<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-39673
$50,000,000
WORLD AIRWAYS, INC.
8% Convertible Senior Subordinated Debentures Due 2004
Interest Payable February 26 and August 26
------------------
This Prospectus relates to the public offer and sale of up to $50,000,000
aggregate principal amount of 8% Convertible Senior Subordinated Debentures Due
2004 (the "Debentures") and an indeterminate number of shares of World Airways,
Inc. ("World Airways" or the "Company") common stock $0.001 par value ("Common
Stock") that are issuable upon conversion of the Debentures (the "Shares" and,
together with the Debentures, are sometimes referred to as the "Securities").
The Securities may be offered from time to time for the account of the holders
thereof named herein (the "Selling Securityholders"). See "Selling
Securityholders" and "Plan of Distribution"). Information concerning the
Selling Securityholders may change from time to time which changes will be set
forth in an accompanying Prospectus Supplement.
The Debentures are convertible into the Shares at any time after October 25,
1997 and at or before maturity, unless previously redeemed, at a conversion
price of $8.90 per share, subject to adjustment on the occurrence of certain
events. The Common Stock of the Company is traded on The Nasdaq National Market
System ("Nasdaq") under the symbol "WLDA." On November 3, 1997, the last
reported sale price of the Common Stock on Nasdaq was $8.25 per share.
The Debentures do not provide for a sinking fund and are not redeemable by the
Company prior to August 26, 2000. Subject to the foregoing, the Debentures are
redeemable at the option of the Company, in whole or in part, at the redemption
prices set forth in this Prospectus, together with accrued interest. Upon a
Repurchase Event (as defined herein), each holder of Debentures shall have the
right, at the holder's option, to require the Company to repurchase such
holder's Debentures at a purchase price equal to 100% of the principal amount
thereof, plus accrued interest. See "Description of Debentures--Certain Rights
to Require Repurchase of Debentures."
The Debentures are unsecured senior subordinated obligations of the Company
and are subordinate to all present and future Senior Indebtedness (as defined
herein) of the Company. As of June 30, 1997, Senior Indebtedness was $40.8
million (including $6.7 million attributable to capital lease obligations). The
Indenture (as defined herein) will not restrict the incurrence of any other
indebtedness or liabilities by the Company or its subsidiaries, if any. See
"Description of Debentures--Subordination."
The Debentures were originally issued by the Company on August 26, 1997, in a
private placement (the "Private Placement"), with Furman Selz and Dillon, Read &
Co. Inc. as initial purchasers therein (the "Initial Purchasers"). See
"Prospectus Summary The Private Placement." As of the date of this Prospectus,
the aggregate principal amount of Debentures outstanding is $50,000,000 and no
Debentures have been converted into Shares. Prior to the date of this
Prospectus, there has been no public market for the Debentures. Although the
Debentures are eligible for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") Market of the National Association
of Securities Dealers, Inc., there can be no assurance that an active trading
market for the Debentures will develop.
The Company has been advised by the Selling Securityholders that the Selling
Securityholders, acting as principals for their own account, directly or through
agents, dealers or underwriters to be designated from time to time, may sell the
Debentures and the Shares from time to time on terms to be determined at the
time of the sale through customary brokerage channels or private sales at market
prices then prevailing or at negotiated prices then obtainable. To the extent
required, the aggregate principal amount of the specific Debentures or the
number of Shares to be sold, the names of the Selling Securityholders, the
purchase price, the public offering price, the name of
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any agent, dealer or underwriter, the amount of expenses of the offering and
any applicable commission or discount with respect to a particular offer will be
set forth in an accompanying Prospectus Supplement or, if appropriate, post-
effective amendment to the Registration Statement of which this Prospectus is a
part. Each of the Selling Securityholders reserves the right to accept and,
together with its agents from time to time, to reject in whole or in part any
proposed purchase of the Debentures or Shares to be made directly or through
agents. The aggregate proceeds to the Selling Securityholders from the sale of
the Debentures and the Shares offered by the Selling Securityholders hereby will
be the purchase price of such Debentures or Shares less any discounts or
commissions. For information concerning indemnification arrangements between
the Company and the Selling Securityholders, see "Plan of Distribution."
For a description of certain income tax consequences to holders of the
Debentures, see "Certain United States Federal Income Tax Consequences."
See "Risk Factors" beginning on page 11 of this Prospectus for a discussion of
certain factors that should be considered by prospective investors.
---------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------------------
The date of this Prospectus is November 13, 1997
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the Financial Statements of
World Airways (including the Notes thereto) appearing elsewhere in this
Prospectus or incorporated by reference herein. Unless otherwise indicated, all
information contained herein assumes no exercise of the Initial Purchasers'
over-allotment option or of options granted pursuant to World Airways' stock
option plans. See "Plan of Distribution."
The Company
World Airways, Inc. ("World Airways" or the "Company") is a global provider
of long-range passenger and cargo air transportation outsourcing services to
major international airlines under fixed rate, multi-year contracts. The
Company's passenger and freight operations currently employ 12 wide-body
aircraft which are operated under contracts primarily with Pacific Rim airlines.
These contracts generally require the Company to supply aircraft, crew,
maintenance and insurance ("ACMI" or "wet lease"), while the Company's customers
are responsible for a large portion of the other operating expenses, including
fuel. World Airways' airline customers have determined that outsourcing a
portion of their wide-body passenger and cargo requirements can be less
expensive, and offers greater operational and financial flexibility, than
purchasing new aircraft and additional spare parts required for such aircraft.
World Airways also leads a contractor teaming arrangement that is one of the
largest suppliers of commercial airlift services to the United States Air Forces
Air Mobility Command ("USAF").
The Company, which was founded in 1948, has been providing ACMI contract
services since 1973. Management believes that, as a result of a July 1996
restructuring of its operations to concentrate on ACMI contract services, and
because it is a U.S. certificated "flag" carrier, the Company is well-
positioned to benefit from the growth in the global air passenger and air cargo
markets, particularly in the Pacific Rim region and South America, where the
Company has concentrated a significant amount of its resources.
World Airways restructured its business in July 1996 to focus on ACMI contract
services, taking a one-time charge of $21.0 million as of June 30, 1996. As a
result, the Company terminated all scheduled services on October 27, 1996.
World Airways' block hours flown from continuing operations increased
approximately 10% in the first six months of 1997 over the first six months of
1996 and increased approximately 23% in the year ended December 31, 1996 over
the year ended December 31, 1995. In addition, the Company had operating
revenues of approximately $160.7 million and $151.9 million for the first six
months of 1997 and 1996, respectively, and operating revenues of approximately
$309.6 million and $242.4 million for 1996 and 1995, respectively. Due to
accelerated maintenance on two MD-11s in June 1997, the Company's block hours
flown from continuing operations increased by 1% in the second quarter of 1997
as compared to the same period of the previous year. These aircraft are now
available for operation and are substantially booked for the latter part of
1997. See "Risk Factors -- Aircraft Fleet."
The Company operates a fleet of eight MD-11 and four DC10-30 wide-body
aircraft. The average age of the MD-11 fleet is 3.2 years. World Airways'
overall fleet age averages 8.1 years. When appropriate, the Company will add to
this fleet to accommodate the needs of new and existing customers. The Company
believes that aircraft are available at commercially reasonable rates for this
purpose.
Operating Philosophy
World Airways' operating philosophy is to build on its existing ACMI
relationships to achieve a strong platform for future growth.
. Focus on ACMI Contracts. World Airways concentrates on ACMI contracts
which shift yield, load factor and certain cost risks to the customer. The
customer bears the risk of filling the aircraft with passengers or
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cargo and assumes a large portion of the operating expenses, including
fuel. World Airways has elected to emphasize its ACMI business because the
Company perceives a number of opportunities created by a growing global
economy, particularly growth in second and third world economies where the
demand for airlift exceeds the capacity.
. Maximize Profitability by Combining Long-Term and Short-Term Contracts.
World Airways attempts to maximize profitability by combining its multi-
year ACMI contracts with short-term, higher-yielding ACMI agreements which
meet the peak seasonal requirements of its customers. The Company responds
opportunistically to rapidly changing market conditions by maintaining a
flexible fleet of aircraft that can be deployed in a variety of
configurations.
. Maintain Fleet Flexibility. While the Company's aircraft currently serve
predominantly passenger customers, World Airways substantially increases
its potential customer base by being able to serve both passenger and cargo
customers. The Company flies passenger, cargo and passenger/cargo
convertible aircraft that it believes permit it to react opportunistically
to changing demand. For example, the Company uses convertible aircraft in a
passenger configuration to meet peak seasonal flying for Malaysian Airlines
System Berhad ("Malaysian Airlines") and P.T. Garuda Indonesia ("Garuda")
during the spring of each year. The Company can subsequently use the same
convertible aircraft in a cargo configuration for a customer, such as UPS,
later in the same year.
. Concentrate on Growing Regions. World Airways focuses its marketing
efforts on the Pacific Rim, Europe, and more recently, South America, where
rapid economic development drives demand for the Company's services. The
Company believes that its modern fleet of long-range medium-density wide-
body MD-11 and DC10-30 aircraft are ideally suited to these less dense
international routes and provide superior economics as compared to other
popular aircraft, such as the Boeing 747 which has excess capacity. World
Airways has operated in the Pacific Rim almost since its inception in 1948,
more recently has penetrated the South American market, and believes that
it has developed the ability to serve these markets well.
. Maintain Relationships with Long-Term Customers. World Airways has been
providing safe, reliable services for almost 50 years. The Company has
flown for the USAF since 1956, for Malaysian Airlines since 1981 and for
Garuda since 1973.
Growth Strategy
World Airways' strategy for increasing its revenues and profits focuses on its
growing core business of providing ACMI contract services to international
airlines by:
. Expanding Core Carrier Relationships. Over the years, the Company has
developed long-term relationships with a number of major international
airlines and with the USAF. The Company's growth strategy is based upon
providing high quality service to these customers, thereby maintaining and
expanding the amount of business obtained through long-term contracts.
. Marketing ACMI Services, Particularly in the Pacific Rim and South America.
The Company's new management team is committed to increasing the Company's
marketing efforts, including adding marketing personnel, and has undertaken
a targeted marketing effort worldwide, particularly in the Pacific Rim and
South America. It has recently entered into a Memorandum of Agreement with
Viacao Aereo Sao Paulo ("VASP"), a Brazilian airline. See "Business --
Significant Customer Relationships."
. Entering into New Strategic Alliances. The Company is seeking to enter new
strategic alliances to further the growth of its ACMI business. The Company
believes that in the future there will likely be opportunities for
consolidation within the ACMI business through acquisitions and alliances.
The Company has no present agreements or understandings to acquire or merge
with any other businesses.
World Airways principal executive offices are located at 13873 Park Center
Road, Suite 490, Herndon, Virginia 20171, and its telephone number is (703) 834-
9200.
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The Private Placement
In August 1997, the Company completed a private placement (the "Private
Placement") of $50,000,000 in aggregate principal amount of the Debentures
pursuant to a Purchase Agreement, dated as of August 21, 1997 (the "Purchase
Agreement"), among the Company and the Initial Purchasers. The Debentures were
sold to qualified institutional buyers pursuant to Rule 144A of the Securities
Act of 1933 (the "Securities Act"), certain "accredited investors" pursuant to
Regulation D under the Securities Act, and certain non-U.S. persons pursuant to
Regulation S under the Securities Act.
The net proceeds to the Company from the Private Placement were approximately
$47.5 million, after deducting the discount to the Initial Purchasers and
expenses. The Company intends to use a portion of the net proceeds from the
Private Placement to repurchase approximately 4.0 million shares of Common
Stock. The Company and WorldCorp, Inc. ("WorldCorp") entered into an
agreement (the "Agreement") for the purchase by World Airways of up to 4.0
million shares of Common Stock owned by WorldCorp at a purchase price per share
of $7.65. The Company has received an opinion from Furman Selz LLC that the
terms of the Agreement are fair to the stockholders of the Company from a
financial point of view. Closing under the Agreement was subject to certain
contractual and regulatory contingencies, including the approval of the Boards
of Directors of the Company and WorldCorp. In September 1997, the Boards of
Directors of the Company and WorldCorp approved the Agreement. On September 18,
1997, the Company purchased 3,227,000 shares of Common Stock from WorldCorp for
approximately $24.7 million in cash in accordance with the terms of the
Agreement.
Discussions with MHS Berhad ("MHS") following the Private Placement could have
an impact on the number of shares of Common Stock ultimately repurchased from
WorldCorp. MHS has certain rights under a shareholders agreement, dated as of
February 3, 1994, as amended, among WorldCorp, MHS and the Company (the
"Shareholders Agreement"), the provisions of which are described in "Certain
Relationships and Transactions." This agreement includes a provision that
provides that if WorldCorp were to dispose of its holdings in the Company with
the result that WorldCorp's ownership interest in the Company falls below 51% of
the outstanding shares of Common Stock, then MHS may either sell its shares to a
third party or require WorldCorp to sell a pro rata number of shares held by MHS
to the party purchasing WorldCorp's shares. As a result of the repurchase of
3,227,000 shares of Common Stock by World Airways from WorldCorp, MHS has the
right to sell 773,000 shares of Common Stock. Failure by the Company to effect
the repurchase of at least 4.0 million shares of Common Stock within 150 days
after the original issue of the Debentures is a Repurchase Event. See
"Description of Debentures--Certain Rights to Require Repurchase of Debentures."
Prior to completion of the Private Placement, WorldCorp, MHS and the Company
engaged in preliminary discussions as to a potential repurchase of Common Stock
owned by MHS. The MHS-nominated representatives to the Company's Board of
Directors notified the Company's other Directors that they were not in favor of
using proceeds from the Private Placement to repurchase Common Stock from both
WorldCorp and MHS. The Company anticipates that these discussions will
continue, although there can be no assurance that these discussions will result
in any stock repurchases from MHS. Should MHS not exercise its right to sell
the 773,000 shares of Common Stock, the Company currently intends to repurchase
the 773,000 shares from WorldCorp.
The Company applied approximately $3.8 million of the net proceeds of the
Private Placement to repay borrowings outstanding under the Company's bank
credit agreement (the "Credit Agreement"). Remaining net proceeds of the
Private Placement will be used for working capital and general corporate
purposes, capital expenditures, such as leasing of additional aircraft and the
purchase of engines and spare parts, and the repayment of other indebtedness.
Pending such uses, the Company may invest proceeds of the Private Placement in
income producing investments, including, but not limited to, investments in
commercial paper, government securities or money market funds that invest in
government securities.
Pursuant to a Registration Rights Agreement, dated as of August 26, 1997 (the
"Registration Rights Agreement"), among the Company and the Initial Purchasers,
the Company has agreed to file a shelf registration statement under the
Securities Act (together with all exhibits, schedules and amendments thereto,
the "Registration
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Statement"), of which this Prospectus forms a part, relating to resales of the
Debentures and the Shares. The Company is required under the Registration Rights
Agreement to maintain the effectiveness of the Registration Statement for a
period of two years from the completion of the Private Placement or, if shorter,
when (i) all the Securities have been sold pursuant to the Registration
Statement or (ii) the date on which there ceases to be outstanding any
Securities. See "Description of Debentures--Registration Rights; Liquidated
Damages."
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995:
World Airways desires to take advantage of the new "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. World Airways wishes to
caution readers that this Prospectus contains forward looking statements that
are subject to risks and uncertainties, including, but not limited to, the
impact of significant financial leverage, competition, demand and market
acceptance risks, reliance on key strategic alliances, fluctuations in operating
results and other risks detailed from time to time in World Airways' filings
with the Securities and Exchange Commission and set forth herein, including risk
factors disclosed in World Airways' Form 10-K for the fiscal year ended December
31, 1996 and those discussed in "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." See "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." These risks could cause World Airways' actual results for 1997 and
beyond to differ materially from those expressed in any forward looking
statements made by, or on behalf of, World Airways.
6
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The Offering
<TABLE>
<S> <C>
Securities Offered................. $50,000,000 principal amount of 8% Convertible Senior Subordinated Debentures due
2004 and shares of Common Stock of the Company issuable upon conversion thereof,
subject to adjustment under certain circumstances.
Payment of Interest................ February 26 and August 26, commencing February 26, 1998.
Conversion......................... Convertible into Common Stock of the Company at the option of the holder at any
time after October 25, 1997 and at or before maturity, unless previously
redeemed, at $8.90 per share, subject to adjustment upon the occurrence of
certain events. See "Description of Debentures--Conversion Rights."
Subordination...................... Subordinated to all present and future Senior Indebtedness (as defined) of the
Company. The Debentures will be senior subordinated indebtedness of the Company
ranking pari passu with all future senior subordinated indebtedness of the
Company and senior to all existing and future Subordinated Indebtedness (as
defined) of the Company. As of June 30, 1997, Senior Indebtedness of the Company
was $40.8 million, no indebtedness of the Company was outstanding which would
have ranked pari passu in right of payment with the Debentures, no Subordinated
Indebtedness was outstanding and the Company had no firm arrangements to issue
any significant Subordinated Indebtedness as of such date. The Indenture
contains no limitation on the incurrence of indebtedness (including Senior
Indebtedness) or other liabilities by the Company. See "Description of
Debentures--Subordination."
Redemption......................... The Debentures are not redeemable by the Company prior to August 26, 2000.
Subject to the foregoing, the Debentures are redeemable in whole or in part, at
the option of the Company, at the redemption prices set forth herein, together
with accrued interest. See "Description of Debentures--Optional Redemption."
Redemption at Holder's Option...... In the event that there shall occur a Repurchase Event (as defined herein), each
holder of the Debentures shall have the right, at the holder's option, to require
the Company to repurchase such holder's Debentures at 100% of their principal
amount, plus accrued interest. The Company's ability to repurchase the
Debentures following a Repurchase Event is dependent upon the Company having
sufficient funds and may be limited by the terms of the Company's Senior
Indebtedness or the subordination provisions of the Indenture. There is no
assurance that the Company will be able to repurchase the Debentures upon the
occurrence of a Repurchase Event. See "Description of Debentures--Certain Rights
to Require Repurchase of Debentures."
</TABLE>
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<TABLE>
<S> <C>
Registration Rights................ The Debentures and the Shares are currently subject to certain restrictions on
transfer. However, pursuant to a registration rights agreement between the
Company and the Initial Purchasers (the "Registration Rights Agreement"), the
Company has agreed to file a shelf registration statement under the Securities
Act with the Securities and Exchange Commission (the "Commission") relating to
resales of the Debentures and the Shares. The Registration Statement of which
this Prospectus is a part is being filed pursuant to such agreement. The Company
will not receive any of the proceeds from the sales of the Debentures or the
Shares by the Selling Security Holders pursuant to this Prospectus. The Selling
Security Holders will receive all the net proceeds from any sale of the
Debentures or Shares offered hereby. See "Description of
Debentures--Registration Rights; Liquidated Damages."
Form and Denomination.............. The Debentures initially sold by the Initial Purchasers to qualified
institutional buyers are represented by a Rule 144A Global Security in fully
registered form deposited with a custodian for and registered in the name of a
nominee of The Depository Trust Company ("DTC"). Beneficial interests in the
Rule 144A Global Security will be shown on, and transfers thereof will be
effected through, records maintained by DTC and its Participants (as defined
herein). Debentures initially sold by the Initial Purchasers within the United
States to accredited investors who are not qualified institutional buyers are in
certificated form, and cannot be traded through the facilities of DTC except in
connection with a transfer to a qualified institutional buyer or a transfer
pursuant to Regulation S. The Debentures initially sold by the Initial
Purchasers to non-U.S. persons pursuant to Regulation S under the Securities Act
are represented by a Regulation S Temporary Global Security. Beneficial
interests in the Regulation S Temporary Global Security may be held only through
Euroclear and Cedel Bank. The Regulation S Permanent Global Security is expected
to be deposited with the Trustee as custodian for DTC, and beneficial interests
therein may be held through Euroclear, Cedel Bank or any other Participant.
Absence of Public Market For the Prior to the date of this Prospectus, there has been no public market for the
Notes............................. Debentures and there can be no assurance regarding the future development of a
market for the Debentures. The Debentures are eligible for trading on the PORTAL
Market; however, no assurance can be given as to the liquidity of, or trading
market for, the Debentures. The Company has been advised by the Initial
Purchasers that they intend to make a market in the Debentures. However, the
Initial Purchasers are not obligated to do so and any market-making activities
with respect to the Debentures may be discontinued at any time without notice.
Accordingly, no assurance can be given as to the liquidity of or the trading
market for the Debentures. The Common Stock is traded on Nasdaq under the symbol
"WLDA." See "Plan of Distribution."
</TABLE>
Risk Factors
For a discussion of certain factors that should be considered by prospective
investors, see "Risk Factors."
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Summary Financial and Operating Data
(Dollars in thousands, except operating and per share data)
The following table sets forth selected income statement data, operating data
and balance sheet data for the Company for the periods indicated. The historical
financial information for, and as of the end of, each of the years ended
December 31, 1992, 1993, 1994, 1995 and 1996 is derived from the audited
financial statements of the Company for such years. This information should be
read in conjunction with, and is qualified by reference to, the financial
statements of the Company and the notes thereto included in the Prospectus. The
following selected financial data for the six months ended June 30, 1996 and
1997 is derived from the Company's unaudited financial statements. In the
opinion of management of the Company, such unaudited financial statements
include all adjustments necessary for a fair presentation of the results of
operations for such periods. Operating results for the six months ended June 30,
1997, are not necessarily indicative of results that may be expected for the
entire year ending December 31, 1997. The data appearing under the caption
"Operating Data" is derived from the records of the Company. The unaudited as
adjusted income statement data for the year ended December 31, 1996 and the six
months ended June 30, 1997 give effect to the Private Placement, the repayment
of borrowings under the Credit Agreement, and the purchase of 3,227,000 shares
of Common Stock from WorldCorp as if they were completed on January 1, 1996
and the unaudited as adjusted balance sheet data give effect to these
transactions as if they were completed on June 30, 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1992 1993 1994 1995(1) 1996(1)
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues..................................... $180,293 $ 178,736 $ 180,715 $242,386 $309,587
Operating expenses..................................... 173,028 186,065(2) 185,916(3) 226,488 287,942
-------- ---------- ---------- -------- --------
Operating income (loss)................................ 7,265(5) (7,329) (5,201) 15,898 21,645
Other income (expense)................................. 1,389 (1,656) (3,826) (1,150) (2,613)
Earnings (loss) from continuing operations before
income taxes and change in accounting principle....... 8,654 (8,985) (9,027) 14,748 19,032
Income tax expense (benefit)........................... 236 64 (26) 602 679
Earnings (loss) from continuing operations before
change in accounting principle........................ 8,418 (9,048) (9,001) 14,146 18,353
Net earnings (loss).................................... 6,445(6) (9,048) (9,001) 8,896 (14,022)
Earnings (loss) per common share from continuing
operations............................................ $ 0.94 $ (1.01) $ (0.91) $ 1.34 $ 1.55
Net earnings (loss) per common share................... $ 0.72 $ (1.01) $ (0.91) $ 0.84 $ (1.19)
Cash dividends per common share........................ $ 2.16 $ -- $ -- $ -- $ --
Ratio of earnings to fixed charges(7).................. 1.65x -- -- 1.58x 1.60x
Deficiency in earnings to cover fixed charges(7)....... -- $ 8,984 $ 9,027 -- --
EBITDA(8).............................................. $ 12,186 $ (1,756) $ (1,195) $ 21,954 $ 29,677
Operating Data:
Block hours flown(9):
from continuing operations............................ 22,263 23,462 26,455 35,628 43,897
from discontinued operations(1)....................... -- -- -- 1,714 6,628
-------- ---------- ---------- -------- --------
Total............................................... 22,263 23,462 26,455 37,342 50,525
======== ========== ========== ======== ========
Average aircraft equivalents(10):...................... 7.2 8.8 8.2 10.3 14.1
Daily aircraft utilization (in block hours)(11):....... 8.4 7.3 8.8 9.9 9.8
Operating income (loss) per continuing block
hour(12).............................................. $ 326 $ (312) $ (197) $ 446 $ 493
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1996(1) 1997
------------ -----------
<S> <C> <C>
Income Statement Data:
Operating revenues..................................... $151,873 $ 160,676
Operating expenses..................................... 139,927 147,842(4)
-------- ----------
Operating income (loss)................................ 11,946 12,834
Other income (expense)................................. (859) (1,818)
Earnings (loss) from continuing operations before
income taxes and change in accounting principle....... 11,087 11,016
Income tax expense (benefit)........................... 315 350
Earnings (loss) from continuing operations before
change in accounting principle........................ 10,772 10,666
Net earnings (loss).................................... (21,933) 10,666
Earnings (loss) per common share from continuing
operations............................................ $ 0.90 $ 0.95
Net earnings (loss) per common share................... $ (1.83) $ 0.95
Cash dividends per common share........................ $ -- $ --
Ratio of earnings to fixed charges(7).................. 1.79x 1.58x
Deficiency in earnings to cover fixed charges(7)....... -- --
EBITDA(8).............................................. $ 15,840 $ 17,165
Operating Data:
Block hours flown(9):
from continuing operations............................ 22,007 24,150
from discontinued operations(1)....................... 2,534 --
-------- ----------
Total............................................... 24,541 24,150
======== ==========
Average aircraft equivalents(10):...................... 13.3 13.7
Daily aircraft utilization (in block hours)(11):....... 10.2 9.8
Operating income (loss) per continuing block
hour(12).............................................. $ 543 $ 531
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1997
---------------------
As
Actual Adjusted(13)
--------- ------------
<S> <C> <C>
As Adjusted Balance Sheet Data:
Cash and restricted short-term investments............................................................$ 9,471 $ 29,272
Working capital (deficit)............................................................................. (31,852) (10,851)
Net equipment and property............................................................................ 73,147 73,147
Total assets.......................................................................................... 127,669 149,020
Notes payable and long-term obligations (including current maturities)................................ 40,764 86,802
Accumulated deficit................................................................................... (18,340) (18,340)
Total stockholders' equity (deficit).................................................................. 18,896 (5,791)
</TABLE>
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<TABLE>
<CAPTION>
For the year ended For the six months ended
December 31, 1996 June 30, 1997
--------------------------- -----------------------------
Actual As Adjusted(13) Actual As Adjusted(13)
---------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
As Adjusted Income Statement Data:
Operating revenues......................................................... $309,587 $309,587 $ 160,676 $160,676
Operating expenses......................................................... 287,942 287,942 147,842(4) $147,842
-------- -------- ---------- --------
Operating income........................................................... 21,645 21,645 12,834 12,834
Other income (expense)..................................................... (2,613) (6,059) (1,818) $ (3,628)
-------- -------- ---------- --------
Earnings from continuing operations before income taxes.................... 19,032 15,586 11,016 9,206
Income tax expense......................................................... (679) (607) (350) (312)
-------- -------- ---------- --------
Earnings from continuing operations........................................ 18,353 14,979 10,666 8,894
Discontinued operations.................................................... (32,375) (32,447) -- --
-------- -------- ---------- --------
Net earnings (loss)........................................................ $(14,022) $(17,468) $ 10,666 $ 8,894
======== ======== ========== ========
Primary earnings (loss) per common share:
Continuing operations..................................................... $ 1.55 $ 1.74 $ 0.95 $ 1.11
Discontinued operations................................................... $ (2.74) $ (3.76) $ -- $ --
-------- -------- ---------- --------
Net earnings (loss)....................................................... $ (1.19) $ (2.02) $ 0.95 $ 1.11
======== ======== ========== ========
Weighted average shares outstanding (in thousands)........................ 11,806 8,628 11,234 8,007
Fully diluted earnings (loss) per common share:
Continuing operations..................................................... $ 1.55 $ * $ 0.95 $ 0.80
Discontinued operations................................................... $ (2.74) $ * $ -- $ --
-------- -------- ---------- --------
Net earnings (loss)....................................................... $ (1.19) $ * $ 0.95 $ 0.80
======== ======== ========== ========
Weighted average shares outstanding (in thousands)........................ 11,806 * 11,236 13,627
Ratio of earnings to fixed charges(7)...................................... 1.60x 1.45x 1.58x 1.45x
EBITDA(8).................................................................. $ 29,677 $ 29,677 $ 17,165 $ 17,165
</TABLE>
- --------------
* Fully diluted earnings per share are anti-dilutive.
(1) Operating revenues and expenses for 1995 and 1996 exclude discontinued
operations, consisting of the Company's scheduled passenger and charter
operations.
(2) Operating expenses in 1993 include $2.3 million of termination fees related
to the early return of three DC10-30 aircraft.
(3) Operating expenses in 1994 include a $4.2 million reversal of excess
accrued maintenance reserves associated with the expiration of three DC10-
30 aircraft leases during 1994.
(4) Operating expenses for the six months ended June 30, 1997, include a $1.0
million reversal of accrued maintenance expense in excess of the cost of an
overhaul of a DC-10 aircraft.
(5) Operating income in 1992 includes $4.1 million related to settlement of
contract claims with the U.S. Government related to Operation Desert
Shield/Desert Storm.
(6) Cumulative effect of change in accounting principle from the adoption of
FAS #106, Employers Accounting For Post-Retirement Benefits Other Than
Pensions.
(7) For purposes of computing this ratio, earnings consist of earnings (loss)
from continuing operations before income taxes and change in accounting
principle and fixed charges. Fixed charges consist of interest expense,
including amortization of debt issuance costs and one-third of rent expense
which is deemed to be representative of interest expense.
(8) EBITDA represents operating income (loss) excluding depreciation and
amortization. The Company has included EBITDA to provide additional
information related to the Company's ability to service debt. EBITDA should
not be considered as an alternative measure of the Company's net income or
cash flow (which are determined in accordance with generally accepted
accounting principles), operating performance or liquidity.
(9) "Block hours flown" for an aircraft represents the elapsed time computed
from the moment the aircraft first moves under its own power at the point
of origin to the time it comes to rest at its destination.
(10) "Average aircraft equivalents" represents the total number of aircraft in
service during each day of a given period divided by the number of days in
the given period.
(11) "Daily aircraft utilization" is determined by dividing the block hours
flown during such period by the number of days during such period that the
aircraft were leased by the Company.
(12) "Operating income (loss) per continuing block hour" for any period
represents the amount determined by dividing operating income (loss) for
such period by the total block hours flown for such period.
(13) Adjusted to give effect to the sale by the Company of the Debentures in
the Private Placement, the repayment of borrowings under the Credit
Agreement, as described in "Prospectus Summary--The Private Placement," and
the purchase of 3,227,000 shares of Common Stock from WorldCorp. The as
adjusted amounts do not assume any interest earnings on the net proceeds
from the Private Placement. In the event that the Company repurchases
additional shares of Common Stock, as described in "Prospectus Summary--The
Private Placement," total stockholders' equity would be reduced by the
amount of the purchase price for such Common Stock. See "Capitalization."
10
<PAGE>
RISK FACTORS
In evaluating an investment in the Debentures or the Shares, prospective
investors should consider carefully the following risk factors, in addition to
the other information in this Prospectus and in the documents incorporated by
reference herein.
Risks Related to World Airways and the Debentures:
Significant Financial Leverage
World Airways is highly leveraged and will be substantially more leveraged
upon completion of the Private Placement. World Airways incurred substantial
debt and lease commitments during the past three years in connection with its
acquisition of MD-11 aircraft and related spare parts. In addition, World
Airways has significant future long-term obligations under aircraft lease
obligations relating to its aircraft.
As of June 30, 1997, the Company had outstanding $29.1 million in long-term
debt and capital leases, with expected debt service and capital lease expense of
$5.9 million for the six months ending December 31, 1997 and $13.3 million for
the year ending December 31, 1998. As of June 30, 1997, after giving effect to
the Private Placement and use of proceeds therefrom, the Company's total
indebtedness would have been approximately $86.8 million, $36.8 million of which
would have been Senior Indebtedness, including $6.7 million attributable to
capital lease obligations, no indebtedness of the Company would have ranked pari
passu with the Debentures, and no indebtedness would have been Subordinated
Indebtedness. On September 18, 1997, the Company purchased 3,227,000 shares of
its Common Stock from WorldCorp for approximately $24.7 million in cash. In the
event that the Company repurchases additional shares of Common Stock, as
described in "Prospectus Summary--The Private Placement," total stockholders'
equity would be reduced by the amount of purchase price for such Common Stock.
See "Capitalization." The Indenture does not limit the amount of additional
indebtedness, including Senior Indebtedness, which World Airways can create,
incur, assume or guarantee. See "Description of Debentures--Subordination."
The Company currently has incurred, and after the consummation of the Private
Placement will continue to incur, significant annual cash fixed charge expenses.
After giving effect to the Private Placement, the as adjusted ratio of earnings
to fixed charges for the fiscal year ended December 31, 1996 would have been
1.45 to 1 compared to 1.60 to 1 before the Private Placement. See "Prospectus
Summary--The Private Placement" and "Capitalization."
The Company's ability to make interest payments on the Debentures will be
dependent on the Company's future operating performance, which is itself
dependent on a number of factors, many of which are beyond the Company's
control. The Company's ability to repay the Debentures at maturity will depend
upon these same factors and the ability of the Company to raise additional
funds. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The degree to which World Airways is leveraged could have important
consequences to holders of the Debentures and, upon conversion, holders of the
Shares, including the following: (i) World Airways' ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or other purposes may be limited; (ii) a substantial portion of the Company's
cash flow from operations must be dedicated to the payment of principal and
interest on its indebtedness; (iii) World Airways' degree of leverage and
related debt service obligations, as well as its obligations under operating
leases for aircraft, may make it more vulnerable than some of its competitors in
a prolonged economic downturn; (iv) World Airways' ability to meet its payment
obligations under existing and future indebtedness, capital leases and operating
leases may be limited; and (v) World Airways' financial position may restrict
its ability to pursue new business opportunities and limit its flexibility in
responding to changing business conditions.
11
<PAGE>
Liquidity and Capital Resources
World Airways' cash and cash equivalents at June 30, 1997 and December 31,
1996 were $8.3 million and $7.0 million, respectively. As is common in the
airline industry, World Airways operates with a working capital deficit. At
June 30, 1997, World Airways' current assets were $33.5 million and current
liabilities were $65.3 million. World Airways has substantial long-term
aircraft lease obligations with respect to its current aircraft fleet. Although
there can be no assurances, World Airways believes that its existing contracts
and additional business which it expects to obtain in the near term, along with
its existing cash and financing arrangements and the net proceeds from the
Private Placement will be sufficient to allow World Airways to meet its cash
requirements related to debt service and the operating and capital requirements
for its continuing operations for the next 12 months.
In 1996, World Airways instituted a program to purchase up to one million
shares of its publicly-traded Common Stock pursuant to open market transactions.
As of June 30, 1997, World Airways had purchased 770,000 shares of Common Stock
at an aggregate cost of approximately $7.8 million pursuant to such program.
WorldCorp and World Airways have entered into an agreement for the repurchase of
Common Stock owned by WorldCorp. Failure by the Company to effect the
repurchase of at least 4.0 million shares of Common Stock within 150 days after
the original issue of the Debentures is a Repurchase Event. On September 18,
1997, the Company purchased 3,227,000 shares of Common Stock from WorldCorp at a
purchase price of $7.65 per share. See "Prospectus Summary--The Private
Placement" and "Description of Debentures--Certain Rights to Require Repurchase
of Debentures."
In the event that World Airways enters into leases for additional aircraft,
World Airways will need to make capital expenditures for additional spare
engines and parts. No assurances can be given, however, that World Airways will
obtain all of the financing required for such capital expenditures.
Dependence Upon Key Customers
World Airways' business relies heavily on its contracts with Malaysian
Airlines, Philippine Airlines, Inc. ("Philippine Airlines"), Garuda and the
USAF. For the first six months of 1997, these customers provided 27%, 36%, 19%
and 15%, respectively, of World Airways' revenues and 30%, 38%, 20% and 8%,
respectively, of total block hours. In 1996, these customers accounted for 34%,
15%, 13% and 25%, respectively, of World Airways' revenues and 42%, 17%, 14%,
and 17%, respectively, of total block hours flown from continuing operations.
As a result of teaming arrangements, World Airways has been awarded one of the
largest USAF fixed awards under the Civil Reserve Air Fleet ("CRAF") program for
the U.S. Government's 1997-98 fiscal year. World Airways, however, cannot
determine how the reduction in overall Defense Department spending may affect
arrangements with the USAF in future years. The loss of any of these contracts
with these key customers, a renegotiation of the terms of these contracts or a
substantial reduction in business from any of them, if not replaced, could have
a material adverse effect on the financial condition or results of operations of
World Airways. Although World Airways' customers bear the financial risk of
filling the World Airways' aircraft with passengers or cargo, World Airways can
be affected adversely if its customers are unable to operate its aircraft
profitably, or if one or more of World Airways' customers experience a material
adverse change in their market demand, financial condition or results of
operations. Under these circumstances, World Airways can be adversely affected
by receiving delayed or partial payments or by receiving customer demands for
rate and utilization reductions, flight cancellations, and/or early termination
of their agreements.
As of June 30, 1997, World Airways operated four MD-11 passenger aircraft for
Philippine Airlines under an agreement with high minimum monthly utilization
levels. Philippine Airlines, however, is experiencing financial difficulties,
and since March 1997 had been making monthly lease payments to the Company on an
installment basis according to a payment plan agreed to by the Company and
Philippine Airlines at the beginning of each month. On July 11, 1997, World
Airways agreed to shift two MD-11s currently operating for Philippine Airlines
to other customers of the Company. See "Business--Significant Customer
Relationships." As of the date hereof, Philippine Airlines is in compliance with
its agreements with the Company and has reconfirmed its commitment to operate
the remaining two MD-11s currently in its fleet until February 1998. Failure by
Philippine Airlines to meet its aircraft lease obligations, if not offset by
other business, would have a material adverse effect on the financial condition,
cash flows and results of operations of the Company.
12
<PAGE>
On July 3, 1997, World Airways entered a binding Memorandum of Agreement with
VASP for the lease of two MD-11 passenger aircraft for a six-month term with a
six-month renewal option. The Company is currently negotiating the terms of
this lease with VASP, with commencement anticipated for no earlier than late
1997. The Company is also leasing a cargo plane to VASP under an ACMI contract
which began in June 1997. See "Business--Significant Customer Relationships."
The loss of this agreement, a renegotiation of its terms or a substantial
reduction of business for VASP, if not replaced, could have a material adverse
effect on the financial condition or results of operations of World Airways.
Geographic Concentration
World Airways derives a significant percentage of its revenues and block hours
from its operations in the Pacific Rim region. While World Airways believes the
Pacific Rim region is a growth market for air transportation, any economic
decline or any military or political disturbance in this area may interfere with
World Airways' ability to provide service and could have a material adverse
effect on the financial condition or results of operations of World Airways.
Operating Losses
While World Airways generated operating income each year from 1987 through
1992 and in 1995, it sustained operating losses in 1993 and 1994 of $7.3 million
and $5.2 million, respectively, and net losses of $9.0 million in each of these
two years. For the year ended December 31, 1996, World Airways incurred a net
loss of $14.0 million, which resulted from operating losses incurred in World
Airways' scheduled service operations, which were discontinued in 1996, and the
related estimated loss on disposal. Earnings from continuing operations were
$18.4 million for 1996. While World Airways generated operating income for the
six months ended June 30, 1997 of $12.8 million, there can be no assurance that
World Airways will be able to generate operating income for the remainder of
1997 or future years.
Debentures Represent Unsecured, Subordinated Claims; No Limitation on
Additional Indebtedness
The Debentures are subordinate in right of payment to all current and future
Senior Indebtedness of World Airways and rank pari passu with all future senior
subordinated indebtedness of the Company and rank senior in right of payment to
all existing and future Subordinated Indebtedness of the Company. Senior
Indebtedness includes, among other things, all secured indebtedness and capital
lease obligations of World Airways, whether existing on or created or incurred
after the date of the issuance of the Debentures, and all indebtedness for money
borrowed that is not made subordinate to or pari passu with the Debentures by
the instrument creating the indebtedness. At June 30, 1997, the aggregate
amount of Senior Indebtedness outstanding was approximately $40.8 million
(including $6.7 million attributable to capital lease obligations), no
indebtedness of the Company was outstanding that would have ranked pari passu
with the Debentures, and no Subordinated Indebtedness was outstanding. As of
June 30, 1997, after giving effect to the repayment of approximately $4.0
million of indebtedness with proceeds from the Private Placement, World Airways
will have approximately $86.8 million of indebtedness outstanding, of which
$36.8 million would constitute Senior Indebtedness, no indebtedness of the
Company would rank pari passu with the Debentures, and no indebtedness would
constitute Subordinated Indebtedness. In the event the Company has subsidiaries
that incur debt, the Debentures would be effectively subordinated to such debt.
The Indenture does not limit the amount of additional indebtedness, including
Senior Indebtedness, which World Airways can create, incur, assume or guarantee.
By reason of such subordination of the Debentures, in the event of insolvency,
bankruptcy, liquidation, reorganization, dissolution or winding up of the
business of World Airways or upon a default in payment with respect to any
Senior Indebtedness of World Airways or an event of default with respect to such
indebtedness resulting in the acceleration thereof, the assets of World Airways
will be available to pay the amounts due on the Debentures only after all Senior
Indebtedness of World Airways has been paid in full. See "Description of
Debentures."
13
<PAGE>
Limitations on Repurchase of Debentures Upon a Repurchase Event
In the event of a Repurchase Event, each holder of the Debentures will have
the right, at the holder's option, to require World Airways to repurchase all or
a portion of such holder's Debentures at a purchase price equal to 100% of the
principal amount thereof plus accrued interest to the repurchase date. World
Airways' ability to repurchase the Debentures upon a Repurchase Event may be
limited by the terms of World Airways' Senior Indebtedness and the subordination
provisions of the Indenture. The right to require the Company to repurchase
Debentures as a result of the occurrence of a Repurchase Event could create an
event of default under Senior Indebtedness of the Company, as a result of which
any repurchase could, absent a waiver, be blocked by the subordination
provisions of the Debentures. See "Description of Debentures--Subordination."
Failure by the Company to repurchase the Debentures when required will result in
an Event of Default with respect to the Debentures whether or not such
repurchase is permitted by the subordination provisions. The Company's ability
to pay cash to the holders of Debentures upon a repurchase may be limited by
financial covenants contained in the Company's Senior Indebtedness. Further,
the ability of World Airways to repurchase Debentures upon a Repurchase Event
will be dependent on the Company's ability to raise sufficient funds through
additional borrowings or equity sales and compliance with applicable securities
laws. Accordingly, there can be no assurance that World Airways will be able to
repurchase the Debentures upon a Repurchase Event. The term "Repurchase Event"
is limited to certain specified transactions and may not include other events
that might adversely affect the financial condition of World Airways, nor would
the requirement that World Airways offer to repurchase the Debentures upon a
Repurchase Event necessarily afford holders of the Debentures protection in the
event of a highly leveraged reorganization, merger or similar transaction
involving World Airways. See "Description of Debentures."
Utilization of Aircraft
Due to the large capital costs of leasing and maintaining World Airways'
aircraft, each of World Airways' aircraft must have high utilization at
attractive rates in order for World Airways to operate profitably. Although
World Airways' strategy is to enter into long-term contracts with its customers,
the terms of World Airways' existing customer contracts are substantially
shorter than the terms of World Airways' lease obligations with respect to the
aircraft. Approximately 70% and 13% of World Airways' contract backlog at June
30, 1997, relates to its multi-year contracts with Malaysian Airlines and
Philippine Airlines, respectively. In addition, a significant portion of World
Airways' current contracts expire near the end of 1997. There can be no
assurance that World Airways will be able to enter into additional contracts
with new or existing customers or that it will be able to obtain enough
additional business to fully utilize each aircraft. World Airways' financial
results could be materially adversely affected even by relatively brief periods
of low aircraft utilization and yields. In order to maximize aircraft
utilization, World Airways does not intend to acquire new aircraft unless such
aircraft would be necessary to service existing needs or World Airways has
obtained additional ACMI contracts for the aircraft to service. World Airways
is seeking to obtain additional ACMI contracts with new and existing customers,
to which such new aircraft would be dedicated when placed in service, but World
Airways can provide no assurance that it will obtain new ACMI contracts or that
existing ACMI contracts will be renewed or extended.
Aircraft Fleet
Each of the aircraft in World Airways' existing fleet is to a large extent
contractually dedicated by World Airways to the service of one or more
customers, with limited aircraft available to provide back-up capability.
Therefore, in the event the use of one or more of World Airways' aircraft was
lost, World Airways might have difficulty fulfilling its obligations under one
or more of these contracts, if it were unable to obtain substitute aircraft. On
October 24, 1997 one of the Company's MD-11 aircraft was damaged upon landing.
The aircraft will be out of service for approximately two months while certain
repairs are made. The Company expects insurance to cover repair and certain
related costs, but expects that the Company's loss of revenues that would have
been generated by the aircraft's use will have an adverse effect on the
Company's financial condition and results of operations for the fourth quarter
of 1997. Also, if World Airways is successful in entering into additional
agreements to use its aircraft fleet on a year-round as opposed to seasonal
basis, World Airways will have fewer aircraft available to meet the peak
seasonal demands for its traditional customers such as Garuda for the Hadj
pilgrimage and the USAF for short-term expansion flying. To continue to meet
the peak seasonal demand requirements of its customers, World Airways will have
to acquire additional aircraft on short-term leases. World Airways has
historically been successful in obtaining
14
<PAGE>
MD-11 and DC10-30 aircraft and the financing necessary for the acquisition of
such aircraft. There can be no assurance, however, that World Airways will be
able to lease such aircraft or a satisfactory substitute, that the terms of such
leases will be favorable to World Airways or that World Airways will be able to
obtain satisfactory financing necessary for the acquisition of such aircraft in
the future. Moreover, World Airways may decline to renew most of its MD-11
leases, which are renewable at the Company's option for 10 one-year extensions
in years six through 15 of the lease term. However, the failure to renew such
leases would result in penalties. See "Business--Aircraft Fleet."
Aging DC10-30 Aircraft
World Airways' existing fleet includes four DC10-30 aircraft which were
manufactured between 1974 and 1988. Manufacturer Service Bulletins ("Service
Bulletins") and the FAA's Airworthiness Directives ("Directives") issued under
its "Aging Aircraft" program could cause DC10-30 aircraft operators to be
subject to extensive aircraft examinations and require DC10-30 aircraft to
undergo structural inspections and modifications to address problems of
corrosion and structural fatigue at specified times. It is possible that
Service Bulletins or Directives applicable to the types of aircraft or engines
included in World Airways' fleet could be issued in the future. The cost of
compliance with Directives and Service Bulletins cannot currently be estimated,
but could be substantial and could have a material adverse effect on the
financial condition or results of operations of World Airways.
Reliance on Others
World Airways has entered into agreements with contractors, including other
airlines, to provide certain facilities and services required for its
operations, including all of World Airways' off-wing engine maintenance and most
airframe maintenance. World Airways has also entered into agreements with
contractors to provide security, ground handling and personnel training.
Although World Airways believes that there are many advantages to outsourcing
these activities, the failure of these contractors to provide essential services
that are not otherwise entirely within the control of World Airways could have a
material adverse effect on the financial condition or results of operations of
World Airways.
Maintenance
Engine maintenance accounts for most of World Airways' annual maintenance
expenses. Typically, the hourly cost of engine maintenance increases as the
aircraft ages. World Airways outsources major airframe maintenance and power
plant work to several suppliers. World Airways has a 10-year contract expiring
in August 2003 with United Technologies Corporation's Pratt & Whitney Group for
all off-wing maintenance on the PW 4462 engines that power its MD-11 aircraft.
Under this contract, the manufacturer agreed to provide such maintenance
services at a cost not to exceed specified rates per engine flight hour during
the term of the contract. World Airways' maintenance costs associated with the
MD-11 aircraft and PW 4462 engines have been significantly reduced due in part
to manufacturer guarantees and warranties, which began to expire in 1995 and
which will fully expire by 1998. In addition, the specified rate per engine
flight hour is subject to annual escalation, increasing substantially in 1998.
Accordingly, while World Airways believes the terms of this agreement have
resulted in lower engine maintenance costs than it otherwise would incur, engine
maintenance costs will increase substantially during the last five years of the
agreement. World Airways has begun to accrue these increased expenses in 1997
and such expenses will continue to increase during the remainder of the term of
the contract as World Airways' aircraft fleet ages. See "Business--
Maintenance."
Shareholders Agreement with MHS; Limitation on Voting by Foreign Citizens
MHS currently owns 24.9% of the outstanding Common Stock. Under the
Shareholders Agreement, WorldCorp has agreed to vote its shares of World Airways
Common Stock to elect the number of directors nominated by MHS that represent
MHS' proportionate interest in World Airways, but in no event less than two
directors. In addition, World Airways is not permitted to consummate the sale of
all or substantially all of its business or make a fundamental change in its
line of business without the approval of the directors designated by MHS.
Accordingly, MHS could block World Airways from entering into a transaction or
taking actions that could be in the best interests of stockholders.
Notwithstanding any other provision of the Shareholders Agreement, if without
the prior written consent of MHS, World Airways sells all or substantially all
of its business or
15
<PAGE>
fundamentally changes its line of business, then MHS has the right to require
WorldCorp to purchase all or part of MHS' shares at fair market value, which
could have the effect of discouraging WorldCorp from taking certain actions that
could be in the best interests of other stockholders of World Airways. See "--
World Airways' NOLs." The Shareholders Agreement terminates if either
WorldCorp's or MHS' ownership interest falls below 5% of the outstanding capital
stock of World Airways. The Shareholders Agreement provides that if WorldCorp
were to dispose of its holdings in the Company with the result that WorldCorp's
ownership interest in the Company falls below 51% of the outstanding shares of
Common Stock, then MHS may either sell its shares to a third party or require
WorldCorp to sell a pro rata number of shares held by MHS to the party
purchasing WorldCorp's shares.
Under applicable regulatory restrictions, because World Airways is a U.S.
certificated flag carrier, no more than 25% of the voting stock of World Airways
may be owned or controlled, directly or indirectly, by persons who are not U.S.
citizens ("Foreign Citizens"). World Airways' Certificate of Incorporation and
Bylaws provide that no shares of capital stock may be voted by or at the
direction of Foreign Citizens unless such shares are registered on a separate
stock record (the "Foreign Stock Record"). No shares of Common Stock owned by
Foreign Citizens will be registered on the Foreign Stock Record of World Airways
to the extent that the aggregate ownership by Foreign Citizens reflected in the
Foreign Stock Record would exceed 25% of World Airways' outstanding shares of
Common Stock.
Employee Relations
World Airways' flight attendants are represented by the International
Brotherhood of Teamsters (the "Teamsters") under a collective bargaining
agreement which expires in August 2000. World Airways' flight attendants
challenged the use of foreign flight attendant crews on World Airways' flights
for Malaysian Airlines and Garuda which has historically been World Airways'
operating procedure. World Airways is contractually obligated to permit its
Southeast Asian customers to deploy their own flight attendants. While the
arbitrator in this matter recently denied the union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that World Airways' contract with its flight attendants requires World
Airways to first actively seek profitable business opportunities that require
using World Airways' flight attendants, before World Airways may accept wet
lease business opportunities that use the flight attendants of World Airways'
customers. World Airways can provide no assurances as to how the imposition of
this requirement will affect World Airways' financial condition or results of
operations. World Airways' cockpit crew members, who are also represented by
the Teamsters, are subject to a four-year collective bargaining agreement
expiring in June 1998. World Airways is unable to predict whether any of its
employees not currently represented by a labor union, such as World Airways'
maintenance personnel, will elect to be represented by a labor union or
collective bargaining unit. The election of such employees for representation
in such an organization could result in employee compensation and working
condition demands that could have a material adverse effect on the financial
condition or results of operations of World Airways.
World Airways' NOLs
As of December 31, 1996, World Airways had net operating loss carryforwards
("NOLs") for federal income tax purposes of $103.8 million ($29.0 million of
which is subject to a $6.9 million annual limitation as a result of an ownership
change of World Airways for tax purposes in 1991). These NOLs, if not utilized
to offset taxable income in future periods, would expire between 1998 and 2011.
Use of World Airways' NOLs in future years could be further limited if an
ownership change were to occur in the future. World Airways believes that
neither the sale of common stock in its initial public offering nor the purchase
of 3,227,000 shares of its Common Stock from WorldCorp (see "Prospectus
Summary--The Private Placement") caused an ownership change. However, the
application of the Internal Revenue Code (the "Code") in this area is subject to
interpretation by the Internal Revenue Service. The NOLs are subject to
examination by the IRS and, thus, are subject to adjustment or disallowance
resulting from any such IRS examination. In addition, conversion of the
Debentures or future transactions in the Common Stock, (see "Prospectus
Summary--The Private Placement") or the common stock of the Company's
stockholders may cause an ownership change, which could result in a
substantial reduction in the annual limitation in the use of the NOLs and the
loss of a substantial portion of the NOLs available to the Company.
Accordingly, prospective purchasers of the Debentures should not assume the
availability of any portion of World Airways' currently existing or future
NOLs, if any, in making their investment decisions.
16
<PAGE>
Seasonality
Historically, World Airways' business has been significantly affected by
seasonal factors. During the first quarter, World Airways typically experiences
lower levels of utilization and yields due to lower demand for passenger and
cargo services relative to other times of the year. World Airways experiences
higher levels of utilization and yields in the second quarter, principally due
to peak demand for commercial passenger services associated with the annual Hadj
pilgrimage. In 1997, World Airways' flight operations associated with the Hadj
pilgrimage occurred from March 15 to May 20. Because the Islamic calendar is a
lunar-based calendar, the Hadj pilgrimage occurs approximately 10 to 12 days
earlier each year relative to the Western (Gregorian) calendar. As a result,
revenues resulting from future Hadj pilgrimage contracts will continue to shift
from the second quarter to the first quarter over the next several years. World
Airways believes that its contracts with Malaysian Airlines and the USAF should
lessen the effect of these seasonal factors.
Legal and Administrative Proceedings
World Airways has periodically received correspondence from the FAA with
respect to minor noncompliance matters. In November 1996, as the FAA has
increased its scrutiny of U.S. airlines, World Airways was assessed a
preliminary fine of $810,000 in connection with certain security violations by
ground handling crews contracted by World Airways for services at foreign
airport locations. Under 49 U.S.C. 46301, any violation of pertinent
provisions of 49 U.S.C. 40101 or related rules is subject to a civil penalty
for each violation. Upon review of the evidence or facts and circumstances
relating to the violation, the statute allows for the compromise of proposed
civil penalties. The penalties were proposed by the FAA in connection with
recent inspections at foreign airport facilities and relate primarily to ground
handling services provided by World Airways' customers in connection with their
operations; specifically, the inspection procedures of its aircraft, passengers
and associated cargo. In each of these instances, World Airways was in
compliance with international regulations, but not the more stringent U.S.
requirements, despite the fact that the flights in question did not originate or
terminate in the United States. World Airways has taken steps to comply with
the U.S. requirements. In September 1997, the Company entered into a consent
order and settlement agreement with the FAA in connection with the above-
mentioned alleged violations. Pursuant to such agreement, the Company is liable
for a sum of $610,000, of which $405,000 was paid in September. The remaining
$205,000 was suspended and will be forgiven if the Company complies with the
provisions of the settlement agreement, including not incurring any security
violations during the one-year period following execution of the settlement
agreement. While World Airways believes it is currently in compliance in all
material respects with all appropriate standards and has all required licenses
and authorities, any material non-compliance by World Airways therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on the financial condition or results of operations of World
Airways.
In addition, World Airways is party to routine litigation and administrative
proceedings incidental to its business, none of which is believed by World
Airways to be likely to have a material adverse effect on the financial
condition of World Airways. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Legal and Administrative
Proceedings."
Possible Volatility of Stock Price
The market price of the Common Stock has been subject to significant
fluctuations in response to World Airways' operating results and other factors.
The market price of the shares of the Common Stock has varied significantly and
may be volatile depending on news announcements and changes in general market
conditions. In particular, news announcements regarding quarterly results of
operations, competitive developments, litigation or governmental regulatory
actions impacting the Company may adversely affect the Common Stock price and,
consequently, the price of the Debentures. In addition, because the number of
shares of Common Stock held by the public is relatively small, the sale of
substantial number of shares of the Common Stock in a short period of time could
adversely affect the market price of the Common Stock and, consequently, the
price of the Debentures. In addition, the stock market has from time to time
experienced extreme price and volume volatility. These fluctuations may be
unrelated to the operating performance of particular companies whose shares are
traded. Market fluctuations
17
<PAGE>
may adversely affect the market price of the Common Stock and the Debentures.
There can be no assurance that the market price of the Common Stock and the
Debentures will not decline in the future.
Absence of an Existing Market for the Debentures; Possible Volatility of
Debenture and Common Stock Prices
The Debentures constitute a new issue of securities with no established
trading market. There can be no assurance as to the liquidity of any market
that may develop for the Debentures, the ability of the holders to sell their
Debentures or the price at which holders of the Debentures may be able to sell
their Debentures. Future trading prices of the Debentures will depend on many
factors, including, among other things, prevailing interest rates, World
Airways' operating results, the price of the Common Stock and the market for
similar securities. Although the Initial Purchasers have informed the Company
that they currently intend to make a market in the Debentures, they are not
obligated to do so and any such market making may be discontinued at any time
without notice. In addition such market-making activity will be subject to the
limits imposed by the Securities Act and the Exchange Act, and may be limited
during the period of effectiveness of the shelf registration statement to be
filed in connection with the sale of the Debentures. Accordingly, there can be
no assurance as to the development or liquidity of any market for the
Debentures. The Debentures have been designated for trading in the PORTAL
market by eligible investors. The Company does not intend to apply for listing
of the Debentures on any securities exchange or for quotation through any
automated quotation system. Historically, the market for non-investment grade
debt has been subject to disruptions that have caused substantial volatility in
the prices of securities similar to the Debentures. There can be no assurance
that, if a market for the Debentures were to develop, such a market would not be
subject to similar disruptions. The liquidity of, and the trading market for,
the Debentures may also be materially adversely affected by the declines in the
market for debt securities generally. Such a decline may materially and
adversely affect such liquidity and trading independent of the financial
performance of, and prospects for, the Company. Depending on the prevailing
interest rates, the market for similar securities, the financial condition of
the Company and other factors, the Debentures may trade at a discount from their
principal amount. See "Prospectus Summary The Private Placement,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Certain Relationships and
Transactions" and "Description of Debentures."
Anti-takeover Provisions; Certain Provisions of Delaware Law, Certificate of
Incorporation and Bylaws
Certain provisions of Delaware law, World Airways' Certificate of
Incorporation and Bylaws and the Shareholders Agreement could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of World Airways. Certain of
these provisions allow World Airways to issue preferred stock with rights senior
to those of the Common Stock without any further vote or action by the holders
of Common Stock. The issuance of preferred stock of World Airways could
decrease the amount of earnings and assets available for distribution to the
holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock and, consequently the market price of the Debentures.
In addition, the Certificate of Incorporation provides for the Board of
Directors to be divided into three classes of directors serving staggered three-
year terms. Classification of the Board of Directors expands the time required
to change the composition of a majority of directors and may tend to discourage
an acquisition proposal for World Airways.
Control by WorldCorp; Potential Conflicts of Interest
As of September 30, 1997, WorldCorp owned approximately 46.3% of the
outstanding Common Stock. WorldCorp is a holding company that owns positions in
two companies: InteliData Technologies Corporation and World Airways. WorldCorp
is highly leveraged and therefore requires substantial funds to cover debt
service each year. As a holding company, all of WorldCorp's funds are generated
through its subsidiaries, neither of which is expected to pay dividends in the
foreseeable future. As a result of WorldCorp's cash requirements, it may be
required to sell additional shares of Common Stock during 1997, and such sales,
or the threat of such sales, could have a material adverse effect on the market
price of the Common Stock. Except as limited by contractual arrangements with
MHS, WorldCorp also is in a position to control the outcome of many issues
submitted to World Airways' stockholders, including the election of all of World
Airways' Board of Directors, adoption of amendments to World Airways'
Certificate of Incorporation, and approval of mergers.
18
<PAGE>
Risks Related to the Air Transportation Industry
Cyclical Nature of Air Carrier Business
World Airways operates in a challenging business environment. The air
transportation industry is highly sensitive to general economic conditions.
Since a substantial portion of passenger airline travel (both business and
personal) is discretionary, the industry tends to experience severe adverse
financial results during general economic downturns and can be adversely
affected by unexpected global political developments. The financial results of
air cargo carriers are also adversely affected by general economic downturns due
to the reduced demand for air cargo transportation. In 1993 and 1994, the
combination of a generally weak global economy and the depressed state of the
air transportation industry adversely affected World Airways' operating
performance. Although World Airways recently has experienced a growth in demand
for its services, such that block hours flown from continuing operations
increased 10% for the first six months of 1997 over the same period in 1996 and
by 23% for 1996 over 1995, there can be no assurance that this level of growth
will continue.
Competition
The market for outsourcing air passenger and cargo ACMI services is highly
competitive. Certain of the passenger and cargo air carriers against which
World Airways competes possess substantially greater financial resources and
more extensive facilities and equipment than those which are now, or will in the
foreseeable future become, available to World Airways. World Airways believes
that the most important bases for competition in the ACMI outsourcing business
are the age of the aircraft fleet, the passenger, payload and cubic capacities
of the aircraft, and the price, flexibility, quality and reliability of the air
transportation service provided. Competitors in the ACMI outsourcing market
include MartinAir Holland, Tower Air and American TransAir and all-cargo
carriers, such as Atlas Air, Gemini Air Cargo, Polar Air Cargo and Kitty Hawk,
and scheduled and non-scheduled passenger carriers which have substantial belly
capacity. The ability of World Airways to continue to grow depends upon its
success in convincing major international airlines that outsourcing some portion
of their air passenger and cargo business remains more cost-effective than
undertaking passenger or cargo operations with their own incremental capacity
and resources. The allocation of military air transportation contracts by the
USAF is based upon the number and type of aircraft a carrier, alone or through a
teaming arrangement, makes available for use in times of national emergencies.
The formation of competing teaming arrangements comprised of larger partners
than those sponsored by World Airways, an increase by other air carriers in
their commitment of aircraft to the emergency program, or the withdrawal of
World Airways' current partners, could adversely affect the size of the USAF
contracts, if any, which are awarded to World Airways in future years.
Regulation
World Airways is subject to government regulation and control under the laws
of the United States and the various other countries in which it operates. It is
also governed by bilateral air transport services agreements between the U.S.
and the countries to which World Airways provides airline service. World Airways
is subject to Title 49 of the United States Code (the "Transportation Code"),
under which the Department of Transportation (the "DOT") and the Federal
Aviation Administration (the "FAA") exercise regulatory authority. Additionally,
foreign governments assert jurisdiction over air routes and fares to and from
the U.S., airport operation rights and facilities access. Due to its
participation in CRAF, World Airways is subject to inspections approximately
every two years by the USAF as a condition to retaining its eligibility to
provide military charter flights. The USAF may terminate its contract with World
Airways if World Airways fails to pass such inspection or otherwise fails to
maintain satisfactory performance levels. World Airways has periodically
received correspondence from the FAA with respect to minor noncompliance
matters. See "Business--Regulation."
19
<PAGE>
Insurance Coverage and Expenses
World Airways is exposed to potential losses that may be incurred in the event
of an aircraft accident. Any such accident could involve not only repair or
replacement of a damaged aircraft and the consequent temporary or permanent loss
from service, but also significant potential claims of injured passengers and
others. World Airways is required by the DOT to carry liability insurance on
each of its aircraft. Although World Airways believes its current insurance
coverage is adequate and consistent with the current industry practice, there
can be no assurance that the amount of such coverage will not be changed or that
World Airways will not bear substantial losses from accidents. Substantial
claims resulting from an accident in excess of related insurance coverage could
have a material adverse effect on the financial condition or results of
operations of World Airways. In addition, World Airways' insurance expenses
could significantly increase if World Airways were to provide service to
destinations where military action is taking place. Any such increases in
expenses could have a material adverse effect on the financial condition or
results of operations of World Airways. As is customary in the airline
business, World Airways has no business interruption insurance. Any extended
interruption of World Airways' operations due to the loss, or unavailability due
to unscheduled servicing or repair, or lack of availability of substitute
aircraft could have a material adverse effect on the financial condition or
results of operations of World Airways. See "Business--Insurance."
Aviation Fuel
The air transportation industry in general is affected by the price and
availability of aviation fuel. Both the cost and availability of aviation fuel
are subject to many economic and political factors and events occurring
throughout the world and remain subject to the various unpredictable economic
and market factors that affect the supply of all petroleum products.
Fluctuations in the price of fuel have not had a significant impact on World
Airways' operations in recent years because, in general, World Airways' ACMI
contracts with its customers limit World Airways' exposure to increases in fuel
prices. However, a substantial increase in the price or the unavailability of
aviation fuel could have a material adverse effect on the air transportation
industry in general and the financial condition and results of operations of
World Airways.
USE OF PROCEEDS
The Company will not receive any proceeds from the sales of the Debentures or
the Shares by the Selling Securityholders. See " Selling Securityholders" for a
list of those persons and entities receiving the proceeds from the sales of the
Debentures or the Shares pursuant to this Prospectus. The Company will not
receive any proceeds from the issuance of Shares upon conversion of the
Debentures.
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on Nasdaq under the symbol "WLDA." The following
table sets forth, for the periods indicated the high and low sales prices of the
Common Stock as reported by Nasdaq for each quarter following the Company's
October 1995 initial public offering:
<TABLE>
<CAPTION>
High Low
----------- ------------
<S> <C> <C>
1995
Fourth Quarter (beginning October 5).................. $12 3/4 $9
1996
First Quarter......................................... 11 1/8 6
Second Quarter........................................ 11 1/4 6 3/4
Third Quarter......................................... 7 3/4 4 3/4
Fourth Quarter........................................ 11 1/8 6 5/8
1997
First Quarter......................................... 10 1/2 7
Second Quarter........................................ 9 3/4 6 1/4
Third Quarter......................................... 9 1/2 5 1/4
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
Fourth Quarter (through November 3)................... 9 1/2 7 7/16
</TABLE>
PRICE RANGE OF DEBENTURES
The Debentures were originally issued on August 26, 1997. As of the date
hereof, there is no public market for the Debentures, although the Debentures
have been eligible for trading in the PORTAL Market.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends or distributions on
its Common Stock since the payment of a distribution to WorldCorp in 1992. The
Company currently intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. Any future decision
concerning the payment of dividends on the Common Stock will depend upon the
results of operations, financial condition and capital expenditure plans of the
Company, as well as such other factors as the Board of Directors, in its sole
discretion, may consider relevant.
The Credit Agreement contains restrictions on the Company's ability to pay
dividends on the Common Stock. The Credit Agreement provides that the Company
shall not declare, pay or make any dividends or distributions in any six-month
period which aggregate in excess of the lesser of $4.5 million or 50% of the
Company's net income for the previous six months and requires that the Company
have a cash balance of not less than $7.5 million after giving effect to such
dividend or distribution. Additionally, WorldCorp is subject to the provisions
of an indenture, expiring in 2004, which causes the Company not to pay dividends
upon the occurrence of any events of default by WorldCorp under the indenture.
However, the indenture is not applicable to World Airways if WorldCorp's
ownership percentage is below 50% of the issued and outstanding shares of Common
Stock. As of September 30, 1997, WorldCorp owned approximately 46.3% of the
outstanding Common Stock. This percentage could increase if the Company
purchases shares from other stockholders. See "Prospectus Summary--The Private
Placement."
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of World Airways at June 30,
1997, and as adjusted to give effect to the completion of the Private Placement
and the application of the net proceeds therefrom. See "Prospectus Summary--The
Private Placement." This information should be read in conjunction with the
Company's Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus or incorporated by reference herein. Except as otherwise noted
below, the information set forth in the table assumes no exchange or redemption
of the Debentures.
<TABLE>
<CAPTION>
At June 30, 1997
--------------------------------------------------------
Actual As Adjusted(1) Pro Forma(2)
--------------- ------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C>
Notes payable and current maturities of long-term obligations......... $ 11,694 $ 10,494 $ 10,494
======== ======== ========
Long-term obligations, net of current maturities (including
capital lease obligations)........................................... $ 29,070 $ 76,308 $ 76,308
Stockholders' equity:
Preferred stock, $0.001 par value; none authorized, issued
and outstanding; 5,000,000 shares authorized and none
issued and outstanding as adjusted................................. -- -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized, 12,000,064 shares issued and 11,230,064
outstanding(3)...................................................... 12 12 12
Additional paid-in capital............................................ 42,522 42,522 42,522
Contributed capital................................................... 3,000 3,000 3,000
ESSOP guaranteed bank loan............................................ (461) (461) (461)
Accumulated deficit................................................... (18,340) (18,340) (18,340)
Treasury stock, at cost............................................... (7,837) (32,524) (38,437)
-------- -------- --------
Total stockholders' equity (deficit)............................... 18,896 (5,791) (11,704)
-------- -------- --------
Total capitalization............................................ $ 47,966 $ 70,517 $ 64,604
======== ======== ========
</TABLE>
- --------------
(1) Adjusted to reflect the completion of the Private Placement, the repayment
of borrowings under the Credit Agreement and the purchase of 3,227,000
shares of Common Stock from WorldCorp for approximately $24.7 million in
cash. On September 18, 1997, the Company purchased 3,227,000 shares of
Common Stock from WorldCorp at a purchase price of $7.65 per share. As a
result, Common Stock outstanding was reduced to 8,003,064 shares. These as
adjusted amounts do not include the effect of additional repurchases of
Common Stock from WorldCorp or MHS which may occur as described in
"Prospectus Summary--The Private Placement."
(2) Assumes the Company repurchases an additional 773,000 shares of Common Stock
at a purchase price of $7.65 per share pursuant to the Agreement as
described in "Prospectus Summary--The Private Placement." As a result,
Common Stock outstanding would be reduced to 7,230,064 shares. Consummation
of any further stock repurchases pursuant to the Agreement is subject to
certain contractual and regulatory contingencies. Therefore, there can be
no assurances that any such repurchases shall occur. Failure by the Company
to effect the repurchase of at least 4.0 million shares of Common Stock
within 150 days after the original issue of the Debentures, is a Repurchase
Event. See "Description of Debentures--Certain Rights to Require Repurchase
of Debentures" and "Prospectus Summary--The Private Placement."
(3) These data exclude 1.2 million shares of Common Stock reserved for issuance
upon the exercise of options granted to date pursuant to the Company's stock
option plans, and the shares of Common Stock reserved for issuance upon
conversion of Debentures.
22
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except operating and per share data)
The following table sets forth selected income statement, operating data and
balance sheet data for World Airways for the periods indicated. The historical
financial information for, and as of the end of, each of the years ended
December 31, 1992, 1993, 1994, 1995 and 1996 are derived from the audited
financial statements of World Airways for such years. This information should
be read in conjunction with, and is qualified by reference to, the financial
statements of World Airways and the notes thereto included in this Prospectus.
The following selected financial data for the six months ended June 30, 1996 and
1997 are derived from World Airways' unaudited financial statements. In the
opinion of management of World Airways, such unaudited financial statements
include all adjustments necessary for a fair presentation of the results of
operations for such periods. Operating results for the six months ended June
30, 1997, are not necessarily indicative of results that may be expected for the
entire year ending December 31, 1997. The data appearing under the caption
"Operating Data" are derived from the records of World Airways. The unaudited as
adjusted income statement data for the year ended December 31, 1996 and the six
months ended June 30, 1997, give effect to the Private Placement, the repayment
of borrowings under the Credit Agreement, and the purchase of 3,227,000 shares
of Common Stock from WorldCorp as if they were completed on January 1, 1996 and
the unaudited as adjusted balance sheet data give effect to these transactions
as if they were completed on June 30, 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1992 1993 1994 1995(1) 1996(1)
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Operating revenues........................................... $180,293 $ 178,736 $ 180,715 $242,386 $309,587
Operating expenses........................................... 173,028 186,065(2) 185,916(3) 226,488 287,942
-------- ---------- ---------- -------- --------
Operating income (loss)...................................... 7,265(5) (7,329) (5,201) 15,898 21,645
Other income (expense)....................................... 1,389 (1,656) (3,826) (1,150) (2,613)
-------- ---------- ---------- -------- -------
Earnings (los) from continuing operations before income
taxes and change in accounting principle.................... 8,654 (8,985) (9,027) 14,748 19,032
Income tax expense (benefit)................................. 236 64 (26) 602 679
-------- ---------- ---------- -------- --------
Earnings (loss) from continuing operations before change
in accounting principle..................................... 8,418 (9,048) (9,001) 14,146 18,353
Discontinued operations...................................... -- -- -- (5,250) (32,375)
Cumulative effect of change in accounting principle(6)....... (1,973) -- -- -- --
-------- ---------- ---------- -------- --------
Net earnings (loss).......................................... 6,445 (9,048) (9,001) 8,896 (14,022)
======== ========== ========== ======== ========
Weighted average common stock and common equivalent
shares outstanding (in thousands)........................... 9,000 9,000 9,939 10,572 11,806
Earnings (loss) per common share from continuing
operations.................................................. $ 0.94 $ (1.01) $ (0.91) $ 1.34 $ 1.55
Net earnings (loss) per common share......................... $ 0.72 $ (1.01) $ (0.91) $ 0.84 $ (1.19)
Cash dividends per common share.............................. $ 2.16 -- -- -- --
Ratio of earnings to fixed charges(7)........................ 1.65x -- -- 1.58x 1.60x
Deficiency in earnings to cover fixed charges(7)............. -- $ 8,984 $ 9,027 -- --
EBITDA(8).................................................... $ 12,186 $ (1,756) $ (1,195) $ 21,954 $ 29,677
Operating Data:
Block hours flown(9):
from continuing operations.................................. 22,263 23,462 26,455 35,628 43,897
from discontinued operations(1)............................. -- -- -- 1,714 6,628
-------- ---------- ---------- -------- --------
Total..................................................... 22,263 23,462 26,455 37,342 50,525
======== ========== ========== ======== ========
Average aircraft equivalents(10)............................. 7.2 8.8 8.2 10.3 14.1
Daily aircraft utilization (in block hours)(11).............. 8.4 7.3 8.8 9.9 9.8
Operating income (loss) per continuing block hour(12)........ $ 326 $ (312) $ (197) $ 446 $ 493
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1996(1) 1997
------------ -----------
<S> <C> <C>
Income Statement Data:
Operating revenues.......................................... $151,873 $ 160,676
Operating expenses.......................................... 139,927 147,842(4)
-------- ----------
Operating income (loss)..................................... 11,946 12,834
Other income (expense)...................................... (859) (1,818)
-------- ----------
Earnings (loss) from continuing operations before income
taxes and change in accounting principle................... 11,087 11,016
Income tax expense (benefit)................................ 315 350
-------- ----------
Earnings (loss) from continuing operations before change
in accounting principle.................................... 10,772 10,666
Discontinued operations..................................... (32,705) --
Cumulative effect of change in accounting principle(6)...... -- --
-------- ----------
Net earnings (loss)......................................... (21,933) 10,666
======== ==========
Weighted average common stock and common equivalent
shares outstanding (in thousands).......................... 12,000 11,236
Earnings (loss) per common share from continuing
operations................................................. $ 0.90 $ 0.95
Net earnings (loss) per common share........................ $ (1.83) $ 0.95
Cash dividends per common share............................. -- --
Ratio of earnings to fixed charges(7)....................... 1.79x 1.58x
Deficiency in earnings to cover fixed charges(7)............ -- --
EBITDA(8)................................................... $ 15,840 $ 17,165
Operating Data:
Block hours flown(9):
from continuing operations................................. 22,007 24,150
from discontinued operations(1)............................ 2,534 --
-------- ----------
Total.................................................... 24,541 24,150
======== ==========
Average aircraft equivalents(10)............................ 13.3 13.7
Daily aircraft utilization (in block hours)(11)............. 10.2 9.8
Operating income (loss) per continuing block hour(12)....... $ 543 $ 531
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------- At June 30,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and restricted short-term investments .................... $12,958 $ 11,746 $ 4,722 $ 26,180 $ 8,075 $ 9,471
Working capital (deficit) ..................................... (8,305) (17,441) (25,794) (8,883) (29,556) (31,852)
Net equipment and property .................................... 26,957 28,700 24,666 52,429 65,002 73,147
Total assets .................................................. 66,486 88,512 78,051 130,695 130,124 127,669
Notes payable and long-term obligations (including current
maturities) .................................................. 13,076 42,256 33,826 37,112 50,538 40,764
Accumulated deficit ........................................... (5,831) (14,879) (23,880) (14,984) (29,006) (18,340)
Total stockholders' equity (deficit) .......................... 1,292 (7,756) (1,367) 30,340 8,362 18,896
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
For the year ended For the six months
December 31, 1996 ended June 30, 1997
Actual As Adjusted(13) Actual As Adjusted(13)
---------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
As Adjusted Income Statement Data:
Operating revenues .................................................... $309,587 $309,587 $ 160,676 $160,676
Operating expenses .................................................... 287,942 287,942 147,842(4) 147,842
-------- -------- ---------- --------
Operating income ...................................................... 21,645 21,645 12,834 12,834
Other income (expense) ................................................ (2,613) (6,059) (1,818) (3,628)
-------- -------- ---------- --------
Earnings from continuing operations before income taxes ............... 19,032 15,586 11,016 9,206
Income tax expense .................................................... (679) (607) (350) (312)
-------- -------- ---------- --------
Earnings from continuing operations ................................... 18,353 14,979 10,666 8,894
Discontinued operations ............................................... (32,375) (32,447) -- --
-------- -------- ---------- --------
Net earnings (loss) ................................................... $(14,022) $(17,468) $ 10,666 $ 8,894
-------- -------- ========== ========
Primary earnings (loss) per common share:
Continuing operations ................................................ $ 1.55 $ 1.74 $ 0.95 $ 1.11
Discontinued operations .............................................. $ (2.74) $ (3.76) $ -- $ --
-------- -------- ---------- --------
Net earnings (loss) .................................................. $ (1.19) $ (2.02) $ 0.95 $ 1.11
-------- -------- ========== ========
Weighted average shares outstanding (in thousands) ................... 11,806 8,628 11,234 8,007
Fully diluted earnings (loss) per common share:
Continuing operations ................................................ $ 1.55 $ * $ 0.95 $ 0.80
Discontinued operations .............................................. $ (2.74) $ * $ -- $ --
-------- -------- ---------- --------
Net earnings (loss) .................................................. $ (1.19) $ * $ 0.95 $ 0.80
-------- ======== ========== ========
Weighted average shares outstanding (in thousands) ................... 11,806 * 11,236 13,627
Ratio of earnings to fixed charges(7) ................................. 1.60x 1.45x 1.58x 1.45x
EBITDA(8) ............................................................. $ 29,677 $ 29,677 $ 17,165 $ 17,165
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1997
------------------------
Actual As Adjusted(13)
--------- -------------
<S> <C> <C>
As Adjusted Balance Sheet Data:
Cash and restricted short-term investments ........................................................ $ 9,471 $ 29,272
Working capital (deficit) ......................................................................... (31,852) (10,851)
Net equipment and property ........................................................................ 73,147 73,147
Total assets ...................................................................................... 127,669 149,020
Notes payable and long-term obligations (including current maturities) ............................ 40,764 86,802
Accumulated deficit ............................................................................... (18,340) (18,340)
Total stockholders' equity (deficit) .............................................................. 18,896 (5,791)
</TABLE>
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* Fully diluted earnings per share are anti-dilutive.
(1 ) Operating revenues and expenses for 1995 and 1996 exclude discontinued
operations, consisting of the Company's scheduled passenger and charter
operations.
(2) Operating expenses in 1993 include $2.3 million of termination fees related
to the early return of three DC10-30 aircraft.
(3) Operating expenses in 1994 include a $4.2 million reversal of excess
accrued maintenance reserves associated with the expiration of three DC10-
30 aircraft leases during 1994.
(4) Operating expenses for the six months ended June 30, 1997, include a $1.0
million reversal of accrued maintenance expense in excess of the cost of an
overhaul of a DC-10 aircraft.
(5) Operating income in 1992 includes $4.1 million related to settlement of
contract claims with the U.S. Government related to Operation Desert
Shield/Desert Storm.
(6) Cumulative effect of change in accounting principle from the adoption of
FAS #106, Employer's Accounting For Post-Retirement Benefits Other Than
Pensions.
(7) For purposes of computing this ratio, earnings consist of earnings (loss)
from continuing operations before income taxes and change in accounting
principle and fixed charges. Fixed charges consist of interest expense,
including amortization of debt issuance costs and one-third of rent expense
which is deemed to be representative of interest expense.
(8) EBITDA represents operating income (loss) excluding depreciation and
amortization. The Company has included EBITDA to provide additional
information related to the Company's ability to service debt. EBITDA should
not be considered as an alternative measure of the Company's net income or
cash flow (which are determined in accordance with generally accepted
accounting principles), operating performance or liquidity.
(9) "Block hours flown" for an aircraft represents the elapsed time computed
from the moment the aircraft first moves under its own power at the point
of origin to the time it comes to rest at its destination.
(10) "Average aircraft equivalents" represents the total number of aircraft in
service during each day of a given period divided by the number of days in
the given period.
(11) "Daily aircraft utilization" is determined by dividing the block hours
flown during such period by the number of days during such period that the
aircraft were leased by the Company.
(12) "Operating income (loss) per continuing block hour" for any period
represents the amount determined by dividing operating income (loss) for
such period by the total block hours flown for such period.
(13) Adjusted to give effect to the sale by the Company of the Debentures in the
Private Placement, the repayment of borrowings under the Credit Agreement,
as described in "Prospectus Summary--The Private Placement," and the
purchase of 3,227,000 shares of Common Stock from WorldCorp. The as
adjusted amounts do not assume any interest earnings on the net proceeds
from the Private Placement. In the event that the Company repurchases
additional shares of Common Stock, as described in "Prospectus Summary--The
Private Placement," total stockholders' equity would be reduced by the
amount of the purchase price for such Common Stock. See "Capitalization."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
Audited and Unaudited Financial Statements (including the Notes thereto)
appearing elsewhere in this Prospectus.
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below relates to the operations of World Airways as
reflected in its financial statements. World Airways was organized in March
1948 and became a wholly owned subsidiary of WorldCorp in a holding company
reorganization in 1987. In February 1994, pursuant to an October 1993
agreement, WorldCorp sold 24.9% of its ownership to MHS. Effective December 31,
1994, WorldCorp increased its ownership in the Company to 80.1% through the
purchase of 5% of World Airways common stock held by MHS. In October 1995, the
Company completed an initial public offering in which 2,000,000 shares were
issued and sold by the Company and 900,000 shares were sold by WorldCorp. On
September 18, 1997, WorldCorp sold 3,227,000 shares of Common Stock to the
Company. See "Prospectus Summary--The Private Placement." At September 30,
1997, WorldCorp and MHS owned 46.3% and 24.9%, respectively, of the outstanding
common stock of World Airways. The balance was publicly traded.
The Company had an overall contract backlog at June 30, 1997 of $338.7
million, compared to $532.6 million at June 30, 1996. Approximately $116.8
million of the backlog relates to operations during the remainder of 1997. The
Company's backlog for each contract is determined by multiplying the minimum
number of block hours (defined as the elapsed time computed from the moment the
aircraft first moves under its own power at the point of origin to the time it
comes to rest at its destination) guaranteed under the applicable contract by
the specified hourly rate under such contract. Approximately 70% and 13% of the
backlog relates to its contracts with Malaysian Airlines and Philippine
Airlines, respectively. In addition, a significant portion of the Company's
current contracts expire near the end of 1997. Although there can be no
assurance that it will be able to secure additional business to reduce this
excess capacity, the Company is actively seeking customers for 1998 and beyond.
The Company's financial results and financial condition would be affected
adversely if the Company is unable to secure additional business to reduce this
excess capacity.
Results of Operations
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Total block hours, including discontinued operations, decreased 391 hours, or
2%, to 24,150 hours in the first six months of 1997 from 24,541 hours in 1996,
with an average of 13.7 available aircraft per day in 1997 compared to 13.3 in
1996. Average daily utilization (block hours flown per day per aircraft)
decreased to 9.8 hours in 1997 from 10.2 hours in 1996. In 1997, wet lease
contracts accounted for 90% of total block hours, an increase from 74% for the
six months ended June 30, 1996. Total operating revenues increased $8.8
million, or 6%, to $160.7 million in 1997 from $151.9 million in 1996.
Continuing Operations
Block hours from continuing operations increased 2,143 hours, or 10%, to
24,150 hours in the first six months of 1997 from 22,007 hours in 1996.
Operating Revenues. Revenues from flight operations increased $13.7 million,
or 9%, to $158.5 million in 1997 from $144.8 million in 1996. This increase was
primarily attributable to the increase in block hours flown, partially offset by
a shift in its mix of business during 1997 with an increase in wet lease
operations and a decrease in full service operations.
Operating Expenses. Total operating expenses increased $7.9 million, or 6%,
in 1997 to $147.8 million from $139.9 million in 1996.
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<PAGE>
Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft costs, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Flight operations expenses decreased $0.2 million in 1997 to
$33.1 million from $33.3 million in 1996. This decrease resulted primarily from
the shift in the mix of business from full service to wet lease operations,
partially offset by higher crew costs. The Company expects that it will
experience increased training costs during the remainder of 1997 as a result of
crewmember attrition.
Maintenance expenses increased $4.1 million, or 13%, in 1997 to $34.6 million
from $30.5 million in 1996. This increase resulted primarily from the increase
in the number of aircraft dedicated to the Company's continuing operations, the
integration of additional aircraft into the fleet, and a corresponding increase
in block hours flown. In addition, the Company experienced an increase in costs
of approximately $1.2 million associated with the MD-11 aircraft and related
engines as a result of certain manufacturer guarantees and warranties which
began to expire in 1995 and will fully expire by 1998. The Company expects its
maintenance expense to increase further in 1997 and 1998 due to escalations in
the specified rates per hour under the Company's maintenance agreement. The
increase was partially offset by a reversal in 1997 of $1.0 million of accrued
maintenance expense in excess of the cost of an overhaul of a DC-10 aircraft.
Aircraft costs increased $7.9 million, or 19%, in 1997 to $49.4 million from
$41.5 million in 1996. This increase resulted from the increase in the number
of aircraft dedicated to the Company's continuing operations, primarily due to
the lease of two MD-11ER aircraft in March 1996, and the lease of additional
spare engines necessary to maintain the expanded fleet.
Fuel expenses decreased $2.4 million, or 30%, in 1997 to $5.7 million from
$8.1 million in 1996. This decrease is due primarily to the shift from full
service to wet lease operations where the Company is not responsible for fuel
costs. This decrease was partially offset by an increase in price per gallon.
Promotions, sales and commissions increased $1.1 million in 1997 to $4.7
million from $3.6 million in 1996. This increase resulted primarily from
expenses incurred in connection with a customer contract.
Depreciation and amortization increased $0.4 million in 1997 to $4.3 million
from $3.9 million in 1996. This increase resulted primarily from an increase in
spare parts required to support the additional MD-11 aircraft described above,
offset by a decrease in the amortization of certain intangible assets.
General and administrative expenses increased $2.7 million, or 24%, in 1997 to
$13.8 million from $11.1 million in 1996. This increase was primarily due to
the hiring of additional administrative personnel, beginning in the second
quarter of 1996, necessary to support the growth in the Company's core business
and an increase in property tax accruals. As part of its strategy to increase
its marketing efforts, the Company is currently increasing its sales and
marketing staff. As a result, the Company expects a modest increase in general
and administrative expenses during the second half of 1997.
Other Income (Expense). Other expenses increased by $0.9 million, or 100%, in
1997 to $1.8 million from $0.9 million in 1996. This increase was primarily
attributable to additional interest expense associated with the purchase of
additional spare engines related to the MD-11ERs, along with a decrease in
interest income due mainly to a decrease in cash balances.
Discontinued Operations
The Company commenced scheduled service between Tel Aviv and New York in July
1995. In the first quarter of 1996, the Company generated $4.2 million in losses
related to these operations. In the second quarter of 1996, the Company expanded
its scheduled service operations with service between the United States and
South Africa and introduced scheduled charter operations between the United
States and various destinations within Europe. As the Company was unable to
operate these scheduled service operations profitably, in July 1996, the Company
announced its decision to exit its scheduled service operations by October 1996
and focus its operations on its core wet lease operations. Consistent with this
decision, World Airways ceased all scheduled operations as of October 27, 1996.
26
<PAGE>
As a result, the Company's scheduled service operations were reflected as
discontinued operations as of June 30, 1996, and prior period results were
restated to reflect scheduled service operations as discontinued operations.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total block hours increased 13,183 hours, or 35%, to 50,525 hours in 1996 from
37,342 hours in 1995, with an average of 14.1 available aircraft per day in 1996
compared to 10.3 in 1995. Average daily utilization (block hours flown per day
per aircraft) decreased to 9.8 hours in 1996 from 9.9 hours in 1995. In 1996,
the Company continued to obtain a higher percentage of its revenues under wet
lease contracts as opposed to full service contracts. In 1996, wet lease
contracts accounted for 68% of total block hours, consistent with 70% in 1995.
Total operating revenues increased $67.2 million, or 28%, to $309.6 million in
1996 from $242.4 million in 1995.
Continuing Operations
Block hours from continuing operations increased 8,269 hours, or 23%, to
43,897 hours in 1996 from 35,628 hours in 1995.
Operating Revenues. Revenues from flight operations increased $64.3 million,
or 28%, to $296.9 million in 1996 from $232.6 million in 1995. This increase
was primarily attributable to an increase in military flying and an increase in
revenues generated from its 1996 Hadj operations and services to certain
international carriers, partially offset by a decrease in cargo operations
resulting from a shift in the mix of business during 1996.
Operating Expenses. Total operating expenses increased $61.4 million, or 27%,
in 1996 to $287.9 million from $226.5 million in 1995.
Flight operations expenses increased $5.9 million, or 9%, in 1996 to $71.1
million from $65.2 million in 1995. This increase resulted primarily from an
increase in block hours flown and higher crew costs and up-front training
expenses in connection with the integration of additional aircraft into the
fleet. These increases were partially offset by a decrease in accrued profit
sharing expenses. In 1995, the Company accrued profit sharing expenses as a
result of earnings experienced during that period. No such accrual is necessary
in 1996 as a result of losses from the discontinuation of scheduled service
operations. In addition, the Company expects that its training costs will
increase in 1997 as a result of crewmember attrition.
Maintenance expenses increased $18.7 million, or 45%, in 1996 to $60.5 million
from $41.8 million in 1995. This increase resulted primarily from the
integration of additional aircraft into the fleet and a corresponding increase
in block hours flown. In addition, the Company experienced an increase in costs
associated with the MD-11 aircraft and related engines as a result of certain
manufacturer guarantees and warranties which began to expire in 1995 and will
fully expire by 1998. As discussed previously, the Company expects its
maintenance expense to increase in 1997 due to escalations in the specified
rates per hour under the Company's maintenance agreement.
Aircraft costs increased $17.9 million, or 27%, in 1996 to $85.2 million from
$67.3 million in 1995. This increase was primarily due to the lease of two MD-
11ER aircraft in the first quarter of 1996 and the lease of incremental DC10-30
aircraft which began in the second and fourth quarters of 1995 and the first
quarter of 1996, partially offset by the return of two DC10-30 aircraft to the
lessor in the third quarter of 1995.
Fuel expenses increased $2.6 million, or 16%, in 1996 to $19.3 million from
$16.7 million in 1995. This increase is due primarily to an increase in fuel
utilized in connection with its military operations and a slight increase in
price per gallon.
Promotions, sales and commissions increased $4.2 million in 1996 to $6.2
million from $2.0 million in 1995. This increase resulted primarily from
expenses incurred in connection with a customer contract and an increase in
teaming arrangement expenses associated with the larger fixed-award contract
received from the U.S. Air Force beginning October 1995.
27
<PAGE>
Depreciation and amortization increased $1.9 million, or 31%, in 1996 to $8.0
million from $6.1 million in 1995. This increase resulted primarily from an
increase in spare parts required to support the additional MD-11 aircraft and
incremental DC10-30 aircraft described above.
General and administrative expenses increased $6.5 million, or 36%, in 1996 to
$24.7 million from $18.2 million in 1995. This increase was primarily due to
the hiring of additional administrative personnel necessary to support the
growth in the Company's core business and an increase in certain legal and
professional fees.
Discontinued Operations
World Airways ceased all scheduled operations as of October 27, 1996. As a
result, the Company's scheduled service operations were reflected as
discontinued operations as of June 30, 1996, and prior period results have been
restated to reflect scheduled service operations as discontinued operations.
Loss from discontinued operations (net of income tax effect) approximated $11.7
million for the year ended December 31, 1996. In addition, an estimated loss on
disposal of $21.0 million (net of income tax effect) which was recorded as of
June 30, 1996, included the following: $13.6 million for estimated operating
losses during the phase-out period; a $2.6 million estimated loss to be incurred
in connection with sub-leasing DC-10 aircraft which will not be utilized in the
Company's operations subsequent to the phase-out of scheduled service
operations; a $2.3 million write-off of related leasehold improvements; and $2.0
million for passenger reprotection expenses. The Company incurred approximately
$18.9 million of these costs during the six months ended December 31, 1996 and
the Company believes that its remaining accrual for estimated losses on disposal
will be adequate to meet the remaining costs to be incurred during the phase-out
period.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total block hours increased 10,885 hours, or 41%, to 37,342 hours in 1995 from
26,457 hours in 1994, with an average of 10.3 available aircraft per day in 1995
compared to 8.2 in 1994. Average daily utilization (block hours flown per day
per aircraft) increased to 9.9 hours in 1995 from 8.8 hours in 1994. In 1995,
the Company continued to obtain a higher percentage of its revenues under wet
lease contracts as opposed to full service contracts. In 1995, wet lease
contracts accounted for 70% of total block hours, up from 63% in 1994. Total
operating revenues increased $78.8 million, or 44%, to $259.5 million in 1995
from $180.7 million in 1994.
Continuing Operations
Block hours from continuing operations increased 9,171 hours, or 35%, to
35,628 hours in 1995 from 26,457 hours in 1994.
Operating Revenues. Revenues from flight operations increased $58.7 million,
or 34%, to $232.6 million in 1995 from $173.9 million in 1994. This increase
was primarily attributable to a $58.4 million increase in revenues generated
from the new multi-year contracts with Malaysian Airlines. Average daily
utilization for these contracts was 11.2 hours in 1995. In addition, the
Company realized an increase in revenues associated with services to certain
international carriers. Partially offsetting these increases was a decrease in
revenues associated with the 1995 summer charter programs to Europe.
Revenues from flight operations subcontracted to other carriers increased $3.2
million for 1995 to $8.6 million from $5.4 million in 1994. This increase
resulted primarily from the Company's need to subcontract certain flights to
other carriers due to peak airlift requirements for the 1995 Hadj pilgrimage.
This increase was partially offset by the subservice of certain contracts in the
fourth quarter of 1994 primarily to make aircraft capacity available for the
commencement of operations under the Company's multi-year contracts with
Malaysian Airlines.
Operating Expenses. Total operating expenses increased $40.6 million, or 22%,
in 1995 to $226.5 million from $185.9 million in 1994.
Flight operations expenses increased $7.4 million, or 13%, in 1995 to $65.2
million from $57.8 million in 1994. This increase resulted primarily from the
following: an increase in block hours flown; higher cockpit crew levels
associated with the integration of additional aircraft into the fleet in 1995;
and an increase in accruals under the
28
<PAGE>
Company's profit sharing plans for its crewmembers during 1995. These factors
were partially offset by a shift from full service to basic contracts.
Maintenance expenses increased $15.6 million, or 60%, in 1995 to $41.8 million
from $26.2 million in 1994. This increase resulted primarily from a non-
recurring 1994 reversal of $4.2 million of excess reserves associated with the
expiration of three DC10-30 aircraft leases and the increase in block hours
flown in 1995 and lower costs associated with reduced maintenance requirements
of new MD-11 aircraft and the guarantees and warranties received from the engine
and aircraft manufacturers of the MD-11 aircraft and related engines, which
guaranties and warranties began to expire in 1995.
Aircraft costs increased $13.4 million, or 25%, in 1995 to $67.3 million from
$53.9 million in 1994. This increase was primarily due to the lease of two
additional MD-11 convertible aircraft in the first quarter of 1995 and the
short-term lease of incremental DC10-30 aircraft which began in the fourth
quarter of 1994 and second quarter of 1995, partially offset by the return of
three lower-cost DC10-30 aircraft to the lessor in the third quarter of 1994.
Fuel expenses decreased $0.2 million in 1995 to $16.7 million from $16.9
million in 1994. This decrease is due primarily to a shift from full service to
wet leases in 1995 under which the Company is not responsible for fuel,
partially offset by an increase in fuel uplifted for military and scheduled
service operations.
Promotions, sales and other related expenses increased $0.9 million in 1995 to
$2.0 million from $1.1 million in 1994. This increase resulted primarily from
an increase in joint venture expenses associated with the larger fixed-award
contract received from the U.S. Air Force beginning October 1995.
Depreciation and amortization increased $2.1 million, or 53%, in 1995 to $6.1
million from $4.0 million in 1994. This increase resulted primarily from an
increase in spare parts required to support the additional MD-11 aircraft and
incremental DC10-30 aircraft described above as well as the amortization of
certain MD-11 aircraft integration costs and other deferred costs.
General and administrative expenses decreased $2.3 million, or 11%, in 1995 to
$18.2 million from $20.5 million in 1994. This decrease was primarily due to a
decrease in certain legal and professional fees, partially offset by the hiring
of additional marketing personnel.
Other Income (Expense). Other expenses decreased $2.6 million, or 68%, in
1995 from 1994 primarily due to a $0.7 million loss on the sale of a DC10 engine
by the Company in 1994. In addition, the Company recognized a $0.8 million gain
in 1995 resulting from a settlement with the lessor relating to the return of
two DC10 aircraft in 1993.
Liquidity and Capital Resources
The Company is highly leveraged. The Company incurred substantial debt and
lease commitments during the past three years in connection with its acquisition
of MD-11 aircraft and related spare parts. In addition, the Company has
significant future long-term obligations under aircraft lease obligations
relating to its aircraft.
As of June 30, 1997, the Company had outstanding $29.1 million in long-term
debt and capital leases, with expected debt service and capital lease expense of
$5.9 million for the six months ending December 31, 1997 and $13.3 million for
the year ending December 31, 1998. As of June 30, 1997, after giving effect to
the Private Placement, the Company's total indebtedness would have been
approximately $86.8 million, $36.8 million would have been Senior Indebtedness,
including $6.7 million attributable to capital lease obligations, no
indebtedness of the Company would have ranked pari passu with the Debentures,
and no indebtedness would have been Subordinated Indebtedness. In August 1997,
the Company completed the Private Placement. The Debentures are unsecured
obligations, convertible into shares of Common Stock, and subordinated to all
present and future senior indebtedness of the Company. The Company intends to
use the net proceeds from the Private Placement to repurchase approximately 4.0
million shares of Common Stock, repay certain indebtedness, increase working
capital and for general corporate purposes. See "Prospectus Summary--The Private
Placement." Failure by the Company to
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<PAGE>
effect the repurchase of at least 4.0 million shares of Common Stock within 150
days after the original issue of the Debentures constitutes a Repurchase Event
whereby each holder of the Debentures would have the right, at the holder's
option, to require the Company to repurchase such holder's Debentures at 100% of
their principal amount, plus accrued interest. The ability of the Company to
repurchase the Debentures upon a Repurchase Event will be dependent on the
Company's ability to raise sufficient funds through additional borrowings or
equity sales and compliance with applicable securities laws. Accordingly, there
can be no assurance that the Company will be able to repurchase the Debentures
upon a Repurchase Event.
In connection with the Private Placement, the Company and WorldCorp entered
into an agreement for the purchase by World Airways of up to 4.0 million shares
of Common Stock owned by WorldCorp at a purchase price per share of $7.65. On
September 18, 1997, the Company purchased 3,227,000 shares of Common Stock from
WorldCorp for approximately $24.7 million in cash in accordance with the
Agreement. Discussions with MHS following the Private Placement could have an
impact on the number of shares of Common Stock ultimately repurchased from
WorldCorp. MHS has certain rights under the Shareholders Agreement. This
agreement includes a provision that provides that if WorldCorp were to dispose
of its holdings in the Company with the result that WorldCorp's ownership
interest in the Company falls below 51% of the outstanding shares of Common
Stock, then MHS may either sell its shares to a third party or require WorldCorp
to sell a pro rata number of shares held by MHS to the party purchasing
WorldCorp's shares. As a result of the repurchase of 3,227,000 shares of Common
Stock by World Airways from WorldCorp, MHS has the right to sell 773,000 shares
of Common Stock. WorldCorp, MHS and the Company engaged in preliminary
discussions as to the potential repurchase of Common Stock owned by MHS. The
Company anticipates that these discussions will continue, although there can be
no assurance that these discussions will result in any stock repurchases from
MHS. Should MHS not exercise its right to sell the 773,000 shares of Common
Stock, the Company currently intends to repurchase the shares from WorldCorp.
The Company's ability to make interest payments on the Debentures will be
dependent on the Company's future operating performance, which is itself
dependent on a number of factors, many of which are beyond the Company's
control. The Company's ability to repay the Debentures at maturity will depend
upon these same factors and the ability of the Company to raise additional
funds.
The degree to which World Airways is leveraged could have important
consequences to holders of the Debentures and upon conversion, holders of the
Shares, including the following: (i) World Airways' ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or other purposes may be limited; (ii) a substantial portion of the Company's
cash flow from operations must be dedicated to the payment of principal and
interest on its indebtedness; (iii) World Airways' degree of leverage and
related debt service obligations, as well as its obligations under operating
leases for aircraft, may make it more vulnerable than some of its competitors in
a prolonged economic downturn; (iv) World Airways' ability to meet its payment
obligations under existing and future indebtedness, capital leases and operating
leases may be limited; and (v) World Airways' financial position may restrict
its ability to pursue new business opportunities and limit its flexibility in
responding to changing business conditions.
World Airways' cash and cash equivalents at June 30, 1997 and December 31,
1996 were $8.3 million and $7.0 million, respectively. As is common in the
airline industry, World Airways operates with a working capital
deficit. At June 30, 1997, World Airways' current assets were $33.5 million and
current liabilities were $65.3 million. World Airways has substantial long-term
aircraft lease obligations with respect to its current aircraft fleet. Although
there can be no assurances, World Airways believes that its existing contracts
and additional business which it expects to obtain in the near term, along with
its existing cash and financing arrangements and net proceeds from the Private
Placement will be sufficient to allow World Airways to meet its cash
requirements related to debt service and the operating and capital requirements
for its continuing operations for the next 12 months.
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<PAGE>
In 1996, World Airways instituted a program to purchase up to one million
shares of its publicly-traded Common Stock pursuant to open market transactions.
As of June 30, 1997, World Airways had purchased 770,000 shares of Common Stock
at an aggregate cost of approximately $7.8 million pursuant to such program.
WorldCorp and World Airways have entered into an agreement for the repurchase of
Common Stock owned by WorldCorp and, pursuant to such agreement, the Company
repurchased 3,227,000 shares of Common Stock from WorldCorp on September 18,
1997. See "Prospectus Summary--The Private Placement."
In the event that World Airways enters into leases for additional aircraft,
World Airways will need to make capital expenditures for additional spare
engines and parts. No assurances can be given, however, that World Airways will
obtain all of the financing required for such capital expenditures.
Cash Flows from Operating Activities
Operating activities provided $22.7 million in cash for the six months ended
June 30, 1997 compared to using $1.0 million in the comparable period in 1996.
This increase in cash in 1997 resulted primarily from an increase in net
earnings and a decrease in accounts receivable, partially offset by a decrease
in accounts payable, accrued expenses, and other liabilities.
Operating activities used $1.5 million in cash for the year ended December 31,
1996 compared to providing $18.7 million of cash in the comparable period in
1995. This decrease in cash in 1996 resulted primarily from an increase in
losses from discontinued operations and the loss on disposal of discontinued
operations, an increase in accounts receivable, and a decrease in unearned
revenue, partially offset by an increase in accounts payable, accrued expenses,
and other liabilities.
Cash Flows from Investing Activities
Investing activities used $4.2 million in cash for the six months ended June
30, 1997, compared to $4.5 million in the comparable period in 1996. In 1997,
cash was used primarily for the purchase of rotable spare parts, a spare engine,
and engine upgrades required for two MD-11 aircraft.
Investing activities used $9.1 million in cash for the year ended December 31,
1996, compared to $22.5 million in the comparable period in 1995. In 1996, cash
was used primarily for the purchase of rotable spare parts required for the
integration of two MD-11 aircraft and incremental DC-10 aircraft and leasehold
improvements required on one of the DC-10 aircraft obtained in late 1995.
Cash Flows from Financing Activities
Financing activities used $17.3 million in cash for the six months ended June
30, 1997 compared to using $0.9 million in the comparable period in 1996. This
decrease in cash resulted primarily from an increase in repayments of the
Company's net borrowings and the purchase of shares of the Company's common
stock for an aggregate cost of $0.5 million in 1997.
Financing activities used $7.6 million in cash for the year ended December 31,
1996 compared to providing $25.0 million in the comparable period in 1995. This
decrease in cash resulted primarily from the purchase of shares of Common Stock
for an aggregate cost of $7.4 million in 1996, as compared to proceeds of $22.8
million from the sale of common stock in 1995.
Capital Commitments
In October 1992 and January 1993, the Company signed a series of agreements to
lease seven new MD-11 aircraft for initial lease terms of two to five years,
renewable for up to 10 years (and in the case of one aircraft, for 13 years) by
the Company with increasing rent costs. As of March 1995, the Company had taken
delivery of all seven aircraft, consisting of four passenger MD-11 aircraft, one
freighter MD-11, and two passenger/cargo convertible MD-11s. As part of the
lease agreements, the Company was assigned purchase options for four additional
MD-11 aircraft. In 1992, the Company made non-refundable deposits of $1.2
million toward the option aircraft and the
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purchase options were terminated. In March 1996, the Company signed an agreement
with the manufacturer to lease two MD-11ER aircraft. Under the agreement, the
Company leased each aircraft for a term of 24 years with an option to return the
aircraft after a seven-year period with certain fixed termination fees. As part
of the agreement, the above-mentioned deposits were applied towards the deposits
required on these two aircraft. In addition, the Company agreed to assume an
existing lease of two additional MD-11 freighter aircraft for 20 years,
beginning in 1999, in the event that the existing lessee terminates its lease
with the manufacturer at that time. As of June 30, 1997, annual minimum payments
required under the Company's aircraft and lease obligations totaled $43.6
million for the remainder of 1997 and $84.9 million for 1998.
As of June 30, 1997, World Airways has long-term leases for four DC10-30
aircraft. Three of the leases expire in 1998 and one expires in 2003.
In August 1995, the Company amended its aircraft spare parts facility under
the Credit Agreement to provide for a variable rate borrowing. Approximately
$2.5 million of this facility was used to pay off the previously outstanding
balance of the spare parts loan facility and $0.8 million was used to purchase
additional spare parts for MD-11s required during the remainder of 1995. The
balance of this loan facility was used to increase cash balances which were
drawn down during the first half of 1995 to purchase MD-11 spare parts.
In September 1995, the Company agreed to purchase a spare engine which was
delivered in March 1996. The engine cost approximately $8.0 million. The
Company entered into an agreement with the engine's manufacturer to finance 80%
of the purchase price over a seven-year term. The Company made payments of $1.2
million and $0.4 million towards this purchase in September 1995 and January
1996, respectively.
As discussed above, the Company signed an agreement for the lease of two MD-
11ER aircraft beginning in the first quarter of 1996 to provide additional
capacity for growth opportunities. As part of the agreement for the MD-11
aircraft, the Company received spare parts financing from the lessor of $9.0
million of which $3.0 million was made available with the delivery of each
aircraft, and the remaining $3.0 million was made available in December 1996.
As of June 30, 1997, approximately $7.4 million had been received. In January
1996, the Company agreed to purchase an additional engine and received a
commitment from the engine manufacturer to finance 85% of its purchase price
over a seven-year term with an interest rate to be fixed at the time of
delivery. In June 1997, the Company took delivery of the engine and signed a
note for $6.3 million. The note bears interest at a rate of 8.18% and is
payable over an 84-month period at approximately $48,000 per month with the
balance of $2.2 million due on June 18, 2004.
The Company anticipates that its total capital expenditures in 1997, which
includes the spare engine, will approximate $13.0 million of which the Company
will receive approximately $6.3 million in financing. The Company expects that
the remaining balance will be funded from its operating cash flow and proceeds
from the Private Placement.
As of June 30, 1997, the Company held approximately $3.6 million (at book
value) of aircraft spare parts currently available for sale.
Income and Other Taxes
As of December 31, 1996, World Airways had NOLs for federal income tax
purposes of $103.8 million ($29.0 million of which is subject to a $6.9 million
annual limitation as a result of an ownership change of World Airways for tax
purposes in 1991). These NOLs, if not utilized to offset taxable income in
future periods, would expire between 1998 and 2011. Use of World Airways' NOLs
in future years could be further limited if an ownership change were to occur in
the future. World Airways believes that neither the sale of common stock in its
initial public offering nor the purchase of 3,227,000 shares of its Common Stock
from WorldCorp (see "Prospectus Summary--The Private Placement") caused an
ownership change. However, the application of the Internal Revenue Code in this
area is subject to interpretation by the Internal Revenue Service. The NOLs are
subject to examination by the Internal Revenue Service and, thus, are subject to
adjustment or disallowance resulting from any such IRS examination. In
addition, conversion of the Debentures or future transactions in the Common
Stock (see "Prospectus
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<PAGE>
Summary--The Private Placement") or the common stock of the Company's
stockholders may cause an ownership change, which could result in a substantial
reduction in the annual limitation in the use of the NOLs and the loss of a
substantial portion of the NOLs available to the Company. Accordingly,
prospective purchasers of the Debentures should not assume the availability of
any portion of World Airways' currently existing or future NOLs, if any, in
making their investment decisions.
Legal and Administrative Proceedings
World Airways has periodically received correspondence from the FAA with
respect to minor noncompliance matters. In November 1996, as the FAA increased
its scrutiny of U.S. airlines, World Airways was assessed a preliminary fine of
$810,000 in connection with certain security violations by ground handling crews
contracted by World Airways for services at foreign airport locations. Under 49
U.S.C. 46301, any violation of pertinent provisions of 49 U.S.C. 40101 or
related rules is subject to a civil penalty for each violation. Upon review of
the evidence or facts and circumstances relating to the violation, the statute
allows for the compromise of proposed civil penalties. The penalties were
proposed by the FAA in connection with recent inspections at foreign airport
facilities and relate primarily to ground handling services provided by World
Airways' customers in connection with their operations; specifically, the
inspection procedures of its aircraft, passengers and associated cargo. In each
of these instances, World Airways was in compliance with international
regulations, but not the more stringent U.S. requirements, despite the fact
that the flights in question did not originate or terminate in the United
States. World Airways has taken steps to comply with the U.S. requirements. In
September 1997 the Company entered into a consent order and settlement agreement
with the FAA in connection with the above-mentioned alleged violations.
Pursuant to this Agreement, the Company is liable for a sum of $610,000, of
which $405,000 was paid in September. The remaining $205,000 was suspended and
will be forgiven if the Company complies with the provisisons of the settlement
agreement, including not incurring any security violations during the one-year
period following the execution of the settlement agreement. While World Airways
believes it is currently in compliance in all material respects with all
appropriate standards and has all required licenses and authorities, any
material non-compliance by World Airways therewith or the revocation or
suspension of licenses or authorities could have a material adverse effect on
the financial condition or results of operations of World Airways.
World Airways and WorldCorp (the "World Defendants") were defendants in
litigation brought by the Committee of Unsecured Creditors of Washington
Bancorporation in August 1992, captioned Washington Bancorporation v. Boster
et. al., Adv. Proc. 92-0133 (Bankr. D.D.C.) (the "Boster Litigation").
Under a settlement agreement, the plaintiff agreed to dismiss with prejudice the
Boster Litigation against all defendants, including the World Defendants, with
each party to bear its own costs. Under the settlement agreement, the World
Defendants do not have any further liability in the Boster Litigation.
In connection with the discontinuance of World Airways' scheduled service
operations, World Airways is subject to claims by various third parties and may
be subject to further claims in the future. One claim which had been filed in
connection with World Airways' discontinuance of scheduled service to South
Africa, and which sought approximately $37.8 million in compensatory and
punitive damages, has been settled by the parties for approximately $0.7
million.
In addition, World Airways is party to routine litigation and administrative
proceedings incidental to its business, none of which is believed by World
Airways to be likely to have a material adverse effect on the financial
condition of World Airways.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 ("FAS #128") Earnings per
Share, and SFAS No. 129 ("FAS #129") Disclosure of Information About Capital
Structure. FAS #128 was issued to simplify the computation of earnings per
share and to make the U.S. standard more compatible with the standards of other
countries and that of the International Accounting Standards Committee. FAS
#128 replaces primary and fully diluted earnings per share with basic
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<PAGE>
earnings and diluted earnings per share. FAS #129 will change some of the
required disclosures about capital structure. It is not expected that these
statements will have a material effect on the Company's financial statements in
the future. The SFASs are effective for the year ending December 31, 1997.
Inflation
The Company believes that inflation has not had a material effect on the
Company's revenues during the past three years.
34
<PAGE>
BUSINESS
General
World Airways is a global provider of long-range passenger and cargo air
transportation outsourcing services to major international airlines under fixed
rate, multi-year contracts. World Airways' passenger and freight operations
currently employ 12 wide-body aircraft which are operated under contracts
primarily with Pacific Rim airlines. These contracts generally require World
Airways to supply aircraft, crew, maintenance and insurance ("ACMI" or "wet
lease"), while World Airways' customers are responsible for a large portion of
the other operating expenses, including fuel. World Airways' airline customers
have determined that outsourcing a portion of their wide-body passenger and
cargo requirements can be less expensive, and offers greater operational and
financial flexibility, than purchasing new aircraft and additional spare parts
required for such aircraft.
World Airways also leads a contractor teaming arrangement that is one of the
largest suppliers of commercial airlift services to the USAF.
World Airways restructured its business in July 1996 to focus on ACMI contract
services, taking a one-time charge of $21.0 million as of June 30, 1996. As a
result, the Company terminated all scheduled services on October 27, 1996.
World Airways' block hours flown from continuing operations increased
approximately 10% in the first six months of 1997 over the first six months of
1996 and increased approximately 23% in the year ended December 31, 1996 over
the year ended December 31, 1995. In addition, the Company had operating
revenues of approximately $160.7 million and $151.9 million for the first six
months of 1997 and 1996, respectively, and operating revenues of approximately
$309.6 million and $242.4 million for 1996 and 1995, respectively. Due to
accelerated maintenance on two MD-11s in June 1997, the Company's block hours
flown from continuing operations increased by 1% in the second quarter of 1997
as compared to the same period of the prior year. These aircraft are now
available for operation and are substantially booked for the latter part of
1997. See "Risk Factors--Aircraft Fleet."
The Company operates a fleet of eight MD-11 and four DC10-30 wide-body
aircraft. The average age of the MD-11 fleet is 3.2 years. World Airways'
overall fleet age averages 8.1 years. When appropriate, the Company will add to
this fleet to accommodate the needs of new and existing customers. The Company
believes that aircraft are available at commercially reasonable rates for this
purpose.
World Airways' operating philosophy is to build on its existing ACMI
relationships to achieve a strong platform for future growth. World Airways
concentrates on ACMI contracts which shift yield, load factor and certain cost
risks to the customer. The customer bears the risk of filling the aircraft with
passengers or cargo and assumes a large portion of the operating expenses,
including fuel. World Airways has elected to emphasize its ACMI business
because the Company perceives a number of opportunities created by a growing
global economy, particularly growth in second and third world economies where
the demand for airlift exceeds capacity. World Airways attempts to maximize
profitability by combining its multi-year ACMI contracts with short term,
higher-yielding ACMI agreements which meet the peak seasonal requirements of its
customers. The Company responds opportunistically to rapidly changing market
conditions by maintaining a flexible fleet of aircraft that can be deployed in a
variety of configurations.
While the Company's aircraft currently serve predominantly passenger
customers, World Airways substantially increases its potential customer base by
being able to serve both passenger and cargo customers. The Company flies
passenger, cargo and passenger/cargo convertible aircraft that it believes
permit it to react opportunistically to changing demand. For example, the
Company uses convertible aircraft in a passenger configuration to meet peak
seasonal flying for Malaysian Airlines and Garuda during the spring of each
year. The Company can subsequently use the same convertible aircraft in a cargo
configuration for a customer, such as UPS, later in the same year.
World Airways focuses its marketing efforts on the Pacific Rim, Europe and
more recently South America, where rapid economic development drives demand for
the Company's services. The Company believes that its modern fleet of long-
range medium-density wide-body MD-11 and DC10-30 aircraft are ideally suited to
these less
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dense international routes and provide superior economics as compared to other
popular aircraft, such as the Boeing 747 which has excess capacity. World
Airways has operated in the Pacific Rim almost since its inception in 1948, more
recently has penetrated the South American market, and believes that it has
developed the ability to serve these markets well.
World Airways has been providing safe, reliable ACMI services for almost 50
years. World Airways has flown for the USAF since 1956, for Malaysian Airlines
since 1981 and for Garuda since 1973. On July 3, 1997, World Airways entered
into a multi-aircraft agreement with VASP.
Business Strategy
World Airways' strategy for increasing its revenues and profits focuses on its
growing core business of providing ACMI contract services to international
airlines by:
. Expanding Core Carrier Relationships. Over the years, the Company has
developed long-term relationships with a number of major international
airlines and with the USAF. The Company's growth strategy is based upon
providing high quality service to these customers, thereby maintaining and
expanding the amount of business obtained through long-term contracts.
. Marketing ACMI Services, Particularly in the Pacific Rim and South America.
The Company's new management team is committed to increasing the Company's
marketing efforts, including adding marketing personnel and has undertaken
a targeted marketing effort worldwide, particularly the Pacific Rim and
South America. The Company has recently entered into a Memorandum of
Agreement with VASP. See "Business--Significant Customer Relationships."
. Entering into New Strategic Alliances. The Company is seeking to enter new
strategic alliances to further the growth of its ACMI business. The Company
believes that in the future there will likely be opportunities for
consolidation within the ACMI business through acquisitions and alliances.
The Company from time to time has engaged in discussions concerning
possible acquisitions, strategic alliances, investments or joint ventures.
The Company currently has no present understandings, commitments or
agreements with respect to any such transaction and there can be no
assurance that any such transaction will occur. The Company expects that it
will continue to pursue such transactions aggressively to further the
growth of its ACMI business.
Management believes that, as a result of July 1996 restructuring of its
operations to concentrate on its ACMI contract services, and because it is a
U.S. certificated "flag" carrier, the Company is well-positioned to benefit
from the growth in the global air passenger and air cargo markets, particularly
in the Pacific Rim region and South America, where the Company has concentrated
a significant amount of its resources. The Company believes that anticipated
continued growth in the demand for passenger and cargo air transportation in
Southeast Asia, the Pacific Rim and South America, combined with the need of the
national airlines of these countries to manage their own rapid expansion by
utilizing the Company's operating experience and aircraft, should provide the
Company with the opportunity to expand its outsourcing services and is
indicative of the demand for airlift services in the developing world in
general. The Company also believes that the U.S. military will continue to
outsource a substantial amount of its commercial airlift requirements in order
to meet its need for mobility.
Competitive Advantages
The Company believes that it possesses several key competitive advantages that
allow it to offer efficient, reliable and cost-effective outsourcing services to
its customers on a profitable basis:
. Concentration in Two of the World's Fastest Growing Regions. The Company
has found a profitable niche providing highly reliable long-range medium-
density airlift capacity to rapidly growing national airlines in Southeast
Asia. The Company has also recently begun to penetrate the fast-growing
South American market. The Pacific Rim is the fastest growing market in the
world for both air passenger and air cargo services.
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Over the past two years, the Pacific Rim (excluding Japan) GDP growth has
averaged approximately 7%, while worldwide GDP growth has averaged only
approximately 2.5%. In the Pacific Rim market, air traffic generally grows
at close to two times the underlying GDP growth rate. The airlines of the
Pacific Rim and South America principally desire access to the Company's 49
years of operating experience, modern fleet, and U.S. route authorities.
. Long-term Customer Contracts Which Stabilize Revenue and Minimize Cost
Risks. The Company has entered into several long-term contracts which help
to stabilize the Company's revenue base and minimize the Company's cost
risks. The Company's contractual arrangements with its customers provide
for its customers to guarantee monthly minimum aircraft utilization levels
at fixed hourly rates and are in force for periods of one to five years,
subject to certain termination provisions. These contracts typically are
ACMI arrangements in which the Company's customers bear a substantial
portion of the other operating expenses, including the costs of fuel and
fuel servicing, marketing associated with obtaining passengers or cargo,
airport passenger handling and ticketing, aircraft ground handling, and
aircraft push-back and de-icing services. The Company believes that
customers prefer the ACMI arrangements because they pay a simple per-hour
fee for a complete service package that includes everything required to
complete the flight, except passengers, fuel and flight attendants.
Consequently, few additional assets or investments are required by the
customer. The customer is able to increase revenues without assuming the
asset risk or related costs of the aircraft. The Company prefers the ACMI
arrangement because, unlike a full-service contract, the customer bears the
load factor and yield risk; the Company is essentially paid to provide and
operate the aircraft. In addition, with long-term ACMI contracts, the
Company's profit margins are less volatile than in scheduled markets, and
revenues and cash flows are more predictable. The Company currently has
five ACMI contracts with at least one aircraft dedicated to each contract,
and the Company is currently in preliminary discussions with respect to
other possible ACMI contracts.
. Attractive Fleet Characteristics. The Company operates a fleet of eight
MD-11 and four DC10-30 wide-body aircraft in a variety of configurations
which provide significant marketing advantages to the Company. Both the MD-
11 and the DC10-30 aircraft are long-range, medium density, wide-body
aircraft. The Company's fleet is designed to meet the requirements of its
target markets and customers as well as to provide the Company with the
flexibility to redeploy its aircraft to meet worldwide passenger or cargo
demand. The Company's fleet has three principal advantages: young age, low
cost and flexibility. The average age of the Company's MD-11 fleet is 3.2
years and the average age of its overall fleet is 8.1 years. Typically,
national carriers served by the Company demand newer aircraft with medium-
density long-haul capabilities such as the Company's MD-11 fleet. These
younger aircraft have higher fuel efficiencies and lower maintenance costs.
In addition to the operating benefits, newer aircraft are perceived by the
public to be safer. Many of the routes served by the Company's customers
cannot be served efficiently by larger wide-body aircraft such as the
Boeing 747 because such aircraft provide too much capacity relative to
existing demand. The Company's older DC10-30 fleet meets the needs of
customers who seek an aircraft with characteristics similar to those of the
MD-11, but desire a low-cost alternative for their passenger or cargo
needs. The Company believes that it acquired the majority of its MD-11's on
favorable lease terms due to the airline manufacturing recession of 1993.
These leases are renewable at the Company's option for 10 one-year
extensions in years six through 15 of the lease terms. However, failure to
renew such contracts would result in penalties.
Pursuant to its strategy of maintaining a flexible fleet, in March 1996, World
Airways entered into two leases with McDonnell Douglas for a new extended-range
model of the McDonnell Douglas MD-11. World Airways has leased each MD-11ER
aircraft for a term of 24 years with an option to return the aircraft after a
seven-year period with certain fixed termination fees. The MD-11ER, is capable
of flying nonstop between such cities as Zurich and Santiago, New York and
Johannesburg, and Los Angeles and Shanghai. The aircraft's increased range is
due to a combination of engineering and aerodynamic improvements and
innovations.
Significant Customer Relationships
Over the years, the Company has developed long-term relationships with a
number of major international airlines and with the USAF. The Company's growth
strategy is based upon providing high quality service to these
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customers, thereby maintaining and expanding the amount of business being done
through long-term contracts. These contracts have increased the year-round usage
of the Company's aircraft fleet, reduced the seasonality of the Company's
business and contributed to its recently improved operating performance.
Malaysian Airlines. World Airways has provided wet lease services to
Malaysian Airlines since 1981, providing wet lease services for Malaysian
Airlines' scheduled passenger and cargo operations as well as transporting
passengers for the annual Hadj pilgrimage. MHS, which owned 24.9% of the
Company as of September 30, 1997, also owns 29.1% of Malaysian Airlines.
Malaysian Airlines accounted for 27% and 34% of World Airways' revenues and 30%
and 42% of total block hours for the first six months of 1997 and for the year
ended December 31, 1996, respectively. Certain of the Company's previous long-
term contracts with Malaysian Airlines have recently expired.
In 1997, the Company entered into a new 32-month agreement for year-round
operations (including the Hadj) with Malaysian Airlines whereby the Company will
provide two passenger aircraft with cockpit crews, maintenance and insurance to
Malaysian Airlines' newly-formed charter division through May 1999. The Company
provided three aircraft for 1997 Hadj operations.
The Company has a long-term contract to operate three MD-11 cargo aircraft for
Malaysian Airlines. However, beginning in July 1996, and as mutually agreed by
the parties, World Airways redeployed two cargo aircraft, which had been
operating under these contracts, into the Philippine Airlines contract. The
Company and Malaysian Airlines are currently discussing the future redeployment
of these aircraft back into Malaysian Airlines' operations in order to meet the
contracts' original obligations. The Company can provide no assurances,
however, that the Company will, in fact, be able to do so. Revenues associated
with these contractual obligations are included in the Company's backlog amount
included herein.
The Company was recently informed that Malaysian Airlines received notice from
the Malaysian Hadj Board that Malaysian Airlines will not participate in the
1998 Hadj pilgrimage. Notwithstanding, Malaysian Airlines has assured the
Company that it will honor its contractual obligations, described above. For the
nine months ended September 30, 1997, the Company received approximately $17.0
million in revenues as a result of aircraft provided to Malaysian Airlines for
1997 Hadj operations.
Garuda. The Company has flown for Garuda periodically since 1973 and yearly
since 1988. Since 1988, the Company has been one of the largest providers of
passenger services to Indonesia for the Hadj pilgrimage. The Indonesian Hadj
pilgrimage is the world's largest due to the size of Indonesia's Islamic
population. In 1997, approximately 40,000 of the 200,000 Indonesians who
traveled to Jeddah for the Hadj pilgrimage flew on the Company's aircraft. The
Company is currently negotiating an agreement with Garuda to operate six
aircraft during the 1998 pilgrimage.
Philippine Airlines. As of June 30, 1997, World Airways operated four MD-11
passenger aircraft for Philippine Airlines under an agreement with high minimum
monthly utilization levels. Philippine Airlines, however, is experiencing
financial difficulties and since March 1997 had been making monthly lease
payments to the Company on an installment basis according to a payment plan
agreed to by the Company and Philippine Airlines at the beginning of each month.
On July 11, 1997, World Airways agreed to shift two MD-11s currently operating
for Philippine Airlines to other customers of the Company. As of the date
hereof, Philippine Airlines is in compliance with its agreements with the
Company and has reconfirmed its commitment to operate the remaining two MD-11s
currently in its fleet until February 1998. Failure by Philippine Airlines to
meet its aircraft lease obligations, if not offset by other business, would have
a material adverse effect on the financial condition, cash flows and results of
operations of the Company.
VASP. On July 3, 1997, World Airways entered a binding Memorandum of
Agreement with VASP for the lease of two MD-11 passenger aircraft for a six-
month term with a six-month renewal option. The Company is currently negotiating
the terms of this lease with VASP, with commencement anticipated for no earlier
than late 1997. The loss of this agreement, a renegotiation of its terms or a
substantial reduction of business for VASP, if not replaced, could have a
material adverse effect on the financial condition, cash flow and results of
operations of World Airways. The Company is also leasing a cargo plane to VASP
under an ACMI contract which began in June 1997.
USAF. The Company has provided international air transportation to the USAF
since 1956. The overall downsizing of the U.S. military places a premium on
the mobility of the U.S. armed forces. This is reflected in the stable size
over the past several years of the USAF's procurement of commercial airlift
services. Although the Company's agreements with the USAF provide for full
service contracts with certain minimum performance
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requirements, the Company has risks similar to an ACMI agreement because the
USAF agreements are cost-plus contracts at attractive rates. The Company leads a
contractor teaming arrangement that enjoyed a 44% market share of the USAF's
overall commercial airlift requirement for 1996-1997. During a period in which
the U.S. military downsized substantially, the Company's portion of the fixed
USAF award increased from $15.6 million for the government's 1992-93 fiscal
year, to $52.8 million for the government's 1996-97 fiscal year. While the prior
year's annual contract expired on September 30, 1997, the Company recently
received a $73.9 million fixed award for the government's 1997-98 fiscal year.
The USAF awards points to air carriers acting alone or through teaming
arrangements in proportion to the number and type of aircraft such carriers make
available to CRAF. The Company utilizes such teaming arrangements to maximize
the value of potential awards. The current members of the Company's teaming
arrangement include Continental Airlines, Inc., Northwest Airlines, Inc.
("Northwest"), Evergreen International Airlines, Inc., Emery Worldwide Airlines,
Inc. and Miami Air International, Inc.
The Company's teaming arrangement purchases CRAF points from member carriers
to increase the size of the arrangements' fixed award and then allocates these
points among the team members. In addition, the Company pays commissions to
Northwest in exchange for allowing the Company to fly additional routes using
Northwest's points. The Company's operating revenues from CRAF are net of these
commissions. As a result of the Company's increasingly effective use of teaming
arrangements, the Company's fixed awards have generally grown in recent years
and the Company has one of the largest fixed awards for the U.S. Government's
1996-97 fiscal year.
USAF fixed awards provide predictable utilization of the Company's aircraft.
Under the 1996-97 contract, the Company operated one MD-11 from St. Louis and
Los Angeles to military bases in Japan and Korea for approximately 10 months.
The Company also operated one DC10-30 from Philadelphia to military bases in
Europe and the Middle East for a minimum of six months. These operating
schedules are specified in the contract award and serve as minimum utilization
commitments to the Company. The Company believes that predictable aircraft
utilization and attractive compensation levels, as well as international routes
well suited to the Company's wide-body, long-range fleet, have allowed the
Company to operate profitably under USAF contracts.
Aircraft Fleet
The Company's fleet strategy stresses market flexibility. Utilizing two
aircraft types provides the first measure of flexibility. Modern generation MD-
11 aircraft are well-suited for providing air transportation services to
airlines in the Pacific Rim as well as for serving the USAF's trans-Pacific
routes. Proven DC10-30 aircraft are well-suited for operating seasonal
programs, such as the annual Hadj pilgrimage, and for serving the USAF's routes
to Europe and the Middle East. Furthermore, the Company believes that it
achieves an additional measure of flexibility by operating four models of the
MD-11 and two models of the DC10-30.
A DC10-30 operator since 1978, the Company launched a reequipment program in
1993 in which it has acquired the eight MD-11 aircraft that now comprise its
core fleet. The MD-11 offers a number of important competitive advantages.
First, as a modern generation aircraft, the MD-11 meets the preference of
Pacific Rim carriers for the newest technology aircraft. The average age of the
Company's eight MD-11s is just 3.2 years. Second, the MD-11's long range allows
it to operate nonstop from Pacific Rim locations to destinations in North
America, Europe and Africa. The Company's two new MD-11ER aircraft, delivered in
1996, are capable of nonstop flights of over 15 hours. Third, although some
models of the Boeing 747 aircraft may provide lower unit costs per seat/mile or
ton/mile, the Company believes that the total operating costs of the MD-11 are
substantially lower than those of the Boeing 747 over routes that do not produce
enough traffic to efficiently utilize the Boeing 747's larger capacity. As a
result, the Company believes the MD-11 provides superior operating economics on
the Company's routes. Fourth, the MD-11 is produced in a wide range of models,
including passenger, extended-range passenger, freighter and convertible
freighter.
The Company has retained DC10-30 aircraft to supplement its MD-11 fleet.
Advantages of the DC10-30 include lower fixed cost, and therefore lower break-
even aircraft utilization levels (average block hours per day), as well as
shorter lease commitments. For these reasons, the acquisition of a DC10-30
involves less financial risk than
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the acquisition of an MD-11. In addition, the Company believes that the
Company's 19 years of experience with the DC10-30 has positioned the Company to
support this aircraft type. By supplementing the MD-11 fleet with DC10-30s, the
Company is able to target certain seasonal markets and USAF requirements that
cannot be profitably served with MD-11 aircraft.
The Company's strategy allows for fleet growth by acquiring additional MD-11s
or DC10-30s. The Company believes that continued growth in demand for services
to Pacific Rim and South American carriers would support additions to the MD-11
fleet and growth in demand for seasonal programs with lower aircraft utilization
levels would support additions to the DC10-30 fleet.
The Company returned one MD-11 to the lessor during the third quarter. The
MD-11 which was returned was the oldest, least modern MD-11 in the Company's
fleet and was one of the first MD-11s to be manufactured by McDonnell-Douglas.
Due to favorable market conditions, the Company believes that returning the
aircraft to its lessor provides World Airways with an opportunity to upgrade its
fleet at an appropriate time with a newer MD-11.
The following table summarizes the lease term, date of manufacture, engine
type, range and capacity of the Company's aircraft fleet as of June 30, 1997:
<TABLE>
<CAPTION>
Lease
Aircraft(1) Expiration Year of Engine
- ---------- (month/year)(2) Manufacture Type Range(3) Capacity(4)
--------------- ----------- -------- -------- -----------------------
<S> <C> <C> <C> <C> <C>
MD-11ER ............................. 03/2020 1995 PW4462 6700 409 seats
MD-11ER ............................. 03/2020 1995 PW4462 6700 409 seats
MD-11CF ............................. 03/2010 1995 PW4462 6200 410 seats or 90 tons
MD-11CF ............................. 03/2010 1995 PW4462 6200 410 seats or 90 tons
MD-11F .............................. 03/2009 1994 PW4462 6200 95 tons
MD-11 ............................... 04/2008 1993 PW4462 6200 409 seats
MD-11 ............................... 03/2008 1993 PW4462 6200 409 seats
MD-11 ............................... 09/2008 1992 PW4462 6200 409 seats
DC10-30CF ........................... 01/2009 1979 CF6-50C2 4700 380 seats or 65 tons
DC10-30 ............................. 12/1998 1974 CF6-50C2 4700 350 seats
DC10-30 ............................. 09/1998 1988 CF6-50C2 4700 350 seats
DC10-30 ............................. 08/1998 1977 CF6-50C2 4700 350 seats
</TABLE>
- --------------
(1) "F" aircraft are freighters, "CF" aircraft are convertible freighters and
may operate in either passenger or freight configuration and aircraft with
no letter designation are passenger-only aircraft.
(2) Assumes exercise of all lease extensions.
(3) Range is in nautical miles based on operational take-off weight with full
fuel load and no runway constraints.
(4) Number of seats or tons of freight.
The Company currently leases from the manufacturer two MD-11ER aircraft for a
term of 24 years with an option to return the aircraft after a seven-year period
with certain fixed termination fees. In addition, the Company received spare
parts financing from the lessor of $9.0 million. As of June 30, 1997, $7.4
million had been received. Finally, the Company agreed to assume an existing
lease of two additional MD-11 freighter aircraft for 20 years, beginning in
1999, in the event that the other lessee terminates its lease with the
manufacturer at that time.
The Company believes that it acquired the majority of its MD-11's on favorable
lease terms due to the airline manufacturing recession of 1993. These leases
are renewable at the Company's option for 10 one-year extensions in years six
through 15 of the lease term. However, failure to renew such contracts would
result in penalties.
The Company currently leases three DC10-30 aircraft under short-term leases,
including two under leases with Malaysian Airlines and one DC10-30 aircraft
under a long-term lease. See "Certain Relationships and Transactions." The
long-term lease expires in January 2003, and includes renewal options allowing
the Company to extend the lease for up to six years. One short-term DC10-30
lease expires in August 1998, with the second expiring in September 1998 and the
third in December 1998. All of the DC10-30 leases contain standard default
provisions.
40
<PAGE>
The Company leases certain of its spare engines. Some of the Company's
rotable spare parts inventory and certain of the Company's spare engines are
subject to mortgages and other security interests granted in favor of the
Company's lenders. As of June 30, 1997, the Company owned $3.6 million of DC10-
30 aircraft spare parts which are classified as assets held for sale. These
spare parts were not required by the Company following its transition in 1993
and 1994 from a fleet of all DC10-30s to a fleet of predominantly MD-11
aircraft. The Company has consigned these parts to be sold by a third party
over a reasonable period of time with the objective of maximizing the proceeds
from such sale.
The Company has historically acquired and intends in the future to acquire
additional aircraft on short-term leases primarily to meet the peak seasonal
demand requirements of certain of its customers. There can be no assurance,
however, that reliable aircraft will be available for short-term leases to the
Company or, if such aircraft are available, that the Company will be able to
lease such aircraft on terms as favorable as its current leases. From time to
time the Company may subcontract with other carriers to meet requirements during
periods of peak demand.
Maintenance
The Company outsources its maintenance requirements where it believes that it
is uneconomical to keep such requirements within the Company. The Company's
maintenance and engineering group is responsible for maintaining the technical
condition of its aircraft fleet in compliance with the Company's FAA approved
maintenance program. Aircraft maintenance includes six basic activities:
maintenance control; line maintenance; scheduled airframe heavy maintenance;
power plant maintenance; material services; and quality assurance. These
activities are managed in the Company's headquarters near Washington Dulles
International Airport. The Company's maintenance control center coordinates
routine and non-routine maintenance operations worldwide on a 24-hour basis.
Engine maintenance accounts for most of the Company's annual maintenance
expenses. Typically, the hourly cost of engine maintenance increases as the
aircraft ages. The Company outsources major airframe maintenance and power
plant work to several suppliers. The Company has a 10-year contract expiring in
August 2003 with an option to extend for two years, to be exercised in March
1998, with United Technologies Corporation's Pratt & Whitney Group for all off-
wing maintenance on the PW 4462 engines that power its MD-11 aircraft. Under
this contract, the manufacturer agreed to provide such maintenance services at a
cost not to exceed a specified rate per engine flight hour during the term of
the contract. The Company's maintenance costs associated with the MD-11
aircraft and PW 4462 engines have been significantly reduced due in part to
manufacturer guarantees and warranties, which began to expire in 1995 and which
will fully expire by 1998. In addition, the specified rate per engine flight
hour is subject to annual escalation, increasing substantially in 1998.
Accordingly, while the Company believes that the terms of this agreement have
resulted in lower engine maintenance costs than it otherwise would incur, engine
maintenance costs will increase substantially during the last five years of the
agreement. The Company has begun to accrue these increased expenses in 1997 and
such expenses will continue to increase during the remainder of the term of the
contract as the Company's aircraft fleet ages.
The Company outsources major airframe maintenance to several suppliers. The
Company currently has agreements with SwissAir at its facilities in Zurich, KLM
at its facilities in Amsterdam, Lufthansa at its facilities in Frankfurt, and
TIMCO at its facilities in Greensboro. The Company deploys maintenance
representatives to supervise the work of certain of its maintenance contractors.
See "Certain Relationships and Transactions."
Each of the Company's aircraft carries spare parts and support kits, which
consist of approximately $1.5 to $3.5 million in parts and special equipment.
In addition, a highly-trained maintenance representative is on board all flights
to destinations where the Company does not have on-site maintenance facilities.
As described above, the Company has entered into agreements with contractors,
including other airlines, to provide certain facilities and services required
for its operations, including all of the Company's off-wing engine maintenance
and most airframe maintenance. The Company has also entered into agreements
with contractors to
41
<PAGE>
provide security, ground handling and personnel training. Although the Company
believes that there are many advantages to outsourcing these activities, the
failure of these contractors to provide essential services that are not
otherwise entirely within the control of the Company could have a material
adverse effect on the financial condition or results of the operations of the
Company.
Flight Operations
Worldwide flight operations (including aircraft dispatching and crew
scheduling) are planned and controlled by the Company's flight operations group
which is staffed on a 24-hour, seven days a week basis, operating out of the
Company's headquarters in Herndon, Virginia. Logistical support necessary for
extended operations outside the Company's fixed bases are coordinated through
the Company's global communications network.
Physical Facilities
The Company leases office space in Herndon, Virginia, located near Washington
Dulles International Airport, which houses its corporate headquarters and
substantially all of the administrative employees of the Company. In addition,
the Company leases additional office and warehouse space in Wilmington,
Delaware; Philadelphia, Pennsylvania; New York, New York; Los Angeles,
California; Kuala Lumpur, Malaysia; Yakota, Japan; and Frankfurt, Germany.
Additional small offices and maintenance material storage space are leased at
certain airports to provide administrative and maintenance support for
commercial and military contracts. The Company considers its present office
space and other facilities to be sufficient for its needs.
Aviation Fuel
The air transportation industry in general is affected by the price and
availability of aviation fuel. Both the cost and availability of aviation fuel
are subject to many economic and political factors and events occurring
throughout the world and remain subject to the various unpredictable economic
and market factors that affect the supply of all petroleum products. The price
of fuel has not had a significant impact on the Company's operations in recent
years. The Company's exposure to fuel risk is limited because (i) under the
terms of the Company's wet lease, the customer is responsible for providing
fuel, (ii) under the terms of its full service contracts with the U.S.
Government, the Company is reimbursed for fuel price increases in excess of 5%
of the price agreed upon in the contract, subject to a 10% cap. However, a
substantial increase in the price or the unavailability of aviation fuel could
have a material adverse effect on the air transportation industry in general and
the financial condition or results of operations of the Company.
Security
The Company believes that its security program complies with the FAA and the
U.S. Department of Defense requirements and is tailored to the needs of the
markets it serves, including increased security necessary to serve certain
customers. See "--Regulation."
Insurance
The Company carries the types and amounts of insurance that are customary in
the airline industry, including coverage for public liability, passenger
liability, property damage, aircraft loss or damage, baggage and cargo liability
and workers' compensation. The Company maintains insurance coverage with major
insurance carriers with coverage of up to $115 million for damage per aircraft
and $1.0 billion of third party liability per occurrence. The Company has a low
claim experience with its insurers and believes that it enjoys a good reputation
with insurance providers. The "Hull War Risks" section of these policies
imposes a $445 million annual aggregate limit.
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<PAGE>
Additionally, the Company carries deductible insurance which lowers its per
aircraft deductible from $1 million to $100,000 for any one claim, subject to an
aggregate of $4.0 million in claims per policy year. The Company also obtains
war risks insurance from the U.S. Government under Title XIII of the Aviation
Act ("Title XIII"). Title XIII generally authorizes the U.S. Government to issue
insurance with respect to aircraft engaged in operations deemed by the U.S.
Government to be necessary to carry out the foreign policy of the U.S. when such
insurance is either unavailable or prohibitively expensive when sought from
private insurers. Payment of valid claims pursuant to insurance issued under
Title XIII is made out of and subject to Congressional appropriations. As is
customary in the air transportation business, the Company does not maintain
business interruption insurance.
Employees
As of June 30, 1997, the Company had 946 full-time employees, classified as
follows:
<TABLE>
<CAPTION> Number of
Full-Time
Classification Employees
-------------- --------------------
<S> <C>
Senior Management ..................................................... 10
Administrative and Operations ......................................... 313
Cockpit Crew (including pilots) ....................................... 326
Flight Attendants ..................................................... 297
------------------
Total Employees .................................................... 946
==================
</TABLE>
The Company's cockpit crew members are highly trained individuals with
significant international flight experience. The Company has 56 cockpit crew
members employed by the Company for over 20 years.
The Company's cockpit crew members, who are represented by the Teamsters, are
subject to a four-year collective bargaining agreement expiring in June 1998.
The Company's flight attendants, who are also represented by the Teamsters, are
subject to a four-year collective bargaining agreement that will expire in
August 2000. The Company's flight attendants challenged the use of foreign
flight attendant crews on the Company's flights for Malaysian Airlines and
Garuda Indonesia. The Company is contractually obligated to permit its
Southeast Asian customers to deploy their own flight attendants. While the
arbitrator in this matter recently denied the union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that the Company's contract with its flight attendants requires the
Company to first actively seek profitable business opportunities that require
using the Company's flight attendants, before the Company may accept wet lease
business opportunities that use the flight attendants of the Company's
customers. The Company can provide no assurances as to how the imposition of
this requirement will affect the Company's financial condition and results of
operations.
The Company's aircraft dispatchers are represented by the Transport Workers
Union (the "TWU"). This contract became subject to renegotiation on June 30,
1993. In May 1995, the parties reached agreement with respect to a new four-
year contract, which was ratified in February 1996. Fewer than 12 Company
employees are covered by this collective bargaining agreement.
The Company is unable to predict whether any of its employees not currently
represented by a labor union, such as the Company's maintenance personnel, will
elect to be represented by a labor union or collective bargaining unit. The
election of such employees for representation in such an organization could
result in employee compensation and working condition demands that could have a
material adverse effect on the financial condition or results of the operations
of the Company.
Competition
The market for outsourcing air passenger and cargo ACMI services is highly
competitive. A number of airlines currently provide services for themselves and
for others similar to the services offered by the Company, and new airlines may
be formed that would also compete with the Company. Such airlines may have
substantially greater
43
<PAGE>
financial resources and a larger fleet of passenger and cargo aircraft than
those which are now, or will in the foreseeable future become, available to the
Company. The Company believes that the most important bases for competition in
the ACMI outsourcing business are the modernity of the aircraft fleet, the
passenger, payload and cubic capacities of the aircraft, and the price,
flexibility, quality and reliability of the passenger and cargo transportation
service. Competitors in the ACMI outsourcing market include MartinAir Holland,
Tower Air and American TransAir and all-cargo carriers, such as Atlas Air,
Gemini Air Cargo, Polar Air Cargo and Kitty Hawk, and scheduled and non-
scheduled passenger carriers which have substantial belly cargo capacity. The
ability of the Company to achieve growth depends upon its success in convincing
major international airlines that outsourcing some portion of their air
passenger and cargo business remains more cost-effective than undertaking
passenger or cargo operations with their own incremental capacity and resources.
See "--Business Strategy ." The allocation of military air transportation
contracts by the USAF is based upon the number and type of aircraft a carrier,
alone or through teaming arrangements, makes available for use in times of
national emergency. The formation of competing teaming arrangements that have
larger partners than those sponsored by the Company, an increase by other air
carriers in their commitment of aircraft to CRAF or the withdrawal of the
Company's current partners, could adversely affect the size of the USAF
contracts, if any, which are awarded to the Company in future years.
Regulation
Since it was founded in 1948, the Company has been authorized to engage in
commercial air transportation by the DOT or its predecessor agencies. The
Company is currently authorized to engage in the scheduled and charter air
transportation of combination (persons, property and mail) and all-cargo
services between all points in the U.S., its territories and possessions. It
also holds worldwide charter authority for both combination and all-cargo
operations. In addition, the Company is authorized to conduct scheduled
combination services to the foreign points listed in its DOT certificate. The
Company also holds certificates of authority to engage in scheduled all-cargo
services to a limited number of foreign destinations.
The Company is subject to the jurisdiction of the FAA with respect to aircraft
maintenance and operations, including flight operations, equipment, aircraft
noise, ground facilities, dispatch, communications, training, weather
observation, flight time, crew qualifications, aircraft registration and other
matters affecting air safety. The FAA requires each air carrier to obtain an
operating certificate and operations specifications authorizing the carrier to
operate to particular airports on approved international routes using specified
equipment. These certificates and specifications are subject to amendment,
suspension, revocation or termination by the FAA. In addition, all of the
Company's aircraft must have and maintain certificates of airworthiness issued
or approved by the FAA. The Company currently holds an FAA air carrier
operating certificate and operations specifications under Part 121 of the
Federal Aviation Regulations. The FAA has the authority to suspend temporarily
or revoke permanently the authority of the Company or its licensed personnel for
failure to comply with regulations promulgated by the FAA and to assess civil
penalties for such failures.
Under the Airport Noise and Capacity Act of 1990 and related FAA regulations,
the Company's aircraft fleet must comply with certain Stage 3 noise restrictions
by certain specified deadlines. All of the Company's aircraft currently meet
the Stage 3 noise reduction requirement, which is currently the most stringent
FAA noise requirement. FAA regulations require compliance with the Traffic
Alert and Collision Avoidance System ("TCAS"), approved airborne windshear
warning system, digital flight data recorder system and aging aircraft
regulations.
Additional laws and regulations have been proposed from time to time which
could significantly increase the cost of airline operations by imposing
additional requirements or restrictions on operations. Laws and regulations
have been considered from time to time that would prohibit or restrict the
ownership and transfer of airline routes or slots. There is no assurance that
laws and regulations currently enacted or enacted in the future will not
adversely affect the Company's ability to maintain its current level of
operating results.
Several aspects of airline operations are subject to regulation or oversight
by Federal agencies other than the DOT or FAA. For instance, labor relations in
the air transportation industry are generally regulated under the Railway Labor
Act, which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions arising under collective
bargaining agreements. In addition, the Company is
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<PAGE>
subject to the jurisdiction of other governmental entities, including (i) the
FCC regarding its use of radio facilities pursuant to the Federal Communications
Act of 1934, as amended, (ii) the Commerce Department, the Customs Service, the
Immigration and Naturalization Service and the Animal and Plant Health
Inspection Service of the Department of Agriculture regarding the Company's
international operations, (iii) the Environmental Protection Agency (the "EPA")
regarding compliance with standards for aircraft exhaust emissions and (iv) the
Department of Justice regarding certain merger and acquisition transactions. The
EPA regulates operations, including air carrier operations, which affect the
quality of air in the U.S. The Company has made all necessary modifications to
its operating fleet to meet fuel-venting requirements and smoke emissions
standards issued by the EPA.
The Company's international operations are generally governed by the network
of bilateral civil air transport agreements providing for the exchange of
traffic rights between governments which then select and designate air carriers
authorized to exercise such rights. In the absence of a bilateral agreement,
such international air services are governed by principles of comity and
reciprocity. Bilateral provisions pertaining to the charter services provided
by the Company vary considerably depending on the particular country. Most
bilateral agreements into which the U.S. has entered permit either country to
terminate the agreement with one year's notification to the other. In the event
a bilateral agreement is terminated, international air service between the
affected countries is governed by the principles of comity and reciprocity.
Certain airports served by the Company are subject to slot allocations
administered by the governments of the countries in which such airports are
located or by coordinating committees comprising airline representatives. A
"slot" is an authorization to take off or land at the designated airport within
a specified time window. In the past, the Company has generally been successful
in obtaining the slots it needs in order to conduct planned operations. There
can be no assurance, however, that it will be able to do so in the future
because, among other factors, government policies regulating the distribution of
slots, both in the U.S. and in foreign countries, are subject to change.
Pursuant to federal law, no more than 25% of the voting interest in the
Company may be owned or controlled by Foreign Citizens. In addition, under
existing precedent and policy, actual control must reside in U.S. citizens. As
a matter of regulatory policy, the DOT has stated that it would not permit
aggregate equity ownership of a domestic air carrier by Foreign Citizens in an
amount in excess of 49%. The Company fully complies as of the date hereof with
these U.S. citizen ownership requirements. See "Description of Capital Stock."
Due to its participation in CRAF, the Company is subject to inspections
approximately every two years by the military as a condition of retaining its
eligibility to perform military charter flights. The last such inspection was
undertaken in 1996 and the next is anticipated to occur in 1998. As a result of
such inspections, the Company has been required to implement measures, such as
the establishment of a crew resource management course, beyond those required by
the DOT, FAA and other government agencies. The USAF may terminate its contract
with the Company if the Company fails to pass such inspection or otherwise fails
to maintain satisfactory performance levels, if the Company loses its
airworthiness certificate or if the aircraft pledged to the contracts lose their
U.S. registry or are leased to unapproved carriers.
The Company believes it is in compliance in all material respects with all
requirements necessary to maintain in good standing its operating authority
granted by the DOT and its air carrier operating certificate issued by the FAA.
A modification, suspension or revocation of any of the Company's DOT or FAA
authorizations or certificates could have a material adverse effect upon the
Company. The Company also is subject to state and local laws and regulations at
locations where it operates and the regulations of various local authorities
which operate the airports it serves. Certain airport operators have adopted
local regulations which, among other things, impose curfews and noise abatement
regulations. While the Company believes it is currently in compliance in all
material respects with all appropriate standards and has all required licenses
and authorities, any material non-compliance by the Company therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on the Company.
45
<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below are the names, ages and positions and a brief description of
the business experience of World Airways' directors and executive officers. All
directors hold office until the annual meeting of stockholders following the end
of their three-year term and until their successors are duly elected and
qualified.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
T. Coleman Andrews, III(1) ......... 43 Chairman of the Board
Russell L. Ray, Jr.(1) ............. 62 Director, President and Chief Executive Officer
Vance Fort .......................... 53 Executive Vice President and General Counsel
Ahmad M. Khatib .................... 47 Director and Executive Vice President--Marketing and Sales
William R. Lange ................... 52 Executive Vice President--Operations
A. Scott Andrews(2)(3) ............. 38 Director
John C. Backus, Jr. ................ 38 Director
Dato' Wan Malek Ibrahim(1) .......... 48 Director
Peter M. Sontag(2)(3) .............. 53 Director
Lim Kheng Yew ....................... 45 Director
</TABLE>
- --------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
T. Coleman Andrews, III has served as Chairman of the Board of the Company
since September 1986. Mr. Andrews is a Director and Chairman of the Board of
WorldCorp, and has served as a Director of InteliData Technologies Corporation
("InteliData") (and its predecessor U.S. Order, Inc.) ("US Order") since 1990.
From 1978 through 1986, he was affiliated with Bain & Company, Inc., an
international strategy consulting firm. At Bain, he was elected partner in 1982
and was a founding general partner in 1984 of The Bain Capital Fund, a private
venture capital partnership. Prior to his experience with Bain, Mr. Andrews
served in several appointed positions in the White House for the Ford
Administration. He is the brother of A. Scott Andrews.
Russell L. Ray, Jr. has served as a Director of the Company since July 1993.
Mr. Ray was appointed President and CEO of World Airways on April 4, 1997.
Prior to that appointment, Mr. Ray was senior advisor to Winston Partners, a
private investment firm. From 1992 to 1993, Mr. Ray served as Executive Vice
President of British Aerospace, Inc. From 1991 to 1992, Mr. Ray served as
President and Chief Executive Officer of Pan American World Airways. From 1988
to 1991, he served as Vice President and General Manager of Commercial Marketing
of McDonnell Douglas Corporation, from 1985 to 1988, he served as President of
Pacific Southwest Airlines and from 1971 to 1985, he served as Senior Vice
President at Eastern Airlines. Mr. Ray has also served on the boards of
directors of a number of public and private companies.
Vance Fort has served as Senior Vice President--Government Affairs and General
Counsel of the Company since July 1993 and currently manages the Human Resources
and Management Information Systems departments of the Company. He joined the
Company as Senior Vice President--Government and International Affairs, in
September 1989. He served as Vice President--International and Government
Affairs for the Flying Tiger Line, an air cargo service provider, from September
1987 to September 1989. From 1978 to 1987 he served in various positions at the
U.S. Department of Transportation, including service as Deputy Assistant
Secretary for Policy and International Affairs.
Ahmad M. Khatib has served as Executive Vice President--Marketing and Sales
since late 1996. Prior to this date, Mr. Khatib was Chief Operating Officer
since April 1996 and Director and Executive Vice President--Operations of the
Company since February 1994. Mr. Khatib has served as Senior Vice President,
in different capacities, since June 1988. He joined the Company in May 1972 as
a passenger service agent. During his more than 20 years with the Company, he
has held numerous management positions in the areas of sales, planning and
46
<PAGE>
services as well as in aircraft leasing and related agreements, becoming Vice
President of Marketing and Customer Services in 1987.
William R. Lange has served as Executive Vice President--Operations since
June 19, 1997. Prior to this date, Mr. Lange was the founder and principal of
Aero Initiatives, an aviation consulting firm. Mr. Lange was Executive Vice
President and Chief Operating Officer of Jetstream Aircraft, Inc. from 1993
until founding Aero Initiatives in 1996, and was Vice President--Jetstream
Programs for British Aerospace Holdings, Inc. from 1992. Prior to that, Mr.
Lange was President and Chief Operating Officer of Pan Am Express, Inc. from
1989 until 1993 and served in various positions for Pan American World Airways,
Inc. from 1973 until 1989.
A. Scott Andrews has served as a Director of the Company since June 1992. He
was a founder and has served as Managing Director of Winston Partners, L.P. a
private investment firm, since May 1994. He served as Chief Financial Officer
of the Company and WorldCorp from May 1992 until May 1994. Mr. Andrews joined
WorldCorp as Treasurer in August 1987 and was elected Vice President--Finance
and Treasurer of WorldCorp in April 1988. From August 1985 to February 1987, he
was Vice President--Finance of Presidential Airways, a passenger airline. From
September 1980 to August 1985, he was associated with J.P. Morgan & Co., a
banking firm, most recently as Assistant Vice President. He is the brother of
T. Coleman Andrews, III.
John C. Backus, Jr. worked at US Order since its inception in 1990 and
served as its President and Chief Operating Officer until US Order was merged
into InteliData in November 1996. Upon the effective date of the merger, Mr.
Backus became President and Chief Operating Officer of InteliData. Prior to
working with US Order, Mr. Backus worked for six years at WorldCorp and its
subsidiaries holding a variety of executive positions including Vice President
of Corporate Development, Vice President of Finance, and Vice President of Sales
and Marketing at World Airways. Prior to joining WorldCorp, Mr. Backus worked
at Bain & Company, Inc., a worldwide strategy consulting firm, in its consulting
and venture capital groups where he focused on consumer products and services.
Mr. Backus serves on the Board of Directors of InteliData and Home Financial
Network, Inc.
Dato' Wan Malek Ibrahim has served as a Director of the Company since February
1994. Mr. Malek is Managing Director and a member of the Board of Directors of
Malaysian Airlines. He is a Director of MHS and Polypulp Paper Industries
Berhad ("Polypulp"), an industrial paper manufacturer. Pursuant to the
Shareholders Agreement, WorldCorp is obligated to vote its shares to elect two
directors nominated by MHS. Mr. Malek is one of such nominees.
Peter M. Sontag has served as a Director of the Company since February 1994.
Mr. Sontag currently is Partner, Chairman and Chief Executive Officer of
Travelogue, a Travel Management Company. Mr. Sontag served as President of OAG
Travel Services, a travel services related company and a subsidiary of Reed
Travel Group from July 1995 to March 1996. From January 1995 to July 1995, Mr.
Sontag served as Chairman and Chief Executive Officer of Sontag & Associates,
Inc., a company providing advice and counsel to entities interested in worldwide
travel and travel-related growth. From 1986 to 1994, Mr. Sontag served as
Chairman and Chief Executive Officer of USTravel, a travel company he founded in
1986.
Lim Kheng Yew has served as a Director of the Company since February 1994.
Mr. Lim has served as Managing Director and Chief Executive Officer of MHS
since February 1996. Mr. Lim had served as Executive Director of Technology
Resources Industries Berhad ("TRI"), a telecommunications company, since prior
to 1990. He is a Director of MHS, TRI and Polypulp. Mr. Lim is one of the MHS
nominees to the Board.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company operated as a wholly-owned subsidiary of WorldCorp from June 1987
until February 1994 and has operated since February 1994 as a majority owned
subsidiary of WorldCorp. The Company completed an initial public offering of
its Common Stock in October 1995. Approximately 28.8% of the Company's
outstanding Common Stock is owned by public investors. WorldCorp owns 46.3% of
the Company's outstanding Common
47
<PAGE>
Stock. The remaining 24.9% is owned by MHS. Mr. T. Coleman Andrews, III,
the Company's Chairman, serves as Chairman of the Board of WorldCorp.
WorldCorp and the Company historically have utilized a single corporate staff
for administrative services, thus permitting the Company to utilize WorldCorp
management personnel as needed. Effective January 1, 1995, substantially all of
WorldCorp's management personnel became employees of the Company and since such
date, the Company has provided certain administrative services to WorldCorp.
WorldCorp and the Company have entered into a services agreement pursuant to
which the Company and WorldCorp will continue to provide services to each other
at negotiated rates, which the Company believes are comparable to those that
could be obtained on an arms-length basis. In June 1995, the Company borrowed
$1.8 million from WorldCorp pursuant to a demand promissory note with an
interest rate of 13.875%. In July 1995, this note was repaid to WorldCorp.
WorldCorp is subject to an indenture expiring in 2004, that could, under
certain circumstances, restrict the Company's ability to pay dividends to all
shareholders. The indenture is not applicable to World Airways if WorldCorp's
ownership is below 50% of the issued and outstanding shares of Common Stock. As
of September 30, 1997, WorldCorp owned approximately 46.3% of the outstanding
Common Stock. This percentage could increase if the Company purchases shares
from other stockholders. See "Prospectus Summary The Private Placement" and
"Dividend Policy."
Pursuant to the MHS October 1993 Stock Purchase Agreement, the Company and
WorldCorp sold 24.9% of the outstanding shares of Common Stock to MHS for $27.4
million (or $11.00 per share) in February 1994. In August 1994, MHS acquired
32% of the common stock, and assumed management control, of Malaysian Airlines,
one of the Company's largest customers. Effective December 31, 1994, WorldCorp
agreed to pay MHS $8.5 million pursuant to a promissory note due December 31,
1995 in exchange for (i) 5% of the outstanding shares of Common Stock which was
held by MHS, and (ii) the execution of a series of multi-year contracts between
the Company and Malaysian Airlines. WorldCorp paid the $8.5 million note in
full on December 31, 1995. Of the $8.5 million consideration paid by WorldCorp
to MHS, $3.0 million was attributable to certain contract enhancements received
by the Company as a result of such multi-year contracts with Malaysian Airlines.
Such $3.0 million amount is included in the Company's balance sheets in Other
Assets and Deferred Charges and in Contributed Capital.
In connection with the MHS Stock Purchase Agreement, the Company and MHS
executed a stock registration rights agreement, dated October 30, 1993 (the
"Stock Registration Rights Agreement") and the Company, MHS and WorldCorp
executed the Shareholders Agreement. Under the Stock Registration Rights
Agreement, if at any time the Company registers its Common Stock under the
Securities Act, MHS has the right to demand the registration of its shares of
Common Stock. Also, if without the prior written consent of MHS: (1) the
Company sells all or substantially all of its business; or (2) the Company
fundamentally changes its line of business, then under the Shareholders
Agreement, MHS may require WorldCorp to purchase all or part of MHS' shares at
fair market value. Fair market value is defined to be not less than the
aggregate of the costs borne by MHS in acquiring and holding shares of Common
Stock, which currently exceeds the market price of the Common Stock. The
Shareholders Agreement provides that if WorldCorp were to dispose of its
holdings in the Company with the result that WorldCorp's ownership interest in
the Company falls below 51% of the outstanding shares of Common Stock, then MHS
may either sell its shares to a third party or require WorldCorp to sell a pro
rata number of shares held by MHS to the party purchasing WorldCorp's shares.
The Shareholders Agreement also grants MHS a right of first refusal to purchase
shares of Common Stock issued by the Company or sold by WorldCorp to third
parties and to purchase additional shares of Common Stock to maintain its
ownership percentage in the Company. These rights were waived by MHS in
connection with the Company's initial public offering. In addition, the
Shareholders Agreement provides that (i) WorldCorp will vote its shares of
Common Stock to elect the number of directors nominated by MHS that represent
MHS' proportionate interest in the Company (not less than two directors), (ii)
the Company will declare and distribute all dividends properly payable, subject
to the requirements of law and general overall financial prudence, and (iii) the
Board of Directors will hold Board meetings only if a director nominated by MHS
is present and will not approve a sale of substantially all of the business of
the Company, transactions not in the ordinary course of the air transportation
business in excess of $500,000, the winding up of the business, the appointment
of outside auditors, or the appointment of committees of the Board of Directors
or the delegation of authority to such committees, without the consent of MHS,
or the directors nominated by MHS. WorldCorp-nominated directors must abstain
from voting on certain transactions in which WorldCorp or its affiliates have a
48
<PAGE>
beneficial interest. One of the Company's directors, Dato' Wan Malek Ibrahim,
serves as Managing Director of Malaysian Airlines and is a director of MHS.
Another director, Lim Kheng Yew, serves as Managing Director and CEO of MHS.
The Shareholders Agreement terminates if either WorldCorp's or MHS' ownership
interest falls below 5% of the outstanding capital stock of the Company.
The Company presently operates one cargo aircraft and two passenger aircraft
for Malaysian Airlines under multi-year agreements, expiring between 1999 and
2000. During 1996, the Company generated revenues of $105.4 million from
Malaysian Airlines under these and other agreements. The Company leases two
DC10-30 aircraft from Malaysian Airlines under leases that expire in August 1998
and December 1998.
49
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth, as of September 12, 1997, information
concerning the principal amount of Debentures beneficially owned by each Selling
Securityholder which may be offered from time to time pursuant to this
Prospectus. Other than as a result of the ownership or placement of Debentures
or Common Stock, none of the Selling Securityholders has had any material
relationship with the Company within the past three years, except as noted
herein. The table has been prepared based upon information furnished to the
Company by or on behalf of the Selling Securityholders.
<TABLE>
<CAPTION>
Principal Amount Principal Amount
of Debentures of Debentures Percent of
Name Beneficially Owned Being Registered Outstanding Debentures
- ---- ------------------ ---------------- ----------------------
(in thousands) (in thousands)
<S> <C> <C> <C>
The Bank of New York $ 500,000 $ 500,000 1.00%
925 Patterson Plank Road
Secaucus, NJ 07094
BankBoston, N.A. 298,000 298,000 0.60
150 Royal Street
Canton, MA 02021
Bankers Trust Company 13,477,000 13,477,000 26.95
c/o BT Services Tennessee, Inc.
648 Grassmere Park Drive
Nashville, TN 37211
Bear Stearns Securities Corp. 5,150,000 5,150,000 10.30
One Metrotech Center North, 4th Floor
Brooklyn, NY 11201-3862
Chase Manhattan Bank 1,803,000 1,803,000 3.61
Two Chase Manhattan Plaza
5th Floor
New York, NY 10081
Firstar Trust Company 1,000,000 1,000,000 2.00
777 East Wisconsin Avenue
Milwaukee, WI 53202
Fleet Bank of Massachusetts, N.A. 129,000 129,000 0.26
51 Mercedes Way
Edgewood, NJ 11717
First National Bank of Omaha 480,000 480,000 0.96
One First National Center
Omaha, NE 68102
Goldman, Sachs & Co. 1,500,000 1,500,000 3.00
51 Mercedes Way
Edgewood, NJ 11717
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C> <C>
Investors Bank & Trust/M.F. Custody 2,000,000 2,000,000 4.00
89 South Street, 6th Floor
Corp. Action Dept.
Boston, MA 02111
Merrill, Lynch Professional Clearing Corp. 500,000 500,000 1.00
20 Broad Street
New York, NY 10005
Montgomery Securities 500,000 500,000 1.00
51 Mercedes Way
Edgewood, NJ 11717
Morgan Stanley & Co. Incorporated 1,500,000 1,500,000 3.00
One Pierrepont Plaza
7th Floor
Brooklyn, NY 11201
Northern Trust Company 793,000 793,000 1.59
801 S. Canal C-IN
Chicago, IL 60607
Scott & Stringfellow, Inc. 500,000 500,000 1.00
909 E. Main Street
Richmond, VA 23219
Spear, Leeds & Kellogg 500,000 500,000 1.00
120 Broadway
New York, NY 10271-0093
SSB -- Custodian 7,000,000 7,000,000 14.00
Global Proxy Unit, A5NW
P.O. Box 1431
Boston, MA 02105-1631
Wilmington Trust Company 1,500,000 1,500,000 3.00
Rodney Square North
1100 North Market Street
Wilmington, DE 19890-0001
Chase Manhattan Bank/Chemical 9,370,000 9,370,000 18.74
2 Chase Manhattan Plaza
5th Floor
New York, NY 10081
E D & F Man International 200,000 200,000 0.40
440 South Lasalle Street
20th Floor
Chicago, IL 60605-1028
Kelly Asset Management 200,000 200,000 0.40
3000 Colfax Avenue
Suite 222
Denver, CO 80206-1607
</TABLE>
51
<PAGE>
<TABLE>
<S> <C> <C> <C>
Agoura Asset Management 100,000 100,000 0.20
29424 Weeping Willow Drive
Agoura, CA 91301-4135
NV Investments, Inc. 400,000 400,000 0.80
120 Broadway
New York, NY 10271-0002
Oscar Investment Fund 100,000 100,000 0.20
P.O. Box 64
Bowling Green Station
New York, NY 10274-0064
Fingerboard Management 250,000 250,000 0.50
Marie Chaseman 250,000 250,000 0.50
----------- ----------- ------
Total $50,000,000 $50,000,000 100.00%
=========== =========== ======
</TABLE>
Each Selling Securityholder is registering the entire amount of the Debentures
set forth opposite its name above. In addition, each Selling Securityholder is
registering the entire number of Shares which may be issued upon conversion of
the Debentures set forth opposite its name above. The exact number of Shares
which may be issued upon conversion of the Debentures cannot be determined until
the date of such conversion, as the conversion price is subject to adjustment
upon the occurrence of certain dilutive events. See "Description of
Debentures." At the initial conversion price of $8.90 per share, each $1,000
principal amount of Debentures entitles the holder thereof to 112,360 shares of
Common Stock. Further, because the Selling Securityholders may offer pursuant
to this Prospectus all or some part of the Securities which they beneficially
own and because such offer is not being underwritten on a firm commitment basis,
no estimate can be given as to the amount of Securities to be offered for sale
by the Selling Securityholders pursuant to this Prospectus or the amount of
Securities that will be held by the Selling Securityholders upon termination of
the offering pursuant to this Prospectus. See "Plan of Distribution." To the
extent required, the specific amount of Securities to be sold by a Selling
Securityholder in connection with a particular offer pursuant to this Prospectus
will be set forth in an accompanying Prospectus Supplement.
The Company and the Selling Securityholders have agreed to indemnify each
other against certain liabilities arising under the Securities Act. The Company
has agreed to pay all expenses incident to the offer and sale of the Debentures
and Common Stock to the public other than selling commissions and fees. See
"Plan of Distribution."
52
<PAGE>
DESCRIPTION OF DEBENTURES
On August 26, 1997, the Company issued and sold, through the Initial
Purchasers, an aggregate principal amount of $50,000,000 of the Debentures to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act ("Qualified Institutional Buyers") and certain other investors pursuant to
Regulation S under the Securities Act in a private placement. As of the date of
this Prospectus, the Debentures are issued and outstanding under an Indenture
dated as of August 1, 1997 (the "Indenture") between the Company and First Union
National Bank, as trustee (the "Trustee"). The Indenture is included as an
exhibit to the Registration Statement to which this Prospectus is a part. The
following summaries of certain provisions of the Indenture do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Indenture, including the definition therein of
certain terms. Wherever particular sections or defined terms of the Indenture
are referred to, such sections or defined terms are incorporated herein by
reference.
General
The Debentures are unsecured obligations of the Company, are limited to $50.0
million in aggregate principal amount and mature on August 26, 2004. The
Debentures bear interest at the rate of 8% from August 26, 1997 or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semi-annually on February 26 and August 26 of each year, commencing
February 26, 1998, to the Person in whose name the Debenture (or any predecessor
Debenture) is registered at the close of business on the preceding February 11
or August 11, as the case may be. Interest on the Debentures is paid on the
basis of a 360-day year of 12 30-day months.
Principal of, and premium, if any, interest and Liquidated Damages (if any)
on, the Debentures are payable in same day funds (i) in respect of Debentures
held of record by the Depository Trust Company ("DTC") or its nominee on or
prior to the payment dates with respect to such amounts and (ii) in respect of
Debentures held of record by holders other than DTC or its nominee at the office
of the Trustee, or its agent, in New York, New York. The Debentures may be
surrendered for transfer, exchange or conversion at the office of the Trustee,
or its agent, in New York, New York. In addition, with respect to Debentures
held of record by holders other than DTC or its nominee, payment of interest and
Liquidated Damages (if any) may be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no such
account is specified, by check mailed to the address of the persons entitled
thereto as it appears in the Register for the Debentures on the Regular Record
Date for such interest. (Section 301)
The Debentures will be issued only in registered form, without coupons and in
denominations of $1,000 or any integral multiple thereof. (Section 302) No
service charge will be made for any transfer or exchange of the Debentures, but
the Company may require payment of a sum sufficient to cover any tax or other
governmental charge and any other expenses (including the fees and expenses of
the Trustee) payable in connection therewith. (Section 304) The Company is not
required (i) to issue, register the transfer of or exchange any Debentures
during a period beginning at the opening of business 15 days before the day of
the mailing of a notice of redemption and ending at the close of business on the
day of such mailing, or (ii) to register the transfer or exchange of any
Debenture selected for redemption in whole or in part, except the unredeemed
portion of Debentures being redeemed in part.
All monies paid by the Company to the Trustee or any Paying Agent for the
payment of principal of and premium and interest on any Debenture which remain
unclaimed for two years after such principal, premium or interest become due and
payable may be repaid to the Company. Thereafter, the Holder of such Debentures
may, as an unsecured general creditor, look only to the Company for payment
thereof.
The Indenture does not contain any provisions that would provide protection to
Holders of the Debentures against a sudden and dramatic decline in credit
quality of the Company resulting from any takeover, recapitalization or similar
restructuring, except as described below under "Certain Rights to Require
Repurchase of Debentures."
53
<PAGE>
Conversion Rights
The Debentures are convertible into Common Stock at any time after October 25,
1997 and prior to redemption or final maturity, initially at the conversion
price of $8.90 per share. The right to convert Debentures which have been
called for redemption will terminate at the close of business on the second
business day preceding the Redemption Date. (Section 1301) See "Optional
Redemption" below.
The conversion price is subject to adjustment upon the occurrence of any of
the following events: (i) the subdivision, combination or reclassification of
outstanding shares of Common Stock; (ii) the payment in shares of Common Stock
of a dividend or distribution on any class of capital stock of the Company;
(iii) the issuance of rights or warrants to all holders of Common Stock
entitling them to acquire shares of Common Stock at a price per share less than
the Current Market Price (as defined in the Indenture); (iv) the distribution to
holders of Common Stock of shares of capital stock other than Common Stock,
evidences of indebtedness or assets (including securities, but excluding
dividends or distributions paid exclusively in cash and dividends,
distributions, rights and warrants referred to above); (v) a distribution of
cash (excluding any cash portion of a distribution resulting in an adjustment
pursuant to clause (iv) above) to all holders of Common Stock in an aggregate
amount that, together with (A) all other cash distributions made within the 12
months preceding such distribution and (B) any cash and the fair market value of
other consideration payable in respect of any tender offer by the Company or a
subsidiary of the Company for the Common Stock consummated within the 12 months
preceding such distribution, exceeds 12.5% of the Company's market
capitalization (being the product of the Current Market Price times the number
of shares of common Stock then outstanding) on the date fixed for determining
the stockholders entitled to such distribution; and (vi) the consummation of a
tender offer made by the Company or any subsidiary of the Company for the Common
Stock which involves an aggregate consideration that, together with (X) any cash
and other consideration payable in respect of any tender offer by the Company or
a subsidiary of the Company for the Common Stock consummated within the 12
months preceding the consummation of such tender offer and (Y) the aggregate
amount of all cash distributions (excluding any cash portion of a distribution
resulting in an adjustment pursuant to clause (iv) above) to all holders of the
Common stock within the 12 months preceding the consummation of such tender
offer, exceeds 12.5% of the Company's market capitalization at the date of
consummation of such tender offer. (Section 1301) No adjustment of the
conversion price will be required to be made until cumulative adjustments amount
to at least one percent of the conversion price, as last adjusted. Any
adjustment that would otherwise be required to be made shall be carried forward
and taken into account in any subsequent adjustment. (Section 1304)
In addition to the foregoing adjustments, the Company will be permitted to
reduce the conversion price as it considers to be advisable in order that any
event treated for federal income tax purposes as a dividend of stock or stock
rights will not be taxable to the holders of the Common Stock or, if that is not
possible, to diminish any income taxes that are otherwise payable because of
such event. (Section 1304)
In the case of any consolidation or merger of the Company with any other
corporation (other than one in which no change is made in the Common Stock), or
any sale or transfer of all or substantially all of the assets of the Company,
the Holder of any Debenture then outstanding will, with certain exceptions, have
the right thereafter to convert such Debenture only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares of Common Stock into which
such Debenture might have been converted immediately prior to such
consolidation, merger, sale or transfer; and adjustments will be provided for
events subsequent thereto that are as nearly equivalent as practical to the
conversion price adjustments described above. (Section 1311)
Fractional shares of Common Stock will not be issued upon conversion, but, in
lieu thereof, the Company will pay a cash adjustment based upon the then Closing
Price at the close of business on the day of conversion. (Section 1303) If any
Debentures are surrendered for conversion during the period from the opening of
business on any Regular Record Date through and including the next succeeding
Interest Payment Date (except any such Debentures called for redemption), such
Debentures when surrendered for conversion must be accompanied by payment in New
York Clearing House funds of an amount equal to the interest thereon which the
registered Holder on such Regular Record Date is to receive. (Section 1302)
Except as described in the preceding sentence, no interest will be payable by
the Company on converted Debentures with respect to any Interest Payment Date
subsequent to the date of
54
<PAGE>
conversion. (Section 307) No other payment or adjustment for interest or
dividends is to be made upon conversion. (Section 1302)
Subordination
The payment of the principal of and premium, if any, interest and Liquidated
Damages, if any, on the Debentures will, to the extent set forth in the
Indenture, be subordinated in right of payment to the prior payment in full of
all Senior Indebtedness. The Debentures will be senior subordinated
indebtedness of the Company ranking pari passu with all future senior
subordinated indebtedness of the Company and senior to all existing and future
Subordinated Indebtedness of the Company. If there is a payment or distribution
of assets to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors, marshaling of assets or
any bankruptcy, insolvency or similar proceedings of the Company, the holders of
all Senior Indebtedness will be entitled to receive payment in full of all
amounts due or to become due thereon or provision for such payment in money or
money's worth before the Holders of the Debentures will be entitled to receive
any payment in respect of the principal of or premium, if any, interest or
Liquidated Damages, if any, on the Debentures. (Section 1202) In the event of
the acceleration of the Maturity of the Debentures, the holders of all Senior
Indebtedness will first be entitled to receive payment in full in cash of all
amounts due thereon or provision for such payment in money or money's worth
before the Holders of the Debentures will be entitled to receive any payment for
the principal of or premium, if any, interest or Liquidated Damages, if any, on
the Debentures. (Section 1203) No payments on account of principal of or
premium, if any, interest or Liquidated Damages, if any, on the Debentures or on
account of the purchase or acquisition of Debentures may be made if there has
occurred and is continuing a default in any payment with respect to Senior
Indebtedness, any acceleration of the maturity of any Senior Indebtedness or if
any judicial proceeding is pending with respect to any such default. (Section
1204)
Senior Indebtedness is defined in the Indenture as the principal of and
premium, if any, and interest on (a) all indebtedness of the Company for money
borrowed, whether outstanding on the date of execution of the Indenture or
thereafter created, incurred or assumed, except any such other indebtedness that
by the terms of the instrument or instruments by which such indebtedness was
created or incurred expressly provides that it (i) is junior in right of payment
to the Debentures ("Subordinated Indebtedness") or (ii) ranks pari passu in
right of payment with the Debentures, and (b) any amendments, renewals,
extensions, modifications, refinancings and refundings of any of the foregoing.
The term "indebtedness for money borrowed" when used with respect to the Company
is defined to mean (i) any obligation of, or any obligation guaranteed by, the
Company for the repayment of borrowed money (including, without limitation,
fees, penalties and other obligations in respect thereof), whether or not
evidenced by bonds, debentures, notes or other written instruments, and
reimbursement obligations for letters of credit, (ii) any deferred payment
obligation of, or any such obligation guaranteed by, the Company for the payment
of the purchase price of property or assets evidenced by a note or similar
instrument and (iii) any obligations and other liabilities (contingent or
otherwise) of, or any such obligation guaranteed by, the Company for the payment
of rent or other amounts under a lease of property or assets which obligation is
required to be classified and accounted for as a capitalized lease on the
balance sheet of the Company under generally accepted accounting principles.
(Section 101)
The Indenture does not limit or prohibit the incurrence of Senior
Indebtedness. At June 30, 1997, the aggregate amount of Senior Indebtedness
outstanding and the amount of indebtedness and other liabilities of the Company
to which the Debentures are effectively subordinated was $40.8 million
(including $6.7 million attributable to capital lease obligations), no
indebtedness of the Company was outstanding that would have ranked pari passu
with the Debentures, and no indebtedness was outstanding that would have been
Subordinated Indebtedness. The Company also expects to incur Senior
Indebtedness from time to time in the future.
Optional Redemption
The Debentures are redeemable, at the Company's option, in whole or from time
to time in part, at any time on or after August 26, 2000, upon not less than 30
nor more than 60 days' notice mailed to each Holder of Debentures to be redeemed
at its address appearing in the Security Register and prior to Maturity at the
following Redemption Prices (expressed as percentages of the principal amount)
plus accrued interest to the Redemption Date (subject to
55
<PAGE>
the right of Holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date) (Article Eleven).
If redeemed during the 12-month period beginning August 26, in the year
indicated, the redemption price shall be:
<TABLE>
<CAPTION>
Redemption
Year Price
- ---- ----------
<S> <C>
2000 ................................................................ 104.571%
2001 ................................................................ 103.429%
2002 ................................................................ 102.286%
2003 ................................................................ 101.143%
</TABLE>
and thereafter, at a redemption price equal to 100% of the principal amount,
together with accrued interest in each case, to the date of redemption.
No sinking fund is provided for the Debentures.
Consolidation, Merger and Sale of Assets
The Company will not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person unless (a) if applicable, the Person formed by such consolidation
or into which the Company is merged or the Person which acquires or leases all
or substantially all the properties and assets of the Company is a corporation,
limited liability company, partnership or, trust organized and validly existing
under the laws of the United States or any state thereof or the District of
Columbia and expressly assumes payment of the principal of and premium, if any,
and interest on the Debentures and performance and observance of each obligation
of the Company under the Indenture, (b) after consummating such consolidation,
merger, conveyance, transfer or lease, no Default or Event of Default will occur
and be continuing, (c) such consolidation, merger, conveyance, transfer or lease
does not adversely affect the validity or enforceability of the Debentures and
(d) the Company has delivered to the Trustee an Officer's Certificate and an
Opinion of Counsel, each stating that such consolidation, merger, conveyance,
transfer or lease complies with the provisions of the Indenture. (Section 801)
Certain Rights to Require Repurchase of Debentures
In the event of any Repurchase Event (as defined below) occurring on or prior
to Maturity, each Holder of Debentures will have the right, at the Holder's
option, to require the Company to repurchase all or any part of the Holder's
Debentures on the date (the "Repurchase Date") that is 60 days after the date
the Company gives notice of the Repurchase Event as described below at a price
(the "Repurchase Price") equal to 100% of the principal amount thereof, together
with accrued and unpaid interest to the Repurchase Date. (Section 1401) On or
prior to the Repurchase Date, the Company shall deposit with the Trustee or a
Paying Agent an amount of money in same day funds sufficient to pay the
Repurchase Price of the Debentures which are to be repaid on or promptly
following the Repurchase Date. (Section 1403)
Failure by the Company to provide timely notice of a Repurchase Event, as
provided for below, or to repurchase the Debentures when required under the
preceding paragraph will result in an Event of Default under the Indenture
whether or not such repurchase is permitted by the subordination provisions of
the Indenture. (Section 501)
On or before the 60th day after the occurrence of a Repurchase Event, the
Company is obligated to mail to all Holders of Debentures a notice of the
occurrence of such Repurchase Event identifying the event constituting the
Repurchase Event and the date thereof, the Repurchase Date, the date by which
the repurchase right must be exercised, the Repurchase Price for Debentures and
the procedures which the Holder must follow to exercise this
56
<PAGE>
right. To exercise the repurchase right, the Holder of a Debenture must
deliver, on or before the close of business on the Repurchase Date, written
notice to the Company (or an agent designated by the Company for such purpose)
and to the Trustee, of the Holder's exercise of such right, together with the
certificates evidencing the Debentures with respect to which the right is being
exercised, duly endorsed for transfer. (Section 1402)
A "Repurchase Event" shall mean (i) failure by the Company to effect the
repurchase of at least 4.0 million shares of Common Stock within 150 days after
the original issue of the Debentures or (ii) the occurrence of a Change in
Control (as defined below) or a Termination of Trading (as defined below).
(Section 1406)
A "Change in Control" shall occur when: (i) all or substantially all of the
Company's assets are sold as an entirety to any person or related group of
persons; (ii) there shall be consummated any consolidation or merger of the
Company (A) in which the Company is not the continuing or surviving corporation
(other than a consolidation or merger with a wholly owned subsidiary of the
Company in which all shares of Common Stock outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same consideration)
or (B) pursuant to which the Common Stock would be converted into cash,
securities or other property, except in the case of (A) and (B), a consolidation
or merger of the Company in which the holders of the Common Stock immediately
prior to the consolidation or merger have, directly or indirectly, at least a
majority of the total voting power of all classes of capital stock entitled to
vote generally in the election of directors of the continuing or surviving
corporation immediately after such consolidation or merger in substantially the
same proportion as their ownership of Common Stock immediately before such
transaction; (iii) any person, or any persons acting together which would
constitute a "group" for purposes of Section 13(d) of the Exchange Act, together
with any affiliates thereof (excluding, for purposes of this clause, WorldCorp)
shall beneficially own (as defined in Rule 13d-3 under the Securities and
Exchange Act of 1934, as amended) at least 50% of the total voting power of all
classes of capital stock of the Company entitled to vote generally in the
election of directors of the Company; (iv) at any time during any consecutive
two-year period, individuals who at the beginning of such period constituted the
Board of Directors of the Company (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of the Company
then in office; or (v) the Company is liquidated or dissolved or adopts a plan
of liquidation or dissolution; provided, however, that a Change in Control shall
not be deemed to have occurred if either (a) the closing price per share of the
Common Stock for any 10 Trading Days within the period of 20 consecutive Trading
Days ending immediately before the Change in Control shall equal or exceed 105%
of the conversion price in effect on each such Trading Day, or (b) (i) at least
90% of the consideration (excluding cash payments for fractional shares) in the
transaction or transactions constituting the Change in Control consists of
shares of common stock with full voting rights traded on a national securities
exchange or quoted on Nasdaq (or which will be so traded or quoted when issued
or exchanged in connection with such Change in Control) (such securities being
referred to as "Publicly Traded Securities") and as a result of such transaction
or transactions such Debentures become convertible solely into such Publicly
Traded Securities and (ii) the consideration in the transaction or transactions
constituting the Change in Control consists of cash, Publicly Traded Securities
or a combination of cash and Publicly Traded Securities with an aggregate fair
market value (which, in the case of Publicly Traded Securities, shall be equal
to the average closing price of such Publicly Traded Securities during the ten
consecutive Trading Days commencing with the sixth Trading Day following
consummation of the transaction or transactions constituting the Change in
Control) of at least 105% of the Conversion Price in effect on the date
immediately preceding the date of consummation of such Change in Control.
(Section 1406)
A "Termination of Trading" shall occur if the Common Stock (or other common
stock into which the Debentures are then convertible) is neither listed for
trading on a U.S. national securities exchange nor approved for trading on an
established automated over-the-counter trading market in the United States.
(Section 1406)
The Change of Control purchase feature of the Debentures may make more
difficult or discourage a takeover of the Company, and, thus, the removal of
incumbent management.
57
<PAGE>
The right to require the Company to repurchase Debentures as a result of the
occurrence of a Repurchase Event could create an event of default under Senior
Indebtedness of the Company, as a result of which any repurchase could, absent a
waiver, be blocked by the subordination provisions of the Debentures. See
"Subordination." Failure by the Company to repurchase the Debentures when
required will result in an Event of Default with respect to the Debentures
whether or not such repurchase is permitted by the subordination provisions.
The Company's ability to pay cash to the Holders of Debentures upon a repurchase
may be limited by certain financial covenants contained in the Company's Senior
Indebtedness.
In the event a Repurchase Event occurs and the Holders exercise their rights
to require the Company to repurchase Debentures, the Company intends to comply
with applicable tender offer rules under the Exchange Act, including Rules 13e-4
and 14e-1, as then in effect, with respect to any such purchase.
The foregoing provisions would not necessarily afford Holders of the
Debentures protection in the event of highly leveraged or other transactions
involving the Company that may adversely affect Holders. Moreover, certain
events that may involve an actual change of control would not constitute a
"Change of Control" for purposes of the Indenture. In addition, the foregoing
provisions may discourage open market purchases of the Common Stock or a non-
negotiated tender or exchange offer for such stock and, accordingly, may limit a
stockholder's ability to realize a premium over the market price of the Common
Stock in connection with any such transaction.
Rule 144A Information Requirement
The Company has agreed to furnish to the Holders or beneficial holders of the
Debentures and prospective purchasers of the Debentures designated by the
Holders of the Debentures, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act until such time
as the Company registers the Debentures and the Shares for resale under the
Securities Act. (Section 705)
Events of Default
The following are Events of Default under the Indenture with respect to the
Debentures: (a) default in the payment of principal of or premium, if any, on
any Debenture when due (even if such payment is prohibited by the subordination
provisions of the Indenture); (b) default in the payment of any interest on, or
Liquidated Damages with respect to, any Debenture when due, which default
continues for 30 days (even if such payment is prohibited by the subordination
provisions of the Indenture); (c) failure to provide timely notice of a
Repurchase Event as required by the Indenture; (d) default in the payment of the
Repurchase Price in respect of any Debenture on the Repurchase Date therefor
(even if such payment is prohibited by the subordination provisions of the
Indenture); (e) default in the performance, or breach, of any other covenant of
the Company in the Indenture which continues for 60 days after written notice as
provided in the Indenture; (f) default under any bond, debenture, note or other
evidence of indebtedness for money borrowed by the Company or any subsidiary of
the Company or under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any indebtedness for
money borrowed by the Company or any subsidiary of the Company, whether such
indebtedness now exists or shall hereafter be created, which default shall
constitute a failure to pay the principal of indebtedness in excess of
$5,000,000 when due and payable after the expiration of any applicable grace
period with respect thereto or shall have resulted in indebtedness in excess of
$5,000,000 becoming or being declared due and payable prior to the date on which
it would otherwise have become due and payable, without such indebtedness having
been discharged, or such acceleration having been rescinded or annulled, within
a period of 30 days after there shall have been given to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Outstanding Debentures a written notice
specifying such default and requiring the Company to cause such indebtedness to
be discharged or cause such acceleration to be rescinded or annulled; and (g)
certain events in bankruptcy, insolvency or reorganization of the Company or any
Material Subsidiary of the Company. (Section 501)
If an Event of Default with respect to the Debentures shall occur and be
continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Outstanding Debentures then outstanding may declare the
principal of, premium, if any, and interest accrued on the Debentures to the
date of declaration and Liquidated Damages, if any, on all such Debentures to be
due and payable immediately, but if the Company cures all Events of
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Default (except the nonpayment of interest on, premium, if any, and principal of
any Debentures) and certain other conditions are met, such declaration may be
canceled and past defaults may be waived by the holders of a majority in
principal amount of Outstanding Debentures. (Section 502) If an Event of Default
shall occur as a result of an event of bankruptcy, insolvency or reorganization
of the Company or any subsidiary of the Company, the principal of, premium, if
any, accrued and unpaid interest and Liquidated Damages, if any, on the
Debentures shall automatically become due and payable. (Section 502) The Company
is required to furnish to the Trustee annually a statement as to the performance
by the Company of certain of its obligations under the Indenture and as to any
default in such performance. (Section 1004) The Indenture provides that the
Trustee may withhold notice to the Holders of the Debentures of any continuing
default (except in the payment of the principal of or premium, if any, or
interest on any Debentures) if the Trustee considers it in the interest of
Holders of the Debentures to do so. (Section 602)
Modification, Amendments and Waivers
Except as provided in the next two succeeding paragraphs, the Indenture or the
Debentures may be amended or supplemented with the consent of the Holders of not
less than a majority in principal amount of the Debentures, and any past default
hereunder and its consequences may be waived by the Holders of not less than a
majority in principal amount of the Debentures. (Article Nine and Section 513)
Without the consent of the Holder of each Outstanding Debenture affected, an
amendment or supplement may not: (i) change the Maturity of the principal of, or
any installment of interest on, any Debenture, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or change the place of payment where, or the coin or
currency in which, any Debenture or any premium or interest thereon is payable,
or impair the right to institute suit for the enforcement of any such payment on
or after the Maturity thereof (or, in the case of redemption, on or after the
Redemption Date), or adversely affect the right to convert any Debenture as
provided in the Indenture, or modify the provisions of the Indenture relating to
the Holder's right to require repurchase, or the provisions of the Indenture
with respect to the subordination of the Debentures, in a manner adverse to the
Holders; (ii) reduce the percentage in principal amount of the Debentures, the
consent of whose Holders is required for any such supplemental indenture, or the
consent of whose Holders is required for any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder and their
consequences provided for in the Indenture; (iii) make any change in the
Indenture relating to waivers of past Defaults or the right of Holders of
Debentures to receive payments of principal of, premium, if any, interest or
Liquidated Damages, if any, on the Debentures; or (iv) modify any of the
provisions of the Indenture relating to amendment, supplement or waiver (except
to increase any such percentage or to provide that certain other provisions of
the Indenture cannot be modified or waived without the consent of the Holder of
each Debenture affected). (Section 902)
Modifications and amendments of the Indenture may be made by the Company and
the Trustee without the consent of the Holders to: (a) cause the Indenture to be
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"); (b) evidence the succession of another Person to the Company
and the assumption by any such successor of the covenants of the Company herein
and in the Debentures; (c) add to the covenants of the Company for the benefit
of the Holders or an additional Event of Default, or surrender any right
or power conferred upon the Company; (d) secure the Debentures; (e) make
provision with respect to the conversion rights of Holders in the event of a
consolidation, merger or sale of assets involving the Company, as required by
the Indenture; (f) evidence and provide for the acceptance of appointment by a
successor Trustee with respect to the Debentures; (g) cure any ambiguity,
correct or supplement any provision which may be defective or inconsistent with
any other provision, or make any other provisions with respect to matters or
questions arising under the Indenture which shall not be inconsistent with the
provisions of the Indenture, provided, however, that no such modifications or
amendment may adversely affect the interest of Holders in any material respect.
(Section 901)
Book-Entry, Delivery and Form
The Debentures that were sold to Qualified Institutional Buyers in the Private
Placement in reliance on Rule 144A under the Securities Act have been issued in
the form of one global Debenture (the "Rule 144A Global Security") which was
deposited with, or on behalf of, DTC and registered in the name of DTC or its
nominee (the "Global Security Holder"). (Section 201) Except as set forth
below, the Rule 144A Global Security may be
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transferred, in whole and not in part, only to DTC or another nominee of DTC.
Investors may hold their beneficial interests in the Rule 144A Global Security
directly through DTC if they are Participants in such system or indirectly
through organizations that are Participants in such system. (Section 304)
The Debentures originally sold to "accredited investors" (as defined in Rule
501(a)(1), (2), (3), (5), (6) or (7) under the Securities Act and referred to as
"Accredited Investors") who are not Qualified Institutional Buyers have been
issued and registered in certificated form without coupons and bear a legend
containing restrictions on transfers (the "Certificated Securities").
Certificated Securities are not eligible to be exchanged for an interest in a
Global Security. (Section 201)
The Debentures that were sold outside of the United States in the Private
Placement in reliance on Regulation S under the Securities Act initially are
represented by the Regulation S Temporary Global Security. The Regulation S
Temporary Global Security was deposited on behalf of the subscribers therefor
with a custodian for DTC. The Regulation S Temporary Global Security is
registered in the name of DTC or its nominee for credit to the subscribers'
respective accounts at Morgan Guaranty Trust Company of New York, Brussels
office, as operator of Euroclear or Cedel Bank. Beneficial interests in the
Regulation S Temporary Global Security may be held only through Euroclear or
Cedel Bank. (Section 201)
Within a reasonable period of time after the expiration of the 40-day
restricted period referred to in Rule 903(c)(3) of Regulation S under the
Securities Act (the "40-day restricted period"), the Regulation S Temporary
Global Security will be exchanged for the Regulation S Permanent Global Security
upon delivery to DTC of certification of compliance with the transfer
restrictions applicable to the Debentures and pursuant to Regulation S under the
Securities Act as provided in the Indenture. (Section 304) The Regulation S
Permanent Global Security will be deposited with a custodian and will be
registered in the name of a nominee of DTC. (Section 201) Cedel Bank and
Euroclear will hold beneficial interests in the Regulation S Permanent Global
Security on behalf of their participants through their respective depositaries,
which in turn will hold such beneficial interests in the Regulation S Permanent
Global Security in participants' securities accounts in the depositaries' names
on the books of DTC.
Prior to and after the expiration of the 40-day restricted period, a
beneficial interest in the Regulation S Temporary Global Security may be
transferred to a person who takes delivery in the form of an interest in the
Rule 144A Global Security only upon receipt by the Trustee of a written
certification from the transferor in the form required by the Indenture to the
effect that such transfer is being made (i) to a person whom the transferor
reasonably believes is a Qualified Institutional Buyer in a transaction meeting
the requirements under the Securities Act (in which case such certificate must
be accompanied by an opinion of counsel regarding the availability of such
exemption) and (ii) in accordance with all applicable securities laws of any
state of the United States or any other jurisdiction. Beneficial interests in
the Rule 144A Global Security may be transferred to a person who takes delivery
in the form of an interest in the Regulation S Temporary or Permanent Global
Security, whether before, on or after the 40-day restricted period, only upon
receipt by the Trustee of a written certification from the transferor in the
form required by the Indenture to the effect that such transfer is being made in
accordance with Regulation S. Any beneficial interest in one of the Global
Securities that is transferred to a person who takes delivery in the form of an
interest in another Global Security will, upon transfer, cease to be an interest
in such Global Security and become an interest in such other Global Security
and, accordingly, will thereafter be subject to all transfer restrictions and
other procedures applicable to beneficial interests in such other Global
Security for as long as it remains such an interest. (Section 304)
Because of time zone differences, the securities accounts of Euroclear or
Cedel Bank participants (each, a "Member Organization") purchasing an interest
in a Global Security from a Depositary Participant that is not a Member
Organization will be credited during the securities settlement processing day
(which must be a business day for Euroclear or Cedel Bank, as the case may be)
immediately following the Depositary settlement date. Transactions in interests
in a Global Security settled during any securities settlement processing day
will be reported to the relevant Member Organization on the same day. Cash
received in Euroclear or Cedel Bank as a result of sales of interests in a
Global Security by or through a Member Organization to a Depositary Participant
that is not a Member Organization will be received with value on the Depositary
settlement date, but will not be available in the relevant Euroclear or Cedel
Bank cash account until the business day following settlement at the Depositary.
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Subject to compliance with the transfer restrictions applicable to the Global
Securities described above and in the Indenture, cross-market transfers between
holders of interests in the Rule 144A Global Security, on the one hand, and
direct or indirect account holders at a Member Organization holding interests in
the Regulation S Permanent Global Security, on the other, will be effected
through the Depositary in accordance with the Depositary's rules and the rules
of Euroclear or Cedel Bank, as applicable. Such cross-market transactions will
require, among other things, delivery of instructions by such Member
Organization to Euroclear or Cedel Bank, as the case may be, in accordance with
the rules and procedures and within deadlines (Brussels time) established in
Euroclear or Cedel Bank, as the case may be. If the transaction complies with
all relevant requirements, Euroclear or Cedel Bank, as the case may be, will
then deliver instructions to its depositary to take action to effect final
settlement on its behalf.
DTC is a limited-purpose trust company that was created to hold securities for
its participating organizations (collectively, the "Participants" or "DTC's
Participants") and to facilitate the clearance and settlement of transactions in
such securities between Participants through electronic book-entry changes in
accounts of its Participants. DTC's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's system
is also available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants" or "DTC's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through DTC's
Participants or DTC's Indirect Participants.
Pursuant to procedures established by DTC (i) upon the issuance of the Rule
144A Global Securities, the Regulation S Temporary Global Securities or the
Regulation S Permanent Global Securities (each, a "Global Security" and
together, the "Global Securities"), DTC will credit the accounts of Participants
designated by the Initial Purchaser with portions of the principal amount of the
Global Securities and (ii) ownership of the Debentures evidenced by the Global
Securities will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC (with respect to the interests
of the Depositary's Participants), DTC's Participants and DTC's Indirect
Participants. Prospective purchasers are advised that the laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer Debentures
evidenced by the Global Securities will be limited to such extent.
So long as the Global Security Holder is the registered owner of any
Debentures, the Global Security Holder will be considered the sole Holder under
the Indenture of any Debentures evidenced by the Global Securities. Beneficial
owners of Debentures evidenced by the Global Securities will not be considered
the owners or holders thereof under the Indenture for any purpose, including
with respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. Neither the Company nor the Trustee will have any
responsibility or liability for any aspect of the records of DTC or for
maintaining, supervising or reviewing any records of DTC relating to the
Debentures.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Debentures registered in the name of the
Global Security Holder on the applicable Record Date will be payable by the
Trustee to or at the direction of the Global Security Holder in its capacity as
the registered holder under the Indenture. Under the terms of the Indenture,
the Company and the Trustee may treat the persons in whose names Debentures,
including the Global Securities, are registered as the owners thereof for the
purpose of receiving such payments. Consequently, neither the Company nor the
Trustee has or will have any responsibility or liability for the payment of such
amounts to beneficial owners of Debentures (including principal, premium, if
any, interest and Liquidated Damages, if any). The Company believes, however,
that it is currently the policy of DTC to immediately credit the accounts of the
relevant Participants with such payments, in amounts proportionate to their
respective holdings of beneficial interests in the relevant security as shown on
the records of DTC. Payments by Participants and Indirect Participants to the
beneficial owners of Debentures will be governed by standing instructions and
customary practice and will be the responsibility of Participants or Indirect
Participants.
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Payments; Certifications by Holders of the Regulation S Temporary Global
Security
A holder of a beneficial interest in the Regulation S Temporary Global
Security must provide Euroclear or Cedel Bank, as the case may be, with a
certificate in the form required by the Indenture certifying that the beneficial
owner of the interest in the Regulation S Temporary Global Security is either
not a U.S. Person (as defined below) or has purchased such interest in a
transaction that is exempt from the registration requirements under the
Securities Act and is in the process of obtaining a beneficial interest in the
Rule 144A Global Security in exchange for its beneficial interest in the
Regulation S Temporary Global Security (the "Regulation S Certificate"), and
Euroclear or Cedel Bank, as the case may be, must provide to the Trustee (or the
Paying Agent if other than the Trustee) a certificate in the form required by
the Indenture, prior to (i) the payment of interest or principal with respect to
such holder's beneficial interest in the Regulation S Temporary Global Security
and (ii) any exchange of such beneficial interest for a beneficial interest in
the Regulation S Permanent Global Security. "U.S. Person" means (i) any
individual resident in the United States, (ii) any partnership or corporation
organized or incorporated under the laws of the United States, (iii) any estate
of which any executor or administrator is a U.S. Person (other than an estate
governed by foreign law and of which at least one executor or administrator is a
non-U.S. Person who has sole or shared investment discretion with respect to
its assets), (iv) any trust of which any trustee is a U.S. Person (other than a
trust of which at least one trustee is a non-U.S. Person who has sole or shared
investment discretion with respect to its assets and no beneficiary of the trust
(and no settlor if the trust is revocable) is a U.S. Person), (v) any agency or
branch of a foreign entity located in the United States, (vi) any non-
discretionary or similar account (other than an estate or trust) held by a
dealer or other fiduciary for the benefit or account of a U.S. Person, (vii)
any discretionary or similar account (other than an estate or trust) held by a
dealer or other fiduciary organized, incorporated or (if an individual) resident
in the United States (other than such an account held for the benefit or account
of a non-U.S. Person) and (viii) any partnership or corporation organized or
incorporated under the laws of a foreign jurisdiction and formed by a U.S.
Person principally for the purpose of investing in securities not registered
under the Securities Act (unless it is organized or incorporated, and owned, by
accredited investors within the meaning of Rule 501(a) under the Securities Act
who are not natural persons, estates or trusts); provided, however, that the
term "U.S. Person" shall not include (A) a branch or agency of a U.S. Person
that is located and operating outside the United States for valid business
purposes as a locally regulated branch or agency engaged in the banking or
insurance business, (B) any employee benefit plan established and administered
in accordance with the law, customary practices and documentation of a foreign
country and (C) the international organizations set forth in Section 902(c)(7)
of Regulation S under the Securities Act and any other similar international
organizations, and their agencies, affiliates and pension plans. (Section 304)
Certificated Securities
Subject to certain conditions, any person having a beneficial interest in the
Global Securities may, upon request to the Trustee, exchange such beneficial
interest for Debentures evidenced by registered, definitive Certificated
Securities. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof). All such Certificated
Securities would be subject to the legend requirements as provided in the
Indenture. In addition, if (i) the Company notifies the Trustee in writing that
DTC is no longer willing or able to act as a depositary and the Company is
unable to locate a qualified successor within 90 days or (ii) the Company, at
its option, notifies the Trustee in writing that it elects to cause the issuance
of Debentures in the form of Certificated Securities under the Indenture, then,
upon surrender by the Global Security Holder of its Global Securities,
Debentures in such form will be issued to each person that the Global Security
Holder and DTC identify as being the beneficial owner of the related Debentures.
(Section 304)
Neither the Company nor the Trustee will be liable for any delay by the Global
Security Holder or DTC in identifying the beneficial owners of Debentures and
the Company and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the Global Security Holder or DTC for all
purposes.
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Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Debentures represented
by the Global Security (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Security Holder. With respect to
Certificated Securities, the Company will make all payments of principal,
premium, if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the Debentures represented by the Global Security are eligible for
trading in the PORTAL Market to trade in the Depositary's Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
Debentures will, therefore, be required by the Depositary to be settled in
immediately available funds. The Company expects that secondary trading in the
Certificated Securities also will be settled in immediately available funds.
Registration Rights; Liquidated Damages
Pursuant to a registration rights agreement dated as of August 26, 1997 (the
"Registration Rights Agreement") the Company agreed for the benefit of the
Holders, that (i) it would, at its cost, within 90 days after the closing of the
Debenture Closing (the "Debenture Closing"), file a shelf registration statement
(the "Shelf Registration Statement") with the Commission with respect to resales
of the Debentures and the Shares, (ii) it will use its commercially reasonable
efforts to cause such Shelf Registration Statement to be declared effective by
the Commission within 150 days after the Debenture Closing, and (iii) it will
use its commercially reasonable efforts to keep such Shelf Registration
Statement continuously effective under the Securities Act until, subject to
certain exceptions specified in the Registration Rights Agreement, the second
anniversary of the Debenture Closing. The Company will be permitted to suspend
use of the prospectus that is part of the Shelf Registration Statement during
certain periods of time and in certain circumstances relating to pending
corporate developments and public filings with the Commission and similar
events. If (a) the Company fails to file the Shelf Registration Statement
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) such Shelf Registration Statement is not declared effective
by the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date") or (c) the Shelf Registration Statement is declared
effective but thereafter ceases to be effective in connection with resales of
Transfer Restricted Securities (as defined below) during the periods specified
in the Registration Rights Agreement (each such event referred to in clauses (a)
through (c) above a "Registration Default"), then the Company will pay
Liquidated Damages to each Holder, with respect to the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $0.05 per week (such amount to be pro rated on a daily basis) per
$1,000 aggregate principal amount of the Debentures held by such Holder. The
amount of the Liquidated Damages will increase by an additional $0.05 per week
(such amount to be pro rated on a daily basis) per $1,000 aggregate principal
amount of the Debentures held by each Holder with respect to each subsequent 90-
day period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages of $0.25 per week (such amount to be pro rated on a
daily basis) per $1,000 aggregate principal amount of the Debentures held by
each Holder. All accrued Liquidated Damages will be paid by the Company on each
Interest Payment Date in cash. Such payment will be made to the Holder of the
Global Securities by wire transfer of immediately available funds or by federal
funds check and to Holders of Certificated Securities, if any, by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Debenture and each Share until the earlier of (i) the date on which such
Debenture or Share has been effectively registered under the Securities Act and
disposed of pursuant to an effective registration statement, (ii) the date on
which such Debenture or Share is distributed to the public pursuant to Rule 144
under the Securities Act (or any similar provision then in effect) or is
saleable pursuant to Rule 144(k) under the Securities Act and all legends
thereon relating to transfer restrictions have been removed, or (iii) the date
on which such Debenture or Share ceases to be outstanding.
Holders of Debentures will be required to deliver information to be used in
connection with the Shelf Registration Statement within time periods set forth
in the Registration Rights Agreement in order to have their
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Debentures or Shares included in the Shelf Registration Statement and benefit
from the provisions regarding Liquidated Damages set forth above.
The Company will provide to each registered holder of the Debentures or the
Shares, who is named in the prospectus and who so requests in writing, copies of
the prospectus which will be a part of such Shelf Registration Statement, notify
each such holder when such Shelf Registration Statement for the Debentures and
Shares has become effective and will take certain other actions as are required
to permit unrestricted resales of the Debentures and Shares. A holder of
Debentures or Shares that sells such securities pursuant to a Shelf Registration
Statement generally will be required to be named as a selling security holder in
the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such a holder (including
certain indemnification and contribution rights and obligations).
The foregoing summary of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the provisions of the Registration Rights
Agreement. The Registration Rights Agreement is included as an exhibit to the
Registration Statement to which this Prospectus is a part.
Governing Law
The Indenture and Debentures will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to such state's
conflicts of laws principles. (Section 112)
Information Concerning the Trustee
The Company and its subsidiaries may maintain deposit accounts and conduct
other banking transactions with the Trustee in the ordinary course of business.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain United States federal income
tax considerations to holders of the Debentures. This discussion is based upon
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service ("IRS") rulings, and judicial decisions
now in effect, all of which are subject to change (possibly with retroactive
effect) or different interpretations.
This discussion does not deal with all aspects of United States federal income
taxation that may be important to holders of the Debentures or shares of Common
Stock and does not deal with tax consequences arising under the laws of any
foreign, state or local jurisdiction. This discussion is for general
information only, and does not purport to address all tax consequences that may
be important to particular purchasers in light of their personal circumstances,
or to certain types of purchasers (such as certain financial institutions,
insurance companies, tax-exempt entities, dealers in securities or persons who
hold the Debentures or Common Stock in connection with a straddle) that may be
subject to special rules. This discussion assumes that each holder holds the
Debentures and the shares of Common Stock received upon conversion thereof as
capital assets, and that the Debentures are properly characterized as debt
instruments for federal income tax purposes.
For the purpose of this discussion, a "Non-U.S. Holder" refers to any holder
who is not a United States person. The term "United States person" means a
citizen or resident of the United States, a corporation or partnership created
or organized in the United States or any state thereof, an estate the income of
which is includible in income for United States federal income tax purposes
regardless of its source, or a trust subject to primary supervision by a court
in the United States and control by one or more United States fiduciaries.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THEIR OWNERSHIP AND
DISPOSITION OF THE DEBENTURES, INCLUDING CONVERSION OF THE DEBENTURES, AND THE
EFFECT THAT THEIR PARTICULAR CIRCUMSTANCES MAY HAVE ON SUCH TAX CONSEQUENCES.
Ownership of the Debentures
Interest on Debentures. Interest on Debentures will be taxable to a holder as
ordinary interest income in accordance with the holder's methods of tax
accounting at the time that such interest is accrued or received. The
Debentures were not issued with original issue discount ("OID") within the
meaning of the Code.
Adjustments to Conversion Price. Adjustments to the conversion price as
provided in the Indenture in most cases will not constitute a taxable event for
a Holder. However, certain corporate transactions, such as distributions of
assets to holders of Common Stock, may cause a deemed, taxable distribution to
the holders of the Debentures when the conversion price is adjusted to reflect
such a transaction.
Sale or Exchange of Debentures or Shares of Common Stock. In general, a
holder of Debentures will recognize gain or loss upon the sale, redemption,
retirement or other disposition of the Debentures measured by the difference
between the amount realized (except to the extent attributable to the payment of
accrued interest) and the holder's adjusted tax basis in the Debentures. A
holder's tax basis in Debentures generally will equal the cost of the Debentures
to the holder, increased by the amount of any market discount previously taken
into income by the holder or decreased by any bond premium amortized by the
holder with respect to the Debentures. (For the basis and holding period of
shares of Common Stock, see "Conversion of Debentures.") In general, each holder
of Common Stock into which the Debentures have been converted will recognize
gain or loss upon the sale, exchange, or other disposition of the Common Stock
under rules similar to those applicable to the Debentures. Subject to the
market discount rules discussed below, the gain or loss on the disposition of
the Debentures or shares of Common Stock generally will be capital gain or loss.
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Conversion of Debentures. A holder of Debentures will not recognize gain or
loss on the conversion of the Debentures into shares of Common Stock, except
upon the receipt of cash in lieu of a fractional share. The holder's tax basis
in the shares of Common Stock received upon conversion of the Debentures will
equal the holder's aggregate basis in the Debentures exchanged therefor (less
any portion thereof allocable to a fractional share). The holding period of the
shares of Common Stock received by the holder upon conversion of Debentures will
include the period during which the holder held the Debentures prior to the
conversion. Cash received in lieu of a fractional share of Common Stock should
be treated as a payment in exchange for such fractional share. Gain or loss
recognized on the receipt of cash paid in lieu of a fractional share generally
will equal the difference between the amount of cash received and the amount of
tax basis allocable to the fractional share.
Market Discount. The resale of Debentures may be affected by the "market
discount" provisions of the Code. Market discount on a Debenture will generally
equal the amount, if any, by which the principal amount of the Debenture exceeds
the holder's acquisition price. Subject to a de minimis exception, these
provisions generally require a holder of a Debenture acquired at a market
discount to treat as ordinary income any gain recognized on the disposition of
such Debenture to the extent of the "accrued market discount" at the time of
disposition. If a Debenture with accrued market discount is converted into
Common Stock pursuant to the conversion feature, the amount of such accrued
market discount generally will be taxable as ordinary income upon disposition of
the Common Stock. Market discount on a Debenture will be treated as accruing on
a straight-line basis over the term of such Debenture or, at the election of the
holder, under a constant-yield method. A holder of a Debenture acquired at a
market discount may be required to defer the deduction of a portion of the
interest on any indebtedness incurred or maintained to purchase or carry the
Debenture until the Debenture is disposed of in a taxable transaction, unless
the holder elects to include market discount in income as it accrues.
Amortizable Premium. A purchaser of a Debenture at a premium over its stated
principal amount, plus accrued interest, generally may elect to amortize such
premium ("Section 171 premium") from the purchase date to the Debenture's
maturity date under a constant-yield method that reflects semiannual compounding
based on the Debenture's payment period. Amortizable premium, however, will not
include any premium attributable to a Debenture's conversion feature. The
premium attributable to the conversion feature is the excess, if any, of the
Debenture's purchase price over what the Debenture's fair market value would be
if there were no conversion feature. Amortized Section 171 premium is treated
as an offset to interest income on a Debenture and not as a separate deduction.
Certain Federal Income Tax Considerations Applicable to Non-U.S. Holders
Interest on Debentures. Generally, interest paid on the Debentures to a Non-
U.S. Holder will not be subject to United States federal income tax if: such
interest is not effectively connected with the conduct of a trade or business
within the United States by such Non-U.S. Holder; the Non-U.S. Holder does not
actually or constructively own 10% or more of the total voting power of all
classes of stock of the Company entitled to vote and is not a "controlled
foreign corporation" with respect to which the Company is a "related person"
within the meaning of the Code; and the beneficial owner, under penalty of
perjury, certifies to the payor that the owner is not a United States person and
provides the owner's name and address. If certain requirements are satisfied,
the certification described above may be provided by a securities clearing
organization, a bank, or other financial institution that holds customers'
securities in the ordinary course of its trade or business. For this purpose,
the holder of Debentures would be deemed to own constructively the Common Stock
into which it could be converted. A holder that is not exempt from tax under
these rules generally will be subject to United States federal income tax
withholding at a rate of 30% unless (i) the interest is effectively connected
with the conduct of a United States trade or business, in which case the
interest will be subject to the United States federal income tax on net income
that applies to United States persons generally, or (ii) an applicable income
tax treaty provides for a lower rate of, or exemption from, withholding tax.
Sale or Exchange of Debentures or Shares of Common Stock. A Non-U.S. Holder
generally will not be subject to United States federal income tax on gain
recognized upon the sale or other disposition of Debentures or shares of Common
Stock unless the gain is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder or, in the case of a
Non-U.S. Holder who is a nonresident alien individual and holds the Common Stock
as a capital asset, such holder is present in the United States for 183 or more
days in the taxable
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year. However, if the Company were to become a "United States real property
holding corporation," a Non-U.S. Holder may be subject to federal income tax
with respect to gain realized on the disposition of Debentures or shares of
Common Stock. In that case, any withholding tax withheld pursuant to the rules
applicable to dispositions of a "United States real property interest" will be
creditable against such Non-U.S. Holder's United States federal income tax
liability and may entitle such Non-U.S. Holder to a refund upon furnishing
required information to the IRS.
Conversion of Debentures. A Non-U.S. Holder generally will not be subject to
United States federal income tax on the conversion of a Debenture into shares of
Common Stock. To the extent a Non-U.S. Holder receives cash in lieu of a
fractional share on conversion, such cash may give rise to gain that would be
subject to the rules described above with respect to the sale or exchange of a
Debenture or Common Stock.
Dividends on Shares of Common Stock. Generally, any distribution on shares of
Common Stock to a Non-U.S. Holder will be subject to United States federal
income tax withholding at a rate of 30% unless (i) the dividend is effectively
connected with the conduct of trade or business within the United States by the
Non-U.S. Holder, in which case the dividend will be subject to the United
States federal income tax on net income that applies to United States persons
generally (and, with respect to corporate holders under certain circumstances,
the branch profits tax), or (ii) an applicable income tax treaty provides for a
lower rate of, or exemption from, withholding tax. A Non-U.S. Holder may be
required to satisfy certain certification requirements in order to claim a
reduction of or exemption from withholding under the foregoing rules.
Information Reporting and Backup Withholding
U.S. Holders. Information reporting and backup withholding may apply to
payments of principal, interest or dividends on or the proceeds of the sale or
other disposition of the Debentures or shares of Common Stock with respect to
certain noncorporate U.S. Holders. Such U.S. Holders generally will be
subject to backup withholding at a rate of 31% unless, among other conditions,
the U.S. Holder supplies a taxpayer identification number, and certain other
information, certified under penalties of perjury, to the payor or otherwise
establishes an exemption from backup withholding. Any amount withheld under
backup withholding is allowable as a credit against the U.S. Holder's federal
income tax.
Non-U.S. Holders. Generally, information reporting and backup withholding of
United States federal income tax at a rate of 31% may apply to payments of
principal, interest and dividends to Non-U.S. Holders if the payee fails to
certify that the holder is a Non-U.S. person. The 31% backup withholding tax
will not apply to interest or dividends subject to the 30% withholding tax
discussed above.
The payment of the proceeds of the disposition of Debentures or shares of
Common Stock to or through the United States office of a United States or
foreign broker will be subject to information reporting and backup withholding
unless the owner provides a required certification or otherwise establishes an
exemption. The proceeds of the disposition by a Non-U.S. Holder of Debentures
or Common Stock to or through a foreign office of a broker generally will not be
subject to backup withholding. However, if the broker is a U.S. person, a
controlled foreign corporation for United States tax purposes, or a foreign
person 50% or more of whose gross income from all sources for certain periods is
from activities that are effectively connected with a United States trade or
business, information reporting generally will apply unless the broker has
documentary evidence in its files of the Non-U.S. Holder's foreign status and
has no actual knowledge to the contrary.
Proposed regulations would modify the information reporting and backup
withholding tax rules for Non-U.S. Holders and, if adopted, generally would be
effective for payments made after December 31, 1997.
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DESCRIPTION OF CAPITAL STOCK
World Airways' authorized capital stock consists of 40,000,000 shares of
Common Stock, par value $0.001 per share, and 5,000,000 shares of preferred
stock, par value $0.001 per share (the "Preferred Stock") of which 8,003,064
shares of Common Stock and no shares of Preferred Stock are outstanding as of
the date hereof. All of the issued and outstanding shares of Common Stock are
fully paid and nonassessable.
The following summary description of World Airways' capital stock accurately
describes the material rights of holders of World Airways' capital stock but
does not purport to be complete and is qualified in its entirety by reference to
World Airways' Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and Amended and Restated Bylaws (the "Bylaws").
Common Stock
The holders of validly issued and outstanding shares of Common Stock are
entitled to one vote per share on all matters to be voted upon by stockholders.
At a meeting of stockholders at which a quorum is present, a majority of the
votes cast decides all questions, unless the matter is one upon which a
different vote is required by express provision of law or World Airways'
Certificate of Incorporation or Bylaws. There is no cumulative voting with
respect to the election of directors (or any other matter), but World Airways'
Board of Directors is classified, which means that the holders of a majority of
the shares at a meeting at which a quorum is present can elect all of the
directors of the class then to be elected if they choose to do so, and, in such
event, the holders of the remaining shares would not be able to elect any
directors of that class. Under Delaware law, if WorldCorp owns a majority of
the outstanding Common Stock, WorldCorp will be able to approve certain actions
by written consent without a meeting of the stockholders of World Airways,
subject to (i) WorldCorp's obligation to vote its shares of Common Stock for two
directors nominated by MHS, (ii) to the requirement that one director nominated
by MHS be present to constitute a quorum at a meeting of the Board of Directors
and (iii) the requirement that MHS' approval be obtained for certain actions.
See "Certain Relationships and Transactions."
The holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities.
Subject to the rights of holders of Preferred Stock, if any, in the event of a
liquidation, dissolution or winding up of World Airways, holders of Common Stock
are entitled to participate equally, share for share, in all assets remaining
after payment of liabilities.
Preferred Stock
World Airways' Certificate of Incorporation authorizes the Board of Directors
to issue up to 5,000,000 shares of Preferred Stock in one or more series and to
establish such relative voting, dividend, redemption, liquidation, conversion
and other powers, preferences, rights, qualifications, limitations and
restrictions as the Board of Directors may determine without further approval of
the stockholders of World Airways. The issuance of Preferred Stock by the Board
of Directors could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a person or group to gain control of World Airways.
The issuance of any series of Preferred Stock, and the relative powers,
preferences, rights, qualifications, limitations and restrictions of such
series, if and when established, will depend upon, among other things, the
future capital needs of World Airways, the then-existing market conditions and
other factors that, in the judgment of the Board of Directors, might warrant the
issuance of Preferred Stock. At the date of this Prospectus, there are no
plans, agreements or understandings relative to the issuance of any shares of
Preferred Stock.
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Limitation on Voting by Foreign Owners
The Certificate of Incorporation defines "Foreign Ownership Restrictions" as
applicable provisions of law and regulations relating to ownership or control of
U.S. air carriers (as amended or modified from time to time). Such
restrictions currently require that no more than 25% of the voting stock of
World Airways be owned or controlled, directly or indirectly, by Foreign
Citizens for purposes of the Foreign Ownership Restrictions, and that World
Airways' President and at least two-thirds of its directors be U.S. citizens.
The Certificate of Incorporation and Bylaws provide that no shares of capital
stock may be voted by or at the direction of Foreign Citizens, unless such
shares are registered on the Foreign Stock Record. World Airways' Bylaws
further provide that no shares will be registered on the Foreign Stock Record if
the amount so registered would exceed the Foreign Ownership Restrictions.
Registration on the Foreign Stock Record is made in chronological order based on
the date World Airways receives a written request for registration. MHS owns
approximately 24.9% of the outstanding Common Stock and such shares are
registered on the Foreign Stock Record.
Delaware Law and Certain Charter and Bylaw Provisions
Certain provisions of the General Corporation Law of the State of Delaware and
of World Airways' Certificate of Incorporation and Bylaws, summarized in the
following paragraphs, may be considered to have an anti-takeover effect and may
delay, deter or prevent a tender offer, proxy contest or other takeover attempt
that a stockholder might consider to be in such stockholder's best interest,
including such an attempt as might result in payment of a premium over the
market price for shares held by stockholders.
Delaware Anti-takeover Law. World Airways, a Delaware corporation, is subject
to the provisions of the General Corporation Law of the State of Delaware,
including Section 203. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which such person became an interested stockholder unless: (i) prior to such
date, the Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; or (ii) upon becoming an interested stockholder, the stockholder
then owned at least 85% of the voting stock, as defined in Section 203; or (iii)
subsequent to such date, the business combination is approved by both the Board
of Directors and by holders of at least 66 2/3% of the corporation's
outstanding voting stock, excluding shares owned by the interested stockholder.
For these purposes, the term "business combination" includes mergers, asset
sales and other similar transactions with an "interested stockholder." An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, within the prior three years, did own) 15% or more of the
corporation's voting stock. Although Section 203 permits a corporation to elect
not to be governed by its provisions, World Airways to date has not made this
election.
Classified Board of Directors. The Certificate of Incorporation provides for
the Board of Directors to be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the Board
of Directors will be elected each year. Classification of the Board of
Directors expands the time required to change the composition of a majority of
directors and may tend to discourage an acquisition proposal for World Airways.
Moreover, under the General Corporation Law of the State of Delaware, in the
case of corporations having a classified Board of Directors, the stockholders
may remove a director only for cause unless the corporation elects otherwise in
its charter. World Airways' Certificate of Incorporation and Bylaws provide for
removal of directors only with cause.
Special Meetings of Stockholders; Action by Consent. World Airways' Bylaws
provide that special meetings of stockholders may be called only by the Chairman
of the Board of Directors or by the Secretary at the request in writing of a
majority of the members of the Board of Directors of World Airways. World
Airways' Bylaws also provide that any action required to be taken at any annual
or special meeting of stockholders may be taken without a meeting, without prior
notice and without a vote upon the written consent of the minimum number of
stockholders necessary to authorize such action.
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Advance Notice Requirements for Stockholder Proposals and Director
Nominations. World Airways' Bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or a special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal executive office
of World Airways, not less than 60 days prior to the scheduled annual meeting
regardless of any postponements, deferrals or adjournments of the meeting. The
Bylaws also specify certain requirements pertaining to the form and substance of
a stockholder's meeting. These provisions may preclude some stockholders from
making nominations for directors at an annual or special meeting or from
bringing other matters before the stockholders at a meeting.
Indemnification. World Airways' Certificate of Incorporation provides that
directors and officers of World Airways will be indemnified by World Airways to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of World Airways.
Limitation of Liability. The Certificate of Incorporation provides that
directors of World Airways will not be personally liable for monetary damages to
World Airways for certain breaches of their fiduciary duty as directors, unless
they violated their duty of loyalty to World Airways or its stockholders, acted
in bad faith, knowingly or intentionally violated the law, authorized illegal
dividends or redemptions or derived an improper personal benefit from their
action as directors. This provision does not affect the availability of
equitable remedies or non-monetary relief, such as an injunction or rescission
for breach of the duty of care. In addition, the provision applies only to
claims against the director arising out of his role as a director and not in any
other capacity (such as an officer or employee of World Airways). Furthermore,
liability of a director for violations of the federal securities laws will not
be limited by this provision. Directors are not, however, liable for monetary
damages arising from decisions involving violations of the duty of care which
could be deemed grossly negligent.
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PLAN OF DISTRIBUTION
The Selling Securityholders may sell all or a portion of the Debentures and
the Shares offered hereby from time to time while the Registration Statement of
which this Prospectus is a part remains effective. Pursuant to the Registration
Rights Agreement, the Company is obligated to maintain the effectiveness of the
Registration Statement for a period of two years from the completion of the
Private Placement or, if shorter, when (i) all the Securities have been sold
pursuant to the Registration Statement, (ii) all the Securities have been
distributed to the public pursuant to Rule 144 under the Securities Act or are
saleable pursuant to Rule 144(k) under the Securities Act or (iii) the date on
which there ceases to be any outstanding Securities. The Selling
Securityholders may sell Debentures or Shares on terms to be determined at the
times of such sales through customary brokerage channels, negotiated
transactions or by a combination of theses methods, at fixed prices that may be
changed, at market prices then prevailing or at negotiated prices then
obtainable. There is no assurance that the Selling Securityholders will sell
any or all of the Debentures or Shares offered pursuant to this Prospectus.
Each of the Selling Securityholders reserves the right to accept and, together
with its agents from time to time, to reject in whole or in part any proposed
purchase of the Debentures or Shares to be made directly or through agents. The
Company will not receive any of the proceeds from the sale of Debentures or
Shares pursuant to this Prospectus. The aggregate proceeds to the Selling
Securityholders from the sale of the Debentures and the Shares offered by the
Selling Securityholders hereby will be the purchase price of such Debentures or
Shares less any discounts or commissions.
The Company has been advised by the Selling Securityholders that the Selling
Securityholders, acting as principals for their own account, may sell Debentures
or Shares from time to time directly to purchasers. Alternatively, the Selling
Securityholders may, from time to time, sell Debentures or Shares through
agents, dealers or underwriters to be designated by the Selling Securityholders
from time to time who may receive compensation in the form of underwriting
discounts, commissions or concessions from the Selling Securityholders and the
purchasers of the Debentures or Shares for whom they may act as agent. To the
extent required, the aggregate principal amount of the Debentures and the number
of Shares to be sold, the names of the Selling Securityholders, the purchase
price, the name of any agent, dealer or underwriter and any applicable
commissions with respect to a particular offer will be set forth in an
accompanying Prospectus Supplement or, if appropriate, a post-effective
amendment to the Registration Statement of which this Prospectus is a part. The
Selling Securityholders and any agents, broker-dealers or underwriters that
participate with the Selling Securityholders in the distribution of the
Debentures or the Shares may be deemed to be "underwriters" within the meaning
of the Securities Act, in which event any discounts, commissions or concessions
received by such broker-dealers, agents or underwriters and any profit on the
resale of the Debentures or the Shares purchased by them may be deemed to be
underwriting discounts or commissions under the Securities Act.
A Selling Securityholder may elect to engage a broker or dealer to effect
sales in one or more of the following transactions: (a) block trades in which
the broker or dealers so engaged will attempt to sell the Securities as agent by
may position and resell a portion of the block as principal to facilitate the
transaction, (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus, and (c) ordinary
brokerage transactions and transactions in which the broker solicits purchases.
In effecting sales, brokers and dealers engaged by Selling Securityholders may
arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from Selling Securityholders in amounts to be
negotiated (and, if such broker-dealer acts as agent for the purchaser of such
Securities, from such purchaser). Broker-dealers may agree with the Selling
Securityholders to sell a specified number of such Securities at a stipulated
price, and, to the extent such broker-dealer is unable to do so acting as agent
for a Selling Securityholder, to purchase as principal any unsold Securities at
the price required to fulfill the broker-dealer commitment to such Selling
Securityholder. Broker-dealers who acquire Securities as principal may
thereafter resell such Securities from time to time in transactions (which may
involve crosses and block transaction and sales to and through other broker-
dealers, including transactions of the nature described above) in the over-the-
counter market or otherwise at prices and on terms then prevailing at the time
of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such Securities commissions as described above.
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The Securities originally issued by the Company in the Private Placement
contained legends as to their restricted transferability. Upon the
effectiveness of the Registration Statement of which this Prospectus is a part,
these legends will no longer be necessary. Upon the transfer by the Selling
Securityholders of any of the Securities, new certificates representing such
Securities will be issued to the transferee, free of any such legends.
To comply with the securities laws of certain states, if applicable, the
Debentures and the Shares will be sold in such states only through registered or
licensed brokers or dealers. In addition, in certain states the Debentures and
the Shares may not be offered or sold unless they have been registered or
qualified for sale in such state or an exemption from the registration or
qualification requirement is available and is complied with.
The Company will not receive any of the proceeds from the offering of the
Debentures and Shares by the Selling Securityholders hereby and will pay all
expenses incident to the offering and sale of the Debentures and the Shares to
the public other than underwriting discounts, selling commissions and fees.
Pursuant to the Registration Rights Agreement, the Company and the Selling
Securityholders have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act.
Prior to the date hereof, there has been no public market for the Debentures
and there can be no assurance regarding the future development of a market for
the Debentures. The Debentures are eligible for trading on the PORTAL Market;
however, no assurance can be given as to the liquidity of, or trading market
for, the Debentures. The Company has been advised by the Initial Purchasers
that they intend to make a market in the Debentures. However, the Initial
Purchasers are not obligated to do so and any market-making activities with
respect to the Debentures may be discontinued at any time without notice.
Accordingly, no assurance can be given as to the liquidity of or the trading
market for the Debentures.
In addition, any securities covered by this Prospectus which qualify for sale
pursuant to Rule 144 or rule 144A of the Securities Act may be sold under Rule
144 or Rule 144A rather than pursuant to this Prospectus. There is no assurance
that any Selling Securityholder will sell any or all of the Debentures or Shares
described herein, and any Selling Security Holder may transfer, devise or gift
such securities by other means not described herein.
The Debentures were originally sold to the Initial Purchasers on August 26,
1997 in a private placement at face value less approximately 3% offering
expenses. The Company agreed to indemnify and hold such Initial Purchasers
harmless against certain liabilities under the Securities Act that could arise
in connection with the sale of the Debentures by them. The Company and the
Selling Securityholders are obligated to indemnify each other against certain
liabilities arising under the Securities Act.
For additional information concerning the registration rights of Selling
Securityholders pursuant to which this Registration Statement is filed, see
"Description of the Debentures--Registration Rights; Liquidated Damages."
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for World
Airways by Hunton & Williams, Richmond, Virginia.
EXPERTS
The financial statements and schedule of World Airways as of December 31, 1995
and 1996 and for each of the years in the three-year period ended December 31,
1996, have been incorporated by reference herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein and upon the
authority of said firm as experts in accounting and auditing.
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AVAILABLE INFORMATION
World Airways is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by World Airways may be inspected and copied at the public
reference facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices:
Seven World Trade Center, 13th Floor, New York, New York 10048; and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and copies
of such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. In addition, such material can also be obtained from the
Commission's Web site at http://www.sec.gov. World Airways' Common Stock is
traded on Nasdaq under the symbol "WLDA."
The Company has filed with the Commission the Registration Statement on Form
S-3 under the Securities Act for the offering of the Securities made by this
Prospectus. This Prospectus, filed as part of the Registration Statement, does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information about the Company and
the Securities offered pursuant to this Prospectus, refer to the Registration
Statement and the exhibits and schedules thereto, all of which may be inspected
without charge or copied at the Commission's offices (at the locations described
above) and copies of which may be obtained at prescribed rates from the Public
Reference Section of the Commission (at the locations described above).
Statements made in this Prospectus about the contents of any contract, agreement
or document are not necessarily complete and in each instance reference is made
to the copy of such contract, agreement or document filed as an exhibit to the
Registration Statement and each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents have been filed with the Commission by the Company and
are hereby incorporated by reference into this Prospectus: (i) World Airways'
Annual Report on Form 10-K for the fiscal year ended December 31, 1996, (ii)
World Airways' Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997 and June 30, 1997, all filed pursuant to Section 13 or 15(d) of the
Exchange Act, (iii) World Airways Current Reports on Form 8-K dated July 7,
1997, July 14, 1997 and October 2, 1997, and (iv) the description of World
Airways' Common Stock contained in World Airways' Registration Statement on Form
8-A, filed with the Commission on August 8, 1995 pursuant to Section 12 of the
Exchange Act. All other documents filed by World Airways with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of this offering shall be deemed
to be incorporated by reference herein and shall be deemed to be a part hereof
from the date of filing of such reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
World Airways will provide without charge to each person to whom a Prospectus
is delivered, on the written or oral request of such person, a copy of any or
all of the documents referred to above which have been or may be incorporated by
reference into this Prospectus, other than certain exhibits to such documents.
Requests for such copies should be directed to: Investor Relations, World
Airways, Inc., 13873 Park Center Road, Suite 490, Herndon, Virginia 20171
(telephone: (703) 834-9200).
73
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No dealer, salesperson, or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company, or any Selling Security
Holder. This Prospectus does not constitute an offer to sell, or a solicitation
of an offer to buy, to any person in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any date subsequent to
the date hereof.
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TABLE OF CONTENTS
Page
----
Prospectus Summary.............................................................3
Risk Factors..................................................................11
Use Of Proceeds...............................................................20
Price Range Of Common Stock...................................................20
Price Range Of Debentures.....................................................21
Dividend Policy...............................................................21
Capitalization................................................................22
Selected Financial And Operating Data.........................................23
Management's Discussion And Analysis Of Financial
Conditions And Results Of Operations.......................................25
Business......................................................................35
Management....................................................................46
Certain Relationships And Transactions........................................47
Selling Securityholders.......................................................50
Description Of Debentures.....................................................53
Certain United States Federal Income Tax Consequences.........................65
Description Of Capital Stock..................................................68
Plan Of Distribution..........................................................71
Legal Matters.................................................................72
Experts.......................................................................72
Available Information.........................................................73
Incorporation Of Certain Information By Reference.............................73
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$50,000,000
WORLD AIRWAYS, INC.
8% Convertible
Senior Subordinated
Debentures Due 2004
PROSPECTUS
November 13, 1997
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