro Forma Condensed Combined Financial
Information Information
Item 6 Material Contacts with The Merger
the Company Being
Acquired
Item 7 Additional Information Not Applicable
Required for Reoffering
by Persons and Parties
Deemed to Be
Underwriters
Item 8 Interests of Named Experts; Legal Matters
Experts and Counsel
Item 9 Disclosure of Commission ValuJet Common Stock
Position on
Indemnification for
Securities Act
Liabilities
B. INFORMATION ABOUT THE REGISTRANT
Item 10 Information with Respect Business of ValuJet; ValuJet Management's
to S-3 Registrants Discussion and Analysis of Financial Condition
and Results of Operations; ValuJet Financial
Statements; Incorporation of Certain
Information by Reference
Item 11 Incorporation of Certain Incorporation of Certain Information by Reference
Information by Reference
Item 12 Information with Respect Not Applicable
to S-2 or S-3
Registrants
Item 13 Incorporation of Certain Not Applicable
Information by Reference
Item 14 Information with Respect Not Applicable
to Registrants Other
than S-2 or S-3
Registrants
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
Item 15 Information with Respect Not Applicable
to S-3 Companies
Item 16 Information with Respect Not Applicable
to S-2 or S-3 Companies
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME AND CAPTION IN FORM
S-4 CAPTION OR LOCATIONS IN PROSPECTUS
------------------------ ----------------------------------
<C> <S> <C>
Item 17 Information with Respect Business of Airways; Airways Management's
to Companies Other than Discussion and Analysis of Financial
S-2 or S-3 Companies Condition and Results of Operations;
Airways Changes in and Disagreements
with Accountants; Comparative Market Prices
and Dividends; Principal Stockholders;
Executive Compensation; Airways Financial
Statements
D. VOTING AND MANAGEMENT INFORMATION
Item 18 Information if Proxies, The ValuJet Meeting; The Airways Meeting;
Consents or Summary; Merger
Authorizations are to be
Solicited
Item 19 Information if Proxies, Not Applicable
Consents or
Authorizations are not
to be Solicited or in an
Exchange Offer
</TABLE>
<PAGE>
October 17, 1997
To our stockholders:
Please carefully read the enclosed Joint Proxy Statement and Prospectus
which contains information about a proposal to merge ValuJet, Inc. with
AirWays Corporation. The vote on the proposed merger will take place at the
special meeting of stockholders which will be held on November 17, 1997 in
Atlanta, Georgia. PLEASE MAIL IN YOUR PROXY SO THAT WE WILL HAVE YOUR VOTE ON
THIS IMPORTANT MATTER.
If approved, AirWays Corporation will be merged into ValuJet, Inc. ValuJet,
Inc. will be the surviving corporation and will change its name to AirTran
Holdings, Inc. The airline operating subsidiaries will become wholly owned
subsidiaries of the new merged company. At the stockholder meeting, you will
be asked to consider and vote on (i) the approval of the merger, (ii) the name
change, and (iii) an amendment of ValuJet, Inc.'s Bylaws.
After reading the Joint Proxy Statement and Prospectus, please complete and
return the enclosed proxy card promptly in the accompanying envelope. No
postage will be required if the proxy card is mailed in the United States.
Even if you return the proxy card, you are welcome to attend the stockholders'
meeting.
The merger with AirWays will allow us to better compete against larger
airlines by providing affordable, convenient, safe, reliable air
transportation to business and leisure travelers. The merger and new name will
allow us to offer a number of product enhancements, including a new business
class cabin, assigned seating and access to our affordable fares through
travel agents.
We strongly believe that it is in the best interest of ValuJet, Inc. and our
stockholders to approve this merger. We therefore urge you to vote FOR the
merger so that we may pursue our commitment to providing an enjoyable travel
experience at an affordable price.
Sincerely,
LOGO
D. Joseph Corr
<PAGE>
[LOGO OF AIRWAYS CORPORATION APPEARS HERE]
October 17, 1997
To our stockholders:
The accompanying Joint Proxy Statement and Prospectus contains important
information about a proposal to merge Airways Corporation into ValuJet, Inc.
Since you are being asked to vote on this proposal at a special meeting of
stockholders on November 17, 1997 at 10:00 a.m. at AirTran Airways'
Maintenance Hangar Base at 4170 Wiley Drive, Orlando, Florida 32827, I urge
you to review this material carefully. I also urge you to attend this special
meeting or be represented at it by proxy. IT IS VERY IMPORTANT THAT YOU VOTE.
PLEASE MAIL IN YOUR PROXY IF YOU CANNOT ATTEND.
If approved, the merger proposal will result in the merger of Airways
Corporation into ValuJet, Inc. ValuJet, Inc. would then change its name to
AirTran Holdings, Inc. and would be the surviving corporation in the merger.
AirTran Airways, Inc., the operating subsidiary of Airways Corporation, would
become a wholly owned subsidiary of AirTran Holdings, Inc.
On the effective date of the merger, each share of Airways Corporation
common stock will be converted into one share of ValuJet, Inc. common stock.
Airways stockholders should not send in their stock certificates until they
receive a letter of transmittal and instructions following approval of the
merger.
We strongly believe it is in the best interests of our stockholders to
approve the merger. For this reason, the Board unanimously recommends that you
vote FOR the merger.
After reading the Joint Proxy Statement and Prospectus and considering the
proposal carefully, please complete and return the enclosed proxy card
promptly in the accompanying envelope. No postage is required if mailed in the
United States. You are also welcome to attend the special meeting and vote in
person even if you have returned your proxy card.
Over the last three years, our business strategy of bringing midsize cities
affordable jet service has been a success. I am very proud of the
accomplishments of the dedicated employees of AirTran Airways. We have built
an outstanding carrier that is recognized for its commitment to safety,
service and affordable fares. As a result of this merger you will have the
opportunity to participate in the growth of a stronger airline built on the
strengths of the two airlines. This is an opportunity that is truly exciting
and I feel will be beneficial to you, our stockholders, to our employees and
our customers.
Thank you for your continued support and best wishes for a great year.
Best Regards,
/s/ Robert D. Swenson
- --------------------------
Robert D. Swenson
Chairman, President and Chief Executive Officer
<PAGE>
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
OF VALUJET, INC.
To the Stockholders of ValuJet, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of ValuJet,
Inc. (the "Company") will be held at the law offices of Ellis, Funk, Goldberg,
Labovitz & Dokson, P.C., 3490 Piedmont Road, Suite 400, Atlanta, Georgia
30305, on Monday, November 17, 1997, at 8:30 A.M. Eastern Time, for the
following purposes:
(1) To approve and adopt a Plan of Reorganization and Agreement of Merger
and a Plan of Merger providing for the merger of Airways Corporation with
and into the Company;
(2) To approve an amendment to the Company's Articles of Incorporation to
change the name of the Company to "AirTran Holdings, Inc.;"
(3) To approve an amendment to the Company's By-laws to extend the term of
the members of the Company's Board of Directors until the 1999 annual
meeting of the Company's stockholders;
(4) To transact such other business as may properly come before the meeting.
Holders of the Common Stock of record at the close of business on October 3,
1997, will be entitled to notice of and to vote at the meeting.
Whether or not you expect to be present in person at the meeting, please
sign and date the accompanying proxy card and return it promptly in the
enclosed postage paid reply envelope. This will assist us in preparing for the
meeting.
By Order of the Board of Directors
/s/ Michael D. Acks
Secretary
October 17, 1997
Atlanta, Georgia
<PAGE>
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
OF AIRWAYS CORPORATION
To the Stockholders of Airways Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Airways
Corporation (the "Company") will be held at AirTran Airways' Maintenance
Hangar Base at 4170 Wiley Drive, Orlando, Florida 32827, on Monday, November
17, 1997, at 10:00 A.M. Eastern Time, for the following purposes:
(1) To approve and adopt a Plan of Reorganization and Agreement of Merger
and a Plan of Merger providing for the merger of the Company with and into
ValuJet, Inc.;
(2) To transact such other business as may properly come before the meeting.
Holders of the Common Stock of record at the close of business on October 3,
1997, will be entitled to notice of and to vote at the meeting.
Whether or not you expect to be present in person at the meeting, please
sign and date the accompanying proxy card and return it promptly in the
enclosed postage paid reply envelope. This will assist us in preparing for the
meeting.
By Order of the Board of Directors
/s/ Lawrence H. Brinker
Secretary
October 17, 1997
Orlando, Florida
<PAGE>
JOINT PROXY STATEMENT
FOR THE SPECIAL MEETING FOR THE SPECIAL
OF STOCKHOLDERS MEETING
OF STOCKHOLDERS
TO BE HELD ON NOVEMBER
17, 1997 TO BE HELD ON NOVEMBER
VALUJET, INC. 17, 1997
1800 PHOENIX BOULEVARD AIRWAYS CORPORATION
SUITE 126 6280 HAZELTINE
ATLANTA, GEORGIA 30349 NATIONAL DRIVE
(770) 907-2580 ORLANDO, FLORIDA 32822
-------------- (407) 859-1579
PROSPECTUS
OF
VALUJET, INC.
1800 PHOENIX BOULEVARD
SUITE 126
ATLANTA, GEORGIA 30349
(770) 907-2580
FOR
UP TO 9,629,937 SHARES OF COMMON STOCK
--------------
This Prospectus of ValuJet, Inc., a corporation organized and existing under
the laws of the State of Nevada ("ValuJet"), relates to the shares of its
common stock, par value $.001 per share ("ValuJet Common Stock"), which are
issuable to the stockholders of Airways Corporation, a corporation organized
and existing under the laws of the State of Delaware ("Airways") upon
consummation of the proposed merger described herein (the "Merger"), pursuant
to which Airways will merge with and into ValuJet pursuant to the terms of
that certain Plan of Reorganization and Agreement of Merger dated as of July
10, 1997, by and between ValuJet and Airways as amended on September 19, 1997
(such agreement as amended is referred to herein as the "Merger Agreement" or
the "Agreement") and that certain Plan of Merger dated July 10, 1997, by and
between ValuJet and Airways as amended on September 19, 1997 (such agreement
as amended is referred to herein as the "Plan of Merger"). Copies of the
Agreement and Plan of Merger are attached to this Joint Proxy
Statement/Prospectus as Appendix A.
On the effective date of the Merger (the "Effective Date"), (i) Airways will
merge with and into ValuJet, and (ii) each outstanding share of Airways common
stock, par value $.01 per share ("Airways Common Stock") will be converted
into one share of ValuJet Common Stock. ValuJet will survive the Merger, its
name will be changed to "AirTran Holdings, Inc." and the separate existence of
Airways will cease. AirTran Airways, Inc., a wholly owned subsidiary of
Airways ("AirTran"), will become a wholly owned subsidiary of ValuJet. For a
further description of the terms of the Merger, see "The Merger."
This Prospectus also constitutes a Joint Proxy Statement of ValuJet and
Airways and is being furnished to their respective stockholders in connection
with the solicitation of proxies by their respective Boards of Directors. The
proxies solicited by the Airways Board of Directors will be used at the
Special Meeting of Stockholders of Airways (the "Airways Meeting") to be held
on November 17, 1997, including any adjournment or postponement thereof, to
approve and adopt the Merger Agreement and Plan of Merger and to transact such
other business as may properly come before the Airways Meeting. The proxies
solicited by the ValuJet Board of Directors will be used at the Special
Meeting of Stockholders of ValuJet (the "ValuJet Meeting") to be held on
November 17, 1997, including any adjournments or postponement thereof, (i) to
approve and adopt the Merger Agreement and Plan of Merger, (ii) to approve and
adopt the change in the name of ValuJet (the "Name Change") to "AirTran
Holdings, Inc." to be effected through an amendment to ValuJet's Articles of
Incorporation, (iii) to approve and adopt an amendment to ValuJet's By-laws
(the "By-law Amendment") which provides that the terms of 75% of the members
of the ValuJet Board of Directors serving immediately after the Effective Date
will not expire until the 1999 annual meeting of stockholders of ValuJet, and
(iv) to transact such other business as may properly come before the ValuJet
Meeting or any adjournment(s) thereof. This Joint Proxy Statement/Prospectus
and the accompanying proxy cards are first being mailed to stockholders of
ValuJet and Airways on or about October 17, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS OF AIRWAYS COMMON STOCK WITH RESPECT TO
SHARES OF VALUJET COMMON STOCK OFFERED HEREBY.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
The date of this Joint Proxy Statement/Prospectus is October 17, 1997.
<PAGE>
AVAILABLE INFORMATION
ValuJet and Airways are subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, file reports, proxy statements, and other information
with the Securities and Exchange Commission (the "SEC" or the "Commission").
Copies of such reports, proxy statements and other information can be
obtained, at prescribed rates, from the SEC by addressing written requests for
such copies to the Public Reference Section at the SEC at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such reports,
proxy statements and other information can be inspected at the public
reference facilities referred to above and at the regional offices of the SEC
at 7 World Trade Center, 13th Floor, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding ValuJet and Airways. The address of
such Web site is http://www:sec.gov.
This Joint Proxy Statement/Prospectus constitutes part of the Registration
Statement on Form S-4 of ValuJet (including any exhibits and amendments
thereto, the "Registration Statement") filed with the SEC under the Securities
Act of 1933, as amended (the "Securities Act"), relating to the securities
offered hereby. This Joint Proxy Statement/Prospectus does not include all of
the information in the Registration Statement, certain portions of which have
been omitted pursuant to the rules and regulations of the SEC. For further
information about ValuJet and Airways and the securities offered hereby,
reference is made to the Registration Statement. The Registration Statement
may be inspected and copied, at prescribed rates, at the SEC's public
reference facilities at the addresses set forth above. ValuJet Common Stock
and Airways Common Stock are both traded on the NASDAQ National Market.
Reports, proxy statements and other information concerning ValuJet and Airways
may be inspected at the offices of the National Association of Securities
Dealers, Inc. (the "NASD"), 1735 K Street, N.W., Washington, D.C. 20006.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THERE WILL BE PROVIDED
WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS
JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON ORAL OR WRITTEN REQUEST OF
ANY SUCH PERSON, A COPY OF ANY OR ALL DOCUMENTS INCORPORATED HEREIN BY
REFERENCE (EXCLUDING EXHIBITS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE). THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
MICHAEL D. ACKS, CONTROLLER, VALUJET, INC., 1800 PHOENIX BOULEVARD, SUITE 126,
ATLANTA, GEORGIA 30349 (TELEPHONE (770) 907-2580). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY NOVEMBER 7, 1997.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE INCLUDED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY VALUJET
OR AIRWAYS. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF VALUJET OR AIRWAYS SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
All information included in this Joint Proxy Statement/Prospectus with
respect to ValuJet was supplied by ValuJet, and all information included
herein with respect to Airways was supplied by Airways.
(i)
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by ValuJet and Airways with the Commission
(ValuJet Commission File No. 0-26914; Airways Commission File No. 0-26432)
under Section 13(a) or 15(d) of the Exchange Act are hereby incorporated by
reference in this Joint Proxy Statement/Prospectus:
ValuJet documents:
(i) Annual Report on Form 10-K for the fiscal year ended December 31, 1996;
(ii) Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
1997 and June 30, 1997;
(iii) Current Reports on Form 8-K dated July 10, 1997 and August 13, 1997;
and
(iv) the description of ValuJet Common Stock set forth in ValuJet's
registration statement filed pursuant to Section 12 of the Exchange
Act, and any amendment or report filed for the purpose of updating any
such description.
Airways documents:
(i) Annual Report on Form 10-K for the fiscal year ended March 31, 1997;
(ii) Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1997; and
(iii) Current Reports on Form 8-K dated July 10, 1997 and September 23, 1997.
All documents filed by ValuJet or Airways pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Joint Proxy
Statement/Prospectus and prior to the later of the date of the ValuJet Meeting
and the date of the Airways Meeting are hereby incorporated by reference in
this Joint Proxy Statement/Prospectus and shall be deemed to be a part hereof
from the date of filing of such documents.
Any statement contained herein, in any amendment or supplement hereto or in
a document incorporated or deemed to be incorporated by reference herein,
shall be deemed to be modified or superseded for purposes of the Registration
Statement and this Joint Proxy Statement/Prospectus to the extent that a
statement contained herein, in any amendment or supplement hereto or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of the Registration Statement,
this Joint Proxy Statement/Prospectus or any amendment or supplement hereto.
FORWARD LOOKING STATEMENTS
THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS AND INCORPORATES BY REFERENCE
CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE RESULTS OF
OPERATIONS AND BUSINESSES OF VALUJET AND AIRWAYS. THESE FORWARD LOOKING
STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. FACTORS THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED, PROJECTED,
FORECAST, ESTIMATED OR BUDGETED IN SUCH FORWARD LOOKING STATEMENTS INCLUDE,
AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (I) HEIGHTENED COMPETITION,
INCLUDING SPECIFICALLY THE INTENSIFICATION OF PRICE COMPETITION AND THE ENTRY
OF NEW COMPETITORS; (II) INCREASED GOVERNMENT SCRUTINY OR GOVERNMENT IMPOSED
LIMITATIONS ON OPERATIONS; (III) ANY AIRLINE INCIDENTS OR ACCIDENTS SUFFERED
BY THE COMBINED COMPANY AFTER THE MERGER; (IV) LOSS OF KEY EXECUTIVES; (V)
GENERAL ECONOMIC AND BUSINESS CONDITIONS WHICH ARE LESS FAVORABLE THAN
EXPECTED; AND (VI) UNANTICIPATED CHANGES IN INDUSTRY TRENDS. IN ADDITION,
FACTORS THAT COULD CAUSE ACTUAL RESULTS OF VALUJET (ASSUMING CONSUMMATION OF
THE MERGER) TO
(ii)
<PAGE>
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY OR PROJECTED, FORECAST, ESTIMATED
OR BUDGETED IN FORWARD LOOKING STATEMENTS RELATING TO THE RESULTS OF
OPERATIONS AND BUSINESS OF VALUJET FOLLOWING THE MERGER, INCLUDE COSTS OR
DIFFICULTIES RELATED TO THE INTEGRATION OF THE BUSINESSES OF VALUJET AND
AIRWAYS AND THE INABILITY TO REALIZE COST SAVINGS OR REVENUE ENHANCEMENTS FROM
THE MERGER, INCLUDING EXPECTED COST SAVINGS TO BE REALIZED THROUGH COMBINING
CERTAIN FUNCTIONS OF BOTH VALUJET AND AIRWAYS, MAKING CHANGES TO THE OPERATING
STRUCTURE OF BOTH COMPANIES TO ELIMINATE REDUNDANT FACILITIES AND BETTER SERVE
THE COMBINED COMPANY'S CUSTOMERS AND REDUCTIONS IN STAFF. SEE "RISK FACTORS."
(iii)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... (i)
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... (ii)
FORWARD LOOKING STATEMENTS................................................. (ii)
SUMMARY.................................................................... 1
ValuJet................................................................... 1
Airways................................................................... 1
Special Meeting of Airways Stockholders................................... 2
Special Meeting of ValuJet Stockholders................................... 2
The Merger; Exchange Ratio................................................ 2
Recommendations of Boards of Directors.................................... 3
Reasons for the Merger.................................................... 3
Fairness Opinions......................................................... 3
Effective Date............................................................ 3
Exchange of Stock Certificates............................................ 4
Conditions to Merger...................................................... 4
Termination of the Merger Agreement....................................... 4
Directors and Executive Officers Following the Merger..................... 4
Interests of Certain Persons in the Merger................................ 5
Certain Federal Income Tax Consequences of the Merger..................... 5
Accounting Treatment...................................................... 5
No Appraisal Rights....................................................... 5
Differences in Stockholders' Rights....................................... 5
Market Prices and Dividends............................................... 6
SELECTED FINANCIAL DATA OF VALUJET (HISTORICAL)............................ 6
SELECTED FINANCIAL DATA OF AIRWAYS (HISTORICAL)............................ 7
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION......................... 8
Balance Sheet June 30, 1997............................................... 8
Statements of Operations.................................................. 9
Notes to Pro Forma Financial Statements................................... 10
Comparative Per Share Data................................................ 11
RISK FACTORS............................................................... 13
THE AIRWAYS MEETING........................................................ 21
General................................................................... 21
Record Date; Vote Required................................................ 21
THE VALUJET MEETING........................................................ 22
General................................................................... 22
Record Date; Vote Required................................................ 22
THE MERGER................................................................. 23
General................................................................... 23
Treatment of Airways Options and Warrants................................. 23
Background of and Reasons for the Merger.................................. 23
Opinions of Financial Advisors............................................ 28
Effective Date of the Merger.............................................. 36
Distribution of Stock Certificates After the Merger....................... 36
Regulatory Approvals...................................................... 36
</TABLE>
(iv)
<PAGE>
<TABLE>
<S> <C>
No Appraisal Rights...................................................... 37
Stock Ownership Following the Merger..................................... 37
Interim Operations....................................................... 37
Acquisition Proposals.................................................... 39
Conditions to the Merger................................................. 39
Termination of the Merger Agreement...................................... 41
Amendment of the Merger Agreement........................................ 42
Post-Merger Board of Directors........................................... 42
Post-Merger Officers of ValuJet.......................................... 43
Post-Merger Principal Executive Offices.................................. 43
Interests of Certain Persons in the Merger............................... 44
Material Federal Income Tax Consequences of the Merger................... 44
Required Votes........................................................... 45
PROPOSAL TO EFFECT A NAME CHANGE.......................................... 45
Required Vote............................................................ 46
PROPOSAL TO AMEND BY-LAWS................................................. 46
Required Vote............................................................ 46
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION........................ 47
Balance Sheet (June 30, 1997)............................................ 47
Statements of Operations................................................. 49
Notes to Pro Forma Financial Statements.................................. 50
Comparative Per Share Data............................................... 51
VALUJET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 52
Results of Operations.................................................... 52
Comparison of Years Ended December 31, 1996, December 31, 1995 and Decem-
ber 31, 1994............................................................ 54
Comparison of Quarters Ended June 30, 1997 and June 30, 1996............. 57
Comparison of Six Months Ended June 30, 1997 and June 30, 1996........... 59
Liquidity and Capital Resources.......................................... 61
AIRWAYS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 64
Selected Operating Data for Years Ended March 31, 1997, 1996 and 1995.... 64
Comparison of Years ended March 31, 1997, 1996 and 1995.................. 65
Selected Operating Data for Quarters Ended June 30, 1997 and 1996........ 68
Liquidity and Capital Resources.......................................... 70
BUSINESS OF VALUJET....................................................... 72
General.................................................................. 72
Strategy................................................................. 73
Geographic Market........................................................ 74
Fares, Route System and Scheduling....................................... 74
Aircraft................................................................. 76
Maintenance and Repairs.................................................. 77
Fuel..................................................................... 78
Distribution and Marketing............................................... 79
Automation............................................................... 80
Employees................................................................ 80
Airport Operations....................................................... 81
Insurance................................................................ 81
</TABLE>
(v)
<PAGE>
<TABLE>
<S> <C>
Seasonality and Cyclicality.............................................. 82
Competition.............................................................. 82
Government Regulation.................................................... 83
Property................................................................. 85
Litigation............................................................... 86
BUSINESS OF AIRWAYS....................................................... 88
General.................................................................. 88
Business Strategy........................................................ 88
Fares, Route System and Scheduling....................................... 88
Maintenance and Repairs.................................................. 90
Aircraft................................................................. 90
Fuel..................................................................... 90
Insurance................................................................ 90
Seasonality.............................................................. 90
Competition and Industry Considerations.................................. 91
Marketing................................................................ 91
Employees................................................................ 91
Airport Operations....................................................... 91
Real Property............................................................ 91
SECURITY OWNERSHIP........................................................ 92
ValuJet After the Merger................................................. 92
PRINCIPAL STOCKHOLDERS.................................................... 92
Security Ownership of Management and Certain Beneficial Owners of
ValuJet................................................................. 92
Security Ownership of Management and Certain Beneficial Owners of Air-
ways.................................................................... 93
EXECUTIVE COMPENSATION.................................................... 94
Summary of Cash and Certain Other Compensation--ValuJet.................. 94
Employment Agreements--ValuJet........................................... 95
Stock Option Plans--ValuJet.............................................. 95
ValuJet's Option Grants in Last Fiscal Year.............................. 96
ValuJet--Aggregated Option Exercises in Last Fiscal Year and Fiscal Year
End Option Values....................................................... 96
Summary of Cash and Certain Other Compensation--Airways.................. 97
Airways Option Grants in Last Fiscal Year................................ 97
Airways--Aggregated Option Exercises in Last Fiscal Year and Fiscal Year
End Option Value........................................................ 98
CERTAIN TRANSACTIONS...................................................... 98
COMPARATIVE MARKET PRICES AND DIVIDENDS................................... 99
ValuJet Market Prices.................................................... 99
Airways Market Prices.................................................... 99
Recent Prices............................................................ 100
Stockholders of Record................................................... 100
AIRWAYS CHANGES IN ACCOUNTANTS............................................ 100
VALUJET CAPITAL STOCK..................................................... 101
General.................................................................. 101
Anti-Takeover Provisions of Articles of Incorporation and By-laws of
ValuJet................................................................. 101
Limitation of Liability and Indemnification of Directors................. 101
COMPARISON OF RIGHTS OF HOLDERS OF VALUJET COMMON STOCK AND HOLDERS OF
AIRWAYS COMMON STOCK..................................................... 102
General.................................................................. 102
</TABLE>
(vi)
<PAGE>
<TABLE>
<S> <C>
Anti-Takeover Protection.................................................. 102
Appraisal Rights.......................................................... 104
Amendments to Certificate or Articles of Incorporation.................... 104
Amendments to By-laws..................................................... 104
Preemptive Rights......................................................... 105
Stockholder Action Without Meeting........................................ 105
Stockholder Action--Quorum Requirement.................................... 105
Special Meetings of Stockholders.......................................... 106
Number and Election of Directors.......................................... 106
Removal of Directors...................................................... 107
Indemnification of Directors, Officers, Agents and Employees.............. 107
EXPERTS.................................................................... 108
LEGAL MATTERS.............................................................. 108
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
VALUJET FINANCIAL STATEMENTS............................................... F-2
AIRWAYS FINANCIAL STATEMENTS............................................... FA-1
APPENDIX A: PLAN OF REORGANIZATION AND AGREEMENT OF MERGER................. A-1
APPENDIX B: OPINION OF THE ROBINSON-HUMPHREY COMPANY, LLC.................. B-1
APPENDIX C: OPINION OF PAINEWEBBER INCORPORATED............................ C-1
</TABLE>
(vii)
<PAGE>
SUMMARY
The following is a summary of certain information relating to the Airways
Meeting, the ValuJet Meeting, the proposed Merger, and the shares of ValuJet
Common Stock to be issued upon consummation thereof. This summary does not
purport to be complete and is qualified in its entirety by the more detailed
information appearing elsewhere or incorporated by reference in this Joint
Proxy Statement/Prospectus. Stockholders are urged to read carefully the entire
Joint Proxy Statement/Prospectus, including the Appendices. As used in this
Joint Proxy Statement/Prospectus, the terms "ValuJet" and "Airways" refer to
those entities, respectively, and, where the context requires, to those
entities and their respective subsidiaries.
This Joint Proxy Statement/Prospectus and the documents incorporated herein
by reference contain, in addition to historical information, forward-looking
statements that involve risks and uncertainties. ValuJet's actual results,
including ValuJet's actual results following the Merger if effected, could
differ materially from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed under "Risk Factors," as well as those discussed elsewhere in this
Joint Proxy Statement/Prospectus and in the documents incorporated herein by
reference.
VALUJET
ValuJet, through its wholly owned subsidiary, AirTran Airlines, Inc.
(formerly known as ValuJet Airlines, Inc.), operates an affordable, no frills,
limited frequency, scheduled airline serving short haul markets primarily in
the eastern United States. ValuJet believes that its low cost, no frills
philosophy allows it to offer among the lowest fares in its markets and
generate its own traffic by stimulating incremental demand with price-conscious
travelers. Prior to June 17, 1996, ValuJet offered service to 30 cities from
Atlanta, Washington DC (Dulles Airport), Boston and Orlando. ValuJet's
operations were interrupted by the suspension of the Company's service on June
17, 1996, pursuant to a consent order entered into with the Federal Aviation
Administration ("FAA") following the accident involving Flight 592 on May 11,
1996, and the ensuing extensive adverse media coverage and intense FAA
scrutiny. As of September 30, 1996, the Company resumed operations with service
between Atlanta and four other cities. As of August 15, 1997, the FAA had
approved 31 of the Company's DC-9 Series 30 aircraft for flight and ValuJet
operated 200 flights per peak day of which 182 flights per peak day are between
Atlanta and 23 other cities. There can be no assurance as to when ValuJet will
be able to reestablish its profitable operations, if at all, or to resume its
previous levels of service and growth strategy.
ValuJet's address is 1800 Phoenix Boulevard, Suite 126, Atlanta, Georgia
30349, telephone number (770) 907-2580.
AIRWAYS
Airways, through its wholly owned subsidiary, AirTran, operates a domestic
commercial airline providing direct scheduled passenger air service from
Orlando, Florida to 21 locations in the eastern United States. AirTran began
flying commercially in July 1994 with one Boeing 737-200 aircraft providing
charter services and commenced scheduled flight operations in October 1994. As
of August 15, 1997, AirTran operated a fleet of 11 Boeing 737-200 aircraft.
Airways' address is 6280 Hazeltine National Drive, Orlando, Florida 32822,
telephone number (407) 859-1579.
1
<PAGE>
SPECIAL MEETING OF AIRWAYS STOCKHOLDERS
The Airways Meeting will be held at 10:00 a.m., local time, on November 17,
1997, at AirTran Airways' Maintenance Hangar Base at 4170 Wiley Drive, Orlando,
Florida 32827, for the purpose of approving and adopting the Merger Agreement
and Plan of Merger and transacting such other business as may properly come
before the meeting. See "The Airways Meeting." Only holders of record of
Airways Common Stock at the close of business on October 3, 1997 (the "Airways
Record Date" or the "Record Date"), will be entitled to vote at the Airways
Meeting. Approval of the Merger requires the affirmative vote of a majority of
the shares of Airways Common Stock entitled to vote at the Airways Meeting. As
of the Airways Record Date, there were 9,094,937 shares of Airways Common Stock
outstanding and entitled to be voted.
The directors and executive officers of Airways beneficially owned, as of the
Airways Record Date, 885,514 shares (or approximately 9.29% of the outstanding
shares) of Airways Common Stock. Robert D. Swenson, Lowell T. Swenson and Carl
R. Pohlad have agreed to vote an aggregate of 2,549,953 shares of Airways
Common Stock in favor of the Merger.
As of the Airways Record Date, neither ValuJet nor any of its directors or
executive officers beneficially owned any shares of Airways Common Stock. See
"The Airways Meeting."
SPECIAL MEETING OF VALUJET STOCKHOLDERS
The ValuJet Meeting will be held at 8:30 a.m., local time, on November 17,
1997, at the law offices of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C. 3490
Piedmont Road, Suite 400, Atlanta, Georgia 30305, to consider and vote on (i)
the approval of the Merger Agreement and Plan of Merger, (ii) the Name Change,
(iii) the By-law Amendment, and (iv) such other business as may properly come
before the Meeting. See "The ValuJet Meeting."
Only holders of record of ValuJet Common Stock at the close of business on
October 3, 1997 (the "ValuJet Record Date" or the "Record Date") will be
entitled to vote at the ValuJet Meeting. The affirmative vote of a majority of
the ValuJet Common Stock outstanding and entitled to vote at the ValuJet
Meeting will be required to approve the Merger and the Name Change. Approval of
the By-laws Amendment will require the affirmative vote of a majority of the
shares present in person or by proxy and entitled to vote. As of the ValuJet
Record Date, there were 55,012,936 shares of ValuJet Common Stock outstanding
and entitled to vote.
The directors and executive officers of ValuJet beneficially owned, as of the
ValuJet Record Date, 8,292,740 outstanding shares (or approximately 15.1% of
the outstanding shares) of ValuJet Common Stock. Robert L. Priddy, Lewis H.
Jordan, Maurice J. Gallagher, Jr. and Timothy P. Flynn have agreed to vote an
aggregate of 7,864,240 shares of ValuJet Common Stock in favor of the proposals
to be presented at the ValuJet Meeting.
As of the ValuJet Record Date, neither Airways nor any of its directors or
executive officers beneficially owned any shares of ValuJet Common Stock. See
"The ValuJet Meeting."
THE MERGER; EXCHANGE RATIO
The Agreement provides for the combination of Airways with ValuJet pursuant
to the merger of Airways with and into ValuJet. On the Effective Date, each
share of Airways Common Stock then issued and outstanding will be converted
into one share of ValuJet Common Stock (the "Exchange Ratio"). See "The
Merger--General."
2
<PAGE>
RECOMMENDATIONS OF BOARDS OF DIRECTORS
Airways' Board of Directors has unanimously approved the Merger and the
Merger Agreement and Plan of Merger and has determined that the Merger is fair
to, and in the best interests of, Airways and its stockholders. ACCORDINGLY,
AIRWAYS' BOARD UNANIMOUSLY RECOMMENDS THAT AIRWAYS' STOCKHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND PLAN OF MERGER.
The ValuJet Board of Directors has unanimously approved the Merger and the
Agreement and has determined that the Merger is fair to, and in the best
interests of, ValuJet and its stockholders. ACCORDINGLY, VALUJET'S BOARD
UNANIMOUSLY RECOMMENDS THAT VALUJET'S STOCKHOLDERS VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND PLAN OF MERGER, NAME CHANGE AND BY-LAW
AMENDMENT.
REASONS FOR THE MERGER
In approving the Merger, Airways' directors considered the financial terms of
the Merger; alternatives to the Merger (including remaining as an independent
airline); the need to expand operations; information concerning ValuJet; advice
of its legal and financial advisors; certain financial analyses of ValuJet and
Airways; and other factors. See "The Merger--Background of and Reasons for the
Merger."
In approving the Merger, ValuJet's directors considered Airways' financial
condition, operations and market area; ValuJet's overall strategic focus; the
financial terms and income tax consequences of the Merger; the management
philosophy of Airways and its compatibility with that of ValuJet; advice of its
financial advisor; and other factors. See "The Merger--Background of and
Reasons for the Merger."
FAIRNESS OPINIONS
ValuJet. The Robinson-Humphrey Company, LLC ("R-H" or "Robinson-Humphrey")
has rendered an opinion to ValuJet that, based on and subject to the
procedures, matters and limitations described in its opinion and such other
matters as it considered relevant, as of the date of its opinion, the terms of
the Merger are fair, from a financial point of view, to the stockholders of
ValuJet. R-H's opinion is attached as Appendix B to this Joint Proxy
Statement/Prospectus. Stockholders are urged to read the opinion in its
entirety for a description of the procedures followed, matters considered and
limitations on the reviews undertaken in connection therewith. See "The
Merger--Opinions of Financial Advisors."
Airways. PaineWebber Incorporated ("PaineWebber") has rendered an opinion to
Airways that, based on and subject to the procedures, matters and limitations
described in its opinion and such other matters as it considered relevant, as
of the date of its opinion, the Exchange Ratio is fair, from a financial point
of view, to the stockholders of Airways. PaineWebber's opinion is attached as
Appendix C to this Joint Proxy Statement/Prospectus. Stockholders are urged to
read the opinion in its entirety for a description of the procedures followed,
matters considered and limitations on the reviews undertaken in connection
therewith. See "The Merger--Opinions of Financial Advisors."
EFFECTIVE DATE
Subject to satisfaction or waiver of the conditions to the obligations of the
parties to effect the Merger, the Effective Date will occur on the date the
Certificate of Merger shall have been accepted for filing and filed with the
Delaware Secretary of State and Nevada Secretary of State. Subject to the
Agreement being approved by the requisite vote of ValuJet and Airways
stockholders, the parties expect that all conditions to consummation of the
Merger will be satisfied so that the Merger can be consummated one business day
after approval by the stockholders of both companies, although there can be no
assurance as to whether or when the Merger will occur. See "The Merger--
Effective Date of the Merger, --Conditions to the Merger, and -- Termination of
the Merger Agreement."
3
<PAGE>
EXCHANGE OF STOCK CERTIFICATES
Promptly after the Effective Date, ValuJet will cause First Union National
Bank, Charlotte, North Carolina acting in its capacity as exchange agent for
ValuJet (the "Exchange Agent") to mail to the former stockholders of Airways a
letter of transmittal, together with instructions for the exchange of such
stockholders' certificates representing shares of Airways Common Stock for
certificates representing shares of ValuJet Common Stock. AIRWAYS STOCKHOLDERS
SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE THE FORM LETTER
OF TRANSMITTAL AND INSTRUCTIONS. See "The Merger--Distribution of Stock
Certificates After the Merger."
CONDITIONS TO MERGER
Consummation of the Merger is subject to various conditions, including
receipt of the required approval of the ValuJet and Airways stockholders,
receipt of an opinion as to the tax-free nature of certain aspects of the
Merger and certain other customary conditions. See "The Merger--Conditions to
the Merger."
The change in ownership of AirTran that will be effectuated by the Merger
will require the approval of the Department of Transportation. Consummation of
the Merger is also subject to expiration or early termination of the relevant
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"). The waiting period expired at 11:59 p.m.,
Washington, D.C. time on October 8, 1997 without any request for additional
information or other action taken by the Federal Trade Commission or the
Antitrust Division of the Department of Justice. See "The Merger--Regulatory
Approvals."
TERMINATION OF THE MERGER AGREEMENT
The Agreement may be terminated, and the Merger abandoned, at any time prior
to the Effective Date by mutual action of the Boards of Directors of both
Airways and ValuJet, or by action of the Board of Directors of either company
under certain circumstances, including if the Merger is not consummated by
November 30, 1997. If for any reason the Merger is not consummated, both
ValuJet and Airways will continue to operate under their present management.
See "The Merger--Termination of the Merger Agreement." Under certain
circumstances, one party could become liable for liquidated damages to the
other party if the Merger is not consummated. See "The Merger--Termination of
the Merger Agreement--Certain Consequences of Termination."
DIRECTORS AND EXECUTIVE OFFICERS FOLLOWING THE MERGER
The Agreement provides that ValuJet will be the surviving corporation after
the Merger and that the directors of ValuJet after the Merger will consist of
seven directors, four of whom are to be appointed by ValuJet and three of whom
are to be appointed by Airways. ValuJet has selected Robert L. Priddy, Lewis H.
Jordan, D. Joseph Corr and Don L. Chapman, all of whom are currently Directors
of ValuJet, to serve as its designees to the ValuJet Board of Directors after
the Merger. Airways has selected Robert D. Swenson, John K. Ellingboe and
Robert C. Pohlad to serve as its designees to the ValuJet Board of Directors
after the Merger. Messrs. Swenson and Ellingboe are currently Directors of
Airways. Under the Agreement, Airways has designated Robert D. Swenson to serve
as Chairman of the Board of ValuJet after the Merger. See "The Merger--Post-
Merger Board of Directors." In accordance with the By-law Amendment and the
Merger Agreement, the terms of three of the directors selected by ValuJet and
two of the directors selected by Airways will not expire until ValuJet's 1999
annual meeting of stockholders.
D. Joseph Corr, the current President and Chief Executive Officer of ValuJet,
will continue serving as President and Chief Executive Officer of ValuJet after
the Merger. Other executive officers of ValuJet will be selected by the
President and Chief Executive Officer prior to the Effective Date, subject to
the approval of the Board of Directors.
4
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain executive officers and directors of ValuJet and of Airways have
interests in the Merger in addition to their respective interests as ValuJet or
Airways stockholders generally. Those interests relate to, among other things,
certain severance pay agreements, provisions in the Agreement regarding
indemnification and eligibility for certain ValuJet benefits and treatment of
outstanding options to acquire ValuJet and Airways Common Stock. See "The
Merger--Interests of Certain Persons in the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Airways has received an opinion of Briggs and Morgan, Professional
Association, counsel to Airways, to the effect that, among other things: (i)
the Merger will constitute a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); and (ii)
the exchange in the Merger of Airways Common Stock for ValuJet Common Stock
will not give rise to gain or loss to Airways stockholders. See "The Merger--
Material Federal Income Tax Consequences of the Merger."
DUE TO THE INDIVIDUAL NATURE OF THE INCOME TAX CONSEQUENCES OF THE MERGER,
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
SPECIFIC EFFECT OF THE MERGER ON THEM UNDER FEDERAL, STATE, LOCAL AND FOREIGN
TAX LAWS.
ACCOUNTING TREATMENT
The purchase method of accounting will be used to account for the Merger.
NO APPRAISAL RIGHTS
Neither the holders of Airways Common Stock nor the holders of ValuJet Common
Stock are entitled to appraisal or dissenters' rights in connection with the
Merger. See "The Airways Meeting" and "The ValuJet Meeting."
DIFFERENCES IN STOCKHOLDERS' RIGHTS
The rights of Airways stockholders currently are determined by reference to
the Delaware General Corporation Law ("DGCL") and Airways' Restated Certificate
of Incorporation ("Airways' Charter") and By-laws ("Airways' Bylaws").
Following the Effective Time, Airways stockholders will become stockholders of
ValuJet, and their rights as stockholders will be determined by the Nevada
Revised Statutes (the "NRS") and ValuJet's Articles of Incorporation
("ValuJet's Articles") and By-laws ("ValuJet's By-laws"). For a description of
the material differences in the rights of Airways and ValuJet stockholders, see
"Comparison of Rights of Holders of ValuJet Common Stock and Holders of Airways
Common Stock."
5
<PAGE>
MARKET PRICES AND DIVIDENDS
ValuJet Common Stock is traded on the NASDAQ National Market ("NASDAQ") under
the symbol "VJET" and Airways Common Stock is traded on NASDAQ under the symbol
"AAIR". The following table sets forth the high and low sale prices per share
of ValuJet Common Stock on NASDAQ (as adjusted to reflect two separate two-for-
one stock splits, effective in April 1995 and November 1995) since January 1,
1995 and the high and low sale prices per share of Airways Common Stock on
NASDAQ since September 1995 (when Airways stock first became publicly traded).
<TABLE>
<CAPTION>
SALES PRICES SALES PRICES
PER SHARE OF PER SHARE OF
VALUJET AIRWAYS
COMMON STOCK COMMON STOCK
------------- ------------
CALENDAR QUARTER ENDING HIGH LOW HIGH LOW
- ----------------------- ------ ------ ------ -----
<S> <C> <C> <C> <C>
1995
March 31............................................ $12.63 $ 4.75 N/A N/A
June 30............................................. $17.94 $12.00 N/A N/A
September 30........................................ $18.06 $13.31 $ 9.00 $7.25
December 31......................................... $34.75 $15.94 $10.75 $7.25
1996
March 31............................................ $27.63 $18.50 $11.00 $8.12
June 30............................................. $27.50 $ 4.50 $10.75 $6.75
September 30........................................ $14.00 $ 8.38 $ 7.25 $3.50
December 31......................................... $12.25 $ 5.94 $ 5.62 $2.88
1997
March 31............................................ $ 8.75 $ 6.13 $ 6.38 $2.88
June 30............................................. $ 8.00 $ 6.25 $ 6.25 $4.88
September 30........................................ $7.84 $4.75 $7.25 $4.25
</TABLE>
On July 9, 1997, the last trading day prior to public announcement that
ValuJet and Airways had executed the Agreement, the last reported sale prices
per share of ValuJet Common Stock and Airways Common Stock on the NASDAQ Stock
Market were $6.81 and $5.38, respectively. On October 13, 1997, the last
reported sale prices per share of ValuJet Common Stock and Airways Common Stock
on NASDAQ were $6.00 and $5.75, respectively. AIRWAYS STOCKHOLDERS SHOULD
OBTAIN CURRENT MARKET QUOTATIONS FOR THE VALUJET COMMON STOCK AND AIRWAYS
COMMON STOCK.
Neither ValuJet nor Airways has ever paid any cash dividends on their Common
Stock.
The Agreement provides for the filing of a listing application with the
NASDAQ Stock Market covering the shares of ValuJet Common Stock issuable
pursuant to the Agreement. It is a condition to consummation of the Merger that
such shares of ValuJet Common Stock be authorized for listing on the NASDAQ
Stock Market effective upon official notice of issuance. See "The Merger--
Conditions to the Merger."
SELECTED FINANCIAL DATA OF VALUJET (HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data for the four years ended December 31,
1996 and the period from July 10, 1992 (date of inception) to December 31,
1992, are derived from the audited consolidated financial statements of
ValuJet. The financial data for the six month periods ended June 30, 1997 and
1996 are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which ValuJet considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the six months ended June 30, 1997 are not
6
<PAGE>
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1997. The data should be read in conjunction with the
consolidated financial statements, related notes and other financial
information included herein.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
SIX MONTHS ENDED (JULY 10,
JUNE 30, FISCAL YEAR ENDED DECEMBER 31, 1992) TO
------------------ ----------------------------------- DECEMBER 31,
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $ 84,687 $191,212 $219,636 $367,757 $133,901 $ 5,811 $ 0
Net income (loss)....... (27,733) 1,093 (41,469) 67,763 20,732 (894) (23)
Earnings (loss) per
share.................. (.51) .02 (0.76) 1.13 0.44 (0.03) 0.00
Total assets (as of end
of period)............. 377,008 521,592 417,187 346,741 173,039 30,264 495
Long-term debt including
current maturities (as
of end of period)...... 235,661 312,439 244,706 109,038 46,965 10,398 0
</TABLE>
SELECTED FINANCIAL DATA OF AIRWAYS (HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data for the three years ended March 31,
1997 are derived from the audited consolidated financial statements of Airways.
The financial data for the three month periods ended June 30, 1997 and 1996 are
derived from unaudited financial statements. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which Airways
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the three months
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year ending March 31, 1998. The data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein.
<TABLE>
<CAPTION>
THREE MONTHS FISCAL YEAR ENDED MARCH
ENDED JUNE 30, 31,
---------------- -------------------------
1995
1997 1996 1997 1996 (1)
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Operating revenues............... $27,052 $29,012 $102,623 $68,361 $ 9,607
Net income (loss)................ (172) (282) (6,991) 1,187 (3,496)
Earnings (loss) per share........ (.02) (.03) (.77) .13 (.39)
Total assets (as of end of
period)......................... 70,996 64,640 73,948 69,654 13,544
Long-term debt including current
maturities (as of end of
period)......................... 14,665 15,319 13,696 13,851 0
</TABLE>
- --------
(1) Inasmuch as AirTran commenced operations in July 1994, results prior
thereto are not included herein. Earnings per share for the year ended
March 31, 1995 is presented on a pro forma basis as though Airways had been
spun off as of April 1, 1994.
7
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements of
ValuJet and Airways give effect to (i) the sale by ValuJet of $80.0 million of
10 1/2% Senior Secured Notes (the "Notes") on August 13, 1997, and the
application of the proceeds as set forth below, and (ii) the sale by ValuJet of
the Notes as described in (i) above and the Merger as if such transactions had
occurred as of January 1, 1996 and 1997 with respect to the statements of
operations for the year ended December 31, 1996 and the six months ended June
30, 1997, respectively, and as of June 30, 1997 with respect to the balance
sheet. ValuJet received approximately $77.5 million of net proceeds from the
Notes, after deduction of the initial purchaser's discount and expenses of the
debt offering. The net proceeds, along with approximately $6.2 million of
ValuJet's cash was used to repay $68.5 million of secured debt of ValuJet and
to pay the fees and expenses (approximately $6.0 million) incurred by ValuJet
in connection with a consent solicitation to the holders of ValuJet's 10 1/4%
senior notes and will also be used to purchase approximately $9.2 million of
hush kits for up to four of ValuJet's Stage 2 DC-9 aircraft. The Merger is
reflected using the purchase method of accounting for business combinations.
The pro forma condensed combined financial information is provided for
comparative purposes only and does not purport to be indicative of the results
that would have been obtained if the events set forth above had been effected
on the dates indicated or of those results that may be obtained in the future.
The pro forma condensed combined financial information with respect to the
Merger is based on preliminary estimates of values and transaction costs which
may be incurred in connection with the Merger. The actual recording of the
Merger will be based on final appraisals, values and transaction costs.
Accordingly, the actual recording of the transaction can be expected to differ
from these pro forma condensed combined financial statements. However,
ValuJet's management believes the asset and liability valuations and
allocations utilized for the Merger will not be materially different from the
pro forma information presented herein.
For purposes of preparing the unaudited pro forma condensed combined
statements of operations for the six months ended June 30, 1997 and the year
ended December 31, 1996, Airways' operating results for the six months ended
June 30, 1997 and the year ended March 31, 1997, were combined with ValuJet's
operating results for the six months ended June 30, 1997 and the year ended
December 31, 1996, respectively. Accordingly, Airways' operating results for
the three months ended March 31, 1997 are included in the six months ended June
30, 1997 and in the year ended December 31, 1996 pro forma results. Airways'
revenues and net income for that three month period were $29,777,000 and
$277,000, respectively.
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA VALUJET PRO FORMA PRO FORMA
VALUJET ADJUSTMENTS AS ADJUSTED AIRWAYS ADJUSTMENTS COMBINED
-------- ----------- ----------- ------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................. $149,725 $11,460 (a) $143,435 $1,672 $145,107
(9,200)(b)
(7,800)(d)
(750)(c)
Restricted cash........ 0 0 10,411 10,411
Accounts receivable,
net................... 6,584 6,584 3,956 10,540
Inventory.............. 6,159 6,159 1,066 7,225
Prepaid items.......... 2,482 2,482 4,257 6,739
Income tax receivable.. 13,711 13,711 0 13,711
Deferred tax asset..... 0 0 5,101 $(1,528)(k) 3,573
Other current assets... 1,118 1,118 0 1,118
-------- ------- -------- ------ ------- --------
Total current assets.... 179,779 (6,290) 173,489 26,463 (1,528) 198,424
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA VALUJET PRO FORMA PRO FORMA
VALUJET ADJUSTMENTS AS ADJUSTED AIRWAYS ADJUSTMENTS COMBINED
-------- ----------- ----------- ------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Property and equipment,
net.................... 194,049 9,200 (b) 203,249 38,804 242,053
Debt issuance costs..... 3,180 7,800 (d) 10,980 10,980
Goodwill, net........... 0 1,713 (1,713)(l) 50,662
50,662 (n)
Deferred tax asset...... 0 0 3,493 3,493
Other assets, net....... 0 0 523 (523)(k) 0
-------- -------- -------- ------- ------- --------
Total assets............ $377,008 $ 10,710 $387,718 $70,996 $46,898 $505,612
======== ======== ======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and
accrued expenses...... $ 27,618 $ 27,618 $18,503 $ 3,250 (m) $ 49,371
Air traffic liability.. 10,638 10,638 13,441 24,079
Deferred tax
liability............. 485 485 0 485
Current portion of
long-term debt........ 9,040 9,040 3,476 12,516
Current portion of
maintenance reserves.. 0 0 1,779 (1,779)(k) 0
-------- -------- ------- ------- --------
Total current
liabilities............ 47,781 47,781 37,199 1,471 86,451
Long-term debt less
current maturities..... 226,621 $ 80,000 (a) 238,081 11,188 249,269
(68,540)(a)
Maintenance reserves.... 0 0 2,343 (2,343)(k) 0
Deferred taxes.......... 6,722 (278)(c) 6,444 2,794 (193)(k) 8,205
(840)(m)
Stockholders' equity:
Preferred stock........ 0 0 0 0
Common stock........... 55 55 91 (91)(n) 64
9 (n)
Additional paid-in
capital............... 77,453 77,453 26,621 (26,621)(n) 143,719
63,466 (n)
2,800 (n)
Retained earnings
(deficit)............. 18,376 (472)(c) 17,904 (9,240) 9,240 (n) 17,904
-------- -------- -------- ------- ------- --------
Total stockholders'
equity................. 95,884 (472) 95,412 17,472 48,803 161,687
-------- -------- -------- ------- ------- --------
Total liabilities and
stockholders' equity... $377,008 $ 10,710 $387,718 $70,996 $46,898 $505,612
======== ======== ======== ======= ======= ========
</TABLE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------------
PRO FORMA VALUJET PRO FORMA PRO FORMA
VALUJET ADJUSTMENTS AS ADJUSTED AIRWAYS ADJUSTMENTS COMBINED
------- ----------- ----------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $84,687 $84,687 $56,829 $141,516
Operating expenses...... 119,404 $ 750 (e) 120,729 56,280 $(222)(o) 177,560
575 (f) (71)(p)
844 (q)
------- ------ ------- ------- ----- --------
Operating income
(loss)................. (34,717) (1,325) (36,042) 549 (551) (36,044)
Interest expense....... 12,723 (2,959)(g) 15,028 769 15,797
4,200 (h)
1,064 (i)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------------------------------
PRO FORMA VALUJET PRO FORMA PRO FORMA
VALUJET ADJUSTMENTS AS ADJUSTED AIRWAYS ADJUSTMENTS COMBINED
------------ ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income........ (3,268) (3,268) (366) (3,634)
-------- ------- -------- -------- ------- --------
Income (loss) before
income taxes........... (44,172) (3,630) (47,802) 146 (551) (48,207)
Income tax expense (ben-
efit).................. (16,439) (1,270)(j) (17,709) 41 78 (r) (17,590)
-------- ------- -------- -------- ------- --------
Net income (loss)....... $(27,733) $(2,360) $(30,093) $ 105 $ (629) $(30,617)
======== ======= ======== ======== ======= ========
Net income (loss) per
share.................. $ (0.51) $ (0.55) $ 0.01 $ (0.48)
======== ======== ======== ========
Weighted average shares
outstanding............ 54,892 54,892 9,065 63,960
======== ======== ======== ========
Ratio of earnings to
fixed charges(s)....... -- (t)
========
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
DECEMBER 31, MARCH
1996 PRO FORMA VALUJET 31, 1997 PRO FORMA PRO FORMA
VALUJET ADJUSTMENTS AS ADJUSTED AIRWAYS ADJUSTMENTS COMBINED
------------ ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $219,636 $219,636 $102,623 $322,259
Operating expenses...... 271,035 $ 750 (e) 272,935 114,745 $ (443)(o) 388,783
1,150 (f) (143)(p)
1,689 (q)
-------- ------- -------- -------- ------- --------
Operating loss.......... (51,399) (1,900) (53,299) (12,122) (1,103) (66,524)
Interest expense....... 22,186 (5,917)(g) 26,796 1,507 28,303
8,400 (h)
2,127 (i)
Interest income........ (7,653) (7,653) (984) (8,637)
-------- ------- -------- -------- ------- --------
Loss before income tax-
es..................... (65,932) (6,510) (72,442) (12,645) (1,103) (86,190)
Income tax benefit...... (24,463) (2,279)(j) (26,742) (5,654) 155 (r) (32,241)
-------- ------- -------- -------- ------- --------
Net loss................ $(41,469) $(4,231) $(45,700) $ (6,991) $(1,258) $(53,949)
======== ======= ======== ======== ======= ========
Net loss per share...... $ (0.76) $ (0.84) $ (0.77) $ (0.85)
======== ======== ======== ========
Weighted average shares
outstanding............ 54,702 54,702 9,029 63,770
======== ======== ======== ========
Ratio of earnings to
fixed charges(s)....... -- (t)
========
</TABLE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(a) Reflects the issuance of $80.0 million of 10 1/2% senior secured notes and
the repayment of $68.5 million of secured debt.
(b) Reflects the purchase of four hush kits for approximately $2.3 million per
hush kit.
(c) Reflects the payment and expensing of certain transaction costs with the
related income tax effect.
(d) Reflects the payment and capitalization of debt issuance costs.
(e) Reflects the effect of expensing certain transaction costs.
(f) Reflects depreciation of the four hush kits assumed to be purchased with a
portion of the proceeds of the $80.0 million secured debt offering.
10
<PAGE>
(g) Reflects the elimination of interest on $68.5 million of debt refinanced by
the $80.0 million secured debt offering.
(h) Reflects interest on the $80.0 million of 10 1/2% senior secured notes.
(i) Reflects the amortization of debt issuance costs.
(j) Reflects the income tax effect of the pro forma adjustments.
(k) Reflects the reversal of preoperating costs and maintenance reserves, and
the related deferred tax amounts, to conform accounting policies.
(l) Reflects the reversal of Airways' historical excess of cost over fair value
of the net tangible assets acquired ("goodwill").
(m) Reflects the accrual of estimated merger costs with the related income tax
effect.
(n) Reflects the excess of cost over the estimated fair value of the net
tangible assets acquired in the Merger, the elimination of Airways'
historical common stock, additional paid-in capital and retained deficit,
the value of the Common Stock issued to the Airways stockholders and the
value of options issued to Airways option holders in the Merger.
<TABLE>
<S> <C>
Number of shares issued to acquire Airways..................... 9,067,937
Per share price at date of agreement and joint press release... $ 7.00
---------
Value of stock................................................. $ 63,476
Value of Airways options....................................... 2,800
Transaction costs.............................................. 3,250
---------
Purchase price................................................. 69,526
Less estimated fair value of net tangible assets acquired...... 18,864
---------
Excess of cost over fair value of net tangible assets ac-
quired........................................................ $ 50,662
=========
</TABLE>
Excess of cost over fair value of the net tangible assets acquired is
presented in the pro forma balance sheet utilizing estimated amounts at
June 30, 1997 and will be determined at the Effective Date. Such amount
will also be allocated according to the estimated fair values of assets at
the Effective Date.
(o) Reflects the reversal of historical amortization of preoperating costs of
Airways.
(p) Reflects the reversal of historical amortization of goodwill of Airways.
(q) Reflects the amortization of goodwill resulting from the Merger by use of
the straight line method over a 30-year period.
(r) Reflects the income tax effect of the pro forma adjustments.
(s) For purposes of calculating the ratio of earnings to fixed charges (i)
earnings consist of income (loss) before income taxes, plus fixed charges
and (ii) fixed charges consist of interest expense incurred, plus the
portion of rent expense under operating leases deemed by the Company to be
representative of the interest factor.
(t) For the periods ending June 30, 1997 and December 31, 1996, the pro forma
combined earnings were insufficient to cover fixed charges by $48.2 million
and $86.2 million, respectively.
COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative per share data relating to
net income and book value on (i) an historical basis for ValuJet and Airways,
and (ii) a pro forma combined basis per share of ValuJet Common Stock, giving
effect to the sale by ValuJet of the Notes and the application of the proceeds
therefrom and the Merger. The ValuJet and Airways pro forma combined
information gives effect to the Merger on a purchase accounting basis and is
based upon the Exchange Ratio of one share of ValuJet Common Stock for each
share of Airways Common Stock. The unaudited pro forma data is presented for
informational purposes only and is not necessarily indicative of the results of
operations or combined financial position that would have resulted had the sale
by ValuJet of the Notes and the application of the proceeds therefrom and the
Merger been consummated at the dates or during the periods indicated, nor is it
necessarily indicative of future results of operations or combined financial
position.
11
<PAGE>
The information shown below for the year ended December 31, 1996 is derived
from the audited consolidated financial statements of ValuJet for the period
then ended and the audited consolidated financial statements of Airways for the
year ending on the ensuing March 31 and should be read in conjunction with, and
is qualified in its entirety by, the historical financial statements of ValuJet
and Airways, including the respective notes thereto, and the pro forma
financial information included herein. The information shown below for the six
months ended June 30, 1997 is derived from the unaudited consolidated financial
statements of ValuJet and Airways, including the respective notes thereto, and
should be read in conjunction with, and is qualified in its entirety by, the
pro forma financial information included herein. See "--Selected Financial Data
of ValuJet (Historical)," "--Selected Financial Data of Airways (Historical),"
and "--Pro Forma Condensed Combined Financial Information."
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30,1997 1996(1)
------------ ------------
<S> <C> <C>
INCOME (LOSS) PER SHARE
ValuJet historical................................... $(.51) $(.76)
Airways historical................................... .01 (.77)
ValuJet and Airways pro forma combined(2)............ (.48) (.85)
BOOK VALUE PER SHARE (PERIOD END)
ValuJet historical................................... 1.74
Airways historical................................... 1.93
ValuJet and Airways pro forma combined(2)............ 2.53
</TABLE>
- --------
(1) ValuJet's fiscal year end is December 31 and Airways' fiscal year end is
March 31. Consequently, the data included for Airways as of the date
indicated is based on audited financial statements of Airways for the year
ending on March 31, 1997.
(2) Represents the combined results of ValuJet and Airways giving effect to the
sale by ValuJet of the Notes and the application of the proceeds therefrom
and the Merger as if such transactions had occurred as of January 1, 1996
and 1997, with respect to the statements of operations for the year ended
December 31, 1996, and the six months ended June 30, 1997, respectively,
and as of June 30, 1997, with respect to the balance sheet. The Merger is
reflected using the purchase method of accounting for business
combinations.
12
<PAGE>
RISK FACTORS
Prospective investors should read this entire Joint Proxy
Statement/Prospectus carefully and should consider, among other things, the
risks and the speculative factors inherent in and affecting ValuJet's business
described below and throughout this Joint Proxy Statement/Prospectus.
Accident/Suspension of Operations
As a result of the accident involving Flight 592, the ensuing adverse media
coverage and intensive FAA scrutiny, ValuJet suspended its operations on June
17, 1996, pursuant to a consent order entered into with the FAA. ValuJet now
faces the following additional risk factors: (i) the suspension of operations
resulted in the failure of ValuJet to meet certain financial covenants (the
fixed charge coverage ratio) under certain of its secured debt instruments all
of which debt has been repaid in August 1997; (ii) there can be no assurance
that ValuJet will be able to regain and maintain its low cost structure or to
recover sufficient customer acceptance in order to regain profitability; (iii)
ValuJet may have increased costs or reduced customer support which could
decrease ValuJet's profitability indefinitely; (iv) the expansion of ValuJet's
operations will likely be subject to FAA and DOT approval for an indefinite
period of time; and (v) the occurrence of one or more subsequent incidents or
accidents involving ValuJet's or Airways' aircraft would likely have a
substantial adverse effect on ValuJet's public image and future operations.
Recent Operating Losses
ValuJet has realized net losses in each of its last five quarters. Airways
has realized net losses in two of its last three years. ValuJet's earnings
before fixed charges for the fiscal year ended December 31, 1996 and six
months ended June 30, 1997 were inadequate to cover fixed charges by
approximately $65.9 million and $44.2 million, respectively. Continued failure
by ValuJet to cover fixed charges in the future could result in a failure to
meet ValuJet's debt service obligations, restrictions on ValuJet's activities
or other material adverse effects on ValuJet's financial condition and results
of operations. ValuJet's consolidated leverage and recent history of losses
may adversely affect ValuJet's ability to obtain financing on terms
satisfactory to ValuJet in the future.
Significant Leverage; Ability to Repay Indebtedness At Maturity
The entire principal amount of ValuJet's 10 1/4% senior notes ($150.0
million) and ValuJet's 10 1/2% senior secured notes ($80.0 million) become due
on April 15, 2001. ValuJet does not expect to generate sufficient cash flow
from operations to repay all $230.0 million of such indebtedness and,
accordingly, in order to repay this indebtedness, ValuJet will likely need to
seek to refinance all or a portion of the 10 1/4% senior notes and 10 1/2%
senior secured notes through additional equity or debt or a combination
thereof. There can be no assurance that sufficient equity or debt financing
will be available, or, if available, that it will be on terms acceptable to
ValuJet. If no such financing were available, ValuJet could be forced to
default on its debt obligations and, as an ultimate remedy, seek protection
under the Federal bankruptcy laws.
ValuJet's ability to make scheduled payments of principal of, to pay
interest on or to refinance its indebtedness depends on its future performance
and financial results, which, to a certain extent, are subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond its control. There can be no assurance that ValuJet's business will
generate sufficient cash flow from operations or that future borrowings will
be available in an amount sufficient to enable ValuJet to service its
indebtedness, or make necessary capital expenditures. The degree to which
ValuJet is leveraged could have important consequences to the stockholders of
ValuJet, including, but not limited to, the following: (i) a substantial
portion of ValuJet's cash flow from operations will be required to be
dedicated to debt service and will not be available to ValuJet for its
operations; (ii) ValuJet's ability to obtain additional financing in the
future for aircraft purchases, capital expenditures, working capital or
general corporate purposes could be limited, and (iii) ValuJet's increased
vulnerability to adverse general economic and industry conditions.
Limited Operating History
ValuJet began flight operations on October 26, 1993, and was profitable for
the two years prior to the May 11, 1996 accident. ValuJet's operations since
September 30, 1996 have been constrained by a phased return
13
<PAGE>
to service of its aircraft fleet as the return to service of each aircraft has
been subject to FAA approval. There can be no assurance that ValuJet will be
able to regain and maintain its profitability based on its limited period of
operations. ValuJet's success in the future will depend on its ability to
continue to stimulate air traffic and attract customers in its markets and to
maintain a low cost structure that will allow ValuJet to operate profitably
its low fare, no frills, limited frequency service.
Atlanta Market Dominance by Delta Air Lines, Inc.
The Atlanta market, which is ValuJet's principal hub, is currently dominated
by Delta Air Lines, Inc. ("Delta"), which presently offers more than 600
flights per day from Atlanta. During 1996, Delta enplaned approximately 78% of
all passengers at Atlanta's Hartsfield International Airport. There can be no
assurance that ValuJet will be able to be successful in light of Delta's
Atlanta market dominance.
Airways leases five gates at Orlando from Delta and also obtains ground
handling services from Delta. Airways has entered into a code-sharing
agreement with Comair under which Comair operates certain flights using
AirTran's flight reservation designator code and trademarks. Comair is a
regional airline affiliated with Delta that provides service to Delta under a
separate code-sharing agreement. There can be no assurance that Delta will not
seek to alter or terminate its relationship with Airways or to influence the
code-sharing relationship between Airways and Comair. Airways believes that
gates are available from the Orlando Airport Commission and that it could
obtain ground handling services from other providers. See "Risk Factors--
Reliance on Others" below.
Litigation
As a result of the accident and suspension of operations, several class
action suits have been filed by stockholders against ValuJet and various
officers and directors alleging, among other things, misrepresentations under
applicable securities laws. The plaintiffs seek unspecified damages based upon
the decrease in market value of shares of ValuJet's stock. Although ValuJet
denies that it has violated any of its obligations under the federal
securities laws, there can be no assurance that ValuJet will not sustain
material liability under such or related lawsuits. See "Business of ValuJet--
Litigation."
Numerous lawsuits have also been filed against ValuJet seeking damages
attributable to the deaths of those on Flight 592, and additional lawsuits are
expected. ValuJet's insurance carrier has assumed defense of these lawsuits
under a reservation of rights. See "Business of ValuJet--Litigation." ValuJet
maintains $750.0 million of liability insurance per occurrence with a major
group of independent insurers that provides facilities for all forms of
aviation insurance for many major airlines. Although ValuJet believes, based
on the information currently available to it, that such coverage will be
sufficient to cover claims associated with this accident and that the insurers
have sufficient financial strength to pay claims, there can be no assurance
that the total amount of judgments and settlements will not exceed the amount
of insurance available therefor or that all damages awarded will be covered by
insurance.
Several governmental inquiries and investigations have been launched in
connection with the loss of Flight 592, including investigations by the DOT,
the NTSB, the U.S. Attorney's Offices in Atlanta, Georgia and Miami, Florida
and certain state agencies in Florida. Although ValuJet does not believe,
based on information currently available to it, that such investigations and
inquiries will result in any finding of criminal wrongdoing on its part, the
investigations have not yet been concluded and the possibility of such a
finding cannot be ruled out. ValuJet may also be named as a partially
responsible party and/or be assessed civil penalties in connection with the
accident and/or the results of ensuing investigations. Any such findings or
penalties could be material. In addition, it is possible that ValuJet could be
indirectly affected by negative publicity related to charges of wrongdoing, if
any, against others acting on behalf of ValuJet at the time of the accident.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit
against ValuJet in State Court in Tennessee for breach of contract and a
declaratory judgment for an anticipatory breach. The Nashville Airport
Authority seeks damages of approximately $2.6 million. The dispute involves
whether ValuJet was entitled to exercise a termination right contained in its
lease agreement.
14
<PAGE>
In May 1997, the State of Florida filed suit against ValuJet and its
insurers in the United States District Court for the Southern District of
Florida seeking recovery of costs incurred relating to the accident involving
Flight 592. ValuJet's insurance carrier has assumed defense of this suit on
ValuJet's behalf. ValuJet does not believe that it is obligated for such
amounts and has filed a motion to dismiss this lawsuit. However, the suit is
in its preliminary stages and there can be no assurance that ValuJet will not
sustain material liability under such suit.
Aging Aircraft; Maintenance and Reliability
ValuJet's entire fleet consists of DC-9 aircraft manufactured between 1967
and 1976. Airways' entire fleet consists of Boeing 737-200 aircraft
manufactured between 1968 and 1985. Because many aircraft components are
required to be replaced after specified numbers of flight hours or take-off
and landing cycles and because new aviation technology may be required to be
retrofitted, in general, the cost to maintain aging aircraft will exceed the
cost to maintain newer aircraft. ValuJet believes that its cost to maintain
its aircraft in the long-term will be consistent with industry experience for
this aircraft type and age used by comparable airlines. However, since the
resumption of ValuJet's service in September 1996, ValuJet has incurred higher
than usual maintenance expenses as a result of expenses related to
reactivating its aircraft. In addition, during the past 12 months, Airways has
incurred higher than expected maintenance expenses for its aircraft.
Amendments to FAA regulations are under consideration which would require
certain heavy maintenance checks and other additional maintenance requirements
for aircraft operating beyond certain operational limits. It is likely that
these maintenance requirements will apply to the aircraft operated by ValuJet
and Airways, although it is uncertain whether the proposed amendments will
require any changes to the heavy maintenance procedures already utilized by
ValuJet and Airways. In addition, ValuJet and Airways will be required to
comply with any other future regulations or Airworthiness Directives issued
with respect to aging aircraft. There can be no assurance that ValuJet's and
Airways' costs of maintenance (including costs to comply with aging aircraft
requirements) will not materially increase in the future.
ValuJet and Airways believe that their respective aircraft are mechanically
reliable based on the percentage of scheduled flights completed. However,
there can be no assurance that these aircraft will continue to be sufficiently
reliable over longer periods of time. Furthermore, given the age of ValuJet's
and Airways' fleet, any public perception that such aircraft are less than
completely reliable could have a material adverse effect on their business.
Various incidents involving ValuJet's aircraft prior to May 1996, the accident
involving Flight 592 and the suspension of operations have further contributed
to a negative public perception as to the safety of ValuJet's aircraft and
operations. See "Risk Factors--Accident/Suspension of Operations."
Various FAA findings and safety violations by ValuJet discovered by the FAA
in connection with its special scrutiny of ValuJet led to the consent order
under which ValuJet's operations were suspended. Although ValuJet has
satisfied the FAA sufficiently to justify a return of its operating
certificate, ValuJet continues to be subject to a high level of FAA scrutiny
and there can be no assurance that ValuJet will be able to avoid violations in
the future. See "Business of ValuJet--Maintenance and Repairs" and Business of
ValuJet--Government Regulation."
Risks Associated With Merger
As a result of the Merger, ValuJet will face the following additional risks:
(i) the usual risks associated with the combination of two businesses; (ii)
Airways has a limited operating history and has incurred losses during two of
its three fiscal years of operations; (iii) risks associated with ValuJet's
name change and loss of market recognition; (iv) although ValuJet is seeking
to achieve various economies of scale and costs savings synergies, there can
be no assurance that ValuJet will be able to realize such benefits; (v) the
FAA and DOT may elect to monitor Airways more closely and may seek to impose
limitations on Airways' operations that are not currently in effect; and (vi)
Airways operates Boeing 737-200 aircraft, thereby adding a second aircraft
type to the aircraft fleet to be operated by ValuJet's subsidiaries. In
addition, ValuJet expects to incur material expenses (estimated to be up to
$10 million during the second half of 1997) in connection with the joint
marketing program being implemented by ValuJet and Airways in anticipation of
the Merger. See "Business of ValuJet--Strategy."
Stage 3 Compliance
To satisfy FAA rules regarding allowable noise levels, each of ValuJet and
Airways must have at least 50% of its fleet in compliance with Stage 3 noise
level requirements during 1997. The balance of each airline's fleet
15
<PAGE>
must be brought into compliance with Stage 3 noise requirements in phases,
with 75% compliance required by December 31, 1998, and full compliance by
December 31, 1999. As of August 15, 1997, only 18 of ValuJet's 42 aircraft
meet the Stage 3 requirements. As of August 15, 1997, ValuJet complied with
Stage 3 requirements by virtue of 16 of the 31 operating aircraft complying
with these requirements. See "Business of ValuJet--Aircraft." Six of Airways'
11 aircraft currently satisfy the Stage 3 requirements. ValuJet and Airways
intend to meet their Stage 3 noise requirement obligations by installing hush
kits on Stage 2 aircraft, disposing of other Stage 2 aircraft and acquiring
Stage 3 aircraft. For a discussion of the cost of Stage 3 hush kits, see
"ValuJet Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." Although ValuJet does
not believe that there will be a problem in installing the hush kits or
acquiring Stage 3 aircraft on a timely basis, there can be no assurance that
ValuJet will be able to do so or that failure to do so would not have a
material adverse effect on ValuJet's business.
Low Fuel Efficiency of Fleet
ValuJet's DC-9 Series 30 aircraft and Airways' Boeing 737-200 aircraft are
relatively fuel inefficient compared to newer aircraft and industry averages.
A significant increase in the price of jet fuel would therefore result in a
disproportionately higher increase in ValuJet's average total costs than that
of its competitors using more fuel efficient aircraft. Fuel costs also are
affected by increases in taxes imposed on sale of fuel. For example, in August
1993, the federal taxes on domestic fuel were increased by 4.3c per gallon.
ValuJet and Airways estimate that a 1.0c increase in the per gallon cost of
fuel would increase their respective fuel expenses by approximately $59,000
and $20,000 per month, respectively, based on their current fuel consumption
rates.
The cost and availability of fuel are subject to many economic and political
factors and events occurring throughout the world. Neither ValuJet nor Airways
has any agreement with any fuel suppliers assuring the availability and price
stability of fuel. Consequently, the future cost and availability of fuel to
ValuJet or Airways cannot be predicted, and substantial price or tax increases
or the unavailability of adequate supplies could have a material adverse
effect on their business.
Aircraft Acquisition Expenditures
ValuJet has contracted with McDonnell Douglas to purchase 50 MD-95 aircraft
to be delivered from 1999 to 2002. The total cost of the MD-95 aircraft to be
provided by McDonnell Douglas will exceed $1.0 billion. While McDonnell
Douglas has committed to provide assistance with respect to financing these
aircraft, ValuJet will be required to obtain its financing from other sources.
While ValuJet believes that financing for these aircraft will be available,
there can be no assurances that such additional financing will remain
available when needed or be available on attractive terms. ValuJet can provide
no assurance that Boeing, as the successor to McDonnell Douglas after their
merger, will manufacture and deliver the MD-95 aircraft in accordance with the
terms of the purchase contract.
For a summary of some of ValuJet's capital requirements under its aircraft
acquisition program, see "ValuJet Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
As a result of the accident involving Flight 592, the resulting heightened
FAA scrutiny, customer acceptance concerns and the FAA aircraft approval
process, ValuJet's continuing expansion has been and may continue to be
delayed. Accordingly, ValuJet may not be able to utilize all the aircraft it
has committed to purchase. Although ValuJet has obtained attractive purchase
terms from McDonnell Douglas, if ValuJet cannot use such aircraft, it may be
required to sell or lease such aircraft on terms which will depend upon market
conditions at the time. There can be no assurance that ValuJet will not suffer
a financial loss from any such sales or leases. See "Risk Factors--
Accident/Suspension of Operations."
Employee Relations
ValuJet believes it operates with lower labor costs than many established
airlines, principally due to greater flexibility in its utilization of
personnel. There can be no assurance that ValuJet will be able to maintain
these
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advantages for any extended period of time. Many airline industry employees
are represented by labor unions. Other than its flight attendants and
mechanics, ValuJet's employees are not unionized. The Association of Flight
Attendants ("AFA") has filed a lawsuit against ValuJet regarding the
termination of employment of certain former flight attendants. See "Business
of ValuJet--Litigation." There can be no assurance that there will not be
further unionization or that the existing level of unionization of ValuJet's
employees will not materially increase ValuJet's costs.
Airways has 33 mechanics and ten maintenance stores personnel represented by
the International Association of Machinists (IAM). Contract negotiations are
underway with the mechanics. The remainder of the employees at Airways are
non-union. Union organizing activity directed at various employee groups is
ongoing; therefore, there can be no assurance that the current labor
environment will continue.
Risks of Expansion
ValuJet intends to expand its operations into new markets, subject to FAA
and DOT approval. Although ValuJet's low fare service had previously been
accepted in ValuJet's markets, there can be no assurance that its service will
continue to be accepted in its markets, particularly in light of the accident
involving Flight 592 and increased competition in ValuJet's markets.
Furthermore, ValuJet's continued expansion will require substantial additional
capital expenditures, thereby increasing the risks associated with expansion.
Nontraditional Distribution System and Reliance on Automation
ValuJet employs a computerized airline reservation system which does not
require ValuJet to issue traditional airline tickets. Instead, at the time of
sale/reservation, ValuJet provides its customers with a confirmation number
similar to the systems used by hotels and car rental agencies. Furthermore,
ValuJet does not participate in the Airline Reporting Corporation ("ARC"), the
airline industry collection agent for travel agency sales. ValuJet bills and
collects directly from travel agents based on sales information generated
through its automation system at the time of the travel agent reservation.
ValuJet relies on its computerized information and reservation system as an
important factor in its business strategy. In the event of unanticipated
problems, ValuJet might experience system breakdowns, delays and additional,
unbudgeted expense to remedy the defect or to replace the defective system
with an alternative system. Any material failure of such system could
materially adversely affect ValuJet's business.
Airport Access
As of August 15, 1997, ValuJet provided air service to 23 markets primarily
from Atlanta and Airways provided air service to 21 markets from Orlando.
ValuJet's and Airways' markets are located primarily in the eastern United
States. In late 1995, ValuJet attempted to acquire flight slots at New York's
LaGuardia Airport from TWA. When the slots were ultimately sold to Delta,
ValuJet filed suit to enjoin the transaction. Although injunctive relief was
denied, ValuJet has amended its lawsuit to seek antitrust damages. See
"Business of ValuJet--Litigation." Subsequently, ValuJet was able to lease
other slots at LaGuardia from Continental Airlines which enabled ValuJet to
commence service to New York in May 1996, but ValuJet subsequently
relinquished its slots as a result of the suspension of operations on June 17,
1996. Access to certain "slot" controlled airports (such as Washington's
National, New York's Kennedy and LaGuardia and Chicago's O'Hare) is limited
and there can be no assurance that ValuJet will be able to obtain or maintain
access to such airports at an acceptable cost. Any condition which would deny
or limit ValuJet's access to the airports it serves or seeks to serve may have
a material adverse effect on ValuJet's business.
Reliance on Others
ValuJet has entered into agreements with contractors, including other
airlines, to provide certain facilities and services required for its
operations, including aircraft maintenance, ground facilities, baggage
handling and personnel training. ValuJet will likely need to enter into
similar agreements in any new markets it decides to serve. All of these
agreements are subject to termination after notice. ValuJet's reliance upon
others to provide essential services on behalf of ValuJet may result in
relative inability to control the efficiency, timeliness and
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quality of contract services. For example, ValuJet's reliance on SabreTech,
Inc. ("SabreTech") for certain maintenance work appears to have contributed to
the accident involving Flight 592. Management expects that ValuJet will be
required to rely on independent contractors for some time in the future.
AirTran contracts with Delta to provide ground handling service and five
gates at Orlando International Airport. In addition, AirTran contracts for
ground handling services with Delta at the Cincinnati Airport. The contracts
under which those services are performed are cancelable by either party
provided the requisite notice provisions are met. Although no notice has been
given to date that Delta intends to cancel these contracts, there can be no
assurance that they will not serve notice at a later date of their intention
to cancel forcing AirTran to find alternate gates in Orlando and make
alternate arrangements for ground handling in Orlando and Cincinnati.
AirTran entered into a code share agreement with Comair on June 19, 1997
wherein AirTran sells through flights from AirTran cities (other than
Cincinnati and Orlando) to nine Comair destinations in Florida and Nassau
under the tradename "AirTran Florida Connection." Comair is owned 25% by Delta
and has its own code share agreement with Delta under which through passengers
from Delta cities fly on Comair to its destinations, tradenamed "The Delta
Connection." The code share agreement that AirTran has with Comair can be
canceled by either party, provided the requisite notice provisions are met.
Although no notice has been given to date that Comair intends to cancel this
contract, there can be no assurance that they will not serve notice at a later
date of their intention to cancel, forcing AirTran to stop selling those
routes and potentially reducing AirTran's traffic and revenue.
Risk of Loss
As evidenced by the crash of Flight 592 on May 11, 1996, ValuJet is exposed
to potential catastrophic losses that may be incurred in the event of an
aircraft accident. Any such accident could involve not only repair or
replacement of a damaged aircraft and its consequent temporary or permanent
loss from service, but also significant potential claims of injured passengers
and others. ValuJet is required by the Department of Transportation ("DOT") to
carry liability insurance on each of its aircraft. ValuJet currently maintains
liability insurance in the amount of $750.0 million per occurrence. Although
ValuJet currently believes its insurance coverage is adequate, there can be no
assurance that the amount of such coverage will not be changed or that ValuJet
will not be forced to bear substantial losses from accidents. ValuJet's cost
of insurance substantially increased after the accident. Substantial claims
resulting from an accident in excess of related insurance coverage could have
a material adverse effect on ValuJet. Moreover, any aircraft accident, even if
fully insured, could cause and has caused a public perception that some of
ValuJet's aircraft are less safe or reliable than other aircraft, which could
have and has had a material adverse effect on ValuJet's business.
Dependence on Executive Officers
ValuJet is dependent on the services of D. Joseph Corr (President and Chief
Executive Officer of ValuJet Airlines, Inc.) and its other executive officers.
The loss of services of these officers could materially and adversely affect
the business of ValuJet and its future prospects. ValuJet does not now, and
does not presently intend to, maintain key man life insurance on any of
ValuJet's officers.
Control by Management Group
As of August 31, 1997, ValuJet's Executive Officers and Directors (ten
persons) owned approximately 18.8% of ValuJet's outstanding voting stock,
without taking into account the exercise of any of the outstanding employee
stock options to purchase Common Stock. These stockholders, acting together,
would be able to exercise significant control over all matters requiring
stockholder approval, including election of directors and approval of
significant corporate transactions. See "Principal Stockholders."
Competition and Competitive Reaction
The airline industry is highly competitive, primarily due to the effects of
the Airline Deregulation Act of 1978 (the "Deregulation Act"), which has
substantially eliminated government authority to regulate domestic routes and
fares, and has increased the ability of airlines to compete with respect to
destinations, flight
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frequencies and fares. ValuJet competes with airlines which presently serve
ValuJet's current and proposed routes and which are larger and have greater
name recognition and greater financial resources than ValuJet. ValuJet may
also face competition from airlines which may begin serving any of the markets
ValuJet serves or may subsequently serve, from an expansion of existing low
fare service offered by current competitors, from new low cost airlines that
may be formed to compete in the low fare market and from ground transportation
alternatives.
Other airlines may meet or price their fares below ValuJet's fares or
introduce new non-stop service between cities served by ValuJet on a one-stop
basis, and prevent ValuJet from attaining a share of the passenger traffic
necessary to achieve profitable operations. ValuJet's ability to meet price
competition depends on its ability to operate at costs equal to or lower than
its competitors or potential competitors. In addition, competitors with
greater financial resources than ValuJet may price their fares below ValuJet's
fares or increase their service which could have a material adverse effect on
ValuJet's business.
Recent legislation imposes taxes on domestic airline transportation equal to
a per segment flown charge (initially $1.00 to be increased to $3.00 by 2003)
plus a percentage of the ticket price (initially 9% to be decreased to 7.5% in
1999). These taxes will likely have a greater effect on leisure travelers.
Since ValuJet relies to a large extent on leisure travelers, such a tax
increase may affect ValuJet to a greater extent than ValuJet's competitors who
rely more heavily on business travelers.
Delta Express, a low cost/low fare division of Delta, entered service in
several of Airways' markets in 1996. As a result of the intense competitive
environment generated by Delta Express and by Southwest Airlines' entry into
certain markets, Airways withdrew service from Nashville, Hartford and
Providence. Airways presently is engaged in competition with Delta Express on
its route to Islip, New York. Furthermore, Delta is the largest carrier in
Orlando, accounting for 31% of enplanements (based on February 1997 data).
There can be no assurance that Airways will not face greater competition from
Delta, Delta Express and Southwest Airlines in the future.
Cyclical Nature of Airline Industry
The airline industry is highly sensitive to general economic conditions.
Because a substantial portion of airline travel is leisure travel, the
industry tends to experience severe adverse financial results during general
economic downturns. Any prolonged general reduction in airline passenger
traffic may adversely affect ValuJet, particularly since ValuJet is
substantially dependent on leisure travel and on the stimulation of additional
discretionary air travel.
Federal Regulation
Each of ValuJet and Airways has the necessary authority to conduct flight
operations, including a Certificate of Public Convenience and Necessity from
the DOT and an operating certificate from the FAA; however, the continuation
of such authority is subject to continued compliance with applicable statutes,
rules and regulations pertaining to the airline industry, including any new
rules and regulations that may be adopted in the future. The FAA has the
authority to bring proceedings to enforce the safety laws and regulations
under the Federal Aviation Act of 1958, as amended (the "Aviation Act"),
including the assessment of civil penalties, suspension or revocation of an
airline's authority to operate and the pursuit of criminal sanctions. The DOT
has similar authority with regard to enforcement of the economic laws and
regulations under the Aviation Act. No assurance can be given with respect to
the cost of compliance with all present and future rules and regulations and
the effect on the business of ValuJet or Airways, particularly their expansion
plans and aircraft acquisition program.
Extraordinary regulatory review of ValuJet's operations by the FAA followed
the accident involving Flight 592 on May 11, 1996, and various FAA findings
and violations of FAA safety rules ultimately resulted in the consent order
under which ValuJet's operations were suspended on June 17, 1996. In the
consent order, the FAA alleged that ValuJet violated various federal
regulations relating to aircraft maintenance, maintenance manuals, training,
record keeping and reporting and ValuJet agreed to present a plan to the FAA
specifying the methods by which it would demonstrate to the FAA its
qualifications to hold an air carrier operating certificate. ValuJet
implemented several operating and administrative charges to address the FAA's
concerns and
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subsequently satisfied the FAA with respect to the safety violations
referenced in the consent order. The FAA returned ValuJet's operating
certificate to it on August 29, 1996. ValuJet is likely to be subject to
continuing regulatory scrutiny which could affect ValuJet's operations,
acquisition program and expansion plans indefinitely.
Unauthorized Parts
ValuJet has heavy aircraft maintenance as well as engine and component
overhaul performed by FAA approved contract maintenance providers. Each of the
contractors as well as ValuJet has procedures in place to ensure the use of
authorized materials during the performance of maintenance. A risk exists,
however, that through fraud or negligence unauthorized parts could be used on
any air carrier's aircraft including those of ValuJet.
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THE AIRWAYS MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to the holders of
Airways Common Stock in connection with the solicitation by the Airways Board
of Directors of proxies for use at the Airways Meeting, at which the Airways
stockholders will be asked to vote upon a proposal to approve and adopt the
Merger Agreement and Plan of Merger. The Airways Meeting will be held at 10:00
a.m., local time, on November 17, 1997, at AirTran Airways' Maintenance Hangar
Base at 4170 Wiley Drive, Orlando, Florida 32827.
Airways stockholders are requested promptly to sign, date and return the
accompanying proxy card to Airways in the enclosed postage-paid, addressed
envelope.
Any Airways stockholder who has delivered a proxy may revoke it at any time
before it is voted by giving notice of revocation in writing or submitting to
Airways a signed proxy card bearing a later date, provided that such notice or
proxy card is actually received by Airways before the vote of stockholders or
in open meeting prior to the taking of the stockholder vote at the Airways
Meeting. Any notice of revocation should be sent to Airways, 6280 Hazeltine
National Drive, Orlando, Florida 32822, Attention: Corporate Secretary. The
shares represented by properly executed proxies received at or prior to the
Airways Meeting and not subsequently revoked will be voted as directed in such
proxies. IF INSTRUCTIONS ARE NOT GIVEN, SHARES REPRESENTED BY PROXIES RECEIVED
WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND PLAN OF
MERGER AND IN THE DISCRETION OF THE PROXY HOLDER AS TO ANY OTHER BUSINESS AS
MAY PROPERLY COME BEFORE THE AIRWAYS MEETING. As of the date of this Joint
Proxy Statement/Prospectus, Airways is unaware of any other matter to be
presented at the Airways Meeting.
Solicitation of proxies will be made by mail but also may be made by
telephone or facsimile or in person by the directors, officers and employees
of Airways, who will receive no additional compensation for such solicitation
but may be reimbursed for out-of-pocket expenses. Brokerage houses, nominees,
fiduciaries and other custodians will be requested to forward solicitation
materials to beneficial owners and will be reimbursed for their reasonable
out-of-pocket expenses. Corporate Investor Communications, Inc. has been
engaged by Airways to act as a proxy solicitor and will receive a base fee of
$4,500, plus expenses.
Airways stockholders should not forward any stock certificates with their
proxy cards.
RECORD DATE; VOTE REQUIRED
Airways' Board of Directors has established the close of business on October
3, 1997, as the Record Date for determining the stockholders entitled to
notice of and to vote at the Airways Meeting. Only Airways stockholders of
record as of the Record Date will be entitled to vote at the Airways Meeting.
Approval of the Merger requires the affirmative vote of a majority of the
shares of Airways Common Stock entitled to vote at the Airways Meeting.
Therefore, an abstention, broker non-vote or failure to return a properly
executed proxy card will have the same effect as a vote against the Merger. As
of the Record Date, there were approximately 9,094,937 shares of Airways
Common Stock outstanding and entitled to vote at the Airways Meeting, with
each share entitled to one vote.
The presence, in person or by proxy, of a majority of the outstanding shares
of Airways Common Stock is necessary to constitute a quorum of the
stockholders in order to take action at the Airways Meeting. For these
purposes, shares of Airways Common Stock that are present, or represented by
proxy, at the Airways Meeting will be counted for quorum purposes regardless
of whether the holder of the shares or proxy votes on the Merger. Abstentions
will not voted in favor of any postponement of the Airways Meeting to allow
for additional solicitations.
The directors and executive officers of Airways beneficially owned, as of
the Record Date, 885,515 shares (or approximately 9.29% of the outstanding
shares) of Airways Common Stock. As of the Record Date, neither ValuJet nor
the directors and executive officers of ValuJet beneficially owned any shares
of Airways Common Stock.
Robert D. Swenson, Lowell T. Swenson and Carl R. Pohlad have agreed to vote
an aggregate of 2,549,953 shares of Airways Common Stock in favor of the
Merger.
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THE VALUJET MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to the holders of
ValuJet Common Stock in connection with the solicitation by the ValuJet Board
of Directors of proxies for use at the ValuJet Meeting, at which the ValuJet
stockholders will be asked to vote upon a proposal to approve and adopt the
Merger Agreement and Plan of Merger, the Name Change and the By-law Amendment.
The ValuJet Meeting will be held at 8:30 a.m., local time, on November 17,
1997, at the law offices of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.,
3490 Piedmont Road, Suite 400, Atlanta, Georgia 30305.
ValuJet stockholders are requested promptly to sign, date and return the
accompanying proxy card to ValuJet in the enclosed postage-paid, addressed
envelope.
Any ValuJet stockholder who has delivered a proxy may revoke it at any time
before it is voted by giving notice of revocation in writing or submitting to
ValuJet a signed proxy card bearing a later date, provided that such notice or
proxy card is actually received by ValuJet before the vote of stockholders or
in open meeting prior to the taking of the stockholder vote at the ValuJet
Meeting. Any notice of revocation should be sent to ValuJet, 1800 Phoenix
Boulevard, Suite 126, Atlanta, Georgia 30349, Attention: Corporate Secretary.
The shares represented by properly executed proxies received at or prior to
the ValuJet Meeting and not subsequently revoked will be voted as directed in
such proxies. IF INSTRUCTIONS ARE NOT GIVEN, SHARES REPRESENTED BY PROXIES
RECEIVED WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
PLAN OF MERGER, THE NAME CHANGE AND THE BY-LAW AMENDMENT AND IN THE DISCRETION
OF THE PROXY HOLDER AS TO ANY OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE
VALUJET MEETING. As of the date of this Joint Proxy Statement/Prospectus,
ValuJet is unaware of any other matter to be presented at the ValuJet Meeting.
Solicitation of proxies will be made by mail but also may be made by
telephone or facsimile or in person by the directors, officers and employees
of ValuJet, who will receive no additional compensation for such solicitation
but may be reimbursed for out-of-pocket expenses. Brokerage houses, nominees,
fiduciaries and other custodians will be requested to forward solicitation
materials to beneficial owners and will be reimbursed for their reasonable
out-of-pocket expenses. Corporate Investor Communications, Inc. has been
engaged by ValuJet to act as a proxy solicitor and will receive a base fee of
$6,000, plus expenses.
RECORD DATE; VOTE REQUIRED
ValuJet's Board of Directors has established the close of business on
October 3, 1997, as the Record Date for determining the stockholders entitled
to notice of and to vote at the ValuJet Meeting. Only ValuJet stockholders of
record as of the Record Date will be entitled to vote at the ValuJet Meeting.
Approval of the Merger and Name Change requires the affirmative vote of a
majority of the shares of ValuJet Common Stock entitled to vote at the ValuJet
Meeting. Therefore, abstentions, broker non-votes or failures to return a
properly executed proxy card will have the same effect as a vote against the
Merger and Name Change. The affirmative vote of a majority of the shares of
ValuJet Common Stock present in person or represented by proxy will be
required to approve the By-law Amendment to be considered at the ValuJet
Meeting. As of the Record Date, there were approximately 55,012,936 shares of
ValuJet Common Stock outstanding and entitled to vote at the ValuJet Meeting,
with each share entitled to one vote.
The presence, in person or by proxy, of a majority of the outstanding shares
of ValuJet Common Stock is necessary to constitute a quorum of the
stockholders in order to take action at the ValuJet Meeting. For these
purposes, shares of ValuJet Common Stock that are present, or represented by
proxy, at the ValuJet Meeting will be counted for quorum purposes regardless
of whether the holder of the shares or proxy fails to vote on the Merger or
other proposals to be voted upon. Abstentions will not be voted in favor of
any postponement of the ValuJet Meeting to allow for additional solicitations.
The directors and executive officers of ValuJet and their affiliates
beneficially owned, as of the Record Date, 8,292,740 shares (or approximately
15.1% of the outstanding shares) of ValuJet Common Stock. As of the Record
Date, neither Airways nor the directors and executive officers of Airways
beneficially owned any shares of ValuJet Common Stock.
Robert L. Priddy, Lewis H. Jordan, Maurice J. Gallagher, Jr. and Timothy P.
Flynn have agreed to vote an aggregate of 7,864,240 shares of ValuJet Common
Stock in favor of the Merger.
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THE MERGER
The following description of the Merger does not purport to be complete and
is qualified in its entirely by reference to the Appendices hereto, including
the Agreement, which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and incorporated herein by reference. All stockholders
are urged to read the Appendices in their entirety.
GENERAL
Upon consummation of the Merger, Airways will merge with and into ValuJet.
ValuJet will survive the Merger and ValuJet will change its name to AirTran
Holdings, Inc. and the separate existence of Airways will cease. AirTran will
become a wholly owned subsidiary of ValuJet.
At the Effective Date, each share of Airways Common Stock issued and
outstanding will be converted into one newly issued share of ValuJet Common
Stock. In the event of a stock dividend, stock split or similar stock
reclassification of ValuJet's Common Stock occurring prior to the Effective
Date, the conversion ratio will be correspondingly adjusted. Each share of
ValuJet Common Stock outstanding immediately prior to the Effective Date will
remain outstanding and unchanged as a result of the Merger. No fractional
shares of ValuJet Common Stock will be issued in connection with the Merger.
TREATMENT OF AIRWAYS OPTIONS AND WARRANTS
The Agreement provides that all rights with respect to Airways Common Stock
pursuant to stock options granted by Airways under its stock option plans or
stock warrants which are outstanding at the Effective Date, whether or not
then exercisable, will become rights with respect to ValuJet Common Stock and
ValuJet will assume each of such options and warrants in accordance with their
respective terms. After the Effective Date, such options and warrants will
become options and warrants to purchase ValuJet Common Stock, with the
exercise price and number of shares of ValuJet Common Stock purchasable
thereunder being equal to the exercise price and number of shares of Airways
Common Stock that could have been purchased thereunder immediately prior to
the consummation of the Merger. The executive officers and directors of
Airways collectively hold options to purchase 541,000 shares of Airways Common
Stock.
BACKGROUND OF AND REASONS FOR THE MERGER
Since the successful initiation of ValuJet's business plan in 1993, ValuJet
has received and pursued generally various proposals from others in the
airline industry. In October 1995, ValuJet created a holding company
structure, one of the purposes of which was to provide more flexibility for
possible acquisitions of other businesses.
After the accident involving Flight 592 and the suspension of ValuJet's
operations in June 1996, ValuJet management believed that closer scrutiny has
been focused on low fare airlines and the FAA's oversight of such airlines. In
such environment, ValuJet management believes that a consolidation of low fare
airlines will strengthen their ability to compete with the major airlines.
Since the recommencement of ValuJet's operations on September 30, 1996,
ValuJet has actively sought a merger partner to implement this strategy.
Airways was an attractive target to ValuJet as a result of its low fare
philosophy, its target market of leisure travelers, its location in the
eastern United States and its historical operating performance. Preliminary
discussions between ValuJet and Airways occurred during October and November
1996 between Robert L. Priddy and Robert D. Swenson, the Chief Executive
Officers of ValuJet and Airways, respectively. After a period of inactivity,
discussions between the parties recommenced in February 1997, at which time a
confidentiality agreement, in customary form, was signed by the parties. After
several discussions between Messrs. Priddy and Swenson, Airways legal counsel
commenced a due diligence review of the outstanding ValuJet litigation matters
and a meeting was held in Atlanta on February 13, 1997, at which
representatives of the parties were present along with their respective legal
counsel and investment bankers. After that meeting, discussions were
terminated by Airways because the
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timetable presented by ValuJet did not provide Airways with sufficient
opportunity to conduct due diligence before entering into a definitive
agreement and because Airways was unwilling to enter into a lockup agreement
proposed by ValuJet. Although Airways did not have a specific target, Airways
also sought to achieve an exchange ratio better than the proposed ratio of
0.8276 of a share of ValuJet for each outstanding share of Airways.
During this period, ValuJet engaged in preliminary discussions with other
airlines. The other airlines pursuing discussions with ValuJet appeared to be
interested in the strength of ValuJet's balance sheet and cash position to
support or fund their operations. Other than negotiations with one airline
(discussed below), the discussions with other airlines did not result in any
written proposals and were not pursued by ValuJet as a result of the weak
financial condition of the other airlines involved or the incompatibility of
operations. However, during this period, ValuJet was actively involved in
merger discussions with one other airline. These negotiations ceased as the
parties could not reach agreement on the acquisition price of the other
airline, the amount of cash payment to be made in connection with the proposed
transaction and the degree of control to be exercised by insiders of the
target company.
Discussions between the parties recommenced in Minneapolis, Minnesota, on
March 20, 1997, when D. Joseph Corr, President and Chief Executive Officer of
ValuJet Airlines, met with Carl R. Pohlad, a significant stockholder of
Airways, and John K. Ellingboe, an outside director of Airways. Thereafter,
negotiations were pursued primarily between Mr. Corr and Mr. Ellingboe. The
parties exchanged various term sheets in pursuit of a mutually agreeable
transaction.
On May 22, 1997, the Board of Directors of Airways held a special meeting to
consider strategic options, including possible business combinations with
three air carriers including ValuJet. The Airways Board concluded that a
business combination with one of the air carriers was not desirable because of
its financial condition and its demand for a large equity interest in Airways.
The Airways Board determined that the proposal by such carrier presented too
much risk relative to the possible benefits to Airways and that the proposal
was not in the best interests of Airways' stockholders. The Airways Board also
considered ways of generating the additional cash required by Airways to
remain independent, including through the possible refinancing of Airways'
Orlando hangar and the sale-leaseback of an aircraft. Based upon discussions
with its financial advisor, the Airways Board concluded that additional
financing through a public equity offering was not a viable alternative. After
lengthy deliberations, the Airways Board directed Messrs. Swenson and
Ellingboe to continue negotiations with ValuJet and a second potential merger
candidate. The Airways Board met on June 17, 1997, to discuss the status of
the negotiations with ValuJet. At that meeting, Mr. Swenson reported that the
second candidate was not interested in moving forward with a business
combination and instead sought only a possible code-sharing relationship with
AirTran. Financial terms of a potential business combination had not been
negotiated with this party and discussions were not continued.
On June 25, 1997, the parties met again in Atlanta with their legal counsel
and authorized the commencement of due diligence and the preparation of a
definitive merger agreement. On-site due diligence of Airways was conducted by
representatives of ValuJet during the week of June 30, 1997. Similarly, on-
site due diligence of ValuJet was conducted by Airways representatives during
the weeks of June 30 and July 7, 1997. Subsequently, additional off-site due
diligence and discussions with legal counsel and financial advisors were
undertaken by both companies.
On July 1, 1997, the Airways Board convened to discuss the results of the
due diligence investigations and to consider the structure of a possible
transaction with ValuJet. Mr. Swenson reviewed with the Airways Board all of
the efforts over the course of the preceding and current fiscal years to
engage in business combinations or other transactions which would enhance
stockholder value. Airways' financial and legal advisors presented oral
reports. The Airways Board then authorized and directed the continuation of
negotiations and due diligence investigations concerning a possible
transaction with ValuJet.
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During the negotiations between the parties, Airways disclosed that AirTran
was pursuing a sale leaseback transaction with respect to one of its owned
Boeing 737-200 aircraft in order to provide cash for its operations. Rather
than having AirTran commit to a long term lease at what ValuJet management
believed was a high rate, ValuJet offered to provide the financing itself. As
a result of these discussions, ValuJet loaned AirTran $7.0 million on July 3,
1997, guaranteed by Airways and secured by a first priority security interest
on one Boeing 737-200 aircraft. The loan bears interest at 10% per annum and
is due in December 1997, subject to a three-month extension if the Merger is
not consummated by November 30, 1997.
On July 9, 1997, at a special meeting of the Board of Directors of ValuJet,
due diligence reports on Airways given by ValuJet's financial officers,
management and legal counsel were considered in depth. Representatives of
Robinson-Humphrey commented on the fairness of the Merger to ValuJet's
stockholders. Legal counsel then reviewed the terms and conditions of the
proposed Merger Agreement. After a lengthy discussion, ValuJet's Board
unanimously approved the Merger on the terms and conditions substantially as
provided in the Merger Agreement, subject to receipt of a fairness opinion
from Robinson-Humphrey, and further approved the issuance, when necessary and
as appropriate, of a press release regarding the Merger.
A special meeting of the Board of Directors of Airways was held on July 9
and 10, 1997 for the purpose of considering the proposed merger with ValuJet.
PaineWebber presented its report to the Airways Board, including an in-depth
discussion of the procedures employed in their evaluation of the fairness of
the Exchange Ratio and their conclusions based on those procedures. On July
10, 1997, the Merger Agreement was unanimously approved by the Airways Board
of Directors and was authorized to be submitted to the stockholders of Airways
for approval.
On July 10, 1997, the parties executed the Merger Agreement and issued a
joint press release announcing the execution of the Agreement.
On September 8, 1997, ValuJet loaned AirTran $5.7 million guaranteed by
Airways and secured by a mortgage on AirTran's leasehold interest in its
hangar. The loan bears interest at 12% per annum and is due in December 1997,
subject to a three-month extension if the Merger is not consummated by
November 30, 1997.
On September 23, 1997, ValuJet Airlines and AirTran entered into a Code
Share Agreement which will permit the airlines to use a single designator code
in the Official Airline Guide and in reservation systems. In conjunction with
the Code Share Agreement, the airlines have entered into a License Agreement
which gives ValuJet the non-exclusive use of the name "AirTran Airlines,"
AirTran's designator code "FL" and AirTran's service marks. In the event the
Merger is not consummated by November 30, 1997, the License Agreement will
terminate in May 1998. The Code Share Agreement is terminable by either party
upon notice in accordance with the terms of the agreement. On September 24,
1997, ValuJet Airlines announced that it would begin using the "AirTran
Airlines" name. See "Business of ValuJet-Strategy."
Airways' Reasons for the Merger. The Airways Board of Directors has
unanimously approved the Agreement and has determined that the Merger is in
the best interests of Airways and its stockholders. The terms of the Merger
were the result of arms-length negotiations between representatives of Airways
and representatives of ValuJet.
The Merger Agreement was approved by the Airways Board following its review
of the alternatives for increasing stockholder value, creating flexible
options for the future growth of Airways and advancing Airways' strategic
goals which had been considered during the preceding and current fiscal years.
In making its determination to approve the Merger Agreement, the Airways Board
considered, with the assistance of its management and legal and financial
advisors, the following material factors:
The financial terms of the Merger. PaineWebber presented to the Airways
Board a transaction valuation analysis which showed that Airways' stockholders
would receive a 32.2% premium in the Merger, based on the relative price per
share of Airways and ValuJet Common Stock on July 7, 1997. Based on stock
prices on July 7,
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1997, PaineWebber arrived at the following per share valuation ranges for
Airways Common Stock: comparable public company analysis, $3.60 to $5.75;
comparable transaction analysis, $2.15 to $3.75; and premiums paid analysis,
$6.20 to $6.75. Based on ValuJet's closing price of $6.94 on July 7, 1997, the
Exchange Ratio in the Merger exceeds the implied exchange ratios derived from
the foregoing valuations, which ranged from 0.31x to 0.97x.
The potential effect of a business combination on Airways and its
stockholders. The Airways Board considered the relative benefits of
alternative business combinations with three air carriers, including ValuJet,
including (i) the estimated relative cash position of the entity following
completion of the transaction; (ii) estimated route synergies following
completion of the transaction, such as non duplication of existing route
investments and fit for future expansion and route blending purposes; (iii)
management; (iv) brand identity and in the case of a tranaction with ValuJet,
the use of the AirTran name for the combined entity; (v) financial markets;
(vi) balance sheet; (vii) aircraft fleet, including the number of aircraft,
commonality of types, and condition of the combined fleet after the
transaction; (viii) infrastructure; (ix) market niche, including an assessment
of the defensibility of current market niche and an estimate of the post-
transaction niche; (x) labor issues, including an assessment of the impact of
the transaction on Airways' current officers and employees; (xi) cost
structure; (xii) post-transaction stock ownership percentages of the current
Airways stockholders, relative to the value contributed by the other potential
parties to a transaction; (xiii) risk, including an assessment of the risk to
the Airways' stockholders of the transaction not being consummated and the
estimated risks of the post-transaction combined company; and (xiv) an
estimate of the potential for the increase in value for the Airways'
stockholders as stockholders of the post-transaction combined company.
The effect of remaining independent compared to the effect of merging with
ValuJet. The Airways Board considered the strategic alternatives available to
Airways, including remaining independent or merging with another air carrier,
including ValuJet. The Airways Board examined means of generating additional
cash to sustain Airways as an independent company, including the possible
refinancing of Airways' Orlando hangar facility, sale-leaseback financing of
an aircraft, obtaining access to restricted cash through a third-party
guarantee of credit card receipts and the code-sharing arrangement with Comair
or a public offering of common stock. After detailed consideration of the
advantages and disadvantages of a business combination with three air carriers
including ValuJet, the Airways Board concluded that a merger with ValuJet
would provide greater value to Airways' stockholders than would remaining
independent or pursuing a transaction with the other air carriers under
consideration, one of which ultimately sought only a code-sharing relationship
and the other of which had made a proposal which the Airways Board concluded
was not in the best interests of Airways' stockholders for the reasons
described above.
Need to expand operations. The Airways Board considered the general growth
trend of air carriers, either through internal expansion or acquisitions, and
the belief that achieving sustainable profitability would require Airways to
expand its operations.
Information concerning ValuJet. Airways' management and legal counsel
presented information to the Airways Board concerning the business,
operations, profits and losses, assets, liabilities, financial condition, debt
structure, litigation and potential liabilities of ValuJet. Particular
emphasis was placed on the effects of ValuJet's suspension of operations since
the loss of Flight 592, claims arising from the accident, lawsuits alleging
securities law violations by ValuJet, government investigations of ValuJet and
the possibility that ValuJet's lenders could accelerate its indebtedness as
the result of certain covenant violations. The Airways Board viewed ValuJet's
strong cash position as advantageous.
Advice of financial advisor and fairness opinion. The Airways Board received
the report of PaineWebber, its financial advisor, which compared Airways with
selected peer air carriers and the premium to be paid for Airways compared
with premiums paid in similar transactions. Additionally, the Airways Board
considered the oral opinion of PaineWebber (including the assumptions and
financial information and projections relied upon by PaineWebber in arriving
at such opinion) that, as of July 9, 1997, the Exchange Ratio was fair, from a
financial point of view, to the stockholders of Airways. See "--Opinions of
Financial Advisors."
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Certain financial analyses of ValuJet and Airways. The Airways Board
considered information regarding recent and historical stock performance,
valuation analyses, pro forma financial information, comparative financial and
operating performance data and comparable merger and acquisition transactions
presented by PaineWebber.
Certain non-financial factors. The Airways Board noted the general high
quality of ValuJet's current employees and senior management and the favorable
terms of ValuJet's contract to purchase 50 new MD-95 aircraft. The Airways
Board also considered the terms of the Merger Agreement, including Airways'
right to terminate the Merger Agreement in the event that Airways received a
superior acquisition proposal from a third party. The Airways Board required
that the Merger be tax-free, for federal income tax purposes, to Airways'
stockholders.
Regulatory approvals. The Airways Board considered the probability and
timing of receiving the regulatory approvals necessary to consummate the
Merger. See "The Merger--Regulatory Approvals."
The Airways Board did not quantify or assign relative values to the factors
considered in reaching its determination that the Merger is advisable and fair
to, and in the best interests of, Airways and its stockholders.
AIRWAYS' BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT AIRWAYS STOCKHOLDERS
VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND PLAN OF MERGER.
ValuJet's Reasons for the Merger. The ValuJet Board of Directors has
unanimously approved the Agreement and has determined that the Merger is in
the best interests of ValuJet and its stockholders. In approving the
Agreement, the ValuJet Board considered a number of factors. Without assigning
any relative or specific weights to the factors, the ValuJet Board of
Directors considered the following material factors: (a) a review of (i) the
business, operations, earnings and financial condition of Airways on an
historical and prospective basis, (ii) the demographic characteristics of the
markets in which Airways operates, including existing competition; and (iii)
the results of a due diligence review of Airways by ValuJet management and
legal counsel; (b) the overall strategic focus of ValuJet in the eastern
United States, the ability of ValuJet to maintain a low cost structure and
ValuJet's desire to expand its services; (c) the financial terms and income
tax consequences of the proposed Merger; (d) the management and operating
philosophy of Airways and its compatibility with that of ValuJet; and (e) the
opinion of its financial advisor.
The ValuJet Board approved the Merger Agreement because the Board believes
the Merger would increase the prospective profitability of ValuJet's
operations and enhance its stockholder value after consideration of the number
of shares of ValuJet stock to be issued in the Merger and that the Merger
would be able to accomplish such goals without substantially increasing
ValuJet's debt or requiring any cash payment of purchase price. The Board
believes that the Merger with Airways will enable ValuJet to operate more
competitively and profitably in the eastern United States. In particular,
Airways is an attractive target due to its focus on Orlando, Florida, one of
the most popular leisure destinations in the country, and its positive net
worth. Like ValuJet, AirTran operates lower cost, used aircraft and targets
value-conscious travelers with a limited flight frequency, no-frills product.
Both airlines rely on achieving and maintaining operating costs below industry
averages in order to offer affordable fares. The ValuJet Board believes that
the combined entity can achieve significant financial and operating synergies
and cost savings after the Merger by eliminating redundant operations,
reducing personnel and taking advantage of economies of scale in maintenance
operations and fuel purchasing. The 11 Boeing 737-200 aircraft operated by
AirTran will provide increased revenue opportunities for ValuJet through their
longer flight range and greater seating capacity as compared with ValuJet's
DC-9 aircraft. ValuJet expects that the name change of ValuJet Airlines to
AirTran Airlines and the corresponding change in image will further increase
its revenue opportunities. In addition, the ValuJet Board believes that the
increased size of ValuJet's operations and net worth after the Merger will
strengthen its ability to compete with the major airlines.
ValuJet's Board of Directors believes that the terms and price of the Merger
are fair to ValuJet stockholders based on the opinion of its financial advisor
discussed below.
VALUJET'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT VALUJET
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND PLAN
OF MERGER.
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OPINIONS OF FINANCIAL ADVISORS
ValuJet. ValuJet has retained Robinson-Humphrey to act as its financial
advisor in connection with the Merger. Representatives of Robinson-Humphrey
participated in the due diligence review of Airways and in the meeting of the
ValuJet Board of Directors held on July 9, 1997 when the merger with Airways
was considered in depth. On July 9, 1997, the ValuJet Board approved the
Merger. At the July 9, 1997 meeting, Robinson-Humphrey rendered its oral
opinion to the effect that, as of such date, an Exchange Ratio of one share of
ValuJet Common Stock for each share of Airways Common Stock was fair to the
ValuJet stockholders from a financial point of view. Robinson-Humphrey has
also rendered its written opinion to the ValuJet Board of Directors that as of
October 7, 1997, based on the information set forth therein, the Exchange
Ratio was fair, from a financial point of view, to the ValuJet stockholders.
THE FULL TEXT OF ROBINSON-HUMPHREY'S WRITTEN OPINION IS ATTACHED AS APPENDIX
B TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. THE DESCRIPTION OF THE OPINION SET FORTH HEREIN IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO APPENDIX B. VALUJET STOCKHOLDERS ARE URGED TO READ
THE OPINION IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED,
ASSUMPTIONS MADE, MATTERS CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY ROBINSON-HUMPHREY IN CONNECTION THEREWITH.
Robinson-Humphrey's opinion is directed only to the Exchange Ratio and does
not constitute a recommendation to any ValuJet stockholder regarding how such
stockholder should vote at the ValuJet Meeting.
In arriving at its opinion, Robinson-Humphrey: (i) reviewed the Merger
Agreement and certain related documents; (ii) analyzed certain audited and
unaudited financial statements and other information of ValuJet and Airways;
(iii) reviewed and discussed with management of ValuJet and Airways, the past
and current business activities and financial results and the business and
financial outlook of ValuJet and Airways; (iv) reviewed the historical price
and trading activity of the common stock of ValuJet and Airways and other
airlines; (v) compared certain financial and stock market data relating to
ValuJet and Airways with similar data of other publicly held airlines; (vi)
performed an analysis comparing the pro forma consequences of the Merger to
both ValuJet and Airways stockholders with respect to earnings per share and
tangible book value per share represented by the ValuJet Common Stock; (vii)
considered the relative contributions of ValuJet and Airways to a combined
company in terms of balance sheet, earnings and current equity market
valuation measures; (viii) reviewed the premiums, prices and multiples paid in
certain comparable acquisition transactions of airlines and of merger
transactions in general; (ix) considered the potential synergies and cost
savings that could be achieved through the Merger; and (x) evaluated the
financial and capital implications to ValuJet of the Merger.
In conducting its analysis and arriving at its opinion, Robinson-Humphrey
assumed and relied upon, without independent verification, the accuracy and
completeness of the information it reviewed for purposes of the opinion.
Robinson-Humphrey also relied upon the managements of ValuJet and Airways with
respect to the reasonableness and achievability of the financial forecasts
(and the assumptions and bases underlying such forecasts) provided to
Robinson-Humphrey. Robinson-Humphrey did not make, nor was it furnished with,
independent valuations or appraisals of the assets or liabilities of either
ValuJet or Airways or any of their subsidiaries. Robinson-Humphrey did not
express any opinion about the expected price of ValuJet Common Stock when
issued to the holders of Airways Common Stock pursuant to the Merger or the
price at which ValuJet Common Stock will trade subsequent to the Merger.
ValuJet has informed Robinson-Humphrey, and Robinson-Humphrey has assumed,
that the Merger will be recorded utilizing the purchase method of accounting.
No limitations were imposed by ValuJet or the ValuJet Board of Directors on
the scope of Robinson-Humphrey's investigation or the procedures to be
followed by Robinson-Humphrey in rendering its opinion. The opinion is
necessarily based on economic, market and other conditions as in effect on,
and the information made available to Robinson-Humphrey as of, the date of its
analysis.
In addressing the fairness, from a financial point of view, of the
consideration to be issued by ValuJet to the stockholders of Airways,
Robinson-Humphrey employed a variety of generally recognized valuation
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methodologies and merger analyses and performed those which it believed were
most appropriate for developing its opinion. The preparation of a fairness
opinion involves various determinations of the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances, and, therefore, such an opinion is not readily
susceptible to summary description. In arriving at its fairness opinion,
Robinson-Humphrey did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments about the
significance and relevance of each analysis and factor. None of the analyses
performed by Robinson-Humphrey was assigned a greater significance by
Robinson-Humphrey than any other. Accordingly, Robinson-Humphrey believes that
its analyses must be considered as a whole and that a review of selected
portions of such analyses and the factors considered therein, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying its opinion and any conclusions reached
therein. In its analyses, Robinson-Humphrey relied on projections provided by
ValuJet and Airways and assumed that current market, airline industry and
general economic conditions would continue. Any estimates contained in
Robinson-Humphrey's analyses are not necessarily indicative of actual values
or predictive of future results or values that may be significantly more or
less favorable than such estimates. Estimates of values of companies do not
purport to be appraisals or necessarily reflect the prices at which companies
or their securities actually may be sold. In addition, as described above,
Robinson-Humphrey's opinion and presentation to the ValuJet Board of Directors
was one of many factors taken into consideration by the ValuJet Board of
Directors in making its determination to approve the Merger Agreement.
The following is a brief summary of analyses performed by Robinson-Humphrey
in connection with its oral opinion delivered to the ValuJet Board of
Directors on July 9, 1997.
Comparable Public Companies Analysis. Using publicly available information,
Robinson-Humphrey compared certain financial and operating information and
ratios (described below) for Airways with corresponding financial and
operating information and ratios for a group of publicly traded airlines. The
companies included in the Airways comparable public companies analysis were
Atlantic Coast Airlines, Inc., ASA Holdings, Inc., Comair Holdings, Inc.,
Frontier Airlines, Inc., Mesa Air Group, Inc., Mesaba Holdings, Inc., Midwest
Express Holdings, Inc., Reno Air, Inc., Ryanair Holdings, plc, Skywest, Inc.,
Southwest Airlines Company and Western Pacific Airlines, Inc. (collectively,
the "Airways Comparables"). Robinson-Humphrey compared (i) price/earnings
("P/E") ratios for calendar 1997 (based on information from First Call
Earnings Estimates ("First Call") and Robinson-Humphrey Research Department
Estimates ("Robinson-Humphrey Research") which ranged from 10.4x to 21.8x for
the Airways Comparables (with a mean of 14.5x and a median of 14.1x), compared
to 16.4x for Airways (based on an Airways estimate from Principal Financial
Group); (ii) P/E ratios for calendar 1998 (based on information from First
Call and Robinson-Humphrey Research) which ranged from 8.7x to 24.5x for the
Airways Comparables (with a mean of 13.5x and a median of 12.6x), compared to
5.5x for Airways (based on the ValuJet management forecast for Airways); (iii)
the ratio of market price per share to book value per share which ranged from
1.5x to 5.8x for the Airways Comparables (with a mean of 3.3x and a median of
3.4x), compared to 2.7x for Airways; (iv) the ratio of enterprise value to
revenues for the last twelve months ("LTM") which ranged from 0.62x to 2.09x
for the Airways Comparables (with a mean of 0.98x and a median of 0.74x),
compared to 0.57x for Airways; (v) the ratio of enterprise value as a multiple
of 1997 revenues (based on Robinson-Humphrey Research estimates) which ranged
from 0.32x to 1.89x for the Airways Comparables (with a mean of 0.84x and a
median of 0.65x), compared to 0.47x for Airways (based on the ValuJet
management forecast for Airways); (vi) enterprise value as a multiple of 1997
earnings before interest, taxes, depreciation and amortization ("EBITDA")
(based on Robinson-Humphrey Research estimates) which ranged from 4.5x to
12.5x for the Airways Comparables (with a mean of 6.4x and a median of 6.3x),
compared to 6.9x for Airways (based on the ValuJet management forecast for
Airways).
Analysis of Selected Merger Transactions. Robinson-Humphrey analyzed and
compared the consideration paid in fifteen mergers and acquisitions involving
airlines occurring since December 12, 1985. In each such acquisition,
Robinson-Humphrey calculated enterprise value as a multiple of revenues, as a
multiple of LTM EBITDA, and as a multiple of LTM earnings before interest and
taxes ("EBIT") with resulting average multiples of 0.68x, 10.8x and 16.1x,
respectively, Robinson-Humphrey also calculated equity value as a multiple
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of book value and as a multiple of LTM net income with resulting average
multiples of 2.55x and 19.2x, respectively.
Premium Analysis. Robinson-Humphrey reviewed certain purchase price premiums
paid for the stock of selected publicly-held companies in acquisitions
involving total consideration of between $50 million and $150 million during
the period from July 1, 1995 to June 30, 1997. This analysis measured the
average purchase price premium paid by acquirors over the prevailing stock
market prices of acquirees one day prior to the announcement of an offer, one
week prior to the announcement of an offer, and four weeks prior to the
announcement of an offer, resulting in average premiums of 27.5%, 35.2% and
46.1%, respectively, and median premiums of 22.1%, 29.1% and 37.3%,
respectively. For all transactions with total consideration ranging from $50
million to $150 million that were announced between January 1, 1997 and June
30, 1997, the average purchase price premium paid by acquirors over the
prevailing open market stock prices of acquirees one day prior, one week prior
and four weeks prior to the announcement of an offer resulted in average
premiums of 24.8%, 30.0% and 39.3%, respectively, and median premiums of
19.3%, 26.8% and 41.0%, respectively.
Pro Forma Contribution Analysis. Robinson-Humphrey analyzed certain pro
forma effects resulting from the Merger, including the potential impact of the
Merger on projected earnings per share for the combined company. Robinson-
Humphrey analyzed the pro forma effects for the combined company with and
without merger synergies. The financial projections for ValuJet and the
potential merger synergies were provided by ValuJet management and the
financial projections for Airways were provided by Airways and modified by
ValuJet management.
No company or transaction used in the above analyses as a comparison is
identical to ValuJet, Airways or the Merger. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
the companies to which they are being compared.
In connection with its opinion dated October 7, 1997, Robinson-Humphrey
confirmed the appropriateness of its reliance on the analyses used to render
its July 9, 1997 report and oral opinion by performing procedures to update
certain of such analyses and by reviewing the assumptions on which such
analyses were based and the factors considered in connection therewith.
Robinson-Humphrey is a nationally recognized investment banking firm and, as
a customary part of its investment banking activities, is regularly engaged in
the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, private placements and valuations
for corporate and other purposes.
In the ordinary course of Robinson-Humphrey's business, Robinson-Humphrey
actively trades in ValuJet's Common Stock for its own account and for the
account of its customers and, accordingly, may at any time hold a long or
short position in such securities.
Pursuant to a letter agreement dated July 7, 1997 (the "Robinson-Humphrey
Engagement Letter"), ValuJet engaged Robinson-Humphrey to provide investment
banking advice and services to ValuJet in connection with ValuJet's review and
analysis of potential business combinations. ValuJet agreed to pay Robinson-
Humphrey a fee of $200,000 (the "Advisory Fee") upon rendering an opinion as
to whether or not the consideration payable by ValuJet in the Merger is fair
from a financial point of view. In addition, if the Merger is consummated,
ValuJet has agreed to pay Robinson-Humphrey additional compensation, based on
a percentage of the total consideration for Airways' Common Stock, less the
amount of the Advisory Fee. If the Merger is consummated, this additional
compensation will be approximately $468,700. Due to its contingent nature,
this compensation arrangement could be viewed as creating a conflict of
interest for Robinson-Humphrey. Pursuant to the Robinson-Humphrey Engagement
Letter, ValuJet has agreed to reimburse Robinson-Humphrey for reasonable
expenses incurred by Robinson-Humphrey, subject to certain limitations, and to
indemnify Robinson-Humphrey against certain liabilities in connection with its
engagement.
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Airways. Airways retained PaineWebber Incorporated ("PaineWebber") as a
financial advisor in connection with the Merger. In connection with such
engagement, Airways requested PaineWebber to render an opinion as to whether
or not the exchange ratio of one share of Airways Common Stock for each share
of ValuJet Common Stock (the "Exchange Ratio") received in the Merger is fair,
from a financial point of view, to the holders of Airways Common Stock.
In connection with the Airways Board's consideration of the Merger
Agreement, PaineWebber delivered its written opinion (the "PaineWebber
Opinion"), to the effect that, as of October 7, 1997, and based on its review
and assumptions and subject to the limitations summarized below, the Exchange
Ratio is fair, from a financial point of view, to the holders of Airways
Common Stock. The PaineWebber Opinion was prepared at the request and for the
information of the Airways Board and does not constitute a recommendation to
any holder of Airways Common Stock as to how any such stockholder should vote
with respect to the Merger.
THE FULL TEXT OF THE PAINEWEBBER OPINION, DATED OCTOBER 7, 1997, WHICH SETS
FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX C TO THIS JOINT
PROXY STATEMENT/PROSPECTUS. AIRWAYS STOCKHOLDERS ARE URGED TO READ SUCH
OPINION CAREFULLY AND IN ITS ENTIRETY. THE SUMMARY OF THE PAINEWEBBER OPINION
SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, PaineWebber, among other things: (i) reviewed,
among other public information, Airways' Annual Reports, Forms 10-K and
related financial information for the two fiscal years ended March 31, 1996
and 1997; (ii) reviewed, among other public information, ValuJet's Annual
Reports, Forms 10-K and related financial information for the three fiscal
years ended December 31, 1994, 1995 and 1996 and Form 10-Q and the related
unaudited financial information for the six months ended June 30, 1997; (iii)
reviewed certain information, including financial forecasts, relating to the
business, earnings, cash flows, assets and prospects of Airways and ValuJet,
furnished to PaineWebber by Airways and ValuJet, respectively; (iv) conducted
discussions with members of senior management of Airways and ValuJet
concerning their respective businesses and prospects; (v) reviewed the
historical market prices and trading activity for Airways Common Stock and
ValuJet Common Stock and compared such prices and trading histories with those
of certain other publicly traded companies which PaineWebber deemed to be
relevant; (vi) compared the financial position and operating results of
Airways and ValuJet with those of certain publicly traded companies which
PaineWebber deemed to be relevant; (vii) compared the financial terms of the
Merger with the financial terms of certain other business combinations which
PaineWebber deemed to be relevant; (viii) considered the potential pro forma
effects of the Merger on ValuJet; (ix) reviewed the Merger Agreement; and (x)
reviewed such other financial studies and analyses and performed such other
investigations and took into account all other matters as PaineWebber deemed
to be material or otherwise necessary to render its Opinion, including
PaineWebber's assessment of regulatory, economic, market and monetary
conditions.
In preparing the PaineWebber Opinion, PaineWebber relied on the accuracy and
completeness of all information that was publicly available, supplied or
otherwise communicated to PaineWebber by or on behalf of Airways and ValuJet,
and PaineWebber did not assume any responsibility to independently verify the
same. PaineWebber assumed that the financial forecasts examined by it were
reasonably prepared on bases reflecting the best currently available estimates
and good faith judgments of the respective senior management teams of Airways
and ValuJet as to the future performance of Airways and ValuJet, respectively.
PaineWebber also relied on the assurances of the management of each of Airways
and ValuJet that they were unaware of any facts that would make the
information or financial forecasts provided to PaineWebber incomplete or
misleading. PaineWebber also assumed, with the consent of Airways, that the
Merger will be accounted for under the purchase method of accounting and that
the Merger will qualify as a tax-free reorganization. PaineWebber did not
undertake, and was not provided with, an independent evaluation or appraisal
of the assets or liabilities (contingent or otherwise) of Airways or ValuJet
and assumed that all liabilities (contingent or otherwise, known or unknown)
of Airways and ValuJet were as set forth in their respective consolidated
financial statements. The PaineWebber Opinion is based upon regulatory,
economic, monetary and market conditions existing on the date
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thereof. Furthermore, PaineWebber expressed no opinion as to the price or
trading range at which the securities to be issued in the Merger to the
stockholders of Airways may trade at any time. The PaineWebber Opinion does
not address the relative merits of the Merger and any other transactions or
business strategies discussed by the Airways Board as alternatives to the
Merger, or the decision of the Airways Board to proceed with the Merger. The
Exchange Ratio was determined by Airways and ValuJet in arm's-length
negotiations. PaineWebber was not requested to, and did not, solicit third
party indications of interest with respect to a business combination with
Airways. Airways did not place any limitations upon PaineWebber with respect
to the procedures followed or factors considered in rendering the PaineWebber
Opinion.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses
and the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to partial analysis or
summary description. Accordingly, PaineWebber believes that its analysis must
be considered as a whole and that considering any portion of such analysis and
of the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the
PaineWebber Opinion. In its analyses, PaineWebber made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Airways and
ValuJet. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than as set forth therein. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses may actually be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty and PaineWebber does not assume responsibility for the accuracy of
such analyses and estimates.
The following paragraphs summarize the significant analyses performed by
PaineWebber in arriving at the PaineWebber Opinion.
Stock Trading History. PaineWebber reviewed the history of the trading
prices and volume for the Airways Common Stock and the ValuJet Common Stock,
both separately and in relation to each other, the Nasdaq Composite Index, a
Regional Airline Index and a Major Airline Index. The Regional Airline Index
included Amtran, Inc., Comair Holdings, Inc., Frontier Airlines, Inc., Midwest
Express Holdings, Inc., Reno Air, Inc., Vanguard Airlines, Inc., and Western
Pacific Airlines, Inc. The Major Airline Index included Alaska Air Group,
Inc., America West Airlines, Inc., AMR Corporation, Continental Airlines, Inc.
(Class B Stock), Delta AirLines, Inc., Northwest Airlines Corp., Southwest
Airlines Company, Trans World Airlines, Inc., UAL Corporation, and US Airways
Group Inc. In addition, PaineWebber reviewed the implied exchange ratio
between Airways Common Stock and ValuJet Common Stock from August 31, 1995 to
July 8, 1997 and compared this to the Exchange Ratio. PaineWebber noted that
the implied exchange ratio fell below the Exchange Ratio on each day of the
historical period except for June 18, 1996 through June 21, 1996.
Selected Comparable Public Company Analysis. Using publicly available
information, PaineWebber compared selected historical and projected financial,
operating and stock market performance data of Airways and ValuJet to the
corresponding data of the companies comprising the Regional Airline Index
(collectively, the "Regional Comparable Companies").
With respect to Airways and the Regional Comparable Companies, PaineWebber
compared multiples of total enterprise value ("TEV") (market value of equity,
based on stock market prices as of July 8, 1997, plus total debt less cash and
cash equivalents as of March 31, 1997) to latest twelve months ended March 31,
1997 ("LTM") revenue, LTM earnings before interest, taxes depreciation and
amortization ("EBITDA") and LTM earnings before interest and taxes ("EBIT").
PaineWebber also compared multiples of adjusted TEV (TEV plus capitalized
aircraft rent expense, with capitalized aircraft rent expense equal to 7.5
times LTM aircraft rent expense) to LTM earnings before interest, taxes,
depreciation, amortization and aircraft rent expense ("EBITDAR") and LTM
earnings before interest, taxes and aircraft rent expense ("EBITR").
PaineWebber also compared multiples of market value of equity, based on stock
market prices as of July 8, 1997, to book value of
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stockholders' equity as of March 31, 1997, LTM net income, and estimated
calendar years 1997 and 1998 net income based on IBES earnings estimates for
the Regional Comparable Companies and Airways management's earnings forecasts
for Airways. Airways' TEV multiples of LTM revenue, LTM EBITDA, and LTM EBIT;
adjusted TEV multiples of LTM EBITDAR and LTM EBITR; and market value of
equity multiples of book value, LTM net income and estimated 1997 and 1998 net
income were 0.6x, negative and therefore not meaningful, negative and
therefore not meaningful, negative and therefore not meaningful, negative and
therefore not meaningful, 3.6x, negative and therefore not meaningful,
negative and therefore not meaningful and 18.6x, respectively. The Regional
Comparable Companies' median TEV multiples of LTM revenue, LTM EBITDA and LTM
EBIT; adjusted TEV multiples of LTM EBITDAR and LTM EBITR; and market value of
equity multiples to book value, LTM net income and estimated 1997 and 1998 net
income were 0.5x, 5.5x, 7.3x, 8.3x, 9.6x, 2.7x, 11.8x, 13.6x and 9.3x,
respectively. PaineWebber applied the Regional Comparable Companies' median
multiples to Airways' LTM revenue, LTM EBITDA, LTM EBIT, LTM EBITDAR, LTM
EBITR, book value, LTM net income and estimated 1997 and 1998 net income and
derived a range of fully diluted equity values for Airways of $3.60 to $5.75
per Airways share. Based on the closing stock price of $6.88 for ValuJet
Common Stock on July 8, 1997, such derived equity value range for Airways
implied an exchange ratio range of 0.52x to 0.84x. PaineWebber noted that the
Exchange Ratio fell above this range.
With respect to ValuJet and the Regional Comparable Companies, PaineWebber
compared multiples of TEV to LTM revenue, LTM EBITDA and LTM EBIT. PaineWebber
also compared multiples of adjusted TEV to LTM EBITDAR and LTM EBITR.
PaineWebber also compared multiples of market value of equity to book value,
LTM net income, and estimated 1997 and 1998 net income based on IBES earnings
estimates for the Regional Comparable Companies and ValuJet management's
earnings forecasts for ValuJet. ValuJet's LTM TEV multiples of LTM revenue,
LTM EBITDA and LTM EBIT; adjusted TEV multiples of LTM EBITDAR and LTM EBITR;
and market value of equity multiples of book value, LTM net income and
estimated 1997 and 1998 net income were 3.2x, negative and therefore not
meaningful, negative and therefore not meaningful, negative and therefore not
meaningful, negative and therefore not meaningful, 3.6x, negative and
therefore not meaningful, negative and therefore not meaningful and 20.2x,
respectively. The Regional Comparable Companies' median TEV multiples of LTM
revenue, LTM EBITDA and LTM EBIT; adjusted TEV multiples of LTM EBITDAR and
LTM EBITR; and market value of equity multiples of book value, LTM net income
and estimated 1997 and 1998 net income were 0.5x, 5.5x, 7.3x, 8.3x, 9.6x,
2.7x, 11.8x, 13.6x and 9.3x, respectively. PaineWebber applied the Regional
Comparable Companies' median multiples to ValuJet's LTM revenue, LTM EBITDA,
LTM EBIT, LTM EBITDAR, LTM EBITR, book value, LTM net income and estimated
1997 and 1998 net income and derived a range of fully diluted equity values
for ValuJet of $3.80 to $5.15 per ValuJet share. PaineWebber noted that the
closing stock price of $6.88 for ValuJet Common Stock on July 8, 1997 fell
above this range.
As an additional reference point, using publicly available information,
PaineWebber compared selected historical and projected financial, operating
and stock market performance data of Airways and ValuJet to the corresponding
data of the companies comprising the Major Airline Index (collectively, the
"Major Comparable Companies"). The Major Comparable Companies' median TEV
multiples of LTM revenue, LTM EBITDA and LTM EBIT; adjusted TEV multiples of
LTM EBITDAR and LTM EBITR; and market value of equity multiples of book value,
LTM net income and estimated 1997 and 1998 net income were 0.5x, 4.1x, 5.6x,
5.7x, 6.8x, 2.3x, 10.9x, 7.9x and 7.7x, respectively. Given the nature of the
businesses of the Major Comparable Companies, PaineWebber determined that the
applicability of this analysis was limited and did not derive a range of fully
diluted equity values for Airways or ValuJet based on these multiples.
Selected Comparable Mergers and Acquisitions Analysis. PaineWebber reviewed
publicly available financial information for mergers and acquisitions
involving selected airline companies. The selected mergers and acquisitions
PaineWebber analyzed included (acquirer/target): Mesa Airlines,
Inc./AirMidwest; UAL Corp./Air Wis Services Inc.; Mesa Airlines, Inc./WestAir
Holding Inc.; Investor Group/Continental Airlines Holdings, Inc.; Investor
Group/America West Airlines Inc.; Pan American World Airways, Inc./Carnival
Airlines Inc.; and Western Pacific Airlines/Frontier Airlines (collectively,
the "Comparable Transactions").
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PaineWebber reviewed the consideration paid in the Comparable Transactions
and compared multiples of TEV to the target's revenue, EBITDA and EBIT, each
for the latest twelve months prior to the announcement of the transaction.
With respect to stock-for-stock transactions, stock prices for acquirors on
the day prior to the announcement of the transaction were used to calculate
consideration paid. PaineWebber also reviewed multiples of the equity
consideration paid to the target's net income for the latest twelve months
prior to the announcement of the transaction and book value for the quarter
ended prior to the announcement of the transaction. PaineWebber calculated the
Comparable Transactions' median multiples of revenue, EBITDA, EBIT, net income
and book value to be 0.31x, 4.4x, 5.4x, 8.5x and 1.1x, respectively.
PaineWebber applied the Comparable Transactions' median multiples to Airways'
LTM revenue, LTM EBITDA, LTM EBIT, LTM net income and book value of equity and
derived a range of fully diluted equity values for Airways of $2.15 to $3.75
per Airways share. Based on the closing stock price of $6.88 for ValuJet
Common Stock on July 8, 1997, such derived equity value range for Airways
implied an exchange ratio range of 0.31x to 0.55x. PaineWebber noted that the
Exchange Ratio fell above this range.
Contribution Analysis. PaineWebber analyzed Airways' and ValuJet's relative
contribution to the combined entity with respect to LTM revenue, LTM EBITDA,
LTM EBIT, LTM EBITDAR, LTM EBITR, LTM net income and estimated 1997 and 1998
net income (based on December 31 year end) based on Airways' management
forecasts and ValuJet's management forecasts. PaineWebber also analyzed the
relative contribution of certain balance sheet items as of March 31, 1997 for
Airways and ValuJet, respectively, including: cash and cash equivalents, total
assets, book value of shareholders' equity and total debt. Based on the
Exchange Ratio, holders of Airways Common Stock will own approximately 14.2%
of the common Stock outstanding of the combined company after giving effect to
the Merger. Airways would have contributed to the combined entity's LTM
revenue, LTM EBITDA, LTM EBIT, LTM EBITDAR, LTM EBITR, LTM net income,
estimated 1997 and 1998 net income, cash and cash equivalents, total assets,
book value of shareholders' equity and total debt the following percentages:
41.2%, negative therefore not meaningful, negative therefore not meaningful,
negative therefore not meaningful, negative therefore not meaningful, negative
therefore not meaningful, negative and therefore not meaningful, 13.6%, 9.8%,
15.4%, 14.4% and 5.7%, respectively. The results of this contribution analysis
are not necessarily indicative of the contributions that the respective
businesses may have in the future.
Due to the suspension of ValuJet's operations for approximately three months
following the ValuJet Flight 592 accident, PaineWebber performed a relative
contribution analysis for the fiscal quarter ended prior to such accident as
an additional point of reference. PaineWebber analyzed Airways' and ValuJet's
relative contribution to the combined entity with respect to the three month
period ending March 31, 1996 Quarterly (three month period) revenue, Quarterly
EBITDA, Quarterly EBIT, Quarterly EBITDAR, Quarterly EBITR, Quarterly net
income, based on Airways' and ValuJet's reported financial statements.
PaineWebber also analyzed the relative contribution of certain balance sheet
items as of March 31, 1996 for Airways and ValuJet, respectively, including:
cash and cash equivalents, total assets, book value of shareholders' equity
and total debt. Based on the Exchange Ratio, holders of Airways Common Stock
will own approximately 14.2% of the Common Stock outstanding of the combined
company after giving effect to the Merger. Airways would have contributed to
the combined entity's Quarterly revenue, Quarterly EBITDA, Quarterly EBIT,
Quarterly EBITDAR, Quarterly EBITR, Quarterly net income, cash and cash
equivalents, total assets, book value of shareholders' equity and total debt
the following percentages: 19.9%, 7.4%, 12.7%, 8.8%, 12.5%, 6.5%, 18.8%,
15.1%, 12.2% and 11.1%, respectively. The results of this contribution
analysis are not necessarily indicative of the contributions that the
respective businesses may have in the future.
Premiums Paid Analysis. PaineWebber analyzed purchase price per share
premiums paid in selected publicly disclosed stock-for-stock transactions,
between $50 million to $200 million enterprise value, excluding merger of
equals transactions, in all industries announced and completed from July 7,
1996 through July 7, 1997. This analysis indicated mean premiums to the
target's closing stock price one day, one week and four weeks prior to the
announcement of the transaction of 22.1%, 25.8% and 25.4%, respectively. This
analysis also indicated median premiums to the target's closing stock price
one day, one week and four weeks prior to the announcement of the transaction
of 18.1%, 25.2% and 24.1%, respectively. Based on the closing stock prices of
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Airways' Common Stock one day, one week and four weeks prior to its closing
stock price on July 8, 1997, applying the mean and median premiums to the
applicable closing stock prices yielded fully diluted equity values of $6.20
to $6.75 per share. Based on the closing stock price of $6.88 for ValuJet
Common Stock on July 8, 1997, this range of equity values implied an exchange
ratio range of 0.90x to 0.98x. PaineWebber noted that the Exchange Ratio fell
above this range.
Liquidity Analysis. PaineWebber discussed with the Airways Board of
Directors Airways' liquidity constraints. PaineWebber noted that Airways
nearly depleted its cash during the winter of 1996-1997 and continued to
operate with a minimal cash balance until ValuJet made a $5.0 million secured
loan to Airways the week of June 30, 1997 in anticipation of the Merger.
PaineWebber further noted that, based on management's projections and then
current trends, absent the ValuJet loan and absent possible borrowings by
Airways secured by certain of its fixed assets, Airways would run out of cash
during the third calendar quarter of 1997. PaineWebber also noted the
difficulties that Airways was having in obtaining such secured loans, based on
Airways' discussions with one existing and one prospective lender. PaineWebber
also noted that, even if Airways obtained such secured loans, Airways would
not have a material cash reserve for contingencies and would not in all
likelihood have the capital necessary to implement its business plan.
PaineWebber noted that Airways' access to other sources of capital was
extremely limited and that such capital, if available at all, would likely
result in material dilution to existing Airways stockholders. PaineWebber also
noted the negative impact that liquidity constraints had on the business and
financial condition of a number of other new-entrant jet carriers.
Discounted Cash Flow Analysis. PaineWebber determined that a discounted cash
flow analysis was not relevant due the short-term nature (through March 31,
1999) of the projections provided by Airways' management. The short-term
nature of the projections was not in itself relevant to the opinion set forth
by PaineWebber.
Pro Forma Dilution Analysis. PaineWebber performed an analysis of the
potential pro forma effect of the Merger on ValuJet's earnings per share
("EPS") for fiscal year 1998. In performing this analysis, PaineWebber
assumed, with Airways' consent, (i) a fiscal year ending December 31 for the
combined company; (ii) the Merger would be accounted for under the purchase
method of accounting; and (iii) cost savings, efficiencies and other synergies
would be achieved as a result of the Merger. PaineWebber combined the
projected operating results of Airways (provided by Airways management) with
the corresponding projected operating results of ValuJet (provided by ValuJet
management) and applied the projected cost savings/synergies (provided by
ValuJet management) to arrive at the combined company's projected net income.
PaineWebber divided this by the pro forma shares outstanding to arrive at a
combined company EPS. PaineWebber then compared the combined company EPS to
ValuJet's projected stand-alone EPS (provided by ValuJet management) to
determine the pro forma impact on ValuJet's EPS. This analysis suggested that
the Merger should result in slight dilution to ValuJet's EPS in the fiscal
year ending December 31, 1998.
Other Considerations. PaineWebber reviewed the trading activity of ValuJet
Common Stock over the two month period beginning May 8, 1997 and ending July
8, 1997. PaineWebber noted that over this period ValuJet's stock traded over
14.8 million shares in a price range of $6.69 to $7.38. ValuJet had a
substantial cash position of $138.9 million on March 31, 1997. PaineWebber
further noted that ValuJet's contract to purchase McDonnell Douglas MD-95
aircraft has significant value which is not reflected on ValuJet's balance
sheet.
Airways selected PaineWebber to be its financial advisor in connection with
the Merger because PaineWebber is a prominent investment banking and financial
advisory firm with experience in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate purposes.
Pursuant to an engagement letter between Airways and PaineWebber dated July
1, 1997, PaineWebber has earned a fee of $425,000 for the rendering of the
PaineWebber Opinion and will be reimbursed for certain of its related
expenses. Airways also agreed, under separate agreement, to indemnify
PaineWebber, its affiliates and each of its directors, officers, agents and
employees and each person, if any, controlling PaineWebber or any of its
affiliates against certain liabilities, including liabilities under federal
securities laws.
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PaineWebber may provide financial advisory services to, and may act as
underwriter or placement agent for, the combined company in the future. In the
ordinary course of PaineWebber's business, PaineWebber may actively trade the
securities of Airways and ValuJet for its own account and for the accounts of
its customers and, accordingly, may at any time hold long or short positions
in such securities.
EFFECTIVE DATE OF THE MERGER
Subject to the conditions to the obligations of the parties to effect the
Merger, the Effective Date will occur on the date the Certificate of Merger
shall have been accepted for filing and filed with the Secretary of State of
Nevada and the Secretary of State of Delaware.
No assurance can be provided that the necessary stockholder approvals can be
obtained or that other conditions precedent to the Merger can or will be
satisfied. ValuJet and Airways anticipate that all conditions to consummation
of the Merger will be satisfied so that the Merger can be consummated one
business day after approval by the stockholders of both companies. However,
there can be no assurance as to whether or when the Merger will occur.
The Board of Directors of either ValuJet or Airways generally may terminate
the Agreement if the Merger is not consummated by November 30, 1997. See "--
Conditions to the Merger" and "--Termination of the Merger Agreement."
DISTRIBUTION OF STOCK CERTIFICATES AFTER THE MERGER
Promptly after the Effective Date, ValuJet will cause First Union National
Bank, Charlotte, North Carolina, acting in the capacity of Exchange Agent, to
mail to the former stockholders of Airways a letter of transmittal, together
with instructions for the exchange of such stockholders' certificates
representing shares of Airways Common Stock for certificates representing
shares of ValuJet Common Stock.
AIRWAYS STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL THEY
RECEIVE THE FORM LETTER OF TRANSMITTAL AND INSTRUCTIONS. Upon surrender to the
Exchange Agent of certificates for Airways Common Stock, together with a
properly completed letter of transmittal, there will be issued and mailed to
each holder of Airways Common Stock surrendering such items a certificate or
certificates representing the number of shares of ValuJet Common Stock to
which such holder is entitled as a result of the Merger. After the Effective
Date, to the extent permitted by law, holders of record of Airways Common
Stock as of the Effective Date will be entitled to vote at any meeting of
ValuJet stockholders the number of shares of ValuJet Common Stock into which
their Airways Common Stock has been converted, regardless of whether such
stockholders have surrendered their Airways stock certificates.
After the Effective Date, there will be no transfers of shares of Airways
Common Stock on Airways' stock transfer books. If certificates representing
shares of Airways Common Stock are presented for transfer after the Effective
Date, they will be canceled and exchanged for the shares of ValuJet Common
Stock deliverable in respect thereof.
REGULATORY APPROVALS
Consummation of the Merger is conditioned upon receipt by ValuJet and
Airways of such regulatory and other approvals as are required under
applicable law, including approval by the DOT of the change in ownership of
AirTran and the registration of the ValuJet Common Stock to be issued in the
Merger with the Securities and Exchange Commission and certain state
securities commissions as well as the issuance by the Secretary of State of
the States of Nevada and Delaware of a Certificate of Merger.
Under the HSR Act, certain acquisition transactions, including the proposed
Merger, may not be consummated unless certain information has been furnished
to the Federal Trade Commission (the "FTC") and
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the Antitrust Division of the Department of Justice (the "Antitrust Division")
and certain waiting period requirements have expired or been terminated. In
accordance with the HSR Act, ValuJet and Airways have filed in September 1997,
Notification and Report Forms and certain supplementary materials with the
Antitrust Division and the FTC for review in connection with the proposed
Merger. The waiting period expired at 11:59 p.m., Washington, D.C. time on
October 8, 1997 without any request for additional information or other action
taken by the FTC or Antitrust Division.
ValuJet and Airways are not aware of any other material governmental
approvals or actions that are required for consummation of the Merger. Should
any other approval or action be required, it presently is contemplated that
such approval or action would be sought.
NO APPRAISAL RIGHTS
The shares of Common Stock of Airways are listed on NASDAQ. As a result,
holders of record of Airways Common Stock will not have any dissenters' or
appraisal rights under Delaware law with regard to the Merger. Since ValuJet
is the surviving corporation, stockholders of ValuJet do not have any
dissenters' or appraisal rights under Nevada law.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the number of shares of Airways Common Stock outstanding as of
the Record Date, an aggregate of 9,094,937 shares of ValuJet Common Stock
(excluding the exercise of stock options and a warrant assumed by ValuJet in
the Merger) will be issued to Airways stockholders in the Merger. After giving
effect to the issuance of such 9,094,937 shares of ValuJet Common Stock in
connection with the Merger, former stockholders of Airways will hold
approximately 14.2% of the total outstanding shares of ValuJet Common Stock.
Based on the options and the warrant to acquire Airways Common Stock
outstanding as of the Record Date, ValuJet will assume options and a warrant
to purchase approximately 780,000 shares of Airways Common Stock. After giving
effect to the full exercise of such options and warrants issued in the Merger
into an identical number of shares of ValuJet Common Stock, former
stockholders of Airways and holders of options and warrants to acquire Airways
Common Shares will hold approximately 15.2% of the total outstanding shares of
ValuJet Common Stock.
INTERIM OPERATIONS
Pursuant to the Merger Agreement, each of ValuJet and Airways have agreed
that, prior to the Effective Date (unless ValuJet or Airways, respectively,
shall otherwise agree in writing and except as otherwise contemplated by the
Merger Agreement):
(1) Such company and its subsidiaries will conduct their respective
businesses in a manner consistent with the current operation of their business
and only in the ordinary course and, by way of amplification and not
limitation, neither such company nor its subsidiaries will (i) except with
respect to Common Stock issued upon exercise of the warrants outstanding on
the date of the Agreement and of options vested prior to the Effective Date,
issue any capital stock, or (ii) declare, set aside or pay any dividend or
distribution with respect to its capital stock or any of its subsidiaries
(other than the payment of a dividend by a subsidiary of such company to such
company or to another subsidiary of such company), or (iii) directly or
indirectly redeem, purchase or otherwise acquire any capital stock of such
company or any of its subsidiaries, or (iv) effect a split or reclassification
of any of its capital stock or a recapitalization, or (v) change its charter
or bylaws, or (vi) grant any increase in the compensation payable or to become
payable to officers or salaried employees whose 1996 remuneration exceeded
$50,000 or grant any increase regardless of amount, in any bonus, insurance,
pension or other benefit plan, program, payment or arrangement made to, for or
with any officers or employees, or (vii) adopt any employee benefit plans
including but not limited to stock option plans, or (viii) acquire direct or
indirect ownership or control of voting shares of any other corporation, or of
any interest in any partnership, joint venture, association or similar
organization, other than shares acquired in satisfaction of a security
interest
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or of a debt previously contracted for in a fiduciary or custodial capacity,
or (ix) waive any rights of substantial value, or (x) enter into any material
agreement, contract or commitment calling for aggregate payments in excess of
$200,000 over the life of the contract or extending for more than twelve
months other than contracts entered into for the maintenance or repair of
aircraft, those disclosed to the other party and, in the case of ValuJet,
financing and refinancing agreements and fees and expenses paid in connection
therewith and fees paid to lenders to secure consents to this transaction and
to ValuJet's debt refinancing, or (xi) acquire a fee interest in any real
property.
(2) Neither company nor any of its subsidiaries will undertake or enter into
any sale, disposition, surrender, acquisition, agreement or transaction,
between the date of this Agreement and the Effective Date, relating to any of
their assets except in the ordinary course of business or as contemplated by
this Agreement or disclosed in its filings with the Commission.
(3) Each company will pay and discharge all taxes, assessments and
governmental charges lawfully imposed upon it, upon any subsidiary or upon any
of their property, or upon the income and profits thereof to the extent such
taxes, assessments and governmental charges are due and payable on or before
the Effective Date except for certain deferrals of taxes arranged by Airways
and disclosed to ValuJet.
(4) Each company will maintain its existence and the existence of its
subsidiaries as corporations in good standing under the laws of the state of
its incorporation, other states in which such company and its subsidiaries
operate and the United States and comply and cause its subsidiaries to comply
in all material respects with all laws, governmental regulations, rules and
ordinances, and judicial orders, judgments and decrees applicable to their
business or their properties.
(5) Each company will notify the other party in writing within five days of
the commencement of any material litigation against such company, or against
any of its subsidiaries, or of the existence of any adverse business
conditions threatening its continued, normal business operations or of any
agreement, consent or order of the FAA or DOT involving such company or any of
its subsidiaries.
(6) Each company shall at all times maintain, preserve and keep its
properties and the properties of its subsidiaries in good repair, working
order and condition in all material respects so that the business carried on
in connection therewith may be properly and advantageously conducted, except
for those items that have been designated as obsolete or damaged beyond
economic repair.
(7) Each company will make every reasonable effort to fulfill its
contractual obligations and the contractual obligations of its subsidiaries,
and to maintain in effect its insurance and the insurance of its subsidiaries.
(8) Neither company will enter into, institute or permit any of its
subsidiaries to enter into or institute, any employment contract, employee
policy manual (other than AirTran's current employee manual which is
undergoing revision), deferred compensation, non-competition, bonus, stock
option, profit-sharing, pension, retirement, consultation after retirement,
payments upon retirement, incentive, extraordinary vacation accrual, education
payment or benefit, disability insurance (including medical, travel, group
life or other similar insurance plans) agreement, plan or arrangement or any
other similar arrangement or plan, or, except as required by applicable law or
regulation, renew, amend, modify or terminate any such arrangement or plan now
in existence.
(9) Neither company will enter into, or permit any of its subsidiaries to
enter into, any agreement, understanding or commitment, written or oral, with
any other person which would be a breach of its obligations arising under the
Agreement.
(10) Neither company will make, or permit any of its subsidiaries to make
any loan, advance or commitment to extend credit to any of its directors,
officers or any affiliated or related persons of its directors or officers;
renew, or permit any of its subsidiaries to renew, any outstanding loan or any
outstanding commitment to extend credit to any of its directors, officers or
any affiliated or related persons of its directors or officers; increase, or
permit any of its subsidiaries to increase, any outstanding loan to any of its
directors, officers of any affiliated or related persons of its directors or
officers; or enter into any agreement, understanding or commitment, written or
oral, which obligates it, any of its subsidiaries or their successors or
assigns to make any loan or advance or payment to any of its directors or
officers or to any affiliated or related persons of any of its directors or
officers.
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Furthermore, ValuJet and Airways agreed that neither will grant any
additional stock options or other rights to acquire stock except that ValuJet
is permitted to grant options in connection with the employment of new
employees consistent with prior practices.
In addition, Airways has agreed that neither Airways nor AirTran will
without the prior written consent of ValuJet: (i) borrow or agree to borrow
any funds in excess of $200,000 or guarantee or agree to guarantee the
obligations of others (excluding any refinancing of AirTran's hangar in an
amount ranging from $6.5 million to $8.5 million secured by the hangar and
AirTran's accounts receivable, provided that the terms of such refinancing do
not preclude prepayment on reasonable terms; credit terms extended by
creditors, lessors and vendors in the ordinary course of business; and debt
incurred for expenses of this transaction), or (ii) make any capital
improvement, purchase of equipment or furnishings or lease of any aircraft
(excluding the purchase, lease or repair of aircraft parts and components
required in the ordinary course of maintenance of aircraft) involving an
aggregate expenditure in excess of $200,000, or (iii) transfer, pledge,
hypothecate or otherwise dispose of any assets having a book or market value,
whichever is greater, in excess of $200,000.
ACQUISITION PROPOSALS
Pursuant to the Merger Agreement, Airways has agreed that it will not, and
shall use its reasonable best efforts not to permit any of its officers,
directors, employees, attorneys, financial advisors, agents or other
representatives or those of any of its subsidiaries, directly or indirectly,
to solicit, initiate or knowingly encourage (including by way of furnishing
information) any "Acquisition Proposal" from any person, or engage in or
continue discussions or negotiations relating thereto; provided, however, that
Airways may engage in discussions or negotiations with, and furnish
information concerning Airways and its subsidiaries, businesses, properties or
assets to, any third party which makes an Acquisition Proposal if the Board of
Directors of Airways concludes in good faith after consultation with its
outside counsel that the failure to take such action would present a
reasonable possibility of violating the obligations of such Board to Airways
or to Airways' stockholders under applicable law. Airways will promptly notify
ValuJet of the receipt of any Acquisition Proposal, including the material
terms and conditions thereof and the identify of the person or group making
such Acquisition Proposal, and will promptly notify ValuJet of any
determination by Airways' Board of Directors that a "Superior Proposal" has
been made. As used in this Agreement, (i) "Acquisition Proposal" means any
proposal or offer, or any expression of interest by any third party relating
to Airways' willingness or ability to receive or discuss a proposal or offer
for a merger, consolidation or other business combination involving, or any
purchase of, all or substantially all of the assets of Airways or AirTran or
100% of the voting securities of Airways, and (ii) "Superior Proposal" shall
mean a bona fide Acquisition Proposal made by a third party on terms that a
majority of the members of the Board of Directors of Airways determines in
their good faith reasonable judgment (based on the advice of an independent
financial advisor) may be more favorable to Airways and to its stockholders
than the transactions contemplated by the Merger Agreement and for which any
required financing is committed or which, in the good faith reasonable
judgment of a majority of such members (after consultation with any
independent financial advisor), is then available to such third party. In the
event Airways continues to entertain or negotiate an Acquisition Proposal for
a period of 21 days after its receipt, then ValuJet will have the right to
terminate the Agreement and receive reimbursement of its out-of-pocket
expenses in connection with the transaction.
CONDITIONS TO THE MERGER
Conditions to ValuJet's Obligation
ValuJet's obligation to consummate the Merger is subject to the satisfaction
of various conditions, including the following:
. Approval of the Merger, the Name Change and By-law Amendment by the
stockholders of ValuJet at the ValuJet Meeting and the approval of the
Merger by the stockholders of Airways at the Airways Meeting;
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. Receipt by ValuJet of the consent to this transaction of the requisite
proportion of the holders of ValuJet's 10 1/4 senior notes due 2001 (which
consent has been obtained);
. No court or other governmental agency shall have issued any order (whether
temporary, preliminary or permanent) which in effect prohibits
consummation of the transactions contemplated by the Merger Agreement or
imposes material restrictions on ValuJet in connection with the
consummation of the Merger or to obtain damages with respect thereto; the
FAA and DOT shall have approved the transaction in such a manner that
Airways and AirTran shall not after the Merger become subject to any
restrictions currently applicable to ValuJet or its subsidiaries or
subject to any restrictions not currently applicable to Airways and
AirTran with respect to its business operations (collectively, an
"Order");
. All consents, approvals and authorizations required to be obtained prior
to the Effective Date by Airways from any third party and from any
governmental entity in connection with the Merger and the Merger Agreement
shall have been made or obtained;
. The representations and warranties of Airways set forth in the Agreement
shall be true in all material respects as of the Effective Date as though
made at and as of the Effective Date, and Airways shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Effective Date;
. ValuJet shall have received a customary legal opinion of Briggs and
Morgan, legal counsel to Airways;
. ValuJet shall have received a written opinion of Ernst & Young LLP (based
upon appropriate representations of Airways, ValuJet and stockholders of
Airways) to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code;
. The Registration Statement shall have become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been initiated or be threatened by the
SEC;
. The ValuJet Common Stock to be issued to Airways stockholders in the
Merger shall have been approved for listing on NASDAQ upon official notice
of issuance;
. ValuJet shall have received a written opinion from Robinson-Humphrey, in
customary form, that the terms of the Merger are fair to the stockholders
of ValuJet from a financial point of view.
. Airways shall not have suffered or incurred any material adverse effect
since March 31, 1997, except as disclosed to ValuJet prior to the
execution of the Agreement.
Conditions to Airways' Obligation
Airways' obligation to consummate the Merger is subject to the satisfaction
of various conditions, including the following:
. Approval of the Merger by the stockholders of Airways and the approval of
the Merger, Name Change and By-law Amendment by the stockholders of
ValuJet;
. Receipt by ValuJet of the consent to this transaction of the requisite
proportion of the holders of ValuJet's 10 1/4% senior notes due 2001
(which consent has been obtained);
. There shall be in effect no Order;
. All consents, approvals and authorizations required to be obtained prior
to the Effective Date by ValuJet from, any governmental entity in
connection with the Merger and the Merger Agreement shall have been made
or obtained;
. The representations and warranties of ValuJet set forth in the Merger
Agreement shall be true in all material respects as of the Effective Date
as though made at and as of the Effective Date, and ValuJet shall have
performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Effective Date;
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. Airways shall have received a customary legal opinion of Ellis, Funk,
Goldberg, Labovitz & Dokson, P.C., legal counsel to ValuJet;
. Airways shall have received a written opinion of Briggs and Morgan (based
upon appropriate representations of ValuJet) to the effect that the Merger
will constitute a reorganization within the meaning of Section 368(a) of
the Code;
. The Registration Statement shall have become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been initiated or be threatened by the
SEC;
. The ValuJet Common Stock to be issued to Airways stockholders in the
Merger shall have been approved for listing on NASDAQ upon official notice
of issuance;
. Airways shall have received a written opinion from PaineWebber, in
customary form, that the terms of the Merger are fair to the stockholders
of Airways from a financial point of view;
. ValuJet shall not have suffered or incurred any material adverse effect
since March 31, 1997, except as disclosed to Airways prior to the
execution of the Agreement;
. There shall not be then in existence any event of default under any of
ValuJet's secured debt.
TERMINATION OF THE MERGER AGREEMENT
Possible Termination Events
The Merger Agreement may be terminated at any time prior to the Effective
Date, whether before or after the approval by stockholders of ValuJet or
Airways, in the following circumstances:
(1) By the mutual consent of the Boards of Directors of ValuJet and Airways.
(2) By either ValuJet or Airways if its conditions to closing shall not have
been satisfied or waived by November 30, 1997, or if the Merger shall not have
been consummated by November 30, 1997.
(3) By Airways to allow Airways to enter into an agreement which the Board
of Directors of Airways determines to be a Superior Proposal provided that
Airways pays to ValuJet a $3,000,000 termination fee.
(4) By ValuJet in the event Airways receives an Acquisition Proposal which
Airways continues to entertain or negotiate for a period of 21 days after its
receipt, in which event Airways must pay all of ValuJet's out-of-pocket costs
incurred to third parties in connection with the Merger Agreement.
Certain Consequences of Termination
In the event ValuJet is ready, willing and able to consummate the Merger,
but Airways shall fail to consummate the Merger after all of the conditions to
Airways' performance shall have been satisfied or waived or in the event
ValuJet shall elect not to consummate the Merger as a result of Airways'
failure to comply in all material respects with certain material covenants
required to be performed by Airways prior to the Effective Date as provided in
the Agreement, then Airways shall pay to ValuJet upon its demand therefor
liquidated damages of $5,000,000.
In the event Airways is ready, willing and able to consummate the Merger,
but ValuJet shall fail to consummate the Merger after all of the conditions to
ValuJet's performance shall have been satisfied or waived or in the event
Airways shall elect not to consummate the Merger as a result of ValuJet's
failure to comply in all material respects with certain material covenants
required to be performed by ValuJet prior to the Effective Date as provided in
the Agreement, then ValuJet shall pay to Airways upon its demand therefor
liquidated damages of $5,000,000.
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AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be amended by the Boards of Directors of ValuJet
and Airways at any time before or after the approval of the Merger Agreement
by the ValuJet stockholders and the Airways stockholders, provided that after
any such approval has been obtained, no amendment of the Merger Agreement may
be made which materially changes the terms of the Merger Agreement without
obtaining such further approval.
POST-MERGER BOARD OF DIRECTORS
At the Effective Date, Timothy P. Flynn and Maurice J. Gallagher, Jr. will
resign from the ValuJet Board of Directors and the three designees of Airways
will be added to the ValuJet Board of Directors such that the Board will
consist of the following seven members (the "Post-Merger Directors"): Robert
L. Priddy, Lewis H. Jordan, D. Joseph Corr, Don L. Chapman, Robert D. Swenson,
John K. Ellingboe and Robert C. Pohlad.
Approval of the Merger and the By-law Amendment by the stockholders of
ValuJet at the ValuJet Annual Meeting shall be deemed to constitute
ratification by such stockholders of the election of the Post-Merger Directors
(other than Lewis H. Jordan and Robert C. Pohlad) for a term to expire upon
the 1999 annual meeting of stockholders of ValuJet.
Information with respect to the age and principal occupation during the past
five years of each Post-Merger Director, as of August 15, 1997, is set forth
below. There are no family relationships among the Post-Merger Directors.
Robert L. Priddy, age 50, has been actively employed by ValuJet since June
1993. He has served as a Director and Chairman of the Board of ValuJet since
he participated in its founding in July 1992. As of November 1996, he resigned
his position as Chairman of the Board and Chief Executive Officer of ValuJet
Airlines. Prior to his involvement with ValuJet, Mr. Priddy founded Florida
Gulf Airlines as a subsidiary of Mesa Airlines, Inc. ("Mesa") for which he
served as president from December 1991 to April 1993. From July 1991 to
January 1993, he also served as a director of Mesa. From January 1988 to
November 1991, he served as President and Chief Executive Officer of Air
Midwest, Inc., a regional airline headquartered in Wichita, Kansas, for which
he also served as a director from November 1987 to November 1991. From 1979 to
1987, he served as Vice President and Chief Financial Officer of Atlantic
Southeast Airlines, Inc. ("ASA"), a regional airline headquartered in Atlanta,
Georgia, for which he also served as a director from 1981 to 1987. He was one
of three founding shareholders of ASA. From 1966 to 1979, he worked for
Southern Airways, Inc. ("Southern Airways") in various capacities, his last
responsibilities being manager of scheduling, pricing and market analysis. He
has also served as a director of Lukens Medical Corporation, a medical
supplies company, since 1995 and as a director of Accumed International, Inc.,
a medical technology company, since May 1997.
Lewis H. Jordan, age 53, has served as President, Chief Operating Officer
and a Director of ValuJet since June 1993. As of November 1996, he resigned
his position as President and Chief Operating Officer of ValuJet Airlines, and
he became Chairman of the Board of ValuJet Airlines. He served as President
and Chief Operating Officer and as a director of Continental Airlines, Inc.
("Continental") from August 1991 to March 1993 and served as Executive Vice
President of that company from 1986 to August 1991. From 1985 to 1986, he
served as President and Chief Operating Officer of The Flying Tigers Line,
Inc. ("Flying Tigers"), an air cargo carrier, and was previously employed by
Flying Tigers as Executive Vice President and Chief Operating Officer from
1984 to 1985, as Senior Vice President--Operations from 1980 to 1982 and as
Vice President--Maintenance and Engineering from 1979 to 1980. From 1982 to
1984, he served as Executive Vice President and Chief Operating Officer of Air
Treads, Inc., an aviation tire retreading, wheel and brake company. From 1962
to 1979, he held various positions with Southern Airways, his last position
being Assistant Vice President in charge of technical operations.
D. Joseph Corr, age 56, joined ValuJet in November 1996 as President and
Chief Executive Officer of ValuJet Airlines. Mr. Corr was elected as a
Director and Executive Vice President of ValuJet in July 1997. Since June
1990, Mr. Corr has also been the President and owner of Aircorr, Inc., an
aircraft repair business, and D.
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Joseph Corr, Inc., an investments and management services firm. Prior to 1990,
Mr. Corr served as Chairman, President and Chief Executive Officer of
Continental from December 1988 to October 1989. From March 1986 to November
1988, Mr. Corr was Vice Chairman, President and a Director of TransWorld
Airways ("TWA"). Mr. Corr also served as Chairman and Director of Ozark Air
Lines Inc. during 1986 and as Chairman and a Director of Midcoast Aviation,
Inc. from 1986 to 1988.
Don L. Chapman, age 58, was elected as a Director of ValuJet in April 1994.
He has served as Chief Executive Officer of Tug Manufacturing Company, a
company that manufactures ground support equipment for the airline industry,
since he acquired that company in 1977. He also served as Chief Executive
Officer of Opti World, Inc., an optical superstore chain, from 1983 (when he
founded that company) until 1995. From July 1991 to November 1992, he served
as Chairman of Winkler Products, Co., a plastic cutlery manufacturer. He also
serves as a director of RARE Hospitality International, Inc. (since 1992) and
Omni Insurance Company (since 1993).
Robert D. Swenson, age 43, has served as Chairman of the Board and Chief
Executive Officer of Airways since April 1995 and as Chairman of the Board of
AirTran since June 1994. From June 1994 to January 1995, Mr. Swenson was
President of AirTran. On July 11, 1996, the Board of Directors of Airways and
AirTran appointed him to the office of President of Airways and President and
Chief Executive Officer of AirTran. Mr. Swenson served as a director,
President and Chief Executive Officer of Mesaba Holdings, Inc. and its
subsidiary, Mesaba Aviation, Inc. from 1981 to 1995 and was Chairman of the
Board of Mesaba Holdings, Inc. and Mesaba Aviation, Inc. from 1986 to
September 1995. Mr. Swenson also served as President of Mesaba's predecessor
from 1978 until March 1981. Mr. Swenson holds an Airline Transport Pilot
certificate with flight instructor privileges and is type rated in the Fokker
F-27 aircraft. Mr. Swenson was a member of the Board of Directors of the
Regional Airline Association from 1985 through 1988 and served as Treasurer of
the Association during 1987 and 1988. He was elected to serve as Vice Chairman
of the Board of Directors of the Association for 1992 and was elected Chairman
for 1993.
John K. Ellingboe, age 46, has served as a director of Airways since April
1995 and a director of AirTran since June 1994. Mr. Ellingboe served as a
director of Mesaba Holdings, Inc. from September 1990 to September 1995. Since
June 1996, Mr. Ellingboe has been Chief Executive Officer of PMSA Management
Group, LLC, a management consulting firm. From October 1993 to May 1996, he
was Senior Vice President, Business Development, General Counsel and Secretary
of Fingerhut Companies, Inc. From May 1990 to October 1993, he was Vice
President, General Counsel and Secretary of Fingerhut Companies, Inc. Prior to
1990, he was an attorney in private practice.
Robert C. Pohlad, age 43, has served as President of Pohlad Companies, a
holding and management services company, since 1987. Since 1988 he has been
Chief Executive Officer and a director of Delta Beverage Group, Inc., a soft
drink manufacturer and distributor. He also serves as a director of Mesaba
Holdings, Inc., a regional air carrier, Grow Biz International, Inc. and North
Central Life Insurance Company.
POST-MERGER OFFICERS OF VALUJET
At the Effective Date, D. Joseph Corr will continue to serve as President
and Chief Executive Officer of ValuJet. Other executive officers of ValuJet
after the Merger will be selected by the President and Chief Executive Officer
prior to the Effective Date, subject to the approval of the Board of
Directors.
POST-MERGER PRINCIPAL EXECUTIVE OFFICES
Promptly following the Effective Date, the principal executive offices of
ValuJet may be relocated to Orlando, Florida (initially, in the office space
presently occupied by Airways, but a final decision has not yet been made).
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Severance Agreements. Airways has entered into agreements with a number of
its officers that provide for severance payments in the event their employment
is terminated for any reason other than for cause, death or disability within
12 months after a change in control. The Merger will effect such a change in
control. These severance agreements provide for the payment of the following
amounts of severance with respect to the classification of employees
indicated: (i) president and chief executive officer (Robert D. Swenson)--12
months salary; and (ii) other executive officers (six persons)--six months
salary. Upon the Effective Date of the Merger, Mr. Swenson will become
Chairman of the Board of ValuJet, but he is not expected to be an employee of
ValuJet. As a result, severance pay of $200,000 will be payable to Mr.
Swenson.
Consulting Agreements. Upon the Effective Date, Robert L. Priddy and Lewis
H. Jordan will enter into seven-year consulting agreements with ValuJet. Under
these agreements, each of them will be entitled to the following during the
term of these agreements: (i) compensation of $100,000 per year for the first
five years and $20,000 per year for the next two years, (ii) lifetime pass
privileges for himself and his spouse and dependents, and (iii) lifetime
health insurance coverage for himself and his family.
Benefits for Airways Directors. Each present member of the Airways Board of
Directors (Robert D. Swenson, John K. Ellingboe, Alan R. Stephen and Roger T.
Munt) will receive lifetime pass privileges for himself and his spouse and
dependents. In addition, all stock options previously granted to such persons
will be amended so that the stock options will be exercisable at any time
during the option term rather than expire 90 days after termination of service
as a director. The number of stock options to which this applies are as
follows: Swenson--325,000 shares, Ellingboe--12,000 shares, Stephen--12,000
shares and Munt--12,000 shares.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following summary discusses the material federal income tax consequences
of the Merger. The summary is based upon the Code, applicable Treasury
Regulations thereunder and administrative rulings and judicial authority as of
the date hereof. All of the foregoing are subject to change, possibly with
retroactive effect, and any such change could affect the continuing validity
of the discussion. The discussion assumes that each holder of Airways Common
Stock holds such shares as a capital asset. Further, the discussion does not
address the tax consequences that may be relevant to a particular stockholder
subject to special treatment under certain federal income tax laws, such as
dealers in securities, banks, insurance companies, tax-exempt organizations,
non-United States persons, stockholders who acquired Airways Common Stock
through the exercise of options or otherwise as compensation or through a tax-
qualified retirement plan and holders of Airways options. This discussion does
not address any consequences arising under the laws of any state, locality or
foreign jurisdiction.
Neither ValuJet nor Airways has requested a ruling from the Internal Revenue
Service ("IRS") with regard to any of the federal income tax consequences of
the Merger and the opinion of counsel as to such federal income tax
consequences set forth below will not be binding on the IRS.
General
As of the date hereof, it is intended that the Merger will constitute a
reorganization pursuant to Section 368(a) of the Code and that for federal
income tax purposes no gain or loss will be recognized by Airways or ValuJet.
The respective obligations of the parties to consummate the Merger are
conditioned upon (i) the receipt by Airways of an opinion of Briggs and Morgan
dated the Effective Date confirming that the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code and that each
of Airways and ValuJet will be a party to the reorganization within the
meaning of Section 368(b) of the Code, and (ii) the receipt by ValuJet of an
opinion of Ernst & Young LLP dated the Effective Date confirming that the
Merger will qualify as a reorganization within the meaning of Section 368(a)
of the Code and that each of Airways and ValuJet will be a party to the
reorganization within the meaning of Section 368(b) of the Code. Such opinions
will be based upon, among other things, (i) representations of Airways,
ValuJet and certain stockholders of Airways customarily
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given in transactions of this type and (ii) the assumption that the Merger
will be consummated in accordance with the terms of the Agreement.
The discussion below summarizes the material federal income tax consequences
of the Merger, assuming that the Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Code.
Consequences to Airways Stockholders
Under the reorganization provisions of the Code, no gain or loss will be
recognized by holders of Airways Common Stock with respect thereto as a result
of the surrender of Airways Common Stock in exchange for shares of ValuJet
Common Stock pursuant to the Merger. The aggregate tax basis of the shares of
ValuJet Common Stock received in the Merger will be the same as the aggregate
tax basis of the Airways Common Stock surrendered in exchange therefor in the
Merger. The holding period of the shares of ValuJet Common Stock received in
the Merger will include the holding period of Airways Common Stock surrendered
in exchange therefor in the Merger.
Consequences to Airways, ValuJet and Holders of ValuJet Common Stock
None of Airways, ValuJet or the holders of ValuJet Common Stock will
recognize gain or loss as a result of the Merger.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, AIRWAYS
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER
APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
REQUIRED VOTES
THE VALUJET BOARD OF DIRECTORS AND THE AIRWAYS BOARD OF DIRECTORS HAVE
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND PLAN OF MERGER. THE VALUJET
BOARD OF DIRECTORS AND THE AIRWAYS BOARD OF DIRECTORS RECOMMEND THAT
STOCKHOLDERS VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND PLAN OF MERGER.
Approval and adoption of the Merger requires the affirmative vote of the
holders of a majority of the outstanding shares of Airways Common Stock and a
majority of the outstanding shares of ValuJet Common Stock. The effect of an
abstention is the same as a vote against the Merger.
PROPOSAL TO EFFECT A NAME CHANGE
As part of their consideration of the Merger and the Merger Agreement, the
ValuJet Board of Directors has unanimously approved an amendment to the
ValuJet Articles, contingent upon the effectiveness of the Merger, to change
the corporate name of ValuJet to "AirTran Holdings, Inc." The ValuJet Board of
Directors has approved the name change in order to emphasize that ValuJet has
made significant changes to its operations since the accident and suspension
of operations and to capitalize on the favorable perception of the AirTran
name. Although management of ValuJet believes that the ValuJet name was well
known and that the AirTran name is not as widely known, the ValuJet Board
determined that the benefits of the name change referred to above outweighed
the loss of name recognition.
In anticipation of the Merger and to seek to increase revenue opportunities
of both ValuJet Airlines and AirTran, the parties entered into a Code Share
Agreement and License Agreement in September 1997. The Code Share Agreement
permits the airlines to use a single designator code in the Official Airline
Guide and in
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reservations systems. The License Agreement provides ValuJet the non-exclusive
use of the name "AirTran Airlines," AirTran's designator code "FL" and
AirTran's service marks. In order to begin to capitalize on this joint
marketing program, ValuJet's operating subsidiary, ValuJet Airlines, has
changed its name to AirTran Airlines, is repainting its aircraft with the
AirTran logo and is changing its marketing accordingly. If the Merger is not
consummated, ValuJet's right to use the AirTran name will expire in May 1998.
Following the Effective Date and implementation of the Name Change, ValuJet
has been advised by NASDAQ that ValuJet Common Stock will trade under the new
quotation symbol of "AAIR." However, for a transition period after the Merger,
it is expected that the ValuJet Common Stock will be quoted under the symbol
"AAIRD." If approved, the name change will become effective on the date of
filing Articles of Amendment with the Secretary of State of Nevada.
REQUIRED VOTE
Approval and adoption of the Name Change requires the affirmative vote of
the holders of a majority of the shares of ValuJet Common Stock issued and
outstanding on the ValuJet Record Date. The effect of an abstention or broker
nonvote on the proposal is the same as a vote against the proposal.
THE VALUJET BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE NAME CHANGE. THE
VALUJET BOARD RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF APPROVAL AND
ADOPTION OF THE NAME CHANGE.
PROPOSAL TO AMEND BY-LAWS
As part of their consideration of the Merger and the Merger Agreement, the
ValuJet Board of Directors has unanimously approved an amendment to the
ValuJet By-Laws (the "By-law Amendment") contingent upon the effectiveness of
the Merger, to extend the term of 75% of the members of ValuJet's Board of
Directors immediately after the Merger until the 1999 annual meeting of
stockholders of ValuJet. The remainder of the Directors (one of the Directors
designated by ValuJet (Lewis H. Jordan) and one of the Directors designated by
Airways (Robert C. Pohlad)) will be subject to reelection at the 1998 annual
meeting of Stockholders. The text of the By-law Amendment is as follows:
The last sentence of Section 4.2 of the By-Laws of ValuJet, Inc. is hereby
deleted and the following is added in lieu thereof:
"The Directors shall be elected at an annual or special meeting of the
Shareholders. The term of seventy-five percent (75%) of the Directors
serving as such immediately after the effective date of the merger of
Airways Corporation with and into the corporation will expire upon the
election of Directors at the corporation's 1999 annual meeting of
Shareholders. All other Directors shall serve for a term of one (1) year or
until their successors are elected and qualified. For purposes of
determining the number of Directors constituting seventy-five percent (75%)
of the members of the Board of Directors, any fraction shall be rounded
down to the next lower whole number.
A Director's term of service on the Board may terminate earlier upon his
death, resignation or removal from service by the Board. Without this
amendment, each member of the Board of Directors would serve a one year term
and would be subject to reelection at ValuJet's 1998 annual meeting. Approval
of this amendment to ValuJet's By-laws is a condition to each party's
obligation to consummate the Merger.
REQUIRED VOTE
Approval and adoption of the By-law Amendment requires the affirmative vote
of the holders of a majority of the shares of ValuJet Common Stock represented
at the ValuJet Meeting.
THE VALUJET BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE BY-LAW AMENDMENT.
THE VALUJET BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF
APPROVAL AND ADOPTION OF THE BY-LAW AMENDMENT.
46
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements of
ValuJet and Airways give effect to (i) the sale by ValuJet of $80.0 million of
10 1/2% Senior Secured Notes (the "Notes") on August 13, 1997, and the
application of the proceeds as set forth below, and (ii) the sale by ValuJet
of the Notes as described in (i) above and the Merger as if such transactions
had occurred as of January 1, 1996 and 1997 with respect to the statements of
operations for the year ended December 31, 1996 and the six months ended June
30, 1997, respectively, and as of June 30, 1997 with respect to the balance
sheet. ValuJet received approximately $77.5 million of net proceeds from the
Notes, after deduction of the initial purchasers' discount and expenses of the
debt offering. The net proceeds, along with approximately $6.2 million of
ValuJet's cash was used to repay $68.5 million of secured debt of ValuJet and
to pay the fees and expenses (approximately $6.0 million) incurred by ValuJet
in connection with a consent solicitation to the holders of ValuJet's 10 1/4%
senior notes and will also be used to purchase approximately $9.2 million of
hush kits for up to four of ValuJet's Stage 2 DC-9 aircraft. The Merger is
reflected using the purchase method of accounting for business combinations.
The pro forma condensed combined financial information is provided for
comparative purposes only and does not purport to be indicative of the results
that would have been obtained if the events set forth above had been effected
on the dates indicated or of those results that may be obtained in the future.
The pro forma condensed combined financial information with respect to the
Merger is based on preliminary estimates of values and transaction costs which
may be incurred in connection with the Merger. The actual recording of the
Merger will be based on final appraisals, values and transaction costs.
Accordingly, the actual recording of the transaction can be expected to differ
from these pro forma condensed combined financial statements. However,
ValuJet's management believes the asset and liability valuations and
allocations utilized in the Merger will not be materially different from the
pro forma information presented herein.
For purposes of preparing the unaudited pro forma condensed combined
statements of operations for the six months ended June 30, 1997 and the year
ended December 31, 1996, Airways' operating results for the six months ended
June 30, 1997 and the year ended March 31, 1997 were combined with ValuJet's
operating results for the six months ended June 30, 1997 and the year ended
December 31, 1996, respectively. Accordingly, Airways' operating results for
the three months ended March 31, 1997 are included in the six months ended
June 30, 1997 and in the year ended December 31, 1996 pro forma results.
Airways' revenues and net income for that three month period were $29,777,000
and $277,000, respectively.
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA VALUJET PRO FORMA PRO FORMA
VALUJET ADJUSTMENTS AS ADJUSTED AIRWAYS ADJUSTMENTS COMBINED
-------- ----------- ----------- ------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................. $149,725 $11,460 (a) $143,435 $1,672 $145,107
(9,200)(b)
(7,800)(d)
(750)(c)
Restricted cash........ 0 0 10,411 10,411
Accounts receivable,
net................... 6,584 6,584 3,956 10,540
Inventory.............. 6,159 6,159 1,066 7,225
Prepaid items.......... 2,482 2,482 4,257 6,739
Income tax receivable.. 13,711 13,711 0 13,711
Deferred tax asset..... 0 0 5,101 $(1,528)(k) 3,573
Other current assets... 1,118 1,118 0 1,118
-------- ------- -------- ------ ------- --------
Total current assets.... 179,779 (6,290) 173,489 26,463 (1,528) 198,424
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA VALUJET PRO FORMA PRO FORMA
VALUJET ADJUSTMENTS AS ADJUSTED AIRWAYS ADJUSTMENTS COMBINED
-------- ----------- ----------- ------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Property and equipment,
net.................... 194,049 9,200 (b) 203,249 38,804 242,053
Debt issuance costs..... 3,180 7,800 (d) 10,980 10,980
Goodwill, net........... 0 0 1,713 (1,713)(l) 50,662
50,662 (n)
Deferred tax asset...... 0 0 3,493 3,493
Other assets, net....... 0 0 523 (523)(k) 0
-------- -------- -------- ------- ------- --------
Total assets............ $377,008 $ 10,710 $387,718 $70,996 $46,898 $505,612
======== ======== ======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and
accrued expenses...... $ 27,618 $ 27,618 $18,503 $ 3,250 (m) $ 49,371
Air traffic liability.. 10,638 10,638 13,441 24,079
Deferred tax
liability............. 485 485 0 485
Current portion of
long-term debt........ 9,040 9,040 3,476 12,516
Current portion of
maintenance reserves.. 0 0 1,779 (1,779)(k) 0
-------- -------- ------- ------- --------
Total current
liabilities............ 47,781 47,781 37,199 1,471 86,451
Long-term debt less
current maturities..... 226,621 $ 80,000 (a) 238,081 11,188 249,269
(68,540)(a)
Maintenance reserves.... 0 0 2,343 (2,343)(k) 0
Deferred taxes.......... 6,722 (278)(c) 6,444 2,794 (193)(k) 8,205
(840)(m)
Stockholders' equity:
Preferred stock........ 0 0 0 0
Common stock........... 55 55 91 (91)(n) 64
9 (n)
Additional paid-in
capital............... 77,453 77,453 26,621 (26,621)(n) 143,719
63,466 (n)
2,800 (n)
Retained earnings
(deficit)............. 18,376 (472)(c) 17,904 (9,240) 9,240 (n) 17,904
-------- -------- -------- ------- ------- --------
Total stockholders'
equity................. 95,884 (472) 95,412 17,472 48,803 161,687
-------- -------- -------- ------- ------- --------
Total liabilities and
stockholders' equity... $377,008 $ 10,710 $387,718 $70,996 $46,898 $505,612
======== ======== ======== ======= ======= ========
</TABLE>
48
<PAGE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------------------------------
PRO FORMA VALUJET PRO FORMA PRO FORMA
VALUJET ADJUSTMENTS AS ADJUSTED AIRWAYS ADJUSTMENTS COMBINED
------------ ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 84,687 $ 84,687 $ 56,829 $141,516
Operating expenses...... 119,404 $ 750 (e) 120,729 56,280 $ (222)(o) 177,560
575 (f) (71)(p)
844 (q)
-------- ------- -------- -------- ------- --------
Operating income
(loss)................. (34,717) (1,325) (36,042) 549 (551) (36,044)
Interest expense....... 12,723 (2,959)(g) 15,028 769 15,797
4,200 (h)
1,064 (i)
Interest income........ (3,268) (3,268) (366) (3,634)
-------- ------- -------- -------- ------- --------
Income (loss) before
income taxes........... (44,172) (3,630) (47,802) 146 (551) (48,207)
Income tax expense (ben-
efit).................. (16,439) (1,270)(j) (17,709) 41 78 (r) (17,590)
-------- ------- -------- -------- ------- --------
Net income (loss)....... $(27,733) $(2,360) $(30,093) $ 105 $ (629) $(30,617)
======== ======= ======== ======== ======= ========
Net income (loss) per
share.................. $ (0.51) $ (0.55) $ 0.01 $ (0.48)
======== ======== ======== ========
Weighted average shares
outstanding............ 54,892 54,892 9,065 63,960
======== ======== ======== ========
Ratio of earnings to
fixed charges(s)....... -- (t)
========
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
DECEMBER 31, MARCH
1996 PRO FORMA VALUJET 31, 1997 PRO FORMA PRO FORMA
VALUJET ADJUSTMENTS AS ADJUSTED AIRWAYS ADJUSTMENTS COMBINED
------------ ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $219,636 $219,636 $102,623 $322,259
Operating expenses...... 271,035 $ 750 (e) 272,935 114,745 $ (443)(o) 388,783
1,150 (f) (143)(p)
1,689 (q)
-------- ------- -------- -------- ------- --------
Operating loss.......... (51,399) (1,900) (53,299) (12,122) (1,103) (66,524)
Interest expense....... 22,186 (5,917)(g) 26,796 1,507 28,303
8,400 (h)
2,127 (i)
Interest income........ (7,653) (7,653) (984) (8,637)
-------- ------- -------- -------- ------- --------
Loss before income tax-
es..................... (65,932) (6,510) (72,442) (12,645) (1,103) (86,190)
Income tax benefit...... (24,463) (2,279)(j) (26,742) (5,654) 155 (r) (32,241)
-------- ------- -------- -------- ------- --------
Net loss................ $(41,469) $(4,231) $(45,700) $ (6,991) $(1,258) $(53,949)
======== ======= ======== ======== ======= ========
Net loss per share...... $ (0.76) $ (0.84) $ (0.77) $ (0.85)
======== ======== ======== ========
Weighted average shares
outstanding............ 54,702 54,702 9,029 63,770
======== ======== ======== ========
Ratio of earnings to
fixed charges(s)....... -- (t)
========
</TABLE>
49
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(a) Reflects the issuance of $80.0 million of 10 1/2% senior secured notes and
the repayment of $68.5 million of secured debt.
(b) Reflects the purchase of four hush kits for approximately $2.3 million per
hush kit.
(c) Reflects the payment and expensing of certain transaction costs with the
related income tax effect.
(d) Reflects the payment and capitalization of debt issuance costs.
(e) Reflects the effect of expensing certain transaction costs.
(f) Reflects depreciation of the four hush kits assumed to be purchased with a
portion of the proceeds of the $80.0 million debt offering.
(g) Reflects the elimination of interest on $68.5 million of debt refinanced
by the $80.0 million debt offering.
(h) Reflects interest on the $80.0 million of 10 1/2% senior secured notes.
(i) Reflects the amortization of debt issuance costs.
(j) Reflects the income tax effect of the pro forma adjustments.
(k) Reflects the reversal of preoperating costs and maintenance reserves, and
the related deferred tax amounts, to conform accounting policies.
(l) Reflects the reversal of Airways' historical excess of cost over fair
value of the net tangible assets acquired ("goodwill").
(m) Reflects the accrual of estimated merger costs with the related income tax
effect.
(n) Reflects the excess of cost over the estimated fair value of the net
tangible assets acquired in the Merger, the elimination of Airways'
historical common stock, additional paid-in capital and retained deficit,
the value of the Common Stock issued to the Airways stockholders and the
value of options issued to Airways option holders in the Merger.
<TABLE>
<S> <C>
Number of shares issued to acquire Airways..................... 9,067,937
Per share price at date of agreement and joint press release... $ 7.00
---------
Value of stock................................................. $ 63,476
Value of Airways options....................................... 2,800
Transaction costs.............................................. 3,250
---------
Purchase price................................................. 69,526
Less estimated fair value of net tangible assets acquired...... 18,864
---------
Excess of cost over fair value of net tangible assets ac-
quired........................................................ $ 50,662
=========
</TABLE>
Excess of cost over fair value of the net tangible assets acquired is
presented in the pro forma balance sheet utilizing estimated amounts at
June 30, 1997 and will be determined at the Effective Date. Such amount
will also be allocated according to the estimated fair values of assets at
the Effective Date.
(o) Reflects the reversal of historical amortization of preoperating costs of
Airways.
(p) Reflects the reversal of historical amortization of goodwill of Airways.
(q) Reflects the amortization of goodwill resulting from the Merger by use of
the straight line method over a 30-year period.
(r) Reflects the income tax effect of the pro forma adjustments.
(s) For purposes of calculating the ratio of earnings to fixed charges (i)
earnings consist of income (loss) before income taxes, plus fixed charges
and (ii) fixed charges consist of interest expense incurred, plus the
portion of rent expense under operating leases deemed by the Company to be
representative of the interest factor.
(t) For the periods ending June 30, 1997 and December 31, 1996, the pro forma
combined earnings were insufficient to cover fixed charges by $48.2
million and $86.2 million, respectively.
50
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative per share data relating
to net income and book value on (i) an historical basis for ValuJet and
Airways, and (ii) a pro forma combined basis per share of ValuJet Common
Stock, giving effect to the sale by ValuJet of the Notes and the application
of the proceeds therefrom and the Merger. The ValuJet and Airways pro forma
combined information gives effect to the Merger on a purchase accounting basis
and is based upon the Exchange Ratio of one share of ValuJet Common Stock for
each share of Airways Common Stock. The unaudited pro forma data is presented
for informational purposes only and is not necessarily indicative of the
results of operations or combined financial position that would have resulted
had the sale by ValuJet of the Notes and the application of the proceeds
therefrom and the Merger been consummated at the dates or during the periods
indicated, nor is it necessarily indicative of future results of operations or
combined financial position.
The information shown below for the year ended December 31, 1996 is derived
from the audited consolidated financial statements of ValuJet for the period
then ended and the audited consolidated financial statements of Airways for
the year ending on the ensuing March 31 and should be read in conjunction
with, and is qualified in its entirety by, the historical financial statements
of ValuJet and Airways, including the respective notes thereto, and the pro
forma financial information included herein. The information shown below for
the six months ended June 30, 1997 is derived from the unaudited consolidated
financial statements of ValuJet and Airways, including the respective notes
thereto, and should be read in conjunction with, and is qualified in its
entirety by, the pro forma financial information included herein. See
"Selected Financial Data of ValuJet (Historical)," "Selected Financial Data of
Airways (Historical)," and "Pro Forma Condensed Combined Financial
Information."
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996(1)
------------- --------------------
<S> <C> <C>
INCOME (LOSS) PER SHARE
ValuJet historical...... ($.51) ($.76)
Airways historical...... .01 ( .77)
ValuJet and Airways pro
forma combined (2)..... (.48) (.85)
BOOK VALUE PER SHARE
(PERIOD END)
ValuJet historical...... 1.74
Airways historical...... 1.93
ValuJet and Airways pro
forma combined (2)..... 2.53
</TABLE>
- --------
(1) ValuJet's fiscal year end is December 31 and Airways' fiscal year end is
March 31. Consequently, the data included for Airways as of the date
indicated is based on audited financial statements of Airways for the year
ending on March 31, 1997.
(2) Represents the combined results of ValuJet and Airways giving effect to
the sale by ValuJet of the Notes and the application of the proceeds
therefrom and the Merger as if such transactions had occurred as of
January 1, 1996 and 1997, with respect to the statements of operations for
the year ended December 31, 1996, and the six months ended June 30, 1997,
respectively, and as of June 30, 1997, with respect to the balance sheet.
The Merger is reflected using the purchase method of accounting for
business combinations.
51
<PAGE>
VALUJET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following chart indicates the service offered by ValuJet from December
1993 through June 1997:
<TABLE>
<CAPTION>
TOTAL NUMBER OF NUMBER
NUMBER PEAK-DAY OF CITIES
AS OF OF AIRCRAFT FLIGHTS SERVED
----- ----------- --------- ---------
<S> <C> <C> <C>
December 31, 1993 6 34 8
March 31, 1994 10 70 13
June 30, 1994 14 92 15
September 30, 1994 16 114 17
December 31, 1994 22 124 17
March 31, 1995 27 184 23
June 30, 1995 28 208 24
September 30, 1995 34 228 26
December 31, 1995 42 268 26
March 31, 1996 47 286 28
June 30, 1996 51 0 (1)
September 30, 1996 46 (2) 16 (3)
December 31, 1996 43 (4) 124 18
March 31, 1997 42 (5) 148 21
June 30, 1997 42 (6) 184 24
</TABLE>
- --------
(1) Service suspended to all markets as of June 17, 1996
(2) Of which 4 had been approved for service by the FAA
(3) Service resumed on September 30, 1996 to Atlanta, Fort Lauderdale,
Orlando, Tampa and Washington, D.C.
(4) Of which 15 had been approved for service by the FAA
(5) Of which 24 had been approved for service by the FAA
(6) Of which 30 had been approved for service by the FAA
On May 11, 1996, ValuJet tragically lost its Flight 592 en route from Miami
to Atlanta. There were no survivors. The accident resulted in extensive media
coverage, calling into question the safety of low fare airlines in general and
ValuJet in particular. In response to the accident, the FAA conducted an
extraordinary review of the ValuJet's operations.
On June 17, 1996, ValuJet entered into a consent order with the FAA under
which: (i) ValuJet agreed to suspend operations until such time as ValuJet was
able to satisfy the FAA as to various regulatory compliance concerns
identified by the FAA as a result of its intensive inspections of ValuJet's
operations, (ii) the FAA agreed to work with ValuJet in order to reestablish
operations with up to 15 aircraft initially and (iii) ValuJet paid $2.0
million to the FAA to compensate it for the costs of the special inspections
conducted. In order to reduce costs while ValuJet prepared its plan to restore
service, ValuJet furloughed more than 90% of its personnel (approximately
3,600 of 4,000) for several weeks.
On August 29, 1996, the FAA returned ValuJet's operating certificate and the
Department of Transportation ("DOT") issued a "show cause" order regarding
ValuJet's fitness as an air carrier. The DOT gave its final approval on
September 26, 1996, and ValuJet resumed operations with service between
Atlanta and four other cities on September 30, 1996.
52
<PAGE>
Other effects of the accident, ensuing adverse media coverage, intensive FAA
scrutiny and suspension of operations include the following:
1. The suspension of operations resulted in the failure of ValuJet to
meet certain financial covenants under certain of ValuJet's secured debt.
All of this debt was repaid with the proceeds of ValuJet's $80,000,000
secured debt offering. See "--Liquidity and Capital Resources" below.
2. The expansion of ValuJet's operations will remain subject to FAA and
DOT approval for an indefinite period of time. FAA approvals are required
to increase the number of aircraft on ValuJet's operating certificate and
to commence service to any new market.
3. ValuJet is unable to predict how significantly the accident and
suspension of operations will affect load factors and yield or the length
of time during which load factors and yield will be impacted. During first
quarter 1997, ValuJet's load factor was 53.9% compared to 58.0% for first
quarter 1996 and its average fare was $60.47 compared to $72.01 for first
quarter 1996. ValuJet has commenced the implementation of a program to
enhance its image. See "Business of ValuJet--Strategy."
4. In 1996, ValuJet refunded fares paid by customers affected by
ValuJet's changing schedules and by those who otherwise chose to change
their travel plans.
5. ValuJet's cost per ASM has increased and is likely to remain inflated
to some extent to reflect the cost of additional maintenance procedures and
infrastructure adopted by ValuJet as well as lower aircraft utilization
levels.
6. ValuJet may reduce its workforce permanently if reduced traffic levels
continue and ValuJet is unable to reestablish its previous service levels.
7. The aircraft lost was insured for $4.0 million, which was in excess of
book value. ValuJet carries $750.0 million of liability insurance. Although
ValuJet believes that such insurance will be sufficient to cover all claims
arising from the accident, there can be no assurance that all claims will
be covered or that the aggregate of all claims will not exceed such
insurance limits.
8. Several stockholder lawsuits have been filed against ValuJet and
certain of its officers and directors alleging, among other things,
violation of federal securities laws. While ValuJet denies that it has
violated any of its obligations under the federal securities laws, there
can be no assurance that ValuJet will not sustain material liability under
such or related lawsuits. See "Business of ValuJet--Litigation."
9. Various governmental authorities are conducting investigations of the
circumstances surrounding the accident. ValuJet is cooperating with the
authorities in connection with these investigations. See "Business of
ValuJet--Litigation."
As a result of the accident, the ensuing extraordinary review of ValuJet's
operations by the FAA, the suspension of operations in June 1996 and the
current and prospective FAA imposed limitation on the number of aircraft that
may be operated by ValuJet, ValuJet's results for periods prior to May 11,
1996 are not necessarily indicative of the results to be expected in future
periods. ValuJet's operations for 1996 are also not indicative of future
operations as a result of the suspension of operations for a significant
portion of 1996. ValuJet's operations for the first and second quarters 1997
may not be indicative of future operations as a result of the reduced level of
service, ValuJet's ownership of more aircraft than may be used and additional
infrastructure to support larger operations during the first and second
quarters of 1997.
53
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER
31, 1994
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1995
--------------------------------- ----------------------------------
AMOUNT % OF AMOUNT % OF
(000) REVENUES PER ASM (000) REVENUES PER ASM
----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES...... $ 133,901 100.0% 9.05c $ 367,757 100.0% 9.62c
=========== ======== ======= =========== ======== ========
EXPENSE CATEGORY
Flight operations....... $ 6,967 5.2% 0.47c $ 16,273 4.4% 0.42c
Aircraft fuel........... 21,775 16.3 1.47 55,813 15.2 1.46
Maintenance............. 14,862 11.1 1.00 47,330 12.9 1.24
Station operations...... 20,198 15.1 1.37 49,931 13.6 1.31
Passenger services...... 3,942 2.9 0.27 10,363 2.8 0.27
Marketing and advertis-
ing.................... 6,546 4.9 0.44 8,989 2.4 0.23
Sales and reservations.. 11,325 8.5 0.77 31,156 8.5 0.81
General and administra-
tive................... 5,039 3.8 0.34 10,617 2.9 0.28
Employee bonuses........ 5,146 3.8 0.35 14,382 3.9 0.38
Depreciation............ 3,555 2.7 0.24 15,147 4.1 0.40
Other expenses (income),
net.................... 965 0.7 0.06 (70) (0.0) (0.00)
Shutdown and other non-
recurring.............. 0 0.0 0.00 0 0.0 0.00
----------- -------- ------- ----------- -------- --------
Total Expenses.......... $ 100,320 75.0% 6.78c $ 259,931 70.7% 6.80c
=========== ======== ======= =========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------
AMOUNT % OF
(000) REVENUES PER ASM
----------- ---------- ---------
<S> <C> <C> <C>
OPERATING REVENUES...... $ 219,636 100.0% 8.12c
=========== ======== ========
EXPENSE CATEGORY
Flight operations....... $ 16,479 7.5% 0.61c
Aircraft fuel........... 46,691 21.3 1.73
Maintenance............. 49,500 22.5 1.83
Station operations...... 42,018 19.1 1.55
Passenger services...... 8,879 4.0 0.33
Marketing and advertis-
ing.................... 8,426 3.8 0.31
Sales and reservations.. 18,378 8.4 0.68
General and administra-
tive................... 13,659 6.2 0.51
Employee bonuses........ 1,245 0.6 0.05
Depreciation............ 17,551 8.0 0.65
Other expenses (income),
net.................... (5,252) (2.4) (0.19)
Shutdown and other non-
recurring.............. 67,994 31.0 2.51
----------- -------- --------
Total Expenses.......... $ 285,568 130.0% 10.57c
=========== ======== ========
</TABLE>
OPERATING REVENUES
Total operating revenues for the year ended December 31, 1996 were
approximately $219.6 million as compared to $367.8 million and $133.9 million
for the years ending December 31, 1995 and 1994, respectively. The decrease
from 1995 to 1996 is a result of ValuJet's reduced service level and
suspension of operations during the second and third quarters of 1996. The
increase over 1994 is due to ValuJet flying more available seat miles (ASMs)
during 1996. ValuJet flew 2.7 billion ASMs in 1996 as compared to 3.8 billion
and 1.5 billion in 1995 and 1994, respectively. ValuJet's load factors for
1996, 1995 and 1994 were 57.1%, 68.8% and 64.0%, respectively. The lower load
factor in 1996 is due in part to the accident and ensuing circumstances.
ValuJet's average fare was $69.81 for 1996, $68.10 for 1995 and $63.48 for
1994 due to the absence of the 10% federal excise tax for a substantial part
of 1996.
54
<PAGE>
EXPENSES
Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft fuel, maintenance expenses and
passenger services expenses. Expenses for hull insurance and compensation of
pilots (exclusive of bonuses) are included in flight operations. Flight
operations expenses were higher, on a per ASM basis, for the year ended
December 31, 1996 than the previous two years due to the extended period of
time that ValuJet's operations were suspended, the additional training costs
incurred at restart and the change in ValuJet's compensation structure in
September 1996, which reduced the percentage of compensation represented by
bonuses and shifted this cost to base pay charged to each department. The cost
of hull insurance also increased substantially as of October 1, 1996. Certain
flight operations administrative costs were also incurred during the period of
the suspension with no corresponding ASMs being generated over which to spread
these costs.
Aircraft fuel expenses include both the direct cost of the fuel as well as
the costs of delivering fuel into the aircraft. Fuel expense, on a per ASM
basis, was higher for 1996 than either of the previous two years due to an
increase in the average price of fuel. The average price of fuel increased
from $0.58 per gallon for 1994 to $0.60 per gallon for 1995 to $0.71 per
gallon for 1996. This approximate 20% increase in the price per gallon of fuel
accounts for the 18% increase in fuel cost per ASM.
Maintenance expenses include all administrative costs of the maintenance
department as well as normal recurring maintenance performed during the year.
Expenses for engine overhaul and certain scheduled heavy maintenance
procedures are included in this cost. Most non-routine maintenance costs
performed during the suspension of operations are included in the nonrecurring
expense line item. Maintenance expenses for the year ended December 31, 1996
were higher, on a per ASM basis, than both 1995 and 1994 due to the suspension
of operations during the second and third quarters of 1996 and the reduced
level of service once ValuJet was able to resume operations. ValuJet also had
a lower utilization rate on the aircraft it operated which results in the
spreading of certain fixed costs over fewer ASMs or block hours. In 1996,
ValuJet maintained or paid storage costs on many more aircraft than it was
able to operate. Certain maintenance administrative costs were also incurred
during the period of the suspension of operations with no ASMs being generated
over which to spread these costs.
Station operations expenses include all expenses incurred at the airports,
as well as station operations administration and liability insurance. Certain
facility rental expense related to non-operating stations as a result of the
suspension of operations are included in shutdown and other nonrecurring
expenses. Station operations expenses were higher, on a per ASM basis, for the
year ended December 31, 1996 than in 1995 and 1994 due largely to the
suspension of operations and the inefficiencies generated from restarting
operations on a limited basis. Many station facilities were not fully utilized
during the fourth quarter due to the limited operations. Another factor which
contributed to a higher 1996 station operations expense was an increase in
insurance costs as of October 1, 1996. Certain station operations
administrative costs were also incurred during the period of the suspension of
operations with no ASMs being generated over which to spread these costs.
Passenger services expenses include flight attendant wages and benefits and
catering expenses. Also included are the costs for flight attendant training
and flight attendant overnight expenses. The increase in passenger services
expenses for the year ended December 31, 1996, on a per ASM basis, over 1995
and 1994 is due to the restructuring of the compensation policy as it relates
to flight attendants. The flight attendants' salary levels were adjusted
upward and the regular quarterly bonus portion of their compensation was
eliminated. This change caused passenger services expense to be higher while
reducing the amount of bonus expense.
Marketing and advertising expenses include all advertising expenses and
wages and benefits for the marketing department. Marketing and advertising
expenses for the year ended December 31, 1996, as a percentage of revenue,
were higher than 1995 and lower than 1994. These expenses were higher in 1996
than 1995 due to the additional advertising costs incurred at the resumption
of operations being spread over a reduced revenue base caused by lower service
levels and load factors. Certain marketing administrative costs were also
incurred during the period of the suspension of operations with no ASMs being
generated over which to spread these costs.
55
<PAGE>
Sales and reservations expenses include all of the costs related to
recording a sale or reservation. These expenses include wages and benefits for
reservationists, rent, telecommunication charges, credit card fees and travel
agency commissions. Sales and reservations expenses for the year ended
December 31, 1996 were 8.4% of revenue as compared to 8.5% for each of 1995
and 1994.
General and administrative expenses include the wages and benefits for
ValuJet's executive officers and various other administrative personnel. Also
included are costs for office supplies, legal expenses, bad debts, accounting
and other miscellaneous expenses. General and administrative costs for 1996
were higher than each of 1995 and 1994 due to the shift in compensation
structure to one based to a larger extent on base salaries and also due to
increased legal fees.
The amount of bonus expense for the year ended December 31, 1996 reflects
the change in salary structure as of September 1996 to a structure based less
on bonus and more on base salary and the fact that ValuJet had a net loss from
the second quarter 1996 through the end of the year. The amount charged to
1996 approximates the amount paid to those employees in the quarterly pool for
the first quarter of 1996. The actual amount to be paid and the form of such
payout are at the sole discretion of ValuJet's Board of Directors.
Depreciation expense includes depreciation on aircraft and ground equipment,
but does not include any amortization of start-up and route development costs
as all of these costs are expensed as incurred. Depreciation expense for the
year ended December 31, 1996 was higher than each of the previous two years as
additional aircraft and other property have been acquired. During 1996,
ValuJet made the decision to dispose of certain idled aircraft. Subsequent to
the decision to sell or lease out such aircraft, no depreciation was recorded
on aircraft held for sale. Depreciation on aircraft idled as a result of the
suspension of operations and reduced operations and not yet returned to
service has been recorded in shutdown and other nonrecurring expenses.
Shutdown and other nonrecurring expenses include costs associated with the
loss of Flight 592 and excess operating costs related to the reduced schedule
from May 19, 1996 to June 17, 1996, the suspension of operations from June 17,
1996 to September 29, 1996 and the reduced schedule from September 30, 1996 to
December 31, 1996. Such costs consist of expenses directly related to the
accident and the ensuing extensive FAA review of ValuJet's operations
including legal fees, payments to the FAA, inspection related costs and
maintenance in excess of normal recurring maintenance. In addition,
depreciation on grounded aircraft, rental of abandoned or idled facilities and
costs of personnel idled as a result of the reduced and suspended operations
from May through December 1996 are included in shutdown and other nonrecurring
expenses. Personnel costs include full wages, salaries and benefits that were
provided to idled employees during the reduction and suspension of operations.
A summary of such costs is as follows:
<TABLE>
<S> <C>
Maintenance.................................................. $27,750,000
Legal and other consulting................................... 8,843,000
Facilities rental............................................ 6,114,000
Wages, salaries and benefits, excluding maintenance.......... 4,895,000
Depreciation................................................. 11,054,000
FAA remediation.............................................. 2,000,000
Other........................................................ 7,338,000
-----------
$67,994,000
===========
</TABLE>
ValuJet also incurred additional shutdown and nonrecurring expenses in the
first quarter of 1997 as a result of idled aircraft and facilities due to the
reduced level of service attributable to ValuJet's agreement with the FAA.
No accrual was provided for costs to be incurred in future periods related
to aircraft depreciation and maintenance and rental costs associated with
temporarily idled facilities as such costs will be recognized as they are
incurred. There was no accrual for salaries and wages in connection with the
June 18, 1996 furlough of employees at December 31, 1996 as such employees
were paid through June 30, 1996 with no additional severance benefits
provided.
56
<PAGE>
Other expenses (income), net include interest income and interest expense as
well as certain property transactions. During the year ended December 31,
1996, interest expense exceeded interest income by approximately $14,534,000
due to increasing debt levels attributable to the acquisition of aircraft and
the completion of the issuance of $150.0 of million 10 1/4% Notes. During
1996, ValuJet also recognized $13.0 million of income as an arrangement fee
for aircraft transfers, a $2.8 million gain from insurance recovery and a $3.9
million gain on the sale of aircraft.
COMPARISON OF QUARTERS ENDED JUNE 30, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
JUNE 30, 1996 JUNE 30, 1997
-------------------------- -----------------------
AMOUNT PERCENT OF PER AMOUNT PERCENT OF PER
(000) REVENUES ASM (000) REVENUES ASM
-------- ---------- ----- ------- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES....... $ 81,217 100.00% 8.28c $47,759 100.0% 6.82c
======== ====== ===== ======= ===== ====
EXPENSE CATEGORY
Flight operations........ $ 5,415 6.7% 0.55c $ 4,801 10.1% 0.69c
Aircraft fuel............ 17,061 21.0 1.74 10,716 22.4 1.53
Maintenance.............. 15,807 19.4 1.61 10,534 22.1 1.50
Station operations....... 14,749 18.2 1.51 12,132 25.4 1.73
Passenger services....... 3,632 4.5 0.37 2,122 4.4 0.30
Marketing and advertis-
ing..................... 2,223 2.7 0.23 2,875 6.0 0.41
Sales and reservations... 6,547 8.1 0.67 3,723 7.8 0.53
General and administra-
tive.................... 4,272 5.3 0.44 3,347 7.0 0.48
Employee bonuses......... (550) (0.7) (0.06) 0 0.0 0.00
Depreciation............. 6,695 8.2 0.68 7,362 15.4 1.05
Nonrecurring expenses ... 31,623 38.9 3.23 0 0.0 0.00
Other expenses, net...... (11,133) (13.7) (1.14) 4,811 10.1 0.69
-------- ------ ----- ------- ----- ----
Total expenses........... $ 96,341 118.6% 9.83c $62,423 130.7% 8.91c
======== ====== ===== ======= ===== ====
</TABLE>
OPERATING REVENUES
Total operating revenues for the quarter ended June 30, 1997 were
approximately $47.8 million as compared to $81.2 million for the quarter ended
June 30, 1996. The decrease from 1996 to 1997 is a result of ValuJet's reduced
service level during the second quarter of 1997. ValuJet flew 701 million ASMs
during the second quarter of 1997 as compared to 980 million ASMs during the
second quarter of 1996. ValuJet's load factors for the three month periods
ending June 30, 1997 and 1996 were 54.9% and 55.7%, respectively. ValuJet
believes that the lower load factor in 1997 is due in part to publicity
related to the accident and increased competition. ValuJet's average fare was
$58.92 for the three months ending June 30, 1997 and $73.79 for the three
months ending June 30, 1996 due to ValuJet offering numerous sales during
1997.
EXPENSES
Flight operations expenses were higher, on a per ASM basis, for the quarter
ended June 30, 1997 than the quarter ended June 30, 1996 due to the higher
cost of hull insurance since October 1, 1996.
Fuel expense, on a per ASM basis, was lower for the second quarter 1997 than
the second quarter 1996 due to a decrease in the average price of fuel. The
average price of fuel decreased from $0.72 per gallon for the second quarter
1996 to $0.67 per gallon for the second quarter 1997. This approximate 7%
decrease in the price per gallon of fuel as well as a decrease in fuel burn
per block hour from 858 gallons to 837 gallons over the same period accounts
for the 12% decrease in fuel cost per ASM.
Maintenance expenses for the quarter ended June 30, 1997 were lower, on a
per ASM basis, than the quarter ended June 30, 1996 due to the reduced level
of service during the second quarter 1997 and the timing of certain
57
<PAGE>
heavy maintenance procedures. ValuJet also incurred substantial expenses
during the second quarter 1996 related to the FAA increased inspections.
Station operations expenses were higher, on a per ASM basis, for the second
quarter 1997 than the second quarter 1996 due largely to the inefficiencies
generated from restarting operations on a limited basis. Many of the station
facilities were not fully utilized during the second quarter 1997 due to the
limited operation. Another factor which contributed to a higher 1997 station
operations expense was an increase in insurance costs as of October 1, 1996.
Insurance costs for the second quarter 1997 were .28 cents per ASM compared to
.08 cents per ASM for the second quarter 1996.
Passenger services expenses remained flat as a percentage of revenue from
second quarter 1996 to second quarter 1997 and decreased on a per ASM basis
over the same period as a result of the timing and amount of purchase of
catering supplies.
Marketing and advertising expenses for the second quarter 1997, as a
percentage of revenue, were higher than the second quarter 1996 due to the
additional advertising costs incurred at the resumption of operations into
various markets being spread over a reduced revenue base caused by lower
service levels and load factors.
Sales and reservations expenses for the quarter ended June 30, 1997 were
7.8% of revenue as compared to 8.1% for the quarter ended June 30, 1996.
General and administrative costs for the second quarter 1997 were higher, on
a per ASM basis, than the second quarter 1996 due to the shift in compensation
structure to one based to a larger extent on base salaries and the reduced
level of ASMs over which to spread these costs.
There was no expense recorded in the second quarter 1997 related to bonuses
as ValuJet did not have income. The actual amount to be paid and the form of
such payout are at the sole discretion of ValuJet's Board of Directors.
Depreciation expense for the quarter ended June 30, 1997 was higher than the
quarter ended June 30, 1996 due to the return of aircraft to operating
specifications and to depreciation on non-performing assets being recorded in
the shutdown and other nonrecurring expenses line item for the second quarter
1996.
Shutdown and other nonrecurring expenses include costs associated with the
loss of Flight 592 and excess operating costs related to the reduced schedule
from May 19, 1996 to June 17, 1996 and the suspension of operations subsequent
to June 17, 1996. Such costs consist of expenses directly related to the
accident and the ensuing extensive FAA review of ValuJet's operations
including legal fees, payments to the FAA, inspection related costs and
maintenance in excess of normal recurring maintenance. In addition,
depreciation on grounded aircraft, rental of abandoned or idled facilities and
costs of personnel idled as a result of the reduced and suspended operations
during May and June 1996 are included in shutdown and other nonrecurring
expenses. Personnel costs include full wages, salaries and benefits that were
provided to idled employees during the reduction and suspension of operations.
A summary of such costs is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
---------------------------
1996 1997
--------------- -----------
<S> <C> <C>
Maintenance........................................ $ 7,855,000 $0
Legal and other consulting......................... 6,317,000 0
Facilities rental.................................. 4,109,000 0
Wages, salaries and benefits, excluding
maintenance....................................... 3,916,000 0
Depreciation....................................... 1,480,000 0
FAA remediation.................................... 2,000,000 0
Other.............................................. 5,946,000 0
--------------- -------
$ 31,623,000 $ 0
=============== =======
</TABLE>
58
<PAGE>
No accrual was provided for costs to be incurred in future periods related
to aircraft depreciation and maintenance and rental costs associated with
temporarily idled facilities as such costs were recognized as they were
incurred. There was no accrual at June 30, 1996 for salaries and wages in
connection with the June 18, 1996 furlough of employees as such employees were
paid through June 30, 1996 with no additional severance benefits provided.
During the quarter ended June 30, 1997, interest expense exceeded interest
income by approximately $4,811,000 due to increasing debt levels attributable
to the completion in April 1996 of the issuance of $150 million 10 1/4% senior
notes due 2001.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------------
JUNE 30, 1996 JUNE 30, 1997
-------------------------- -------------------------
AMOUNT PERCENT OF PER AMOUNT PERCENT OF PER
(000) REVENUES ASM (000) REVENUES ASM
-------- ---------- ----- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES...... $191,212 100.00% 8.25c $ 84,687 100.0% 6.98c
======== ====== ===== ======== ===== =====
EXPENSE CATEGORY
Flight operations....... $ 12,933 6.8% 0.56c 8,904 10.5% 0.73c
Aircraft fuel........... 39,137 20.4 1.69 19,852 23.4 1.64
Maintenance............. 31,419 16.4 1.35 24,640 29.1 2.03
Station operations...... 32,641 17.1 1.41 22,485 26.6 1.85
Passenger services...... 7,624 4.0 0.33 3,817 4.5 0.31
Marketing and advertis-
ing.................... 6,507 3.4 0.28 5,227 6.2 0.43
Sales and reservations.. 15,442 8.1 0.67 6,801 8.0 0.56
General and administra-
tive................... 8,161 4.3 0.35 6,143 7.2 0.51
Employee bonuses........ 1,245 .7 0.05 0 0.0 0.00
Depreciation............ 13,211 6.9 0.57 12,247 14.5 1.01
Nonrecurring expenses... 31,623 16.5 1.36 9,338 11.0 0.77
Other expenses, net..... (10,576) (5.5) (0.46) 9,405 11.2 0.78
-------- ------ ----- -------- ----- -----
Total expenses........ $189,367 99.1% 8.16c $128,859 152.2% 10.62c
======== ====== ===== ======== ===== =====
</TABLE>
OPERATING REVENUES
Total operating revenues decreased approximately 56% ($106,525,000) from the
six months ended June 30, 1996 to the six months ended June 30, 1997. This
decrease was due to several factors. The average number of flights decreased
from 222 flights per day to 127 flights per day during the same period due to
reduced service levels attributable to the suspension of operations and FAA
approval process for aircraft and markets. Total available seat miles (ASMs)
decreased 48% from the six months ending June 30, 1996 to the six months
ending June 30, 1997 and revenue passenger miles (RPMs) decreased 50% during
the same period. The decreases in ASMs and RPMs were attributable to reduced
service levels subsequent to the accident.
EXPENSES
Expenses for flight operations per ASM increased from approximately .56c per
ASM for the six months ended June 30, 1996 to .73c per ASM for the six months
ended June 30, 1997 due to ValuJet's higher training costs during the first
quarter of 1997 and ValuJet's increased cost for hull insurance during the six
month period ending June 30, 1997. Hull insurance increased from .06 cents per
ASM for the first six months of 1996 to .19 cents per ASM for the first six
months of 1997.
Aircraft fuel cost decreased approximately 3% on a per ASM basis from the
first six months of 1996 to the first six months of 1997 primarily due to a
decrease in the fuel burn per block hour. ValuJet's average fuel cost
59
<PAGE>
increased from approximately $.70 per gallon for the six months ended June 30,
1996 to approximately $.71 per gallon for the six months ended June 30, 1997
while fuel burn per block hour decreased from 846 gallons to 837 gallons over
the same period. Fuel expenses were also impacted by additional ferrying and
positioning flights made necessary as a result of the FAA intensive
investigations during the second quarter of 1996.
Maintenance expenses were higher on a per ASM basis from the first six
months of 1996 to the first six months of 1997. Maintenance expenses in prior
periods were lower as a result of aircraft recently acquired by ValuJet
entering service immediately following a scheduled maintenance check,
therefore, no scheduled maintenance was required during the first several
months of each aircraft's operations. Due to ValuJet's use of a continuous
overhaul program, ValuJet's aircraft are generally scheduled for some level of
overhaul procedures within twelve months of the purchase date. ValuJet's
maintenance expenses were also negatively impacted by the number of aircraft
which were put into heavy maintenance during the first quarter of 1997 in
anticipation of their return to service.
Station operations expenses increased on a per ASM basis from the six months
ended June 30, 1996 to the six months ended June 30, 1997, primarily due to
inefficiencies in the use of ValuJet's station assets, primarily related to
airport gate usage. The second quarter 1997 costs were also higher, on a per
ASM basis, due to a substantial increase in liability insurance costs as of
October 1, 1996, from .08 cents per ASM for the first six months to 1996 to
.21 cents per ASM for the first six months of 1997.
Passenger services expenses decreased from .33 cents per ASM to .31 cents
per ASM from the first six months of 1996 to the first six months of 1997.
Marketing and advertising expenses, as a percentage of revenues, increased
from 3.4% in the first six months of 1996 to 6.2% in the first six months of
1997 due to ValuJet halting all advertising as of May 11, 1996 and a lower
revenue base during the first six months of 1997 over which to spread these
costs.
Sales and reservations expenses remained flat from the six month period
ending June 30, 1996 to the six month period ending June 30, 1997, decreasing
from 8. 1% of revenue to 8.0% of revenue.
General and administrative costs for the six months ending June 30, 1997
were higher, on a per ASM basis, than the six months ending June 30, 1996 due
to the shift in compensation structure to one based to a larger extent on base
salaries and the reduced level of ASMs over which to spread these costs.
Depreciation expense for the six months ended June 30, 1997 was higher than
the six months ended June 30, 1996 due to the return of aircraft to operating
specifications and to depreciation on nonperforming assets being recorded in
the shutdown and other nonrecurring expenses line item for the second quarter
1996.
Shutdown and other nonrecurring expenses for the six months ended June 30,
1996, include costs associated with the loss of Flight 592 and excess
operating costs related to the reduced schedule from May 19, 1996 to June 17,
1996 and the suspension of operations subsequent to June 17, 1996. Such costs
consist of expenses directly related to the accident and the ensuing extensive
FAA review of ValuJet's operations including legal fees, payments to the FAA,
inspection related costs and maintenance in excess of normal recurring
maintenance. In addition, depreciation on grounded aircraft, rental of
abandoned or idled facilities and costs of personnel idled as a result of the
reduced and suspended operations during May and June 1996 are included in
shutdown and other nonrecurring expenses. Personnel costs include full wages,
salaries and benefits that were provided to idled employees during the
reduction and suspension of operations.
60
<PAGE>
A summary of such costs is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1996 1997
------------- ------------
<S> <C> <C>
Maintenance..................................... $ 7,855,000 $7,300,000
Legal and other consulting...................... 6,317,000 0
Facilities rental............................... 4,109,000 0
Wages, salaries and benefits, excluding
maintenance.................................... 3,916,000 0
Depreciation.................................... 1,480,000 2,038,000
FAA remediation................................. 2,000,000 0
Other........................................... 5,946,000 0
------------- ------------
$ 31,623,000 $9,338,000
============= ============
</TABLE>
ValuJet incurred shutdown and nonrecurring expenses in the six months ended
June 30, 1997 as a result of idled aircraft and facilities due to the reduced
level of service attributable to ValuJet's agreement with the FAA and
continued excess maintenance associated with the extensive FAA inspections.
No accrual was provided for costs to be incurred in future periods related
to aircraft depreciation and maintenance and rental costs associated with
temporarily idled facilities as such costs were recognized as they were
incurred. There was no accrual at June 30, 1996 for salaries and wages in
connection with the June 18, 1996 furlough of employees as such employees were
paid through June 30, 1996 with no additional severance benefits provided.
During the six months ended June 30, 1997, interest expense exceeded
interest income by approximately $9,500,000 due to increasing debt levels
attributable to the issuance during April 1996 of $150 million of 10 1/4%
senior notes due 2001.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1997, ValuJet generated cash flow from
operations of approximately $13.5 million, used cash of approximately $5.9
million to acquire property and equipment and generated cash flow from the
disposal of property and equipment of $.9 million. Approximately $9.0 million
of cash was used for the repayment of debt and $.2 million of cash was
generated from the sale of common stock through option exercises. As of June
30, 1997, ValuJet had cash and cash equivalents of approximately $149.7
million and working capital of approximately $132.0 million.
ValuJet has contracted with McDonnell Douglas for the purchase of 50 MD-95
aircraft, at a cost of approximately $1.0 billion (subject to adjustments for
inflation), for delivery from 1999 to 2002. Approximately $7.6 million and
$31.7 million of cash will be paid in progress payments during 1997 and 1998,
respectively. The balance of the purchase price after all progress payments is
required to be paid or financed upon delivery of each aircraft. If ValuJet
exercises its option to acquire up to an additional 50 MD-95 aircraft,
additional payments will be required. ValuJet may finance up to 90% of the
cost or appraised value of each of these aircraft. Although McDonnell Douglas
has agreed to provide assistance with respect to the financing of aircraft to
be acquired, ValuJet will be required to obtain the financing from other
sources. ValuJet believes that with the assistance to be provided by McDonnell
Douglas, aircraft related debt financing should be available when needed.
However, there is no assurance that ValuJet will be able to obtain sufficient
financing on attractive terms. If it is unable to do so, ValuJet could be
required to modify its aircraft acquisition plans or to incur higher than
anticipated financing costs, which could have a material adverse effect on
ValuJet's results of operations and cash flows.
ValuJet's compliance with Stage 3 noise requirements will require
substantial additional capital expenditures over the next several years. By
December 31, 1999, all of ValuJet's aircraft must be brought into compliance
with Stage 3 requirements. ValuJet intends to meet its Stage 3 noise
requirement obligations by
61
<PAGE>
installing hush kits on Stage 2 aircraft and acquiring Stage 3 aircraft.
ValuJet expects that FAA certified hush kits will cost approximately $2.3
million per aircraft or approximately $55.0 million for a fleet of 24 non-
hushed DC-9-30 aircraft as of June 30, 1997. Approximately $7.3 million of the
proceeds from ValuJet's sale of 10 1/2% senior secured notes ("10 1/2% Secured
Notes") will be used to finance 80% of the cost of four hush kits. ValuJet may
be able to finance a portion of the cost of the remaining hush kits and plans
to pay for the balance of the hush kits using cash flows generated from
operations and from cash reserves. ValuJet expects to pay the debt service on
any such loans out of cash flow generated from operations during the term of
the financing. The phase-in period for full compliance with Stage 3 (through
December 31, 1999) and the expected terms of financing, if available, should
allow ValuJet to spread the payments for Stage 3 compliance over a number of
years.
Prior to August 1997, a substantial number of ValuJet's secured notes
allowed the lender to accelerate payment if specific financial ratios
(concerning debt to equity, net worth, fixed charge coverage and current
ratio) were not maintained. Although ValuJet was in violation of the fixed
charge coverage ratio as of December 31, 1996, ValuJet subsequently entered
into agreements with six of the seven affected lenders for a waiver or reset
of this financial test for each quarter in 1997. ValuJet made all payments
under such secured debt when due and no prepayment event was declared by any
lender. In addition, ValuJet believes that it may have failed to meet certain
of the reset financial maintenance covenants as of June 30, 1997. However, no
such determination was made as all such debt was repaid with the proceeds of
the issuance of $80 million of ValuJet's 10 1/2% Secured Notes due April 15,
2001. Approximately $68.5 million of the proceeds of this new debt issuance
was used to prepay and replace secured debt, including debt to all seven bank
lenders whose secured aircraft loans contained various financial maintenance
covenants. As a result of this new financing, ValuJet no longer has any debt
outstanding with financial maintenance covenants.
As of June 30, 1997, ValuJet's debt related to asset financing totaled $85.7
million, with respect to which ValuJet's aircraft and certain other equipment
are pledged as security. ValuJet has purchased all of its aircraft and,
consequently, has no lease commitments relating to its aircraft fleet. In
addition, ValuJet has $150.0 million of 10 1/4% senior unsecured notes ("10
1/4% Senior Notes") outstanding. The principal balance of the 10 1/4% Senior
Notes is due in 2001 and interest is payable semi-annually. ValuJet's debt
(other than the 10 1/4% Senior Notes and debt refinanced with the proceeds of
the 10 1/2% Secured Notes) has final maturities ranging from 1998 to 2001 with
scheduled debt amortization (calculated without giving effect to any
prepayment that may be required as a result of asset sales) as follows: 1997
(after June 30, 1997)--$4.7 million, 1998--$6.6 million, 1999--$3.0 million,
2000--$1.4 million, 2001--$400,000.
Certain of ValuJet's secured debt, excluding the 10 1/2% Secured Notes,
bears interest at fixed rates ranging from 8.0% to 9.78% per annum and is
repayable in consecutive monthly or quarterly installments over a two- to four
year period. Certain other notes have a variable rate of interest based on
LIBOR plus 2.26% to 2.75%.
Although ValuJet has sufficient cash assets to pay its recurring obligations
and debt service for an extended period of time, ValuJet's failure to resume
profitable operations may result in defaults under ValuJet's debt and the
acceleration of ValuJet's debt. In such event, there can be no assurance that
ValuJet would be able to satisfy all of its obligations on a timely basis.
As a result of the accident and suspension of operations, several class
action suits have been filed by stockholders against ValuJet and various
officers and directors alleging, among other things, misrepresentations under
applicable securities laws. The plaintiffs seek unspecified damages based upon
the decrease in market value of shares of ValuJet's stock. See "Business of
ValuJet--Litigation." Although management of ValuJet intends to defend these
actions vigorously, any litigation contains elements of uncertainty and there
can be no assurance that ValuJet will not sustain material liability under
such or related lawsuits.
Numerous lawsuits have also been filed against ValuJet seeking damages
attributable to the deaths of those on Flight 592, and additional lawsuits are
expected. ValuJet's insurance carrier has assumed defense of these lawsuits
under a reservation of rights against third parties and ValuJet. See "Business
of ValuJet--Litigation." As all claims are handled independently by ValuJet's
insurance carrier, ValuJet cannot reasonably estimate the
62
<PAGE>
amount of liability which might ultimately exist. As a result, no accruals for
losses and the related claim for recovery from ValuJet's insurance carrier
have been reflected in ValuJet's financial statements. ValuJet maintains
$750.0 million of liability insurance per occurrence with a major group of
independent insurers that provides facilities for all forms of aviation
insurance for many major airlines. Although ValuJet believes, based on the
information currently available to it, that such coverage is sufficient to
cover claims associated with this accident and that the insurers have
sufficient financial strength to pay claims, there can be no assurance that
the total amount of judgments and settlements will not exceed the amount of
insurance available therefor or that all damages awarded will be covered by
insurance.
63
<PAGE>
AIRWAYS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Airways generated operating (loss) income of $(12,122,000) and $1,494,000
for the years ended March 31, 1997 ("1997") and March 31, 1996 ("1996"),
respectively, a reduction of $13,616,000. Pre-tax (loss) income, as a
percentage of total revenues, was (12.4%) in 1997 and 2.9% in 1996. The
dramatic reduction, year over year, is the result of four separate factors.
First, demand in AirTran's segment of the travel industry was negatively
affected by the accident on May 11, 1996 of a ValuJet aircraft. Second,
Airways initiated an intensive and costly review of maintenance and other
operations systems and processes to enhance system safety, reliability and
efficiency. Third, fuel prices increased dramatically during the year. Lastly,
Airways realigned its route system partly in response to the entry into
Orlando of other competing major airlines and partly to leave underperforming
markets.
Airways achieved operating income (loss) of $1,494,000 and ($6,421,000) for
1996 and the year ended March 31, 1995 ("1995"), respectively, an improvement
of $7,915,000. Pre-tax income, as a percentage of total revenues, was 2.9% in
1996 and (66.8)% in 1995. The dramatic change, year over year, is principally
the result of AirTran's move from startup mode to full fledged operations.
SELECTED OPERATING DATA FOR YEARS ENDED MARCH 31, 1997, 1996 AND 1995
The table below sets forth selected operating data for Airways for its
fiscal years ended March 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Available seat miles (1)............. 1,426,873,000 974,642,000 180,480,000
Revenue passenger miles (2).......... 932,305,000 605,130,000 80,783,000
Load factor (3)...................... 65.3% 62.1% 44.8%
Yield per revenue passenger mile
(4)................................. $ 0.107 $ 0.107 $ 0.098
Passenger enplanements............... 1,089,000 685,000 87,000
Departures........................... 13,569 8,861 1,627
Miles................................ 11,295,000 7,739,000 1,432,000
Block hours (5)...................... 30,578 21,078 3,405
Average stage length (miles) (6)..... 832 873 880
Average daily aircraft utilization
(hours)............................. 8.4 8.9 4.9
Aircraft (end of period)............. 10 10 4
Full-time equivalent employees (end
of period).......................... 592 429 194
</TABLE>
- --------
(1) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(2) The number of scheduled miles flown by revenue passengers.
(3) Revenue passenger miles divided by available seat miles.
(4) Passenger revenue divided by revenue passenger miles.
(5) The number of hours aircraft were flown as measured from the time of
pushback from the gate to the time of arrival at the next airport's gate.
(6) The average length of the routes flown on AirTran's scheduled route
system.
64
<PAGE>
The table below sets forth the major components of operating revenue and
expenses per ASM for the Company as a comparison among the three years 1997,
1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
--------------------
1997 1996 1995
------ ----- ------
<S> <C> <C> <C>
Operating revenue:
Passenger................................................ $ .070 $.067 $ .044
Charter.................................................. .000 .002 .007
Other.................................................... .002 .001 .003
------ ----- ------
Total operating revenue.................................. .072 .070 .053
------ ----- ------
Operating expenses:
Flight operations........................................ .032 .024 .036
Maintenance.............................................. .018 .012 .016
Aircraft and traffic services............................ .012 .014 .013
Reservations, sales, and marketing....................... .012 .012 .010
General and administrative............................... .004 .003 .011
Depreciation and amortization............................ .003 .002 .003
------ ----- ------
Total operating expense.................................. .080 .067 .089
------ ----- ------
Operating income......................................... $(.008) $.003 $(.035)
====== ===== ======
</TABLE>
COMPARISON OF YEARS ENDED MARCH 31, 1997, 1996 AND 1995
OPERATING REVENUES
Total passenger revenues were $100,077,000 and $64,894,000 in 1997 and 1996,
an increase of $35,183,000 or 54.2%. The increase is a result of having the
entire fleet for twelve months of 1997 whereas in 1996, the fleet was building
up to that level through February 1996.
ASMs were 1,426,873,000 and 974,642,000 in 1997 and 1996, respectively, an
increase of 452,231,000 or 46.4%. This was principally the result of the
growth in departures and AirTran's fleet and mitigated somewhat by shorter
stage lengths in 1997. Revenue Passenger Miles ("RPMs") were 932,305,000 and
605,130,000 in 1997 and 1996, respectively, an increase of 327,175,000 or
54.1%. This was driven by the increased capacity and improved load factor in
1997. Load factors were 65.3% and 62.1% in 1997 and 1996, respectively, an
increase of 3.2 percentage points.
AirTran also had charter revenue which is derived from making its airplanes
available to charter operators when they would otherwise not be efficiently
used. Charter revenues were $402,000 and $1,692,000 in 1997 and 1996,
respectively, a decrease of $l,290,000 or 76.2%. Often when the fleet is
expanded and additional aircraft are delivered, there is a period of
adjustment for the schedule during which aircraft utilization would drop;
during such times, Airways endeavors to use the aircraft in charter operations
to minimize this cost. During 1996, four aircraft were delivered whereas none
were delivered during 1997 accounting for the reduction in 1997.
In addition, the consolidated operations include other revenues, principally
cancellation revenue, change fees, liquor sales and the sales of the FBO
which, collectively, were $2,144,000 and $1,775,000 in 1997 and 1996,
respectively, an increase of $369,000 or 20.8%. The increase in other revenues
is the result of increased sales by the FBO and reduced cancellation revenue
for AirTran. The FBO sold one of the aircraft that it had been holding for
sale for $175,000 and continued to market its inventory of spare parts
successfully during 1997. AirTran experienced lower cancellation revenue in
1997 as a result of offering vouchers for later travel to passengers who
otherwise would have had to forfeit their fare.
Total passenger revenues were $64,894,000 and $7,896,000 in 1996 and 1995,
respectively. The increase of $56,998,000 or 721.9% in 1996 reflects the fact
that AirTran had just commenced scheduled operations in the third quarter of
1995.
65
<PAGE>
ASMs were 974,642,000 and 180,480,000 in 1996 and 1995, respectively, an
increase of 794,162,000 or 440.0%. This was principally the result of the
growth in departures and AirTran's fleet. RPMs were 605,130,000 and 80,783,000
in 1996 and 1995, respectively, an increase of 524,347,000 or 649.1%. This was
the result of the increased ASMs as well as stronger load factors on existing
routes in 1996. Load factors were 62.1% and 44.8% in 1996 and 1995,
respectively, an increase of 17.3 percentage points.
Charter revenues were $1,692,000 and $1,241,000 in 1996 and 1995,
respectively, an increase of $451,000 or 36.3%. The increase reflects full
year operations and more aircraft during the year but the relatively small
increase also reflects the deliberate shift to scheduled service in 1996.
Other revenues were $1,775,000 and $470,000 in 1996 and 1995, respectively,
an increase of $1,305,000 or 277.7%. The increase in other revenues is
principally the result of full year operations.
OPERATING EXPENSES
Flight operations expense includes expenses related directly to the
operation of aircraft except for depreciation and amortization of aircraft and
aircraft improvements. Expenses for hull insurance, crew salaries and their
overnight expenses, aircraft fuel and flight operations administration are all
included in flight operations. Flight operations expenses were $45,507,000 and
$26,913,000 in 1997 and 1996, respectively, an increase of $18,594,000 or
69.1%. Departures were 13,569 and 8,861 in 1997 and 1996, respectively, an
increase of 4,708 or 53.1% which, together with the increased ASMs, drove a
significant portion of the increase in flight operations expense. Flight
operations expense increased significantly more than operating activity
because of several factors. Fuel prices escalated dramatically during 1997
causing fuel expense to increase by $3,500,000 more than it otherwise would
have. Also, Airways embarked upon a program of intense scrutiny of its
aircraft and its maintenance and operational procedures during 1997. In order
to facilitate that work without disrupting its schedule of operations, Airways
entered into wet leases of aircraft for use during the periods when Airways'
aircraft were not available. The wet leases cost Airways $3,322,000.
Flight operations expenses were $26,913,000 and $6,429,000 in 1996 and 1995,
respectively, an increase of $20,484,000 or 318.6%. Departures were 8,861 and
1,627 in 1996 and 1995, respectively, an increase of 7,234 or 444.6% which,
together with the increased ASMs, drove the increase in flight operations
expense. Better aircraft utilization and reduced fleet ownership costs
mitigated the increase, year over year, in flight operations expense. AirTran
purchased four aircraft in 1996 which shifts fleet ownership costs to
depreciation from flight operations expense.
Maintenance expense includes all expenses related to the upkeep of aircraft.
Such expenses include labor, parts, supplies and contract maintenance. The
direct cost of airframe and engine overhauls are generally expensed and, for
leased aircraft, paid monthly to the lessors in the form of reserves. For
owned aircraft, AirTran reserves on a per flight hour basis for future
maintenance that becomes due in the ordinary course. These reserves are
recorded on AirTran's balance sheet each month as the aircraft are flown. The
reserves are then available for major overhauls when they occur. When aircraft
are first delivered to Airways and shortly thereafter, the cost of overhauls
of engines and airframes that may be required to render them fully serviceable
is capitalized and amortized over the period remaining until the next
scheduled overhaul. Maintenance expenses were $25,851,000 and $12,112,000 in
1997 and 1996, respectively, an increase of $13,739,000 or 113.4%. Three cost
drivers pushed maintenance expense dramatically higher during 1997. Firstly,
block hours (which are a cost driver for maintenance) were 30,578 and 21,078
in 1997 and 1996, respectively, an increase of 9,500 or 45.1%. Secondly,
Airways invested heavily in overhauling engines, airframes and related
equipment. Much of its equipment has been substantially improved and
serviceable lives extended. To that extent, those expenditures were
capitalized and are recorded in Fixed Assets on the balance sheet.
Nonetheless, $3,400,000 more was spent on repairs that were identified and
necessary in the circumstances but which did not significantly extend the
useful lives of the underlying assets. Those repairs were charged to expense
in 1997. Thirdly, to facilitate the engine overhauls, Airways entered into
short term leases for replacement engines which cost Airways $950,000 more in
1997 than in 1996. Lastly, the previously mentioned independent review of the
aircraft and the maintenance procedures and records cost Airways $2,700,000.
66
<PAGE>
Maintenance expenses were $12,112,000 and $2,845,000 in 1996 and 1995,
respectively, an increase of $9,267,000 or 325.7%. Maintenance expense is a
semi-variable cost, facilities and administrative salaries for which are
relatively fixed while reserve expense is driven principally by block hours.
Block hours were 21,078 and 3,405 in 1996 and 1995, respectively, an increase
of 17,673 or 519.0%. The increased block hours, year over year, contributed
substantially to the increased maintenance expense.
Aircraft and traffic servicing expense includes all expenses incurred at
airports, including landing fees, facilities rental, station labor, passenger
liability insurance, ground handling services and catering expenses. Aircraft
and traffic servicing expenses were $16,742,000 and $10,169,000 in 1997 and
1996, respectively, an increase of $6,573,000 or 64.6%. The increase is driven
largely by the increased number of flights, passengers, block hours and higher
load factors. As a consequence of Airways' extensive internal reviews and
renovations of aircraft, the operating reliability suffered during parts of
1997. This triggered the need to purchase alternative transportation, costing
$1,700,000 more in 1997, for passengers who would have otherwise not been able
to travel to their destinations.
Aircraft and traffic servicing expenses were $10,169,000 and $2,390,000 in
1996 and 1995, respectively, an increase of $7,779,000 or 325.5%. The increase
was driven by the increased number of flights, markets served, passengers,
block hours and higher load factors.
Reservations and sales expense includes all sales, marketing and advertising
expenses as well as the cost of reservations. Reservation expense includes
salaries of reservations personnel, computer reservation system expenses and
travel agent commissions. Reservations and sales expenses were $16,739,000 and
$11,901,000 in 1997 and 1996, respectively, an increase of $4,838,000 or
40.7%. Although travel agency commission, advertising expense and reservation
expenses increased, they did not increase proportionately with revenue. The
increases were mitigated by the shift of customer mix toward passengers
booking directly with AirTran on its toll-free 1-800-AIR-TRAN reservations
line as opposed to a travel agency. This reduced Airways' CRS fees and
commissions by nearly $1,000,000 compared to what they would have been if the
shift in bookings had not occurred. In addition, Airways' marketing department
established several cooperative advertising arrangements with other companies
to moderate its advertising expense in 1997.
Reservations and sales expenses were $11,901,000 and $1,830,000 in 1996 and
1995, respectively, an increase of $10,071,000 or 550.3%. The increase was due
to increased travel agent commissions, advertising and reservation activity
associated with higher passenger volume and increased sales of future tickets.
The increased activity was caused by the expansion of AirTran's service into
new markets and higher load factors on existing routes in 1996. AirTran had
passenger volume of 685,000 and 87,000 in 1996 and 1995, respectively, an
increase of 598,000 or 687.4%.
General and administrative expense includes the wages and benefits for
executive officers and various other administrative personnel. Also included
are costs for office supplies, legal expenses, accounting and miscellaneous
expenses. General and administrative expenses were $5,185,000 and $3,623,000
in 1997 and 1996, respectively, an increase of $1,562,000 or 43.1%. The
principal cause of the increased expense in 1997 was the continued development
of headquarters and administrative infrastructure to support AirTran's full
and expanding operation.
General and administrative expenses were $3,623,000 and $2,012,000 in 1996
and 1995, respectively, an increase of $1,611,000 or 80.1%. The principal
cause of the increased expense in 1996 was the development of headquarters and
administrative infrastructure to support AirTran's full and expanding
operation. In addition, AirTran introduced a program of profit sharing for all
full time employees during 1996 which, due to AirTran's profitability,
contributed to the increase.
Depreciation and amortization expenses include depreciation on equipment,
aircraft and aircraft improvements and amortization of leasehold improvements,
goodwill and aircraft and loan acquisition costs. Depreciation and
amortization expenses were $4,721,000 and $2,149,000 in 1997 and 1996,
respectively, an increase of $2,572,000 or 119.7%. Purchases of four aircraft
largely completed in the latter part of 1997, were the principal cause of the
increase.
Depreciation and amortization expenses were $2,149,000 and $522,000 in 1996
and 1995, respectively, an increase of $1,627,000 or 311.7%. Purchases of
aircraft completed in the latter part of 1996 were the principal cause of the
increased depreciation expense.
67
<PAGE>
SELECTED OPERATING DATA FOR QUARTERS ENDED JUNE 30, 1997 AND 1996
The table below sets forth selected operating data for the quarters ended
June 30, 1997 and 1996.
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------
JUNE 30, JUNE 30, PERCENTAGE
1997 1996 CHANGE
----------- ----------- ----------
<S> <C> <C> <C>
Available seat miles (1)................. 360,193,000 372,202,000 (3.2)%
Revenue passenger miles (2).............. 245,149,000 264,490,000 (7.3)%
Load factor (3).......................... 68.1% 71.1% (3.0)%
Yield per revenue passenger mile (4)..... 10.4c 10.8c (3.5)%
Passenger enplanements................... 287,716 303,108 (5.1)%
Departures............................... 3,931 3,450 17.7 %
Miles.................................... 2,858,674 2,951,513 (3.1)%
Block hours (5).......................... 7,829 7,892 (.8)%
Average stage length (miles) (6)......... 735 893 (17.7)%
Average daily aircraft utilization
(hours)................................. 8.5 8.3 2.8 %
Aircraft (end of period)................. 10 10 --
Full-time equivalent employees (end of
period)................................. 576 429 34.3 %
</TABLE>
- --------
(1) The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
(2) The number of scheduled miles flown by revenue passengers.
(3) Revenue passenger miles divided by available seat miles. Year over year
percent change is measured only as percentage points difference.
(4) Passenger revenue divided by revenue passenger miles.
(5) The number of hours aircraft were flown as measured from the time of
pushback from the gate to the time of arrival at the next airport's gate,
(6) The average length of the routes flown on Airways' scheduled route system.
Airways generated operating losses of $172,000 and $282,000 for the quarters
ended June 30, 1997 and 1996, respectively, a decrease in operating loss of
$110,000. Pre-tax loss, as a percentage of total revenues, was 0.6% and 1.0%
in the quarters ended June 30, 1997 and 1996, respectively.
The table below sets forth the major components of operating revenue and
expenses per ASM for Airways.
<TABLE>
<CAPTION>
QUARTERS
ENDED JUNE
30,
--------------
1997 1996
------ ------
<S> <C> <C>
Operating revenue:
Passenger.............................................. $ .071 $ .077
Charter................................................ .000 .000
Other.................................................. .004 .001
------ ------
Total operating revenue............................... .075 .078
------ ------
Operating expenses:
Flight operations...................................... .029 .030
Maintenance............................................ .015 .017
Aircraft and traffic services.......................... .011 .012
Reservations, sales, and marketing..................... .012 .014
General and administrative............................. .004 .003
Depreciation and amortization.......................... .005 .003
------ ------
Total operating expense............................... .076 .079
------ ------
Operating income..................................... $(.001) $(.001)
====== ======
</TABLE>
68
<PAGE>
OPERATING REVENUES
Total passenger revenues were $25,550,000 and $28,557,000 in the quarters
ended June 30, 1997 and 1996, respectively, a decrease of $3,007,000 or 10.5%.
The decrease is due to a 3.1% reduction in capacity available in this year's
quarter compared to the prior year and a lower load factor.
ASMs were 360,193,000 and 371,881,000 in the quarters ended June 30, 1997
and 1996, respectively, a decrease of 11,688,000 or 3.1%. This was principally
the result of Airways' rescheduling of the aircraft to make one available at
all times to serve as a spare. This was one of the initiatives designed to
improve Airways' completion factors and reliability performance. RPMs were
245,149,000 and 264,490,000 in the quarters ended June 30, 1997 and 1996,
respectively, a decrease of 19,341,000 or 7.3%. This was driven by the
decreased capacity and the reduced load factor. Load factors were 68.1% and
71.1% in the quarters ended June 30, 1997 and 1996, respectively, a decrease
of three percentage points. The Easter holiday fell in March this year and not
in the first quarter as it did last year markedly decreasing the demand this
year.
Airways also had charter revenue which is derived from making its airplanes
available to charter operators when they would otherwise not be efficiently
used. Charter revenues were $562,000 and $23,000 in the quarters ended June
30, 1997 and 1996, respectively. This was entirely due to service Airways
provided for another carrier during the month of May 1997.
In addition, the consolidated operations include other revenues, principally
cancellation revenue, change fees, liquor sales and the sales of its fixed
base operation which, collectively, were $940,000 and $432,000 in the quarters
ended June 30, 1997 and 1996, respectively, an increase of $508,000 or 117.5%.
Airways initiated accounting processes in fiscal 1998 which enabled it to
record cancellation revenue and change fees more closely in line with when
they were earned.
OPERATING EXPENSES
Flight operations expenses were $10,480,000 and $11,148,000 in the quarters
ended June 30, 1997 and 1996, respectively, a decrease of $668,000 or 6.0%.
ASMs decreased by 3.2% and last year's first quarter included $ 541,000
associated with aircraft which were leased by Airways, on a short term basis,
in an effort to ensure the reliability of its schedule. Departures were 3,931
and 3,450 in the quarters ended June 30, 1997 and 1996, respectively, an
increase of 441 or 13.9%, the cost of which offset a portion of the decrease
resulting from the reduced capacity in this year's quarter.
Maintenance expenses were $5,447,000 and $6,492,000 in the quarters ended
June 30, 1997 and 1996, respectively, a decrease of $1,045,000 or 16.1%.
Airways spent $175,000 less this year on independent consultants. In the prior
year, Airways had engaged experts to assist in evaluating the maintenance
records and systems. As an outgrowth of those reviews, Airways invested
heavily in engines, airframes and related equipment during last year's first
quarter. Those repairs were charged to expense. Block hours (which normally
are a cost driver for maintenance) were essentially unchanged and, therefore,
did not contribute to the variance between years.
Aircraft and traffic servicing expenses were $3,909,000 and $4,643,000 in
the quarters ended June 30, 1997 and 1996, respectively, a decrease of
$734,000 or 15.8%. Although Airways had 17.7% more flights during this year's
first quarter which drove upward a number of expenses, the cost of interrupted
trips for Airways' passengers dropped by $957,000 or 92.1% from the prior
year. The significant decrease is largely a consequence of Airways' improved
operating performance, having completed over 99% of flights in this year's
first quarter. Last year, the extensive internal reviews and renovations of
aircraft that were taking place caused interruptions.
Reservations, sales and marketing expenses were $4,351,000 and $5,130,000
for the quarters ended June 30, 1997 and 1996, respectively, a decrease of
$779,000 or 15.2%. Although sales declined by 6.8% and a resulting decrease
was expected in reservations, sales and marketing expenses, Airways was able
to mitigate
69
<PAGE>
these costs further. A shift of customer mix toward passengers booking
directly with AirTran on its toll-free 1-800-AIR-TRAN reservations line, as
opposed to travel agencies, caused an increase in reservation-related expenses
(salaries and telephone expenses) of about $ 227,000 or 44% over the prior
year's first quarter. On the other hand, Airways' CRS fees, ARC processing
fees and travel agency commissions dropped by nearly $500,000 or 20%. In
addition, Airways' marketing department reduced its media advertising since
last year and established several cooperative advertising arrangements with
other companies to moderate its advertising expense this year, resulting in a
reduction of $ 424,000 or 34%.
General and administrative expenses were $1,403,000 and $978,000 in the
quarters ended June 30, 1997 and 1996, respectively, an increase of $425,000
or 43.4%. The principal cause of the increased expense in 1997 was the
continued development of headquarters and administrative infrastructure.
Depreciation and amortization expenses were $1,637,000 and $1,102,000 in the
quarters ended June 30, 1997 and 1996, respectively, an increase of $535,000
or 48.5%. The increase is primarily due to depreciation on the fixed assets
added since the prior year. Property and equipment at June 30, 1997 and 1996,
respectively, were $44,724,000 and $32,370,000, an increase of $ 12,354,000 or
38.2%. More of the fixed assets added during the past year have shorter useful
lives. Largely, they represent capitalized improvements to aircraft and
engines which will benefit Airways until the next scheduled overhaul, causing
depreciation expense to increase more rapidly than the underlying fixed
assets.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $1,672,000 and $2,354,000 at June 30, 1997
and March 31, 1997, respectively, a decrease of $682,000 or 29.0%. The use of
cash and cash equivalents from operating activities was $189,000. The
principal uses of cash and cash equivalents were for purchases of property and
equipment of $1,374,000 and payments on long-term debt of $676,000.
Restricted cash was $10,411,000 and $12,670,000 at June 30, 1997 and March
31, 1997, respectively, a decrease of $2,259,000 or 17.8%. The decrease in
restricted cash related to the seasonal decline in advance bookings since the
end of March.
Airways' consolidated current ratio was 0.71 and 0.82 to 1.0 at June 30,
1997 and March 31, 1997, respectively. The decrease in the ratio at March 31,
1997 was entirely due to the reclassification of $ 3,493,000 of deferred tax
asset from current to long term during the quarter ended June 30, 1997.
Airways' ratio of indebtedness to total capitalization as of March 31, 1995,
March 31, 1996, March 31, 1997 and June 30, 1997 was 0%, 36.25%, 43.71% and
45.63%, respectively. Airways' net cash inflows (outflows) for the fiscal
years ended March 31, 1995, March 31, 1996, and March 31, 1997 and for the
quarter ended June 30, 1997, were $953,000, $15,476,000, ($14,083,000) and
($682,000), respectively.
During the quarter ended June 30, 1997, Airways entered into an installment
loan with a finance company and a bank in the amount of $1,600,000 which is
secured by one of Airways' owned aircraft. The loan carries a fixed interest
rate of 13.0%. The note requires payment of principal and interest monthly
which will amortize the loan by May 2002 and has provisions allowing early
repayment.
Airways had consolidated current assets of $26,463,000 and $32,666,000 as of
June 30, 1997 and March 31, 1997, respectively. Management believes that such
assets, along with internally generated funds as well as financing which
management believes is or will be made available, will satisfy projected
operating and capital needs. If AirTran increases its rate of growth over
current projections, acquires another company, purchases or leases more
aircraft than is presently planned, sustains further losses or otherwise
requires additional capital, other sources of funds will need to be secured
and there is no assurance that such funds will be secured. During fiscal 1997,
Airways invested heavily in its aircraft and engines. Much of this investment
was paid for from funds generated the year before or from Airways' working
capital. As a consequence, Airways' working capital position weakened.
Therefore, several undertakings were initiated to strengthen its position.
They are as follows:
70
<PAGE>
. On June 13, 1997, Airways entered into a code-sharing agreement with
Comair, a large regional airline operating flights in Florida. The code-
sharing agreement permits AirTran Airways to sell tickets to its
passengers allowing them to connect in Orlando with Comair flights
continuing on to nine Florida destinations other than Orlando. These
tickets will be sold to passengers under the tradename "AirTran's
Florida Connection." Airways began taking reservations on June 19 and
carried its first passenger that same day.
. On July 3, 1997, Airways refinanced one of its aircraft by borrowing
$7,000,000 from ValuJet and repaying a major commercial lender
approximately $3,200,000. The new loan is secured by one of Airways'
owned aircraft and matures in December 1997, subject to a three-month
extension if the Merger is not consummated by November 30, 1997.
. On September 8, 1997, Airways borrowed $5,700,000 from ValuJet. The loan
is secured by a mortgage on Airways' leasehold interest in its Orlando
hangar and matures in December 1997, subject to a three-month extension
if the Merger is not consummated by November 30, 1997.
There can be no assurance that the recently executed loans with ValuJet will
be able to be refinanced when they become due.
The effect of inflation on Airways is not considered material.
71
<PAGE>
BUSINESS OF VALUJET
GENERAL
ValuJet, through its wholly owned subsidiary, ValuJet Airlines, operates an
affordable, no frills, limited frequency, scheduled airline serving short haul
markets primarily in the eastern United States. ValuJet believes that its low
cost, no frills philosophy allows it to offer among the lowest fares in its
markets and generate its own traffic by stimulating incremental demand with
fare conscious travelers.
ValuJet commenced flight operations in October 1993 with two DC-9 aircraft
serving three cities from Atlanta with eight flights per day. The success of
ValuJet's business model allowed it to grow rapidly. During 1995, ValuJet
achieved revenues of $367.8 million and net income of $67.8 million. Prior to
June 17, 1996, ValuJet offered service to 30 cities from Atlanta, Washington,
D.C. (Dulles Airport), Boston and Orlando and operated up to 320 flights per
peak day with its fleet of 51 aircraft.
ValuJet's operations were interrupted by the suspension of ValuJet's service
on June 17, 1996, pursuant to a consent order entered into with the FAA
following the accident involving Flight 592 on May 11, 1996 and the ensuing
extensive adverse media and intense FAA scrutiny into ValuJet's maintenance
and safety procedures.
Prior to ValuJet's resumption of service, ValuJet undertook a thorough
review of its operations, implemented several measures to respond to the
concerns that were raised by the FAA and reaffirmed its focus on the safety of
its aircraft and operations. These measures included: (i) creating a new
position for Senior Vice President of Maintenance and Engineering reporting
directly to the President of ValuJet Airlines; (ii) implementing intensified
performance, safety and compliance-assurance audits of key maintenance
subcontractors, together with revised procedures for qualification, inspection
and supervision of all maintenance contractors; (iii) creating an in-house
organization to supervise all engineering and maintenance planning functions;
(iv) instituting improved maintenance training procedures that require more
hours for initial DC-9 familiarization and orientation training, expanded on-
the-job and initial avionics training, mandatory recurrent training for all
ValuJet and outstation contract mechanics, and new courses for inspectors,
lead mechanics and maintenance managers; (v) reviewing thoroughly all aircraft
prior to reintroducing them into service, including, in each case,
reconfirming compliance with all Airworthiness Directives, correcting
aircraft-specific FAA inspection findings and performing special emphasis "B"
checks; and (vi) expanding training for customer service and station
personnel. Upon implementation of ValuJet's response outlined above and
receipt of FAA approval, ValuJet resumed limited operations with service
between Atlanta and four other cities as of September 30, 1996. ValuJet has
continued to work with the FAA since that time to recertify aircraft and
expand its flight operations. As of August 15, 1997, the FAA has approved 31
of ValuJet's DC-9 Series 30 aircraft for flight and ValuJet operates a total
of 200 flights per peak day of which 182 flights per peak day are between
Atlanta and 23 other cities. Additional service is offered between Washington,
D.C. (Dulles Airport) and Boston and Chicago and between Boston and
Philadelphia.
As a result of the accident, the suspension of operations and subsequent
reduced service levels, ValuJet recorded net losses of $41.5 million for the
year ended December 31, 1996, and $27.7 million in the first six months of
1997. ValuJet attributes these losses to substantial nonrecurring expenses
incurred in connection with the accident, the allocation of fixed costs over
fewer ASMs as a result of ValuJet's reduced flight operations, and lower
revenues resulting from reduced flight operations, lower load factors and
reduced average fares.
Since ValuJet resumed service on September 30, 1996, its principal near-term
objective has been to return to profitability by increasing flight operations
and regaining its low historic cost level per ASM. ValuJet's operating cost
per ASM was 6.77c for the year ended December 31, 1995, one of the lowest in
the airline industry. Although ValuJet's operating cost per ASM (excluding
those expenses classified as shutdown and other nonrecurring expenses)
increased to 10.24c in the first quarter of 1997, ValuJet reported that its
cost per ASM declined to 8.22c for the second quarter of 1997, which it
believes compares favorably with other airlines providing service in ValuJet's
markets. ValuJet's goal is to continue to reduce its cost per ASM through the
end of 1997.
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Despite lower average fares, ValuJet's load factors during the period from
recommencement of operations on September 30, 1996, through April 30, 1997
have been less than the load factors achieved by ValuJet during the same month
in the previous year, except for October 1996, during which ValuJet offered
aggressive fare discounts. Management believes that the lower load factors are
attributable to aggressive fare matching by ValuJet's competitors and as a
result of the accident involving Flight 592 and the suspension of operations.
The following reflects a comparison of ValuJet's load factor in each month
following recommencement of operations and the same month of the immediately
preceding year:
<TABLE>
<CAPTION>
MONTH LOAD FACTOR MONTH LOAD FACTOR
----- ----------- ----- -----------
<S> <C> <C> <C>
October 1996 72.1% October 1995 64.2%
November 1996 48.2% November 1995 66.7%
December 1996 56.0% December 1995 62.8%
January 1997 41.5% January 1996 48.5%
February 1997 55.7% February 1996 58.6%
March 1997 62.1% March 1996 65.3%
April 1997 59.7% April 1996 61.8%
</TABLE>
STRATEGY
In order to return to profitability and resume growth, ValuJet intends to
pursue a three-pronged strategy (i) to maintain its traditional cost and value
leadership in the markets that it serves, (ii) to reposition its brand image
with its target value-conscious customers to address the long-term adverse
effects of the May 1996 accident and the subsequent suspension of operations,
and (iii) to gradually expand capacity as market demand warrants.
ValuJet's strategy is to provide a safe, reliable, customer friendly
alternative for affordable air transportation. ValuJet's operating strategy is
based on its commitment to offer everyday low fares that stimulate demand from
leisure and fare conscious business travelers. The key elements in this
strategy are a simple fare structure and a competitive low cost structure
based on a ticketless distribution system, a fleet of low cost DC-9 aircraft
and relatively low labor costs. For the customer, "simple" means the service
is easy to understand and use, including a simplified fare structure, with
everyday low prices, simplified reservations and check-in procedures and a
ticketless process. In contrast, today's airline industry is characterized by
complex fares, schedules, reservations, check-in procedures and, in most
cases, physical ticketing.
ValuJet's service is intended to satisfy the basic air transportation needs
of ValuJet's targeted customers who are short haul leisure travelers visiting
friends and relatives or vacationing and fare conscious business travelers.
ValuJet believes that the basic air transportation needs of its targeted
customers can be satisfied by providing a limited number of flights per day
(currently up to nine frequencies), baggage service, in-flight beverages and
the ability to make advance reservations. ValuJet avoids what it believes to
be unnecessary and nonproductive costs such as meals, a frequent flyer
program, airport clubs and other amenities offered by many of its competitors.
ValuJet's pricing structure and affordable fares are intended to stimulate
new demand for air travel by leisure customers and fare conscious business
travelers who would have otherwise not travelled or used ground
transportation. ValuJet's simple fare system incorporates a predictable,
"everyday low pricing" fare structure designed to provide its customers with
substantial savings over its competitors based on walk up fares and further
savings by purchasing seats in advance or by flying during off peak times.
ValuJet believes that it has historically generated its own traffic through
low fare market stimulation rather than by pursuing the more traditional
airline approach of competing for market share with existing carriers.
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<PAGE>
ValuJet's thrifty and informal brand image has traditionally complemented
its position as the cost and value leader in its target markets. While ValuJet
believes that its basic business model remains viable, it believes that its
name and image have been significantly impaired by the accident in May 1996,
the subsequent suspension of operations and the resulting adverse media
exposure. As a result, ValuJet has commenced the implementation of a program
to enhance its image. In anticipation of the Merger and to seek to increase
revenue opportunities of both ValuJet Airlines and AirTran, the parties
entered into a Code Share Agreement and License Agreement in September 1997.
The Code Share Agreement permits the airlines to use a single designator code
in the Official Airline Guide and in reservations systems. The License
Agreement provides ValuJet the non-exclusive use of the name "AirTran
Airlines," AirTran's designator code "FL" and AirTran's service marks. In
order to begin to capitalize on this joint marketing program, ValuJet's
operating subsidiary, ValuJet Airlines, has changed its name to AirTran
Airlines, is repainting its aircraft with the AirTran logo and is changing its
marketing accordingly. In addition, ValuJet is reconfiguring its aircraft to
provide 16 business class seats in each aircraft and will commence to offer
advance seat selection beginning in fourth quarter 1997. This program is being
implemented during the second half of 1997 and is expected to result in the
incurrence of up to $10 million of expenses for advertising, promotion,
aircraft repainting, the reconfiguration of aircraft to add business class
seating, new signage and new uniforms during the period. If the Merger is not
consummated, ValuJet's right to use the AirTran name will expire in May 1998.
Once ValuJet reestablishes profitability and a favorable brand image,
ValuJet intends to pursue a prudent growth strategy. ValuJet has entered into
a contract with McDonnell Douglas to purchase 50 new MD-95 aircraft, to be
delivered from 1999 through 2002, with options to purchase an additional 50
aircraft. The MD-95 will have 115 seats, consisting of 16 business class seats
and 99 coach seats. ValuJet estimates that the MD-95 aircraft, which have a
slightly larger seating capacity, increased fuel efficiency and lower
maintenance costs than ValuJet's DC-9 aircraft, will provide a cost per ASM
lower than ValuJet's DC-9 fleet, even after taking into account the aircraft's
higher acquisition cost. ValuJet is the "launch" customer of the MD-95
aircraft. As the launch customer, ValuJet anticipates that this contract will
provide material value in terms of acquisition cost and manufacturer financing
assistance. ValuJet determined that the MD-95 aircraft offers the optimum
balance between operating cost and revenue opportunity.
GEOGRAPHIC MARKET
ValuJet's markets are located predominantly in the eastern United States.
These markets are attractive to ValuJet due to the concentration of major
population centers within relatively short distances from Atlanta,
historically high air fares and the potential for attracting leisure customers
who would otherwise use ground transportation.
During 1996, the Atlanta Airport was the second busiest airport in the
United States, enplaning over 30 million passengers. Additionally, ValuJet
offers service to Florida markets as ValuJet believes that more than 20
million people visit the Florida markets by automobile every year from Atlanta
and other points in the eastern United States.
In ValuJet's city selection process, ValuJet considers the amount of airport
charges, incentives offered by communities to be served, the ability to
stimulate air travel and competitive factors.
FARES, ROUTE SYSTEM AND SCHEDULING
ValuJet serves short haul markets (up to 1,000 miles) primarily from
Atlanta, with a limited number of flights (up to nine round trips per
destination per day) offering basic air transportation at affordable fares.
Service is provided on all routes every day although more frequent service may
be provided on peak travel days.
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<PAGE>
ValuJet offers a range of fares based on advance purchases of 14 days, 7
days and "walk-up" fares. Within the 14 and 7 day fare types, ValuJet offers
off-peak and peak fares which are typically $10 to $30 higher based on day of
week and time of day traveled. Peak travel times are those designated by
flight by ValuJet; peak times are generally portions of the day or all day on
Thursdays, Fridays, Saturdays and Sundays. All ValuJet's fares are
nonrefundable, but can be changed prior to departure for a $30 fee. ValuJet's
fares are always purchased on a one-way basis. ValuJet's fares do not require
any minimum, maximum or day of week (e.g., Saturday night) stay. ValuJet's
simplified fare offerings, all for a single class of service, are in direct
contrast to prevalent pricing policies in the industry where there are
typically many different price offerings and restrictions for seats on any one
flight.
ValuJet's published Atlanta fares for non-stop service range from$49 to $89
for off-peak one-way travel on a 14 day advance purchase basis and $119 to
$159 for one-way travel on a "walk-up" basis. During the reintroduction of
ValuJet's service to markets previously served and during the introduction of
service to new markets, ValuJet generally offers introductory one-way fares
for all flights to or from Atlanta. In addition, ValuJet offers fare sales
from time to time (such as additional discounts for companion travelers) in
order to seek to generate additional traffic. There is recently passed
legislation that imposes taxes on domestic airline transportation equal to a
per segment flown charge (initially $1.00 to be increased to $3.00 by 2003)
plus a percentage of the ticket price (initially 9% to be decreased to 7.5% in
1999). Such taxes will likely have a greater effect on leisure travelers.
Since ValuJet relies to a large extent on leisure travelers, such tax increase
may affect ValuJet to a greater extent than ValuJet's competitors who rely
more heavily on business travelers. As of this time, ValuJet does not expect
to increase its fares to offset the effect of these taxes.
A majority of ValuJet's customers originate or terminate their travel on
ValuJet's non-stop service. One-stop connecting service is provided through
Atlanta between certain of the other cities served by ValuJet.
The following table sets forth certain information with respect to ValuJet's
route system based on ValuJet's schedule in effect as of September 3, 1997.
<TABLE>
<CAPTION>
Round
Trip
Flights
Service Scheduled
Commencement on Peak
Airport Served Date (a) Day (b)
-------------- ------------ ---------
<S> <C> <C>
Atlanta--
Akron/Canton, OH March 1997 3
Boston, MA February 1997 3(c)
Chicago, IL (Midway) October 1996 5
Dallas/Fort Worth, TX April 1997 5
Flint, MI May 1997 3
Fort Lauderdale, FL September 1996 6
Fort Myers, FL January 1997 2
Fort Walton Beach, FL October 1996 2
Jacksonville, FL October 1996 4
Memphis, TN October 1996 4
Mobile, AL October 1996 2
New Orleans, LA October 1996 3
Newport News, VA October 1996 3
Orlando, FL September 1996 6
Philadelphia, PA October 1996 4
Raleigh/Durham, NC October 1996 4
Savannah, GA October 1996 2
Tampa, FL September 1996 6
Washington DC (Dulles) September 1996 9
West Palm Beach, FL December 1996 2
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Round
Trip
Flights
Service Scheduled
Commencement on Peak
Airport Served Date (a) Day (b)
-------------- ------------ ---------
<S> <C> <C>
Washington, DC (Dulles)--
Atlanta, GA September 1996 9
Boston, MA February 1997 4
Chicago, IL (Midway) July 1997 3
</TABLE>
- --------
(a) For markets served by ValuJet prior to the suspension of its operations,
the date indicated is the date ValuJet recommenced service.
(b) Peak day refers to the days of the week on which ValuJet provides the
greatest number of flights for the route shown.
(c) Does not include one-stop service through Washington, DC (Dulles) (up to
four round trips per peak day).
The Company also provides three round trips per peak day between Boston and
Philadelphia.
The Company has announced that it will commence service between Atlanta and
Houston with three round trips per peak day effective September 24, 1997.
Subject to the FAA's approval, ValuJet will consider the addition of other
markets and the provision of service between cities other than Atlanta. There
can be no assurance as to the timing of approvals of additional aircraft or
additional markets by the FAA which will depend upon the FAA's review of
ValuJet's operations. See "Risk Factors--Accident/Suspension of Operations"
and "Risk Factors--Federal Regulation."
ValuJet's aircraft scheduling strategy is directly related to the perceived
needs of its target market segments and the low fixed ownership costs of its
aircraft fleet. ValuJet's target customers are travelers visiting friends and
relatives, vacationers and small business travelers who are more price
sensitive than schedule or frequency sensitive. Since these customers are not
typically as time sensitive as business travelers, ValuJet's schedule provides
for two to nine frequencies per peak travel day in any given market.
ValuJet's low fixed aircraft ownership costs (depreciation plus interest
expense) provide ValuJet with flexibility to tailor capacity to demand. As a
result, on low demand travel days such as Tuesday and Wednesday, ValuJet
reduces total costs by operating a reduced schedule with fewer frequencies per
market. Conversely on peak days, ValuJet may add more frequencies to
accommodate higher demand. ValuJet generally keeps a number of its aircraft
out of scheduled service in order to provide operating spares and to rotate
aircraft into routine scheduled maintenance.
AIRCRAFT
As of August 15, 1997, ValuJet owned 42 DC-9 Series 30 aircraft. The Company
is in the process of reconfiguring its DC-9 fleet to 106 seats consisting of
16 business class seats and 90 coach seats. As of August 15, 1997, the FAA has
approved 31 of ValuJet's aircraft for operation by ValuJet. The addition of
aircraft to ValuJet's operations is subject to FAA and DOT approval. There can
be no assurance as to the timing or extent of any such subsequent approvals.
ValuJet's expansion is subject to FAA approval and could be affected by
heightened FAA scrutiny and ValuJet's ability to regain customer acceptance.
In order to simplify its operations and in light of the limited number of
aircraft ValuJet is authorized to operate, ValuJet has leased out three of its
aircraft under leases not longer than 18 months. Aircraft in excess of the
number ValuJet is authorized to operate will be stored until ValuJet receives
authorization to operate from the FAA and return them to service.
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<PAGE>
ValuJet has entered into a contract with McDonnell Douglas to purchase 50
new MD-95 aircraft, to be delivered from 1999 through 2002, with options to
purchase an additional 50 aircraft. The MD-95 will have 115 seats, consisting
of 16 business class seats and 99 coach seats. ValuJet estimates that the MD-
95 aircraft, with a slightly larger capacity, increased fuel efficiency and
lower maintenance costs, will provide a cost per ASM lower than ValuJet's
existing DC-9 fleet, even after including its higher acquisition cost. ValuJet
is the "launch" customer of the MD-95 aircraft. As the launch customer,
ValuJet anticipates that this contract will provide material value in terms of
acquisition cost and manufacturer financing assistance. ValuJet has determined
that the MD-95 aircraft offers the optimum balance for its purposes between
operating cost and revenue opportunity. ValuJet has not received any
indication that Boeing, as the successor to McDonnell Douglas in their merger,
will not manufacture and deliver the MD-95 aircraft in accordance with the
terms of the purchase agreement, but ValuJet cannot provide any assurance to
that effect.
According to FAA rules, during 1997, each new entrant airline must have at
least 50% of its fleet in compliance with the FAA's Stage 3 noise level
requirements. The balance of such airlines' fleets must be brought into
compliance with Stage 3 noise level requirements in phases: 75% by December
31, 1998 and full compliance required by December 31, 1999. As of June 30,
1997, only 18 of ValuJet's 42 aircraft meet the Stage 3 requirements. However,
ValuJet is in compliance with Stage 3 by virtue of the fact that 16 of
ValuJet's 31 aircraft currently comply with these requirements. Of ValuJet's
remaining 11 aircraft, two comply with Stage 3 as of the date of this Joint
Proxy Statement/Prospectus. ValuJet intends to meet the Stage 3 requirements
by installing hush kits on certain of its Stage 2 aircraft and by acquiring
additional Stage 3 aircraft. ValuJet expects that FAA certified hush kits will
cost approximately $2.3 million per aircraft or approximately $55.0 million
for a fleet of 24 non-hushed DC-9 aircraft. Approximately $7.3 million of the
proceeds from ValuJet's sale of 10 1/2% Secured Notes will be used to finance
80% of the cost of four hush kits. Although ValuJet has sufficient cash
reserves to fund the purchase of the remaining hush kits, ValuJet intends to
seek to finance a portion of the cost of the remaining hush kits. If financing
is obtained, ValuJet plans to pay for the nonfinanced portion of the hush kits
using cash flows generated from operations and from cash reserves. ValuJet
expects to pay the debt service on any such loans out of cash flow generated
from operations during the term of the financing. The phase-in period for full
compliance with Stage 3 (through December 31, 1999) and the expected terms of
financing, if available, should allow ValuJet to spread the payments for Stage
3 compliance over a number of years.
MAINTENANCE AND REPAIRS
Since ValuJet's fleet of DC-9 aircraft are all more than 20 years old, they
will require higher maintenance expenses than newer aircraft. ValuJet believes
that its aircraft are mechanically reliable and that in the long term the
estimated cost of maintenance to fly such aircraft will be within industry
norms for this aircraft type and age. Since the resumption of ValuJet's
service in September 1996, ValuJet has incurred higher maintenance expenses as
a result of costs incurred in connection with reactivating its aircraft.
Amendments to FAA regulations are under consideration which would require
certain heavy maintenance checks and other maintenance requirements for
aircraft operating beyond certain operational limits. ValuJet will be required
to comply with such proposals, if adopted, and with any other aging aircraft
issues, regulations or Airworthiness Directives, that may be promulgated in
the future. There can be no assurance that ValuJet's maintenance expenses
(including costs to comply with aging aircraft requirements) will fall within
industry norms.
Various incidents involving ValuJet's aircraft prior to May 1996, the
accident involving Flight 592 and the suspension of ValuJet's operations have
contributed to a negative public perception as to the safety of ValuJet's
aircraft and operations. Extraordinary regulatory review of ValuJet's
operations by the FAA followed the May 1996 accident and various FAA findings
ultimately resulted in the consent order under which ValuJet's operations were
suspended on June 17, 1996. In the consent order, the FAA alleged that ValuJet
violated various federal regulations relating to aircraft maintenance,
maintenance manuals, training, record keeping and reporting and ValuJet agreed
to present a plan to the FAA specifying the methods by which it would
demonstrate to the FAA its qualifications to hold an air carrier operating
certificate. ValuJet subsequently satisfied the FAA's requirements outlined in
the consent order and the FAA returned ValuJet's operating certificate to it
on August
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<PAGE>
29, 1996. ValuJet is likely to be subject to continuing regulatory scrutiny
which could affect ValuJet's operations, acquisition program and expansion
plans indefinitely.
Prior to the resumption of service, ValuJet implemented the following
additional steps to respond to the concerns that were expressed by the FAA and
reaffirmed its focus on the safety of its aircraft and operations: (i)
creating a new position for a Senior Vice President of Maintenance and
Engineering, a new position reporting directly to the President of ValuJet
Airlines; (ii) implementing intensified performance, safety and compliance-
assurance audits of key maintenance subcontractors, together with revised
procedures for qualification, inspection and supervision of all maintenance
contractors; (iii) creating an in-house organization to supervise all
engineering and maintenance planning functions; (iv) instituting improved
maintenance training procedures that require more hours for initial DC-9
familiarization and orientation training, expanded on-the-job and initial
avionics training, mandatory recurrent training for all ValuJet and outstation
contract mechanics, and new courses for inspectors, lead mechanics and
maintenance managers; (v) reviewing thoroughly all aircraft prior to
reintroducing them into service, including, in each case, reconfirming
compliance with all Airworthiness Directives, correcting aircraft-specific FAA
inspection findings and performing special emphasis "B" checks; and (vi)
expanding training for customer service and station personnel.
Aircraft maintenance and repair consists of routine daily or "turn-around"
maintenance and major overhaul. Routine daily maintenance is performed at
Atlanta by ValuJet's employees or contract employees and by contractors at the
other cities served by ValuJet. Heavy maintenance and other work which require
hanger facilities are currently performed at three maintenance contractors.
The contractors are Zantop International Airlines, Inc. of Macon, Georgia,
Aero Corp. of Lake City, Florida and Pemco World Air Services of Dothan,
Alabama. ValuJet may replace these contractors or add additional contractors
subject to FAA approval. Other routine daily maintenance contractors are
either other airlines which operate DC-9 Series 30 aircraft or other
maintenance companies approved by the FAA, who in either case have employees
qualified in DC-9 Series 30 aircraft maintenance.
The addition of MD-95 aircraft and, if the Merger is consummated, Airways'
Boeing 737-200 aircraft, will require greater inventories of spare parts and
associated costs.
FUEL
The cost of jet fuel is an important expense for ValuJet. ValuJet estimates
that a 14 increase in fuel cost would increase ValuJet's fuel expenses by
approximately $59,000 per month, based on ValuJet's current fuel consumption
rate. Jet fuel costs are subject to wide fluctuations as a result of sudden
disruptions in supply, such as the effect of the invasion of Kuwait by Iraq in
August 1990. Due to the effect of world and economic events on the price and
availability of oil, the future availability and cost of jet fuel cannot be
predicted with any degree of certainty. Increases in fuel prices or a shortage
of supply could have a material adverse effect on ValuJet's operations and
operating results. ValuJet has not entered into any agreement which fixes the
price of fuel over any period of time.
A significant increase in the price of jet fuel would result in a
disproportionately higher increase in ValuJet's average total costs than its
competitors using more fuel efficient aircraft and whose fuel costs represent
a smaller portion of total costs. ValuJet would possibly seek to pass such a
cost increase to ValuJet's customers through a fare increase. There can be no
assurance that any such fare increase would not reduce the competitive
advantage ValuJet seeks by offering affordable fares.
ValuJet's fleet of DC-9 Series 30 aircraft are relatively fuel inefficient
compared to newer aircraft and industry averages. The primary reasons for this
inefficiency are aircraft size and engine technology. In management's opinion,
the lower ownership costs of the DC-9 aircraft more than compensate for this
relative fuel inefficiency. The MD-95 aircraft to be acquired by ValuJet are
expected to be more fuel efficient and should make ValuJet relatively less
susceptible to adverse effects attributable to fuel price changes.
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<PAGE>
DISTRIBUTION AND MARKETING
ValuJet's marketing efforts are vital to its success as it seeks to
stimulate new customer demand, generate the majority of its revenue through
consumer direct distribution channels and forgo traditional amenities. ValuJet
has targeted short haul travelers visiting friends and relatives, vacationing
or involved with fare conscious businesses. These are market segments which
ValuJet believes offer the greatest opportunity for stimulating new demand,
selling direct and not requiring traditional amenities. Based on a survey
conducted by ValuJet in 1994, a substantial majority of ValuJet's customers
were traveling for pleasure.
The primary objectives of ValuJet's marketing activities are to develop a
brand identity or personality which is visibly unique and easily contrasted
with its competitors and to communicate its service directly to potential
customers. When initiating service to a new market or restarting flights to
previously served markets, ValuJet typically makes extensive use of
advertising, as well as active public relations efforts, and focuses on the
affordable fares to be offered on an everyday basis.
ValuJet communicates regularly and frequently with potential customers
through the use of advertisements in newspapers, on radio and on billboards
and through toll-free telephone numbers. These communications feature
ValuJet's destinations, everyday affordable fares, ease of use (including its
simplified fare structure and ticketless travel process) and ValuJet's
reservations phone number.
ValuJet seeks to sell seats directly to the customer whenever possible.
ValuJet also sells seats through travel agents and pays customary sales
commissions, but without volume override increases. Information on its
customers' needs, travel patterns and identity is collected, organized and
stored by ValuJet's automated reservation system and can be used at a future
time for direct marketing efforts.
In June 1997, ValuJet signed participation agreements with two of the
leading travel agency computer reservation system ("CRS") vendors worldwide:
Sabre Travel Information Network Div. (SABRE) and Worldspan L.P. (WORLDSPAN).
These systems provide flight schedules and pricing information. However,
flight reservations made by travel agents can only be confirmed over the
telephone with ValuJet's reservations personnel. Beginning in the fourth
quarter of 1997, ValuJet's participation in these systems is expected to allow
travel agents participating in either of these two systems to electronically
process a ValuJet flight reservation without contacting ValuJet's reservations
facility. These agreements represent an effort by ValuJet to obtain the
benefit of additional distribution channels without compromising ValuJet's
ticketless and direct form of payment (credit card) practices.
ValuJet performs public relations and promotional activities in house.
Advertising is handled by an outside advertising agency.
In June 1997, ValuJet and Greyhound Lines, Inc. introduced "FlightLink"
which provides intermodal scheduled ground transportation between Atlanta's
Hartsfield International Airport and Dalton and Macon, Georgia as well as
Chattanooga, Tennessee. The operation uses modern 47-passenger air-conditioned
motor coach vehicles and provides up to six round-trip segments to each
destination. Customers connecting to/from ValuJet flights can take advantage
of FlightLink's reservations, baggage checking and flight check-in functions.
By using this service, customers avoid airport parking availability problems
as well as parking lot fees and are delivered to Hartsfield's North Terminal
lower level doors. Customers not connecting to ValuJet flights may also
purchase FlightLink reservations.
ValuJet and The Hertz Corporation operate a joint program under which
ValuJet's customers are able to reserve a Hertz rental car outside of Florida
at discounted rates when making a reservation for ValuJet's flights. Alamo
Rent A Car offers discounted car rental rates to ValuJet's customers in
Florida.
Air travel in ValuJet's markets tends to be seasonal, with the highest
levels occurring during the winter months to Florida and the summer months to
the midwest/northeastern U.S. Advertising and promotional expenses may be
greater in lower traffic periods, as well as when entering a new market, in an
attempt to stimulate further air travel.
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<PAGE>
AUTOMATION
Automation is a key component of ValuJet's strategy. ValuJet's UNIX based
computer system has been specifically designed to implement ValuJet's
simplified, ticketless service and is an important component of ValuJet's
attempt to maintain its low cost structure, particularly as ValuJet grows.
ValuJet has designed its computer system to capture information in the
computer at its source, eliminating paper records whenever possible. These
entries are made by the reservation agents, eliminating subsequent data
processing entries. Once the initial data has been entered into the system,
the system updates various affected files and reports. ValuJet's software
supports all of ValuJet's operational areas (e.g., flight operations,
maintenance, accounting, marketing and personnel).
A key component of this system and ValuJet's low cost structure is the
"ticketless" environment. At the time of a sale/reservation, ValuJet provides
its customers with a confirmation number, similar to the systems used by
hotels and car rental agencies. At the airport, this information is available
for customer check-in, which typically requires only two to three key strokes
by the gate agent and helps to alleviate long lines and achieve a quicker
turnaround of aircraft. After the flight has departed, the computer posts
passenger revenue from the passenger manifest information.
In June 1997, ValuJet entered into an agreement for the Open Skies
reservation system which it expects will provide greater flexibility than the
system currently in use. Benefits expected from the Open Skies system include
improved mainframe and hardware performance and reliability, CRS (SABRE)
booking access, applications to improve unit revenue through enhanced data
reporting and software to facilitate Internet reservations booking and
processing. ValuJet expects to effect a transition to the new system during
the second half of 1997. There can be no assurance that ValuJet will not
suffer losses of revenue during the transition period or that ValuJet will be
able to secure the benefits sought.
Furthermore, ValuJet does not participate in the ARC, the airline industry
collection agent for travel agency sales. At the time of the reservation,
ValuJet identifies the travel agency making the booking and takes credit card
information. Each agency then receives a statement summarizing these
transactions. Although management believes that travel agencies are accustomed
to doing business through ARC, management believes that the cost savings
realized by avoiding the fees and revenue accounting costs inherent in the ARC
system justify not participating in ARC.
Because of its ticketless system and its non-participation in ARC, ValuJet's
customers are not able to transfer their reservations from ValuJet to other
airlines, for example in the event of an interruption of a Company flight or a
last minute change in their travel plans.
EMPLOYEES
As of August 31, 1997, ValuJet employed approximately 2,300 people.
Additional employees will be hired as ValuJet increases the number of aircraft
operated subject to FAA approval.
ValuJet has modified its compensation program, increasing employee base pay
for most workers and reducing reliance on variable performance bonuses as a
major component of the overall compensation package. Regular, periodic bonuses
have been eliminated.
Training, both initial and recurrent, is required for most employees. The
average training period for all new employees is approximately one to two
weeks, depending on classification. Both pilot training and mechanic training
are provided by professional training organizations, which may include other
airlines. ValuJet generally pays for recurrent training.
FAA regulations require pilots to be licensed as commercial pilots, with
specific ratings for aircraft to be flown, and to be medically certified as
physically fit. Licenses and medical certification are subject to periodic
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continuation requirements including recurrent training and recent flying
experience. New hire pilots pay for their own initial training which includes
an airline transport pilot rating. Mechanics, quality-control inspectors and
flight dispatchers must be licensed and qualified for specific aircraft.
Flight attendants must have initial and periodic competency fitness training
and certification. Training programs are subject to approval and monitoring by
the FAA. Management personnel directly involved in the supervision of flight
operations, training, maintenance and aircraft inspection must meet experience
standards prescribed by FAA regulations. All of these employees are subject to
pre-employment and subsequent drug testing.
ValuJet's flight attendants have elected the Association of Flight
Attendants ("AFA") and ValuJet's mechanics have elected the International
Brotherhood of Teamsters (the "Teamsters") to represent them in negotiating
contracts with ValuJet. In April 1997, ValuJet reached an agreement with the
Teamsters. ValuJet does not expect that the unionization of its flight
attendants or mechanics will have a material adverse effect on its operating
costs or performance. However, until union contracts are negotiated, there can
be no assurance that this will be the case.
ValuJet is unable to predict whether any of its other employees will elect
to be represented by a labor union or other collective bargaining unit. The
election by ValuJet's employees for representation in such an organization
could result in employee compensation and working condition demands that may
affect operating performance or expenses.
The AFA has filed a lawsuit against ValuJet relating to the termination of
certain former flight attendants. See "--Litigation."
ValuJet from time to time considers alternative means of providing
compensation to its employees and ValuJet's method of determining compensation
is subject to possible change in the future.
AIRPORT OPERATIONS
Ground handling services typically can be placed in three categories--public
contact, underwing and complete ground handling. Public contact services
involve meeting, greeting and serving ValuJet's customers at the check-in
counter, gate and baggage claim area. Underwing ground handling services
include, but are not limited to, marshalling the aircraft into and out of the
gate, baggage and mail loading and unloading, as well as lavatory and water
servicing, anti-icing and deicing and certain services provided to the
aircraft overnight. Complete ground handling consists of public contact and
underwing services combined.
All of ValuJet's ground handling services in Atlanta are conducted by
ValuJet's employees. At other airports, Company operations not conducted by
ValuJet's employees are contracted to other air carriers, ground handling
companies or fixed base operators.
INSURANCE
ValuJet carries customary levels of passenger liability insurance, aircraft
insurance for aircraft loss or damage and other business insurance. ValuJet is
exposed to potential catastrophic losses that may be incurred in the event of
an aircraft accident. Any such accident could involve not only repair or
replacement of a damaged aircraft and its consequent temporary or permanent
loss from service, but also significant potential claims of injured passengers
and others. See "Litigation" below. ValuJet is required by the DOT to carry
liability insurance on each of its aircraft. ValuJet currently maintains
liability insurance in the amount of $750 million per occurrence. Although
ValuJet currently believes its insurance coverage is adequate, there can be no
assurance that the amount of such coverage will not be changed or that ValuJet
will not be forced to bear substantial losses from accidents. Substantial
claims resulting from an accident in excess of related insurance coverage or
not covered by ValuJet's insurance could have a material adverse effect on
ValuJet. Moreover, any aircraft accident, even if fully insured, could cause
and has caused a public perception that some of ValuJet's aircraft are less
safe or reliable than other aircraft, which could have and has had a material
adverse effect on ValuJet's business. ValuJet's insurance premiums have
increased significantly since the accident on May 11, 1996.
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SEASONALITY AND CYCLICALITY
ValuJet's operations are primarily dependent upon passenger travel demand
and, as such, may be subject to seasonal variations. Management believes that
the weakest travel periods will generally be during the months of January, May
and September. Leisure travel generally increases during the summer months and
at holiday periods.
The airline industry is highly volatile. General economic conditions
directly affect the level of passenger travel. Leisure travel is highly
discretionary and varies depending on economic conditions. While business
travel is not as discretionary, business travel generally diminishes during
unfavorable economic times as businesses tend to tighten cost controls.
COMPETITION
The following table identifies airlines which provide non-stop service to
and from Atlanta and the cities indicated and the approximate number of daily
round trip flights scheduled to be flown by those other airlines as of
September 1997.
<TABLE>
<CAPTION>
DAILY NON-STOP ROUND TRIPS
------------------------------------
AMERICAN/NORTHWEST/
-------------------
ATLANTA TO/FROM DELTA USAIR OTHERS(A)
- --------------- ----- ----- ---------
<S> <C> <C> <C>
Akron/Canton, OH........................... -- -- --
Boston, MA................................. 10 -- --
Chicago, IL (Midway)(b).................... -- -- 2
Dallas/Fort Worth, TX...................... 17 14.5 --
Flint, MI.................................. -- -- --
Fort Lauderdale, FL........................ 9.5 -- --
Fort Myers, FL............................. 7.5 -- --
Fort Walton Beach, FL...................... -- -- 9
Jacksonville, FL........................... 7 -- --
Memphis, TN................................ 9.5 6 --
Mobile, AL................................. 8 -- --
New Orleans, LA............................ 9 -- --
Newport News, VA 5(c) -- --
Orlando, FL................................ 14 -- --
Philadelphia, PA........................... 9.5 6 --
Raleigh/Durham, NC......................... 9 -- --
Savannah, GA............................... 8 -- --
Tampa, FL.................................. 10 -- --
Washington DC (Dulles)(d).................. 6 -- 1
West Palm Beach, FL........................ 9 1
--- --- ---
Total...................................... 148 26.5 13
</TABLE>
- --------
(a) Includes United Airlines and Kiwi. Also includes commuter affiliates of
major airlines which generally provide service with turboprop aircraft.
(b) Several major airlines operate daily flights to Chicago's O'Hare Airport
which are not reflected in the table above.
(c) Service provided by Delta to Norfolk, VA.
(d) Delta operates daily flights to Washington DC's National Airport which are
not reflected in the table above.
ValuJet currently provides service between Atlanta and other markets
generally within a 1,000 mile radius and between Washington, D.C. (Dulles
Airport) and Boston. In the future, ValuJet may add additional service
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between cities already served by ValuJet or may add service to new markets.
ValuJet's selection of markets depends on a number of factors existing at the
time service to such market is being considered. Consequently, there can be no
assurance that ValuJet will continue to provide service to all of the markets
listed above or that ValuJet will not provide service to any other particular
market.
With respect to ValuJet's one-stop service provided between markets served
on a connecting basis through Atlanta, ValuJet faces competition from numerous
airlines with varying degrees of flight frequency and marketing approaches. In
addition, ValuJet competes with numerous nonstop flights to many of its cities
from other airports in the same metropolitan areas as served by ValuJet (such
as Washington's National Airport and Chicago's O'Hare Airport).
In October 1996, Delta Express, Delta's new-low-fare operation, commenced
nonstop service from Orlando to various midwest and northeast cities--
Hartford, CT / Springfield, MA / Nashville, TN / Boston, MA / Columbus, OH /
Newark, NJ / Washington, DC (Dulles) / Indianapolis, IN/ Philadelphia, PA /
Louisville, KY / and Providence, RI; plus Orlando to four other Florida
cities--Tampa, Ft. Lauderdale, Ft. Myers and West Palm Beach. Delta Express
recently announced that service will be discontinued to Philadelphia as of
September 30, 1997, and new service will be commenced to Islip, New York and
Raleigh-Durham, North Carolina. Delta Express operates a dedicated single
class fleet of 25 Boeing 737-200 aircraft which are flown by pilots who are
paid less, fly longer hours and operate under more efficient work rules than
other Delta pilots.
Initially, Delta Express started service with 62 daily flights and has
increased daily departures to a total of 128 as of June 1997. A three-tiered
fare structure (21-day advance purchase, 7-day advance purchase and walk-up)
is offered in addition to advance seat selection and the SkyMiles frequent
flyer program. Fares offered by Delta Express compete with ValuJet's
connecting fares via Atlanta. However, Delta Express does not currently have
any flights operating to/from Atlanta and has not announced any current plans
to operate this service in the Atlanta area.
The identity of competing airlines and the number and character of the
flights flown changes from month to month, and while management believes
published schedules for the month of September 1997, upon which the foregoing
information was based, are representative of the competition ValuJet may face,
competing airlines and their flight schedules are subject to frequent change.
ValuJet may also face competition from other airlines which may begin
serving any of the markets it serves or plans to serve, from new low cost
airlines that may be formed to compete in the low fare market (including any
that may be formed by other major airlines) and from ground transportation
alternatives.
ValuJet believes that the most significant competitive factors among
airlines are price (fare levels), convenient departure times, flight frequency
and the availability of incentives such as a frequent flyer program. ValuJet
currently does not offer a frequent flyer program and typically offers limited
flight frequencies. There can be no assurances that ValuJet will not choose to
develop a frequent flyer program or join an existing program for competitive
reasons. Additionally, competitive factors include access to computerized
reservation and ticketing systems used by travel agents, dependability of
service, name recognition, airports served and the availability, quality and
convenience of other passenger services.
GOVERNMENT REGULATION
All interstate air carriers are subject to regulation by the DOT and the FAA
under the Federal Aviation Act of 1958, as amended (the "Aviation Act"). The
DOT's jurisdiction extends primarily to the economic aspects of air
transportation, while the FAA's regulatory authority relates primarily to air
safety, including aircraft certification and operations, crew licensing and
training and maintenance standards.
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U.S. Department of Transportation
In general, the amount of economic regulation over interstate air carriers
in terms of market entry and exit, pricing and inter-carrier acquisitions and
agreements has been greatly reduced subsequent to enactment of the
Deregulation Act. As a result of that change in the regulatory structure, any
company's entry into the domestic air transportation business has been greatly
simplified, and the level of post-entry regulation to which an airline is
subject has been greatly reduced.
Each United States air carrier must obtain, and ValuJet has obtained a
Certificate of Public Convenience and Necessity issued by the DOT pursuant to
Section 401 of the Aviation Act. As a result of ValuJet's suspension of
operations on June 17, 1996, ValuJet was required to apply for recertification
by the DOT. The DOT issued a "show cause" order on August 29, 1996, reflecting
its preliminary determination that ValuJet had satisfied the DOT requirements
and issued its final order on September 26, 1996, approving ValuJet's return
to service.
Each United States carrier must qualify as a United States citizen, which
requires that it be organized under the laws of the United States or a state,
territory or possession thereof, that its President and at least two-thirds of
its Board of Directors and other managing officers must be comprised of United
States citizens, that not more than 25% of its voting stock may be owned by
foreign nationals, and that the carrier not be otherwise subject to foreign
control.
U.S. Federal Aviation Administration
ValuJet has also obtained an operating certificate issued by the FAA
pursuant to Part 121 of the Federal Aviation Regulations. ValuJet's operating
certificate was surrendered to the FAA in connection with the consent order
dated June 17, 1996 and returned to ValuJet on August 29, 1996, after ValuJet
satisfied the requirements of the FAA in the consent order. In the consent
order, the FAA alleged that ValuJet violated various federal regulations
relating to aircraft maintenance, maintenance manuals, training, record
keeping and reporting and ValuJet agreed to present a plan to the FAA
specifying the methods by which it would demonstrate to the FAA its
qualifications to hold an air carrier operating certificate. Under the consent
order, ValuJet suspended operations and paid $2 million to the FAA to
compensate it for the costs of the special FAA inspections conducted and
increases in the number of aircraft are presently subject to FAA approval.
Since the recommencement of operations on September 30, 1996, ValuJet has
made approximately fifteen voluntary self disclosures to the FAA for
maintenance, operational and inflight violations. Under the voluntary self
disclosure program, when a violation is detected, the air carrier promptly
discloses and remedies the violation. If the FAA accepts the remedy proposed
by the air carrier, the FAA will not impose civil penalties for the violation.
Minor penalties have been assessed with respect to certain of these self
disclosures, with all penalties totaling less than $40,000. To its knowledge,
ValuJet believes that it has disclosed all relevant items, but there can be no
assurance that ValuJet will not have other non-compliance items in the future.
Although ValuJet believes that the self-disclosed matters are relatively
routine in the airline business and does not believe that these items will
result in material adverse consequences to ValuJet, ValuJet does not have
control over the consequences that may be imposed by the FAA as a result of
such items.
The FAA has jurisdiction over the regulation of flight operations generally,
including the licensing of pilots and maintenance personnel, the establishment
of minimum standards for training and maintenance and technical standards for
flight, communications and ground equipment. As required, ValuJet has
effective FAA certificates of airworthiness for all of the aircraft used in
its operations. ValuJet's flight personnel, flight and emergency procedures,
aircraft and maintenance facilities are subject to periodic inspections and
tests by the FAA. ValuJet's director of safety and regulatory compliance acts
as a liaison between ValuJet and the FAA, implementing any changes requested
by the FAA with respect to operating procedures or training programs and
generally ensuring proper compliance with aviation regulations applicable to
ValuJet.
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The DOT and FAA also have authority under the Aviation Safety and Noise
Abatement Act of 1979, as amended, under the Airport Noise and Capacity Act of
1990 ("ANCA") and, along with the Environmental Protection Agency, under the
Clean Air Act to monitor and regulate aircraft engine noise and exhaust
emissions. To ValuJet's knowledge, ValuJet's aircraft comply with all
applicable FAA noise control regulations (except as indicated below) and with
current emissions standards.
The ANCA requires the phase-out of Stage 2 airplanes (which meet less
stringent noise emission standards than later Stage 3 airplanes) in the
contiguous 48 states by December 31, 1999. In September 1991, the FAA
promulgated final rules establishing interim compliance dates of December 31,
1994, December 31, 1996 and December 31, 1998 for phasing out Stage 2
aircraft. As of August 15, 1997, ValuJet's operating aircraft consisted of 31
aircraft, 16 of which comply with Stage 3. See "Business of ValuJet--Aircraft"
and "ValuJet Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." Therefore, ValuJet
must take action to continually assure that its fleet will be in compliance
with ANCA.
Miscellaneous
All international service is subject to the regulatory requirements of the
appropriate authorities of the other country involved. ValuJet does not
currently provide any international service.
All air carriers are subject to certain provisions of the Communications Act
of 1934, as amended, because of their extensive use of radio and other
communication facilities, and are required to obtain an aeronautical radio
license from the Federal Communications Commission ("FCC"). To the extent
ValuJet is subject to FCC requirements, it has taken and will continue to take
all necessary steps to comply with those requirements.
ValuJet's operations may become subject to additional federal regulatory
requirements in the future under certain circumstances. ValuJet's labor
relations are covered under Title II of the Railway Labor Act of 1926, as
amended, and are subject to the jurisdiction of the National Mediation Board.
During a period of past fuel scarcity, air carrier access to jet fuel was
subject to allocation regulations promulgated by the Department of Energy. To
the extent ValuJet seeks to provide international air transportation in the
future, it will be required to obtain additional authority from the DOT and
become subject to regulatory requirements imposed by affected foreign
jurisdictions. ValuJet is also subject to state and local laws and regulations
at locations where it operates and the regulations of various local
authorities that operate the airports it serves.
PROPERTY
ValuJet leases approximately 40,500 square feet of office space at 1800
Phoenix Boulevard, Suite 126, Atlanta, Georgia 30349 for general corporate and
operational use (including Atlanta reservations) under a lease which expires
September 30, 1999 and ValuJet also leases approximately 15,000 square feet of
space for use as a training center under a lease that expires August 31, 1999.
ValuJet has signatory status on a lease of facilities at the Atlanta Airport,
which lease expires in the year 2010. ValuJet also maintains a separate
reservations center in leased premises in Savannah, Georgia (approximately
7,000 square feet) which lease expires in January 2000 and leases additional
space in Newport News, Virginia (approximately 20,000 square feet) which lease
expires in the year 2001. ValuJet is not currently using its leased premises
in Newport News, Virginia, and is seeking to sublease such space.
The check-in counters, gates and airport office facilities at each of the
airports ValuJet serves are leased from the appropriate airport authority or
subleased from other airlines. Such arrangements may include baggage handling,
station operations, cleaning and other services. If facilities at any
additional cities to be served by ValuJet are not available at acceptable
rates, or if such facilities cease to be available at acceptable rates, then
ValuJet may choose not to service such markets.
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<PAGE>
LITIGATION
Several stockholder class action suits have been filed against ValuJet and
certain of its executive officers ("Defendants"). The consolidated lawsuits
discussed below seek class certification for all purchasers of stock in
ValuJet during periods beginning on or after June 1995 and ending on or before
June 18, 1996, and are based on allegedly misleading public statements made by
ValuJet or omission to disclose material facts in violation of federal
securities laws. A total of 14 stockholder lawsuits have been filed against
and served upon ValuJet between May 30, 1996 and July 26, 1996. Of these
suits, 11 have been filed in the United States District Court for the Northern
District of Georgia and these suits have been consolidated into a single
action (In re ValuJet, Inc.). Another lawsuit filed in the United States
District Court for the Middle District of Florida has been transferred to the
Northern District of Georgia and has been consolidated into In re ValuJet,
Inc. One additional class action stockholder lawsuit (Davis v. ValuJet
Airlines, Inc., et al.) has been filed and served upon the Defendants.
Regarding Davis, the Defendants filed a "Notice of Newly-Filed Case Opposition
to Joiner of Michael Acks and Alternative Motion to Dismiss" on the same
grounds that Defendants have moved to dismiss Plaintiffs' existing Complaint.
The Plaintiffs filed their response to this Alternative Motion to Dismiss on
June 19, 1997, and on July 7, 1997, Defendants replied. All of the Defendants
filed a joint Motion to Dismiss the Consolidated Amended Complaint on December
23, 1996. The Plaintiffs have responded to this motion to dismiss on April 30,
1997. Defendants filed their reply on July 14, 1997. On November 25, 1996,
Plaintiffs filed their Motion for Class Certification. On January 14, 1997,
Defendants filed a "Notice of Stay of Discovery and Other Proceedings," in
which Defendants state that the filing of their Motion to Dismiss has stayed
the issue of class certification pursuant to the Private Securities Litigation
Reform Act. By consent of the parties, Defendants are not currently obligated
to respond to Plaintiffs' Motion for Class Certification, and if the Court
decides that the issue of class certification is not stayed by the Private
Securities Litigation Reform Act, the Defendants have 30 days from the date of
such decision to respond to Plaintiffs' Motion for Class Certification. Two
suits (Cohen et al. v. ValuJet Airlines, Inc., et al. and Hepler et al. v.
ValuJet Airlines, Inc. et al.) have been filed in the State Court of Fulton
County, Georgia. On December 23, 1996, all Defendants in both actions, other
than SabreTech answered the Complaint and filed a Motion to Dismiss the
Complaint. On May 8, 1997, Plaintiffs responded to this motion. Defendants are
currently working on a response with respect to which no deadline has been
established. On May 2, 1997, the Court ordered the consolidation of these two
state court actions and now refers to them as Cohen, et al. v. ValuJet
Airlines, Inc. Additionally, Defendant Timothy Flynn filed a Motion to Dismiss
for lack of personal jurisdiction. By consent of the parties, the Plaintiffs
have until October 13, 1997, to respond to this motion to dismiss. Although
ValuJet denies that it has violated any of its obligations under the federal
securities laws, there can be no assurance that ValuJet will not sustain
material liability under such or related lawsuits.
Numerous lawsuits have been filed against ValuJet seeking damages
attributable to the deaths of those on Flight 592, and additional lawsuits are
expected. Thus far, approximately 80 such lawsuits have been filed against
ValuJet Airlines, Inc. prior to September 22, 1997. Most of the cases were
initially removed to the federal court. That court, however, remanded the
majority of the actions to the state courts from which they originated and
retained jurisdiction over only seven cases. As a consequence, most of the
cases will proceed in state courts in Florida and Georgia. ValuJet's insurance
carrier has assumed defense of all of these suits under a reservation of
rights against third parties and ValuJet and has settled and paid
approximately 47 claims as of September 22, 1997, and is pursuing settlements
in the balance of the claims. In the remaining lawsuits, SabreTech, has been
named as a co-defendant as a result of the role that it played in the
accident. ValuJet maintains a $750 million policy of liability insurance per
occurrence. ValuJet believes that the coverage will be sufficient to cover all
claims arising from the accident.
In one of the wrongful death suits pending in the State Court of Fulton
County, Georgia, ValuJet petitioned the Court in April 1997 to allow ValuJet
to file a third party complaint against SabreTech, seeking to hold SabreTech
responsible for the accident involving Flight 592. SabreTech is the
maintenance contractor who delivered oxygen generators without safety caps and
in a mislabeled box for shipment aboard Flight 592. The oxygen generators are
currently believed to have caused or contributed to the fire which resulted in
the accident.
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The third party complaint seeks indemnification against losses attributable to
the lawsuits referred to above and other damages that ValuJet suffered as a
result of the accident. In June 1997, the judge denied ValuJet's motion to
file the third party complaint. ValuJet has appealed this denial.
In May 1997, SabreTech filed a Complaint for declaratory judgment and other
relief against ValuJet. The action seeks a determination that SabreTech is not
liable to ValuJet for the accident involving Flight 592 as a result of
language contained in certain of the contracts between the parties and that
ValuJet is liable to SabreTech for damages that it has suffered. ValuJet
intends to vigorously defend this lawsuit and to assert all claims it has
against SabreTech.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit
against ValuJet in State Court in Tennessee for breach of contract and a
declaratory judgment for an anticipatory breach. The Nashville Airport
Authority seeks damages of approximately $2.6 million. The dispute involves
whether ValuJet was entitled to exercise a termination right contained in its
lease agreement.
In May 1997, the State of Florida filed suit against ValuJet and its
insurers in the United States District Court for the Southern District of
Florida seeking recovery of costs incurred relating to the accident involving
Flight 592. ValuJet's insurance carrier has assumed defense of this suit on
ValuJet's behalf. ValuJet does not believe that it is obligated for such
amounts and has filed a motion to dismiss this lawsuit.
On October 21, 1995, the Association of Flight Attendants ("AFA") filed suit
in federal court alleging that ValuJet had violated the Railway Labor Act by
terminating between 20 and 40 flight attendants for engaging in protected
union activities associated with the AFA's organizing drive. ValuJet believes
that it has not wrongfully terminated any of these flight attendants. By order
dated January 30, 1996, the court struck AFA's demands for jury trial,
punitive damages and attorneys' fees. During the course of discovery, the
number of plaintiffs in the case has been reduced to the AFA and five
individuals.
In November 1995, ValuJet filed suit against Delta and TWA in federal
district court alleging violations of the antitrust laws and, regarding TWA,
breaches of contract, arising from ValuJet's attempt to obtain slots to
conduct flight operations at New York's LaGuardia Airport. Preliminary
injunctive relief was denied, and the parties have since been involved in
discovery. The court granted TWA's motion for summary judgment on contract and
conspiracy claims, but has not entered such judgment, and TWA has remained a
party. The court subsequently denied Delta's motion for summary judgment on
antitrust monopolization claims. Trial is expected to begin before the end of
1997.
From time to time, ValuJet is engaged in litigation arising in the ordinary
course of its business. ValuJet does not believe that any such pending
litigation will have a material adverse effect on its results of operations or
financial condition.
Governmental Investigations
Several governmental inquiries and investigations have been launched in
connection with the loss of Flight 592, including investigations by the DOT,
the NTSB, the U.S. Attorney's Office in Atlanta, Georgia and Miami, Florida
and certain state agencies in Florida. Although ValuJet does not believe,
based on information currently available to it, that such investigations and
inquiries will result in any finding of criminal wrongdoing on its part, the
investigations have not yet been concluded and the possibility of such a
finding cannot be ruled out. ValuJet may also be assessed civil penalties in
connection with the accident and/or the results of ensuing investigations. Any
such findings or penalties could be material. In addition, it is possible that
ValuJet could be indirectly affected by negative publicity related to charges
of wrongdoing, if any, against others acting on behalf of ValuJet at the time
of the accident.
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BUSINESS OF AIRWAYS
The following description of the business of Airways does not reflect any
changes that may be implemented after the Merger.
GENERAL
Airways, a Delaware corporation incorporated in 1995, is the parent company
of AirTran, a domestic commercial airline providing direct scheduled passenger
air service from Orlando, Florida to 21 locations in the eastern United
States. AirTran, a Delaware corporation incorporated in September 1993, was
acquired by Mesaba Holdings, Inc. (formerly known as AirTran Corporation) from
Conquest Airlines Corporation in June 1994.
AirTran began flying commercially in July 1994 with one Boeing 737-200
aircraft providing charter services and commenced scheduled flight operations
in October 1994. As of August 15, 1997, AirTran operated a fleet of 11 Boeing
737-200A aircraft.
In addition to AirTran, Airways operates a fixed base operation in Grand
Rapids, Minnesota (the "FBO"), which provides private aircraft services,
maintenance, fueling, hangar facilities, flight instruction, aircraft parts
sales and other ground services to general aviation and government aircraft
fleets. The FBO began operations in 1944 and was previously owned by Mesaba
Aviation, Inc., a subsidiary of Mesaba Holdings, Inc. Airways currently
operates its FBO business under an FAA repair station certificate.
BUSINESS STRATEGY
AirTran's strategy is based on a commitment to customer service, reliability
and affordable service. AirTran's one-way fares currently range from $39 (for
flights between two of its outstations) to $229.
AirTran's affordable service strategy depends on maintaining competitive
operating cost levels. In the fiscal year ended March 31, 1997 ("fiscal
1997"), AirTran's total cost per ASM was 8.04c, resulting in a 73% break-even
load factor. AirTran's fixed aircraft expenses (including hull insurance and
depreciation expense) were 9.6% of operating expenses during fiscal 1997.
FARES, ROUTE SYSTEM AND SCHEDULING
AirTran provides direct scheduled passenger air service between Orlando and
cities principally in the eastern half of the United States. AirTran's
strategy in developing its route system is to serve medium-sized cities from
which direct service to Orlando is not typically provided by the major
airlines. This strategy involves flying long stage lengths to medium-sized
markets on a low frequency basis. Stage lengths range from approximately 152
miles (for the interstation flights between Kansas City and Omaha) to 1,140
miles and service is provided to most markets on a one-flight-per-day
schedule.
AirTran generally offers four fare levels in each of its markets. The number
of seats available at each fare level is set according to market conditions.
AirTran may also offer promotional fares in certain markets. Tickets are non-
refundable but travel dates can be changed prior to departure for a $35 fee.
All fares are sold on a one-way basis without any minimum, maximum or required
overnight stay. The following table shows the expansion of AirTran's scheduled
route system and fleet through August 31, 1997.
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<TABLE>
<CAPTION>
TOTAL NUMBER DEPARTURES
AS OF MONTH END OF AIRCRAFT PER MONTH SCHEDULED CITIES ADDED
--------------- ------------ ---------- ---------------------------------------------
<S> <C> <C> <C>
FISCAL YEAR 1995:
October 2 164 Orlando, Providence*, Hartford*, Huntsville*,
Knoxville & Newburgh
November 2 192 --
December 3 317 Ft. Lauderdale* and Islip*
January 3 326 --
February 3 266 Cincinnati, Albany, and Syracuse
March 4 362 Omaha
FISCAL YEAR 1996:
April 4 354 --
May 4 428 Nashville*
June 4 412 --
July 4 426 --
August 6 714 San Antonio*, Dayton, Birmingham*,
and Buffalo
September 6 642 --
October 7 880 Dallas* , Greenville/Spartanburg, Kansas City
and Norfolk
November 7 874 --
December 8 883 --
January 9 929 --
February 10 1,126 Allentown, Canton/Akron, and Rochester
March 10 1,223 Richmond
FISCAL YEAR 1997:
April 10 1,209 --
May 10 1,135 --
June 10 1,106 Greensboro
July 10 1,315 --
August 10 1,280 --
September 10 963 --
October 10 1,045 Chattanooga*
November 10 1,020 Toledo
December 10 1,034 Bloomington/Normal
January 10 1,060 --
February 10 1,075 Harrisburg, Charleston* and Columbia*
March 10 1,437 DesMoines and Moline
FISCAL YEAR 1998:
April 10 1,357 --
May 10 1,290 --
June 10 1,245 --
July 10 1,284 --
August 11 1,199 --
</TABLE>
- --------
* Service to these locations was subsequently discontinued.
89
<PAGE>
MAINTENANCE AND REPAIRS
Aircraft maintenance consists of routine maintenance and major overhauls.
Routine maintenance is performed in Orlando and at AirTran's newest
maintenance station in Greensboro, North Carolina by AirTran's employees. In
other cities, that work is performed by FAA-approved contractors. Major
overhauls or heavy checks are performed by a contractor approved by the FAA to
work on Boeing 737-200 aircraft.
AirTran's aircraft were manufactured between 1968 and 1985. AirTran believes
that its aircraft are mechanically reliable but that its maintenance costs may
be higher (including costs to comply with FAA aging aircraft requirements and
procedures) than maintenance costs associated with newer fleets.
AirTran maintains an inventory of rotable aircraft parts and supplies for
routine maintenance and obtains parts for major overhauls from vendors and
manufacturers when needed. Due to the large number of 737 aircraft in
commercial operation, AirTran expects that a reliable supply of replacement
engines and parts will continue to be available at market prices.
AIRCRAFT
AirTran's fleet currently consists of seven leased and four owned Boeing
737-200 aircraft with average capacities of 126 passengers. The lease terms
range from three to seven years and require monthly lease payments of $45,000
to $142,000 as well as reserve payments for major engine and airframe
overhauls.
According to FAA rules, AirTran's fleet must comply with the FAA's Stage 3
noise level requirements on the same schedule as ValuJet. Six of AirTran's 11
aircraft currently meet Stage 3 requirements. AirTran intends to remain in
compliance with noise requirements through the acquisition of Stage 3 aircraft
and the installation of hush kits on Stage 2 aircraft presently in its fleet.
Hush kits certified by the FAA for the Boeing 737-200 aircraft are available
at an installed cost of approximately $1.5 million per aircraft.
FUEL
The cost of jet fuel, related taxes and fueling fees is AirTran's largest
operating expense, accounting for 19.5% of total operating costs in 1997. Jet
fuel costs are subject to wide fluctuations, primarily resulting from changes
in supply and the effects of world events. These changes make predicting the
cost of jet fuel difficult. Increases in fuel prices could have a materially
adverse effect on AirTran's operating results. AirTran has not entered into
any fixed-price or guaranteed delivery contracts for fuel.
AirTran's fleet is not as fuel efficient as competitors' fleets comprised of
newer, more efficient jet aircraft. As a result, a significant increase in the
price of jet fuel would disproportionately affect AirTran's costs as compared
to such competitors. AirTran intends to pass on fuel cost increases through
increased fares, but there can be no assurance that AirTran's competitive fare
advantage would not be negatively impacted by such fare increases.
INSURANCE
AirTran carries the types of insurance customary in the airline industry,
including coverage for public liability, passenger liability, property damage,
aircraft loss or damage, baggage and cargo liability and workers'
compensation. AirTran believes that this insurance is adequate in amount and
risk covered. There can be no assurance, however, that the insurance coverage
would be sufficient to protect AirTran adequately in the event of a
catastrophic accident.
SEASONALITY
Seasonal factors, primarily weather conditions and passenger demand, are
expected to affect AirTran's monthly passenger boardings. AirTran generally
experiences diminished demand in late spring, early fall and mid-winter.
90
<PAGE>
COMPETITION AND INDUSTRY CONSIDERATIONS
AirTran's competition includes carriers with substantially greater financial
resources. Fare levels and passenger demand are negatively affected by a
number of factors, including the general state of the economy and intense fare
competition in the industry.
MARKETING
AirTran's marketing objective is to build on the growing awareness of its
service and benefits in the markets served. The message is focused on leisure
travelers and travel agents.
EMPLOYEES
As of August 31, 1997, Airways had 578 full-time equivalent employees.
Management personnel directly involved in the supervision of flight
operations, training, maintenance and aircraft inspection must meet certain
experience levels set by the FAA. Under FAA regulations, pilots are required
to be licensed as commercial pilots, with specific ratings for the type of
aircraft flown, and must also be medically certified as physically fit. In
order to maintain licenses and medical certifications, pilots must satisfy
periodic continuation requirements, including recurrent training and recent
flying experience. Mechanics, quality control inspectors and flight
dispatchers must also be licensed and qualified for specific aircraft. Flight
attendants are required to have initial and periodic competency fitness
training and certification. As required by FAA regulations, all of these
employees must undergo pre-employment and periodic drug testing as well as
employment and background checks. Airways is presently negotiating a
collective bargaining agreement with its mechanics and stores clerks, who are
represented by the International Association of Machinists. Elections for
union representation are pending for Airways' pilots and flight attendants.
Airways has not experienced any work stoppages and believes that its employee
relations are satisfactory.
AIRPORT OPERATIONS
AirTran's operations are based largely at the Orlando International Airport,
where it maintains its aircraft fleet. In Orlando, AirTran's employees provide
passenger services, catering and cleaning of the aircraft. All other ground
services are provided by contractors, including Delta Air Lines. In most other
cities served by AirTran, contractors, including major airlines, provide all
ground handling services, including passenger services. Ground handling
services include greeting and serving passengers at check-in, gate and baggage
claim areas, catering, guiding aircraft to and from gates, baggage handling
services, aircraft cleaning, lavatory and water servicing, de-icing and
certain overnight aircraft maintenance services. AirTran has at least one
employee at each of the cities it serves to promote sales and oversee its
operations.
REAL PROPERTY
AirTran's principal executive offices are located two miles from the Orlando
International Airport in a leased facility consisting of approximately 11,500
square feet of office space. This facility houses the executive offices of
both Airways and AirTran as well as the general administrative staff,
reservations staff and computer systems of AirTran. The lease agreement for
this facility expires in October 1998 and requires monthly lease payments of
approximately $14,000. In January 1996, AirTran entered into a ground lease
with the Greater Orlando Aviation Authority expiring in 2016 and a purchase
agreement with Page AvJet Corporation to acquire an aircraft hangar of
approximately 70,000 square feet at the Orlando International Airport for its
operations staff, including flight operations and station operations, and its
maintenance staff, records, inventory and personnel training facilities.
AirTran paid $3.6 million for the hangar, improved the facilities and makes
monthly ground lease payments of approximately $8,900. The FBO's principal
offices are located in one leased and one owned facility at the Grand Rapids
Itasca County Airport in Grand Rapids, Minnesota.
91
<PAGE>
SECURITY OWNERSHIP
VALUJET AFTER THE MERGER
At and after the Effective Date, by reason of the conversion of Airways
Common Stock into ValuJet Common Stock, the equity ownership of ValuJet will
be shared by the persons who were holders of ValuJet Common Stock and Airways
Common Stock immediately prior to the Effective Date. Accordingly, the equity
interest which each holder of ValuJet Common Stock or Airways Common Stock
holds in ValuJet or Airways, as the case may be, immediately prior to the
Effective Date will be converted into a smaller percentage ownership interest
in a larger company.
As a result of the Merger, immediately after the Effective Date the current
holders of ValuJet Common Stock will hold 85.8% of the then outstanding shares
of ValuJet Common Stock, and the current holders of Airways Common Stock will
hold 14.2% of the then outstanding shares of ValuJet Common Stock, assuming in
each case that no outstanding options or warrants are exercised. Assuming the
exercise of all outstanding options and warrants to purchase ValuJet Common
Stock and Airways Common Stock that are currently exercisable or that become
exercisable within 60 days, the current holders of ValuJet Common Stock and
options would hold 86.1% of outstanding shares of ValuJet after the Effective
Date and the current holders of Airways Common Stock and options would own the
remaining 13.9%. The percentage of outstanding shares of ValuJet Common Stock
to be beneficially owned by the current officers and directors of ValuJet as a
group will be 18.2%, and the percentage of outstanding shares of ValuJet
Common Stock to be beneficially owned by the current officers and directors of
Airways as a group will be 1.4%, assuming in each case the exercise of all
outstanding options to acquire ValuJet Common Stock or Airways Common Stock
held by the respective officer and director group currently exercisable or
exercisable within 60 days and that no other such options, including options
held by the other officer and director group, are exercised.
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF VALUJET
The following table sets forth, as of September 30, 1997, certain
information with respect to ValuJet's Common Stock owned beneficially by each
ValuJet director, by all executive officers and directors as a group and by
each person known by ValuJet to be a beneficial owner of more than 5% of the
outstanding Common Stock of ValuJet. Except as noted in the footnotes, each of
the persons listed has sole investment and voting power with respect to the
shares of ValuJet Common Stock included in the table.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OWNERSHIP (2)
------------------------ --------------------- ------------
<S> <C> <C>
Lewis H. Jordan (3)....................... 4,389,540 7.6%
Robert L. Priddy (4)...................... 4,140,000 7.4%
Maurice J. Gallagher, Jr. (5)............. 3,475,000 6.3%
Don L. Chapman (6)........................ 79,000 *
Timothy P. Flynn (7)...................... 25,000 *
All Executive Officers and Directors as a
group
(10 persons) (2)(3)(4)(5)(6)(7)(8)....... 12,448,740 21.0%
</TABLE>
- --------
* Less than 1%
(1) Information with respect to beneficial ownership is based upon information
furnished by each owner.
(2) The percent of outstanding Common Stock owned is determined by assuming
that in each case the person only, or group only, exercised his or its
rights to purchase all shares of Common Stock underlying presently
exercisable stock options.
(3) Includes options to purchase 3,040,000 shares of Common Stock which are
presently exercisable and also includes 100,000 shares owned by a trust
under which Mr. Jordan is a beneficiary. Mr. Jordan's address is 1800
Phoenix Boulevard, Suite 126, Atlanta, Georgia 30349.
92
<PAGE>
(4) Includes options to purchase 640,000 shares of Common Stock which are
presently exercisable. Excludes 100,000 shares of Common Stock owned by
Mr. Priddy's daughter and son-in-law, with respect to which Mr. Priddy
disclaims any beneficial ownership. Mr. Priddy's address is 1800 Phoenix
Boulevard, Suite 126, Atlanta, Georgia 30349.
(5) Includes options to purchase 155,000 shares of Common Stock which are
presently exercisable, 3,539,000 shares of Common Stock owned by the
Gallagher/Moritz Family Trust under which Mr. Gallagher is a trustee and
beneficiary, and 157,500 shares of Common Stock owned by the
Gallagher/Moritz 1992 Trust under which Mr. Gallagher's children are
beneficiaries. Also includes 30,000 shares of Common Stock owned by a
trust for the benefit of Mr. Gallagher's sisters with respect to which Mr.
Gallagher is a trustee. Mr. Gallagher's address is 6900 Westcliff Drive,
Suite 505, Las Vegas, Nevada 89128.
(6) Includes 69,000 shares of Common Stock owned by a corporation in which Mr.
Chapman is an officer and sole stockholder and options to purchase 10,000
shares of Common Stock which are presently exercisable.
(7) Includes options to purchase 5,000 shares of Common Stock which are
presently exercisable and 20,000 shares of Common Stock owned by Mr.
Flynn's children. Mr. Flynn's address is 6900 Westcliff Drive, Suite 505,
Las Vegas, Nevada 89128.
(8) In addition to outstanding shares of Common Stock owned by Executive
Officers not named in the table, also included are options to purchase
150,000, 88,400, 31,000 and 36,600 shares of Common Stock by D. Joseph
Corr, Stephen C. Nevin, Thomas Kalil and M. Ponder Harrison, respectively,
which are presently exercisable.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS OF AIRWAYS
The following table sets forth, as of September 30, 1997, certain
information with respect to Airways' Common Stock owned beneficially by each
Airways director, by all executive officers and directors as a group and by
each person known by Airways to be a beneficial owner of more than 5% of the
outstanding Common Stock of Airways. Except as noted in the footnotes, each of
the persons listed has sole investment and voting power with respect to the
shares of Airways Common Stock included in the table.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OWNERSHIP (1)
------------------------ --------------------- ------------
<S> <C> <C>
Carl R. Pohlad........................... 1,379,310 15.33%
Lowell T. Swenson........................ 462,748(2) 5.10%
Robert D. Swenson........................ 707,895(3) 7.54%
Alan R. Stephen.......................... 42,000 *
John K. Ellingboe........................ 29,620 *
Roger T. Munt............................ 10,000 *
All directors and executive officers as a
group (10 persons)...................... 885,515 9.29%
</TABLE>
- --------
* Less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date hereof upon exercise
of options and warrants. Each beneficial owner's percentage ownership is
determined by assuming that options and warrants that are held by such
person (but not those held by any other person) and that are exercisable
within 60 days from the date hereof have been exercised. Includes shares
which may be acquired within the next 60 days in the following amounts by
exercise of stock options: R. D. Swenson--325,000; A. Stephen--8,000; J.
Ellingboe--8,000; R. Munt--8,000; and all directors and executive officers
as a group--439,000. The shares shown do not include the following shares
of Common Stock which are subject to stock options that are not
exercisable within the next 60 days: A. Stephen--4,000; J. Ellingboe--
4,000; R. Munt--4,000; and all directors and executive officers as a
group--102,000.
(2) Includes 100,000 shares of Common Stock for which Mr. Swenson shares
voting power with his wife.
(3) Includes (i) 83,220 shares of Common Stock held by Mr. Swenson's wife and
(ii) 69,720 shares of Common Stock Mr. Swenson holds as custodian for his
minor children.
93
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION--VALUJET
The following table shows, for the fiscal years ended December 31, 1994,
December 31, 1995, and December 31, 1996, the cash compensation paid by
ValuJet, as well as certain other compensation paid or accrued for such year,
for ValuJet's Chief Executive Officers and four most highly compensated
Executive Officers other than the Chief Executive Officer. Such table also
indicates all capacities in which they served.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------
NAME AND PRINCIPAL OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATIONS ($) OPTIONS (#) COMPENSATION ($)
------------------ ---- ---------- --------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Priddy........ 1996 135,781 0 0 None 0
Chairman of the Board, 1995 150,000 250,000 0 290,000 0
Chief Executive Officer
(1) 1994 150,000 225,000 0 350,000 0
Lewis H. Jordan......... 1996 135,781 0 0 None 0
President, Chief 1995 150,000 250,000 17,507(3) 290,000 0
Operating Officer (2) 1994 150,000 225,000 35,721(3) 350,000 0
Stephen C. Nevin........ 1996 105,480 0 0 None 0
Senior Vice President-- 1995 100,000 38,000 0 26,000 0
Finance, Chief Finan-
cial 1994 59,452 70,000 0 180,000 30,000(5)
Officer (4)
James R. Jensen......... 1996 110,465 0 5,000 30,000(5)
Senior Vice President--
Maintenance and
Engineering (6)
Thomas Kalil............ 1996 105,480 0 None 0
Senior Vice President-- 1995 65,206 30,000 55,000 5,000(5)
Customer Service (7)
</TABLE>
- --------
(1) The options granted to Mr. Priddy during 1994 include options to purchase
150,000 shares of Common Stock at $3.75 per share granted in January 1995
as a part of Mr. Priddy's 1994 compensation package. The options granted
to Mr. Priddy during 1995 include options to purchase 250,000 shares of
Common Stock at $18.375 per share granted in January 1996 as a part of Mr.
Priddy's 1995 compensation package.
(2) The options granted to Mr. Jordan during 1994 include options to purchase
150,000 shares of Common Stock at $3.75 per share granted in January 1995
as a part of Mr. Jordan's 1994 compensation package. The options granted
to Mr. Jordan during 1995 include options to purchase 250,000 shares of
Common Stock at $18.375 per share granted in January 1996 as a part of Mr.
Jordan's 1995 compensation package.
(3) Consists of reimbursements of moving and related expenses which were paid
in accordance with the terms of his employment agreement with ValuJet.
(4) Mr. Nevin commenced employment with ValuJet on May 9, 1994, and therefore,
the compensation shown for him for 1994 is for the period from May 9, 1994
to December 31, 1994. The options granted to Mr. Nevin during 1995 include
options to purchase 14,000 shares of Common Stock at $18.375 per share
granted in January 1996 as a part of Mr. Nevin's 1995 compensation
package.
(5) The amounts indicated are amounts paid by ValuJet for moving and related
expenses.
(6) Mr. Jensen commenced employment with ValuJet in July 1996, and therefore,
the compensation shown for him for 1996 is for the period from July 1996
through December 1996.
(7) Mr. Kalil commenced employment with ValuJet in May 1995, and therefore,
the compensation shown for him for 1995 is for the period from May 1995
through December 1995. The options granted to Mr. Kalil during 1995
include options to purchase 15,000 shares of Common Stock at $18.375 per
share granted in January 1996 as a part of Mr. Kalil's 1995 compensation
package.
94
<PAGE>
EMPLOYMENT AGREEMENTS--VALUJET
D. Joseph Corr. ValuJet's employment agreement with Mr. Corr provides for a
three year term, a base salary of $250,000 per year, bonuses of up to $250,000
per year based on the performance of ValuJet and severance pay equal to one
year's base salary in the event Mr. Corr's employment is terminated by ValuJet
without cause. Under the agreement, Mr. Corr is also entitled to reimbursement
of certain temporary living and moving expenses.
STOCK OPTION PLANS--VALUJET
ValuJet has three existing stock option plans ("Stock Option Plans"): the
1993 Stock Option Plan (the "1993 Plan") and the 1994 Stock Option Plan (the
"1994 Plan") and the 1996 Stock Option Plan (the "1996 Plan").
A total of 4,800,000 shares of Common Stock are reserved for issuance under
the 1993 Plan. As of December 31, 1996, options to purchase 4,325,300 shares
have been granted under the 1993 Plan, of which options to purchase 1,352,000
shares have been exercised and options to purchase 104,500 shares have lapsed
due to employment terminations prior to vesting. At such date, options to
purchase 2,868,800 shares were outstanding under the 1993 Plan at an average
option price of $2.26 per share and options for up to 579,200 additional
shares may be granted under the 1993 Plan. The 1993 Plan contemplates that
options will be granted to officers, directors and other key employees of
ValuJet. An optionee must remain an employee of ValuJet to retain his options.
If such status terminates, other than by reason of the death of the optionee,
the options will expire within three months of the termination.
The exercise price of the options granted under the 1993 Plan cannot be less
than the fair market value of the Common Stock on the date the option is
granted, as determined by the Compensation Committee or the Board of
Directors. Options granted under the 1993 Plan may be subject to vesting
schedules which defer the optionees' rights to exercise the option. The terms
of the options and the dates after which they become exercisable are
established by the Compensation Committee of the Board of Directors, subject
to the terms of the 1993 Plan. All options granted to date under the 1993 Plan
vest over a five year period.
Options granted under the 1994 Plan and 1996 Plan may be either incentive
stock options or nonqualified options. The 1994 Plan and 1996 Plan contemplate
that options may be granted to directors, key employees and consultants of
ValuJet. The exercise price of the options granted under the 1994 Plan and
1996 Plan will be determined by the Compensation Committee of the Board of
Directors. Options granted under the 1994 Plan and 1996 Plan may be subject to
vesting schedules which defer the optionees' rights to exercise the option.
The terms of the options and the dates after which they become exercisable are
established by the Compensation Committee of the Board of Directors, subject
to the terms of the 1994 Plan.
A total of 4,000,000 shares of Common Stock are reserved for issuance under
the 1994 Plan. As of December 31, 1996, options to purchase 3,925,100 shares
have been granted under the 1994 Plan, of which options to purchase 303,810
have been exercised and options to purchase 316,560 shares have lapsed due to
employment terminations prior to vesting. At that date, options to purchase
3,304,730 shares were outstanding under the 1994 Plan at an average option
price of $6.87 per share and options for up to 391,460 additional shares may
be granted under the 1994 Plan. Of the options granted under the 1994 Plan,
options to purchase 1,296,465 shares are incentive stock options and options
to purchase 2,008,265 shares are nonqualified options. Options granted under
the 1994 Plan generally vest over a five year period except for certain
options granted to certain officers and Directors of ValuJet.
A total of 5,000,000 shares of Common Stock are reserved for issuance under
the 1996 Plan. As of March 10, 1997, options to purchase 450,000 shares have
been granted and are outstanding under the 1996 Plan, all of which have been
granted at a price of $7.125 per share. No options have been exercised or have
lapsed. Options for up to an additional 4,550,000 shares may be granted under
the 1996 Plan. Of the options granted under the 1996 Plan, options to purchase
42,105 shares are incentive stock options and options to purchase 407,895
shares are nonqualified options.
95
<PAGE>
ValuJet has from time to time granted stock options under the Stock Option
Plans in order to provide certain officers, directors, employees and
consultants with a competitive total compensation package and to reward them
for their contribution to ValuJet's performance. These grants of stock options
are designed to align the individual's interest with that of the Stockholders
of ValuJet.
The number of shares and per share stock prices indicated above have been
adjusted to reflect the two separate 2-for-1 stock splits paid to Stockholders
in the form of 100% stock dividends in April 1995 and November 1995.
VALUJET'S OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth information regarding all stock options granted in
the 1996 fiscal year under ValuJet's Stock Option Plans to those Executive
Officers of ValuJet named in the Compensation Table above:
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL MARKET POTENTIAL REALIZED VALUE AT
SECURITIES OPTIONS PRICE OR ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO FAIR VALUE STOCK PRICE APPRECATION(3)
OPTIONS EMPLOYEES IN EXERCISE ON DATE EXPIRATION ----------------------------
GRANTED FISCAL YEAR(2) PRICE OF GRANT DATE 5% 10%
---------- -------------- -------- ---------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert L. Priddy........ None(1)
Lewis H. Jordan......... None(1)
Stephen C. Nevin........ None(1)
James R. Jensen......... 5,000 1.0% $11.50 $11.50 July 8, 2006 $36,161 $91,640
Thomas Kalil............ None(1)
</TABLE>
- --------
(1) Excludes options to purchase an aggregate of 529,000 shares at $18.375 per
share granted in January 1996 to the Executive Officers indicated as a
part of their respective 1995 compensation packages.
(2) Excludes options to purchase an additional 391,800 shares at $18.375 or
$21.375 to other employees as a part of their respective 1996 compensation
packages.
(3) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast possible future appreciation, if
any, of the price of ValuJet's stock.
VALUJET--AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following table shows aggregate exercises of options during 1996 and the
values of options held by ValuJet's Executive Officers as of December 31,
1996.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
DECEMBER 31, 1996 (#) DECEMBER 31, 1996 (2)
SHARES ACQUIRED VALUE EXERCISABLE (E)/ EXERCISABLE (E)/
NAME ON EXERCISE (#) REALIZED UNEXERCISABLE (U) UNEXERCISABLE (U)
---- --------------- -------- ----------------------------- ---------------------
<S> <C> <C> <C> <C>
Robert L. Priddy........ -- -- 640,000 E $ 1,118,125 E
Lewis H. Jordan......... -- -- 3,040,000 E $16,168,105 E
Stephen C. Nevin........ 38,400 $785,400(1) 36,000 E $ 153,250 E
Stephen C. Nevin........ -- -- 131,600 U $ 472,350 U
James R. Jensen......... -- -- 5,000 U None
Thomas Kalil............ -- -- 23,000 E None
Thomas Kalil............ -- -- 32,000 U None
</TABLE>
- --------
(1) Amount shown is based upon the closing sale price for ValuJet's Common
Stock on each date of option exercise, which was $22.56--$23.00 per share.
(2) Amounts shown are based upon the closing sale price for ValuJet's Common
Stock on December 31, 1996, which was $6.44 per share.
96
<PAGE>
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION--AIRWAYS
The following compensation table sets forth, for the fiscal year ended March
31, 1997 ("1997"), the cash and certain other compensation paid by Airways to
its Chief Executive Officer and Airways' other executive officers whose
compensation for 1997 exceeded $100,000 (collectively, the "Named Executive
Officers"). No other executive officer earned an annual salary and bonus in
excess of $100,000 during such year.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------ -------------------
NAME AND PRINCIPAL OTHER
POSITION YEAR SALARY BONUS COMPENSATIONS OPTIONS (#)
------------------ ---- -------- ------ -------------- -------------------
<S> <C> <C> <C> <C> <C>
Robert D. Swenson....... 1997 $161,088 $ -- $78,100(1) 75,000
Chairman and Chief Ex-
ecutive 1996 30,771 -- -- 250,000(2)
Officer of Airways,
Chairman of AirTran
John F. Horn (3)........ 1997 42,283 -- 115,975(3) --
President of Airways 1996 140,005 1,855 81 100,000
and President and Chief
Executive Officer of
AirTran
Mark B. Rinder.......... 1997 116,800 -- -- 10,000
Vice President, Finance
and
Chief Financial Officer
of
Airways and AirTran
Cathy Hoag.............. 1997 110,284 -- -- 10,000
Vice President, Sales
and
Marketing of AirTran
</TABLE>
- --------
(1) Includes relocation costs ($40,000), rental of a home in Orlando, Florida
($19,600) and the cost of transporting the Swenson family twice annually
to their principal home in Anchorage, Alaska ($12,000).
(2) Consists of an option granted in substitution for an option which Mr.
Swenson was required to surrender in connection with the spin off of
Airways from Mesaba Holdings, Inc.
(3) Mr. Horn retired on July 10, 1996 and the other annual compensation
includes compensation paid in connection with the post-employment period.
AIRWAYS' OPTION GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options to the Named Executive
Officers of Airways in 1997. The options were granted under the Airways' 1995
Stock Option Plan. Pursuant to SEC rules, the table also shows the value of
the options granted at the end of the option terms (six years) if the stock
price were to appreciate annually by 5% and 10%, respectively, from the date
the options were granted. There is no assurance that the stock price will
appreciate at the rates shown in the table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE APPRECATION FOR
SECURITIES OPTIONS GRANTED TO EXERCISE OPTION TERM
UNDERLYING EMPLOYEES IN OR BASE EXPIRATION ----------------------------
OPTIONS GRANTED FISCAL YEAR(2) PRICE DATE 5% 10%
--------------- ------------------ -------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert D. Swenson....... 75,000 23% $5.25 7/29/02 $ 527,663 $ 697,552
Mark B. Rinder.......... 5,000 2% 5.25 7/29/02 35,178 46,503
Mark B. Rinder.......... 5,000 2% 3.00 12/22/02 20,101 26,573
Cathy Hoag.............. 5,000 2% 5.25 7/29/02 35,178 46,503
Cathy Hoag.............. 5,000 2% 3.00 12/22/02 20,101 26,573
</TABLE>
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<PAGE>
AIRWAYS--AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following table provides information as to options exercised by each of
the Named Executive Officers of Airways during 1997 and the value of options
held by such officers at year end.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
MARCH 31, 1997 MARCH 31, 1997 (1)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert D. Swenson....... -- -- 325,000 -- $759,375 $ --
Mark B. Rinder.......... -- -- 30,000 5,000 1,875 13,125
Cathy Hoag.............. -- -- 30,000 5,000 1,875 13,125
</TABLE>
- --------
(1) The closing sale price of the Airways Common Stock on March 31, 1997 (the
last trading day of the Company's fiscal year) as reported by NASDAQ was
$5.625 per share. Value is calculated by multiplying (a) the difference
between $5.625 and the option exercise price by (b) the number of shares
of Common Stock underlying the option.
CERTAIN TRANSACTIONS
Prior to August 1996, ValuJet contracted with Jordan Temporaries, Inc. for
temporary personnel and certain recruiting services. Lewis Jordan's daughter
is president and a part owner of Jordan Temporaries, Inc. Jordan Temporaries
provided ValuJet with flight attendants and ticket and gate agents during
1996. ValuJet's expense to Jordan Temporaries for the services of temporary
personnel and recruiting services provided was approximately $4.2 million for
the year ending December 31, 1996. Management of ValuJet believes that the
rates paid to Jordan Temporaries were competitive with alternative agencies
which provide similar services and that the terms of payment were at least as
favorable as available from similar agencies. ValuJet discontinued its
relationship with Jordan Temporaries in August 1996.
ValuJet purchases ground support equipment from Tug Manufacturing
Corporation ("Tug") in which Don L. Chapman is an officer and 100%
stockholder. The amount of ground support equipment purchased by ValuJet from
Tug was approximately $328,000 during 1996. ValuJet intends to continue
purchasing such equipment from Tug so long as Tug's equipment meets ValuJet's
quality, price and time of delivery requirements. ValuJet began to purchase
equipment from Tug prior to Mr. Chapman being elected to ValuJet's Board of
Directors and management believes that its purchases from Tug are at
competitive prices and terms.
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COMPARATIVE MARKET PRICES AND DIVIDENDS
VALUJET MARKET PRICES
The ValuJet Common Stock is traded on NASDAQ under the symbol "VJET". The
following table sets forth, for the indicated periods, the high and low
closing sales prices for ValuJet Common Stock as reported by NASDAQ for prior
periods. Historical share prices have been adjusted to reflect the two 2 for 1
splits of the ValuJet Common Stock effective April 1995 and November 1995.
<TABLE>
<CAPTION>
SALES PRICE
------------
CALENDAR QUARTER ENDING HIGH LOW
----------------------- ------ -----
<S> <C> <C>
1995
March 31................................................... $12.63 $4.75
June 30.................................................... 17.94 12.00
September 30............................................... 18.06 13.31
December 31................................................ 34.75 15.94
1996
March 31................................................... 27.63 18.50
June 30.................................................... 27.50 4.50
September 30............................................... 14.00 8.38
December 31................................................ 12.25 5.94
1997
March 31................................................... 8.75 6.13
June 30.................................................... 8.00 6.25
September 30............................................... 7.84 4.75
</TABLE>
AIRWAYS MARKET PRICES
Since September 1995, Airways' Common Stock has been traded on NASDAQ under
the symbol "AAIR." Prior to August 31, 1995, there was no established public
trading market for the Airways Common Stock. The following table sets forth
quarterly high and low sales prices per share of Airways Common Stock as
reported by NASDAQ.
<TABLE>
<CAPTION>
SALES PRICE
-----------
CALENDAR QUARTER ENDING HIGH LOW
----------------------- ----- -----
<S> <C> <C>
1995
September 30................................................ $9.00 $7.25
December 31................................................. 10.75 7.25
1996
March 31.................................................... 11.00 8.12
June 30..................................................... 10.75 6.75
September 30................................................ 7.25 3.50
December 31................................................. 5.62 2.88
1997
March 31.................................................... 6.38 2.88
June 30..................................................... 6.25 4.88
September 30................................................ 7.25 4.25
</TABLE>
Neither ValuJet nor Airways has ever paid any cash dividends with respect to
its stock.
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RECENT PRICES
On October 13, 1997,,the last reported sales price of ValuJet Common Stock
as reported on the NASDAQ was $6.00 per share, and, the last reported sale
price of Airways Common Stock as reported on NASDAQ was $5.75 per share. At
the close of trading on July 9, 1997, the date of the last sale reported by
the NASDAQ prior to July 10, 1997 (the date the proposed Merger was publicly
announced), the last reported sales price of ValuJet Common Stock was $6.81
per share and the last reported sales price of Airways Common Stock was $5.38
per share.
STOCKHOLDERS OF RECORD
As of the Record Date, there were approximately 4,744 holders of record of
ValuJet Common Stock, and 886 holders of record of Airways Common Stock.
AIRWAYS CHANGES IN ACCOUNTANTS
As a consequence of the relocation of Airways' headquarters to Orlando,
Florida in 1995, Airways terminated its relationship with the independent
public accounting firm of Arthur Andersen LLP ("Arthur Andersen") on September
28, 1995. Arthur Andersen's report on Airways' financial statements for the
fiscal year ended March 31, 1995, did not contain an adverse opinion or a
disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principles. From the time Arthur Andersen was
engaged by Airways through the date of Arthur Andersen's dismissal, there were
no disagreements with Arthur Andersen on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Arthur Andersen,
would have caused it to make reference to the subject matter of the
disagreements in connection with its report.
Airways hired the independent public accounting firm of KPMG Peat Marwick
LLP ("KPMG") for the purpose of conducting audits for its 1996 and 1997 fiscal
years.
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VALUJET CAPITAL STOCK
GENERAL
The authorized Capital Stock of ValuJet consists of 1,000,000,000 shares of
Common Stock, $.001 par value per share and 5,000,000 shares of Preferred
Stock, $.01 par value per share. As of October 3, 1997, ValuJet had
outstanding 55,012,936 shares of Common Stock owned by 4,744 holders of
record.
Any Preferred Stock that may be issued shall have the rights, terms and
preferences delineated by ValuJet's Board of Directors in a certificate filed
with the Secretary of State of Nevada. As of the date of this Joint Proxy
Statement/Prospectus, no shares of Preferred Stock have been issued. The Board
of Directors of ValuJet has no present intention to authorize the issuance of
any series of Preferred Stock. See "Anti-Takeover Provisions of Articles of
Incorporation and By-laws of ValuJet" below.
Holders of the Common Stock of ValuJet are entitled to cast one vote per
share on all matters submitted to a vote of stockholders. Such holders are
entitled to receive dividends when, as and if declared by the Board of
Directors out of funds legally available therefor. Holders of ValuJet Common
Stock do not have any preemptive, subscription, redemption or conversion
rights. Upon any liquidation of ValuJet, holders of ValuJet Common Stock are
entitled to share ratably in the net assets of ValuJet available for
distribution after payment or provision for all debts and obligations of
ValuJet and any preferences attributable to any series of Preferred Stock
outstanding. Shares of ValuJet Common Stock issued in connection with the
Merger will be fully paid and non-assessable.
ANTI-TAKEOVER PROVISIONS OF ARTICLES OF INCORPORATION AND BY-LAWS OF VALUJET
The Board of Directors of ValuJet, without approval of its stockholders, is
authorized to establish the voting, dividend, redemption, conversion,
liquidation and other provisions of a particular series of Preferred Stock.
The issuance of Preferred Stock could, among other things, adversely affect
the voting power or other rights of the holders of Common Stock and, under
certain circumstances, make it more difficult for a third party to acquire, or
discourage a third party from acquiring, control of ValuJet.
Under the By-law Amendment being submitted to a vote of the ValuJet
stockholders, 75% of the members of the Board of Directors of ValuJet in place
after the Merger will not be subject to reelection until the 1999 annual
meeting of ValuJet stockholders.
Under ValuJet's By-laws, special meetings of the stockholders of ValuJet may
be called only by a majority of the Board of Directors in office or by
stockholders holding not less than 25% of the voting power of the corporation.
Action may be taken by Stockholders without a meeting by written consent
setting forth the action taken signed by Stockholders holding at least a
majority of the voting power, unless a greater vote is required (i) under the
corporation's Articles of Incorporation, (i) under a Certificate or Rights,
Preferences and Privileges filed in accordance with the laws of the State of
Nevada, or (iii) under Nevada law.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS
The right of the Stockholders to sue any director for misconduct in
conducting the affairs of ValuJet is limited by that company's Articles of
Incorporation and Nevada statutory law to cases for damages resulting from
breaches of fiduciary duties involving acts or omissions involving intentional
misconduct, fraud, knowing violations of the law or the unlawful payment of
dividends. Ordinary negligence is not a ground for such a suit. The statute
does not limit the liability of directors or officers for monetary damages
under the Federal securities laws.
ValuJet also has the obligation, pursuant to ValuJet's By-laws, to indemnify
any director or officer of ValuJet for all expenses incurred by them in
connection with any legal action brought or threatened against such person for
or on account of any action or omission alleged to have been committed while
acting in the course and scope of the person's duties, if the person acted in
good faith and in a manner which the person reasonably believed to be in or
not opposed to the best interests of ValuJet, and with respect to criminal
actions, had no reasonable cause to believe the person's conduct was unlawful,
provided that such indemnification is made pursuant to then existing
provisions of Nevada General Corporation Law at the time of any such
indemnification.
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<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers or persons
controlling ValuJet pursuant to the foregoing provisions, ValuJet has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is
therefore unenforceable.
COMPARISON OF RIGHTS OF HOLDERS OF VALUJET COMMON STOCK
AND HOLDERS OF AIRWAYS COMMON STOCK
GENERAL
If the Merger is consummated, holders of Airways Common Shares will become
holders of ValuJet Common Stock, and the rights of such former Airways
stockholders will be governed by the laws of the State of Nevada and by the
ValuJet Articles of Incorporation ("ValuJet Articles") and the ValuJet By-
laws. The rights of former Airways stockholders under the Delaware General
Corporation Law ("DGCL"), the Airways Charter and the Airways Bylaws differ in
certain respects from the rights of ValuJet stockholders under the Nevada
Revised Statutes ("NRS"), the ValuJet Articles and the ValuJet By-laws. All
material differences are summarized below. This summary is qualified in its
entirety by reference to the full text of such documents.
ANTI-TAKEOVER PROTECTION
Stockholder Approval. Except as indicated below, under the DGCL, a merger or
consolidation generally must be approved by the holders of a majority of all
of the outstanding stock of each constituent corporation entitled to vote. The
sale of all or substantially all of the assets of a corporation must be
approved by the holders of a majority of the outstanding stock entitled to
vote. The DGCL does not require a stockholder vote of the surviving
corporation in a merger, unless required by the surviving Corporation's
certificate of incorporation, if (i) the merger agreement does not amend the
existing certificate of incorporation, (ii) each share of stock (including
treasury shares) of the surviving corporation before the merger is to be
identical after the merger and (iii) the number of shares of stock to be
issued by the surviving corporation in the merger, plus those initially
issuable upon conversion of any other shares, do not exceed 20% of the shares
of stock outstanding immediately prior to the effective date of the merger. In
addition, no stockholder approval is required if the acquiring corporation
owns 90% or more of the outstanding shares of the acquired corporation. The
Airways Bylaws and Charter do not alter or address these provisions.
Unless the constituent corporation's articles of incorporation, by-laws or
board of directors require a greater vote, the NRS generally require that a
merger be approved by (i) a majority of all votes entitled to be cast on the
matter, voting as a single group and (ii) a majority of all the votes entitled
to be cast by each voting group entitled to vote separately on the plan as a
voting group. The sale of all or substantially all of the assets of a
corporation must be approved by the affirmative vote of a majority of all the
votes entitled to be cast on the matter, regardless of voting groups, unless
the articles of incorporation require a greater vote. Stockholders of the
surviving domestic corporation need not approve a merger if (i) the articles
of incorporation of the surviving domestic corporation will not differ from
its articles before the merger; (ii) each stockholder of the surviving
domestic corporation whose shares were outstanding immediately before the
effective date of the merger will hold the same number of shares, with
identical designations, preferences, limitations and relative rights
immediately after the merger; (iii) the number and kind of voting shares
outstanding immediately after the merger, plus the number of voting shares
issued as a result of the merger, either by the conversion of securities
issued pursuant to the merger or the exercise of rights and warrants issued
pursuant to the merger, will not exceed by more than 20% the total number of
voting shares of the surviving domestic corporation outstanding immediately
before the merger, and (iv) the number of participating shares outstanding
immediately after the merger, plus the number of participating shares issuable
as a result of the merger, either by the conversion of securities issued
pursuant to the merger or the exercise of rights and warrants issued pursuant
to the merger, will not exceed by more than 20% the total number of
participating shares outstanding immediately before the merger. The ValuJet
Articles and By-laws do not alter or address these provisions.
102
<PAGE>
Business Combinations. Section 203 of the DGCL prohibits a corporation that
does not opt out of its provisions from entering into certain business
combination transactions with "interested stockholders" (generally defined to
include persons beneficially owning 15% or more of the corporation's
outstanding voting stock or affiliates or associates of the corporation who
owned 15% or more of the outstanding voting stock during the three prior
years) for a period of three years following the time that such stockholder
became an interested stockholder. The DGCL permits business combinations with
interested stockholders if (i) prior to the stockholder's becoming an
interested stockholder, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced,
excluding, for purposes of determining the number of shares outstanding,
shares owned by persons who are directors and also officers and by certain
employee stock plans or (iii) certain supermajority votes are obtained. The
Airways Articles do not contain a provision opting out of Section 203.
Section 78.438 of the NRS prohibits a domestic corporation from entering
into certain business combination transactions, including mergers, with
"interested stockholders" (defined to include persons beneficially owning 10%
or more of the voting power of the outstanding voting shares of the
corporation or affiliates or associates of the corporation who owned 10% or
more of the outstanding voting stock during the three prior years) for a
period of three years after the interested stockholder or stockholders
acquired shares of the corporation unless the combination or the purchase of
shares made by the interested stockholder is approved by the board of
directors of the resident domestic corporation before the date that the
interested stockholder acquired its shares. The NRS merger provisions apply to
all Nevada resident domestic corporations that have a class of voting shares
registered with the Securities and Exchange Commission unless the
corporation's articles of incorporation opt out. The ValuJet Articles do not
contain such an opting out provision.
Blank Check Preferred Stock. The DGCL permits corporations to issue one or
more series of stock within any class thereof, which classes or series may
have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof as
shall be stated and expressed in the certificate of incorporation or any
amendment thereto, or in the resolution or resolutions providing for the issue
of such stock adopted by the board of directors pursuant to authority
expressly vested in it by the provisions of the certificate of incorporation.
The Airways Charter expressly authorizes the board of directors, upon the
filing of a certificate pursuant to the applicable law of the State of
Delaware, to issue 1,000,000 shares of such "blank check" preferred stock. No
series of preferred stock has been authorized under the Airways Charter nor
are there any shares of Airways preferred stock outstanding.
The NRS provide that the classes, series and number of shares which the
corporation is authorized to issue must be set forth in the articles of
incorporation. The NRS require that if a corporation desires to have more than
one class or series of stock, the articles of incorporation must prescribe, or
vest authority in the board of directors to prescribe, prior to their
issuance, the classes, series and number of each class or series of stock and
the voting powers, designations, preferences, limitations, restrictions and
relative rights of each class or series of stock. The NRS permit the
authorization of one or more classes of stock that have special rights and
powers including specified voting, distribution or redemption rights. The
ValuJet Articles authorize the board of directors to issue 5,000,000 shares of
preferred stock and to determine the relative rights and preferences of any
class or series of preferred stock. No series of preferred stock has been
authorized under the ValuJet Articles nor are there any shares of ValuJet
preferred stock outstanding.
Advance Notice Requirements. The Airways Bylaws provide that an annual
meeting of stockholders will be held at such date and time as the Airways
Board designates. Section 211 of the DGCL provides that if an annual meeting
has not been held for a period of 13 months after the corporation's last
annual meeting, any stockholder or director may apply to the Delaware Court of
Chancery to order that a meeting be held.
The ValuJet By-laws provide that if an annual meeting has not been called
and held by June 30 of any year, such meeting may be called by the holders of
10% or more of the outstanding voting power of the corporation. At the annual
meeting, the stockholders shall elect a board of directors and transact other
properly brought business.
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<PAGE>
APPRAISAL RIGHTS
Under the DGCL, stockholders of corporations not surviving a merger have the
right to serve upon the corporation a written demand for appraisal of their
shares in certain circumstances. Unless otherwise provided in the certificate
of incorporation, this right is not available if (i) the shares of the
corporation are listed on a national securities exchange or designated as a
national market system security by Nasdaq or held of record by more than 2,000
stockholders or (ii) the corporation is the surviving corporation and no vote
of its stockholders is required. Notwithstanding these provisions, appraisal
rights are available if stockholders are required to accept any form of
consideration for their shares other than (i) shares of the surviving
corporation, (ii) shares of any other corporation listed on a national
securities exchange or designated as a national market system security by
Nasdaq or held of record by more than 2,000 stockholders or (iii) cash in lieu
of fractional shares, or any combination thereof. Stockholders entitled to
appraisal rights who properly perfect those rights subsequently receive cash
from the corporation equal to the fair value of their shares as established by
judicial appraisal (exclusive of any element of value arising from the
accomplishment or expectation of the merger). Corporations may enlarge these
statutory rights in their certificates of incorporation. The Airways Charter
contains no such provision enlarging these statutory rights.
The NRS grant stockholders the right to dissent and receive payment of the
fair value of their shares in the event of certain corporate actions,
including certain mergers such as where stockholders are required to approve
the merger transaction. The plan of merger does not require the approval of
the stockholders as the surviving domestic corporation where the number of
voting shares outstanding immediately after the merger plus the number of
voting shares issued as a result of the merger will not exceed by more than
20% the total number of voting shares of the surviving corporation outstanding
immediately before the merger. The right to dissent and receive payment is not
available when the affected shares are listed on a national securities
exchange or designated as a National Market Security by Nasdaq or held by more
than 2,000 stockholders unless (i) the articles of incorporation or a
resolution of the board of directors approving the transaction provide
otherwise or (ii) in a plan of merger or share exchange, stockholders are
required to accept anything other than shares of the surviving corporation or
another publicly held corporation (except for payments in lieu of fractional
shares). The ValuJet Articles do not modify these limitations on dissenters'
appraisal rights.
AMENDMENTS TO CERTIFICATE OR ARTICLES OF INCORPORATION
The DGCL permits a corporation to amend its certificate of incorporation so
long as the amended certificate of incorporation contains only provisions
permissible in an original certificate of incorporation filed when the
amendment is filed. Any amendment to a certificate of incorporation requires
the approval of a majority of the stockholders entitled to vote. Without
limiting the general power of amendment, the DGCL specifically allows a
corporation to amend its certificate of incorporation so as to (i) change its
corporate name, (ii) change the nature of its business or its corporate powers
and purposes, (iii) increase, decrease or reclassify its authorized capital
stock, (iv) cancel or otherwise affect the right of the holders of the shares
of any class to receive accrued, undeclared dividends, (v) create new classes
of stock or (vi) change the duration of the corporate charter.
Under the NRS, every amendment of articles of incorporation adopted after a
corporation has issued stock must be effected by the board of directors
adopting a resolution setting out the proposed amendment, declaring its
advisability, and calling a meeting of stockholders entitled to vote to
consider and vote on the resolution. When the proposal is approved by a
majority of the stockholders or as otherwise provided, then a certificate
setting forth the amendment must be prepared, executed and filed with the
Secretary of State.
AMENDMENTS TO BY-LAWS
Under the DGCL, the power to adopt, amend or repeal bylaws rests with those
stockholders entitled to vote; however, any corporation's certificate of
incorporation may additionally confer such power upon the directors. The
Airways Charter expressly authorizes the Airways Board to make, amend, rescind
or repeal the Airways Bylaws, without the assent of the stockholders, by a
majority vote of the total number of authorized directors. Under the DGCL,
conferring the power to adopt, amend or repeal bylaws upon the directors does
not divest or limit the stockholders' power to adopt, amend or repeal bylaws.
The Airways Charter however, expressly
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<PAGE>
requires that Airways Bylaws fixing the number of directors or their
classifications, qualifications, or terms of office, or prescribing procedures
for removing directors or filling vacancies in the board shall not be adopted,
amended or repealed by the stockholders, except by the vote of the holders of
not less than 75% of the total voting power of all shares of the corporation
entitled to vote in the election of directors (voting together as a single
class).
The NRS empower any private corporation to make by-laws for the management,
regulation and government of its affairs and property, the transfer of its
stock, the transaction of its business, and the calling and holding of
meetings of its stockholders. The ValuJet By-laws reserve the right of the
ValuJet Board of Directors to amend the By-laws by majority vote at any
meeting of the Board. The ValuJet By-laws do not provide for the stockholders
to repeal, amend, adopt or alter the corporation's By-laws, nor do they
require that the stockholders be notified of the intention to alter or repeal
the By-laws.
PREEMPTIVE RIGHTS
Under the DGCL stockholders have no preemptive rights to subscribe to any
additional issues of stock of the corporation unless and except to the extent
that the certificate of incorporation expressly grants such rights. The
Airways Charter does not contain a provision granting preemptive rights.
Under the NRS, stockholders of a corporation organized on or after October
1, 1991 do not have preemptive rights to acquire the corporation's unissued
shares except to the extent provided by the articles of incorporation. The
ValuJet Articles expressly deny the holders of shares in the corporation any
preemptive rights to acquire any unissued stock of the corporation.
STOCKHOLDER ACTION WITHOUT MEETING
Unless the certificate of incorporation otherwise provides, the DGCL permits
any action which must or may be taken at an annual or special meeting of
stockholders to be taken without a meeting, without prior notice and without a
vote. Before stockholder action without a meeting may be taken, written
consents setting forth the action taken must be signed by the stockholders
having at least the minimum number of votes necessary to authorize or take
such action at a meeting where all shares entitled to vote were present and
voted, and the consent must be delivered to the corporation in accordance with
the DGCL. Airways Charter, however, provides that no action required or
permitted to be taken by the stockholders at an annual or special meeting may
be taken except at an annual or special meeting; and no action may be taken by
stockholders without a meeting by written consent.
Under the NRS, any action required or permitted to be taken at a meeting of
the stockholders may be taken without a meeting if a written consent thereto
is signed by stockholders holding at least a majority or other proportion of
the voting power necessary to authorize or take the action, unless otherwise
provided by the articles of incorporation or the by-laws. The ValuJet By-laws
permit action by written consent setting forth the action taken.
STOCKHOLDER ACTION--QUORUM REQUIREMENT
The DGCL allows a corporation's certificate of incorporation or bylaws to
specify the number of shares, or the amount of other securities having voting
power whose holders must be present or represented by proxy at any meeting in
order to constitute a quorum for the transaction of any business, but requires
the quorum to equal at least one-third of the shares entitled to a vote at the
meeting. Unless the certificate of incorporation or bylaws specify otherwise,
a majority of the shares entitled to vote, present in person or represented by
proxy, constitutes a quorum at a stockholder meeting. The Airways By-laws
provide that a majority of the stock issued and outstanding and entitled to
vote constitutes a quorum at all stockholder meetings.
Under the NRS, in order for business to be transacted at a meeting of
stockholders, a quorum of stockholders must be present. Unless the articles of
incorporation or bylaws provide for different proportions, stockholders
holding at least a majority of the voting power entitled to cast a vote are
necessary to constitute a
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quorum. A vote of the stockholders holding the majority of voting power
present at a meeting at which a quorum is constituted will be recognized as an
act of the stockholders. The ValuJet By-laws provide that the majority of
shares entitled to vote, represented in person or by proxy, shall constitute a
quorum. Once a quorum is present to organize a meeting, the stockholders
present may continue to do business at the meeting even though enough
stockholders withdraw to leave less than a quorum.
SPECIAL MEETINGS OF STOCKHOLDERS
Under the DGCL, special meetings of stockholders may be called by the board
of directors or those persons authorized by the corporation's certificate of
incorporation or bylaws. The Airways Bylaws provide that special meetings may
be called by the corporation's president and shall be called by the president
or secretary at the request in writing by a majority of the Airways Board or a
majority of the corporation's voting stock. The Airways Bylaws specify that
written notice of the meeting and the specific purposes and business to be
considered at the meeting must be given by mail to each stockholder of record
entitled to vote at the meeting not less than ten nor more than 60 days prior
to the scheduled date of the special meeting.
The NRS is silent regarding the calling of special meetings of stockholders.
The ValuJet By-laws provide that special meetings may be called at any time by
either a majority of the board of directors or by stockholders holding not
less than 25% of the voting power of the corporation. Business transacted at
all special meetings must be confined to the objects stated in the calling of
the meeting. A written request to the corporate president or secretary shall
cause such officer to give notice to the stockholders entitled to vote at such
special meeting within 30 days after delivery of the request. The request may
fix the time of meeting and contents of the notice. The notice of a special
meeting shall specify the place, day, hour and purpose for calling the meeting
and shall be sent to stockholders not less than 10 days nor more than 60 days
before the meeting, except where the meeting is for the purpose of approving a
merger or consolidation agreement in which case notice must be given not less
than 20 days prior to the meeting.
NUMBER AND ELECTION OF DIRECTORS
The DGCL allows the number of directors to be fixed or determined in the
manner the bylaws provide, unless the corporation's certificate of
incorporation fixes the number of directors, in which case the number of
directors may only be changed by amending the certificate of incorporation.
The DGCL permits the certificate of incorporation or bylaws to divide the
directors into one, two or three classes, with the term of office of one class
of directors to expire each year and the terms of office of no two classes to
expire during the same year. Unless the certificate of incorporation or bylaws
require otherwise, the directors need not be stockholders of the corporation.
The Airways Charter sets the number of directors at not less than three nor
more than 12. The Airways Charter divides the Airways Board into three classes
as nearly equal in number as possible. At each annual stockholders' meeting,
the successors to the directors whose term expired that year are elected to a
three-year term. The Airways Charter also provides that directors need not be
stockholders.
The NRS permit the articles of incorporation or bylaws to specify the
classification of directors as to the duration of their respective terms of
office or as to their election by one or more authorized classes or series of
shares, but requires that at least 1/4 of the directors of the corporation
must be elected annually. The NRS authorize the articles of incorporation to
vary the relative voting power of individual directors or classes of directors
in relation to that of any other class of directors or individual director.
The ValuJet By-laws provide that the board of directors shall consist of not
less than three nor more than nine members. The number required shall be
determined by resolution or unanimous written consent of the board. The Board
currently consists of six members but the number will be increased to seven
upon the Effective Date. The directors are to be elected at an annual or
special meeting of the stockholders to serve for a term of one year or until
their successors are elected and qualified. Under the By-law Amendment being
submitted to a vote of the ValuJet stockholders, the Board of Directors in
place as of the Effective Date of Merger will continue in place until the 1999
annual meeting of ValuJet stockholders.
106
<PAGE>
REMOVAL OF DIRECTORS
The DGCL permits any director, or the entire board of directors, to be
removed, with or without cause, by the holders of a majority of the shares
entitled to vote for directors, except that stockholders may only effect
removal for cause if the board of directors is classified, unless the
certificate of incorporation provides otherwise. The Airways Charter provides
that any director or the entire Board may be removed only for cause and only
by the affirmative vote of holders of 75% or more of the shares then entitled
to vote in an election of directors, cast at a meeting called for the purpose
of removing directors.
Under the NRS, any director may be removed from office with or without
cause, by the vote of stockholders holding not less than 2/3 of the voting
power of issued and outstanding voting stock, unless the articles of
incorporation require a larger percentage of voting power. The ValuJet
Articles and By-laws do not contain a provision affecting removal of
directors.
INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES
The DGCL allows corporations to indemnify a director, officer, agent or
employee against civil or criminal liability if such person acted in good
faith and in a manner the person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action, if the person had no reasonable cause to believe the person's conduct
was unlawful. In a suit by the corporation or in a derivative suit, no
indemnification may be made if the director, officer, agent or employee is
held liable to the corporation unless a court determines that indemnification
is appropriate. In any action in which the director, officer, agent or
employee has been successful, on the merits or otherwise, the corporation must
indemnify him against reasonable expenses. The indemnification provisions of
the DGCL provide that they are not exclusive of additional rights to
indemnification.
Under the NRS, a corporation may indemnify any director, officer, employee
or agent of the corporation for expenses including amounts paid in settlement
actually and reasonably incurred as a party to a suit or proceeding by reason
of his relationship with the corporation if he acted in a manner that he
reasonably believed in good faith in, or not opposed to, the best interests of
the corporation and, in the case of any criminal proceeding, that he had no
reasonable cause to believe his conduct was unlawful. Where a determination
that the director or officer met a specified standard of conduct is required,
the determination whether indemnification is proper in the circumstances must
be made by the stockholders, the majority vote of a quorum of the board of
directors not parties to the proceeding, or by written opinion of an
independent legal counsel in the circumstance where a quorum of disinterested
directors so orders, or where no quorum of disinterested directors can be
obtained. A corporation may not indemnify a director, officer, agent or
employee in a derivative action or in a proceeding by the corporation in which
that person is adjudged liable to the corporation, or for amounts paid in
settlement to the corporation, unless and only to the extent that the court in
which a suit was brought, or other competent court, determines that in view of
all the circumstances the person is fairly entitled to indemnity. A
corporation may indemnify an officer or employee for expenses ordered or
authorized by a court in an action in his official capacity or another
capacity if authorized by its articles of incorporation, by-laws, vote of
stockholders or disinterested members of the board of directors or by contract
unless his acts or omissions involved intentional misconduct, fraud or knowing
violation of the law or were material to the cause of action. The corporation
is required to indemnify a director or officer to the extent that the director
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he was a party because of his status as a director or
officer of the corporation. Before a final disposition is reached, the NRS
permit a corporation to pay or reimburse a director the reasonable expenses
incurred by the director in his defense if he attests in writing that he acted
in good faith or in the best interest of the corporation and that he will
repay the expenses if it is determined he is not entitled to indemnification.
The ValuJet By-laws require ValuJet to indemnify a director, officer,
employee or agent against expenses actually and reasonably incurred in any
actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by virtue of the fact that he or she is or
was a director, officer, employee or agent
107
<PAGE>
of the corporation, to the extent allowed by law. The ValuJet By-laws provide
for indemnification of any officer or director for any liability incurred by
him in a proceeding if he acted in good faith and in a way he believed to be
in, or not opposed to the best interests of the corporation, and in a criminal
proceeding with no reasonable cause to believe his conduct was unlawful. The
By-laws deny indemnification in a proceeding where the person was adjudged
liable to the corporation unless the competent court determines that the
person is fairly entitled to indemnification.
The ValuJet Articles eliminate the personal liability of the directors of
the corporation to the extent permitted by the general corporate law of
Nevada.
Under the NRS, the corporation may mitigate the personal liability of a
director, officer, employee or agent to the corporation or its Stockholders
for monetary damages for breach of duties of care or other fiduciary duties,
by the purchase and maintenance of insurance or by making other financial
arrangements. However, no protection may be provided by any financial
arrangement for a person adjudged by a competent court to be liable for
intentional misconduct, fraud or knowingly violated law, except by a court
ordering advancement of expenses or indemnification.
The DGCL allows a corporation's certificate of incorporation to eliminate or
limit a director's personal liability to the corporation or its stockholders
for monetary damages for the director's breach of his fiduciary duty as a
director. However, the corporation may not eliminate or limit a director's
liability for (i) any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law, (iii) unlawful
payment of dividends or unlawful stock purchase or redemption or (iv) any
transaction from which the director derived an improper personal benefit. No
provision may retroactively eliminate or limit a director's liability. The
Airways Charter limits the liability of Airways directors to the full extent
permitted by Delaware law now or in the future, and states that any repeal or
modification of the DGCL provision will not adversely affect any right or
protection of any Airways director existing immediately prior to such repeal
or modification.
EXPERTS
The consolidated financial statements of ValuJet at December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996,
included in this Joint Proxy Statement/Prospectus of ValuJet, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated balance sheets of Airways as of March 31, 1997 and 1996,
and the related consolidated statements of operations, changes in
stockholders' equity and group equity and cash flows for the years then ended
have been audited by KPMG Peat Marwick LLP, independent auditors, as set forth
in their report appearing elsewhere herein. The combined statements of
operations, changes in group equity and cash flows of Airways for the fiscal
year ended March 31, 1995, have been audited by Arthur Andersen LLP,
independent auditors, as set forth in their report appearing elsewhere herein.
Such financial statements are included herein in reliance upon such reports
given upon the authority of such firms as experts in accounting and auditing.
LEGAL MATTERS
The validity of the ValuJet Common Stock issuable pursuant to the Merger and
certain other legal matters relating to the Merger and the transactions
contemplated thereby will be passed upon for ValuJet by Ellis, Funk, Goldberg,
Labovitz & Dokson, P.C., Atlanta, Georgia. The shareholders of Ellis, Funk,
Goldberg, Labovitz & Dokson, P.C. own approximately 23,000 shares of the
Common Stock of ValuJet. Certain legal matters relating to the Merger and the
transactions contemplated thereby will be passed upon for Airways by Briggs
and Morgan, Professional Association, St. Paul and Minneapolis, Minnesota.
108
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VALUJET, INC.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS--YEARS ENDED DECEMBER 31,
1996, 1995 AND 1994
Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets--December 31, 1996 and 1995................ F-3
Consolidated Statements of Operations--Years Ended December 31, 1996,
1995 and 1994......................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity--Years Ended
December 31,
1996, 1995 and 1994................................................... F-5
Consolidated Statements of Cash Flows--Years Ended December 31, 1996,
1995 and 1994......................................................... F-6
Notes to Consolidated Financial Statements--December 31, 1996.......... F-7
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--THREE AND SIX MONTHS ENDED
JUNE 30, 1997 AND 1996
Consolidated Balance Sheets (Unaudited)--December 31, 1996 and June 30,
1997.................................................................. F-20
Consolidated Statements of Operations (Unaudited)--Three Months Ended
June 30,
1997 and 1996......................................................... F-22
Consolidated Statements of Operations (Unaudited)--Six Months Ended
June 30,
1997 and 1996......................................................... F-23
Consolidated Statements of Cash Flows (Unaudited)--Six Months Ended
June 30,
1997 and 1996......................................................... F-24
Condensed Notes to Unaudited Consolidated Interim Financial
Statements--June 30, 1997............................................. F-25
AIRWAYS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS--YEARS ENDED MARCH 31,
1997, 1996 AND 1995
Independent Auditors Reports........................................... FA-1
Consolidated Balance Sheets--March 31, 1997 and 1996................... FA-3
Consolidated Statements of Operations--Years Ended March 31, 1997, 1996
and 1995.............................................................. FA-4
Consolidated Statements of Cash Flows--Years Ended March 31, 1997, 1996
and 1995.............................................................. FA-5
Consolidated Statements of Changes in Stockholders' Equity and Group
Equity--Years Ended March 31, 1997, 1996 and 1995..................... FA-7
Notes to Consolidated Financial Statements--March 31, 1997............. FA-8
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--QUARTERS ENDED
JUNE 30, 1997 AND 1996
Consolidated Balance Sheets (Unaudited)--March 31, 1997 and June 30,
1997.................................................................. FA-18
Consolidated Statements of Operations (Unaudited)--Quarters Ended June
30, 1997 and 1996..................................................... FA-19
Consolidated Statements of Cash Flows (Unaudited)--Quarters Ended June
30, 1997 and 1996..................................................... FA-20
Notes to Financial Statements (Unaudited)--June 30, 1997............... FA-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
ValuJet, Inc.
We have audited the accompanying consolidated balance sheets of ValuJet,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ValuJet, Inc.
at December 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
February 10, 1997, except for
Note 4 as to which the date is
March 27, 1997
F-2
<PAGE>
VALUJET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $150,012,695 $127,947,096
Accounts receivable, less allowance of $838,000
and $405,000 at December 31, 1996 and 1995,
respectively.................................... 7,014,702 12,074,394
Income tax receivable............................ 36,440,653 --
Inventories of parts and supplies................ 6,607,307 4,016,266
Prepaid expenses................................. 8,066,792 4,758,205
Deferred tax asset............................... -- 401,621
Assets held for disposition...................... 42,060,242 --
Other current assets............................. 839,040 589,986
------------ ------------
Total current assets........................... 251,041,431 149,787,568
Property and equipment:
Flight equipment................................. 126,829,882 153,513,693
Other property and equipment..................... 65,662,504 40,472,604
Deposits on flight equipment purchase contracts.. 14,534,895 21,801,525
------------ ------------
207,027,281 215,787,822
Less accumulated depreciation.................... (44,455,397) (18,834,231)
------------ ------------
162,571,884 196,953,591
Debt issuance costs................................ 3,573,561 --
------------ ------------
Total assets................................... $417,186,876 $346,741,159
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 3,221,542 $ 6,721,754
Accrued liabilities.............................. 22,718,555 35,866,095
Air traffic liability............................ 3,813,583 22,221,133
Income taxes payable............................. -- 24,957
Deferred tax liability........................... 1,298,400 --
Current maturities of long-term debt............. 33,246,302 21,430,984
Debt on assets held for disposition.............. 18,188,222 --
------------ ------------
Total current liabilities...................... 82,486,604 86,264,923
Long-term debt less current maturities............. 193,271,800 87,607,149
Deferred income taxes payable...................... 18,028,835 10,803,856
Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized shares--5,000,000 Issued and
outstanding shares--none at December 31, 1996
and 1995....................................... -- --
Common stock, $.001 par value:
Authorized shares--1,000,000,000 Issued and
outstanding--54,875,610 and 54,556,020 at
December 31, 1996 and 1995, respectively....... 54,876 54,556
Additional paid-in capital......................... 77,236,447 74,433,062
Retained earnings.................................. 46,108,314 87,577,613
------------ ------------
Total stockholders' equity..................... 123,399,637 162,065,231
------------ ------------
Total liabilities and stockholders' equity..... $417,186,876 $346,741,159
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues:
Passenger.......................... $209,707,346 $352,574,954 $129,551,344
Cargo.............................. 2,968,863 4,874,449 --
Other.............................. 6,960,023 10,307,975 4,349,966
------------ ------------ ------------
Total operating revenues......... 219,636,232 367,757,378 133,901,310
Operating expenses and other, net:
Flight operations.................. 16,478,712 16,272,833 6,967,015
Aircraft fuel...................... 46,691,296 55,812,838 21,774,936
Maintenance........................ 49,500,163 47,330,009 14,862,239
Station operations................. 42,018,389 49,931,088 20,197,983
Passenger services................. 8,878,835 10,363,538 3,941,749
Marketing and advertising.......... 8,426,358 8,988,656 6,546,043
Sales and reservations............. 18,377,843 31,155,592 11,325,162
General and administrative......... 13,659,237 10,617,312 5,038,897
Employee bonus..................... 1,245,000 14,382,000 5,146,039
Depreciation....................... 17,550,596 15,147,647 3,555,426
Arrangement fee for aircraft
transfers......................... (13,036,294) -- --
Gain on insurance recovery......... (2,814,785) (1,093,527) --
Gain on sale of property........... (3,934,576) -- --
Shutdown and other nonrecurring
expenses.......................... 67,994,000 -- --
------------ ------------ ------------
Total operating expenses and
other, net...................... 271,034,774 258,907,986 99,355,489
------------ ------------ ------------
Operating (loss) income.............. (51,398,542) 108,849,392 34,545,821
Interest expense (income):
Interest expense................... 22,186,349 6,579,020 2,388,240
Interest income.................... (7,652,592) (5,555,160) (1,422,955)
------------ ------------ ------------
Total interest expense, net...... 14,533,757 1,023,860 965,285
------------ ------------ ------------
(Loss) income before income taxes.... (65,932,299) 107,825,532 33,580,536
Income tax (benefit) expense......... (24,463,000) 40,062,934 12,848,556
------------ ------------ ------------
Net (loss) income.................... $(41,469,299) $ 67,762,598 $ 20,731,980
============ ============ ============
Net (loss) income per share.......... $ (0.76) $ 1.13 $ 0.44
============ ============ ============
Weighted average shares outstanding.. 54,702,000 59,793,000 47,620,000
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
---------------------------------- ---------------------------------
NOTES
ADDITIONAL ADDITIONAL RECEIVABLE RETAINED TOTAL
PAID-IN- PAID-IN- FROM COMMON EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL STOCK SALE (DEFICIT) EQUITY
---------- -------- ------------ ---------- --------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,
1993........... 3,250,000 $ 32,500 $ 11,826,244 22,300,000 $ 223,000 $ 4,302,028 $(324,010) $ (916,965) $ 15,142,797
Payments on
notes
receivable from
common stock
sale and
offering
expenses
related to
issuance of
common stock... -- -- -- -- -- (8,858) 124,000 -- 115,142
Conversion of
preferred
stock.......... (3,250,000) (32,500) (11,826,244) 13,000,000 130,000 11,728,744 -- -- --
Issuance of
common stock to
employees...... -- -- -- 39,680 396 (396) -- --
Issuance of
common stock,
net of issuance
costs.......... -- -- -- 6,000,000 60,000 16,904,743 -- -- 16,964,743
Exercise of
warrants for
common stock... -- -- -- 1,000,000 10,000 1,190,000 -- -- 1,200,000
Issuance of
common stock
for exercise of
options........ -- -- -- 8,000 80 1,253 -- -- 1,333
Exercise of
warrants for
common stock... -- -- -- 10,422,300 104,224 38,856,528 -- -- 38,960,752
Exchange of
warrants for
common stock... -- -- -- 447,160 4,472 (4,472) -- -- --
Net income...... -- -- -- -- -- -- -- 20,731,980 20,731,980
---------- -------- ------------ ---------- --------- ----------- --------- ------------ ------------
BALANCE AT
DECEMBER 31,
1994........... -- -- -- 53,217,140 532,172 72,969,570 (200,010) 19,815,015 93,116,747
Issuance of
common stock
for exercise of
options........ -- -- -- 28,000 280 10,171 -- -- 10,451
Issuance of
common stock
for exercise of
options........ -- -- -- 1,309,000 13,090 373,111 -- -- 386,201
Issuance of
common stock
under stock
purchase plan.. -- -- -- 1,880 18 39,206 -- -- 39,224
Change in par
value.......... -- -- -- -- (491,004) 491,004 -- -- --
Accrued
compensation
related to
stock options.. -- -- -- -- -- 550,000 -- -- 550,000
Payments on
notes
receivable from
common stock
sale........... -- -- -- -- -- -- 200,010 -- 200,010
Net income...... -- -- -- -- -- -- -- 67,762,598 67,762,598
---------- -------- ------------ ---------- --------- ----------- --------- ------------ ------------
BALANCE AT
DECEMBER 31,
1995........... -- -- -- 54,556,020 54,556 74,433,062 -- 87,577,613 162,065,231
Issuance of
common stock
for exercise of
options........ -- -- -- 310,810 311 835,862 -- -- 836,173
Issuance of
common stock
under stock
purchase plan.. -- -- -- 8,770 9 113,493 -- -- 113,502
Accrued
compensation
related to
stock options.. -- -- -- -- -- 1,854,030 -- -- 1,854,030
Net loss........ -- -- -- -- -- -- -- (41,469,299) (41,469,299)
---------- -------- ------------ ---------- --------- ----------- --------- ------------ ------------
BALANCE AT
DECEMBER 31,
1996........... -- $ -- $ -- 54,875,600 $ 54,876 $77,236,447 $ -- $ 46,108,314 $123,399,637
========== ======== ============ ========== ========= =========== ========= ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................. $ (41,469,299) $ 67,762,598 $ 20,731,980
Adjustments to reconcile net
(loss) income to cash (used in)
provided by operating activities:
Depreciation and amortization... 29,164,596 15,147,647 3,548,426
Provision for uncollectible
accounts....................... 3,637,589 3,159,935 1,043,902
Deferred income taxes........... 8,925,000 7,390,070 3,012,165
Gain on disposal of flight
equipment...................... (6,749,361) (1,093,527) --
Changes in operating assets and
liabilities:
Accounts receivable............ 1,422,103 (7,705,398) (6,285,616)
Other current assets........... (6,148,682) (6,644,002) (1,218,142)
Accounts payable and accrued
liabilities................... (14,354,877) 23,738,400 16,921,695
Air traffic liability.......... (18,407,550) 12,614,252 7,361,035
Income taxes payable........... (36,465,610) (581,559) 606,516
------------- ------------- ------------
Net cash (used in) provided by
operating activities............. (80,446,091) 113,788,416 45,721,961
INVESTING ACTIVITIES
Purchases of property and equip-
ment............................. (127,570,815) (142,128,206) (61,969,880)
Proceeds from disposal of
equipment........................ 97,598,198 3,000,000 --
------------- ------------- ------------
Net cash used in investing
activities....................... (29,972,617) (139,128,206) (61,969,880)
FINANCING ACTIVITIES
Notes receivable.................. -- 5,500,000 (5,500,000)
Payment received on notes
receivable from common stock
sale............................. -- 200,010 50,000
Issuance of long-term debt........ 224,497,189 73,707,688 40,612,884
Proceeds from sale of common
stock............................ 949,675 435,876 56,961,546
Payment of long-term debt......... (92,962,557) (11,634,230) (4,045,580)
------------- ------------- ------------
Net cash provided by financing
activities....................... 132,484,307 68,209,344 88,078,850
------------- ------------- ------------
Net increase in cash and cash
equivalents...................... 22,065,599 42,869,554 71,830,931
Cash and cash equivalents at
beginning of year................ 127,947,096 85,077,542 13,246,611
------------- ------------- ------------
Cash and cash equivalents at end
of year.......................... $ 150,012,695 $ 127,947,096 $ 85,077,542
============= ============= ============
Cash paid for income taxes........ $ 4,041,000 $ 32,770,000 $ 9,215,000
============= ============= ============
Cash paid for interest............ $ 19,412,000 $ 6,592,000 $ 2,155,000
============= ============= ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reorganization and Principles of Consolidation
ValuJet Airlines, Inc. was originally incorporated on July 10, 1992 under
the name of Charter Way, Inc. In May 1993, the Company changed its name to
ValuJet Airlines, Inc. As a result of a merger between ValuJet Airlines, Inc.
and VJET Acquisition, Inc. on October 19, 1995, ValuJet Airlines, Inc. became
a wholly-owned subsidiary of ValuJet, Inc. ValuJet, Inc. was incorporated on
July 17, 1995 by ValuJet Airlines, Inc. as its wholly-owned subsidiary.
ValuJet, Inc. formed VJET Acquisition, Inc. as its wholly-owned subsidiary.
Pursuant to a Plan and Agreement of Merger ("the Merger"), VJET Acquisition,
Inc. was merged into ValuJet Airlines, Inc. with ValuJet Airlines, Inc. being
the surviving corporation. In connection with the Merger, each outstanding
share of Common Stock, $.01 par value per share, of ValuJet Airlines, Inc. was
converted into and became the right to receive one share of Common Stock,
$.001 par value per share, of ValuJet, Inc., and the shares of Common Stock of
VJET Acquisition, Inc. owned by ValuJet, Inc. were converted into shares of
Common Stock of ValuJet Airlines, Inc. The shares of Common Stock of ValuJet,
Inc. owned by ValuJet Airlines, Inc. were canceled. Therefore, the then
current stockholders of ValuJet Airlines, Inc. became stockholders of ValuJet,
Inc. and ValuJet Airlines, Inc. became a wholly-owned subsidiary of ValuJet,
Inc. Each of the former stockholders of ValuJet Airlines, Inc. has exactly the
same proportionate interest in ValuJet, Inc. as they had in ValuJet Airlines,
Inc. prior to the Merger.
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Description of Business
The Company offers affordable, no-frills, point-to-point scheduled air
transportation and cargo service, serving short-haul markets primarily in the
eastern United States.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results inevitably will differ from
those estimates, and such differences may be material to the consolidated
financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable are due primarily from major credit card processors and
travel agents. These receivables are unsecured. The Company provides an
allowance for doubtful accounts equal to the estimated losses expected to be
incurred in the collection of accounts receivable.
F-7
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories of Parts and Supplies
Inventories of flight equipment, expendable parts, materials and supplies
are carried at the lower of cost or market using the first-in, first-out
method (FIFO). These items are charged to expense when issued for use.
Allowances for obsolescence are provided over the estimated useful life of the
related aircraft and engines, for spare parts expected to be on hand at the
date aircraft are retired from service.
Property and Equipment
Property and equipment is stated on the basis of cost. Flight equipment is
depreciated to its residual values, estimated at 20%, using the straight-line
method over seven to ten years. Other property and equipment is depreciated
over three years.
Interest Capitalized
Interest attributable to funds used to finance the acquisition of new
aircraft is capitalized as an additional cost of the related asset. Interest
is capitalized at the Company's weighted average interest rate on long-term
debt or, where applicable, the interest rate related to specific borrowings.
Capitalization of interest ceases when the asset is placed in service. In
1996, approximately $1,212,000 of interest cost was capitalized. No interest
was capitalized in 1995 or 1994.
Aircraft and Engine Maintenance
The Company accounts for airframe and aircraft engine overhaul costs using
the direct-expensing method. Overhauls are performed on a continuous basis and
the cost of overhauls and routine maintenance costs for aircraft and engine
maintenance are charged to maintenance expense as incurred.
Advertising Costs
Advertising costs are charged to expense in the period the costs are
incurred. Advertising expense was approximately $6,261,000, $8,038,000 and
$5,507,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Revenue Recognition
Passenger and cargo revenue is recognized when transportation is provided.
Transportation purchased but not yet used is included in air traffic
liability.
Arrangement Fee for Aircraft Transfers
During 1996, the Company sold its contractual purchase commitments with
respect to certain aircraft to other entities for approximately $17,000,000
which, net of related deposits, resulted in income of approximately
$13,000,000. This amount is reflected as Arrangement Fee for Aircraft
Transfers in the accompanying statement of operations. The Company has no
further obligations with respect to these purchase commitments.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
Preoperating Costs
The cost of routine development of new routes and the pre-operating cost
incurred in connection with aircraft acquisitions are charged to expense as
incurred.
F-8
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to officers,
directors, key employees and consultants of the Company with an exercise price
equal to or below the fair value of the shares at the date of grant. The
Company accounts for stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees, and accordingly, recognizes
compensation expense only if the market price of the underlying stock exceeds
the exercise price of the stock option on the date of grant.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, which provides an
alternative to APB Opinion No. 25 in accounting for stock-based compensation
issued to employees. However, the Company will continue to account for stock-
based compensation in accordance with APB Opinion No. 25.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of
common and preferred shares outstanding and dilutive common stock equivalents
during the periods.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common and preferred stock issued for consideration below the initial
public offering ("IPO") price of $3.125 per share and stock options and
warrants issued with exercise prices below the IPO price during the twelve-
month period preceding the initial filing of the Registration Statement
("Cheap Stock") have been included in the calculation of common shares, using
the treasury stock method, as if they were outstanding for all periods prior
to the effective date of the IPO.
In accordance with APB Opinion No. 15, supplemental income per share data
for 1994 is presented for comparability purposes. The following income per
share is calculated excluding the effects of Cheap Stock issued during the
twelve months immediately preceding the effective date of the Company's IPO.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Net income per share......................................... $0.42
=====
</TABLE>
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the discounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1996, and the effect of
adoption was not material.
During 1996, as a result of the accident involving Flight 592 and the
consent order with the FAA which requires the Company to reestablish
operations with up to 15 aircraft and subjects further expansion of the
Company's operations to FAA and DOT approval, the Company plans to sell
certain of its aircraft with a carrying amount of approximately $42 million.
Those aircraft which the Company has decided to sell have been classified in
the balance sheet as assets held for disposition and are stated at the lower
of carrying amount or fair value less cost to sell. The Company began
marketing the aircraft to potential buyers and plans to sell the aircraft
during 1997. At December 31, 1996, the fair value, as estimated by the current
market value, less cost to sell exceeded the carrying amount of such aircraft.
F-9
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform to the current year presentation.
2. COMMITMENTS AND CONTINGENCIES
On May 11, 1996, the Company suffered a tragic loss involving Flight 592.
The accident resulted in extensive media coverage calling into question the
safety of low-fare airlines in general and the Company in particular, despite
the fact that the cause of the accident is still under investigation by the
National Transportation Safety Board. In response to the accident, the Federal
Aviation Administration (FAA) conducted an extraordinary review of the
Company's operations. As a result, the Company significantly reduced its
schedule between May 19, 1996 and June 17, 1996, and on June 17, 1996 entered
into a consent order with the FAA under which the Company agreed to several
matters including the suspension of operations until such time as the Company
was able to satisfy the FAA as to its various regulatory compliance concerns
and the payment of $2,000,000 to the FAA to compensate it for the cost of the
special inspections. The Company satisfied the FAA's requirements and received
FAA clearance during August 1996. The Company received its determination of
fitness from the Department of Transportation on September 25, 1996 and
restarted operations on September 30, 1996. See Note 9 regarding charges
associated with the accident and related suspension of operations.
As a result of the above mentioned events, numerous lawsuits were filed
against the Company seeking damages attributable to the deaths of those on
Flight 592. Thus far, a total of approximately 50 such lawsuits have been
filed against ValuJet Airlines, Inc. Most of the cases were initially removed
to the federal court. That court, however, remanded the majority of the
actions to the state courts from which they originated and retained
jurisdiction for only seven cases. As a consequence, most of the cases will
proceed in state courts in Florida and Georgia. In 36 of these lawsuits, a
third party maintenance contractor has been named as a co-defendant. The
Company's insurance carrier has assumed defense of these suits under a
reservation of rights. As all claims are handled independently by the
Company's insurance carrier, the Company cannot reasonably estimate the amount
of liability which might finally exist. As a result, no accruals for losses
and the related claim for recovery from the Company's insurance carrier have
been reflected in the Company's financial statements. The Company maintains
$750 million of liability insurance, per occurrence, with a major group of
independent insurers that provide facilities for all forms of aviation
insurance for many major airlines.
Although the Company believes, based on the information currently available
to it, that such coverage will be sufficient to cover all claims arising out
of the loss of Flight 592 and that the insurers have sufficient financial
strength to pay claims, there can be no assurance that the total amount of
judgments and settlements will not exceed the Company's insurance limit or
that all damages awarded will be covered by insurance.
Several stockholder class action suits have been filed against the Company
and certain of its executive officers ("Defendants"). The consolidated
lawsuits seek class certification for all purchasers of stock in the Company
during periods beginning on or after June 1995 and ending on or before June
18, 1996, and are based on allegedly misleading public statements made by the
Company or failure to disclose material facts in violation of federal
securities laws. A total of 14 stockholder lawsuits were filed against the
Company. Of these suits, 11 were filed in the United States District Court for
the Northern District of Georgia and these suits have been consolidated into a
single action (In re: ValuJet, Inc.). Another lawsuit filed in the United
States District Court for the Middle District of Florida has been transferred
to the Northern District of Georgia and has been consolidated into In re:
ValuJet, Inc. All of the Defendants filed a joint Motion to Dismiss the
Consolidated Amended Complaint on December 23, 1996. The Plaintiffs' response
to this motion to Dismiss is due on May 9, 1997. On November 25, 1996,
Plaintiffs filed their Motion for Class Certification. On January 14, 1997,
Defendants filed a "Notice of Stay of Discovery and Other Proceedings", in
which Defendants state that the
F-10
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
filing of their Motion to Dismiss has stayed the issue of class certification
pursuant to the Private Securities Litigation Reform Act. By consent of the
parties, Defendants are not currently obligated to respond to Plaintiffs'
Motion for Class Certification, and if the Court decides that the issue of
class certification is not stayed by the Private Securities Litigation Reform
Act, the Defendants have 30 days from the date of such decision to respond to
Plaintiffs' Motion for Class Certification. Two suits (Cohen et al. v.
ValuJet, Inc., et al. and Hepler et al. v. ValuJet, Inc. et al.) have been
filed in the State Court of Fulton County, Georgia. On December 23, 1996, all
Defendants in both actions, other than a third party contractor, answered the
Complaint and filed a Motion to Dismiss the Complaint. Additionally, a
director named in the suits filed a Motion to Dismiss for lack of personal
jurisdiction. By consent of the parties, the Plaintiffs have until May 9,
1997, to respond to these motions to dismiss. The Company denies that it has
violated any of its obligations under the federal securities laws and believes
that meritorious defenses exist in the lawsuits.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit
against the Company in State Court in Tennessee for breach of contract and a
declaratory judgment for an anticipatory breach. The Nashville Airport
Authority seeks damages of approximately $2.6 million. The dispute involves
whether the Company was entitled to exercise a termination right contained in
its lease agreement. Management believes the ultimate resolution will not have
a materially adverse effect on the Company's financial position or results of
operations.
From time to time, the Company is engaged in litigation arising in the
ordinary course of business. The Company does not believe that any such
pending litigation will have a material adverse effect on its results of
operations or financial condition.
At December 31, 1996, the Company's contractual commitments consisted
primarily of scheduled aircraft acquisitions. The Company has entered into a
contract with a major aircraft manufacturer to purchase 50 new aircraft, to be
delivered from 1999 to 2002, with options to purchase another 50 aircraft.
Aggregate funding needed for these and all other aircraft commitments was
approximately $1 billion at December 31, 1996. Approximately $162 million of
this amount is required to be paid in progress payments due from 1995 to 2001.
After progress payments, the balance of the total purchase price must be paid
or financed upon delivery of each aircraft. While the major aircraft
manufacturer is required to provide credit support for a limited portion of
third party financing, the Company will be required to obtain financing from
other sources relating to these deliveries. If the Company exercises its
option to acquire up to an additional 50 aircraft, additional payments could
be required beginning in 1997. In conjunction with these contractual
commitments, the Company has made refundable deposits of approximately
$13,008,000 at December 31, 1996.
Future required deposits for aircraft progress payments as of December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997......................................................... $ 7,567,000
1998......................................................... 31,655,000
1999......................................................... 35,512,000
2000......................................................... 44,874,000
2001......................................................... 29,565,000
------------
$149,173,000
============
</TABLE>
F-11
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
By December 31, 1999, all of the Company's aircraft must be brought into
compliance with the FAA's Stage 3 noise requirements. The Company intends to
meet its Stage 3 noise requirement obligations by installing hush kits on
Stage 2 aircraft and acquiring Stage 3 aircraft. The Company expects that FAA
certified hush kits will cost approximately $55,000,000 for its aircraft not
currently meeting such requirements.
3. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Accrued bonuses...................................... $ -- $12,017,001
Accrued maintenance.................................. 7,710,207 4,700,000
Other................................................ 15,008,348 19,149,094
----------- -----------
$22,718,555 $35,866,095
=========== ===========
</TABLE>
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
Senior notes..................................... $150,000,000 $ --
Promissory notes for aircraft and other
equipment....................................... 94,706,324 109,038,133
------------ ------------
244,706,324 109,038,133
Less current maturities.......................... 33,246,302 21,430,984
Less debt on assets held for disposition......... 18,188,222 --
------------ ------------
$193,271,800 $ 87,607,149
============ ============
</TABLE>
During April 1996, the Company closed a private offering of $150,000,000
principal amount of 10 1/4% Senior Notes due 2001. In October 1996, the
Company exchanged the unregistered Notes for Registered 10 1/4% Senior Notes
due 2001. Interest on the Senior Notes is payable semi-annually on April 15
and October 15.
The promissory notes relate to aircraft financing and bear interest at rates
ranging from 7.43% to 10.18% per annum, and principal and interest payments
are due in monthly or quarterly installments over four to seven year terms on
a mortgage-style amortization based on the delivery date of the aircraft.
Certain of these notes, with an aggregate unpaid principal balance of
approximately $14.3 million as of December 31, 1996, have a variable rate of
interest based on the London interbank offered rate (LIBOR) (5.5% at December
31, 1996) plus 1.85% to 3% (1.85% at December 31, 1996) based on the Company's
compliance with specific financial ratios concerning leverage and fixed charge
coverage. Certain other of these notes have a variable rate of interest based
on LIBOR plus a range of 1.20% to 2.75%.
A substantial portion of the secured notes require prepayment if specific
financial ratios (concerning debt to equity, net worth, fixed charge coverage
and current ratio) are not maintained. At December 31, 1996, the Company was
in violation of the fixed charge coverage ratio covenant related to
approximately $66,103,000 of this secured debt. In March 1997, certain of the
Company's secured lenders agreed to waive the fixed charge coverage ratio
covenant at December 31, 1996 and to waive or reduce the required fixed charge
coverage ratio through December 31, 1997. As a result, management believes it
will meet all loan covenant requirements on such debt totalling $47,151,000
through December 31, 1997. Accordingly, amounts payable under these secured
debt agreements, excluding current maturities and debt on assets held for
disposition, are classified as long-term in the accompanying consolidated
balance sheet. The Company remains in violation of the fixed charge coverage
ratio for $18,952,000 of secured debt. As a result, such debt has been
classified as current maturities or debt on assets held for disposition, where
appropriate, in the accompanying consolidated balance sheet. No prepayment
requests have been made related to such debt. The Company's aircraft, engines
and computer and telephone equipment totalling approximately $155,157,000
serve as collateral on secured debt.
F-12
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future statutory long-term debt principal payments at December 31, 1996 were
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997............................................................ $ 21,457,302
1998............................................................ 23,124,833
1999............................................................ 20,552,472
2000............................................................ 15,536,446
2001............................................................ 162,885,469
Thereafter...................................................... 1,149,802
------------
$244,706,324
============
</TABLE>
5. LEASES
The Company leases facilities from local airport authorities or other
carriers, as well as office space. These leases are operating leases and have
terms from one month to fourteen years.
Total rental expense charged to operations for facilities and office space
for the years ended December 31, 1996, 1995 and 1994 was approximately
$15,824,000, $12,516,000, and $4,726,000, respectively.
Future minimum lease payments under non-cancelable operating leases with
initial terms in excess of one year at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1997............................................................. $ 5,076,000
1998............................................................. 4,922,000
1999............................................................. 4,750,000
2000............................................................. 4,131,000
2001............................................................. 3,954,000
Thereafter....................................................... 34,597,000
-----------
$57,430,000
===========
</TABLE>
6. STOCKHOLDERS' EQUITY
During 1993, the Company issued 1,200,000 shares of common stock to an
officer of the Company and 300,000 shares to a consultant in exchange for
notes receivable of $200,010 and $50,000, respectively. During 1996 and 1995,
the notes receivable were repaid in full.
In conjunction with a private placement offering during 1993, the Company
issued 250,000 Preferred Stock purchase warrants to the placement agent which
entitled the holder to acquire shares of Preferred Stock at a price of $4.80
per share. These warrants were exercised for common stock during the year
ended December 31, 1994.
Also, during 1993, the Company issued 260 units ("Units"), each consisting
of 12,500 shares of convertible Series A Preferred Stock ("Preferred Stock")
and warrants to purchase 50,000 shares of common stock, or 3,250,000 shares of
Preferred Stock and 13,000,000 warrants to purchase common stock, for
$11,858,744, net of issuance costs of $1,141,351. Each warrant entitled the
holder to purchase shares of common stock at a price of $3.75 per share on or
before December 31, 1995. The warrants were callable by the Company at $.0125
per share if the closing bid price of the Company's common stock was greater
than or equal to $5 per share for a period of fifteen consecutive trading days
and if the common stock issuable upon exercise of warrants was then covered by
an effective registration statement filed with the Securities and Exchange
Commission. In addition, in conjunction with a sale of common stock in 1993,
the Company issued 1,000,000 warrants to purchase
F-13
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock at a price of $3.75 per share. In October 1994, the Company
called the 14,000,000 warrants outstanding at that date. Pursuant to the
Company's exchange offer, 10,422,300 warrants for common stock were exercised
for $3.75 per share resulting in proceeds of approximately $38,960,000, net of
expenses. The remaining 3,577,700 warrants for common stock were exchanged for
447,160 shares of common stock, in accordance with the Company's exchange
offer.
On July 6, 1994, the Company closed an initial public offering of 6,000,000
shares of its common stock, generating proceeds of approximately $17 million,
net of underwriting discounts and commissions, and other expenses. Concurrent
with the closing of the Company's IPO, all of the Company's Preferred Stock
was automatically converted into common stock on a one-for-four basis.
On June 28, 1994, the Company issued 39,680 shares of common stock to a
trust for the benefit of its employees at the IPO date. These shares were
valued at the IPO price of $3.12 per share and compensation expense related to
these shares will be recognized over the vesting period of three years from
the issuance date. At the end of the vesting term, the shares will be divided
among the employees employed at the IPO date remaining with the Company at the
end of the three year vesting period. Approximately 33,000 of these shares had
been earned as of December 31, 1996.
During 1995, the Company announced two separate two-for-one stock splits
effected in the form of stock dividends. The stock splits were payable on
April 10, 1995 and November 21, 1995 to stockholders of record as of the close
of business on March 24, 1995 and November 6, 1995, respectively. All
references in the consolidated financial statements to shares, per share
amounts and stock plans have been retroactively restated to reflect the stock
splits.
7. STOCK OPTION PLANS
In 1993, the Company established the ValuJet Airlines, Inc. 1993 Incentive
Stock Option Plan (the "1993 Plan") whereby up to 4,800,000 options may be
granted to officers, directors and key employees to purchase shares of common
stock at prices not less than the fair value of the shares on the dates of
grant. With respect to individuals owning more than 10% of the voting power of
all classes of the Company's stock, the exercise price per share shall not be
less than 110% of the fair value of the shares on the date of grant.
On March 31, 1994, the Company established the ValuJet Airlines, Inc. 1994
Stock Option Plan (the "1994 Plan") whereby up to 4,000,000 incentive stock
options or non-qualified options may be granted to officers, directors, key
employees and consultants of the Company.
On January 30, 1996, the Company established the ValuJet, Inc. 1996 Stock
Option Plan (the "1996 Plan") whereby up to 5,000,000 incentive stock options
or non-qualified options may be granted to officers, directors, key employees
and consultants of the Company.
Vesting and term of all options is determined by the Board of Directors and
may vary by optionee; however, the term may be no longer than ten years from
the date of grant.
At December 31, 1996, the vesting of 1,504,000 stock options with a weighted
average exercise price of $0.85 granted to two executive officers was
accelerated such that they became fully vested on that date. Such stock
options represented all of the nonvested stock options held by the two
executive officers.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by Statement 123, which also requires that the information
be determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair
F-14
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions
for 1996 and 1995, respectively: risk-free interest rates of 7.3% and 6.4%; no
dividend yields; volatility factors of the expected market price of the
Company's common stock of .625 for 1996 and 1995; and a weighted-average
expected life of the options of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
A summary of stock option activity under the above-described plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES PRICE RANGE AVERAGE PRICE
---------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1993........ 3,880,000 $ 0.17 $0.17
Granted........................... 2,240,000 1.00 - 3.75 2.90
Exercised......................... (8,000) 0.17 0.17
Canceled.......................... (92,000) 0.17 - 3.13 1.63
----------
Balance at December 31, 1994........ 6,020,000 0.17 - 3.75 1.16
Granted........................... 1,175,600 3.75 - 23.19 5.67
Exercised......................... (1,337,000) 0.17 - 3.13 0.33
Canceled.......................... (239,200) 0.17 - 12.19 3.42
----------
Balance at December 31, 1995........ 5,619,400 0.17 - 23.19 2.20
Granted........................... 1,406,000 3.75 - 23.19 15.99
Exercised......................... (310,010) 0.17 - 3.13 2.68
Canceled.......................... (91,860) 0.17 - 12.19 5.91
----------
Balance at December 31, 1996........ 6,623,530 0.17 - 23.19 5.06
==========
Exercisable at December 31, 1996.... 4,336,430
==========
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.17 2,516,000 6.50 $ 0.17 2,452,000 $ 0.17
$ 1.00 - $ 5.13 2,603,230 7.69 $ 3.52 1,315,230 $ 2.68
$ 8.50 - $15.00 570,000 9.62 $10.23 15,600 $13.43
$18.38 - $23.19 934,300 8.82 $19.35 553,600 $18.40
--------- ---------
6,623,530 7.60 $ 5.06 4,336,430 $ 3.21
========= =========
</TABLE>
F-15
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Pro forma net income (loss)....................... $(44,880,415) $67,193,721
Pro forma earnings (loss) per share:.............. (0.82) 1.14
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
1999.
The weighted-average fair value of options granted during 1996 and 1995 with
option prices equal to the market price on the date of grant was $7.82 and
$4.00, respectively. The weighted-average fair value of options granted during
1996 and 1995 with option prices less than the market price of the stock on
the date of grant was $10.13 and $2.73, respectively.
At December 31, 1996, the Company had reserved a total of 12,144,190 shares
of common stock for future issuance upon exercise of stock options.
8. INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Current:
Federal.............................. $(31,311,000) $30,389,736 $ 8,387,121
State................................ (2,077,000) 2,283,128 1,449,270
------------ ----------- -----------
Total current.......................... (33,388,000) 32,672,864 9,836,391
Deferred:
Federal.............................. 10,614,000 6,313,839 2,694,773
State................................ (1,689,000) 1,076,231 317,392
------------ ----------- -----------
Total deferred......................... 8,925,000 7,390,070 3,012,165
------------ ----------- -----------
$(24,463,000) $40,062,934 $12,848,556
============ =========== ===========
</TABLE>
A reconciliation of the provision for income taxes (benefit) to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Tax at statutory rate... $(23,076,000) $37,738,937 $11,648,639
State taxes, net of fed-
eral benefit........... (2,448,000) 2,183,583 1,330,254
Other................... 1,061,000 140,414 233,576
Valuation reserve....... -- -- (363,913)
------------ ----------- -----------
$(24,463,000) $40,062,934 $12,848,556
============ =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:
F-16
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Prepaid insurance................................. $ 2,687,180 $ 1,210,775
Depreciation...................................... 19,584,784 10,919,065
Gain on involuntary conversion.................... 1,484,100 --
----------- -----------
Total deferred tax liabilities...................... 23,756,064 12,129,840
Deferred tax assets:
Accrued liabilities............................... 770,463 1,181,489
State operating loss carryforwards................ 2,035,751 --
Non qualified stock options....................... 929,956 --
Other............................................. 692,659 546,116
----------- -----------
Total deferred tax assets........................... 4,428,829 1,727,605
----------- -----------
Net deferred tax liability.......................... $19,327,235 $10,402,235
=========== ===========
</TABLE>
Various subsidiaries of the Company have state operating loss carryforwards
of approximately $3,100,000 with expiration dates through the year 2011.
9. SHUTDOWN AND OTHER NONRECURRING EXPENSES
Shutdown and other nonrecurring expenses include costs associated with the
loss of Flight 592 and excess operating costs related to the reduced schedule
from May 19, 1996 to the June 17, 1996 shutdown, the suspension of operations
from June 17, 1996 to September 29, 1996 and the reduced schedule from
September 30, 1996 to December 31, 1996. Such costs consist of expenses
directly related to the accident and the ensuing extensive FAA review of the
Company's operations including legal fees, payments to the FAA, inspection
related costs and unusual maintenance in excess of normal recurring
maintenance. In addition, depreciation on grounded aircraft, rental of vacated
or idled facilities and costs of personnel idled as a result of the reduced
and suspended operations from May through December, 1996 are included in
shutdown and other nonrecurring expenses. Personnel costs include full wages,
salaries and benefits that were provided to idled employees during the
reduction and suspension of operations.
A summary of such costs is as follows for the year ended December 31, 1996:
<TABLE>
<S> <C>
Maintenance..................................................... $27,750,000
Legal and other consulting...................................... 8,843,000
Facilities rental............................................... 6,114,000
Wages, salaries and benefits, excluding maintenance............. 4,895,000
FAA remediation................................................. 2,000,000
Depreciation.................................................... 11,054,000
Other........................................................... 7,338,000
-----------
$67,994,000
===========
</TABLE>
No accrual was provided for costs to be incurred in future periods related
to aircraft depreciation and maintenance and rental costs associated with
temporarily idled facilities as such costs will be recognized as they are
incurred. There is no accrual for salaries and wages in connection with the
June 18, 1996 furlough of employees at December 31, 1996 as such employees
were paid through June 30, 1996 with no additional severance benefits
provided.
F-17
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS
The Company has utilized temporary employees provided by a temporary agency
which is partially owned by the daughter of one of the Company's officers.
This arrangement was terminated during 1996. Amounts recorded as expense
related to this agency were approximately $4,223,000, $12,663,000, and
$5,140,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Accounts payable to this agency was approximately $370,703 at December 31,
1995. No amounts were due at December 31, 1996.
11. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company maintains cash and cash equivalents with
various high credit-quality financial institutions or in short-duration high
quality debt securities. The Company periodically evaluates the relative
credit standing of those financial institutions that are considered in the
Company's investment strategy. Concentration of credit risk with respect to
accounts receivable is limited due to the large number of customers comprising
the Company's customer base.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable: The carrying amounts reported
in the balance sheet for accounts receivable and accounts payable
approximate their fair value.
Long-term debt: The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and
cash equivalents....... $150,012,695 $150,012,695 $127,947,096 $127,947,096
Accounts receivable, net
of allowance........... 7,014,702 7,014,702 12,074,394 12,074,394
Accounts payable........ 3,221,036 3,221,036 6,721,754 6,721,754
Long-term debt.......... 244,706,324 219,326,000 109,038,133 110,973,000
</TABLE>
12. EMPLOYEE BENEFIT PLANS
Effective April 1, 1995, the Company adopted the ValuJet Airlines, Inc.
401(k) Plan (the "Plan"), a defined contribution benefit plan which qualifies
under Section 401(k) of the Internal Revenue Code. All employees of the
Company are eligible to participate in the Plan. Participants may contribute
up to 15% of their base salary to the Plan. Contributions to the Plan by the
Company are discretionary. No employer contributions were made in 1996 or
1995.
Effective May 16, 1995, the Company formed the 1995 Employee Stock Purchase
Plan (the "Stock Plan") whereby employees who complete twelve months of
service are eligible to make quarterly purchases of the Company's common stock
at up to a 15% discount from the market value on the offering date. The
discount rate
F-18
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
is determined by the Board of Directors before each offering date. The Company
is authorized to issue up to 4,000,000 shares of common stock under this plan.
During 1996 and 1995, the employees purchased a total of 8,770 and 1,880
shares at an average price of $12.94 and $20.86 per share, respectively, which
represented a 5% discount from the market price on the offering dates.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
-------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1996:
Operating revenues.................. $109,995 $ 81,217 $ 311 $ 28,113
Operating income (loss)............. 17,525 (11,581) (29,946) (27,397)
Net income (loss)................... 10,667 (9,574) (21,945) (20,617)
Net income (loss) per share......... .18 (.18) (.40) (.38)
</TABLE>
<TABLE>
<CAPTION>
QUARTER
---------------------------------
FIRST SECOND THIRD FOURTH
------- ------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1995:
Operating revenues....................... $60,747 $86,913 $109,296 $110,801
Operating income......................... 14,581 27,086 36,672 30,511
Net income............................... 9,071 16,860 22,661 19,171
Net income per share..................... .15 .28 .38 .32
</TABLE>
14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's $150,000,000 of 10 1/4% Senior Notes issued during 1996 are
fully and unconditionally guaranteed on a joint and several basis by ValuJet
Airlines, Inc., a wholly-owned subsidiary of the Company, and all its
subsidiaries ("Guarantors"). All of the operations of the Company are
conducted by ValuJet Airlines, Inc. and its subsidiaries. All of the
Guarantors are wholly-owned or indirect subsidiaries of the Company, and there
are no direct or indirect subsidiaries of the Company that are not Guarantors.
Separate financial statements of the Guarantors are not presented because all
of the Company's subsidiaries guarantee the Senior Notes on a full,
unconditional and joint and several basis.
Summarized financial information of ValuJet Airlines, Inc. and its
subsidiaries is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Current assets.............................................. $246,041,431
Non-current assets.......................................... 162,571,884
Current liabilities......................................... 81,743,233
Non-current liabilities..................................... 207,167,474
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Operating revenues.......................................... $219,636,232
Operating loss.............................................. (51,398,542)
Loss before income taxes.................................... (65,932,299)
Net loss.................................................... (41,469,299)
</TABLE>
F-19
<PAGE>
VALUJET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
(NOTE) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $150,012,695 $149,724,768
Accounts receivable, less allowance of $838,000
and $1,141,000 at December 31, 1996 and June 30,
1997, respectively.............................. 7,014,702 6,583,785
Inventories of parts............................. 6,607,307 6,159,038
Prepaid expenses................................. 8,066,792 2,481,642
Income taxes receivable.......................... 36,440,653 13,711,144
Assets held for disposition...................... 42,060,242 0
Other current assets............................. 839,040 1,118,194
------------ ------------
Total current assets............................... 251,041,431 179,778,571
Property and equipment, at cost
Flight equipment................................. 126,829,882 166,292,124
Other property and equipment..................... 65,662,504 70,779,835
Deposits on flight equipment purchase contracts.. 14,534,895 15,352,895
------------ ------------
207,027,281 252,424,854
Less allowance for depreciation.................. (44,455,397) (58,375,017)
------------ ------------
162,571,884 194,049,837
Debt issuance costs................................ 3,573,561 3,179,811
------------ ------------
Total assets....................................... $417,186,876 $377,008,219
============ ============
</TABLE>
- --------
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. See condensed notes to
financial statements.
F-20
<PAGE>
VALUJET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
(NOTE) (UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 3,221,542 $ 3,305,939
Accrued liabilities................................ 22,718,555 24,311,893
Air traffic liability.............................. 3,813,583 10,638,312
Deferred tax liability............................. 1,298,400 485,400
Current maturities of long-term debt............... 33,246,302 9,039,986
Debt on assets held for sale....................... 18,188,222 0
------------ ------------
Total current liabilities............................ 82,486,604 47,781,530
Long-term debt less current maturities............... 193,271,800 226,620,758
Deferred income taxes payable........................ 18,028,835 6,721,835
Stockholders' equity:
Common stock, $.001 par value:
1,000,000,000 shares authorized: issued and
outstanding--54,875,610 at December 31, 1996 and
54,963,330 at June 30, 1997....................... 54,876 54,964
Additional paid-in capital......................... 77,236,447 77,453,497
Retained earnings.................................. 46,108,314 18,375,635
------------ ------------
Total stockholders' equity........................... 123,399,637 95,884,096
------------ ------------
Total liabilities and stockholders' equity........... $417,186,876 $377,008,219
============ ============
</TABLE>
- --------
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date, but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. See condensed notes to
financial statements.
F-21
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
Operating revenues:
Passenger........................................ $ 77,961,574 $ 45,192,019
Cargo............................................ 1,261,818 677,831
Other............................................ 1,993,898 1,889,317
------------ ------------
Total operating revenues........................... 81,217,290 47,759,167
Operating expenses and other, net:
Flight operations................................ 5,414,622 4,801,014
Aircraft fuel.................................... 17,061,473 10,716,157
Maintenance...................................... 15,807,217 10,534,328
Station operations............................... 14,748,674 12,132,375
Passenger services............................... 3,631,749 2,122,077
Marketing and advertising........................ 2,223,363 2,875,368
Sales and reservations........................... 6,547,058 3,723,027
General and administrative....................... 4,271,741 3,346,538
Employee bonus................................... (550,000) 0
Depreciation..................................... 6,694,708 7,362,025
Arrangement fee for aircraft transfers........... (11,861,294) 0
Gain from insurance recovery..................... (2,814,785) 0
Shutdown and other nonrecurring expenses......... 31,623,410 0
------------ ------------
Total operating expenses and other, net............ 92,797,936 57,612,909
------------ ------------
Operating loss..................................... (11,580,646) (9,853,742)
Interest expense (income):
Interest expense................................. 6,221,023 6,513,064
Interest income.................................. (2,677,785) (1,702,111)
------------ ------------
Total interest expense, net........................ 3,543,238 4,810,953
------------ ------------
Loss before income taxes........................... (15,123,884) (14,664,695)
Provision for income taxes......................... (5,550,000) (5,439,000)
------------ ------------
Net loss........................................... $ (9,573,884) $ (9,225,695)
============ ============
Net loss per share................................. $ (0.18) $ (0.17)
============ ============
Weighted average shares outstanding................ 54,663,481 54,906,000
============ ============
</TABLE>
See accompanying notes.
F-22
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
Operating revenues:
Passenger........................................ $183,530,818 $ 80,307,366
Cargo............................................ 2,707,764 1,127,081
Other............................................ 4,973,715 3,252,931
------------ ------------
Total operating revenues........................... 191,212,297 84,687,378
Operating expenses:
Flight operations................................ 12,932,717 8,904,203
Aircraft fuel.................................... 39,137,578 19,851,908
Maintenance...................................... 31,418,618 24,639,815
Station operations............................... 32,641,303 22,485,239
Passenger services............................... 7,623,789 3,817,164
Marketing and advertising........................ 6,506,737 5,227,059
Sales and reservations........................... 15,442,045 6,800,726
General and administrative....................... 8,161,420 6,142,929
Employee bonus................................... 1,245,000 0
Depreciation..................................... 13,211,088 12,247,322
Arrangement fee for aircraft transfers........... (11,861,294) 0
Gain from insurance recovery..................... (2,814,785) 0
Gain on sale of assets........................... 0 (49,600)
Shutdown and other nonrecurring expenses......... 31,623,410 9,338,000
------------ ------------
Total operating expenses........................... 185,267,626 119,404,765
------------ ------------
Operating income (loss)............................ 5,944,671 (34,717,387)
Interest expense (income):
Interest expense................................. 8,624,015 12,722,772
Interest income.................................. (4,524,234) (3,268,480)
------------ ------------
Total interest expense, net........................ 4,099,781 9,454,292
------------ ------------
Income (loss) before income taxes.................. 1,844,890 (44,171,679)
Provision for income taxes......................... 752,000 (16,439,000)
------------ ------------
Net income (loss).................................. $ 1,092,890 $(27,732,679)
============ ============
Net income (loss) per share........................ $ 0.02 $ (0.51)
============ ============
Weighted average shares outstanding................ 59,587,450 54,892,000
============ ============
</TABLE>
See accompanying notes.
F-23
<PAGE>
VALUJET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1996 1997
------------- -------------
<S> <C> <C>
Operating revenues:
Net income (loss)............................... $ 1,092,890 ($27,732,679)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Depreciation.................................. 14,690,386 14,634,446
Provision for uncollectible accounts.......... 2,420,482 749,515
Gain from disposal of assets.................. (2,814,785) (49,600)
Deferred income taxes......................... 0 (11,307,000)
Changes in operating assets and liabilities:
Accounts receivable......................... 7,910,190 (318,598)
Other current assets........................ (256,477) 5,754,265
Accounts payable and accrued liabilities.... (13,803,802) 3,467,059
Air traffic liability....................... (18,393,981) 6,824,729
Income taxes payable........................ 309,945 21,431,109
------------- -------------
Net cash provided by (used in) operating activi-
ties........................................... (8,845,152) 13,453,246
Investing activities:
Proceeds from disposal of equipment............. 4,000,000 949,974
Purchases of property and equipment............. (116,706,995) (5,862,705)
------------- -------------
Net cash used in investing activities........... (112,706,995) (4,912,731)
Financing activities:
Issuance of long-term debt...................... 216,529,498 0
Proceeds from sale of common stock.............. 2,244,351 217,138
Payment of long-term debt....................... (17,191,703) (9,045,580)
------------- -------------
Net cash provided by (used in) financing activi-
ties........................................... 201,582,146 (8,828,442)
------------- -------------
Net increase (decrease) in cash and cash equiva-
lents.......................................... 80,029,999 (287,927)
Cash and cash equivalents at beginning of peri-
od............................................. 127,947,096 150,012,695
------------- -------------
Cash and cash equivalents at end of period...... $ 207,977,095 $ 149,724,768
============= =============
</TABLE>
See accompanying notes.
F-24
<PAGE>
VALUJET, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
interim financial statements contain all adjustments necessary to present
fairly the Company's financial position as of June 30, 1997 and December 31,
1996, the results of operations for the three and six month periods ended June
30, 1997 and June 30, 1996, and cash flows for the six month periods ended
June 30, 1997 and June 30, 1996. The adjustments made are of a normal
recurring nature. Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission for Form 10-Q. It is suggested that these unaudited interim
financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Annual Report on Form 10-K
filed by the Company with the Securities and Exchange Commission on March 31,
1997, and amendments thereto.
The results of operations for the three and six month periods ended June 30,
1997 and 1996 are not necessarily indicative of the results to be expected for
the full fiscal year.
B. NET INCOME PER COMMON SHARE
Net income per share is based on the weighted average number of common
shares outstanding and common stock equivalents during the periods. Common
stock equivalents include shares issuable upon the assumed exercise of stock
options using the treasury stock method when dilutive. See Note G.
C. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Senior notes due 2001................................ $150,000,000 $150,000,000
Promissory notes due 1998 through 2006............... 94,706,324 85,660,744
Less current maturities.............................. 33,246,302 9,039,986
Less debt on assets held for sale.................... 18,188,222 0
------------ ------------
$193,271,800 $226,620,758
============ ============
</TABLE>
Interest on the Company's $150 million senior notes is payable semi-annually
on April 15 and October 15 at 10 1/4% per annum. Certain debt bears interest
at fixed rates ranging from 8.0% to 9.78% per annum and is repayable in
consecutive monthly or quarterly installments over a two- to four-year period.
Certain other notes have a variable rate of interest based on the London
interbank offered rate (LIBOR) plus 2.26% to 2.75%.
A substantial portion of the secured notes require prepayment if specific
financial ratios (concerning debt to equity, net worth, fixed charge coverage
and current ratio) are not maintained. Although the Company was in violation
of the fixed charge coverage ratio as of December 31, 1996, the Company
subsequently entered into agreements with six of the seven affected lenders
for a waiver or reset of this financial test for each quarter in 1997. In
August, 1997, the Company completed the private placement of $80 million of 10
1/2% senior secured notes due April 15, 2001. All of the secured debt with
financial maintenance covenants was repaid with a portion of the proceeds of
this offering. As a result, such debt has been classified as long-term debt in
the accompanying balance sheet. Certain aircraft, together with the installed
engines related thereto, three spare engines and four hush kits after their
purchase by ValuJet Airlines serve as collateral for the senior secured notes.
F-25
<PAGE>
VALUJET, INC.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS--(CONTINUED)
D. COMMITMENTS AND CONTINGENCIES
On May 11, 1996, the Company suffered a tragic loss involving Flight 592.
The accident resulted in extensive media coverage calling into question the
safety of low-fare airlines in general and the Company in particular, despite
the fact that the cause of the accident is still under investigation by the
National Transportation Safety Board. In response to the accident, the Federal
Aviation Administration (FAA) conducted an extraordinary review of the
Company's operations. As a result, on June 17, 1996 the Company entered into a
consent order with the FAA under which the Company agreed to several matters
including the suspension of operations until such time as the Company was able
to satisfy the FAA as to various regulatory compliance concerns and the
payment of $2,000,000 to the FAA to compensate it for the cost of the special
inspections. The Company satisfied the FAA's requirements and received FAA
clearance during August 1996. The Company received its determination of
fitness from the Department of Transportation on September 25, 1996 and
restarted operations on September 30, 1996. See Note H regarding charges
associated with the accident and related shutdown of operations.
As a result of the above mentioned events, several class action suits have
been filed by shareholders against the Company and various officers alleging,
among other things, misrepresentations regarding the Company's safety. The
plaintiffs seek unspecified damages based upon the decrease in market value of
shares of the Company's stock. Management intends to defend these actions
vigorously and believes that the suits are without merit. While any litigation
contains elements of uncertainty, management presently believes, based on the
information available to it and discussions with outside counsel, that the
outcome of each such proceeding or claim which is pending or known to be
threatened, or all of them combined, will not have a material adverse effect
on the results of operations or the financial position of the Company.
Numerous lawsuits have also been filed against the Company seeking damages
attributable to the deaths of those on Flight 592, and additional lawsuits are
expected. The Company's insurance carrier has assumed defense of these
lawsuits under a reservation of rights and is providing the defense of such
claims. As all claims are handled independently by the Company's insurance
carrier, the Company cannot reasonably estimate the amount of liability which
might finally exist. As a result, no accruals for losses and the related claim
for recovery from the Company's insurance carrier have been reflected in the
Company's financial statements. The Company maintains $750 million of
liability insurance, per occurrence, with a major group of independent
insurers that provide facilities for all forms of aviation insurance for many
major airlines. Although the Company believes, based on the information
currently available to it, that such coverage is sufficient to cover claims
arising out of the loss of Flight 592 and that the insurers have sufficient
financial strength to pay claims, there can be no assurance that the total
amount of judgments and settlements will not exceed the amount of insurance
available therefor or that all damages awarded will be covered by insurance.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit
against the Company in State Court in Tennessee for breach of contract and a
declaratory judgment for an anticipatory breach. The Nashville Airport
Authority seeks damages of approximately $2.6 million. The dispute involves
whether the Company was entitled to exercise a termination right contained in
its lease agreement. Management believes the ultimate resolution will not have
a materially adverse effect on the Company's financial position or results of
operations.
From time to time, the Company is engaged in litigation arising in the
ordinary course of business. The Company does not believe that any such
pending litigation will have a material adverse effect on its results of
operations or financial condition.
E. PROPOSED MERGER
On July 10, 1997, the Company entered into a merger agreement with Airways
Corporation ("Airways"). Under the merger agreement (which remains subject to,
among other things, shareholder approval by both companies), the Company will
acquire Airways through a merger of Airways with and into the Company (the
F-26
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"Merger"). The purchase price to be paid by the Company in the Merger will
consist of approximately 9.1 million shares of Common Stock of the Company.
Upon completion of the Merger, the Company intends to change its name to
AirTran Holdings, Inc., and to change the name of ValuJet Airlines to AirTran
Airlines, while Airways' operating subsidiary, AirTran Airways, Inc.
("AirTran") will continue to operate under its current name.
F. ASSETS HELD FOR DISPOSITION
During 1996, as a result of the loss of Flight 592 and the consent order
with the FAA which required the Company to reestablish operations with up to
15 aircraft and subjected further expansion of the Company's operations to FAA
and DOT approval, the Company's management decided to sell or lease certain of
its aircraft. Those aircraft which the Company decided to sell were removed
from operations and were classified in the balance sheet as assets held for
disposition and were stated at the lower of carrying amount or fair value less
cost to sell. Such aircraft were available for sale and an active sales
program was initiated. The fair value, as estimated by the current market
value of these aircraft, less cost to sell exceeded the carrying amount of
such aircraft.
At June 30, 1997, as a result of the pending merger with Airways and the
resulting opportunities for the Company to expand its services, the Company's
management has decided to make the remaining aircraft classified as assets
held for disposition available for a return to its operating specifications.
Each of ValuJet Airlines and AirTran has the necessary authority to conduct
flight operations, including a Certificate of Public Convenience and Necessity
from the DOT and an operating certificate from the FAA. All remaining aircraft
classified as assets held for disposition were reclassified to flight
equipment at their carrying amount at June 30, 1997 and will continue to be
depreciated over their remaining depreciable lives.
G. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997 the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, "Earnings per Share", which will
change the current method of computing earnings per share. The new standard
requires presentation of "basic earnings per share" and "diluted earnings per
share" amounts, as defined. SFAS No. 128 will be effective for the Company's
quarter and year ending December 31, 1997, and, upon adoption, all prior-
period earnings per share data presented shall be restated to conform with the
provisions of the new pronouncement. Application earlier than the Company's
quarter ending December 31, 1997 is not permitted.
Pro forma basic and diluted earnings per share for the three months and six
months ended June 30, 1996 and 1997 calculated under the provisions of SFAS
No. 128 are as follows:
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- --------------
1996 1997 1996 1997
------- ------- --------------
<S> <C> <C> <C> <C>
Basic earnings per share.................. $ (0.18) $ (0.17) $ 0.02 $ (0.51)
Diluted earnings per share................ (0.18) (0.17) $ 0.02 (0.51)
</TABLE>
H. SHUTDOWN AND OTHER NONRECURRING EXPENSES
Costs associated with the loss of Flight 592 and excess operating costs
related to the reduced schedule and grounded aircraft for the six months ended
June 30, 1997 are shown in the statement of operations as shutdown and other
nonrecurring expenses. Such costs consist of expenses directly related to the
accident and the ensuing
F-27
<PAGE>
VALUJET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
extensive FAA review of the Company's operations including legal fees, payments
to the FAA, inspection related costs and unusual maintenance costs in excess of
normal recurring maintenance. In addition, depreciation on grounded aircraft,
rental of abandoned or idled facilities and costs of personnel idled as a
result of the reduced and suspended operations during May and June of 1996 are
included in shutdown and other nonrecurring expenses. No such costs were
incurred in the three months ended June 30, 1997.
A summary of such costs is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------- -------------------------
1996 1997 1996 1997
----------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Maintenance.................. $ 7,855,000 $0 $ 7,855,000 $7,300,000
Depreciation................. 1,480,000 0 1,480,000 2,038,000
Legal/consulting............. 6,317,000 0 6,317,000 0
Facilities rental............ 4,109,000 0 4,109,000 0
Wages/Salaries............... 3,916,000 0 3,916,000 0
FAA payment.................. 2,000,000 0 2,000,000 0
Other........................ 5,946,000 0 5,946,000 0
----------- -- ----------- ----------
$31,623,000 $0 $31,623,000 $9,338,000
=========== == =========== ==========
</TABLE>
F-28
<PAGE>
INDEPENDENT AUDITORS REPORT
Board of Directors
Airways Corporation:
We have audited the accompanying consolidated balance sheets of Airways
Corporation and subsidiary (the "Company") as of March 31, 1997 and 1996, and
the related consolidated statements of operations, changes in stockholders'
equity and group equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of Airways
Corporation's management. Our responsibility is to express an opinion on these
consolidated 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 provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Airways
Corporation and subsidiary as of March 31, 1997 and 1996 and the results of
its operations and its cash flows for the years ended March 31, 1997 and 1996,
in conformity with generally accepted accounting principles.
As discussed in Notes 10 and 11 to the consolidated financial statements,
the Company changed its methods of accounting for Computer Reservation System
fee expense in 1997 and Credit card processing fee expense in 1996.
KPMG PEAT MARWICK LLP
Orlando, Florida
June 6, 1997
FA-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Airways Corporation:
We have audited the combined statements of operations, changes in group
equity and cash flows of the Airways Group for the year ended March 31, 1995.
These financial statements are the responsibility of The Airways Group's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of the
Airways Group for the year ended March 31, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
May 19, 1995
FA-2
<PAGE>
AIRWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 2,354 $16,437
Restricted cash................................................ 12,670 11,309
Account receivable, net........................................ 4,212 3,135
Inventory, expendable parts and supplies....................... 1,034 1,847
Prepaid expenses............................................... 4,020 1,947
Deferred Tax Asset............................................. 8,376 1,294
------- -------
Total current assets......................................... 32,666 35,969
------- -------
Property and equipment
Flight equipment............................................... 34,485 24,943
Other property and equipment................................... 9,405 6,587
Less: Accumulated depreciation............................... (6,192) (2,072)
------- -------
37,698 29,458
------- -------
Other assets:
Goodwill, net.................................................. 1,749 1,891
Lease and equipment deposits................................... 1,244 1,339
Other assets, net.............................................. 591 997
------- -------
Total assets..................................................... $73,948 $69,654
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts Payable............................................... $18,022 $ 9,362
Air traffic liability.......................................... 16,198 14,912
Accrued expenses............................................... 908 2,775
Current portion of long-term debt.............................. 3,157 3,574
Current portion of maintenance reserves........................ 1,525 307
Income taxes payable........................................... -- 533
------- -------
Total current liabilities.................................... 39,810 31,463
------- -------
Long-term debt, less current portion............................. 10,539 10,277
Maintenance Reserves............................................. 3,186 2,207
Deferred income taxes............................................ 2,772 1,344
------- -------
Total liabilities................................................ 56,307 45,291
------- -------
Stockholders' equity
Preferred stock, $.01 par value per shares, 1,000,000 shares
authorized, no shares issued or outstanding................... -- --
Common stock, $.01 par value per shares, 19,000,000 shares au-
thorized, 9,061,937 and 8,966,937 shares issued and outstand-
ing at March 31, 1997 and 1996, respectively.................. 91 90
Additional paid-in capital..................................... 26,618 26,350
Accumulated deficit............................................ (9,068) (2,077)
------- -------
Total stockholders' equity................................... 17,641 24,363
------- -------
Total liabilities and stockholders' equity................... $73,948 $69,654
======= =======
Commitments and contingencies
</TABLE>
See accompanying notes to consolidated financial statements.
FA-3
<PAGE>
AIRWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Operating revenues:
Passenger....................................... $100,077 $64,894 $ 7,896
Charter......................................... 402 1,692 1,241
General aviation and other...................... 2,144 1,775 470
-------- ------- -------
Total operating revenues...................... 102,623 68,361 9,607
-------- ------- -------
Operating expenses:
Flight operations............................... 45,507 26,913 6,429
Maintenance..................................... 25,851 12,112 2,845
Aircraft and traffic servicing.................. 16,742 10,169 2,390
Reservations, sales and marketing............... 16,739 11,901 1,830
General and administrative...................... 5,185 3,623 2,012
Depreciation and amortization................... 4,721 2,149 522
-------- ------- -------
Total operating expenses...................... 114,745 66,867 16,028
-------- ------- -------
Operating (loss) income....................... (12,122) 1,494 (6,421)
Interest (income) and other....................... (984) (1,007) (59)
Interest expense.................................. 1,507 524 --
-------- ------- -------
(Loss) income before income taxes............. (12,645) 1,977 (6,362)
Income tax (benefit) expense...................... (5,654) 790 (2,866)
-------- ------- -------
Net (loss) income............................. $ (6,991) $ 1,187 $(3,496)
======== ======= =======
Net (loss) income per share (pro-forma in 1996 and
1995)............................................ $ (0.77) $ .13 $ (0.39)
======== ======= =======
Weighted average shares outstanding (pro-forma in
1996 and 1995)................................... 9,029 9,230 8,927
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
FA-4
<PAGE>
AIRWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net (loss) income.................................. $ (6,991) $ 1,187 $(3,496)
Adjustments to reconcile net (loss) income to net
cash provided by (used for) operating
activities:
Depreciation and amortization.................... 4,721 2,146 522
Maintenance Reserves............................. 2,197 2,229 285
Deferred taxes................................... (5,654) 21 --
Compensation expense incurred in connection with
stock options granted and issued................ -- 224 --
Change in current operating items:
Restricted cash.................................. (1,361) (7,544) (3,765)
Accounts receivable, net......................... (1,077) (2,722) (333)
Inventories...................................... 813 435 (68)
Prepaid expenses and deposits.................... (2,073) (1,527) (357)
Accounts payable and accrued liabilities......... 6,793 8,060 1,839
Air traffic liability............................ 1,286 11,284 3,628
Income tax payable............................... (533) 533 --
-------- ------- -------
Net cash flows (used for) provided by operating
activities.................................... (1,879) 14,326 (1,745)
Investing activities:
Purchase of Conquest Sun Airlines, Inc........... -- -- (2,500)
Purchase of property and equipment............... (11,126) (28,380) (2,277)
Increase (decrease) in other assets.............. 58 (1,390) (1,356)
-------- ------- -------
Net cash flows used for investing activities... (11,068) (29,770) (3,633)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
FA-5
<PAGE>
AIRWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Financing activites:
Capital contributions............................. -- 15,154 8,831
Proceeds from long-term debt...................... -- 16,800 --
Repayments of long-term debt...................... (1,405) (1,142) --
Proceeds from issuance of common stock............ 269 108 --
Borrowings from former parent..................... -- -- 458
Repayments to former parent....................... -- -- (458)
-------- ------- ------
Net cash flows (used) provided by financing
activities....................................... (1,136) 30,920 8,831
Net (decrease) increase in cash and short-term
investments...................................... $(14,083) $15,476 $ 953
Cash and short-term investments at begining of
year............................................... $ 16,437 $ 961 $ 8
-------- ------- ------
Cash and short-term investments at end of year...... $ 2,354 $16,437 $ 961
======== ======= ======
Supplemental disclosures of cash flow activities:
Cash paid for interest............................ $ 1,459 $ 501 $ --
======== ======= ======
Cash paid for income taxes........................ $ 533 $ 278 $ --
======== ======= ======
</TABLE>
Supplemental disclosure of non-cash investing and financing activities: During
the year ended March 31, 1997 and 1996, the Company purchased $1,250 and $400
of flight equipment with long-term debt.
FA-6
<PAGE>
AIRWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND GROUP EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
GROUP COMMON PREFERRED PAID-IN (ACCUMULATED STOCKHOLDERS'
EQUITY SHARES STOCK STOCK CAPITOL DEFICIT) EQUITY
------- ------ ------ --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1994.. $ 2,123 -- -- -- -- $ 232 $ 2,355
Net Loss................ -- -- -- -- -- (3,496) (3,496)
Capitol Contributions... 8,831 -- -- -- -- -- 8,831
------- ----- --- --- ------- ------ -------
Balance, March 31,
1995................... 10,954 -- -- -- -- (3,264) 7,690
Net Income.............. -- -- -- -- -- 1,187 1,187
Stock options granted
and exercised under
stock option plan...... -- 40 1 -- 331 -- 332
Shares issued and
contribution of group
equity................. (10,954) 8,927 89 -- 26,019 -- 15,154
------- ----- --- --- ------- ------ -------
Balance, March 31,
1996................... -- 8,967 90 -- 26,350 (2,077) 24,363
Net Loss................ -- -- -- -- -- (6,991) (6,991)
Stock options granted
and exercised under
stock option plan...... -- 99 1 -- 268 -- 269
------- ----- --- --- ------- ------ -------
Balance, March 31,
1997................... -- 9,066 $91 -- $26,618 $9,068 $17,641
======= ===== === === ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
FA-7
<PAGE>
AIRWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) CORPORATE ORGANIZATION AND BUSINESS
In June 1994, AirTran Corporation, former parent company, now doing business
as Mesaba Holdings, Inc. ("Mesaba"), acquired the common stock of Conquest Sun
Airlines, Inc. ("Conquest") for $2,500 in a transaction accounted for under
the purchase method of accounting. At the time of the acquisition, Conquest
had recently obtained U.S. Department of Transportation ("DOT") approval to
operate a jet airline. Conquest's name was subsequently changed to AirTran
Airways, Inc. ("AirTran") and scheduled passenger service commenced on October
6, 1994.
In March 1995, Mesaba and Northwest Airlines, Inc. ("Northwest") entered
into an agreement to spin off AirTran Airways, Inc. and a fixed-base operation
("FBO") in Grand Rapids, Minnesota. Under the terms of the spin-off, on April
7, 1995, Mesaba established a new wholly-owned subsidiary, Airways Corporation
(the "Company") into which the above operations were consolidated (and
previously referred to as The Airways Group) in order to facilitate the
distribution of the Company common stock to Mesaba shareholders (other than
Northwest). In connection with the spin-off, Mesaba made a contribution in
cash and certain assets to the Company prior to the spin-off date. The
distribution was approved by Mesaba's shareholders on August 29, 1995 and was
made on September 7, 1995 to the shareholders of record (other than Northwest)
on August 31, 1995.
The FBO has historically operated as a division of Mesaba. The accompanying
consolidated financial statements present the results of the combined entities
whereby significant intercompany accounts and transactions are eliminated.
AirTran serves 23 cities from Orlando, operating as AirTran Airways. The FBO
sells aircraft parts, provides fueling and other aircraft servicing, rentals
and flight training.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash, Cash Equivalents and Restricted Cash
Cash equivalents consist primarily of U.S. government securities and
interest-bearing deposits with maturities of less than 90 days and are stated
at cost, which approximates market. Restricted cash represents amounts
escrowed relating to the Company's air traffic liability and to cash
collateralizing the Company's long-term debt.
(b) Inventory
Inventory parts held for sale by the FBO are stated at the lower of average
cost or market and consist of expendable aircraft service parts and fuel.
Consumable spare parts, materials and supplies relating to flight equipment
are expensed as purchased.
(c) Property and Equipment
Property and equipment is stated at cost and depreciated on a straight-line
basis for financial reporting purposes with no residual values except for the
aircraft which are assumed to have 10% residual value. The depreciable lives
used for the principal depreciable asset classifications are:
<TABLE>
<CAPTION>
DEPRECIABLE LIVES
-----------------
<S> <C>
Aircraft............................ 5-12 years
Rotable parts....................... 5 years
Leasehold improvements.............. Shorter of useful life or lease term
Buildings........................... 20 years
Other equipment..................... 3-5 years
</TABLE>
FA-8
<PAGE>
AIRWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Equipment and property under capital leases are amortized over the term of
the leases and such amortization is included in depreciation and amortization.
(d) Goodwill
The excess of purchase price paid for Conquest over the fair market value of
net tangible assets acquired totaled $2,141 and is being amortized over 15
years. Accumulated amortization totaled $393 and $250 at March 31, 1997 and
1996, respectively.
(e) Other Assets
Certain costs incurred in connection with the acquisition of aircraft and
the start-up of AirTran's airline service have been deferred. As of March 31,
1997 and 1996, such costs totaled $1,335 and $1,297 respectively, and
consisted of initial flight crew training, aircraft rent and insurance
expenses incurred prior to AirTran's scheduled airline service. Pre-operating
costs are being amortized over three years and accumulated amortization
totaled $743 and $300 at March 31, 1997 and 1996, respectively. Development
costs relating to new routes, obtaining regulatory approval, and
administrative and promotional costs are charged to expense as incurred.
(f) Revenue Recognition
Passenger and charter revenues are recorded as income when the respective
services are rendered or the passenger ticket otherwise expires. Cash received
on advance ticket and charter sales is deferred and recorded as air traffic
liability.
(g) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, which is an asset and liability
approach to financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income.
(h) Incentive Compensation
In October, 1995 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123--"Accounting for Stock-
Based Compensation" (SFAS 123), effective for financial statements with fiscal
years beginning after December 15, 1996. SFAS 123 establishes the financial
accounting and reporting standard for stock-based employee compensation plans
as well as transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. This statement defines a fair
value-based method of accounting for employee based stock options and
encourages all entities to adopt this method of accounting for all employee
stock compensation plans. However, it does allow an entity to continue
applying Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("Opinion 25") to measure the intrinsic value-based
compensation cost. Entities electing to remain with the accounting method
prescribed by Opinion 25 must make pro forma disclosures of net income and
earnings per share, as if the fair valued-based method of accounting as
prescribed by SFAS 123 had been applied. The Company has elected to continue
accounting for its stock-based compensation plans prescribed by Opinion 25 and
has included in the Notes to the Consolidated Financial Statements the pro
forma disclosures required by SFAS 123.
FA-9
<PAGE>
AIRWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(i) Airframe and Engine Overhaul Expense
The Company has adopted the accrual method for recognizing the estimated
cost of future airframe and engine overhaul expenses. The accrual method
provides for estimating the cost of such overhauls, when they occur in the
ordinary course, and recording the estimated cost, based on an hourly rate, in
maintenance expense. Costs associated with overhauls of airframes and engines
which occur at or near the aircraft's introduction into the fleet are
capitalized and amortized over the period to the next overhaul. The actual
expenditures of ongoing overhauls not incurred at inception are charged to the
accrual and any deficiency or excess is charged or credited to expense in the
period incurred.
(j) Net (loss) Income Per Share
Net (loss) income per share is computed based on the weighted average number
of common shares and, if dilutive, common stock equivalent shares (options)
outstanding in 1997 and for the prior years is on a pro-forma basis.
(k) Consolidation Policy
The accompanying consolidated financial statements include the accounts of
the Company and AirTran, a wholly-owned subsidiary of the Company. All
material intercompany transactions have been eliminated.
(l) Concentration of Credit Risk
At March 31, 1997, most of the Company's receivables related to tickets sold
to individual passengers through the use of major credit cards on the
Company's flights. These receivables are short-term, generally being settled
within 14 days after sale. The Company does not believe it is subject to any
significant concentration of credit risk.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
(n) Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial statements have
been reclassified to conform with the 1997 presentation. These
reclassifications had no impact on net income or shareholder's or group equity
as previously reported.
(o) Future Application Accounting Standards
On March 3, 1997 the FASB issued Statement of Financial Accounting Standards
No. 128 (SFAS 128) "Earnings per Share". The new statement is effective for
fiscal years beginning after December 15, 1997 and applies to all entities
that have issued common stock or potential common stock (e.g. options,
warrants, convertible securities etc.) if those securities trade in a public
market or in a stock exchange or over-the-counter market. SFAS 128 replaces
primary Earnings Per Share ("EPS") with Basic EPS. Basic EPS will be computed
by dividing reported earnings available to common stockholders by weighted
average shares outstanding. No dilution for any potentially dilutive
securities is included. Fully diluted EPS, now called diluted EPS is still
required.
FA-10
<PAGE>
AIRWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) PROPERTY AND EQUIPMENT
The Company's aircraft fleet consisted of ten Boeing 737-200s, of which six
are held under operating leases as of March 31, 1997. The remaining four
aircraft are owned by the Company and had a net book value of $17,716 at March
31, 1997. Approximately $4,380 and $2,514 has been accrued for major airframe
and engine overhauls as of March 31, 1997 and 1996, respectively. The Company
estimates that the costs of major engine and airframe overhauls due in 1998
will total approximately $6,500, virtually all of which is either reserved and
on the balance sheet, will be reversed during 1998 pursuant to the Company's
accounting policies for leased and owned aircraft or will be reimbursable from
lessors.
The aircraft operating leases require future minimum rental payments as
follows at March 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 5,443
1999............................................................. 4,558
2000............................................................. 3,002
2001............................................................. 3,002
2002............................................................. 2,893
Thereafter....................................................... 1,278
--------
$ 20,176
========
</TABLE>
Rent expense under aircraft operating leases totaled approximately $5,984
and $4,535 in 1997 and 1996, respectively and is included in flight operations
in the accompanying consolidated statements of operations. In addition, the
Company spent $3,322 and $54 on subservice aircraft rentals which was also
charged to expense in 1997 and 1996, respectively.
(4) COMMITMENTS AND CONTINGENCIES
Lease Commitments
As detailed in Note 3 the Company leases six aircraft under operating
leases. In addition, the Company leases office and hangar facilities and
certain terminal facilities under operating leases which are all month to
month lease terms. Rent expense under all facility operating leases totaled
approximately $554 in 1997, $365 in 1996 and $360 in 1995.
Credit Facility
The Company has negotiated with a bank to issue eleven letters of credit
totaling $1,100 which were outstanding at March 31, 1997. In the event
advances under the facility are drawn, the borrowings would bear interest at
the bank's prime rate plus 1 1/4%. No amounts were drawn under this facility
as of or during the year ended March 31, 1997.
Litigation
The Company is a party to ongoing legal proceedings arising in the ordinary
course of business. In the opinion of management, the resolution of these
matters will not have a materially adverse effect on the Company's financial
position, results of operations, or its cash flows.
FA-11
<PAGE>
AIRWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Aircraft Commitments
In order to comply with the Airport Noise and Capacity Act (ANCA)
requirements, the Company is required to purchase hush kits for its aircraft
to convert them from Stage 2 to Stage 3. The installation of these hush kits
will bring the aircraft into compliance with FAA Stage 3 noise level
requirements. The projected payments associated with the purchase of the hush
kits are $0 in fiscal year 1998 and $3,000 in 1999 and based on those
purchases combined with AirTran's current plans for aircraft acquisitions and
upcoming aircraft lease expirations, it will continue to meet the Stage 3
requirements. The Company has contracted to purchase four hush kits for its
aircraft at its installed cost of $6,000 of which two have already been
purchased during fiscal 1997.
(5) LONG-TERM DEBT
Long-term debt as of March 31, 1997 is summarized as follows:
<TABLE>
<S> <C>
Installment loan, dated August 1995, collateralized by flight
equipment, payments of $100 plus interest at 11.67%, maturing August
2000................................................................ $ 3,332
Installment loan, dated August 1995, collateralized by flight
equipment, payments of $23 including interest at 5.85%, maturing
August 2000......................................................... 834
Installment loan, dated December 1995, collateralized by flight
equipment, payments of $85 including interest at 10.04%, maturing
December 2000....................................................... 3,182
Installment loan, dated December 1995, collateralized by flight
equipment, payments of $85 including interest at 10.04%, maturing
December 2000....................................................... 3,182
Installment loan, dated February 1996, collateralized by flight
equipment, payments of $13 including interest at 10%, maturing
February 1999....................................................... 269
Term loan, dated March 1996, collateralized by a hangar, payments of
$25 plus interest at prime + 1% (9.25% as of March 31, 1996),
maturing October 2002............................................... 1,700
Installment loan, dated December 1996, collateralized by flight
equipment, payments of $23 including interest of 10%, maturing
November 2002....................................................... 1,198
--------
Total long-term debt............................................. 13,697
Less current installments of long-term debt.......................... 3,157
--------
Net long-term debt............................................. $ 10,540
========
</TABLE>
The aggregate amounts of principal maturities of debt outstanding at March
31, 1997, for the five subsequent years are as follows:
<TABLE>
<S> <C>
1998................................................................. $ 3,157
1999................................................................. 3,452
2000................................................................. 3,642
2001................................................................. 2,520
2002................................................................. 546
Thereafter........................................................... 380
-------
$13,697
=======
</TABLE>
FA-12
<PAGE>
AIRWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(6) INCOME TAXES
Income tax (benefit) expense attributable to (loss) income for the years
ended March 31, 1997, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
1997
Federal......................................... -- $(3,931) $(3,931)
State........................................... -- (1,723) (1,723)
------- ------- -------
-- $(5,654) $(5,654)
======= ======= =======
1996
Federal......................................... $ 722 $ (52) $ 670
State........................................... 89 31 120
------- ------- -------
$ 811 $ (21) $ 790
======= ======= =======
1995
Federal......................................... $(2,423) $ (59) $(2,482)
State........................................... (514) 12 (502)
------- ------- -------
$(2,937) $ (47) $(2,984)
======= ======= =======
</TABLE>
Total income tax (benefit) expense for the years ended March 31, 1997, 1996
and 1995 differed from amounts computed by applying the U.S. federal income tax
rate of 35% to (loss) income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ---- -------
<S> <C> <C> <C>
Computed "expected" tax (benefit) expense.............. $(4,425) $672 $(2,163)
(Increase) decrease in income tax expense (benefit)
resulting from:
Nondeductible expenses............................... 5 -- (60)
State income tax (benefit) expense net of federal
income taxes........................................ (1,120) 72 (502)
Reorganization costs................................. 42
Other, net........................................... (114) 4 (141)
------- ---- -------
$(5,654) $790 $(2,866)
======= ==== =======
</TABLE>
FA-13
<PAGE>
AIRWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax assets and deferred tax liabilities as of March
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Workers' compensation....................................... -- $ 11
Alternative minimum tax credit carry forwards............... -- 337
Deferred maintenance costs.................................. 1,730 946
Vacation Pay................................................ 139 --
Net Operating Loss carry forward............................ 6,507 --
------ ------
Total gross deferred tax assets........................... $8,376 $1,294
------ ------
Deferred tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation.............................. $2,602 $ 996
Deferred pre-operating costs.............................. 170 267
Prepaid expenses, principally due to prepaid commissions.. -- 46
Other..................................................... -- 35
------ ------
Total gross deferred tax liabilities...................... 2,772 1,344
------ ------
Net deferred tax (liabilities).............................. $5,604 $ (50)
====== ======
Presented as:
Current deferred income tax asset......................... $5,604
======
Noncurrent deferred tax (liability)....................... $ 50
======
</TABLE>
The valuation allowance for deferred tax assets as of March 31, 1997 and
1996 was $0. The net change in the total valuation allowance for the years
ended March 31, 1997 and 1996 was $0. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income or the reversal of deferred tax liabilities during
the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based
upon management's projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of these deductible
differences as of March 31, 1997. See Note 14 to the Consolidated Financial
Statements for subsequent events which have a bearing on the Company's
operating plan under which these estimates were made.
As of March 31, 1997, the Company has alternative minimum tax credit
carryforwards of $0.
(7) BENEFIT PROGRAM
The Company introduced a profit sharing arrangement during 1996 covering
substantially all employees. Profit sharing expense was $0 in 1997 and $338 in
1996.
(8) FINANCIAL INSTRUMENTS
The fair value of the Company's long-term debt is estimated using the
present value of discounted cash flows based on the borrowing rate currently
available to the Company for debt with similar remaining terms and
FA-14
<PAGE>
AIRWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
maturity. The carrying amounts reported in the consolidated financial
statements for cash and cash equivalents, restricted cash, accounts
receivable, accounts payable and accrued expenses approximate fair value due
to their immediate or short-term maturities. The carrying amounts of the
Company's long-term debt with variable interest rates approximate fair value
as these instruments are repriced regularly.
The carrying amount and fair value of the Company's fixed long-term debt at
March 31, 1997 is as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ----------
<S> <C> <C>
Long-term debt.................................... $13,696 $13,649
</TABLE>
(9) EFFECT OF FOURTH QUARTER RESULTS
Adjustments were made to the air traffic liability during the fourth
quarters of 1997 and 1996 which totaled $1,742 and $1,197, respectively, of
which $1,742 and $886 were recorded as additional passenger revenue in 1997
and 1996, respectively, and $311 was recorded as other revenue in 1996. These
adjustments were made to record passenger, cancellation and change fee revenue
not previously recognized by the Company. The adjustments reflect the
accelerated revenue recognition required at year end to ensure that all earned
revenue was recorded during the fiscal year. During the year, cancellation and
change fee revenues earned in a given quarter were recorded in the following
quarter. Of the adjustments recorded, $1,042 and $926 related to revenue
earned in the fourth quarters of 1997 and 1996, respectively, and the balances
related to the third quarters of those years. Of revenue recorded in the third
quarter of fiscal 1997, $546 and $101 related to revenue earned in the second
and first quarters of fiscal 1997, respectively. Other revenue adjustments in
fiscal 1996 were not material. The Company has put into place accounting
processes, during fiscal 1998, which will enable it to record these revenues
when they are earned.
In addition, other adjustments were made in 1996 to operating expenses for
costs incurred which were underaccrued in prior periods totaling $1,515.
Adjustments were made to flight operations expense--$660, maintenance--$490,
aircraft and traffic services--$85 and reservations and sales expense--$280.
Of those amounts, $846, $138 and $531 related to expenses incurred in the
fourth, second and first quarters of 1996, respectively.
(10) CHANGE IN ACCOUNTING METHOD FOR CREDIT CARD PROCESSING FEE EXPENSE IN
1996
Credit card processing fees paid are deferred and recognized when the
passenger travel has been completed. Prior to 1996, these fees were expensed
when paid. The new method was adopted to match the credit card processing fee
expense more appropriately with the related revenue and to make treatment
consistent with the Company's standard revenue recognition policies. The
effect of the change was to increase income by approximately $165 or $0.02 per
share net of the effect of income taxes in 1996. The cumulative effect of the
change in accounting principle on prior years is immaterial.
(11) CHANGE IN ACCOUNTING METHOD FOR CRS FEE EXPENSE IN 1997
Computer Reservation System (CRS) fees, the fees charged for travel agents'
use of the computer reservation systems owned by others, are deferred and
recognized when the passenger travel has been completed. Prior to 1997, these
fees were expensed when paid. The new method was adopted to match the CRS fee
expense more appropriately with the related revenue and to make treatment
consistent with the Company's standard revenue recognition policies. The
effect of the change was to increase income by approximately $144 or $0.02 per
share net of the effect of income taxes in 1997. The cumulative effect of the
change in accounting principle on prior years is immaterial.
(12) STOCK-BASED COMPENSATION
In 1995, the Airways Corporation Stock Option Plan and Director Stock Option
Plan (the "Plans") were established. The Plans provide for the granting to
directors, officers and key employees of the Company qualified and non-
qualified stock options and incentive stock options. Options are granted at
the fair market value of the Company's common stock at the time of grant for a
period not in excess of ten years. Generally, options vest over a one year
period from the date of grant. The purchase price of the stock may not be less
than 110% of the
FA-15
<PAGE>
AIRWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
fair market value of the Company's common stock on the date of the grant for
participants owning 10% or more of the outstanding common stock or 100% of the
fair market value for all other participants. As of March 31, 1996, 40,000
options had been exercised pursuant to a change made to the Plan resulting in
$224 of compensation expense during the year ended March 31, 1996. A total of
1,300,000 shares of the Company's common stock have been reserved for issuance
pursuant to options granted under the Plans. At March 31, 1997 the number of
shares available for future grant was 358,000.
Information with respect to stock options granted under the Plans is as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Balance, beginning of fiscal year......... 610,000 $4.60 0 --
Granted................................... 344,000 5.22 820,000 $4.13
Lapsed.................................... 119,000 5.43 103,000 2.81
Exercised................................. 32,000 2.70 107,000 2.70
------- ----- ------- -----
Outstanding at 3/31....................... 803,000 $4.82 610,000 $4.60
======= ===== ======= =====
Exercisable at year end March 31.......... 503,000 -- 0 --
======= ===== ======= =====
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
-------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0-5............. 496,000 4.6 years $ 3.04 350,000 $ 2.70
$5-10............ 282,000 5.1 years $ 7.43 128,000 $ 8.73
$10-15........... 25,000 4.9 years $ 10.75 25,000 $10.75
------- -------
$0-15............ 803,000 4.8 years $ 4.82 503,000 $ 4.63
======= =======
</TABLE>
The Company applies Opinion 25 in accounting for the Plans. Since stock
options under the Plans are issued at fair market value on the date of award,
no compensation cost has been recognized.
SFAS 123 provides an alternative to Opinion 25 whereby values may be
ascribed to options using a valuation model and amortize to compensation
expense over the vesting period of the options. Had the Company applied SFAS
123 in accounting for stock options, net income and net income per share would
have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
IN THOUSANDS PER SHARE IN THOUSANDS PER SHARE
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Net Income................... $ (6,991) (.77) $ 1,187 0.13
SFAS No. 123 pro-forma
adjustment after tax........ $ (620) (.07) $ (298) (0.03)
-------- ---- ------- -----
Net Income pro-forma......... $ (7,611) (.84) $ 889 0.10
======== ==== ======= =====
</TABLE>
FA-16
<PAGE>
AIRWAYS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The pro forma adjustments relate to options granted during 1997 and 1996 for
which a fair value on the date of grant was determined using the Black-Schole
option pricing model. Valuation and related assumption information are
presented below:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Valuation Assumption:
Expected life................................................ 4 4
Expected volatility.......................................... 69.00% 69.00%
Risk free interest rate...................................... 6.53% 5.97%
Expected annual dividend per share........................... 0 0
Expected annual forfeitures.................................. 0 0
</TABLE>
FA-17
<PAGE>
AIRWAYS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997
---------------------
JUNE 30, MARCH 31,
----------- ---------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 1,672 $ 2,354
Restricted cash.......................................... 10,411 12,670
Accounts receivable, net................................. 3,956 4,212
Inventory, expendable parts and supplies................. 1,066 1,034
Prepaid expenses......................................... 4,257 4,020
Deferred income taxes.................................... 5,101 8,376
------- -------
Total Current Assets..................................... 26,463 32,666
------- -------
Property and Equipment:
Flight equipment....................................... 35,093 34,485
Other property and equipment........................... 9,631 9,405
Less: Accumulated depreciation....................... (7,694) (6,192)
------- -------
37,030 37,698
------- -------
Other Assets:
Deferred income taxes.................................. 3,493 --
Goodwill, net.......................................... 1,713 1,749
Lease and equipment deposits........................... 1,774 1,244
Other assets, net...................................... 523 591
------- -------
Total Assets......................................... $70,996 $73,948
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable....................................... $16,380 $18,022
Air traffic liability.................................. 13,441 16,198
Accrued liabilities.................................... 2,123 908
Current portion of long-term debt...................... 3,476 3,157
Current portion of maintenance reserves................ 1,779 1,525
------- -------
Total Current Liabilities............................ 37,199 39,810
Long-term debt, less current portion..................... 11,188 10,539
Maintenance Reserves..................................... 2,343 3,186
Deferred income taxes.................................... 2,794 2,772
------- -------
Total Liabilities.................................... 53,524 56,307
======= =======
Stockholders' Equity
Preferred stock, $.01 par value per share, 1,000,000
shares authorized, no shares issued or outstanding.... -- --
Common stock, $.01 par value per share, 19,000,000
shares authorized, 9,067,937 and 9,065,937 shares
issued and outstanding at June 30 and March 31, 1997,
respectively.......................................... 91 91
Additional paid-in capital............................. 26,621 26,618
Accumulated deficit.................................... (9,240) (9,068)
------- -------
Total Stockholders' Equity........................... 17,472 17,641
------- -------
Commitments and contingencies............................ -- --
Total Liabilities and Stockholders' Equity........... $70,996 $73,948
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
FA-18
<PAGE>
AIRWAYS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
JUNE 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating Revenues:
Passenger.......................................... $ 25,550 $ 28,557
Charter............................................ 562 23
General aviation and other......................... 940 432
----------- -----------
Total Operating Revenues......................... 27,052 29,012
----------- -----------
Operating Expenses:
Flight operations.................................. 10,480 11,148
Maintenance........................................ 5,447 6,492
Aircraft and traffic servicing..................... 3,909 4,643
Reservations, sales and marketing.................. 4,351 5,130
General and administrative......................... 1,403 978
Depreciation and amortization...................... 1,637 1,102
----------- -----------
Total Operating Expenses......................... 27,227 29,493
----------- -----------
Operating Loss................................... (175) (481)
Interest income and other............................ (184) (359)
Interest expense..................................... 399 390
----------- -----------
Loss Before Income Taxes......................... (390) (512)
Income tax benefit................................... (218) (230)
----------- -----------
Net Loss......................................... $ (172) $ (282)
=========== ===========
Net Loss Per Share................................... $ (0.02) $ (0.03)
=========== ===========
Weighted average shares outstanding.................. 9,068 9,303
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
FA-19
<PAGE>
AIRWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
JUNE 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating activities:
Net Loss............................................. $ (172) $ (282)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (used for) Operating Activities:
Depreciation and amortization.................... 1,637 1,105
Maintenance Reserves............................. 1,546 585
Deferred income taxes............................ (218) --
Changes in Current Operating Items:
Restricted cash.................................. 2,260 2,448
Accounts receivable, net......................... 255 723
Inventory, expendable parts and supplies......... (32) 82
Prepaid expenses and deposits.................... (237) (323)
Accounts payable and accrued liabilities......... (2,472) 682
Air traffic liability............................ (2,756) (3,514)
Income tax payable............................... -- (706)
----------- -----------
Net Cash Flows (used for) Provided by Operating
Activities.......................................... (189) 800
Investing Activities:
Purchases of property and equipment................ (844) (1,095)
Decrease in other assets........................... (530) (38)
----------- -----------
Net Cash Flows used for Investing Activities......... (1,374) (1,133)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
FA-20
<PAGE>
AIRWAYS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
JUNE 30,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Financing Activities:
Proceeds from long-term debt....................... 1,555 --
Repayments of long-term debt....................... (676) (739)
Proceeds from issuance of common stock............. -- 81
---------- -----------
Net Cash Flows Provided by (used for) Financing Ac-
tivities............................................ 879 (658)
---------- -----------
Net Decrease in Cash and Cash Equivalents.......... (682) (991)
Cash and Cash Equivalents at Beginning of Quarter.... 2,354 16,437
---------- -----------
Cash and Cash Equivalents at End of Quarter.......... $ 1,672 $ 15,446
========== ===========
Supplemental disclosures of cash flow activities:
Cash paid for interest............................. $ 358 $ 334
========== ===========
Cash paid for income taxes......................... $ -- $ 475
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
FA-21
<PAGE>
AIRWAYS CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
The financial statements included herein have been prepared by Airways
Corporation (the Company), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The information
furnished in the financial statements includes normal recurring adjustments
and reflects all adjustments which are, in the opinion of management,
necessary for a fair presentation of such financial statements. The Company's
business is seasonal and, accordingly, interim results are not indicative of
results for a full year. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these financial statements be read in conjunction with the financial
statements for the year ended March 31, 1997, and the notes thereto, included
in the Company's Form 10-K and the Company's Form 10-K/A (File No. 0-26432)
filed with the Securities and Exchange Commission.
(1) Spin-Off Transaction
In March 1995, AirTran Corporation, parent of the Company ("AirTran"),
Mesaba Aviation, Inc. and Northwest Airlines, Inc. ("Northwest") entered into
an agreement to spin-off AirTran's Orlando-based jet carrier and fixed-base
operations ("FBO") in Grand Rapids, Minnesota. On April 7, 1995, AirTran
established the Company as a wholly owned subsidiary to consolidate the above
operations in order to facilitate the spin-off. The spin-off, in the form of a
one-for-one dividend of all of the outstanding shares of the Company to the
shareholders of AirTran, was approved by AirTran's shareholders on August 29,
1995. The distribution was made on September 7, 1995 to shareholders of record
(other than Northwest) on August 31, 1995.
AirTran Airways, Inc., which operates the Orlando-based jet carrier, was
previously a subsidiary of AirTran. The FBO had historically been a division
of AirTran. The following financial statements present the results of the
combined entities whereby significant intercompany accounts and transactions
are eliminated.
(2) Net Loss Per Share
Net loss per share information for the quarters ended June 30, 1997 and 1996
were based on 9,067,104 and 9,303,140 shares outstanding, respectively,
calculated using the treasury method, fully-diluted basis. Pursuant to the
rules promulgated by the Financial Accounting Standards Board, no common stock
equivalents were included in the computation of loss per share amounts in
either quarter in order to ensure that the reported loss per share would not
be inadvertently minimized through their inclusion.
(3) Aircraft
The Company's fleet, at June 30, 1997, consisted of six leased and four
owned Boeing 737 with average capacities of 126 passengers. The Company's
eleventh aircraft, leased from a major aircraft lessor, was delivered to the
Company on August 9, 1997.
(4) Route Matters
During the three months ended June 30, 1997, the Company withdrew service
from Orlando to Chattanooga.
(5) Letters of Credit
The Company's bank has issued eleven letters of credit totaling $1,100,000.
In the event advances under the facility are drawn, the borrowings would bear
interest at the bank's prime rate plus 1 1/4%. No advances were outstanding
under this facility as of or during either of the quarters ended June 30, or
March 31, 1997.
FA-22
<PAGE>
AIRWAYS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) Litigation
The Company is a party to ongoing legal proceedings arising in the ordinary
course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's financial
position, results of operations, or its cash flows.
(7) Reclassification
Certain amounts in the June 30, 1996 consolidated financial statements have
been reclassified to conform with the presentation in this quarter.
FA-23
<PAGE>
APPENDIX A
PLAN OF REORGANIZATION
AND
AGREEMENT OF MERGER
BETWEEN
VALUJET, INC.
AND
AIRWAYS CORPORATION
THIS PLAN OF REORGANIZATION AND AGREEMENT OF MERGER (hereinafter called the
"Agreement") is dated as of the 10th day of July, 1997 by and between VALUJET,
INC., a Nevada corporation ("VJET"), and AIRWAYS CORPORATION, a Delaware
corporation ("Airways").
WITNESSETH:
WHEREAS, the Boards of Directors of VJET and Airways, respectively, deem it
advisable and in the best interests of VJET and Airways and their respective
stockholders that Airways merge with and into VJET pursuant to this Agreement,
a Plan of Merger between Airways and VJET substantially in the form of Exhibit
"A" attached hereto (the "Plan of Merger"), and applicable provisions of the
laws of the States of Nevada and Delaware (such transaction being hereinafter
called the "Merger"); and
WHEREAS, the parties propose to enter into the Plan of Merger which
provides, among other things, for the conversion of each share of Airways
common stock, no par value ("Airways Common Stock"), issued and outstanding
immediately prior to the "Effective Date of the Merger" (as herein defined),
into the "Merger Price" as determined in accordance with Section 6.01 of this
Agreement, all as more fully described in the Plan of Merger; and
WHEREAS, the Boards of Directors of VJET and Airways, respectively, have
approved and adopted this Agreement and the Plan of Merger as a plan of merger
under the provisions of Section 78.451 of the Nevada Revised Statutes and
Section 252 of the Delaware General Corporation Law; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a tax free reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, provisions and covenants herein contained, the parties hereto
hereby agree as follows:
ARTICLE I
THE MERGER
1.01 The Merger, Effective Time and Conversion Ratio. Subject to Article V
of this Agreement, the Plan of Merger shall be executed and acknowledged by
each of VJET and Airways and delivered to the Secretary of State of the States
of Nevada and Delaware for filing as provided in Section 78.458 of the Nevada
Revised Statutes and Section 252 of the Delaware General Corporation Law as of
the "Closing Date" (as herein defined). The effective date of the Merger shall
be the date the Articles of Merger or a Certificate of Merger shall have been
duly filed with the Secretary of State of the States of Nevada and Delaware
and the Merger shall have become effective under Nevada and Delaware law (the
"Effective Date of the Merger"). On the Effective Date of the Merger, the
separate existence of Airways shall cease and Airways shall be merged with and
into VJET. VJET agrees on the Effective Date of the Merger to pay the Merger
Price as determined in accordance with Section 6.01 of this Agreement and
pursuant to the terms of the Plan of Merger.
A-1
<PAGE>
1.02 Closing. Subject to the terms and conditions hereof, Airways and VJET
shall communicate and consult with each other with respect to the fulfillment
of the various conditions to their obligations under this Agreement. The
exchange of the certificates, opinions and other documents contemplated in
connection with the consummation of the Merger (the "Closing") shall take
place at the offices of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C., 3490
Piedmont Road, Suite 400, Atlanta, Georgia 30305, on the twenty-eighth (28th)
day following the effective date of the Registration Statement described in
Section 4.07 of this Agreement or such earlier or later date as may be agreed
upon by Airways and VJET. Such date and time is herein sometime referred to as
the "Closing" or "Closing Date." In the event that at the Closing no party
exercises any right it may have to terminate this Agreement and no condition
to the obligations of the parties exists that has not been satisfied or
waived, the parties shall (i) deliver to each other the certificates, opinions
and other documents required to be delivered under this Agreement including,
the Articles of Merger and (ii) at the Closing or as soon thereafter as
possible, consummate the Merger by filing the Articles or Certificate of
Merger with the Secretary of State of the States of Delaware and Nevada.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF AIRWAYS
Airways does hereby represent and warrant to VJET as follows:
2.01 Organization. Airways is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Each Subsidiary
of Airways has been duly organized and is validly existing and in good
standing under the laws of its state of its organization. Airways and each of
its Subsidiaries has the corporate power to own its property and to carry on
its business as now being conducted; Airways has the corporate power and
authority to execute and deliver this Agreement, subject to stockholder
approval, the Plan of Merger and to consummate the transactions contemplated
hereby.
2.02 Authorization, Execution and Delivery of Agreement. The execution and
delivery and, subject to the stockholder approval of Airways, the performance
of this Agreement and the Plan of Merger by Airways have been duly and validly
authorized and approved by the Board of Directors of Airways, and Airways has
taken, or will use reasonable efforts to take prior to the Effective Date of
the Merger, all other action required by law on the part of Airways, its
Articles of Incorporation and bylaws or otherwise to effect the transactions
contemplated by this Agreement and the Plan of Merger.
2.03 Capital Stock of Airways; Subsidiaries.
(a) As of the date of this Agreement, the authorized capital stock of
Airways consists of 1,000,000 shares of Preferred Stock, $.01 par value per
share, none of which is outstanding and 19,000,000 shares of Common Stock,
$.01 par value per share, of which 9,067,937 shares were outstanding as of
June 27, 1997. No additional shares of stock have been issued between June 27,
1997 and the date of this Agreement. As of the date of this Agreement,
1,150,000 shares of Airways Common Stock were reserved for issuance under
Airways' 1995 Stock Option Plans and 150,000 shares of Airways Common Stock
were reserved for issuance under Airways' 1995 Directors Stock Option Plan
(such plans being hereinafter collectively referred to as the "Airways
Plans"). Schedule 2.03(a) to the Airways' Disclosure Statement delivered to
VJET contemporaneously with the execution and delivery of this Agreement
("Airways' Disclosure Statement") is a complete list of all outstanding
options and warrants granted by Airways, including for each option and
warrant, the optionee, exercise price and vesting provisions. Other than the
options and warrants described in this Section 2.03, there are no outstanding
options, warrants or rights to subscribe for or purchase from Airways any
capital stock of Airways or securities convertible into or exchangeable for
capital stock of Airways.
(b) Schedule 2.03(b) to Airways' Disclosure Statement lists each Subsidiary
of Airways. All the outstanding shares of capital stock of each such
Subsidiary have been validly issued and are fully paid and nonassessable and
are owned by Airways, by another Subsidiary of Airways or by Airways and
another such Subsidiary, free
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and clear of all pledges, claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever. Except for the capital shares of
its Subsidiaries, Airways does not own, directly or indirectly, any capital
stock or other ownership interest in any corporation, partnership, joint
venture or other entity. There are no outstanding options, warrants or rights
to subscribe for or purchase from Airways or any Airways Subsidiary any
capital stock of any Airways Subsidiary or securities convertible into or
exchangeable for capital stock of any Airways Subsidiary.
2.04 Financial.
(a) Airways has previously furnished VJET true and complete copies of the
following documents which have been filed by Airways with the Securities and
Exchange Commission ("SEC") pursuant to Sections 13(a), 14(a), (b) or (c) or
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (such
documents are hereinafter collectively called the "Airways SEC Filings"): (i)
its Annual Report on Form 10-K for the year ended March 31, 1997, which report
includes, among other things, Consolidated Balance Sheets as at March 31, 1996
and March 31, 1997 and Consolidated Statements of Operations, Consolidated
Statements of Stockholders' Equity and Group Equity and Consolidated
Statements of Cash Flows of Airways for the periods ended March 31, 1997,
March 31, 1996 and March 31, 1995, examined and reported upon by Airways'
independent certified public accountants, (ii) quarterly reports on Form 10-Q
for the quarters ended June 30, 1996, September 30, 1996 and December 31,
1996, which reports include Consolidated Balance Sheets, Consolidated
Statements of Operations and Consolidated Statements of Cash Flows of Airways
at and for the respective fiscal periods then ended and at and for the
corresponding date and fiscal periods for the prior year, (iii) all reports on
Form 8-K filed by Airways with the SEC during the period from and after April
1, 1996, and (iv) Airways' Proxy Statement dated July 27, 1996. The Airways
SEC Filings constitute all reports Airways was required to file under Sections
13(a), 14(a), (b) or (c) and 15(d) of the Exchange Act since April 1, 1996. At
the time of filing with the SEC, the Airways SEC Filings (i) were prepared in
all material respects in accordance with the applicable requirements of the
Exchange Act, and the rules and regulations thereunder, (ii) did not contain
any untrue statement of a material fact, and (iii) did not omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except to the extent
information contained in any Airways SEC Filing has been revised or superseded
by a later-filed Airways SEC Filing, the audited and unaudited financial
statements contained in the Airways SEC Filings are true and correct in all
material respects and present fairly the consolidated financial condition and
results of operations and changes in stockholders' equity and group equity and
cash flows as of the dates and for the periods indicated, except as may
otherwise be stated in such financial statements. For purposes of this
Agreement, all financial statements of Airways shall be deemed to include any
notes to such financial statements. The financial statements described in this
Section 2.04 are hereinafter referred to as the "Airways Financial
Statements".
(b) Except as publicly disclosed by Airways or disclosed to VJET in Schedule
2.04(b) or any other Schedule to Airways' Disclosure Statement (in either
case, which disclosure is made prior to the execution of this Agreement),
Airways has not experienced or suffered any Material Adverse Effect between
March 31, 1997 and the date of this Agreement.
2.05 No Breach of Statute or Contract, Governmental Authorizations. Except
as set forth in Schedule 2.05 to Airways' Disclosure Statement, neither the
execution and delivery of this Agreement by Airways, nor compliance with the
terms and provisions of this Agreement by Airways will violate any law,
statute, rule or regulation of any governmental authority, domestic or
foreign, or will on the Effective Date of the Merger conflict with or result
in a breach of any of the terms, conditions or provisions of any judgment,
order, injunction, decree or ruling of any court or governmental agency or
authority, domestic or foreign, to which Airways or any Subsidiary is subject
or of any agreement or instrument to which Airways or any Subsidiary is a
party or by which it is bound, or constitute a default thereunder, or result
in the creation of any lien, charge or encumbrance upon any property or assets
of Airways or any Subsidiary or cause any acceleration of maturity of any
obligation or loan, or give to others any interest or rights, including rights
of termination or cancellation, in or with respect to any of the material
properties, assets, agreements, contracts or business of Airways or any
Subsidiary. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity
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is required by or with respect to Airways or any Subsidiary in connection with
the execution and delivery of this Agreement by Airways or the consummation by
Airways of the transactions contemplated hereby, except for (i) the filing
required by the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as
amended ("HSR" Act"), (ii) the filing with the SEC of (A) a proxy statement
relating to the adoption of this Agreement by Airways' shareholders (the
"Merger Proxy Statement") and (B) such reports and schedules under the
Exchange Act as may be required in connection with this Agreement and the
transactions contemplated hereby, (iii) the filing of the Articles of Merger
with the Secretary of the State of Delaware and appropriate documents with the
relevant authorities of other states in which Airways is qualified to do
business; and (iv) any required filings with and any approvals required by the
DOT and the FAA.
2.06 No Litigation or Adverse Events. Except as set forth in the Airways SEC
Filings or in Schedule 2.06 to Airways' Disclosure Statement, there is no
suit, action or legal, administrative, arbitration or other proceeding or
governmental investigation pending, or to the best of the knowledge of Airways
threatened, which if adversely determined, would be a Material Adverse Effect.
2.07 Employee Benefit Plans. Schedule 2.07 to Airways' Disclosure Statement
contains a list of all employment contracts (including agreements with any
union), severance agreements, and all employee policy manuals, all deferred
compensation, non-competition, bonus, stock option, profit sharing, pension,
retirement, consultation after retirement, payment upon retirement, incentive,
extraordinary vacation accrual, material consulting contracts, education
payment or benefit, disability insurance (including medical, travel, group
life or other similar insurance plans), agreements, arrangements or plans, or
any other fringe benefit arrangements of, or applicable to, employees of
Airways or any Airways Subsidiary. Each employee plan is in full compliance
with all applicable government laws, rules and regulations, except for any
noncompliance which is not a Material Adverse Effect. No such plan which is
subject to Part 3 of Subtitle B of Title 1 of the Employment Retirement Income
Security Act of 1974 and the rules and regulations thereunder ("ERISA")
("Airways' ERISA Plan") has incurred any "accumulated funding deficiency"
within the meaning of Section 302 of ERISA or Section 412 of the Code and
neither Airways nor any Airways Subsidiary has incurred any liability on
account of such an "accumulated funding deficiency" with respect to any
Airways' ERISA Plan. No liability to the Pension Benefit Guaranty Corporation
established under ERISA has been incurred with respect to any Airways' ERISA
Plan and to the best knowledge of Airways, neither Airways nor any Airways
Subsidiary has incurred any liability for any tax imposed by Section 4975 of
the Code. Neither Airways nor any Subsidiary has suffered or otherwise caused
a "complete withdrawal" or a "partial withdrawal", as such terms are defined
in Section 4203 and Section 4205, respectively, of ERISA, since the effective
date of such Sections 4203 and 4205 with respect to any Multi-employer Pension
Plan.
2.08 Governmental Approvals. The business of Airways and the Airways
Subsidiaries as presently conducted does not require any approval of any
governmental body, whether federal, state, local or foreign, which has not
been obtained or applied for, except as would not result in a Material Adverse
Effect. Except as set forth in Schedule 2.08 to Airways' Disclosure Statement,
Airways and the Airways Subsidiaries have, as of the date hereof, and will
have as of the Closing Date, such permits, licenses, authorities, operating
certificates, "slot" assignments, essential air service designations, and
other certificates or approvals required by the Federal Aviation
Administration ("FAA") or the U.S. Department of Transportation ("DOT").
Except as may be expressly permitted by the terms of this Agreement or
otherwise disclosed in this Agreement or any Schedule hereto, the business of
Airways and any Airways Subsidiary as presently conducted in any jurisdiction
meets all known applicable legal requirements of such jurisdiction and all
known requisite governmental approvals have been duly obtained or applied for
and are in full force and effect, except for any failure of legal requirements
or any lack of governmental approvals which is not a Material Adverse Effect;
and to the best of Airways' knowledge there is no basis for any governmental
body to deny or rescind any approval for the conduct of the business of
Airways or of any Airways Subsidiary.
2.09 Accuracy of Books and Records. The books and records, financial and
otherwise, of Airways and of the Airways Subsidiaries present fairly the
financial position of Airways and of the Airways Subsidiaries in
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all material respects and all transactions of Airways and of the Airways
Subsidiaries have been recorded in such books and records in a manner
consistent with generally accepted accounting principles ("GAAP").
2.10 Aircraft and Other Property. Except as disclosed in Schedule 2.10, to
Airways' Disclosure Statement all aircraft owned, leased or in the possession
and control of Airways or of any Airways Subsidiary are, and on the Closing
Date will be, in an airworthy condition, and are being maintained according to
FAA regulatory standards and Airways' FAA-authorized maintenance program. A
list of all aircraft now owned, leased or in the possession and control of
Airways or of any Airways Subsidiary is attached hereto as said Schedule 2.10.
Except as set forth in said Schedule 2.10, all other operating properties,
leasehold improvements and equipment of Airways and of the Airways
Subsidiaries are in normal operating condition, free from any known defects,
except such minor defects as do not materially interfere with the continued
use thereof in the conduct of normal operations.
2.11 Material Contracts. Schedule 2.11 to Airways' Disclosure Statement is a
list of all contracts of Airways or of any Airways Subsidiary involving
aggregate payments by Airways or any Airways Subsidiary or to Airways or to
any Airways Subsidiary of more than $200,000, or extending for a term beyond
twenty-four (24) months or providing for severance benefits upon a termination
of employment after the consummation of the Merger. Said Schedule 2.11 also
contains a list showing all policies of insurance in force as of the date
hereof.
2.12 Taxes. Airways and the Airways Subsidiaries have filed or secured
extensions for filing all tax returns required to be filed by the United
States Government, by any of the states of the United States and by any other
governmental authority; all taxes, assessments and other governmental charges
known by the officers of Airways to be due from Airways or from any Airways
Subsidiary or with respect to any of their income, property or assets have
been duly paid and no extensions for the time of payment have been requested,
except as disclosed in Schedule 2.12 to Airways' Disclosure Statement. There
are no pending or, to the best of Airways' knowledge, threatened additional
assessments of taxes by any governmental authority known to any of the
officers of Airways, except as disclosed in said Schedule 2.12. No unexpired
waivers of the statute of limitations executed by Airways or by any Airways
Subsidiary with respect to federal or state income taxes are in effect on the
date hereof, except as disclosed in said Schedule 2.12. Except as set forth in
Schedule 2.12, the accruals and reserves made for tax liabilities of Airways
in the March 31, 1997, Consolidated Balance Sheet of Airways are adequate for
the payment of all of Airways and Airways Subsidiaries' federal, state and
local tax liabilities for all periods ending on or before March 31, 1997.
Airways and each of its Subsidiaries has withheld all required amounts from
its employees for all periods in full and complete compliance with the tax
withholding provisions of applicable laws, all required returns with respect
to income tax withholding, social security and unemployment and other taxes
have been filed by Airways and the Airways Subsidiaries for all periods for
which returns were due and the amounts shown on such returns to be due and
payable have been paid in full, except for any such failure to do any of the
foregoing which is not a Material Adverse Effect.
2.13 Title to Properties. Except as disclosed in Schedule 2.13 to Airways'
Disclosure Statement, Airways and the Airways Subsidiaries have good and (in
the case of owned real property) marketable title, free and clear of any
mortgage, pledge, lien, charge or other encumbrance, to all of their real or
personal property and other assets reflected on Airways' Consolidated Balance
Sheet as of March 31, 1997, or acquired by Airways or the Airways Subsidiaries
subsequent to the date thereof except for (i) liens or encumbrances on such
property or assets described in the Consolidated Balance Sheet as of March 31,
1997, (ii) liens for current taxes not yet due and payable, and (iii) such
imperfections of title and encumbrances, if any, as are not material in
character, amount or extent, and do not detract from the value or interfere
with the present or presently contemplated future use of the properties
subject thereto or affected thereby or those arising by operation of law for
which payment is not yet delinquent, and (iv) dispositions in the ordinary
course of business. Airways and the Airways Subsidiaries enjoy peaceable and
undisturbed possession under all material leases under which they are
operating and all of their equipment and premises which are leased are in good
condition and repair (ordinary wear and tear excepted) and are suitable for
the purposes for which such equipment and premises are being utilized. Except
as disclosed in said Schedule 2.13, neither Airways nor any of the Airways
Subsidiaries is in default under or has received any notice of default under
any lease agreement. Except as disclosed in said Schedule 2.13, neither
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Airways nor any of the Airways Subsidiaries has received any notice of
violation of any applicable zoning ordinance or other law, order, regulation
or requirement relating to their operations or to their owned or leased
properties. To the best of its knowledge, each parcel of real property owned,
leased or operated by Airways or by any Airways Subsidiary is reasonably free
of any and all hazardous wastes, hazardous emissions, toxic substances or
other types of contamination or matters of environmental concern, and neither
Airways nor any Airways Subsidiary is subject to any material liability (under
the Comprehensive Environmental Response, Compensation and Liability Act or
otherwise) resulting from or related to any such wastes, emissions,
substances, contaminants or matters of environmental concern in connection
with any such property.
2.14 Disclosure. No representation or warranty by Airways contained in this
Agreement and no statement contained in any certificate, exhibit, schedule or
other instrument furnished or to be furnished to VJET pursuant hereto,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statements contained
therein not misleading. The information contained in the Prospectus/Proxy
Statement to be furnished to the stockholders of the parties pursuant to the
Merger (other than information included in reliance upon and in conformity
with information furnished by VJET in writing expressly for use therein) will
not contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading.
2.15 Broker's or Finder's Fees. Except as provided in Schedule 2.15 to
Airways' Disclosure Statement, no agent, broker, person or firm acting on
behalf of Airways or any of its subsidiaries or under the authority of any of
them is or will be entitled to any commission or broker's or finder's fee from
any of the parties hereto in connection with any of the transactions
contemplated herein.
2.16 No Antitakeover Provisions. Except as disclosed in Schedule 2.16 to
Airways' Disclosure Statement, there are no antitakeover provisions or other
provisions of similar effect applicable to Airways under the terms of Airways'
Articles of Incorporation or By-laws or under Delaware or other law applicable
to Airways that must be complied with prior to the consummation of the Merger.
2.17 Intellectual Property.
(a) Schedule 2.17 to Airways' Disclosure Statement contains a correct and
complete list of all of intellectual property of Airways and its Subsidiaries
("Airways' Intellectual Property"). Neither Airways nor any of its
Subsidiaries has violated, infringed upon or unlawfully or wrongfully used the
Intellectual Property of others and none of Airways' Intellectual Property or
any related rights as used in its business or in the other businesses now or
heretofore conducted by Airways infringes upon or otherwise violates the
rights of others, nor has any person asserted a claim of such infringement or
misuse. Airways has taken all reasonable measures (other than registration) to
enforce, maintain and protect its interests and to the extent applicable, the
rights of third parties, in and to Airways' Intellectual Property. Airways
has, and upon consummation of the transactions contemplated by this Agreement,
VJET will have, all right, title and interest in the Intellectual Property
identified on said Schedule 2.17. The consummation of the transactions
contemplated by this Agreement will not alter or impair any Intellectual
Property rights of Airways or result in a default under any contract of
Airways. Except as set forth in said Schedule 2.17, Airways is not obligated
nor has Airways incurred any liability to make any payments for royalties,
fees or otherwise to any person in connection with any of Airways'
Intellectual Property. All patents, trademarks, trade names, service marks,
assumed names and copyrights and all registrations thereof included in or
related to Airways' Intellectual Property are valid, subsisting and in full
force and effect.
(b) No present or former officer, director, partner or employee of Airways
owns or has any proprietary, financial or other interest, direct or indirect,
in any of Airways' Intellectual Property, except as described on said Schedule
2.17. No officer, director, partner or employee of Airways has entered into
any contract that requires such officer, director, partner or employee to
assign any interest in any Airways Intellectual Property.
2.18 Labor Matters. Airways has made available to VJET copies of all
collective bargaining agreements, contracts or other agreements or
understandings with a labor union or labor organization to which Airways or
any of its Subsidiaries is a party or by which any of them is bound. Except as
and to the extent set forth in
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Schedule 2.18 to Airways' Disclosure Statement, (i) Airways or any of its
Subsidiaries is not a party to any union agreement or collective bargaining
agreement or work rules or practices agreed to with any labor organization or
employee association applicable to any employees of Airways or any of its
Subsidiaries and no attempt to organize any of the employees of Airways'
business is currently proposed or threatened, (ii) Airways or any of its
Subsidiaries has not had any Equal Employment Opportunity Commission charges
or other claims of employment discrimination made against it which, if
resolved adversely to Airways or its Subsidiaries, would result in a Material
Adverse Effect to Airways or its Subsidiaries, (iii) no Wage and Hour
Department investigations have been made of Airways or any of its Subsidiaries
which, if resolved adversely to Airways or its Subsidiaries, would result in a
Material Adverse Effect to Airways or its Subsidiaries, (iv) no labor strike,
dispute, stoppage or lockout is pending or threatened against or affecting
Airways or any of its Subsidiaries, the assets or the business of Airways or
any of its Subsidiaries, and (v) no unfair labor practice charge or complaint
against Airways or any of its Subsidiaries is pending or threatened before the
National Labor Relations Board or any similar governmental authority. Since
the enactment of the Worker Adjustment and Retraining Notification Act (the
"WARN Act"), Airways and any of its Subsidiaries has not effectuated (i) a
"plant closing" (as defined in the WARN Act) affecting any site of employment
or one or more facilities or operating units within any site of employment or
facility of Airways or any of its Subsidiaries, or (ii) a "mass layoff" (as
defined in the WARN Act) affecting any site of employment or facility of
Airways or any of its Subsidiaries, nor has Airways or any of its Subsidiaries
been affected by any transaction or engaged in layoffs or employment
terminations sufficient in number to trigger application of any similar state
or local law. Except as set forth in said Schedule 2.18, none of Airways' or
any of its Subsidiaries' employees suffered an "employment loss" (as defined
in the WARN Act) within the six (6) month period prior to the date hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VJET
VJET represents and warrants to Airways as follows:
3.01 Organization, etc. VJET is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada. Each
Subsidiary of VJET has been duly organized and is validly existing and in good
standing under the laws of the state of its organization. VJET and each of its
Subsidiaries has the corporate power to own its property and to carry on its
business as now being conducted; VJET has the corporate power and authority to
execute and deliver this Agreement and the Plan of Merger and, subject to the
stockholder approval referenced in Section 5.02(a)(i) hereof, to consummate
the transactions contemplated hereby.
3.02 Authorization, Execution and Delivery of Agreement. The execution and
delivery and, subject to the stockholder approval of VJET, the performance of
this Agreement and the Plan of Merger by VJET have been duly and validly
authorized and approved by the Board of Directors of VJET, and VJET has taken,
or will use reasonable efforts to take prior to the Effective Date of the
Merger, all other action required by law on the part of VJET, its respective
Articles of Incorporation and bylaws or otherwise to effect the transactions
contemplated by this Agreement and the Plan of Merger.
3.03 Capital Stock of VJET.
(a) As of the date of this Agreement, the authorized capital stock of VJET
consists of 5,000,000 shares of Preferred Stock, $.01 par value, none of which
is outstanding and 1,000,000,000 shares of Common Stock, $.001 par value, of
which 54,969,238 shares were outstanding as of June 30, 1997. No additional
shares of stock have been issued between June 30, 1997, and the date of
execution of this Agreement. As of the date of this Agreement, 3,420,000
shares of VJET Common Stock were reserved for issuance under VJET's 1993
Incentive Stock Option Plan, 3,640,790 shares of VJET Common Stock were
reserved for issuance under VJET's Stock Option Plan, 5,000,000 shares of VJET
Common Stock were reserved for issuance under VJET's 1996 Stock Option Plan
and 3,979,864 shares of VJET Common Stock were reserved for issuance under
VJET's Employee Stock Purchase Plan (such plans being hereinafter collectively
referred to as the "VJET Plans"). Other than the
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options described in this Section 3.03, there are no outstanding options,
warrants or rights to subscribe for or purchase from VJET any capital stock of
VJET or securities convertible into or exchangeable for capital stock of VJET.
(b) Schedule 3.03(b) to VJET's Disclosure Statement delivered to Airways
contemporaneously with the execution and delivery of this Agreement ("VJET's
Disclosure Statement") lists each Subsidiary of VJET. All the outstanding
shares of capital stock of each such Subsidiary have been validly issued and
are fully paid and nonassessable and are owned by VJET, by another Subsidiary
of VJET or by VJET and another such Subsidiary, free and clear of all pledges,
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever. Except for the capital shares of its Subsidiaries, VJET
does not own, directly or indirectly, any capital stock or other ownership
interest in any corporation, partnership, joint venture or other entity. There
are no outstanding options, warrants or rights to subscribe for or purchase
from VJET or any VJET Subsidiary any capital stock of any VJET Subsidiary or
securities convertible into or exchangeable for capital stock of any VJET
Subsidiary.
3.04 Financial.
(a) VJET has previously furnished Airways true and complete copies of the
following documents which have been filed by VJET with the SEC pursuant to
Sections 13(a), 14(a), (b) or (c) or 15(d) of the Exchange Act (such documents
are hereinafter collectively called the "VJET SEC Filings"): (i) its Annual
Report on Form 10-K for the year ended December 31, 1996, which report
includes, among other things, Consolidated Balance Sheets as at December 31,
1995 and December 31, 1996 and Consolidated Statements of Operations,
Consolidated Statements of Stockholders' Equity and Consolidated Statements of
Cash Flows of VJET for the periods ended December 31, 1996, December 31, 1995
and December 31, 1994, examined and reported upon by Ernst & Young, LLP,
independent certified public accountants, (ii) quarterly reports on Form 10-Q
for the quarter ended March 31, 1997, which reports include Consolidated
Balance Sheets, Consolidated Statements of Operations and Consolidated
Statements of Cash Flows of VJET at and for the respective fiscal periods then
ended and at and for the corresponding date and fiscal periods for the prior
year, (iii) all reports on Form 8-K filed by VJET with the SEC during the
period from and after January 1, 1997, (iv) VJET's Proxy Statement dated April
10, 1997, and (v) VJET's S-4 Registration Statement declared effective as of
October 11, 1996. The VJET SEC Filings constitute all reports VJET was
required to file under Sections 13(a), 14(a), (b) or (c) and 15(d) of the
Exchange Act since January 1, 1997. At the time of filing with the SEC, the
VJET SEC Filings (i) were prepared in all material respects in accordance with
the applicable requirements of the Exchange Act, and the rules and regulations
thereunder, (ii) did not contain any untrue statement of a material fact, and
(iii) did not omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except to the extent information contained in any VJET SEC Filing
has been revised or superseded by a later filed VJET SEC Filing, the audited
and unaudited financial statements contained in the VJET SEC Filings are true
and correct in all material respects and present fairly the consolidated
financial condition and results of operations and changes in stockholders'
equity and cash flows as of the dates and for the periods indicated, except as
may otherwise be stated in such financial statements. For purposes of this
Agreement, all financial statements of VJET shall be deemed to include any
notes to such financial statements. The financial statements described in this
Section 3.04 are hereinafter referred to as the "VJET Financial Statements".
(b) Except as publicly disclosed by VJET or disclosed to Airways in Schedule
3.04(b) or any other Schedule to VJET's Disclosure Statement (in either case,
which disclosure is made prior to the execution of this Agreement), VJET has
not experienced or suffered any Material Adverse Effect between March 31, 1997
and the date of this Agreement.
3.05 Status of VJET Common Stock. All shares of VJET Common Stock, when
issued to the stockholders of Airways pursuant to this Agreement and the Plan
of Merger, will be duly and validly authorized and issued, fully paid and
nonassessable.
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3.06 No Breach of Statute or Contract, Governmental Authorizations. Except
as set forth in Schedule 3.06 to VJET's Disclosure Statement, neither the
execution and delivery of this Agreement by VJET, nor compliance with the
terms and provisions of this Agreement by VJET, will violate any law, statute,
rule or regulation of any governmental authority, domestic or foreign, or will
on the Effective Date of the Merger conflict with or result in a breach of any
of the terms, conditions or provisions of any judgment, order, injunction,
decree or ruling of any court or governmental agency or authority, domestic or
foreign, to which VJET or any Subsidiary is subject or of any agreement or
instrument to which VJET or any Subsidiary is a party or by which it is bound,
or constitute a default thereunder, or result in the creation of any lien,
charge or encumbrance upon any property or assets of VJET or any Subsidiary or
cause any acceleration of maturity of any obligation or loan, or give to
others any interest or rights, including rights of termination or
cancellation, in or with respect to any of the material properties, assets,
agreements, contracts or business of VJET or any Subsidiary. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity is required by or with respect to VJET or any
subsidiary or in connection with the execution and delivery of this Agreement
by VJET or the consummation by VJET of the transactions contemplated hereby,
except for (i) the filings required by the HSR Act, (ii) the filing with the
SEC of (A) the Registration Statement required by Section 4.07, (B) a proxy
statement relating to the VJET shareholders meeting to be held prior to
Closing to approve the Merger and to amend VJET's Articles of Incorporation
and Bylaws and (C) such reports and schedules under the Exchange Act as may be
required in connection with this Agreement and the transactions contemplated
hereby and (iii) the filing of the Articles or Certificate of Merger with the
Secretary of State of Nevada and appropriate documents with the relevant
authorities of other states in which VJET is qualified to do business, and
(iv) any required filings with and any approvals required by the DOT and the
FAA.
3.07 No Litigation or Adverse Events. Except as set forth in the VJET SEC
Filings or in Schedule 3.07 to VJET's Disclosure Statement, there is no suit,
action or legal, administrative, arbitration or other proceeding or
governmental investigation pending, or to the best of the knowledge of VJET
threatened, which, if adversely determined, would be a Material Adverse
Effect.
3.08 Employee Benefit Plans. Schedule 3.08 to VJET's Disclosure Statement
hereto contains a list of all employment contracts (including agreements with
any union), severance agreements, and all employee policy manuals, all
deferred compensation, non-competition, bonus, stock option, profit sharing,
pension, retirement, consultation after retirement, payment upon retirement,
incentive, extraordinary vacation accrual, material consulting contracts,
education payment or benefit, disability insurance (including medical, travel,
group life or other similar insurance plans), agreements, arrangements or
plans, or any other fringe benefit arrangements of, or applicable to,
employees of VJET or any VJET Subsidiary. Each employee plan is in full
compliance with all applicable government laws, rules and regulations, except
for any noncompliance which is not a Material Adverse Effect. No such plan
which is subject to ERISA ("VJET ERISA Plan") has incurred any "accumulated
funding deficiency" within the meaning of Section 302 of ERISA or Section 412
of the Code and neither VJET nor any Subsidiary has incurred any liability on
account of such an "accumulated funding deficiency" with respect to any VJET
ERISA Plan. No liability to the Pension Benefit Guaranty Corporation
established under ERISA has been incurred with respect to any VJET ERISA Plan
and to the best knowledge of VJET, neither VJET nor any VJET Subsidiary has
incurred any liability for any tax imposed by Section 4975 of the Code.
Neither VJET nor any VJET Subsidiary has suffered or otherwise caused a
"complete withdrawal" or a "partial withdrawal", as such terms are defined in
Section 4203 and Section 4205, respectively, of ERISA, since the effective
date of such Sections 4203 and 4205 with respect to any Multi-employer Pension
Plan.
3.09 Governmental Approvals. The business of VJET and the VJET Subsidiaries
as presently conducted does not require any approval of any governmental body,
whether federal, state, local or foreign, which has not been obtained or
applied for, except as would not result in a Material Adverse Effect. Except
as set forth in Schedule 3.09 to VJET's Disclosure Statement, VJET and the
VJET Subsidiaries have, as of the date hereof, and will have as of the Closing
Date, such permits, licenses, authorities, operating certificates, "slot"
assignments, essential air service designations, and other certificates or
approvals required by the FAA or the DOT. Except as may be expressly permitted
by the terms of this Agreement or otherwise disclosed in this
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Agreement or any Schedule hereto, the business of VJET and any VJET Subsidiary
as presently conducted in any jurisdiction meets all known applicable legal
requirements of such jurisdiction and all known requisite governmental
approvals have been duly obtained or applied for and are in full force and
effect, except for any failure of legal requirements or any lack of
governmental approvals which is not a Material Adverse Effect; and to the best
of its knowledge there is no basis for any governmental body to deny or
rescind any approval for the conduct of the business of VJET or of any VJET
Subsidiary.
3.10 Accuracy of Books and Records. The books and records, financial and
otherwise, of VJET present fairly the financial position of VJET in all
material respects and all transactions of VJET have been recorded in such
books and records in a manner consistent with GAAP.
3.11 Surviving Corporation After Merger. Immediately after the Closing Date
and after giving effect to any changes in the assets and liabilities of VJET
as a result of the Merger, VJET will not (i) be insolvent (either because its
financial condition is such that the sum of its debts is greater than the fair
value of its assets or because the fair saleable value of its assets is less
than the amount required to pay its probable liability on its existing debts
as they mature), (ii) have unreasonably small capital with which to engage in
its business, or (iii) have incurred debts beyond its ability to pay the same
as they become due.
3.12 Aircraft and Other Property. Except as disclosed in Schedule 3.12 to
VJET's Disclosure Statement, all aircraft owned, leased or in the possession
and control of VJET or of any VJET Subsidiary are, and on the Closing Date
will be, in an airworthy condition, and are being maintained according to FAA
regulatory standards and VJET's FAA-authorized maintenance program. A list of
all aircraft now owned, leased or in the possession and control of VJET or of
any VJET Subsidiary is attached hereto as Schedule 3.12. Except as set forth
in said Schedule 3.12, all other operating properties, leasehold improvements
and equipment of VJET and of the VJET Subsidiaries are in normal operating
condition, free from any known defects, except such minor defects as do not
materially interfere with the continued use thereof in the conduct of normal
operations.
3.13 Material Contracts. Attached hereto as Schedule 3.13 to VJET's
Disclosure Statement is a list of all contracts of VJET or of any VJET
Subsidiary involving aggregate payments by VJET or any VJET Subsidiary or to
VJET or to any VJET Subsidiary of more than $200,000, or extending for a term
beyond twenty-four (24) months and a list showing all policies of insurance in
force as of the date hereof.
3.14 Taxes. VJET and the VJET Subsidiaries have filed or secured extensions
for filing all tax returns required to be filed by the United States
Government, by any of the states of the United States and by any other
governmental authority; all taxes, assessments and other governmental charges
known by the officers of VJET to be due from VJET or from any VJET Subsidiary
or with respect to any of their income, property or assets have been duly paid
and no extensions for the time of payment have been requested, except as
disclosed in Schedule 3.14 to VJET's Disclosure Statement. There are no
pending or, to the best of VJET's knowledge, threatened additional assessments
of taxes by any governmental authority known to any of the officers of VJET,
except as disclosed in said Schedule 3.14. No unexpired waivers of the statute
of limitations executed by VJET or by any VJET Subsidiary with respect to
federal or state income taxes are in effect on the date hereof, except as
disclosed in said Schedule 3.14. Except as set forth in said Schedule 3.14,
the accruals and reserves made for tax liabilities of VJET in the March 31,
1997, Consolidated Balance Sheet of VJET are adequate for the payment of all
of VJET and VJET Subsidiaries' federal, state and local tax liabilities for
all periods ending on or before March 31, 1997. VJET and each of its
Subsidiaries has withheld all required amounts from its employees for all
periods in full and complete compliance with the tax withholding provisions of
applicable laws, all required returns with respect to income tax withholding,
social security and unemployment and other taxes have been filed by VJET and
the VJET Subsidiaries for all periods for which returns were due and the
amounts shown on such returns to be due and payable have been paid in full,
except for any such failure to do the foregoing which is not a Material
Adverse Effect.
3.15 Title to Properties. Except as disclosed in Schedule 3.15 to VJET's
Disclosure Statement, VJET and the VJET Subsidiaries have good and, (in the
case of owned real property) marketable title, free and clear of any mortgage,
pledge, lien, charge or other encumbrance, to all of their real or personal
property and other assets
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reflected on VJET's Consolidated Balance Sheet as of March 31, 1997, or
acquired by VJET or the VJET Subsidiaries subsequent to the date thereof
except for (i) liens or encumbrances on such property or assets described in
the Consolidated Balance Sheet as of March 31, 1997, (ii) liens for current
taxes not yet due and payable, and (iii) such imperfections of title and
encumbrances, if any, as are not material in character, amount or extent, and
do not detract from the value or interfere with the present or presently
contemplated future use of the properties subject thereto or affected thereby
or those arising by operation of law for which payment is not yet delinquent,
and (iv) dispositions in the ordinary course of business. VJET and the VJET
Subsidiaries enjoy peaceable and undisturbed possession under all material
leases under which they are operating and all of their equipment and premises
which are leased are in good condition and repair (ordinary wear and tear
excepted) and are suitable for the purposes for which such equipment and
premises are being utilized. Except as disclosed in said Schedule 3.15,
neither VJET nor any of the VJET Subsidiaries is in default under or has
received any notice of default under any lease agreement. Except as disclosed
in said Schedule 3.15, neither VJET nor any of the VJET Subsidiaries has
received any notice of violation of any applicable zoning ordinance or other
law, order, regulation or requirement relating to their operations or to their
owned or leased properties. To the best of its knowledge, each parcel of real
property owned, leased or operated by VJET or by any VJET Subsidiary is
reasonably free of any and all hazardous wastes, hazardous emissions, toxic
substances or other types of contamination or matters of environmental
concern, and neither VJET nor any VJET Subsidiary is subject to any material
liability (under the Comprehensive Environmental Response, Compensation and
Liability Act or otherwise) resulting from or related to any such wastes,
emissions, substances, contaminants or matters of environmental concern in
connection with any such property.
3.16 Disclosure. No representation or warranty by VJET contained in this
Agreement and no statement contained in any certificate, exhibit or other
instrument furnished or to be furnished to Airways pursuant hereto, contains
or will contain any untrue statement of a material fact or omits or will omit
to state a material fact necessary to make the statements contained therein
not misleading. The information contained in the Prospectus/Proxy Statement to
be furnished to stockholders of the parties pursuant to the Merger (other than
information included in reliance upon and in conformity with information
furnished by Airways in writing expressly for use therein) will not contain an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading.
3.17 Broker's or Finder's Fees. Except as provided in Schedule 3.17 to
VJET's Disclosure Statement, no agent, broker, person or firm acting on behalf
of VJET or any of its Subsidiaries or under the authority of any of them is or
will be entitled to any commission or broker's or finder's fee from any of the
parties hereto in connection with any of the transactions contemplated herein.
3.18 No Antitakeover Provisions. Except as disclosed in Schedule 3.18 to
VJET's Disclosure Statement, there are no antitakeover provisions or other
provisions of similar effect applicable to VJET under the terms of VJET's
Articles of Incorporation or By-laws or under Nevada or other law applicable
to VJET that must be complied with prior to the consummation of the Merger.
3.19 Intellectual Property.
(a) Schedule 3.19 to VJET's Disclosure Statement contains a correct and
complete list of all of intellectual property of VJET and its Subsidiaries
("VJET's Intellectual Property"). Neither VJET nor any of its Subsidiaries has
violated, infringed upon or unlawfully or wrongfully used the Intellectual
Property of others and none of VJET's Intellectual Property or any related
rights as used in its business or in the other businesses now or heretofore
conducted by VJET infringes upon or otherwise violates the rights of others,
nor has any person asserted a claim of such infringement or misuse. VJET has
taken all reasonable measures (other than registration) to enforce, maintain
and protect its interests and to the extent applicable, the rights of third
parties, in and to VJET's Intellectual Property. VJET has, and upon
consummation of the transactions contemplated by this Agreement, VJET will
have, all right, title and interest in the Intellectual Property identified on
said Schedule 3.19. The consummation of the transactions contemplated by this
Agreement will not alter or impair any Intellectual Property rights of VJET or
result in a default under any contract of VJET. Except as set forth in said
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Schedule 3.19, VJET is not obligated nor has VJET incurred any liability to
make any payments for royalties, fees or otherwise to any person in connection
with any of VJET's Intellectual Property. All patents, trademarks, trade
names, service marks, assumed names and copyrights and all registrations
thereof included in or related to VJET's Intellectual Property are valid,
subsisting and in full force and effect.
(b) No present or former officer, director, partner or employee of VJET owns
or has any proprietary, financial or other interest, direct or indirect, in
any of VJET's Intellectual Property, except as described on said Schedule
3.19. No officer, director, partner or employee of VJET has entered into any
contract that requires such officer, director, partner or employee to assign
any interest in any VJET Intellectual Property.
3.20 Labor Matters. VJET has made available to Airways copies of all
collective bargaining agreements, contracts or other agreements or
understandings with a labor union or labor organization to which VJET or any
of its Subsidiaries is a party or by which any of them is bound. Except as and
to the extent set forth in Schedule 3.20 to VJET's Disclosure Statement, (i)
VJET or any of its Subsidiaries is not a party to any union agreement or
collective bargaining agreement or work rules or practices agreed to with any
labor organization or employee association applicable to any employees of VJET
or any of its Subsidiaries and no attempt to organize any of the employees of
VJET's business is currently proposed or threatened, (ii) VJET or any of its
Subsidiaries has not had any Equal Employment Opportunity Commission charges
or other claims of employment discrimination made against it which, if
resolved adversely to VJET or its Subsidiaries, would result in a Material
Adverse Effect to VJET or its Subsidiaries, (iii) no Wage and Hour Department
investigations have been made of VJET or any of its Subsidiaries which, if
resolved adversely to VJET or its Subsidiaries, would result in a Material
Adverse Effect to VJET or its Subsidiaries, (iv) no labor strike, dispute,
stoppage or lockout is pending or threatened against or affecting VJET or any
of its Subsidiaries, the assets or the business of VJET or any of its
Subsidiaries, and (v) no unfair labor practice charge or complaint against
VJET or any of its Subsidiaries is pending or threatened before the National
Labor Relations Board or any similar governmental authority. Since the
enactment of the Worker Adjustment and Retraining Notification Act (the "WARN
Act"), VJET and any of its Subsidiaries has not effectuated (i) a "plant
closing" (as defined in the WARN Act) affecting any site of employment or one
or more facilities or operating units within any site of employment or
facility of VJET or any of its Subsidiaries, or (ii) a "mass layoff" (as
defined in the WARN Act) affecting any site of employment or facility of VJET
or any of its Subsidiaries, nor has VJET or any of its Subsidiaries been
affected by any transaction or engaged in layoffs or employment terminations
sufficient in number to trigger application of any similar state or local law.
Except as set forth in said Schedule 3.20, none of VJET's or any of its
Subsidiaries' employees suffered an "employment loss" (as defined in the WARN
Act) within the six (6) month period prior to the date hereof.
3.21 Offering Memorandum. The draft of the Offering Memorandum set forth in
Schedule 3.21 to VJET's Disclosure Statement is true and correct in all
material respects.
ARTICLE IV
COVENANTS AND TRANSACTIONS PRIOR TO THE CLOSING DATE
4.01. Investigations; Operation of Business of Airways. Between the date of
this Agreement and the Effective Date of the Merger:
(a) Airways agrees to give to VJET full access to all the premises and
books and records of it and its Subsidiaries, and to cause its and its
Subsidiaries' officers to furnish VJET with such financial and operating
data and other information with respect to the business and properties of
it and its Subsidiaries as VJET shall from time to time request; provided,
however, that any such investigation shall not affect any of the
representations, warranties or covenants of Airways hereunder; and provided
further, that any such investigation shall be conducted in such manner as
not to interfere unreasonably with the operation of the respective
businesses of Airways and its Subsidiaries. In the event of termination of
this Agreement, VJET will return to Airways or destroy any and all
financial statements, agreements, documents, memoranda or other
repositories of information relating to Airways that VJET has obtained or
prepared in connection with
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its review of Airways and its operations and VJET agrees that any
information relating to Airways, its financial condition, business,
operations and prospects is strictly confidential and shall not be
disclosed to any third party or used by VJET for its benefit or the benefit
of any other person. VJET shall have the right to have a representative
present at all meetings of the Board of Directors of Airways (the "VJET
Observation Rights") and there shall be no meeting of the Board of
Directors of Airways unless (i) a representative of VJET shall be present
in person or by conference telephone call, or (ii) VJET shall have been
given notice in accordance with the by-laws of Airways with respect to such
meeting; provided, however, that failure of Airways to comply with the
terms of this Paragraph shall not affect the validity of action taken by
Airways' Board of Directors. In addition, VJET shall have the right to
review any consent resolutions of the Airways Board of Directors prior to
signing. Exercise of the VJET Observation Rights shall not be, and shall
not be construed as being, participation by VJET on the Board of Directors
of Airways. Notwithstanding the foregoing, the VJET representative shall
not be entitled to be present during discussion of any Acquisition Proposal
or of any matters directly relating to VJET and shall not have the right to
review in advance any consent resolutions relating to any Acquisition
Proposal or VJET.
(b) Airways will, to the extent required for continued operation of its
business without impairment, use its best efforts to preserve substantially
intact the business organization of Airways and its Subsidiaries, to keep
available the services of the present officers and employees of Airways and
its Subsidiaries, and to preserve the present relationships of Airways and
its Subsidiaries with persons having significant business relations
therewith such as suppliers, customers, tour operators, brokers, agents or
otherwise.
(c) Airways and its Subsidiaries will conduct their respective businesses
in a manner consistent with the current operation of their business and
only in the ordinary course and, by way of amplification and not
limitation, neither Airways nor its Subsidiaries will without the prior
written consent of VJET which consent shall not be unreasonably withheld
(i) except with respect to Airways Common Stock issued upon exercise of the
warrants outstanding on the date hereof and of options vested prior to the
Closing Date, issue any capital stock, or (ii) declare, set aside or pay
any dividend or distribution with respect to the capital stock of Airways
or any of its Subsidiaries (other than the payment of a dividend by a
subsidiary of Airways to Airways or to another subsidiary of Airways), or
(iii) directly or indirectly redeem, purchase or otherwise acquire any
capital stock of Airways or any of its Subsidiaries, or (iv) effect a split
or reclassification of any capital stock of Airways or a recapitalization
of Airways, or (v) change the charter or bylaws of Airways, or (vi) grant
any increase in the compensation payable or to become payable by Airways or
its Subsidiaries to officers or salaried employees of Airways or its
Subsidiaries whose 1996 remuneration exceeded $50,000 or grant any increase
regardless of amount, in any bonus, insurance, pension or other benefit
plan, program, payment or arrangement made to, for or with any officers or
employees, or (vii) adopt any employee benefit plans including but not
limited to stock option plans, or (viii) borrow or agree to borrow any
funds in excess of $200,000 or guarantee or agree to guarantee the
obligations of others (excluding any refinancing of Airways' Subsidiary's
hangar in an amount ranging from $6.5 million to $8.5 million secured by
the hangar and Airways' Subsidiary's accounts receivable, provided that the
terms of such refinancing do not preclude prepayment on reasonable terms;
credit terms extended by creditors, lessors and vendors in the ordinary
course of business; and debt incurred for expenses of this transaction), or
(ix) make any capital improvement, purchase of equipment or furnishings or
lease of any aircraft (excluding the purchase, lease or repair of aircraft
parts and components required in the ordinary course of maintenance of
aircraft) involving an aggregate expenditure in excess of $200,000, or (x)
transfer, pledge, hypothecate or otherwise dispose of any assets having a
book or market value, whichever is greater, in excess of $200,000, or (xi)
acquire direct or indirect ownership or control of voting shares of any
other corporation, or of any interest in any partnership, joint venture,
association or similar organization, other than shares acquired in
satisfaction of a security interest or of a debt previously contracted for
in a fiduciary or custodial capacity, or (xii) waive any rights of
substantial value, or (xiii) enter into any material agreement, contract or
commitment calling for aggregate payments in excess of $200,000 over the
life of the contract or extending for more than twelve months other than
contracts entered into for the maintenance or repair of aircraft or those
disclosed on Schedule 4.01(c) to Airways' Disclosure Statement, or (xiv)
acquire a fee interest in any real property.
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(d) Subject to Section 4.04 hereof, without the prior written consent of
VJET, neither Airways nor any of its Subsidiaries will undertake or enter
into any sale, disposition, surrender, acquisition, agreement or
transaction, between the date of this Agreement and the Closing Date,
relating to any of their assets except in the ordinary course of business
or as contemplated by this Agreement or disclosed in the Airways SEC
Filings.
(e) Airways will pay and discharge all taxes, assessments and
governmental charges lawfully imposed upon it, upon any Airways Subsidiary
or upon any of their property, or upon the income and profits thereof to
the extent such taxes, assessments and governmental charges are due and
payable on or before the Closing Date except for deferrals of taxes
arranged by Airways with the respective taxing authorities as indicated on
Schedule 4.01(e) to Airways' Disclosure Statement; provided, however, that
nothing herein contained shall require Airways or any Airways Subsidiary to
pay or discharge any tax assessment or governmental charge, so long as the
validity thereof shall be contested in good faith and by appropriate
proceedings unless property essential to the conduct of Airways or of any
Airways Subsidiary's business will be lost, forfeited or materially
endangered.
(f) Airways will maintain its existence and the existence of the
Subsidiaries as corporations in good standing under the laws of the State
of Delaware, other states in which Airways and the Airways Subsidiaries
operate and the United States and comply and cause the Airways Subsidiaries
to comply in all material respects with all laws, governmental regulations,
rules and ordinances, and judicial orders, judgments and decrees applicable
to their business or their properties, except while contesting the validity
of any of the foregoing in good faith and by appropriate proceedings.
(g) Airways will notify VJET in writing within five (5) days of the
commencement of any material litigation against Airways, or against any
Airways Subsidiary, or of the existence of any adverse business conditions
threatening the continued, normal business operations of Airways or of any
Airways Subsidiary, or of any agreement, consent or order of the FAA or DOT
involving Airways or any Airways Subsidiary.
(h) Airways shall at all times maintain, preserve and keep its properties
and the properties of its Subsidiaries in good repair, working order and
condition in all material respects so that the business carried on in
connection therewith may be properly and advantageously conducted, except
for those items that have been designated as obsolete or damaged beyond
economic repair.
(i) Airways will make every reasonable effort to fulfill its contractual
obligations and the contractual obligations of its Subsidiaries, and to
maintain in effect its insurance and the insurance of its Subsidiaries.
(j) Airways will not enter into, institute or permit any Airways
Subsidiary to enter into or institute, any employment contract, employee
policy manual (other than Airways' Subsidiary's current employee manual
which is undergoing revision), deferred compensation, non-competition,
bonus, stock option, profit-sharing, pension, retirement, consultation
after retirement, payments upon retirement, incentive, extraordinary
vacation accrual, education payment or benefit, disability insurance
(including medical, travel, group life or other similar insurance plans)
agreement, plan or arrangement or any other similar arrangement or plan,
or, except as required by applicable law or regulation, renew, amend,
modify or terminate any such arrangement or plan now in existence.
(k) Airways will not enter into, or permit any Subsidiary to enter into,
any agreement, understanding or commitment, written or oral, with any other
person which would be a breach of the obligations of Airways arising under
this Agreement.
(l) Airways will not make, or permit any Subsidiary to make any loan,
advance or commitment to extend credit to any of the directors, officers or
any affiliated or related persons of the directors or officers of Airways
or of any Airways Subsidiary; renew, or permit any Airways Subsidiary to
renew, any outstanding loan or any outstanding commitment to extend credit
to any directors, officers or any affiliated or related persons of the
directors or officers of Airways or of any Airways Subsidiary; increase, or
permit any Airways Subsidiary to increase, any outstanding loan to any of
the directors, officers of any affiliated or related persons of the
directors or officers of Airways or of any Airways Subsidiary; or enter
into any agreement, understanding or commitment, written or oral, which
obligates Airways, any of the Airways
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Subsidiaries or their successors or assigns to make any loan or advance or
payment to any of the directors or officers or to any affiliated or related
persons of any of the directors or officers of Airways or of any Airways
Subsidiary.
4.02. Investigation of VJET. Between the date of this Agreement and the
Effective Date of the Merger:
(a) VJET agrees to give to Airways full access to all the premises and
books and records of it and its Subsidiaries, and to furnish Airways with
such financial and operating data and other information with respect to the
business and properties of it and its Subsidiaries as Airways shall from
time to time request; provided, however, that any such investigation shall
not affect any of the representations, warranties or covenants of VJET
hereunder; and provided further, that any such investigation shall be
conducted in such manner as not to interfere unreasonably with the
operation of the respective businesses of VJET and its Subsidiaries. In the
event of termination of this Agreement, Airways will return to VJET or
destroy any and all financial statements, agreements, documents, memoranda
or other repositories of information relating to VJET or its Subsidiaries
that Airways has obtained or prepared in connection with its review of VJET
and its operations and Airways agrees that any information relating to
VJET, its Subsidiaries and their financial condition, business, operations
and prospects is strictly confidential and shall not be disclosed to any
third party, or used by Airways for its benefit or the benefit of any other
person. Airways shall have the right to have a representative present at
all meetings of the Board of Directors of VJET (the "Airways Observation
Rights") and there shall be no meeting of the Board of Directors of VJET
unless (i) a representative of Airways shall be present in person or by
conference telephone call, or (ii) Airways shall have been given notice in
accordance with the by-laws of VJET with respect to such meeting; provided,
however, that failure of VJET to comply with the terms of this Paragraph
shall not affect the validity of action taken by VJET's Board of Directors.
In addition, Airways shall have the right to review any consent resolutions
of the VJET Board of Directors prior to signing. Exercise of the Airways
Observation Rights shall not be, and shall not be construed as being,
participation by Airways on the Board of Directors of VJET. Notwithstanding
the foregoing, the Airways representative shall not be entitled to be
present during discussions of any matters directly relating to Airways and
shall not have the right to review in advance any consent resolutions
relating to Airways.
(b) VJET and its Subsidiaries will conduct their respective businesses in
a manner consistent with the current operation of their business and only
in the ordinary course and, by way of amplification and not limitation,
neither VJET nor its Subsidiaries will without the prior written consent of
Airways which consent shall not be unreasonably withheld (i) except with
respect to VJET Common Stock issued upon exercise of options vested prior
to the Closing Date, issue any capital stock, or (ii) declare, set aside or
pay any dividend or distribution with respect to the capital stock of VJET
or any of its Subsidiaries (other than the payment of a dividend by a
subsidiary of VJET to VJET or to another subsidiary of VJET), or (iii)
directly or indirectly redeem, purchase or otherwise acquire any capital
stock of VJET or any of its Subsidiaries, or (iv) effect a split or
reclassification of any capital stock of VJET or a recapitalization of
VJET, or (v) change the charter or bylaws of VJET, or (vi) grant any
increase in the compensation payable or to become payable by VJET or its
Subsidiaries to officers or salaried employees of VJET or its Subsidiaries
whose 1996 remuneration exceeded $50,000 or grant any increase regardless
of amount, in any bonus, insurance, pension or other benefit plan, program,
payment or arrangement made to, for or with any officers or employees, or
(vii) adopt any employee benefit plans including but not limited to stock
option plans, or (viii) acquire direct or indirect ownership or control of
voting shares of any other corporation, or of any interest in any
partnership, joint venture, association or similar organization, other than
shares acquired in satisfaction of a security interest or of a debt
previously contracted for in a fiduciary or custodial capacity, or (ix)
waive any rights of substantial value, or (x) enter into any material
agreement, contract or commitment calling for aggregate payments in excess
of $200,000 over the life of the contract or extending for more than twelve
months other than (a) financing or refinancing agreements and fees and
expenses paid in connection therewith, (b) fees paid to lenders to secure
consents to this transaction and to VJET's debt refinancing, and (c)
contracts entered into for the maintenance, repairs or refurbishment of
aircraft or those disclosed on Schedule 4.02(c) to VJET's Disclosure
Statement or (xi) acquire a fee interest in any real property.
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(c) Without the prior written consent of Airways, neither VJET nor any of
its Subsidiaries will undertake or enter into any sale, disposition,
surrender, acquisition, agreement or transaction, between the date of this
Agreement and the Closing Date, relating to any of their assets except in
the ordinary course of business or as contemplated by this Agreement or as
disclosed in the VJET SEC Filings.
(d) VJET will pay and discharge all taxes, assessments and governmental
charges lawfully imposed upon it, upon any VJET Subsidiary or upon any of
their property, or upon the income and profits thereof to the extent such
taxes, assessments and governmental charges are due and payable on or
before the Closing Date; provided, however, that nothing herein contained
shall require VJET or any VJET Subsidiary to pay or discharge any tax
assessment or governmental charge, so long as the validity thereof shall be
contested in good faith and by appropriate proceedings unless property
essential to the conduct of VJET or of any VJET Subsidiary's business will
be lost, forfeited or materially endangered.
(e) VJET will maintain its existence and the existence of the
Subsidiaries as corporations in good standing under the laws of the State
of Nevada, other states in which VJET and the VJET Subsidiaries operate and
the United States and comply and cause the VJET Subsidiaries to comply in
all material respects with all laws, governmental regulations, rules and
ordinances, and judicial orders, judgments and decrees applicable to their
business or their properties, except while contesting the validity of any
of the foregoing in good faith and by appropriate proceedings.
(f) VJET will notify Airways in writing within five (5) days of the
commencement of any material litigation against VJET or any of its
Subsidiaries or of the existence of any adverse business conditions
threatening the continued, normal business operations of VJET or any of its
Subsidiaries, or of any agreement, consent or order of the FAA or DOT
involving VJET or any of its Subsidiaries.
(g) VJET shall at all times maintain, preserve and keep its properties
and the properties of its Subsidiaries in good repair, working order and
condition in all material respects so that the business carried on in
connection therewith may be properly and advantageously conducted, except
for those items that have been designated as obsolete or damaged beyond
economic repair.
(h) VJET will make every reasonable effort to fulfill its contractual
obligations and the contractual obligations of its Subsidiaries, and to
maintain in effect its insurance and the insurance of its Subsidiaries.
(i) VJET will not enter into, institute or permit any VJET Subsidiary to
enter into or institute, any employment contract, employee policy manual,
deferred compensation, non-competition, bonus, stock option, profit-
sharing, pension, retirement, consultation after retirement, payments upon
retirement, incentive, extraordinary vacation accrual, education payment or
benefit, disability insurance (including medical, travel, group life or
other similar insurance plans) agreement, plan or arrangement or any other
similar arrangement or plan, or, except as required by applicable law or
regulation, renew, amend, modify or terminate any such arrangement or plan
now in existence.
(j) VJET will not enter into, or permit any Subsidiary to enter into, any
agreement, understanding or commitment, written or oral, with any other
person which would be a breach of the obligations of VJET arising under
this Agreement.
(k) VJET will not make, or permit any Subsidiary to make any loan,
advance or commitment to extend credit to any of the directors, officers or
any affiliated or related persons of the directors or officers of VJET or
of any VJET Subsidiary; renew, or permit any VJET Subsidiary to renew, any
outstanding loan or any outstanding commitment to extend credit to any
directors, officers or any affiliated or related persons of the directors
or officers of VJET or of any VJET Subsidiary; increase, or permit any VJET
Subsidiary to increase, any outstanding loan to any of the directors,
officers of any affiliated or related persons of the directors or officers
of VJET or of any VJET Subsidiary; or enter into any agreement,
understanding or commitment, written or oral, which obligates VJET, any of
the VJET Subsidiaries or their successors or assigns to make any loan or
advance or payment to any of the directors or officers or to any affiliated
or related persons of any of the directors or officers of VJET or of any
VJET Subsidiary.
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(l) VJET agrees to provide to the law firm or accounting firm providing
the tax opinion referred to in Section 5.02(n) hereof, those customary
representations (to the extent true) which would be required by the
Internal Revenue Service under Revenue Procedure 86-42 to obtain a
favorable ruling that the Merger qualifies as a tax-deferred reorganization
under Internal Revenue Code Section 368(a).
4.03 Airways Stockholder Approval. Subject to Section 4.04 hereof, Airways
agrees to submit this Agreement and the Plan of Merger to its stockholders for
approval, all as provided by law and its Articles of Incorporation, at a
meeting (the "Airways Special Meeting") which shall be held prior to the
Closing Date. The Board of Directors of Airways will, subject to Section 4.04
hereof, recommend that the stockholders of Airways vote to adopt and approve
the Merger and use its best efforts to solicit from stockholders proxies in
favor of such adoption and approval. By separate agreement, Robert D. Swenson,
Lowell T. Swenson and Carl R. Pohlad (collectively, the "Insiders") have
agreed that they will not dispose of their shares of Airways Common Stock and
will vote in favor of the Merger; provided, however, that the Insiders'
obligations under said Agreement will be suspended if the Board of Directors
of Airways determines in the exercise of its fiduciary duties to entertain,
negotiate or participate in any other Acquisition Proposal for so long as it
is so entertaining, negotiating or participating in any such other Acquisition
Proposal (and shall terminate if Airways accepts a Superior Proposal) and pays
the termination fee set forth in Section 5.04(c).
4.04 No Solicitation. From and after the date hereof, Airways will not, and
shall use its reasonable best efforts not to permit, any of its officers,
directors, employees, attorneys, financial advisors, agents or other
representatives or those of any of its Subsidiaries to, directly or
indirectly, solicit, initiate or knowingly encourage (including by way of
furnishing information) any Acquisition Proposal from any person, or engage in
or continue discussions or negotiations relating thereto; provided, however,
that Airways may engage in discussions or negotiations with, and furnish
information concerning Airways and its Subsidiaries, businesses, properties or
assets to, any third party which makes an Acquisition Proposal if the Board of
Directors of Airways concludes in good faith after consultation with its
outside counsel (who may be Airways' engaged outside counsel) that the failure
to take such action would present a reasonable possibility of violating the
obligations of such Board to Airways or to Airways' stockholders under
applicable law. Airways will promptly (but in no case later than 48 hours)
notify VJET of the receipt of any Acquisition Proposal, including the material
terms and conditions thereof and the identify of the person or group making
such Acquisition Proposal, and will promptly (but in no case later than 48
hours) notify VJET of any determination by Airways' Board of Directors that a
Superior Proposal (as hereinafter defined) has been made. As used in this
Agreement, (i) "Acquisition Proposal" shall mean any proposal or offer, or any
expression of interest by any third party relating to Airways' willingness or
ability to receive or discuss a proposal or offer, in each case made prior to
the stockholder vote at the Airways Special Meeting, other than a proposal or
offer by VJET or any of its Subsidiaries, for a merger, consolidation or other
business combination involving, or any purchase of, all or substantially all
of the assets of Airways or Airways' Subsidiary or 100% of the voting
securities of Airways, and (ii) "Superior Proposal" shall mean a bona fide
Acquisition Proposal made by a third party on terms that a majority of the
members of the Board of Directors of Airways determines in their good faith
reasonable judgment (based on the advice of an independent financial advisor)
may be more favorable to Airways and to its stockholders than the transactions
contemplated hereby and for which any required financing is committed or
which, in the good faith reasonable judgment of a majority of such members
(after consultation with any independent financial advisor), is then available
to such third party.
4.05 VJET Stockholder Approval. VJET agrees to submit to its stockholders a
proposal to amend its Articles of Incorporation and Bylaws as set forth in
Exhibit B annexed hereto and made a part hereof and, if required under Nevada
law or by NASDAQ, VJET agrees to submit this Agreement and the Plan of Merger
to its stockholders for approval, all as provided by law and its Articles of
Incorporation, at a meeting (the "VJET Meeting") which shall be held prior to
the Closing Date. The Board of Directors of VJET will recommend that the
stockholders of VJET vote to adopt and approve the amendment to its Articles
of Incorporation, Bylaws and the Merger, and use their best efforts to solicit
from stockholders proxies in favor of such adoption and approval. By separate
agreement, at least three of the following persons (Timothy P. Flynn, Maurice
J. Gallagher, Jr., Lewis H. Jordan and Robert L. Priddy) shall agree that they
will vote in favor of the amendment to VJET's Articles of Incorporation and
By-laws and in favor of the Merger.
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4.06 No Granting of Options.
(a) Prior to the Closing Date, neither Airways nor any of its Subsidiaries
will, without the prior written consent of VJET, grant any options, warrants
or other rights to purchase or otherwise acquire any shares of its capital
stock or issue any securities convertible into shares of its capital stock or
to accelerate the vesting of any such option, warrant or right.
(b) Prior to the Closing Date, neither VJET nor any of its Subsidiaries
will, without the prior written consent of Airways, grant any options,
warrants or other rights to purchase or otherwise acquire any shares of its
capital stock or issue any securities convertible into shares of its capital
stock or to accelerate the vesting of any such option, warrant or right except
that options may be granted to newly hired executive officers in amounts
consistent with prior practice.
4.07 VJET Registration Statement. Prior to the Effective Date of the Merger,
VJET shall have prepared and filed with the SEC, a registration statement on
Form S-4 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") , and under the blue sky laws of such states as
may be required by law, for the purpose of registering the shares of VJET
Common Stock into which the shares of Airways Common Stock will be converted
pursuant to Article V of the Plan of Merger, which Registration Statement is
intended to permit Airways' stockholders (other than Airways Affiliates who
would be subject to Rule 144 limitations) to freely trade their shares. VJET
will use reasonable efforts to cause such Registration Statement to become
effective as soon as reasonably practicable.
4.08 Information for Registration Statement and Proxy Statement. Airways and
VJET will each furnish to the other such data and information relating to it
as the other may reasonably request for the purpose of including such data and
information in any proxy statement or registration statement which the other
may use in connection with the special meetings of stockholders to be held to
consider and take action with respect to the approval and adoption of this
Agreement and the Plan of Merger.
4.09 Restricted VJET Common Stock. Airways will deliver to VJET not later
than three business days before the Effective Date of the Merger a schedule
listing all Airways Affiliates and the amounts of shares held by each, for the
purpose of permitting VJET to imprint appropriate legends on the certificates
representing the shares of VJET Common Stock to be issued pursuant to the
Merger to Airways Affiliates. For the purposes of this Agreement, "Airways
Affiliates" means each director of Airways and each person who, should such
person resell, transfer or distribute VJET Common Stock acquired by him in
connection with the Merger, would be subject to the requirements of paragraphs
(c) and (d) of Rule 145, as amended, under the Securities Act, or who would
otherwise be considered to be an Airways Affiliate under the applicable rules
and regulations of the SEC and the Securities Act.
4.10 Consents. Airways and VJET shall each use its best efforts to obtain
the consent or approval of each person whose consent or approval shall be
required in order to permit the respective party to consummate the Merger
without acceleration of indebtedness of such party or without breaching any
contract to which such party is subject. Airways may not, without VJET's prior
written consent, pay or agree to pay more than a mutually agreed amount to
obtain any such consent.
4.11 Best Efforts. Upon the terms and subject to the conditions of this
Agreement, each of VJET and Airways agrees to use its respective best efforts
to take, or cause to be taken, and to assist and cooperate with the other
party hereto in doing, all things reasonably necessary, proper or advisable
under applicable laws and regulations to consummate and make effective, in the
most expeditious manner practicable, the transactions contemplated by this
Agreement and the Plan of Merger, including, without limitation, using such
best efforts to obtain any necessary actions, waivers, consents and approvals
from the DOT, the FAA and other governmental agencies and make all necessary
registrations and filings (including, without limitation, joint filings with
the DOT, the United States Federal Trade Commission and other governmental
agencies).
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4.12 Indemnification and Insurance.
(a) VJET agrees that all rights to exculpation and indemnification for acts
or omissions occurring prior to the Effective Date of the Merger now existing
in favor of the current or former directors or officers (the "Indemnified
Parties") of Airways as provided in its charter, by-laws, in any agreement or
any statute or other law shall survive the Merger and shall continue in full
force and effect in accordance with their terms. For six years from the
Effective Date of the Merger, VJET shall indemnify the Indemnified Parties to
the same extent as such Indemnified Parties are entitled to indemnification
pursuant to the preceding sentence.
(b) For six years and one month from the Effective Date of the Merger, VJET
shall, maintain in effect directors' and officers' liability insurance
covering those persons who are currently covered by Airways' directors' and
officers' liability insurance policy with respect to all acts occurring prior
to the Effective Date of the Merger. Such continuing liability insurance shall
be maintained with limits not less than $25,000,000 so long as it is
commercially reasonable to do so, but in no event less than the coverage
limits applicable to the then current officers and directors of VJET.
4.13 Governmental Reports.
(a) Between the date of this Agreement and the Closing Date, Airways shall
furnish or make available to VJET any and all reports, not heretofore
delivered to VJET under this Agreement or which are filed subsequent to the
date of this Agreement, to any state or federal government, agency or
department, including but not limited to, the FAA, DOT, IRS, EPA, FTC and
PBGC.
(b) Between the date of this Agreement and the Closing Date, VJET shall
furnish or make available to Airways any and all reports, not heretofore
delivered to Airways under this Agreement or which are filed subsequent to the
date of this Agreement, to any state or federal government, agency or
department, including but not limited to, the FAA, DOT, IRS, EPA, FTC and
PBGC.
4.14 SEC Filings. Each party shall provide the other party with all reports
and other filings it makes with the SEC under the Securities Act or under the
Exchange Act from the date of this Agreement to the Closing Date.
4.15 Listing of VJET Common Stock. VJET shall use reasonable efforts to
obtain, prior to the Closing Date, approval for listing on the NASDAQ Stock
Market ("NASDAQ"), upon official notice of issuance, the shares of VJET Common
Stock constituting the Merger Price.
4.16 Hart-Scott-Rodino Filing. VJET shall assume the responsibility for
completing and filing the Notification and Report Form required by the HSR
Act. Airways shall furnish VJET with all information needed from Airways to
complete the Hart-Scott-Rodino Notification and Report Form, and shall
otherwise fully cooperate with VJET in the completion and filing of the
Notification and Report Form.
4.17 Fees and Expenses. Except to the extent set forth in Section 5.04(d),
all fees and expenses incurred in connection with the Merger and the other
transactions contemplated hereby shall be paid by the party incurring such
fees or expenses, whether or not the Merger is consummated.
ARTICLE V
CONDITIONS OF MERGER; ABANDONMENT OF MERGER
5.01 Conditions of Obligations of VJET. The obligations of VJET to effect
the Merger shall be subject to the following conditions:
(a) Airways Stockholder and Board of Directors Approvals. Airways shall
have furnished VJET with (i) evidence that the stockholders of Airways
shall have approved the Merger, (ii) certified copies of resolutions duly
adopted by the Board of Directors of Airways authorizing all necessary and
proper corporate action to enable Airways to comply with the terms of this
Agreement and the Plan of Merger and approving the execution and delivery
to VJET of this Agreement and the execution and delivery of the Plan of
Merger to VJET; and (iii) an Incumbency Certificate for the appropriate
officers of Airways.
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(b) Representations and Warranties of Airways to be True. Except to the
extent waived hereunder, (i) the representations and warranties of Airways
herein contained shall be true on the Closing Date with the same effect as
though made at such time as if none of such representations and warranties
contained any qualifications as to materiality or the absence of a Material
Adverse Effect; provided, however, that notwithstanding the foregoing, this
condition shall be deemed to be satisfied if all breaches of such
representations and warranties, do not cumulatively constitute a Material
Adverse Effect; and (ii) Airways shall have performed all obligations and
complied with all covenants required by this Agreement to be performed or
complied with by it prior to the Effective Date of the Merger. Airways
shall also have delivered to VJET a certificate of Airways, dated the
Effective Date of the Merger and signed by its Chairman of the Board or
President to both of the aforementioned effects. Notwithstanding the
foregoing, VJET shall not rely on this Section 5.01(b) to excuse its
performance hereunder unless: (i) VJET shall have given Airways written
notice of any breach of covenants and Airways fails to cure such breach
within a reasonable time (but not more than ten days) after receipt of such
notice, and (ii) the breach of representations, warranties or covenants
will constitute a Material Adverse Effect with respect to Airways.
(c) Third Party Consents. Airways shall have obtained consents to the
transactions contemplated by this Agreement to the extent required from its
bank lender group, from other persons which are parties to material
contracts with Airways or its Subsidiaries (except Comair, Inc. and Delta
Air Lines, Inc.) and from all federal, state or local governmental agencies
except to the extent the failure to obtain one or more consents would not
materially affect the continuing business of the Airways' Subsidiary. There
shall have been completed all Hart-Scott-Rodino and other like governmental
filings, and there shall have been obtained Hart-Scott-Rodino approval or
expiration of the applicable waiting period.
(d) Registration of VJET Stock. The Registration Statement shall have
become effective under the Securities Act and no stop order suspending the
effectiveness shall have been issued and no proceedings for that purpose
shall have been instituted, pending or contemplated under such Act, and the
shares to be issued to Airways' stockholders pursuant hereto shall have
been duly registered under the Securities Act.
(e) No Material Adverse Effect. Airways shall not have suffered or
incurred any Material Adverse Effect since March 31, 1997, other than as
disclosed by Airways to VJET (whether by public filings or separate
disclosure) prior to the execution of this Agreement.
(f) VJET Bond Holder Consent. VJET shall have secured the consent to the
transactions contemplated hereby by the requisite proportion of the holders
of the VJET 10 1/4% Senior Notes due 2001. VJET agrees to use good faith
efforts to obtain such bondholder consent on or before the earlier of the
date the Registration Statement is declared effective by the SEC or the
date that is sixty (60) days after the date of this Agreement.
(g) Performance of Agreement. There shall not have been issued and be in
effect any order of any court or tribunal of competent jurisdiction or
governmental agency which in effect prohibits the performance of this
Agreement or the Merger and the transactions contemplated hereby, or would
impose limitations on the ability of VJET effectively to exercise and
possess all the rights, privileges, immunities and franchises of Airways or
of any Airways Subsidiary as of the Closing Date.
(h) Statutory Requirements; Litigation. All statutory requirements for
the valid consummation by VJET and Airways of the transactions contemplated
by this Agreement and the Plan of Merger shall have been fulfilled; all
authorizations, consents and approvals of all federal, state or local
governmental agencies and authorities required to be obtained in order to
permit consummation by VJET and Airways of the transactions contemplated by
this Agreement and the Plan of Merger and to permit the business presently
carried on by Airways and its Subsidiaries to continue unimpaired
immediately following the Effective Date of the Merger shall have been
obtained; the FAA and DOT shall have approved the transaction in such a
manner that Airways and its Subsidiaries shall not after the Merger become
subject to any restrictions currently applicable to VJET or its
Subsidiaries or subject to any restrictions not currently applicable to
Airways and its Subsidiaries; between the date of this Agreement and the
Effective Date of the Merger, no governmental agency, whether federal,
state or local, shall have instituted (or threatened to institute either
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orally or in a writing directed to Airways, any of its Subsidiaries, VJET
or any of its Subsidiaries) an investigation which is pending on the
Effective Date of the Merger relating to the Merger and between the date of
this Agreement and the Effective Date of the Merger no action or proceeding
shall have been instituted or, to the knowledge of VJET, shall have been
threatened before a court or other governmental body or by any public
authority to restrain or prohibit the transaction contemplated by this
Agreement or the Plan of Merger or to obtain damages in respect thereof.
(i) Opinion of Counsel of Airways. VJET shall have received from Briggs &
Morgan, counsel to Airways, an opinion, dated the Closing Date, in form and
substance satisfactory to VJET's counsel, Ellis, Funk, Goldberg, Labovitz &
Dokson, P.C., to the effect that (i) each of Airways and its Subsidiaries
is a corporation duly organized and validly existing and in good standing
under the laws of the jurisdiction of its respective incorporation, (ii)
each of Airways and its Subsidiaries is duly qualified or licensed, as may
be required, as a foreign corporation, and in good standing in each
jurisdiction where the failure to do so would constitute a Material Adverse
Effect, (iii) each of Airways and its Subsidiaries has the corporate power
to carry on its business as now being conducted, (iv) the authorized
capital stock of Airways is as set forth in Section 2.03 hereof, and
stating the number of such shares which have been issued, and that such
issued shares have been duly authorized, are validly issued and
outstanding, and are fully paid and nonassessable, (v) all of the
outstanding shares of capital stock of the Airways Subsidiaries are
directly or indirectly owned free and clear of all liens, charges or
encumbrances, all of such shares have been duly authorized, are validly
issued and outstanding, and are fully paid and nonassessable, and neither
Airways nor its Subsidiaries is a party to or bound by any outstanding
option or agreement to sell, issue or otherwise dispose of any capital
stock of Airways or its Subsidiaries except the Airways options and
warrants referred to in Section 2.03 hereof, and (vi) this Agreement and
the Plan of Merger each has been duly executed and delivered by Airways and
is the valid, binding and enforceable obligation of Airways (subject to
equity principles of general application and to applicable bankruptcy,
reorganization, insolvency and moratorium laws and other laws from time to
time in effect affecting the enforcement of creditor's rights generally and
no opinion shall be required with respect to the enforceability of any
liquidated damage provision contained herein), and all corporate action by
the Board of Directors and stockholders of Airways required to authorize
the Merger has been taken, and Airways has the corporate power to effect
the Merger provided for in this Agreement and the Plan of Merger. In
rendering such opinion such counsel may rely, to the extent such counsel
deems such reliance necessary or appropriate, on opinions of local counsel
as to matters involving the law other than that of the United States or the
State of Delaware and, as to matters of fact, upon certificates of state
officials and of corporate officers of Airways, provided the extent of such
reliance is specified in such opinion.
(j) VJET Stockholder Approval. The holders of a majority of the
outstanding shares of VJET Common Stock shall have approved the amendment
to VJET's Articles of Incorporation, the amendment to the By-laws set forth
in Exhibit "B" attached hereto and the Merger at a meeting of stockholders
duly called for such purpose.
(k) Plan of Merger. Airways shall have delivered to VJET a duly executed
copy of the Plan of Merger and Articles of Merger.
(l) Listing of VJET Common Stock. The shares of VJET Common Stock to be
delivered to Airways stockholders in payment of the Merger Price shall have
been approved for listing on NASDAQ, upon official notice of issuance.
(m) Fairness Opinion. The Board of Directors of VJET shall have received
a written opinion from The Robinson-Humphrey Company, Inc. dated as of the
date of the Proxy Statement relating to VJET's stockholder meeting
contemplated by Section 5.01(j), in customary form, stating that the terms
of the Merger are fair to the stockholders of VJET from a financial point
of view; provided, however, that this condition shall be deemed to have
been waived if (i) VJET does not receive such fairness opinion on or before
the date of such Proxy Statement, and (ii) VJET does not terminate this
Agreement as provided in Section 5.03(g). VJET agrees to use its good faith
efforts to obtain such fairness opinion within such time period.
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(n) Minute Books and Stock Ledgers. Airways shall have delivered to VJET
the minute books and stock ledgers for Airways and each of its
Subsidiaries.
(o) Tax Opinion. VJET shall have received a tax opinion from Ernst &
Young LLP to the effect that the Merger will be treated for federal income
tax purposes as a tax free reorganization within the meaning of Internal
Revenue Code Section 368(a); provided, however, that if Ernst & Young LLP
does not provide such opinion, then Airways shall have the right to have
such opinion provided by Airways' counsel or independent public
accountants.
5.02 Conditions of Obligation of Airways. The obligation of Airways to
effect the Merger shall be subject to the following conditions:
(a) VJET Stockholders and Board of Director Approvals. VJET shall have
furnished Airways with (i) evidence that the stockholders of VJET shall
have approved the amendment to its Articles of Incorporation and Bylaws set
forth in Exhibit A and, if required by NASDAQ, the Merger (ii) certified
copies of resolutions duly adopted by its Board of Directors authorizing
all necessary and proper corporate action to enable VJET to comply with the
terms of this Agreement and the Plan of Merger and approving the execution
and delivery to Airways of this Agreement and the Plan of Merger; and (iii)
Incumbency Certificates for the officers of VJET.
(b) Representations and Warranties of VJET to be True. Except to the
extent waived hereunder, (i) the representations and warranties of VJET
herein contained shall be true on the Closing Date with the same effect as
though made at such time as if none of such representations and warranties
contained any qualifications as to materiality or the absence of a Material
Adverse Effect; provided, however, notwithstanding the foregoing this
condition shall be deemed to be satisfied if all breaches of such
representations and warranties do not cumulatively constitute a Material
Adverse Effect; and (ii) VJET shall have performed all obligations and
complied with all covenants required by this Agreement to be performed or
complied with by it prior to the Effective Date of the Merger. VJET shall
also have delivered to Airways a certificate of VJET, dated the Effective
Date of the Merger and signed by its Chairman of the Board or President as
to both of the aforementioned effects. Notwithstanding the foregoing,
Airways shall not rely on this Section 5.02(b) to excuse its performance
hereunder unless: (i) Airways shall have given VJET written notice of any
breach of covenants and VJET fails to cure such breach within a reasonable
time (but not more than ten days) after receipt of such notice, and (ii)
the breach of representations, warranties or covenants will constitute a
Material Adverse Effect with respect to VJET or has or is likely to
materially adversely affect VJET's stock price.
(c) Third Party Consents. VJET shall have obtained consents to the
transactions contemplated by this Agreement to the extent required from all
federal, state or local governmental agencies except to the extent the
failure to obtain one or more consents would not materially affect VJET's
continuing business. There shall have been completed all Hart-Scott-Rodino
and other like governmental filings, and there shall have been obtained
Hart-Scott-Rodino approval or expiration of the applicable waiting period.
(d) VJET Bondholder Consent. VJET shall have secured the consent of the
requisite proportion of the holders of the VJET 10 1/4% Senior Notes due
2001 to the transactions contemplated hereby.
(e) Registration of VJET Stock. The Registration Statement shall have
become effective under the Securities Act and all other applicable statutes
and no stop order suspending the effectiveness shall have been issued and
no proceedings for that purpose shall have been instituted, pending or
contemplated under such Act, and the shares to be issued to Airways'
stockholders pursuant hereto shall have been duly registered under the
Securities Act.
(f) No Material Adverse Effect. VJET shall not have suffered or incurred
any Material Adverse Effect since March 31, 1997, other than as disclosed
by VJET to Airways (whether by public filings or separate disclosure) prior
to the execution of this Agreement.
(g) Statutory Requirements; Litigation. All statutory requirements for
the valid consummation by VJET and Airways of the transaction contemplated
by this Agreement and the Plan of Merger shall have
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been fulfilled; all authorizations, consents and approvals of all federal,
state or local governmental agencies and authorities required to be
obtained in order to permit consummation by VJET and Airways of the
transactions contemplated by this Agreement and the Plan of Merger and to
permit the business presently carried on by VJET to continue unimpaired
immediately following the Effective Date of the Merger shall have been
obtained; the FAA and DOT shall have approved the transaction in such a
manner that Airways and its Subsidiaries will not after the Merger become
subject to any restrictions currently applicable to VJET or its
Subsidiaries or subject to any restrictions not currently applicable to
Airways and its Subsidiaries; between the date of this Agreement and the
Effective Date of the Merger no governmental agency, whether federal, state
or local, shall have instituted (or threatened to institute either orally
or in a writing directed to Airways, any of its Subsidiaries, VJET or its
Subsidiaries) an investigation which is pending on the Effective Date of
the Merger relating to the Merger and between the date of this Agreement
and the Effective Date of the Merger no action or proceeding shall have
been instituted or, to the knowledge of Airways, shall have been threatened
before a court or other governmental body or by any public authority to
restrain or prohibit the transaction contemplated by this Agreement or the
Plan of Merger or to obtain damages in respect thereof.
(h) Performance of Agreement. There shall not have been issued and be in
effect any order of any court or tribunal of competent jurisdiction or
governmental agency which in effect prohibits the performance of this
Agreement or the Merger and the transactions contemplated hereby.
(i) Opinion of Counsel of VJET. Airways shall have received from Ellis,
Funk, Goldberg, Labovitz & Dokson, P.C., counsel to VJET, an opinion, dated
the Closing Date, in form and substance satisfactory to Airways' counsel,
Briggs & Morgan to the effect that (i) VJET is a corporation duly organized
and validly existing and in good standing under the laws of the State of
Nevada, (ii) VJET has the corporate power to carry on its business as now
being conducted, (iii) the authorized capital stock of VJET is as set forth
in Section 3.03 hereof, and stating the number of shares of such authorized
capital stock which are issued, that such issued shares have been duly
authorized, are validly issued and outstanding, and are fully paid and
nonassessable, (iv) the shares of VJET Common Stock for which the shares of
Airways Common Stock are to be exchanged pursuant to the Plan of Merger
have been duly authorized and, immediately after the Effective Date of the
Merger, will be duly and validly issued and will be fully paid and
nonassessable, (v) this Agreement and the Plan of Merger have been duly
executed and delivered by VJET and this Agreement is the valid, binding and
enforceable (subject to equity principles of general application and to
bankruptcy, reorganization, insolvency and moratorium laws and other laws
from time to time in effect affecting the enforcement of creditors' rights
generally and no opinion shall be required with respect to the
enforceability of any liquidated damage provision contained herein)
obligation of VJET, the Plan of Merger is the valid and binding obligation
of VJET, all corporate action by the Board of Directors of VJET and the
stockholders of VJET required to authorize the Merger has been taken, and
VJET has the corporate power to effect the Merger provided for in this
Agreement and the Plan of Merger, and (vi) the Registration Statement shall
have been declared effective by the SEC. In rendering such opinion such
counsel may rely, to the extent such counsel deems such reliance necessary
or appropriate, on opinions of local counsel as to matters involving the
law other than that of the United States or the State of Nevada and, as to
matters of fact, upon certificates of state officials and of corporate
officers of VJET, provided the extent of such reliance is specified in such
opinion.
(j) Airways Stockholder Approval. The holders of a majority of the
outstanding shares of Airways Common Stock shall have approved the Merger
at a meeting of stockholders duly called and held for such purpose.
(k) Plan of Merger. VJET shall have delivered to Airways a duly executed
copy of the Plan of Merger and Articles of Merger containing the Plan of
Merger.
(l) Listing of VJET Common Stock. The shares of VJET Common Stock to be
delivered to Airways stockholders in payment of the Merger Price shall have
been approved for listing on NASDAQ, upon official notice of issuance.
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<PAGE>
(m) Fairness Opinion. The Board of Directors of Airways shall have
received a written opinion from Paine Webber Incorporated dated as of the
date of the Proxy Statement relating to Airways' stockholders meeting
contemplated by Section 5.02(j), in customary form, stating that the terms
of the Merger are fair to the stockholders of Airways from a financial
point of view; provided, however, that this condition shall be deemed to
have been waived if (i) Airways does not receive such fairness opinion on
or before the date of said Proxy Statement, and (ii) Airways does not
terminate this Agreement as provided in Section 5.03(h). Airways agrees to
use its good faith efforts to obtain such fairness opinion within such time
period.
(n) Tax Opinion. Airways shall have received a tax opinion from Briggs &
Morgan to the effect that the Merger will be treated for federal income tax
purposes as a tax free reorganization within the meaning of Internal
Revenue Code Section 368(a) and that the tax treatment to be accorded
Airways' stockholders in connection with the spin-off of Airways which
occurred in September 1995, shall not be adversely affected by the
consummation of the transactions contemplated hereby; provided, however,
that if Briggs & Morgan does not provide such opinion, then VJET shall have
the right to have such opinion provided by VJET's counsel or independent
public accountants. For purposes of this subparagraph (n), the law firm or
accounting firm may assume that the Airways' stockholders will maintain
their respective interests in VJET after the Merger to the extent necessary
to support the rendering of such favorable opinion.
(o) No Event of Default on VJET Secured Debt. There shall not be then in
existence any event of default under any of VJET's secured debt.
5.03 Termination of Agreement and Abandonment of Merger. Anything herein to
the contrary notwithstanding, this Agreement and the Merger contemplated
hereby may be terminated at any time before the Effective Date of the Merger,
whether before or after approval of this Agreement by the respective
stockholders of VJET and Airways, as follows, and in no other manner:
(a) Mutual Consent. By mutual consent of the Boards of Directors of VJET
and Airways.
(b) Conditions of Airways Not Met. By the Board of Directors of VJET if,
by November 30, 1997 or such later date as may be determined by mutual
agreement of VJET and Airways, the conditions set forth in Section 5.01 of
this Article V shall not have been met (or waived as provided in Article
VIII of this Agreement).
(c) Conditions of VJET Not Met. By the Board of Directors of Airways if,
by November 30, 1997 or such later date as may be determined by mutual
agreement of VJET and Airways, the conditions set forth in Section 5.02 of
this Article V shall not have been met (or waived as provided in Article
VIII of this Agreement).
(d) Expiration Date. By the Board of Directors of either VJET or Airways
if the Merger shall not have become effective by November 30, 1997, which
date may be extended by mutual agreement of the Board of Directors of VJET
and Airways.
(e) Superior Proposal. By Airways if Airways receives a Superior Proposal
and pays the termination fee set forth in Section 5.06(a).
(f) Acquisition Proposal. By VJET if Airways receives an Acquisition
Proposal which Airways continues to entertain or negotiate for a period of
21 days after its receipt.
(g) VJET Fairness Opinion. By VJET if it does not receive the fairness
opinion referred to in Section 5.01(m) within the time period provided
therein; provided, however, that this right to terminate may not be
exercised later than ten (10) days after the date the Registration
Statement is declared effective by the SEC.
(h) Airways Fairness Opinion. By Airways if it does not receive the
fairness opinion referred to in Section 5.02(m) within the time period
provided therein; provided, however, that this right to terminate may not
be exercised later than ten (10) days after the date the Registration
Statement is declared effective by the SEC.
5.04 Liquidated Damages to VJET.
(a) In the event VJET is ready, willing and able to consummate the Merger,
but Airways shall fail to consummate the Merger after all of the conditions to
Airways' performance as set forth in Section 5.02
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<PAGE>
thereof shall have been satisfied or shall have been waived by Airways, then
Airways shall pay to VJET upon its demand therefor, in immediately available
funds, Five Million Dollars ($5,000,000) as liquidated damages and not as a
penalty.
(b) In the event VJET shall elect not to consummate the Merger as a result
of Airways' failure to comply in all material respects with all material
covenants required to be performed by Airways prior to the Effective Date of
Merger as provided in Sections 4.01 and 4.06 of this Agreement, then Airways
shall pay to VJET upon its demand therefor, in immediately available funds,
Five Million Dollars ($5,000,000) as liquidated damages and not as a penalty.
(c) In the event the Merger is not consummated for the reasons set forth in
this Section 5.04, VJET will suffer substantial damage to its reputation and
public image, in addition to the costs and expenses incurred by it in the
pursuit of this transaction. Airways acknowledges and agrees that the actual
losses to be suffered by VJET in the event the Merger is not consummated for
the reasons set forth in this Section 5.04 will be difficult to ascertain and
that these liquidated damages have been arrived at after a good faith effort
to estimate such losses and are reasonable.
5.05 Liquidated Damages to Airways.
(a) In the event Airways is ready, willing and able to consummate the
Merger, but VJET shall fail to consummate the Merger after all of the
conditions to VJET's performance as set forth in Section 5.01 of this
Agreement shall have been satisfied or shall have been waived by VJET, then
VJET shall pay to Airways upon its demand therefor, in immediately available
funds, Five Million Dollars ($5,000,000) as liquidated damages and not as a
penalty.
(b) In the event Airways shall elect not to consummate the Merger as a
result of VJET's failure to comply in all material respects with all material
covenants required to be performed by VJET prior to the Effective Date of
Merger as provided in Sections 4.02 and 4.06 of this Agreement, then VJET
shall pay to Airways upon its demand therefor, in immediately available funds,
Five Million Dollars ($5,000,000) as liquidated damages and not as a penalty.
(c) In the event the Merger is not consummated for the reasons set forth in
this Section 5.05, Airways will suffer substantial damage to its reputation
and public image, in addition to the costs and expenses incurred by it in the
pursuit of this transaction. VJET acknowledges and agrees that the actual
losses to be suffered by Airways in the event the Merger is not consummated
for the reasons set forth in this Section 5.05 will be difficult to ascertain
and that these liquidated damages have been arrived at after a good faith
effort to estimate such losses and are reasonable.
5.06 Certain Termination Payments.
(a) In the event Airways terminates this Agreement pursuant to Section
5.03(e), then Airways shall pay to VJET, upon VJET's demand, a termination fee
equal to the sum of Three Million Dollars ($3,000,000) in immediately
available funds.
(b) In the event VJET terminates this Agreement pursuant to Section 5.03(f),
then Airways shall pay to VJET, upon VJET's demand all of VJET's out-of-pocket
costs incurred to third parties in connection with this Agreement and the
transactions contemplated hereby.
ARTICLE VI
DETERMINATION OF THE MERGER PRICE
6.01 The Merger Price. Upon the Effective Date of the Merger, holders of
Airways Common Stock shall be entitled to receive the portion of the Merger
Price to which each is entitled pursuant to the Plan of Merger. The Merger
Price shall be paid in the form of VJET Common Stock. The total number of
shares of VJET Common Stock to be issued to the stockholders of Airways in the
Merger (the "Merger Price") shall be equal to the number of shares of Airways
Common Stock issued and outstanding on the Closing Date.
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ARTICLE VII
OTHER AGREEMENTS AFTER CLOSING
7.01 Corporate Governance After Merger. VJET shall expand its Board of
Directors to seven (7) members effective as of the Closing Date. Four (4) of
the members of the Board of Directors will be selected by VJET prior to the
Closing and three (3) of the members of the Board of Directors will be
selected by Airways prior to the Closing. Said Directors will be elected for a
term expiring upon VJET's 1999 annual stockholders' meeting.
7.02 Press Releases. Each party shall consult with the other party hereto
before publishing, releasing or otherwise disseminating to the public any
information, publicity or statements concerning this Agreement, the Plan of
Merger or any of the transactions herein contemplated; provided, however, that
this section shall not be construed to prohibit any of the parties hereto from
making announcements to the press with respect to other factual business or
financial developments concerning its operations or making any such releases
as are time-critical under applicable law or regulations.
7.03 Other Agreements.
(i) Promptly after the Effective Date of the Merger, VJET shall issue
lifetime passes to all persons who were members of Airways' Board of Directors
immediately prior to the Effective Date of the Merger, which passes shall
provide the same level of authority as the passes granted to Robert L. Priddy
and Lewis H. Jordan and may be used by each such person, his spouse and
dependents.
(ii) VJET will enter into a consulting agreement with each of Robert L.
Priddy and Lewis H. Jordan providing for: (i) a five (5) year term, (ii)
compensation of $100,000 per year, (iii) their respective option agreements
with VJET will be amended such that such options will remain exercisable until
the expiration date thereof notwithstanding his termination of employment,
(iv) lifetime pass benefits for himself, his spouse and dependents, and (v)
lifetime eligibility for coverage in VJET's health insurance plan in effect
from time to time. In consideration therefor, each of them agrees to devote
such time during such five year period as may be necessary to supervise on
behalf of VJET in connection with its defense to litigation in process prior
to the Closing Date.
7.04 Tax Treatment. Each of VJET and Airways will use its best efforts to
cause the Merger to qualify as a reorganization under the provisions of
Section 368(a) of the Code. Neither party nor any affiliate shall take any
action that would cause the Merger not to qualify as a reorganization under
Section 368(a) except to the extent that such action is specifically
contemplated by this Agreement.
ARTICLE VIII
TERMINATION OF OBLIGATIONS AND WAIVER OF CONDITIONS
8.01 Termination. In the event that this Agreement shall be terminated
pursuant to Section 5.03 of Article V hereof, all further obligations of the
parties hereto under this Agreement shall terminate without further liability
of any party to another and each party hereto will pay all costs and expenses
incident to its negotiation and preparation of this Agreement and to its
performance and compliance with all agreements and conditions contained herein
on its part to be performed or complied with, including the fees, expenses and
disbursements of its counsel. The foregoing shall not apply to the extent
certain provisions survive the termination of this Agreement as provided in
Section 9.06.
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<PAGE>
8.02 Waiver. If any of the conditions specified in Section 5.01 of Article V
hereof has not been satisfied, VJET may nevertheless, at the election of VJET,
proceed with the transactions contemplated hereby and, if any of the
conditions specified in Section 5.02 of Article V hereof has not been
satisfied, Airways may nevertheless, at its election, proceed with the
transactions contemplated hereby. Any such election to proceed shall be
evidenced by a certificate executed on behalf of the electing party by its
Chairman of the Board or President.
8.03 Confidentiality. In the event of the termination of the transactions
contemplated by this Agreement, all information acquired by either VJET or
Airways, shall be held in the strictest of confidence if not public
information, and neither party shall use such information to the disadvantage
of the other.
ARTICLE IX
GENERAL
9.01 Amendments. This Agreement and the form of any exhibit attached hereto
may be amended in writing by the parties hereto before and after the meeting
of stockholders referred to in Sections 4.03 and 4.04 hereof at any time prior
to the Effective Date of the Merger.
9.02 "Subsidiaries". A "Subsidiary" with respect to any corporation referred
to in this Agreement shall mean a corporation (or equivalent legal entity
under foreign law) of which Airways, VJET or any other corporation referred to
in this Agreement, as the case may be, owns directly or indirectly 50% or more
of the stock the holders of which are ordinarily and generally, in the absence
of contingencies, entitled to vote for the election of a majority of the
directors.
9.03 "Knowledge". Wherever in this Agreement any representation or warranty
is expressed in the terms of "knowledge" or "to the best of its knowledge" of
Airways or VJET, such knowledge shall be deemed to refer to matters which the
respective officers and directors of Airways or VJET, as the case may be, knew
or should have known after diligent inquiry.
9.04 "Material Adverse Effect". With respect to any person or entity shall
mean any event, condition, development or effect which, individually or in the
aggregate, shall have had, or insofar as can reasonably be foreseen will have,
a material adverse effect on the business, operations, assets, liabilities or
condition (financial or otherwise) or prospects of a person and its
subsidiaries (if applicable) taken as a whole. For purposes of this Agreement,
the termination or expiration without renewal of Airways' code sharing
agreement with Comair, Inc. or the termination of Airways' lease of gate space
from Delta Air Lines, Inc. at the Orlando airport shall not be a Material
Adverse Effect.
9.05 Schedules. Each Disclosure Statement described in this Agreement has
been delivered simultaneously with the execution and pursuant to the terms of
this Agreement. Any information supplied to either party in writing between
the date hereof and the Closing Date if accepted by either party shall be made
a part of the Schedules hereto and be deemed to have been disclosed to the
other party for all purposes of this Agreement.
9.06 No Survival of Representations and Warranties. The respective
covenants, representations and warranties of Airways and VJET shall expire and
be terminated and extinguished on the Effective Date of the Merger, except for
Section 4.12 relating to indemnification and D&O liability insurance and those
covenants contained in Article VII hereof. Except for the provisions of
Sections 5.04, 5.05, 7.01, and 7.03, the confidentiality provisions of
Sections 4.01(a) and 4.02(a) and 8.03, the respective covenants,
representations and warranties of Airways and VJET shall expire and be
terminated and extinguished in the event of the termination and abandonment of
this Agreement as provided in Article VIII hereof. No party to this Agreement
shall have any liability to any other party to this Agreement after the
Effective Date of the Merger as a result of any breach of any covenant,
representation or warranty contained in this Agreement.
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<PAGE>
9.07 Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Nevada with respect to the Merger and governed by and construed in
accordance with the laws of the State of Georgia in all other respects.
9.08 Notices. All notices hereunder shall be deemed given if in writing and
delivered personally or sent by telecopy (with written evidence of receipt),
telegram, registered mail or certified mail (return receipt requested) to the
parties at the following addresses (or at such other addresses as shall be
specified by like notice):
(a) If to VJET, to:
ValuJet, Inc.
1800 Phoenix Blvd.
Suite 126
Atlanta, Georgia 30349
Attn: D. Joseph Corr
Fax: (770) 907-2586
With a copy to:
Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
3490 Piedmont Road
Suite 400
Atlanta, Georgia 30305
Attn: Robert B. Goldberg
Fax: (404) 233-2188
(b) If to Airways, to
Airways Corporation
6280 Hazeltine National Drive
Orlando, Florida 32822
Attn: Robert D. Swenson
Fax: (407) 888-9693
With a copy to:
Briggs & Morgan
2400 IDS Center
80 South 8th Street
Minneapolis, Minnesota 55402
Attn: R. L. Sorenson, Esq.
Fax: (612) 334-8650
Any such notice or communication shall be deemed to have been given as of
three days after posting, one day after next day delivery service or upon
personal delivery or confirmed telecopy.
9.09 No Assignment. This Agreement may not be assigned by operation of law
or otherwise without the express written consent of the other parties.
9.10 Headings. The descriptive headings of the several Articles, Sections
and paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
9.11 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties hereto and delivered to each of the other parties hereto.
9.12 Entire Agreement. This Agreement and the exhibits hereto and other
documents delivered or to be delivered pursuant hereto or incorporated by
reference herein, taken together contain the entire agreement between the
parties hereto concerning the transactions contemplated hereby and supersede
all prior agreements
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<PAGE>
or understandings, written or oral, between the parties hereto relating to the
subject matter hereof. No oral representation, agreement or understanding made
by any party hereto shall be valid or binding upon such party or any other
party hereto.
9.13 Severability. The parties intend for this Agreement to be severable. It
is mutually agreed that in the event any paragraph, subparagraph, section,
subsection, sentence, clause or phrase hereof shall be construed as illegal,
invalid or unenforceable for any reason, such determination shall in no manner
affect the other paragraphs, subparagraphs, sections, subsections, sentences,
clauses or phrases hereof which shall remain in full force and effect, as if
the said paragraph, subparagraph, section, subsection, sentence, clause or
phrase so construed as illegal, invalid or unenforceable were not originally a
part hereof, and the enforceability hereof as a whole will not be affected.
The parties hereby declare that they would have agreed to the remaining parts
hereof if they had known that such parts hereof would be construed as illegal,
invalid or unenforceable.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the day and year first above written.
Valujet, Inc.
Robert L. Priddy
By: ________________________________
Airways Corporation
Robert D. Swenson
By: ________________________________
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<PAGE>
EXHIBIT A
DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM SECTION REFERENCE
------------ -----------------
<S> <C>
Acquisition Proposal............................... Section 4.05
Airways............................................ Introductory Paragraph
Airways Affiliates................................. Section 4.09
Airways Common Stock............................... Recitals
Airways Financial Statements....................... Section 2.04(a)
Airways' Intellectual Property..................... Section 2.17(a)
Airways Plans...................................... Section 2.03
Airways SEC Filings................................ Section 2.04(a)
Airways Special Meeting............................ Section 4.03
Closing Date or Closing............................ Section 1.02
Dissenting Stockholder............................. Section 6.02
DOT................................................ Section 2.08
Effective Date of the Merger....................... Section 1.01
Exchange Act....................................... Section 2.04(a)
FAA................................................ Section 2.08
GAAP............................................... Section 2.09
HSR Act............................................ Section 2.05
Insiders........................................... Section 4.03
Material Adverse Effect............................ Section 9.04
Merger............................................. Recitals
Merger Price....................................... Section 6.01
NASDAQ............................................. Section 4.15
Plan of Merger..................................... Recitals
Proxy Statement.................................... Section 5.01(j)
Registration Statement............................. Section 4.07
SEC................................................ Section 2.04(a)
Securities Act..................................... Section 4.07
Subsidiaries....................................... Section 9.02
Superior Proposal.................................. Section 4.04
VJET............................................... Introductory Paragraph
VJET Financial Statement........................... Section 3.04(a)
VJET Meeting ...................................... Section 4.04
VJET Plans......................................... Section 3.03
VJET SEC Filings................................... Section 3.04(a)
VJET's Intellectual Property....................... Section 3.19(a)
</TABLE>
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<PAGE>
AMENDMENT TO
PLAN OF REORGANIZATION
AND
AGREEMENT OF MERGER
BETWEEN
VALUJET, INC.
AND
AIRWAYS CORPORATION
THIS IS AN AMENDMENT (the "Amendment") to that certain PLAN OF
REORGANIZATION AND AGREEMENT OF MERGER (the "Agreement") dated July 10, 1997
by and between VALUJET, INC., a Nevada corporation ("VJET"), and AIRWAYS
CORPORATION, a Delaware corporation ("Airways").
IT IS AGREED AS FOLLOWS:
1. The third "WHEREAS" clause is hereby amended changing "Section 78.451 of
the Nevada Revised Statutes" to "Section 92A.100 of the Nevada Revised
Statutes."
2. The first sentence in Section 1.01 of the Agreement is hereby amended by
changing "Section 78.458 of the Nevada Revised Statutes" to "Section 92A.200
of the Nevada Revised Statutes."
3. The last sentence in Section 7.01 of the Agreement is hereby amended to
read as follows:
"Three (3) of such members selected by VJET and two (2) of such members
selected by Airways will be elected for a term expiring upon VJET's 1999
annual stockholders' meeting."
4. Exhibit "B" is hereby amended to read as follows:
The last sentence of Section 4.2 of the By-Laws of ValuJet, Inc. is hereby
deleted and the following is added in lieu thereof:
"The Directors shall be elected at an annual or special meeting of the
Shareholders. The term of seventy-five percent (75%) of the Directors
serving as such immediately after the effective date of the merger of
Airways Corporation with and into the corporation, will expire upon the
election of Directors at the corporation's 1999 annual meeting of
Shareholders. All other Directors shall serve for a term of one (1) year or
until their successors are elected and qualified. For purposes of
determining the number of Directors constituting seventy-five percent (75%)
of the members of the Board of Directors, any fraction shall be rounded
down to the next lower whole number."
5. Except as expressly modified herein, the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the day of September, 1997.
VALUJET, INC.
/s/ Robert L. Priddy
By: _________________________________
Title: Chairman of the Board of
Directors and Chief Executive
Officer
AIRWAYS CORPORATION
/s/ Robert D. Swenson
By: _________________________________
Title: President and Chief Executive
Officer
A-31
<PAGE>
PLAN OF MERGER
PLAN OF MERGER, dated July 10, 1997, by and between Airways Corporation, a
Delaware corporation ("Airways"), and ValuJet, Inc., a Nevada corporation
("VJET"), herein sometimes referred to as the "Surviving Corporation", said
corporations being hereinafter collectively referred to as the "Constituent
Corporations".
W I T N E S S E T H:
WHEREAS, Airways is a corporation organized and existing under and by virtue
of the laws of the State of Delaware and having an authorized capitalization
of 1,000,000 shares of preferred stock, $.01 par value per share, no shares of
which are issued or outstanding and 19,000,000 shares of common stock, $.01
par value per share ("Airways Common Stock"), of which 9,067,937 shares are
issued and outstanding as of the date of this Plan of Merger; and
WHEREAS, VJET is a corporation organized and existing under and by virtue of
the laws of the State of Nevada and having an authorized capitalization of
5,000,000 shares of preferred stock, par value $.01 per share ("Preferred
Stock"), no shares of which are issued or outstanding and 1,000,000,000 shares
of Common Stock, par value $.001 per share ("VJET Common Stock") of which
54,969,238 shares are issued and outstanding as of the date of this Plan of
Merger; and
WHEREAS, Airways and VJET have entered into a Plan of Reorganization and
Agreement of Merger, dated as of July 10, 1997 (the "Merger Agreement"),
providing, among other things, for the execution and acknowledgment of this
Plan of Merger, the execution, acknowledgment and filing of Articles or
Certificates of Merger and the merger of Airways with and into VJET upon the
terms set forth in the Merger Agreement and this Plan of Merger; and
WHEREAS, the respective Boards of Directors of each of the Constituent
Corporations deem it advisable and in the best interest of each of such
corporations and their respective stockholders that Airways be merged with and
into VJET in the manner contemplated herein and in the Merger Agreement and
have adopted resolutions approving this Agreement and the Merger Agreement and
have recommended that the merger of Airways with and into VJET (the "Merger")
be approved, and that this Plan of Merger and the Merger Agreement be approved
and adopted by the stockholders of VJET and by the stockholders of Airways;
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements herein contained, and subject to the conditions herein set forth,
and for the purpose of stating the terms and conditions of the Merger, the
mode of carrying the same into effect, the manner of exchanging the shares of
VJET Common Stock issued and outstanding immediately prior to the effective
date of the Merger for the Merger Price in accordance with Article V hereof,
and such other details and provisions as are deemed desirable all as
contemplated by Section 78.451 of the Nevada Revised Statutes and Section 252
of the Delaware General Corporation Law, the parties hereto have agreed, and
do hereby agree, subject to the terms and conditions hereinafter set forth, as
follows:
ARTICLE I.
The Constituent Corporations shall be merged into a single corporation by
Airways merging into and with VJET, the Surviving Corporation, which shall
survive the Merger, pursuant to the provisions of the Nevada Revised Statutes
and the Delaware General Corporation Law. Upon such Merger, the separate
corporate existence of Airways shall cease and the Surviving Corporation shall
become the owner, without transfer, of all rights and property of the
Constituent Corporations, and the Surviving Corporation shall become subject
to all the debt and liabilities of the Constituent Corporations in the same
manner as if the Surviving Corporation had itself incurred them.
ARTICLE II.
The name of the Surviving Corporation (heretofore "ValuJet, Inc.") shall be
changed to AirTran Holdings, Inc.
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<PAGE>
ARTICLE III.
A. On the effective date of the merger, which shall be the day the Articles
or Certificates of Merger shall have been accepted for filing and filed with
the Secretary of the State of the States of Nevada and Delaware (the
"Effective Date of the Merger"), the Articles of Incorporation of VJET shall
be the Articles of Incorporation of the Surviving Corporation, provided they
shall be amended as set forth in ARTICLE II above.
B. On the Effective Date of the Merger, the bylaws of VJET, as in effect on
the Effective Date of the Merger, shall remain the bylaws of the Surviving
Corporation. Subsequent to the Effective Date of the Merger, such bylaws shall
be the bylaws of the Surviving Corporation until they shall thereafter be duly
amended, except that such Bylaws shall be amended as set forth in Exhibit B in
the Merger Agreement.
ARTICLE IV.
A. On the Effective Date of the Merger the members of the board of directors
of the Surviving Corporation shall be as follows: [FOUR PERSONS TO BE SELECTED
BY VJET PRIOR TO THE CLOSING AND THREE PERSONS TO BE SELECTED BY AIRWAYS PRIOR
TO THE CLOSING] all of whom shall continue to hold their positions as
directors until the 1999 shareholders meeting and thereafter until the
election and qualification of their respective successors or until they shall
resign, die or otherwise cease to hold such directorships in accordance with
the bylaws of the Surviving Corporation.
B. The Chairman of the Board immediately after the Effective Date of the
Merger shall be Robert D. Swenson, a non-employee Director to be designated by
Airways.
C. As of the Effective Date of the Merger, D. Joseph Corr shall become
President and Chief Executive Officer of the Surviving Corporation. All other
officers of the Surviving Corporation shall be selected by the Chief Executive
Officer, subject to the approval of the Board of Directors.
ARTICLE V.
A. On the Effective Date of the Merger, each of the then issued and
outstanding shares of VJET Common Stock shall continue to be an issued and
outstanding share of Common Stock of the Surviving Corporation.
B. On the Effective Date of the Merger, each of the then issued and
outstanding shares of Airways Common Stock shall be converted into the right
to receive the "Merger Price" which shall be one (1) share of Common Stock of
the Surviving Corporation for each share of Airways Common Stock.
C. The manner of exchanging the shares of Airways Common Stock issued and
outstanding immediately prior to the Effective Date of the Merger for the
Merger Price to be distributed to the Airways stockholders in accordance with
paragraph (1) below, shall be as follows:
(1) On the Effective Date of the Merger, each share of Airways Common Stock
issued and outstanding immediately prior to the Effective Date of the Merger
shall, by virtue of the Merger and without any action on the part of the
holder thereof, automatically be cancelled and converted into the Merger
Price, as allocated below, and each share of treasury stock of Airways shall
be cancelled.
(2) On the Effective Date of the Merger:
(i) Each record holder of a certificate theretofore evidencing Airways Common
Stock who has surrendered the same to VJET, duly endorsed with the signatures
appropriately guaranteed and accompanied by any evidence required by VJET,
shall be entitled to receive therefor one (1) share of VJET Common Stock for
each share of Airways Common Stock surrendered. The exchange agent for VJET,
First Union National Bank, Charlotte, North Carolina, will send a notice and a
transmittal form to each holder of an outstanding certificate
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<PAGE>
or certificates of Airways Common Stock who on the Effective Date of the
Merger has not so surrendered his certificate or certificates, advising such
stockholder of the terms of the conversion effected by the Merger, the method
of selling any fractional share interest (when applicable) as described in
Section (2)(iii) of this Article V, and the procedure for surrendering to the
Exchange Agent such certificate or certificates in exchange for the Merger
Price allocated therefor. Until so surrendered, each such outstanding
certificate which prior to the Effective Date of the Merger represented shares
of Airways Common Stock shall be deemed for all corporate purposes (subject to
the further provisions of this Section (2)) to evidence ownership of one (1)
share of VJET Common Stock. After the Effective Date of the Merger, the stock
transfer book of Airways shall be closed and no transfer of Airways Common
Stock shall thereafter be made. If, after the Effective Date of the Merger,
certificates representing shares of Airways Common Stock are presented to the
Surviving Corporation, they shall be cancelled and exchanged for certificates
representing VJET Common Stock.
(ii) If any certificate of VJET Common stock is to be issued to a person other
than the person in whose name the Airways Common Stock certificate is
surrendered in exchange therefor is registered, it shall be a condition to
such exchange that the certificate so surrendered shall be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
transfer pay to Airways and VJET or the Exchange Agent, as the case may be,
any transfer or other taxes required by reason of the issuance of VJET Common
Stock in any name other than that of the registered holder of the Airways
stock certificate surrendered or establish to the satisfaction of VJET or the
Exchange Agent, as the case may be, that such tax has been paid or is not
applicable.
(iii) Neither certificates nor scrip for fractional shares of VJET Common
Stock will be issued but each holder of Airways Common Stock who otherwise
would be entitled to receive a fractional share of VJET Common Stock will be
entitled in lieu thereof to an amount of cash, without interest, determined by
multiplying such fraction times the closing price of VJET's Common Stock as
reported for the NASDAQ Stock Exchange in The Wall Street Journal, Southeast
Edition, on the Effective Date of the Merger. After the expiration of sixty
(60) days after the Effective Date of the Merger, the Exchange Agent will sell
to VJET, for the account of the holders of such fractional share interests who
have not surrendered stock certificates, shares of VJET Common Stock
equivalent to the aggregate of such fractional share interests then
outstanding. The Exchange Agent will thereafter, subject to any applicable
abandoned property or similar law, until one (1) year after the Effective Date
of the Merger pay to such holders upon surrender of their certificates
representing Airways Common Stock their pro rata proceeds of any such sale,
without interest. Any balance of such proceeds and any amounts paid to the
Exchange Agent in respect of VJET Common Stock issued in the Merger,
certificates for which shall not have been surrendered by the expiration of
such one (1) year period, will, together with any interest thereon, be paid
over to VJET as soon as practicable after the expiration of such period
subject to any applicable abandoned property or similar law. The fee of the
Exchange Agent and any expenses of the Exchange Agent incidental to the sale
of fractional share interests shall be borne by the Surviving Corporation.
D. Prior to the Effective Date of the Merger, the Board of Directors of VJET
will adopt Airways' stock option plans and assume Airway's obligations under
all outstanding warrants and to take such other action as may be required such
that on the Effective Date of Merger, any option or warrant to acquire Airways
Common Stock granted or issued pursuant to any stock option plan or otherwise
that have not been exercised and have not lapsed, shall, by operation of the
Merger, be converted into and become, without any action on the part of the
holder thereof, an option or right to acquire shares of VJET Common Stock
equal to the number of shares of Airways Common Stock subject to such options
or warrants prior to the Merger. The exercise price for such options or
warrants to purchase shares of VJET Common Stock after the Merger shall be the
same as the exercise price under such stock options or warrants applicable
prior to the Merger. All of the other terms and conditions applicable to the
options and warrants to purchase Airways stock prior to the Merger shall
continue to apply after the Merger.
E. If between the date of this Plan of Merger and the Effective Date of the
Merger the outstanding shares of VJET Common Stock shall have been changed
into a different number of shares or a different class by reason of any
reclassification, recapitalization, split-up, combination, exchange of shares
or readjustment, or a stock dividend thereon shall be declared with a record
date within said period, the conversion ratio set forth in Sections VB and VD
above, shall be correspondingly adjusted.
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<PAGE>
ARTICLE VI.
This Plan of Merger shall be submitted to the stockholders of the
Constituent Corporations for their approval in the manner provided to the
extent required by the applicable laws of the States of Nevada and Delaware,
at meetings to be held on such date(s) as the respective Boards of Directors
of the Constituent Corporations shall agree. After approval by the vote of the
holders representing a majority of the issued and outstanding shares of VJET
and by Airways, Articles or Certificates of Merger shall be filed as required
by the laws of the States of Nevada and Delaware; the Merger being effective
when the Articles or Certificates of Merger, as provided by the laws of the
States of Nevada and Delaware, are accepted for filing and filed in the office
of the Secretary of State of the States of Nevada and Delaware.
ARTICLE VII.
The Merger may be abandoned at any time (before or after this Plan of Merger
shall have been approved by the stockholders of VJET or Airways) prior to the
Effective Date of the Merger as provided in, and subject to the conditions set
forth in Section 5.03 of the Merger Agreement.
ARTICLE VIII.
The Surviving Corporation hereby agrees that it may be served with process
in the State of Delaware in any proceeding for enforcement of any obligation
of Airways, as well as for enforcement of any obligation of the Surviving
Corporation arising from the Merger, including any suit or other proceeding to
enforce the rights of any stockholders as determined in appraisal proceedings
pursuant to Section 262 of the Delaware General Corporation Law, and hereby
irrevocably appoints the Secretary of State of the State of Delaware as its
agent to accept service of procession any such suit or proceedings. The
address to which a copy of such process shall be mailed by the Secretary of
State is as follows:
Robert B. Goldberg
Ellis, Funk, Goldberg, Labovitz & Dokson
3490 Piedmont Road, Suite 400
Atlanta, Georgia 30305
ARTICLE IX.
For the convenience of the parties hereto and to facilitate the filing and
recording of this Plan of Merger, any number of counterparts hereof may be
executed, and each such counterpart shall be deemed to be an original
instrument.
IN WITNESS WHEREOF, each of the Constituent Corporations have caused this
Plan of Merger to be executed by its respective duly authorized officers and
its respective corporate seal to be impressed thereon, as of the 10th day of
July, 1997.
VALUJET, INC.
/s/ Robert L. Priddy
By______________________________
Robert L. Priddy
Its Chairman of the Board and
Chief Executive Officer
AIRWAYS CORPORATION
/s/ Robert D. Swenson
By______________________________
Robert D. Swenson
Its President
A-35
<PAGE>
AMENDMENT TO
PLAN OF MERGER
THIS IS AN AMENDMENT (the "Amendment") to that certain PLAN OF MERGER ("the
Plan") dated July 10, 1997, by and between Airways Corporation, a Delaware
corporation ("Airways"), and ValuJet, Inc., a Nevada corporation ("VJET"),
herein sometimes referred to as the "Surviving Corporation", said corporations
being hereinafter collectively referred to as the "Constituent Corporations".
It is agreed as follows:
1. The reference on page 2 of the Plan to "Section 78.451 or the Nevada
Revised Statutes" is hereby changed to "Section 92A.100 of the Nevada
Revised Statutes."
2. Paragraph A of Article IV of the Plan is hereby amended to read as
follows:
"On the Effective Date of the Merger the members of the board of directors
of the Surviving Corporation shall consist of four persons to be selected
by VJET prior to the Closing and three persons to be selected by Airways
prior to the Closing. Of such seven (7) members of the Board of Directors,
three (3) of such members selected by VJET and two (2) of such members
selected by Airways shall continue to hold their positions as directors
until the 1999 shareholders meeting and thereafter until the election and
qualification of their respective successors or until they shall resign,
die or otherwise cease to hold such directorships in accordance with the
bylaws of the Surviving Corporation."
3. Except as expressly modified herein, the Plan shall remain in full
force and effect.
IN WITNESS WHEREOF, each of the Constituent Corporations has caused this
Amendment to be executed by its respective duly authorized officers as of the
19th day of September, 1997.
VALUJET, INC.
/s/ D. Joseph Corr
By: _________________________________
Title: Executive Vice President
AIRWAYS CORPORATION
/s/ Robert D. Swenson
By: _________________________________
Title: President and Chief Executive
Officer
A-36
<PAGE>
APPENDIX B
October 7, 1997
Board of Directors
ValuJet, Inc.
1800 Phoenix Boulevard
Suite 126
Atlanta, Georgia 30349
Gentlemen:
We understand that ValuJet, Inc. ("ValuJet" or the "Company") has entered
into a proposed plan of merger with Airways Corporation ("Airways"). We
understand that under this plan of merger (the "Proposed Transaction"),
Airways will merge with and into ValuJet and each issued and outstanding share
of Common Stock of Airways (the "Airways Common Stock") will be converted into
one share of ValuJet Common Stock. The terms and conditions of the Proposed
Transaction are set forth in more detail in the Plan of Reorganization and
Agreement of Merger dated July 10, 1997, and as amended on September 19, 1997,
by and among ValuJet and Airways (the "Agreement").
We have been requested by the Company to render our opinion (the "Opinion")
with respect to the fairness, from a financial point of view, to the Company's
stockholders of the consideration to be paid by the Company in the Proposed
Transaction. We have not been requested to opine as to, and our opinion does
not in any manner address, the Company's underlying business decision to
proceed with or effect the Proposed Transaction.
In arriving at its opinion, Robinson-Humphrey among other things: (i)
reviewed the Agreement and certain related documents; (ii) analyzed certain
audited and unaudited financial statements and other information of ValuJet
and Airways; (iii) reviewed and discussed with management of ValuJet and
Airways, the past and current business activities and financial results and
the business and financial outlook of ValuJet and Airways; (iv) reviewed the
historical price and trading activity of the common stock of ValuJet and
Airways and other airlines; (v) compared certain financial and stock market
data relating to Valulet and Airways with similar data of other publicly held
airlines; (vi) performed an analysis comparing the pro forma consequences of
the Proposed Transaction to ValuJet stockholders with respect to earnings per
share and tangible book value per share represented by the ValuJet Common
Stock; (vii) considered the relative contributions of ValuJet and Airways to a
combined company in terms of balance sheet, earnings and current equity market
valuation measures; (viii) reviewed the premiums, prices and multiples paid in
certain comparable acquisition transactions of airlines and of merger
transactions in general; (ix) considered the potential synergies and cost
savings that could be achieved through the Proposed Transaction based on
discussions with the managements of ValuJet and Airways; (x) evaluated the
financial and capital implications to ValuJet of the Proposed Transaction; and
(xi) performed such other analyses as Robinson-Humphrey deemed appropriate.
In conducting its analysis and arriving at its Opinion, Robinson-Humphrey
assumed and relied upon, without independent verification, the accuracy and
completeness of the information it reviewed for the purposes of the Opinion.
Robinson-Humphrey also relied upon the managements of ValuJet and Airways with
respect to the reasonableness and achievability of the financial forecasts
(and the assumptions and bases underlying such forecasts) provided to
Robinson-Humphrey. Robinson-Humphrey did not make, nor was it furnished with,
independent valuations or appraisals of the assets or liabilities of either
ValuJet or Airways or any of their subsidies. Our Opinion is necessarily based
upon market, economic and other conditions as they exist and can be evaluated
as of the date of this letter.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services a portion of
which will be paid upon the delivery of this Opinion and the remaining portion
of the fee will be paid upon consummation of the Proposed Transaction. In
addition, the Company has agreed to indemnify us for certain potential
liabilities arising out of the rendering of this Opinion.
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Based upon and subject to the foregoing, we are of the Opinion as of the
date hereof that, from a financial point of view, the consideration to be paid
by the Company in the Proposed Transaction is fair to the stockholders of the
Company.
Very truly yours,
THE ROBINSON-HUMPHREY COMPANY, LLC
B-2
<PAGE>
APPENDIX C
CONFIDENTIAL
OCTOBER 7, 1997
Board of Directors
Airways Corporation
6280 Hazeltine National Drive
Orlando, FL 32822
Gentlemen:
Airways Corporation (the "Company") has entered into a Plan of
Reorganization and Agreement of Merger (the "Agreement") with ValuJet, Inc.
("ValuJet") dated as of July 10, 1997 pursuant to which the Company will be
merged with and into ValuJet (the "Merger"). At the Effective Time (as defined
in the Agreement) of the Merger, each outstanding share of common stock, par
value $0.01 per share of the Company (the "Company Common Stock"), other than
shares held in the Company's treasury, will be converted solely into one share
of common stock, par value $0.001 per share of ValuJet ("ValuJet Common
Stock") (the "Exchange Ratio").
You have asked us whether or not, in our opinion, the Exchange Ratio is fair
to the shareholders of the Company from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed, among other public information, the Company's Annual
Reports, Forms 10-K and related financial information for the two
fiscal years ended March 31, 1997 and the related unaudited financial
information for the six months ended June 30, 1997;
(2) Reviewed, among other public information, ValuJet's Annual Reports,
Forms 10-K and related financial information for the three fiscal
years ended December 31, 1996 and ValuJet's Form 10-Q and the related
unaudited financial information for the six months ended June 30,
1997;
(3) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets and prospects of the
Company and ValuJet, furnished to us by the Company and ValuJet,
respectively;
(4) Conducted discussions with members of senior management of the Company
and ValuJet concerning their respective businesses and prospects;
(5) Reviewed the historical market prices and trading activity for the
Company Common Stock and the ValuJet Common Stock and compared such
prices and trading activity with those of certain publicly traded
companies which we deemed to be relevant;
(6) Compared the financial position and results of operation of the
Company and ValuJet with those of certain publicly traded companies
which we deemed to be relevant;
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Board of Directors
Airways Corporation
October 7, 1997
Page 2
(7) Compared the proposed financial terms of the Merger with the financial
terms of certain other business combinations which we deemed to be
relevant;
(8) Considered the potential pro forma financial effects of the Merger on
ValuJet;
(9) Reviewed the Agreement dated July 10, 1997; and
(10) Reviewed such other financial studies and analyses and performed such
other investigations and took into account all other matters as we
deemed to be material or otherwise necessary to render our Opinion,
including our assessment of regulatory, economic, market and monetary
conditions.
In preparing our opinion, we have relied on the accuracy and completeness of
all information that was publicly available, supplied or otherwise
communicated to us by or on behalf of the Company and ValuJet, and we have not
assumed any responsibility to independently verify such information. With
respect to the financial forecasts examined by us, we have assumed that they
were reasonably prepared on bases reflecting the best currently available
estimates and good faith judgments of the Company's and ValuJet's respective
senior management teams as to the future performance of the Company and
ValuJet, respectively. We have also relied upon the assurances of the
management of each of the Company and ValuJet that they are unaware of any
facts that would make the information or financial forecasts provided to us
incomplete or misleading. We have not undertaken, and have not been provided
with, an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company or ValuJet and have assumed that all
liabilities (contingent or otherwise, known or unknown) of the Company and
ValuJet are as set forth in their respective consolidated financial
statements. We have also assumed with your consent that the Merger will be
accounted for under the purchase method of accounting and that the Merger will
qualify as a tax-free reorganization. Our opinion is based upon the
regulatory, economic, market and monetary conditions existing on the date
hereof.
Our opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any shareholder of the Company as to how
any such shareholder should vote on the Merger. This opinion does not address
the relative merits of the Merger and any other transactions or business
strategies discussed by the Board of Directors of the Company as alternatives
to the Merger or the decision of the Board of Directors of the Company to
proceed with the Merger. The Exchange Ratio was determined by the Company and
ValuJet in arms length negotiations. PaineWebber has not been requested to,
and did not, solicit third party indications of interest with respect to a
business combination with the Company. Furthermore, no opinion is expressed
herein as to the price or trading range at which the securities to be issued
in the Merger to the shareholders of the Company may trade at any time.
This opinion has been prepared for the information of the Board of Directors
of the Company in connection with the Merger and shall not be reproduced,
summarized, described or referred to, provided to any person or
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Board of Directors
Airways Corporation
October 7, 1997
Page 3
otherwise made public or used for any other purpose without the prior written
consent of PaineWebber Incorporated; provided, however, that this letter may
be reproduced in full in the Proxy Statement/Prospectus relating to the
Merger.
PaineWebber is currently acting as a financial advisor to the Company in
connection with the Merger and will receive a fee upon the delivery of this
opinion.
In the ordinary course of our business, we may trade the securities of the
Company and ValuJet for our own account and for the accounts of our customers
and, accordingly, may at any time hold long or short positions in such
securities.
On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Exchange Ratio is fair to the shareholders of the
Company from a financial point of view.
Very truly yours,
PAINEWEBBER INCORPORATED
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation of the Registrant provide that directors of
the Registrant will not be personally liable for monetary damages to the
Registrant for certain breaches of their fiduciary duty as directors to the
fullest extent allowable by Nevada law. Under current Nevada law, directors
would remain liable for: (i) acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law, and (ii) approval of certain
illegal dividends or redemptions. In appropriate circumstances, equitable
remedies or nonmonetary relief, such as an injunction, will remain available
to a stockholder seeking redress from any such violation. In addition, the
provision applies only to claims against a director arising out of his role as
a director and not in any other capacity (such as an officer or employee of
the Registrant).
The Registrant also has the obligation, pursuant to the Registrant's By-
laws, to indemnify any director or officer of the Registrant for all expenses
incurred by them in connection with any legal action brought or threatened
against such person for or on account of any action or omission alleged to
have been committed while acting in the course and scope of the person's
duties, if the person acted in good faith and in a manner which the person
reasonably believed to be in or not opposed to the best interests of the
Registrant, and with respect to criminal actions, had no reasonable cause to
believe the person's conduct was unlawful, provided that such indemnification
is made pursuant to then existing provisions of Nevada General Corporation Law
at the time of any such indemnification.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration Statement:
<TABLE>
<C> <S>
2.1 Plan of Reorganization and Agreement of Merger dated July 10, 1997
between ValuJet and Airways Corporation. (1)
2.2 Plan of Merger dated July 10, 1997 between ValuJet and Airways
Corporation. (1)
2.3 Amendment to Plan of Reorganization and Agreement of Merger between
ValuJet and Airways Corporation. (10)
2.4 Amendment to Plan of Merger between ValuJet and Airways Corporation.
(10)
3.1 Articles of Incorporation of ValuJet. (2)
3.2 By-laws of ValuJet. (2)
5.1 Opinion of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C. (10)
8.1 Form of Tax Opinion of Briggs and Morgan, Professional Association.
10.1 Employment Agreement dated September 1, 1993, between ValuJet Airlines,
Inc. and Robert L. Priddy. (3)(4)
10.2 Employment Agreement dated June 1, 1993, between ValuJet Airlines, Inc.
and Lewis H. Jordan. (3)(4)
10.3 Letter Agreement dated July 26, 1993, between ValuJet Airlines, Inc.
and Lewis H. Jordan amending Employment Agreement. (3)(4)
10.4 Incentive Stock Option Agreement dated June 1, 1993, between ValuJet
Airlines, Inc. and Lewis H. Jordan. (3)(4)
10.5 ValuJet Airlines, Inc. 1993 Incentive Stock Option Plan. (3)(4)
10.6 ValuJet Airlines, Inc. 1994 Stock Option Plan. (3)(4)
10.7 Director Noncompete Agreement dated as of May 18, 1994, between ValuJet
Airlines, Inc. and Timothy P. Flynn. (3)(4)
</TABLE>
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<TABLE>
<C> <S>
10.8 Director Noncompete Agreement dated as of May 18, 1994, between
ValuJet Airlines, Inc. and Don L. Chapman. (3)(4)
10.9 ValuJet Airlines, Inc. 401(k) Plan Adoption Agreement. (5)
10.10 ValuJet Airlines, Inc. 1995 Employee Stock Purchase Plan. (6)
10.11 Purchase Agreement between McDonnell Douglas Corporation and ValuJet
Airlines, Inc. dated December 6, 1995. (7)
10.12 Agreement and Lease of Premises Central Passenger Terminal Complex
Hartsfield Atlanta International Airport. (7)
10.13 Indenture dated as of April 17, 1996, among ValuJet, its subsidiaries
and Bank of Montreal Trust Company, as Trustee. (8)
10.14 Exchange and Registration Rights Agreement dated as of April 17, 1996,
between ValuJet and Goldman, Sachs & Co. (8)
10.15 Consent Order in the Matter of ValuJet Airlines, Inc. with United
States Department of Transportation, Federal Aviation Administration.
(9)
10.16 ValuJet, Inc. 1996 Stock Option Plan. (11)
10.17 Employment letter dated October 28, 1996, between ValuJet Airlines,
Inc. and D. Joseph Corr. (4)(11)
10.18 Code Share Agreement dated September 24, 1997, between AirTran
Airways, Inc. and ValuJet Airlines, Inc. (10)
23.1 Consent of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C. (included in
Exhibit 5.1).
23.2 Consent of Ernst & Young LLP. (10)
23.3 Consent of KPMG Peat Marwick LLP. (10)
23.4 Consent of Arthur Andersen LLP. (10)
23.5 Consent of PaineWebber Incorporated. (10)
23.6 Consent of The Robinson-Humphrey Company, Inc. (10)
23.7 Consent of Briggs and Morgan, Professional Association (included in
Exhibit 8.1).
23.8 Consent of Robert D. Swenson. (10)
23.9 Consent of John K. Ellingboe. (10)
23.10 Consent of Robert C. Pohlad. (10)
24.1 Powers of Attorney. (10)
99.1 Form of Proxy (ValuJet).
99.2 Form of Proxy (Airways).
</TABLE>
Financial Statement Schedules--Schedule II--Valuation and Qualifying
Accounts. (11)
- --------
(1) Incorporated by reference to ValuJet's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, Commission File No. 0-26914, filed with
the Commission on August 14, 1997.
(2) Incorporated by reference to ValuJet's Registration Statement on Form S-
4, registration number 33-95232, filed with the Commission on August 1,
1995, and amendments thereto.
(3) Incorporated by reference to ValuJet's Registration Statement on Form S-
1, registration number 33-78856, filed with the Commission on May 12,
1994, and amendments thereto.
(4) Management contract or compensation plan or arrangement.
(5) Incorporated by reference to ValuJet's Annual Report on Form 10-K for the
year ended December 31, 1994, Commission File No. 0-24164, filed with the
Commission on March 31, 1995, and amendment thereto.
(6) Incorporated by reference to ValuJet's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995, Commission File No. 0-24164, filed with
the Commission on August 11, 1995.
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(7) Incorporated by reference to ValuJet's Annual Report on Form 10-K for the
year ended December 31, 1995, Commission File No. 0-26914, filed with the
Commission on March 29, 1996.
(8) Incorporated by reference to ValuJet's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996, Commission File No. 0-26914, filed with
the Commission on May 3, 1996.
(9) Incorporated by reference to ValuJet's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, Commission File No. 0-26914, filed with
the Commission on August 14, 1996.
(10) Previously filed with this Registration Statement.
(11) Incorporated by reference to ValuJet's Annual Report on Form 10-K for the
year ended December 31, 1996, Commission File No. 0-26914, filed with the
Commission on March 31, 1997.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) (i) The undersigned Registrant hereby undertakes:
(A) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(1) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(2) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(3) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(B) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(C) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unissued at the
termination of the offering.
(ii) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
ValuJet, Inc. annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(iii) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(iv) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any
II-3
<PAGE>
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(v) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (iv) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS PRE-EFFECTIVE AMENDMENT NO. 3 TO REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF ATLANTA, STATE OF GEORGIA ON THE 14TH DAY OF OCTOBER, 1997.
ValuJet, Inc.
/s/ D. Joseph Corr
By: _________________________________
D. JOSEPH CORR,
EXECUTIVE VICE PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS PRE-
EFFECTIVE AMENDMENT NO. 3 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON THE 14TH DAY OF OCTOBER,
1997.
Robert L. Priddy* Chairman of the Board (principal
- ------------------------------------- executive officer) and Director
ROBERT L. PRIDDY
Lewis H. Jordan* President and Director
- -------------------------------------
LEWIS H. JORDAN
/s/ D. Joseph Corr Executive Vice President and
- ------------------------------------- Director
D. JOSEPH CORR
/s/ Stephen C. Nevin Vice President-Finance
- ------------------------------------- (principal financial officer)
STEPHEN C. NEVIN
/s/ Michael D. Acks Controller (principal accounting
- ------------------------------------- officer)
MICHAEL D. ACKS
Director
- -------------------------------------
DON L. CHAPMAN
Timothy P. Flynn* Director
- -------------------------------------
TIMOTHY P. FLYNN
Maurice J. Gallagher, Jr.* Director
- -------------------------------------
MAURICE J. GALLAGHER, JR.
*By: /s/ Stephen C. Nevin
--------------------------------
STEPHEN C. NEVIN
AS ATTORNEY-IN-FACT
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<PAGE>
EXHIBIT 8.1
BRIGGS AND MORGAN
Professional Association
2400 IDS Center
Minneapolis, Minnesota 55402
October 14, 1997
Board of Directors
Airways Corporation
6280 Hazeltine National Drive
Orlando, Florida 32822
RE: CERTAIN FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE ACQUISITION OF
AIRWAYS CORPORATION BY VALUJET, INC.
We are rendering this opinion to you at your request and in our capacity as
tax counsel to Airways Corporation ("Airways"), in connection with its
acquisition by ValuJet, Inc. ("ValuJet") by means of a merger of Airways with
and into ValuJet (the "Merger"), in the manner and according to the terms
described below.
For purposes of this opinion, we have examined such documents and questions
of law as we have considered necessary or appropriate, including but not limited
to:
1. The Plan of Reorganization and Agreement of Merger by and between
Airways and ValuJet, dated July 10, 1997 as amended (the "Reorganization
Agreement") and a Plan of Merger, providing for the Merger of Airways with and
into ValuJet.
2. The Affidavit of Representations dated October 8, 1997 provided to us by
Airways (the "Airways Affidavit");
3. The Affidavits of Representations executed on various dates and
provided to us by certain stockholders of Airways (the "Airways Stockholders
Affidavits");
4. The Certificate of Representation dated October 10, 1997 provided
to us by ValuJet (the "ValuJet Certificate"); and
5. The Joint Proxy Statement/Prospectus ("Proxy Statement/Prospectus")
included in the Registration Statement on Form S-4 (Registration No. 333-
33837) filed by ValuJet with the Securities and Exchange Commission ("SEC") (the
"Registration Statement").
<PAGE>
In such examination, we have assumed, with your permission, but have not
independently verified, the authenticity of all signatures on original documents
where due execution and delivery are requirements to the effectiveness thereof,
the legal capacity of all natural persons and the authenticity of all documents
submitted to us as copies. Terms used but not defined herein, whether
capitalized or not, will have the same meaning ascribed to them in said Proxy
Statement/Prospectus and Registration Statement and exhibits thereto.
BACKGROUND
----------
Airways, through its wholly owned subsidiary AirTran Airways, Inc.
("AirTran"), operates a domestic commercial airline providing direct scheduled
passenger air service from Orlando, Florida to 21 locations in the eastern
United States. AirTran began flying commercially in July 1994 with one Boeing
737-200A aircraft providing charter services and commenced scheduled flight
operations in October, 1994. As of August 15, 1997, AirTran operated a fleet of
11 Boeing 737-200A aircraft. Airways also owns a fixed-base operation ("FBO")
in Grand Rapids, Minnesota which sells aircraft parts, provides fueling and
other aircraft servicing, rentals and flight training. On June 30, 1997,
Airways had consolidated total assets of $70,996,000, consolidated liabilities
of $53,524,000 and stockholders' equity of $17,472,000.
In June, 1994, AirTran Corporation, the former parent company of Airways,
now doing business as Mesaba Holdings, Inc. ("Mesaba"), acquired the common
stock of Conquest Sun Airlines, Inc. ("Conquest") for $2,500 in a transaction
accounted for under the purchase method of accounting. At the time of the
acquisition, Conquest had recently obtained U.S. Department of Transportation
("DOT") approval to operate a jet airline. Conquest's name was subsequently
changed to AirTran Airways, Inc. ("AirTran") and scheduled passenger service
commenced on October 6, 1994.
In March, 1995, Mesaba and Northwest Airlines, Inc. ("Northwest") entered
into an agreement to spin off AirTran Airways, Inc. and the FBO (the "Spin-
off"). Under the terms of the Spin-off, on April 7, 1995, Mesaba established a
new wholly-owned subsidiary, Airways, into which the above operations were
consolidated in order to facilitate the distribution of the Airways common
stock to Mesaba stockholders (other than Northwest). In connection with the
Spin-off, Mesaba made a contribution of cash and certain assets to Airways prior
to the Spin-off date. The distribution was approved by Mesaba's stockholders on
August 29, 1995 and was made on September 7, 1995 to the stockholders of record
(other than Northwest) as of August 31, 1995.
2
<PAGE>
This distribution was intended to qualify for tax-free treatment pursuant
to Section 355 of the Internal Revenue Code of 1986, as amended ("Code"). The
Internal Revenue Service issued a private letter ruling on the distribution on
June 13, 1995 in which it ruled that the transaction would qualify for tax-free
treatment under Section 355 of the Code.
The authorized capital of Airways consists of 19,000,000 shares of common
stock, par value $.01 per share ("Airways Common Stock") and 1,000,000 shares of
preferred stock, par value $.01 per share ("Airways Preferred Stock"). As of
June 30, 1997, there were 8,966,937 shares of Airways Common Stock issued and
outstanding. As of June 30, 1997, no shares of Airways Preferred Stock had been
issued. All shares of Airways Common Stock are fully paid and nonassessable.
Holders of Airways Common Stock are entitled to cast one vote per share on all
matters submitted to a vote of stockholders and the holders do not have
cumulative voting rights. Such holders are entitled to receive ratably
dividends when, as and if declared by the Airways Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Airways Preferred Stock. Airways has never paid any cash dividends
on its Common Stock. Holders of Airways Common Stock do not have any
preemptive, subscription, redemption or conversion rights. Upon any liquidation
of Airways, holders of Airways Common Stock are entitled to share ratably in the
net assets of Airways available for distribution after payment or provision for
all debts and obligations of Airways and any preferences attributable to any
series of Airways Preferred Stock outstanding.
The Airways Board of Directors, without approval of its shareholders, but
subject to any limitation prescribed by law, is authorized to establish the
voting, dividend, redemption, conversion, liquidation and other provisions of a
particular series of Airways Preferred Stock.
Airways Common Stock is traded on the NASDAQ National Market ("NASDAQ")
under the symbol "AAIR." As a result holders of record of Airways Common Stock
will not have any dissenters' or appraisal rights under Delaware law with
respect to the Merger. On July 9, 1997, the last trading day prior to the
public announcement that Airways and ValuJet had executed the Reorganization
Agreement, the last reported sales price per share of Airways Common Stock on
NASDAQ was $5.38.
As of September 30, 1997, Airways had two existing stock option plans: the
Airways 1995 Stock Option Plan (the "Airways 1995 Plan") and the 1995 Directors
Stock Option Plan (the "DSOP"). As of that date, 1,150,000 shares of Airways
Common Stock were reserved for issuance under the 1995 Plan. As of September 30,
1997, options to purchase 1,176,000 shares had been granted under the Airways
1995 Plan, of which options to purchase 168,000 shares had been exercised and
options to purchase 314,000 shares had lapsed due to employment terminations
prior to vesting. As of September 30, 1997 options to purchase 694,000 shares
were outstanding under the Airways 1995 Plan at an average option price of $4.52
per share and options for up to 288,000 additional shares may be granted under
the Airways 1995 Plan. As of July 10, 1997, 150,000 shares of Airways Common
Stock were reserved for issuance under the DSOP Plan. As of September 30, 1997,
options to purchase 40,000 shares had been granted under the DSOP, none of which
had been exercised and options to purchase 4,000 shares had lapsed prior to
exercise. As of September 30, 1997 options to purchase 36,000 shares were
outstanding under the DSOP at an average option price of $6.02 per share and
options for up to 114,000 additional shares may be granted under the DSOP.
3
<PAGE>
Prior to the Closing Date, neither Airways nor any of its subsidiaries
will, without the prior written consent of ValuJet, grant any options, warrants
or other rights to purchase or otherwise acquire any shares of its capital stock
or issue any securities convertible into shares of its capital stock or to
accelerate the vesting of any such option, warrant or right.
ValuJet, through its wholly owned subsidiary, AirTran Airlines, Inc.
(formerly known as ValuJet Airlines, Inc. and referred to herein as "ValuJet
Airlines"), operates an affordable no frills, limited frequency, scheduled
airline serving short haul markets primarily in the eastern United States.
ValuJet commenced flight operations in October, 1993 with two DC-9 aircraft
serving three cities from Atlanta, Georgia, with eight flights per day. Prior
to June 17, 1996, ValuJet offered service to 30 cities from Atlanta, Washington
D.C. (Dulles Airport), Boston and Orlando and operated up to 320 flights per
peak day with a fleet of 51 aircraft.
ValuJet's operations were interrupted by the suspension of ValuJet's
service on June 17, 1996, pursuant to a consent order entered into with the
Federal Aviation Administration ("FAA") following an accident involving ValuJet
Flight 592 on May 11, 1996. Prior to ValuJet's resumption of service, ValuJet
undertook a thorough review of its operations, implemented several measures to
respond to the concerns that were raised by the FAA and reaffirmed its focus on
the safety of its aircraft and operations. Upon the implementation of these
measures and receipt of FAA approval, ValuJet resumed limited operations with
4
<PAGE>
service between Atlanta and four other cities as of September 30, 1996. ValuJet
has continued to work with the FAA since that time to recertify aircraft and
expand its flight operations. As of August 15, 1997, the FAA had approved 31 of
ValuJet's DC-9 Series 30 aircraft for flight and ValuJet operates a total of 200
flights per day of which 182 flights per peak day are between Atlanta and 23
other cities. Additional service is offered between Washington, D.C. (Dulles
Airport) and Boston and Chicago and between Boston and Philadelphia.
As of June 30, 1997, ValuJet had consolidated total assets of $377,008,000,
total liabilities of $281,124,000, and total stockholders' equity of
$95,884,000.
The authorized capital of ValuJet consists of 1,000,000,000 shares of
common stock, par value $.001 per share ("ValuJet Common Stock") and 5,000,000
shares of preferred stock, par value $.01 per share ("ValuJet Preferred Stock").
As of the close of business on June 30, 1997, there were 54,963,330 shares of
ValuJet Common Stock issued and outstanding. The ValuJet Board of Directors,
without approval of its shareholders, is authorized to establish the voting,
dividend, redemption, conversion, liquidation and other provisions of a
particular series of ValuJet Preferred Stock. As of June 30, 1997, no shares of
ValuJet Preferred Stock had been issued. Holders of ValuJet Common Stock are
entitled to cast one vote per share on all matters submitted to a vote of
stockholders. Such holders are entitled to receive dividends when, as and if
declared by the ValuJet Board of Directors out of funds legally available
therefor. ValuJet has never paid any cash dividends on its Common Stock.
Holders of ValuJet Common Stock do not have any preemptive, subscription,
redemption or conversion rights. Upon any liquidation of ValuJet, holders of
ValuJet Common Stock are entitled to share ratably in the net assets of ValuJet
available for distribution after payment or provision for all debts and
obligations of ValuJet and any preferences attributable to any series of ValuJet
Preferred Stock outstanding.
ValuJet Common Stock is traded on the NASDAQ National Market ("NASDAQ")
under the symbol "VJET." On July 9, 1997, the last trading day prior to the
public announcement that Airways and ValuJet had executed the Reorganization
Agreement, the last reported sales price per share of ValuJet Common Stock on
NASDAQ was $6.81.
ValuJet has three existing stock option plans ("Stock Option Plans"): the
1993 Stock Option Plan (the "1993 Plan"), the 1994 Stock Option Plan (the "1994
Plan") and the 1996 Stock Option Plan (the "1996 Plan"). A total of 4,800,000
shares of ValuJet Common Stock are reserved for issuance under the 1993 Plan.
As of December 31, 1996, options to
5
<PAGE>
purchase 4,325,300 shares had been granted under the 1993 Plan, of which options
to purchase 1,352,000 shares had been exercised and options to purchase 104,500
shares had lapsed due to employment terminations prior to vesting. As of
December 31, 1996, options to purchase 2,868,800 shares were outstanding under
the 1993 Plan at an average option price of $2.26 per share and options for up
to 579,200 additional shares may be granted under the 1993 Plan.
A total of 4,000,000 shares of ValuJet Common Stock are reserved for
issuance under the 1994 Plan. As of December 31, 1996, options to purchase
3,925,100 shares had been granted under the 1994 Plan, of which options to
purchase 303,810 had been exercised and options to purchase 316,560 shares had
lapsed due to employment terminations prior to vesting. As of that date,
options to purchase 3,304,730 shares were outstanding under the 1994 Plan at an
average option price of $6.87 per share and options for up to 391,460 additional
shares may be granted under the 1994 Plan.
6
<PAGE>
A total of 5,000,000 shares of ValuJet Common Stock are reserved for
issuance under the 1996 Plan. As of March 10, 1997, options to purchase 450,000
shares have been granted and are outstanding under the 1996 Plan, all of which
have been granted at a price of $7.125 per share. No options have been
exercised or have lapsed. Options for up to an additional 4,550,000 shares may
be granted under the 1996 plan.
Prior to the Closing Date, neither ValuJet nor any of its subsidiaries
will, without the prior written consent of ValuJet, grant any options, warrants
or other rights to purchase or otherwise acquire any shares of its capital stock
or issue any securities convertible into shares of its capital stock or to
accelerate the vesting of any such option, warrant or right, except that options
may be granted to newly hired executive officers in amounts consistent with
prior practice.
The numbers of ValuJet shares and per share stock prices indicated above
have been adjusted to reflect two separate 2-for-1 stock splits paid to ValuJet
Stockholders in the form of 100% stock dividends in April 1995 and November
1995.
PROPOSED TRANSACTION
--------------------
Preliminary discussions between Airways and ValuJet commenced in November
1996 between the respective chief executive officers of Airways and ValuJet. On
July 10, 1997, the respective Boards of Directors of Airways and ValuJet each
adopted the Reorganization Agreement and the Plan of Merger which provide for
the acquisition of Airways by ValuJet using ValuJet Common Stock in the manner
described therein. The Board of Directors of Airways believes that the terms of
the Reorganization Agreement and the Plan of Merger
7
<PAGE>
are fair and that the Merger is in the best interests of Airways and its
stockholders. The Board of Directors of Airways believes that the Merger
represents an opportunity to increase the value of Airways stockholders
investment, create flexible options for the future growth of Airways and
advancing Airways' strategic goals.
Among the factors considered by the Board of Directors of Airways in
deciding to approve and recommend the execution of the Reorganization Agreement
and Plan of Merger were: the financial terms and conditions of the Merger, the
potential effect of a business combination on Airways and its stockholders, the
effect of remaining independent compared to the effect of merging with ValuJet,
the need to expand operation information concerning ValuJet, certain financial
analysis of Airways and ValuJet, certain nonfinancial factors and the
probability and timing of receiving the regulatory approvals necessary to
consummate the Merger. The Airways Board of Directors did not quantify or assign
relative values to the various factors considered in reaching its determination
that the Merger is advisable and fair to, and in the best interests of, Airways
and its stockholders.
Under the Reorganization Agreement and Plan of Merger, and related
documents, the following transaction is proposed:
(i) Pursuant to the Reorganization Agreement and Plan of Merger, and
in accordance with applicable federal and state law and regulations,
Airways will merge with and into ValuJet, with ValuJet as the surviving
corporation. As a result of the Merger, ValuJet will acquire substantially
all of the assets and assume all of the liabilities of Airways, including
all liabilities to which the transferred assets are then subject.
(ii) At the Effective Date of the Merger, each outstanding share of
Airways Common Stock, will be converted into and exchanged for one newly
issued share of ValuJet Common Stock.
(iii) No fractional shares of ValuJet Common Stock will be issued as
part of the Merger. Instead, any Airways stockholder otherwise entitled to
a fractional share interest of ValuJet Common Stock as part of the Merger
will, in lieu of receiving such fractional share interest, receive an
amount of cash (without interest), determined by multiplying such fraction
times the closing price of ValuJet's Common Stock as reported for the
NASDAQ in The Wall Street Journal, Southeast Edition, on the Effective Date
of the Merger.
8
<PAGE>
(iv) Prior to the Effective Date of the Merger, the Board of Directors
of ValuJet will adopt Airways' stock option plans and assume Airway's
obligations under all outstanding warrants and to take such other action as
may be required such that on the Effective Date of the Merger, any option
or warrant to acquire Airways Common Stock granted or issued pursuant to
any stock option plan or otherwise that have not been exercised and have
not lapsed, will, by operation of the Merger, be converted into and become,
without any action on the part of the holder thereof, an option or right to
acquire shares of ValuJet Common Stock equal to the number of shares of
Airways Common Stock subject to such options or warrants prior to the
Merger. The exercise price for such options or warrants to purchase shares
of ValuJet Common Stock after the Merger will be the same as the exercise
price under such stock options or warrants applicable prior to the Merger.
All of the other terms and conditions applicable to the options and
warrants to purchase Airways Common Stock prior to the Merger shall
continue to apply after the Merger.
The Merger is to be consummated in compliance with the laws of Nevada and
Delaware, and is subject to the approval of the appropriate regulatory agencies.
The Reorganization Agreement and Plan of Merger must also receive (i) the
approval of at least a majority of the total number of outstanding shares of
Airways Common Stock entitled to vote at the special meeting of Airways
stockholders held to consider the Merger and (ii) the approval of at least a
majority of the total number of outstanding shares of ValuJet Common Stock
entitled to vote at the special meeting of ValuJet stockholders held to consider
the Merger. On the Effective Date of the Merger, the name of ValuJet will be
changed to "AirTran Holdings, Inc." AirTran will become a wholly owned
subsidiary of ValuJet. Following the transaction, ValuJet will continue to
operate its business and Airways' business, through its wholly owned
subsidiaries, AirTran and ValuJet Airlines.
REPRESENTATIONS
---------------
In connection with the proposed Merger, the following statements and
representations have been made by the management of Airways in the Airways
Affidavit, by certain stockholders of Airways in the Airways Stockholder
Affidavits and by the management of ValuJet in the ValuJet Certificate, each of
which are attached hereto and incorporated herein by reference, in support of
the opinion contained herein.
1. To the best of the knowledge of the management of Airways, the
fair market value of the ValuJet Common Stock and other consideration to be
received
9
<PAGE>
by each stockholder of Airways Common Stock pursuant to the Merger will be
approximately equal to the fair market value of the Airways Common Stock
surrendered in exchange therefor.
2. To the best of the knowledge of the management of Airways, there
is no plan or intention by the stockholders of Airways Common Stock who own
five percent or more of the Airways Common Stock, and there is no plan or
intention on the part of the remaining stockholders of Airways Common
Stock, to sell, exchange or otherwise dispose of a number of shares of
ValuJet Common Stock received in the Merger that would reduce the Airways
stockholders' ownership of ValuJet Common Stock to a number of shares
having a value, as of the Effective Date of the Merger, of less than 50
percent of the value of all of the formerly outstanding stock of Airways as
of the same date. For purposes of this representation, shares of Airways
Common Stock (i) exchanged for cash or other property, or (ii) exchanged
for cash in lieu of fractional shares of ValuJet Common Stock will be
treated as outstanding Airways Common Stock on the Effective Date of the
Merger. Moreover, shares of Airways Common Stock and shares of ValuJet
Common Stock held by Airways stockholders and otherwise sold, redeemed, or
disposed of prior or subsequent to the Merger will be considered in making
this representation.
3. Carl R. Pohlad, the beneficial owner of 1,379,310 shares or
approximately 15.2% of the shares of Airways Common Stock, has no present plan
or intention to sell, exchange or otherwise dispose of a number of shares of
ValuJet Common Stock he will receive in the Merger that would reduce the Airways
stockholders' ownership of ValuJet Common Stock to a number of shares having a
value, as of the Effective Date of the Merger, of less than 50 percent of the
value of all of the formerly outstanding stock of Airways as of the same date.
For purposes of this representation, shares of Airways Common Stock (i)
exchanged for cash or other property, or (ii) exchanged for cash in lieu of
fractional shares of ValuJet Common Stock are treated as outstanding Airways
Common Stock on the Effective Date of the Merger. Shares of Airways Common Stock
and shares of ValuJet Common Stock held by Airways stockholders and otherwise
sold, redeemed, or disposed of prior or subsequent to the Merger are considered
in making this representation.
4. Lowell T. Swenson, the beneficial owner of 462,748 shares or
approximately 5.1% of the shares of Airways Common Stock, has no present plan or
intention to sell, exchange or otherwise dispose of a number of shares of
ValuJet Common Stock he
10
<PAGE>
will receive in the Merger that would reduce the Airways stockholders'
ownership of ValuJet Common Stock to a number of shares having a value, as
of the Effective Date of the Merger, of less than 50 percent of the value
of all of the formerly outstanding stock of Airways as of the same date.
For purposes of this representation, shares of Airways Common Stock (i)
exchanged for cash or other property, or (ii) exchanged for cash in lieu of
fractional shares of ValuJet Common Stock are treated as outstanding Common
Stock on the Effective Date of the Merger. Shares of Airways Common Stock
and shares of ValuJet Common Stock held by Airways stockholders and
otherwise sold, redeemed, or disposed of prior or subsequent to the Merger
are considered in making this representation.
5. Robert D. Swenson, the beneficial owner of 707,895 shares or
approximately 7.5% of the shares of Airways Common Stock, has no present
plan or intention to sell, exchange or otherwise dispose of a number of
shares of ValuJet Common Stock he will receive in the Merger that would
reduce the Airways stockholders' ownership of ValuJet Common Stock to a
number of shares having a value, as of the Effective Date of the Merger, of
less than 50 percent of the value of all of the formerly outstanding stock
of Airways as of the same date. For purposes of this representation, shares
of Airways Common Stock (i) exchanged for cash or other property, or (ii)
exchanged for cash in lieu of fractional shares of ValuJet Common Stock are
treated as outstanding Airways Common Stock on the Effective Date of the
Merger. Shares of Airways Common Stock and shares of ValuJet Common Stock
held by Airways stockholders and otherwise sold, redeemed, or disposed of
prior or subsequent to the Merger are considered in making this
representation.
6. ValuJet has no plan or intention to reacquire any of its stock
issued in the Merger.
7. ValuJet has no plan or intention to cause the sale or other
disposition of any of the assets of Airways acquired in the Merger except
for (i) dispositions made in the ordinary course of business, or (ii)
transfers described in Section 368(a)(2)(C) of the Code.
8. The liabilities of Airways to be assumed at the time of the Merger
and the liabilities to which the transferred assets of Airways will then be
subject will have been incurred by Airways in the ordinary course of its
business.
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<PAGE>
9. Following the Merger, ValuJet will continue the historic business
of Airways or use a significant portion of Airways' historic business
assets in a business.
10. Airways, ValuJet and Airways stockholders will pay and accrue
their respective expenses, if any, incurred in connection with the Merger.
11. There is no intercorporate indebtedness existing between Airways
and ValuJet that was issued, acquired, or will be settled at a discount.
12. No two parties to the Merger are investment companies as defined
in Section 368(a)(2)(F)(iii) and (iv) of the Code.
13. Airways is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
14. At the Effective Date of the Merger, the fair market value of the
assets of Airways will equal or exceed the liabilities of Airways plus the
amount of liabilities, if any, to which Airways' assets are subject.
15. The payment of cash in lieu of fractional shares of ValuJet
Common Stock is solely for the purpose of avoiding the expense and
inconvenience to ValuJet of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash
consideration that will be paid in the Merger to the Airways stockholders
instead of issuing fractional shares of ValuJet Common Stock will not
exceed one percent of the total consideration that will be issued in the
Merger to the Airways stockholders in exchange for their shares of Airways
Common Stock. The fractional share interests of each Airways stockholder
will be aggregated, and no Airways stockholder will receive cash in an
amount equal to or greater than the value of one full share of ValuJet
Common Stock.
16. None of the compensation received by any stockholder-employee of
Airways will be separate consideration for, or allocable to, any of such
shareholder-employee's shares of Airways Common Stock. None of the shares
of ValuJet Common Stock received by any stockholder-employee will be
separate consideration for, or allocable to, any employment agreement in
the Merger, and the compensation paid to any stockholder-employee of
Airways will be for services actually rendered
12
<PAGE>
and will be commensurate with amounts paid to third parties bargaining at
arm's length for similar services.
17. A bona fide corporate business purpose exists for the Merger and
the principal purpose of the Merger is not the avoidance of income tax.
18. Airways and ValuJet first commenced preliminary discussions
concerning the Merger in November, 1996.
The above representations do not and are not intended to limit or otherwise
modify any of the other matters described within this letter.
ASSUMPTIONS
-----------
The opinions set forth below are based upon certain assumptions,
including:
1. The Merger will be consummated in accordance with the terms of the
Reorganization Agreement.
2. The stockholders of Airways do not have any plan or intention to
dispose of more than 50% of the ValuJet Common Stock received pursuant to the
Mergers;
3. Except for the payment of cash in lieu of fractional shares of ValuJet
Common Stock the stockholders of Airways will not directly or indirectly receive
any consideration for their shares of Airways Common stock other than ValuJet
Common Stock.
For purposes of such assumptions, amounts paid for Merger expenses of Airways
will be considered as assets held by Airways immediately prior to the Merger.
OPINION
-------
Based on the foregoing and in reliance thereon, and subject to the
conditions stated herein, it is our opinion that the following federal income
tax consequences will result from the proposed transaction.
(1) The Merger will qualify as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, and Airways and ValuJet will each be a
party to the reorganization within the meaning of Section 368(b) of the
Code.
13
<PAGE>
(2) No gain or loss will be recognized by the stockholders of Airways
Common Stock upon the conversion of Airways Common Stock solely in exchange
for ValuJet Common Stock pursuant to the Merger.
(3) If a stockholder of Airways Common Stock receives only ValuJet
Common Stock in the Merger, the Airways stockholder's basis in the ValuJet
Common Stock received in the Merger (including any fractional share
interest to which he or she may be entitled) will be the same as the basis
of the Airways Common Stock converted.
(4) The holding period of the ValuJet Common Stock received by a
stockholder of Airways pursuant to the Merger will include the period
during which the Airways Common Stock surrendered was held, provided that
the Airways Common Stock surrendered was a capital asset on the date of the
Merger.
(5) The form of the 1995 Spin-off of Airways Common Stock reflects its
substance and will be respected for federal income tax purposes. The
Merger will not affect the tax-free nature of the Spin-off.
SCOPE OF OPINION
----------------
Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any federal,
state, local, foreign or other tax considerations. If any of the information on
which we have relied is incorrect, or if changes in the relevant facts occur
after the date hereof, our opinion could be affected thereby. Moreover, our
opinion is based on the case law, Internal Revenue Code, Treasury Regulations
thereunder and Internal Revenue Service rulings as they now exist. These
authorities are all subject to change, and such change may be made with
retroactive effect. We can give no assurance that, after such change, our
opinion would not be different. We undertake no responsibility to update or
supplement our opinion. This opinion is not binding on the Internal Revenue
Service and there can be no assurance, and none is hereby given, that the
Internal Revenue Service will not take a position contrary to one or more of the
positions reflected in the foregoing opinion, or that our opinion will be upheld
by the courts if challenged by the Internal Revenue Service.
14
<PAGE>
We do not express any opinion or view herein regarding the separate tax
consequences, if any, to the stockholders of Airways Common Stock who receives
cash or other property in addition to ValuJet Common Stock in connection with
the Merger.
Therefore, nothing contained herein should be interpreted as an opinion,
either express or implied, regarding such related transactions or subsequent
mergers.
CONSENT
-------
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement of which the Proxy Statement/Prospectus is a part and to
the references to our firm in the Proxy Statement/Prospectus.
Very truly yours,
Briggs and Morgan, P.A.
By /s/ Brigid M. McDonough
------------------------------
Brigid M. McDonough
15
<PAGE>
EXHIBIT 99.1
LOGO
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD NOVEMBER 17, 1997
VALUJET, INC.
The undersigned hereby appoints D. Joseph Corr and Stephen C. Nevin, or
either of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below, all the
shares of common stock held of record on October 3, 1997, at the Special
Meeting of the Stockholders to be held on November 17, 1997, at 8:30 A.M. at
the offices of Ellis, Funk, Goldberg, Labovitz & Dokson, P.C., 3490 Piedmont
Road, Suite 400, Atlanta, Georgia 30305, or any adjournment thereof.
1. Proposal to approve, and adopt a merger agreement and plan of merger
providing for the merger of Airways Corporation with and into ValuJet, Inc.
For[_] Against Abstain
[_] [_]
2. Proposal to change the name of the Company to "AirTran Holdings, Inc."
For[_] Against Abstain
[_] [_]
3. Proposal to amend the Company's By-laws as set forth in the Joint Proxy
Statement/Prospectus dated October , 1997.
For[_] Against Abstain
[_] [_]
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or adjournment thereof.
THIS PROXY, DULY EXECUTED, WILL BE VOTED AS SPECIFIED. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 & 3.
<PAGE>
LOGO
VALUJET, INC.
PROXY
The undersigned hereby acknowledges receipt of the Joint Proxy
Statement/Prospectus and Notice of Special Meeting to be held November ,
1997.
Dated: ____________________ , 1997
___________________________ (SEAL)
___________________________ (SEAL)
(Please sign exactly as your name
appears hereon. If stock is reg-
istered in more than one name,
each holder should sign. When
signing as an attorney, adminis-
trator, executor, guardian or
trustee, please add your title as
such. If executed by a corpora-
tion, the proxy should be signed
by a duly authorized officer).
PLEASE SIGN, DATE AND PROMPTLY
RETURN THIS PROXY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.
<PAGE>
EXHIBIT 99.2
AIRWAYS CORPORATION STOCKHOLDER PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS NOVEMBER 17, 1997
The undersigned hereby appoints Robert D. Swenson, Mark B. Rinder, or either
of them, as proxies, each with the power to appoint his substitute, to
represent, and vote all shares of Common Stock of and on behalf of the
undersigned as designated on the reverse side at the Special Meeting of
Stockholders of Airways Corporation, to be held November 17, 1997, and any
adjournments thereof, with all powers the undersigned would possess if
personally present and voting at such meeting.
Please mark your
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE votes as indicated
FOLLOWING PROPOSAL. in this example [X]
1. PROPOSAL TO APPROVE AND ADOPT A MERGER AGREEMENT AND PLAN OF MERGER
PROVIDING FOR THE MERGER OF AIRWAYS CORPORATION WITH AND INTO VALUJET, INC.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. OTHER BUSINESS: The proxies are authorized to vote in their discretion on
such other business as may properly come before the meeting.
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder. If no direction is indicated, the Proxy will be
voted FOR Proposal 1 and in the discretion of the proxy holder as to any other
business as may properly come before the meeting.
PLEASE MARK ON THIS SIDE AND SIGN, AND DATE ON THE REVERSE SIDE. (ARROW)
RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE>
LOGO
(Continued from other side)
This Proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder. If no direction is indicated, the Proxy will be
voted FOR Proposal 1.
THIS PROXY IS SOLICITED ON
BEHALF OF THE BOARD OF DIRECTORS
Dated: ______________________ , 1997
____________________________________
Signature
____________________________________
Signature if held jointly
PLEASE SIGN EXACTLY AS NAME(S) AP-
PEAR(S) HEREON. IF SHARES ARE HELD
IN THE NAME OF TWO OR MORE PERSONS,
ALL MUST SIGN. WHEN SIGNING AS AT-
TORNEY, EXECUTOR, ADMINISTRATOR,
PERSONAL REPRESENTATIVE, TRUSTEE,
OR GUARDIAN, GIVE FULL TITLE AS
SUCH. IF SIGNER IS A CORPORATION,
SIGN FULL CORPORATE NAME BY DULY
AUTHORIZED OFFICER.
