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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1998
Registration No. 333- 39673
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================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
Post-Effective Amendment No. 1 to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________
WORLD AIRWAYS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 94-1358276
(State or Other Jurisdiction of 13873 PARK CENTER ROAD, SUITE 490 (I.R.S. Employer
Incorporation or Organization) HERNDON, VIRGINIA 20171 Identification No.)
(703) 834-9200
</TABLE>
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
_________________________
RUSSELL L. RAY, JR.
President
AND CHIEF EXECUTIVE OFFICER
WORLD AIRWAYS, INC.
WASHINGTON DULLES INTERNATIONAL AIRPORT
13873 PARK CENTER ROAD, SUITE 490
HERNDON, VIRGINIA 20171
(703) 834-9200
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
COPIES TO:
DAVID M. CARTER
HUNTON & WILLIAMS
RIVERFRONT PLAZA, EAST TOWER
951 EAST BYRD STREET
RICHMOND, VIRGINIA 23219-4074
(804) 788-8200
_________________________
Approximate date of commencement of the proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment, please check the following
box. _________
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. *
----
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective statement for the same
offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box._________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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$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 June 22, 1998, the last reported
sale price of the Common Stock on Nasdaq was $5.125 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 March 31, 1998, Senior Indebtedness was $34.3
million (including $4.6 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. 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 any agent, dealer or
underwriter, the amount of expenses of the offering and any applicable
commission or
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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 9 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 June 24, 1998
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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 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, a substantial portion of which are
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.
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________________________________________________________________________________
On June 17, 1998, Mr. T. Coleman Andrews, III resigned as Chairman of World
Airways and left his board seat to accept a position as the Chief Executive
Officer of South African Airways. Mr. Russell L. Ray, Jr., the President and
Chief Executive Officer of World Airways, was elected as the new chairman,
replacing Mr. Andrews.
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 used 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"), dated August 20, 1997, 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 received an opinion from Furman Selz LLC that
the terms of the Agreement were 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 its Common Stock from WorldCorp
for approximately $24.7 million in cash in accordance with the terms of the
Agreement. At December 31, 1997, WorldCorp and Malaysian Helicopter Services
International Limited ("MHS") owned approximately 46.3% and 24.9% of World
Airways, respectively. The remaining shares were publicly traded. In accordance
with a shareholders agreement (the "Shareholders Agreement"), dated as of
February 3, 1994, as amended, among WorldCorp, MHS and the Company, 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. Therefore, as a result of the purchase by World
Airways of 3,227,000 shares of its Common Stock from WorldCorp, MHS had the
right to sell, and accordingly sold, 773,000 shares of its World Airways Common
Stock to the Company for approximately $5.9 million, effective January 23, 1998.
Therefore, effective January 23, 1998, WorldCorp and MHS own approximately 51.2%
and 16.8%, respectively, of World Airways.
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________________________________________________________________________________
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 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, 1997 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 1998 and
beyond to differ materially from those expressed in any forward looking
statements made by, or on behalf of, World Airways.
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________________________________________________________________________________
THE OFFERING
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 March 31, 1998, Senior
Indebtedness of the Company was $34.3
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."
________________________________________________________________________________
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________________________________________________________________________________
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
Notes.............................. has been no established 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. The
Common Stock is traded on Nasdaq under the
symbol "WLDA." See "Plan of Distribution."
RISK FACTORS
For a discussion of certain factors that should be considered by prospective
investors, see "Risk Factors."
________________________________________________________________________________
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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. World Airways incurred substantial debt
and lease commitments during the past four years in connection with its issuance
of the Debentures and 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 March 31, 1998, the Company had outstanding long-term debt and
capital leases of $70.7 million and notes payable and current maturities of long
term obligations of $13.6 million. In addition, the Company has significant
future long-term obligations under aircraft lease obligations relating to its
aircraft.
The Company currently has incurred 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, 1997 would
have been 1.35 to 1 compared to 1.60 to 1 before the Private Placement. See
"Prospectus Summary--The Private Placement."
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)
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World Airways' financial position may restrict its ability to pursue new
business opportunities and limit its flexibility in responding to changing
business conditions.
Liquidity and Capital Resources
World Airways' cash and cash equivalents at March 31, 1998 and December 31,
1997 were $10.7 million and $25.9 million, respectively. As is common in the
airline industry, World Airways operates with a working capital deficit. At
March 31, 1998, World Airways' current assets were $36.9 million and current
liabilities were $52.7 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 March 31, 1998, World Airways had purchased 770,000 shares of Common Stock
at an aggregate cost of approximately $7.9 million pursuant to such program.
The Company does not intend to purchase any additional shares at this time.
On September 18, 1997, the Company purchased 3,227,000 shares of its Common
Stock from WorldCorp for approximately $24.7 million. In accordance with the
Shareholders Agreement dated as of February 3, 1994, as amended, among
WorldCorp, MHS and the Company, if WorldCorp's ownership interest in the Company
falls below 51% of the outstanding shares of Common Stock, then MHS may either
sell its shares to a third party or require WorldCorp to sell a prorata number
of shares held by MHS to the party purchasing WorldCorp's shares. Therefore, as
a result of the purchase of 3,227,000 shares of Common Stock by World Airways
from WorldCorp, MHS had the right to sell, and accordingly sold, 773,000 shares
of Common Stock to World Airways for approximately $5.9 million, effective
January 23, 1998. See "Prospectus Summary--The Private Placement" and
"Description of Debentures--Certain Rights to Require Repurchase of
Debentures."
Subsequent to year end 1997, World Airways loaned WorldCorp $2.0 million
which was used by WorldCorp to pay debt obligations. See "--Control by
WorldCorp; Potential Conflicts of Interest."
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 has relied heavily on its contracts with Malaysian
Airline System Berhad ("Malaysian Airlines" or "MAS"), Philippine Airlines, Inc.
("Philippine Airlines"), Garuda Indonesia ("Garuda") and the USAF. For the
quarter ending March 31, 1998, these customers provided approximately 20%, 10%,
22% and 37%, respectively, of the Company's revenues and 20%, 12%, 25% and 24%,
respectively, of total block hours. For the year of 1997, these customers
provided 21%, 31%, 10% and 25%, respectively, of World Airways' revenues and
23%, 34%, 11% and 16%, 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.
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See "Business--Customers."
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. In
February 1998, World Airways' contract with Philippine Airlines expired.
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.
For a description of customer contracts see "Business--Customers."
Geographic Concentration
The Company derives a significant percentage of its revenues and block
hours from its operations in the Pacific Rim region. Any further economic
decline or any military or political disturbance in this area may interfere with
the Company's ability to provide service in this area. In 1997, the affects of
the adverse economic conditions in Malaysia and Indonesia and other countries in
the Asia Pacific Region included a national liquidity crisis, significant
depreciation in the value of the ringgit and rupiah, higher domestic interest
rates, reduced opportunity for refinancing or refunding of maturing debts, and a
general reduction in spending throughout the region. These conditions and
similar conditions in other countries in the Asia Pacific Region could have a
material adverse effect on the operations of Malaysian Airlines and Garuda, and
therefore on the operations of the Company.
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 income for the year ended
December 31, 1997 of $16.9
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million, there can be no assurance that World Airways will be able to generate
operating income for 1998 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 March 31, 1998, the
aggregate amount of Senior Indebtedness outstanding was approximately $34.3
million (including $4.6 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. 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."
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 in 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
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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. A significant portion of World Airways' contract backlog at March 31,
1998, relates to its multi-year contracts with Malaysian Airlines which is
subject to the financial difficulties associated with the adverse economic
conditions in Malaysia and the Asia Pacific region. In addition, the Company has
substantial uncontracted capacity in the third and fourth quarters of 1998 and
beyond. See "Business--Customers." 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 position and results of operations 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
World Airways' strategy is to attempt to ensure that each of the aircraft
in its 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.
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.
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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. 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 began 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.
Shareholders Agreement with MHS; Limitation on Voting by Foreign Citizens
MHS currently owns 16.8% of the outstanding Common Stock of World Airways.
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
other 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 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.
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<PAGE>
Employee Relations
World Airways' flight attendants are represented by the International
Brotherhood of Teamsters (the "Teamsters") under a four-year collective
bargaining agreement which expires in August 2000. World Airways' flight
attendants have argued that the "scope clause" of the collective bargaining
agreement had been violated by World Airways and 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 denied
in 1997 the Teamsters' 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. Subsequently, in
1997, the flight attendants challenged and filed "scope clause" grievances with
respect to four separate wet lease contracts. The Company and the Teamsters are
presently in discussions regarding these grievances. At this time, however,
World Airways can give no assurance that these discussions will be successful
and the grievances will not be submitted to formal arbitration. World Airways
can provide no assurances as to how the resolution of this matter 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 that will become amendable in July
1998. Approximately 35% of the Company's employees are covered under this
collective bargaining agreement. The Company expects to begin negotiations in
the third quarter of 1998 and cannot predict the outcome of the negotiations or
their possible impact on World Airways' financial condition or results of
operations. 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, 1997, World Airways had net operating loss carryforwards
("NOLs") for federal income tax purposes of $92.2 million ($27.8 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. While World Airways believes that
as of March 31, 1998, no ownership change has occurred since the 1991 ownership
change, the application of the Internal Revenue Code (the "Code") in this area
is subject to interpretation by the Internal Revenue Service (the "IRS"). 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 Offering") or the Common Stock of the Company's
stockholders, including conversions of a portion of the outstanding WorldCorp
debentures into Common Stock, 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.
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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 1998, World Airways' flight operations associated with the Hadj
pilgrimage occurred from February 28 to May 12. 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.
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 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. A claim has been filed in Germany
against the Company by a tour operator seeking approximately $3.5 million in
compensation related to the cancellation of a summer program in 1996. The
Company believes it has substantial defenses to this action, although no
assurance can be given of the eventual outcome of this litigation.
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.
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
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<PAGE>
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 a 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 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 Securities Exchange Act of 1934, as
amended (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 March 31, 1998, WorldCorp owned approximately 51.2% of the
outstanding World Airways Common Stock. WorldCorp is a holding company that, as
of March 31, 1998,
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owned positions in two companies: InteliData and World Airways. On April 20,
1998, WorldCorp consummated a transaction pursuant to which it acquired an 80%
interest in Paper Acquisition Corp. ("Paper"), a Delaware corporation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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 World Airways
Common Stock, and such sales, or the threat of such sales, could have a material
adverse effect on the market price of the World Airways Common Stock. All of the
shares of World Airways Common Stock owned by WorldCorp are pledged as
collateral for certain borrowings. 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.
A subsidiary of WorldCorp, WorldCorp Acquisition, Inc., created in
connection with the abovementioned Paper acquisition, entered into promissory
notes which contain various restrictive covenants, including dividend
restrictions on WorldCorp and its subsidiaries, including World Airways.
The Company loaned WorldCorp $1.75 million on February 27, 1998 and an
additional $0.25 million subsequent to March 31, 1998, which was used by
WorldCorp to pay debt obligations. The loan was originally collateralized by one
million shares of the Company's Common Stock owned by WorldCorp and bore
interest at prime plus 2.5%. After WorldCorp failed to make the required payment
on April 28, 1998, WorldCorp and the Company entered into, and subsequently
completed, negotiations to restructure the loan. The restructured loan calls for
WorldCorp to increase the interest rate effective April 28, 1998 to 12% as
compared to prime plus 2.5% in the original loan and to substitute 1,860,396
shares of its InteliData common stock and 500,000 shares of its World Airways
Common Stock as collateral for the loan, rather than the prior collateral
package of 1,000,000 shares of World Airways Common Stock. If WorldCorp reduces
the loan principal, World Airways will return a pro rata amount of the
collateral.
Year 2000
The Company has begun a comprehensive review of its computer system to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a major system failure or miscalculations.
The Company presently believes that, with modifications to existing software and
converting to new software, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted. However, if such modifications and conversion are not completed in a
timely manner, the Year 2000 problem may have a material impact on the
operations of the Company. The Company has not yet estimated the cost of
modifying its computer systems.
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.
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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--Regulatory Matters."
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.
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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
Fourth Quarter.................................................................. 9 1/2 6 3/8
1998
First Quarter................................................................... 7 1/6 5 1/8
Second Quarter (through June 19)................................................ 6 1/8 4 1/8
</TABLE>
PRICE RANGE OF DEBENTURES
The Debentures were originally issued on August 26, 1997. As of the date
hereof, there is no established public market for the Debentures, although the
Debentures have been eligible for trading in the PORTAL Market.
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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 its Common Stock will depend upon the
results of operations, financial condition and capital expenditure plans of the
Company, provisions of certain financing instruments as well as such other
factors as the Board of Directors, in its sole discretion, may consider
relevant.
Under the terms of the Shareholders Agreement among the Company, WorldCorp,
and MHS, the Company has agreed to declare and distribute all dividends properly
payable, subject to the requirements of law and general overall financial
prudence. The Credit Agreement with BNY Financial Corporation, as amended in
March 1998, the "Credit Agreement," contains restrictions on the Company's
ability to pay dividends or make any distributions of Common Stock in excess of
5% of the total aggregate outstanding amount of stock, except that the Company
may make quarterly dividends so long as in any six month period, such dividends
do not exceed 50% of the Company's aggregate net income for the previous six
months.
In connection with the aforementioned acquisition of Paper, WorldCorp
Acquisition entered into promissory notes which contain various restrictive
covenants, including dividend restrictions on WorldCorp and its subsidiaries,
including World Airways.
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. The Company is currently restricted
from paying dividends under the provisions of the WorldCorp 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 March 31, 1998, WorldCorp owned approximately 51.2% of the outstanding Common
Stock. See "Prospectus Summary--The Private Placement."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, the Company repurchased 3,227,000 shares of its Common Stock
from WorldCorp. See "Prospectus Summary--The Private Placement." At December
31, 1997, WorldCorp and MHS owned 46.3% and 24.9%, respectively, of the
outstanding Common Stock of World Airways. The balance was publicly traded.
Effective January 23, 1998, the Company purchased 773,000 shares of its Common
Stock from MHS. As a result, as of March 31, 1998, WorldCorp and MHS own 51.2%
and 16.8%, respectively, of the outstanding Common Stock of World Airways, with
the balance publicly traded.
On August 26, 1997, the Company completed the Private Placement, issuing
$50.0 million of 8% convertible senior subordinated debentures due in 2004. The
Debentures were subsequently registered with the Securities and Exchange
Commission. The Debentures are unsecured obligations, convertible into shares of
the Company's Common Stock at $8.90 per share, subject to adjustment in certain
events, and subordinated to all present and future senior indebtedness of the
Company. In the event of a Change in Control of the Company, as defined, the
holders of the Debentures could require the Company to repurchase the
outstanding Debentures. The Debentures are not redeemable by the Company prior
to August 26, 2000. The Company used the net proceeds of the Private Placement
to repurchase approximately 4.0 million shares of its Common Stock, repay
certain indebtedness, increase working capital and for general corporate
purposes.
In connection with the Private Placement, the Company and WorldCorp,
entered into the Agreement on August 20, 1997 for the purchase by World Airways
of up to 4.0 million shares of Common Stock owned by WorldCorp at a purchase
price of $7.65 per share. On September 18, 1997, the Company purchased 3,227,000
shares of its Common Stock from WorldCorp for approximately $24.7 million. In
accordance with the Shareholders Agreement dated as of February 3, 1994, as
amended, among WorldCorp, MHS and the Company, 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
prorata number of shares held by MHS to the party purchasing WorldCorp's shares.
Therefore, as a result of the purchase of 3,227,000 shares of Common Stock by
World Airways from WorldCorp, MHS had the right to sell, and accordingly sold,
773,000 shares of Common Stock to World Airways for approximately $5.9 million,
effective January 23, 1998.
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 March 31, 1998, World Airways had purchased 770,000 shares of Common Stock
at an aggregate cost of approximately $7.9 million pursuant to such program. The
Company does not intend to purchase any additional shares at this time.
On April 20, 1998, WorldCorp consummated a transaction pursuant to which it
acquired an 80% interest in Paper Acquisition Corp., a Delaware corporation
("Paper"). Pursuant to the transaction, (i) WorldCorp exchanged seven-year
warrants to acquire 35% (after the exercise of such warrants and the
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WorldCorp Acquisition Corp. options described below) of the issued and
outstanding capital stock of WorldCorp Acquisition Corp. a Delaware corporation
("WorldCorp Acquisition"), held by WorldCorp for certain of the shares of Paper
held by the Paper shareholders (the warrants are exercisable after one-year, at
an exercise price of 125% of the estimated fair market value of the WorldCorp
Acquisition stock at April 20, 1998 and payable with a seven-year, full-
recourse, interest only note)(ii) WorldCorp contributed all of its shares of
World Airways and the Paper shares received above, to WorldCorp Acquisition
Corp., in exchange for 80% of the issued and outstanding capital stock of
WorldCorp Acquisition and (iii) the holders of Paper contributed their shares of
capital stock of Paper in exchange for (A) 20% of the issued and outstanding
capital stock of WorldCorp Acquisition, (B) the assumption of approximately $15
million of debt, net of cash and investments, of Paper, (C) $15 million of 8%
interest only promissory notes of WorldCorp Acquisition due in April 2003, (D)
$1 million of 8% promissory notes of WorldCorp Acquisition due in March 1999 and
(E) an earn-out based on the earnings before interest, taxes, depreciation and
amortization of Paper during the next five years. The earn-out is payable,
including interest at 10%, in September 2002. WorldCorp has pledged all of its
shares of common stock of both WorldCorp Acquisition and InteliData, and
WorldCorp Acquisition has pledged all of its shares of common stock of both
World Airways and Paper to the current Paper shareholders to collateralize the
notes and the earn-out. One million shares of World Airways Common Stock owned
by WorldCorp were previously pledged to secure a loan of approximately $2.0
million from World Airways to WorldCorp. Such loan was restructured where
WorldCorp agreed to replace the previously agreed-to collateral package of 1
million shares of its World Airways Common Stock with 1,860,396 shares of
InteliData common stock and 500,000 shares of its World Airways Common Stock.
Under the restructured loan, if WorldCorp reduces the loan principal, World
Airways will return a pro rata amount of the collateral. After repayment of the
loan and release of the World Airways and InteliData shares, such shares will
become subject to the pledge to the former Paper shareholders. The notes contain
various restrictive covenants, including dividend restrictions on WorldCorp and
its subsidiaries, limitations on transfers of cash to WorldCorp, as well as
cross-default provisions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Total block hours decreased 2,905 hours, or 25%, to 8,909 hours in the
first quarter of 1998 from 11,814 hours in 1997, with an average of 12.0
available aircraft per day in 1998 compared to 13.4 in 1997. This decrease is
due to one less aircraft in 1998 versus 1997 as well as low first quarter cargo
wet lease aircraft utilization in 1998 in comparison to four aircraft in high
utilization PAL flying in 1997. Average daily utilization (block hours flown per
day per aircraft) was 8.3 hours in 1998 and 9.8 hours in 1997. In 1998, wet
lease contracts accounted for 73% of total block hours, a decrease from 89% in
1997 due to continuous AMC flying in 1998 versus redeployment to Garuda
Indonesia for Hadj flying in 1997. Total operating revenues decreased $9.5
million, or 12%, to $69.2 million in 1998 from $78.7 million in 1997.
Operating Revenues. Revenues from flight operations decreased $9.5
million, or 13%, to $68.9 million in 1998 from $78.4 million in 1997. This
decrease corresponds primarily to a decrease in block hours flown in
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<PAGE>
1998 compared to 1997, partially offset by a shift in business during 1998 with
an increase in full service operations from wet lease operations.
Operating Expenses. Total operating expenses decreased $1.6 million, or 2%,
in 1998 to $70.8 million from $72.4 million in 1997.
Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft cost, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Flight operations expenses increased $0.3 million, or 2%, in
1998 to $16.7 million from $16.4 million in 1997. This increase resulted
primarily from a shift to full service flying offset by a slight decrease
related to cockpit crew headcount and training due to a decrease in the number
of aircraft in the fleet and in block hours.
Maintenance expenses decreased $1.1 million, or 7%, in 1998 to $15.6
million from $16.7 million in 1997. This decrease resulted primarily from the
decrease in the number of aircraft from 13 to 12 and a reduction in overall
hours flown, offset by an additional maintenance accrual of $1.4 million
relating to an engine overhaul in the first quarter of 1998. The Company expects
its maintenance expenses to increase in 1998 due to escalations in the specified
rates per hour under the Company's maintenance agreement.
Aircraft costs decreased $3.4 million, or 14%, in 1998 to $21.3 million
from $24.7 million in 1997. This decrease resulted primarily from the return of
two Pratt & Whitney engines in the fourth quarter of 1997 and one MD-11 aircraft
in the third quarter of 1997, and a decrease in aircraft insurance as a result
of a reduction in insurance policy rates.
Fuel expenses increased $2.4 million, or 80%, in 1998, to $5.4 million from
$3.0 million in 1997. This increase is due primarily to an increase in military
contract fuel prices and a higher volume of military fuel uplifts.
Promotions, sales and commissions increased $0.4 million in 1998, or 17%,
to $2.7 million from $2.3 million in 1997. This increase resulted primarily from
expenses incurred in connection with increased revenues relating to increased
Air Mobility Command flying.
Depreciation and amortization increased $0.2 million, or 10%, in 1997 to
$2.3 million from $2.1 million in 1997. This increase resulted primarily from an
increase in the depreciation of DC-10 and MD-11 engines offset by a decrease in
the depreciation of DC-10 leasehold improvements.
General and administrative expenses decreased $0.4 million, or 6%, in 1998
to $6.4 million from $6.8 million in 1997. This decrease was primarily due to a
reduction in legal expenses offset by an increase in general insurance.
Interest expense increased $0.6 million, or 50%, in 1998 to $1.8 million
from $1.2 million in 1997. This increase resulted primarily from the issuance of
$50.0 million of 8% senior subordinated debentures on August 26, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total block hours decreased 6,745 hours, or 13%, to 43,780 hours in 1997
from 50,525 hours in 1996, with an average of 12.9 available aircraft per day in
1997 compared to 14.1 in 1996. Average daily utilization (block hours flown per
day per aircraft) decreased to 9.3 hours in 1997 from 9.8 hours in 1996. In
1997, the Company continued to obtain a higher percentage of its revenues under
wet lease contracts as opposed to full service contracts. In 1997, wet lease
contracts accounted for 81% of total block hours, an increase from 68% in
1996.
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Continuing Operations
Block hours from continuing operations decreased slightly to 43,780 hours
in 1997 from 43,897 hours in 1996.
Operating Revenues. Revenues from flight operations increased $9.9 million,
or 3%, in 1997 to $306.8 million from $296.9 million in 1996. Revenues in 1997
included approximately $11.2 million related to minimum guarantee payments
received from Malaysian Airlines for flying levels which did not meet the
minimum monthly levels specified in the contracts, and $3.0 million related to
contract modification payments received from Philippine Airlines, for which the
Company incurred no related variable costs.
Operating Expenses. Total operating expenses increased $4.7 million, or 2%,
in 1997 to $292.6 million from $287.9 million in 1996.
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 increased $2.7 million, or 4%, in
1997 to $71.8 million from $69.1 million in 1996. This increase resulted
primarily from higher crew costs relating to an accrual for the profit sharing
bonus plan and an increase in wage rates, partially offset by the shift in the
mix of business from full service to wet lease operations. Flight attendant
costs remained consistent despite the shift to wet lease operations as a result
of flight attendants receiving minimum guarantee payments.
Maintenance expenses increased $5.5 million, or 9%, in 1997 to $66.0
million from $60.5 million in 1996. This increase resulted primarily from the
increase in the number of aircraft dedicated to the Company's continuing
operations and the integration of additional aircraft into the fleet. 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. The
Company expects its maintenance expense to increase further in 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 $6.2 million, or 7%, in 1997 to $91.4 million from
$85.2 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. This increase was partially
offset by the reversal of approximately $0.9 million in lease costs, which had
been recorded in 1996, as a result of a settlement with the engine manufacturer
for reimbursements related to disputed spare engine lease charges.
Fuel expenses decreased $1.7 million, or 9%, in 1997 to $17.6 million from
$19.3 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 $1.4 million, or 17%, in 1997
to $9.6 million from $8.2 million in 1996. This increase resulted primarily from
an increase in commissions related to increased flying during 1997 under the
Philippine Airlines contract.
Depreciation and amortization increased $0.7 million, or 9%, in 1997 to
$8.7 million from $8.0 million in 1996. This increase resulted primarily from
depreciation on the increased levels
25
<PAGE>
of spare parts required to support the additional MD-11 aircraft described
above, partially offset by a decrease in the amortization of certain intangible
assets.
General and administrative expenses increased $0.2 million, or 1%, in 1997
to $24.9 million from $24.7 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 related marketing efforts and an increase in property tax accruals. This
increase was partially offset by a reduction in certain legal and professional
fees.
Interest expense increased $1.9 million, or 54%, in 1997 to $5.4 million
from $3.5 million in 1996. This increase resulted primarily from the issuance of
$50.0 million of 8% senior subordinated debentures on August 26, 1997.
Discontinued Operations
The Company commenced 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.
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.
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) was recorded as of June 30,
1996. The Company recognized an additional $0.5 million of expense in the fourth
quarter of 1997 and believes that substantially all the costs relating to the
disposal have been recorded as of December 31, 1997. The Company is subject to
claims arising as a result of the discontinuance of its scheduled service
operations, but the Company believes it has substantial defenses to these
actions.
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.
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<PAGE>
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 include all expenses related directly to the
operation of the aircraft other than aircraft cost, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Flight operations expenses increased $5.5 million, or 9%, in
1996 to $69.1 million from $63.6 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.
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.
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 $4.6 million in 1996 to $8.2
million from $3.6 million in 1995. This increase resulted primarily from
commissions paid in connection with the new Philippine Airlines contract and an
increase in teaming arrangement commissions associated with the larger fixed-
award contract received from the U.S. Air Force beginning October 1995.
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
The Company commenced 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.
As a result, the Company's scheduled service operations were reflected as
discontinued operations as of June 30, 1996, and prior period
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<PAGE>
results were 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)
was recoreded as of June 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company is highly leveraged. The Company incurred substantial debt and
lease commitments during the past four years in connection with its acquisition
of MD-11 aircraft and related spare parts. In addition, the Company issued
$50.0 million of convertible debentures in August 1997. As of March 31, 1998,
the Company had outstanding long-term debt and capital leases of $70.7 million
and notes payable and current maturities of long term obligations of $13.6
million. In addition, the Company has significant future long-term obligations
under aircraft lease obligations relating to its aircraft.
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<PAGE>
The Company has historically financed its working capital and capital
expenditure requirements out of cash flow from operating activities, public and
private sales of its Common Stock, secured borrowings, and other financings from
banks and other lenders. The degree to which the Company is leveraged could have
important consequences to holders of Common Stock, 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 March 31, 1998 and December 31,
1997 were $10.7 million and $25.9 million, respectively. As is common in the
airline industry, World Airways operates with a working capital deficit.
Effective January 23, 1998, the Company used approximately $5.9 million of its
cash balance to purchase the aforementioned 773,000 shares of Common Stock and
subsequently loaned WorldCorp $2.0 million which was used by WorldCorp to pay
debt obligations. World Airways has substantial long-term aircraft lease
obligations with respect to its current aircraft fleet. At March 31, 1998,
World Airways' current assets were $36.9 million and current liabilities were
$52.7 million.
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 March 31, 1998, World Airways had purchased 773,000 shares of Common Stock
at an aggregate cost of approximately $7.9 million pursuant to such program. The
Company does not intend to purchase any additional shares at this time.
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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.
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 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.
CASH FLOWS FROM OPERATING ACTIVITIES
Operating activities used $2.6 million in cash for the three months ended
March 31, 1998 compared to providing $7.7 million in the comparable period in
1997. This decrease resulted primarily from a net loss in 1998 compared to net
earnings in 1997.
Operating activities provided $22.1 million in cash for the year ended
December 31, 1997 compared to using $1.5 million of cash in the comparable
period in 1996. This increase in cash in 1997 resulted primarily from the
increase in net earnings and a decrease in accounts receivable, partially offset
by a decrease in accounts payable.
CASH FLOWS FROM INVESTING ACTIVITIES
Investing activities used $0.3 million in cash for the three months ended
March 31, 1998, compared to using $2.5 million in the comparable period in 1997.
In 1998, cash was used primarily for the purchase of rotable spare parts and
computer hardware and software.
Investing activities used $4.3 million in cash for the year ended December
31, 1997, compared to $9.1 million in the comparable period in 1996. In 1997,
cash was used primarily for the purchase of rotable spare parts required to
maintain the current fleet as well as leasehold improvements on the
aircraft.
CASH FLOWS FROM FINANCING ACTIVITIES
Financing activities used $12.3 million in cash for the three months ended
March 31, 1998 compared to using $9.7 million in the comparable period in 1997.
In 1998, cash was used primarily for the purchase of shares of the Company's
Common Stock for an aggregate cost of $5.9 million, to loan WorldCorp $2.0
million (see "Risk Factors--Control by Worldcorp; Potential Conflicts of
Interest"), and to repay debt of approximately $4.6 million.
Financing activities provided $1.1 million in cash for the year ended
December 31, 1997 compared to using $7.6 million in the comparable period in
1996. This increase in cash resulted primarily from the $50.0 million proceeds
of the Private Placement in 1997 offset by the purchase of shares of the
Company's Common Stock from WorldCorp for an aggregate cost of $24.7 million and
the repayment of debt.
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CAPITAL COMMITMENTS/FINANCING DEVELOPMENTS
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. The Company
returned one aircraft in August 1997. 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. 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 March 31, 1998, World Airways maintains leases for four DC10-30
aircraft. Two of the leases expire in 1998, one expires in 1999, and one expires
in 2003.
In March 1998, the Company renewed and amended a revolving line of credit
facility of up to $25.0 million for a period of 3 years, collateralized by
certain receivables, inventory and equipment. The proceeds from this facility
will be used to increase working capital and for general corporate
purposes.
Under the terms of the amended Credit Agreement, the Company is not
permitted without prior written approval to (i) incur indebtedness in excess of
$1.0 million (excluding capital leases), (ii) declare, pay, or make any dividend
or distribution in any six month period which aggregate in excess of 50% of net
income for the previous six months, (iii) apply any of its funds, property or
assets to the purchase, redemption or other retirement of any common or
preferred stock in excess of 5% of the total aggregate outstanding amount of
such stock. The Company must also maintain a certain quarterly tangible net
worth, net income (loss) and debt ratio requirements. The Company was not in
compliance with one of these covenants at March 31, 1998. While a wavier of this
covenant as of March 31, 1998 was obtained from the financial institution, no
assurances can be given that the Company will continue to meet these covenants
or, if necessary, obtain the required waivers.
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
31
<PAGE>
March 31, 1998, approximately $7.8 million had been received.
As of March 31, 1998, annual minimum payments required under the Company's
aircraft and lease obligations totaled $60.0 million for the remainder of 1998.
The Company anticipates that its total capital expenditures in 1998 will
approximate $4.1 million which the Company expects to fund from its working
capital. As of March 31, 1998, the Company held approximately $3.1 million (at
book value) of aircraft spare parts currently available for sale.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 130
("FAS No.130:"), "Reporting Comprehensive Income", effective January 1, 1998.
FAS No. 130 established standards for the reporting and display of comprehensive
income and its components in the financial statements. The adoption of FAS No.
130 does not impact the Company since the Company did not record any components
of comprehensive income during the three months ended March 31, 1998 or March
31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("FAS No. 131"), "Disclosure about
Segments of an Enterprise and Related Information." FAS No. 131 requires the
Company to present certain information about operating segments and related
information, including geographic and major customer data, in its annual
financial statements and in condensed financial statements for interim periods.
The Company is required to adopt the provisions of this Statement during fiscal
year 1998. The Company has not completed its analysis of the impact on the
financial statements that will be caused by the adoption of this Statement.
INFLATION
The Company believes that inflation has not had a material effect on the
Company's revenues during the past three years.
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 contracts. Airline operations account for 100% of the Company's operating
revenue and operating income. The Company's passenger and freight operations
employ 12 wide-body aircraft which are operated under contracts, a substantial
portion of which are 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 costs, including fuel. World Airways'
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<PAGE>
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 aircraft to the USAF.
The Company generally charges customers on a block hour basis rather than a
per seat or per pound basis. "Block hours" are 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 final destination. The
Company provides most services under two types of contracts: wet lease contracts
and full service contracts. Under wet lease contracts, the Company provides the
aircraft, cockpit crew, maintenance and insurance and the customer provides all
other operating services and bears all other operating expenses, including fuel
and fuel servicing, marketing costs associated with obtaining passengers and/or
cargo, airport passenger and cargo handling fees, landing fees, cabin crews,
catering, ground handling and aircraft push-back and de-icing services. Under
full service contracts in addition to those services provided under an ACMI
contract, the Company provides fuel, catering, ground handling, cabin crew and
all related support services as well. Accordingly, the Company generally charges
a lower rate per block hour for wet lease contracts than full service contracts,
although it does not necessarily earn a lower profit. Because of shifts in the
mix between full service contracts and wet lease contracts, fluctuations in
revenues are not necessarily indicative of volume trends or profitability. It is
important, therefore, to measure the Company's business volume by block hours
flown and to measure profitability by operating income per block hour.
In July 1996, World Airways restructured its business to focus on ACMI
contract services. As such, the Company ceased all scheduled passenger and
scheduled charter services as of October 27, 1996, taking a one-time charge for
estimated loss on disposal of $21.0 million as of June 30, 1996 (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A")--Discontinued Operations").
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 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.
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<PAGE>
As noted above, the Company has focused its business on ACMI contract
services. As is common in the air transportation industry, the Company has
relatively high fixed aircraft costs. World Airways operates a fleet of eight
MD-11 and four DC10-30 wide-body aircraft, and while the Company believes that
the lease rates on its MD-11 aircraft are favorable relative to lease rates of
other MD-11 operators, the Company's MD-11 aircraft have higher lease costs
(although lower operating costs) than its DC10-30 aircraft. Therefore,
achieving high average daily utilization of its aircraft (particularly its MD-11
aircraft) at attractive yields is an important factor to the Company's financial
results. In addition to fixed aircraft costs, a portion of the Company's labor
costs are fixed due to monthly minimum guarantees to cockpit crewmembers and
flight attendants. Factors that affect the Company's ability to achieve high
utilization in its ACMI business include the compatibility of the Company's
aircraft with customer needs and the Company's ability to react on short notice
to customer requirements (which can be unpredictable due to changes in traffic
rights, aircraft delivery schedules and aircraft maintenance requirements).
Other factors that affect the ACMI business include particular domestic and
foreign regulatory requirements, as well as a trend toward aviation deregulation
which is increasing the number of alliances and code share arrangements.
World Airways focuses its marketing efforts on countries 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 is ideally suited to these less dense international routes and
provides superior economics as compared to other popular aircraft such as the
Boeing 747 which has greater capacity.
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 the Company believes permit
the Company to target emerging opportunities. World Airways has been providing
safe, reliable services for over 50 years. The Company has flown for the USAF
since 1956, for Malaysian Airlines since 1981 and for Garuda since 1973. The
Company has recently entered into a wet lease agreement with Servicios de
Transportes Aereos Fueguinos ("STAF Airlines"), an Argentinian airline, and a
wet lease agreement with Viacao Aereo Sao Paulo ("VASP"), a Brazilian
airline. The VASP contract, scheduled to begin in mid-June, may be delayed,
pending certain regulatory approvals.
34
<PAGE>
On June 17, 1998, Mr. T. Coleman Andrews, III resigned as Chairman of World
Airways and left his board seat to accept a position as the Chief Executive
Officer of South African Airways. Mr. Russell L. Ray, Jr., the President and
Chief Executive Officer of World Airways, was elected as the new chairman,
replacing Mr. Andrews.
CUSTOMERS
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, first and foremost, upon providing the highest level of
service to these 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 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 16.8% of the Company
as of March 31, 1998, also owns 28% of Malaysian Airlines. The Company entered
into a 32-month agreement for year-round operations (including the Hadj) with
Malaysian Airlines whereby the Company is providing two passenger aircraft with
cockpit crews, maintenance and insurance to Malaysian Airlines' newly-formed
charter division through May 1999. However, the Company agreed to a five month
reduction in the utilization of one aircraft during 1997, although the aircraft
was redeployed for other activity. Malaysian Airlines has not informed the
Company of any reductions for 1998. The Company provided three aircraft for 1997
Hadj operations. MAS received notice from the Malaysian Hadj Board that MAS
would not participate in the 1998 Hadj pilgrimage. As a result, MAS entered into
an agreement on behalf of the Company for the Company to provide two DC-10
aircraft to fly in the 1998 Indian Hadj.
35
<PAGE>
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 other contracts. The Company and
Malaysian Airlines are currently discussing the redeployment of these aircraft
back into Malaysian Airlines' operations during 1998 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.
Malaysian Airlines is subject to the financial difficulties associated with
the adverse economic conditions in Malaysia and the Asia Pacific Region, but it
has generally remained current with its payments for committed block hour
minimums provided in the contracts. Although the Company has not yet received
from Malaysian Airlines its June 1998 charter payment, the Company has no
reason to believe that the payment will not be made. Failure by Malaysian
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.
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 operated six aircraft during the 1998 pilgrimage.
Philippine Airlines. The Company had agreements with Philippine Airlines to
operate four passenger aircraft until November 1997. As a result of the
economic distress experienced in the Philippines, the Company negotiated to
terminate the agreements on two of the aircraft effective in August 1997, and
received a monthly termination payment on each of the aircraft through the
original end of the agreements in November 1997. In addition, the contracts on
the remaining two aircraft were extended until February 1998 and the per block
hours rate for those two aircraft were reduced slightly. The two aircraft which
were removed from Philippine Airlines service were redeployed by the Company
under agreements with other customers. The contract with Philippine Airlines
expired in February 1998.
STAF & VASP. On April 29, 1998, the Company entered into a wet lease
agreement with STAF Airlines, an Argentinian airline. The agreement with STAF
Airlines calls for the Company to lease an MD-11 convertible freighter in cargo
configuration to STAF Airlines for a three year term which began in mid-May
1998. Under the terms of the agreement, a second MD-11 cargo aircraft may be
provided to STAF Airlines by World at a later date. On May 20, 1998, the
Company entered into a wet lease agreement with VASP for the lease of one MD-11
passenger aircraft for a six
36
<PAGE>
month term beginning mid-June 1998. However, the start of the contract may be
delayed, pending certain regulatory approvals. Under the terms of the
agreement, VASP has the option to extend the agreement for additional six month
periods and/or to add a second MD-11 aircraft. The loss of either of these
agreements, a renegotiation of the terms of either agreement or a substantial
reduction of business for STAF Airlines or VASP, if not replaced, could have a
material adverse effect on the financial condition or results of operations of
World Airways.
U.S. Air Force. The Company has provided international air transportation
to the U.S. Air Force since 1956. In exchange for requiring pledges of aircraft
to the CRAF for use in times of national emergency, the U.S. Air Force grants
awards to CRAF participants for peacetime transportation of personnel and cargo.
Although the Company's agreements with the USAF provide for full service
contracts with certain minimum performance requirements, the Company has risks
similar to an ACMI agreement because the USAF agreements are cost-plus contracts
at attractive rates. 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. It is uncertain, however, what impact, if any, the instability
within the Middle East will have upon the Company's future flight
operations.
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 Company leads a contractor teaming
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<PAGE>
arrangement that enjoys a large market share of the USAF's overall commercial
airlift requirement. 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 $73.4 million for the
government's 1997-98 fiscal year. The current annual contract commenced on
October 1, 1997 and expires on September 30, 1998. World Airways, however,
cannot determine how future cuts in military spending may affect future
operations with the U.S. Air Force.
New Customers. In addition to the recent STAF and VASP agreements mentioned
above, the Company has recently entered into agreements with the following
airlines: (i) a wet lease with Aer Lingus, an Irish airline, providing a World
Airways MD-11 passenger aircraft for a term running from May 1998 through mid-
December 1998; (ii) a wet lease with El Al Isreal Airlines, an Israli airline,
providing a World Airways MD-11 passenger aircraft for a term running from June
1998 through October 1998, (iii) an aircraft services agreement
38
<PAGE>
with Florida Jet Support providing World Airways freighter aircraft for a term
of fourteen months beginning in mid-March 1998 and (iv) a wet lease with Monarch
Airlines, a British airline, providing a World Airways MD-11 passenger aircraft
for a term commencing mid-May 1998 and ending November 1998.
Although the Company's customers bear the financial risk of filling the
Company's aircraft with passengers or cargo, the Company can be affected
adversely if its customers are unable to operate the Company's aircraft
profitably, or if one or more of the Company's customers experience a material
adverse change in their market demand, financial condition or results of
operations. Under these circumstances, the Company 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 a result of these and other contracts, the Company had an overall
contract backlog at March 31, 1998 of $252.1 million, compared to $414.0 million
at March 31, 1997. Approximately $147.8 million of the backlog relates to
operations during 1998. The Company's backlog for each contract is determined by
multiplying the minimum number of block hours guaranteed under the applicable
contract by the specified hourly rate under such contract. Approximately 59% of
the backlog relates to its contracts with Malaysian Airlines, included in which
are the revenues associated with the three cargo aircraft for Malaysian Airlines
(see "--Malaysian Airlines" for further discussion of these contracts).
Consistent with prior years, the Company still has substantial uncontracted
capacity in the third and fourth quarters of 1998 and beyond and has
historically been successful in obtaining new customers. 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.
Information concerning the classification of products within the air
transportation industry comprising 10% or more of the Company's operating
revenues from continuing operations is presented in the following table (in
millions):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Flight Operations - Passenger $267.3 $257.6 $168.0
Flight Operations - Cargo 39.5 39.3 64.6
</TABLE>
REGULATORY MATTERS
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
39
<PAGE>
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 and aging aircraft regulations.
Additional laws and regulations have been proposed from time to time which
could significantly increase the cost of airline operations by imposing
additional requirements or restrictions on operations. Laws and regulations
have been considered from time to time that would prohibit or restrict the
ownership and transfer of airline routes or slots. There is no assurance that
laws and regulations currently enacted or enacted in the future will not
adversely affect the Company's ability to maintain its current level of
operating results.
Several aspects of airline operations are subject to regulation or
oversight by Federal agencies other than the DOT or FAA. For instance, labor
relations in the air transportation industry are generally regulated under the
Railway Labor Act, which vests in the National Mediation Board certain
regulatory powers with respect to disputes between airlines and labor unions
arising under collective bargaining agreements. In addition, the Company is
subject to the jurisdiction of other governmental entities, including (i) the
Federal Communications Commission (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 wet lease services in
which the Company is primarily engaged vary considerably depending on the
particular country. Most bilateral agreements into which the U.S. has entered
permit either country to terminate the agreement with one year's notification to
the other. In the event a bilateral agreement is terminated, international air
service between the affected countries is governed by the principles of comity
and reciprocity.
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
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<PAGE>
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.
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 operations have adopted
local regulations which, among other things, impose curfews and noise abatement
regulations. While the Company believes it is currently in compliance in all
material respects with all appropriate standards and has all required licenses
and authorities, any material non-compliance by the Company therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on the Company.
EMPLOYEES
As of June 1, 1998, the Company had 845 full time employees classified as
follows:
<TABLE>
<CAPTION>
Number of
Classification Full-Time Employees
- ------------------------------------------- -------------------
<S> <C>
Management....................... 8
Administrative and Operations.... 294
Cockpit Crew (including pilots).. 297
Flight Attendants (active)....... 246
---
Total Employees................ 845
===
</TABLE>
The Company's cockpit crew members, who are represented by the Teamsters,
are subject to a four-year collective bargaining agreement that will become
amendable in July 1998. Approximately 37% of the Company's employees are covered
under this collective bargaining agreement. The Company expects to begin
negotiations in the third quarter of 1998 and cannot predict the outcome of the
negotiations or their possible impact on the Company's financial condition and
results of operations.
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 have
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<PAGE>
argued that the "scope clause" of the collective bargaining agreement had been
violated by the Company and challenged the use of foreign flight attendant crews
on the Company's flights for Malaysian Airlines and Garuda Indonesia which has
historically been the Company's operating procedure. The Company is
contractually obligated to permit its Southeast Asian customers to deploy their
own flight attendants. While the arbitrator in this matter denied in 1997 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. Subsequently, in 1997, the flight
attendants challenged and filed "scope clause" grievances with respect to four
separate wet-lease contracts. The Company and the Teamsters are presently in
discussions regarding these grievances. At this time, however, the Company can
give no assurance that these discussions will be successful and the grievances
will not proceed to formal arbitration. The Company can provide no assurances as
to how the resolution of this matter 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 amendable on June 30, 1993. In May 1995,
the parties reached agreement with respect to a new four-year contract. This
contract 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 will elect to be represented by a labor union or
collective bargaining unit. The election by such employees of representation in
such an organization could result in employee compensation and working condition
demands that could have a material adverse effect on the financial results of
the Company.
AIRCRAFT FLEET
At March 31, 1998, the Company's aggregate operating fleet consisted of 12
leased aircraft as follows:
<TABLE>
<CAPTION>
Capacity
---------------------------------------------
Aircraft (a) Passenger (seats)(b) Cargo (Tons) Total (c)
- -------------------------------- -------------------- ------------ ---------
<S> <C> <C> <C>
McDonnell Douglas MD-11 409 -- 3
McDonnell Douglas MD-11F -- 95 1
McDonnell Douglas MD-11CF 410 90 2
McDonnell Douglas MD-11ER 409 -- 2
McDonnell Douglas DC10-30 350 -- 3
McDonnell Douglas DC10-30CF 380 65 1
--
Total 12
==
</TABLE>
Notes
-----
(a) "F" aircraft are freighters, "CF" are convertible freighters and may
operate in either passenger or freight configurations. "ER" aircraft
maintain extended-range capabilities. Aircraft with no letter
designation are passenger-only aircraft.
(b) Based on standard operating configurations. Other configurations are
occasionally used.
(c) Lease terms expire between 1998 and 2020 (assuming exercise of all lease
extensions).
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<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company operated as a wholly owned subsidiary of WorldCorp from June
1987 until February 1994, for the most part, 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. As of March 31,
1998, approximately 32% of the Company's outstanding Common Stock is owned by
public investors. WorldCorp owns 51.2% of the Company's outstanding Common
Stock. The remaining 16.8% is owned by MHS.
Pursuant to the Agreement, on September 18, 1997, WorldCorp consummated the
sale of 3,227,000 shares (the "Shares") of Common Stock of World Airways to
World Airways. The Shares were purchased by World Airways for total
consideration of $24.7 million or $7.65 per Share, less expenses. The sale
reduced WorldCorp's ownership percentage of World Airways below 50%. The
agreement to purchase the Shares of Common Stock of World Airways triggered
certain "co-sale" rights under the Shareholders Agreement among MHS, WorldCorp
and World Airways that would permit MHS to sell 773,000 shares of World Airways
Common Stock. On January 23, 1998, MHS sold 773,000 shares of World Airways
Common Stock to World Airways. The Shares were purchased by World Airways for
total consideration of $5.9 million, or $7.65 per share, less expenses. The sale
increased WorldCorp's ownership percentage of the Company to 51.2% and reduced
MHS's ownership percentage of the Company to 16.8%.
WorldCorp and the Company historically 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.
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<PAGE>
Pursuant to the October 1993 MHS Stock Purchase Agreement, the Company and
WorldCorp sold 24.9% of the outstanding shares of Common Stock to MHS for $27.4
million (or $11.00 per share) in February 1994. In August 1994, MHS acquired 32%
of the Common Stock and assumed management control of Malaysian Airlines, 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 repaid 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.
In 1997, the Company entered into a 32-month agreement for year-round
operations (including the Hadj) with Malaysian Airlines whereby the Company is
providing two passenger aircraft with cockpit crews, maintenance and insurance
to Malaysian Airlines' newly-formed charter division through May 1999. However,
the Company agreed to a five month reduction in the utilization of one aircraft
during 1997, although the aircraft was redeployed in other activity. Malaysian
Airlines has not informed the Company of any reductions for 1998. The Company
provided three aircraft for 1997 Hadj operations. Malaysian Airlines received
notice from the Malaysian Hadj Board that Malaysian Airlines would not
participate in the 1998 Hadj pilgrimage. As a result, Malaysian Airlines entered
into an agreement on behalf of the Company for the Company to provide two DC-10
aircraft to fly in the 1998 Indian Hadj.
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 another contract which ended in February
1998. The two aircraft were then redeployed to the Garuda Hadj in March 1998.
The Company and Malaysian Airlines are currently discussing the redeployment of
these aircraft back into Malaysian Airlines' operations during 1998 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.
Malaysian Airlines is subject to the financial difficulties associated with
the adverse economic conditions in Malaysia and the Asia Pacific Region but it
has generally remained current with its payments for committed block hour
minimums provided in the contracts. Although the Company has not yet received
from Malaysian Airlines its June 1998 charter payment, the Company has no
reason to believe that the payment will not be made. Failure by Malaysian
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.
Subsequent to year-end 1997, the Company loaned WorldCorp $2.0 million. The
loan was originally collateralized by one million shares of the Company's Common
Stock owned by WorldCorp and bore interest at prime plus 2.5%. After WorldCorp
failed to make the required payment on April 23, 1998, WorldCorp and the Company
entered into, and subsequently completed, negotiations to restructure the loan.
The restructured loan calls for WorldCorp to increase the interest rate
effective April 28, 1998 to 12% as compared to prime plus 2.5% in the original
loan and to substitute 1,860,396 shares of its InteliData common stock and
500,000 shares of its World Airways Common Stock as collateral for the loan,
rather than the prior collateral package of 1,000,000 shares of World Airways
Common Stock. If World Airways reduces the loan principal, World Airways will
return a pro rata amount of the collateral.
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 Company is currently restricted from paying dividends under
the provisions of the WorldCorp indenture. 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 March 31, 1998, WorldCorp owned
approximately 51.2% of the outstanding Common Stock. See "Prospectus Summary--
The Private Placement" and "Dividend Policy."
44
<PAGE>
Effective April 20, 1998, WorldCorp consummated a transaction pursuant to
which it acquired an 80% interest in Paper Acquisition Corp, ("Paper"). In
connection with this transaction with Paper, WorldCorp has pledged all of its
shares of common stock of both WorldCorp Acquisition and InteliData, and
WorldCorp Acquisition has pledged all of its shares of common stock of both
World Airways and Paper, to current Paper shareholders to collateralize the
notes and and the earn-out entered into in connection with the transaction.
Certain shares of World Airways owned by WorldCorp were previously pledged to
secure a loan of approximately $2.0 million from World Airways to WorldCorp.
After repayment of the loan and release of the shares, the shares will become
subject to the pledge to the former Paper shareholders. The notes contain
various restrictive covenants, including dividend restrictions on WorldCorp and
its subsidiaries, limitations on transfers of cash to WorldCorp, as well as
cross-default provisions. Upon an event of default, the noteholders may assume
control of the WorldCorp Acquisition board and the pledged collateral.
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
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.
45
<PAGE>
SELLING SECURITYHOLDERS
[SUBJECT TO FINAL DETERMINATION OF SELLING SHAREHOLDERS]
The following table sets forth, as of June 17, 1998, 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.
Principal Amount
of Debentures
Name of Selling Securityholder Beneficially Owned
------------------------------ ------------------
BankBoston, N.A......................................... 148,000
Bankers Trust Company................................... 12,972,000
Bear, Stearns Securities Corp........................... 5,790,000
Catholic Mutual Relief Society of America............... 380,000
Catholic Mutual Relief Society Retirement Plan & Trust.. 200,000
Century National Insurance Company...................... 750,000
Chase Manhattan Bank.................................... 464,000
Chase Manhattan Bank/Chemical........................... 5,285,000
Citibank, N.A........................................... 4,605,000
CommerzBank Capital Markets Corp........................ 500,000
Donaldson, Lufkin and Jenrette Securities Corp.......... 1,289,000
Fleet Bank of Massachusetts, N.A........................ 129,000
Goldman, Sachs & Co..................................... 2,300,000
Investors Bank & Trust/M.F. Custody..................... 2,000,000
Morgan Stanley & Co. Incorporated....................... 1,105,000
Northern Trust Company.................................. 693,000
PMC Bank, National Association.......................... 2,200,000
State Street Bank - Custodian........................... 5,000,000
U.S. Bank National Association.......................... 190,000
Value Line Convertible Fund............................. 1,200,000
Zazove Convertible Fund, L.P............................ 1,300,000
E D & F Man International............................... 200,000
Kelly Asset Management.................................. 200,000
Agoura Asset Management................................. 100,000
NV Investments, Inc..................................... 400,000
Oscar Investment Fund................................... 100,000
Fingerboard Management.................................. 250,000
Marie Chaseman.......................................... 250,000
-----------
TOTAL.............................................. $50,000,000
===========
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 112.36 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."
46
<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 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."
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<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
48
<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 March 31, 1998, 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 $34.3 million
(including $4.6 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.
49
<PAGE>
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 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
50
<PAGE>
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 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 Exchange Act) 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)
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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.
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
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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 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
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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 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)
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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.
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
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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.
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,
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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.
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 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
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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 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, Treasury Regulations, 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
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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
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,
1997 and 1996 and for each of the years in the three-year period ended December
31, 1997, 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, 1997,
(ii) World Airways' Quarterly Reports on Form 10-Q for the quarter ended March
31, 1998, filed pursuant to Section 13 or 15(d) of the Exchange Act, (iii) World
Airways' Current Report on Form 8-K dated February 9, 1998 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).
67
<PAGE>
================================================================================
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.
_____________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................................................................... 3
Risk Factors............................................................................ 9
Use Of Proceeds......................................................................... 20
Price Range Of Common Stock............................................................. 20
Price Range Of Debentures............................................................... 20
Dividend Policy......................................................................... 21
Management's Discussion And Analysis Of Financial Conditions And Results Of
Operations.............................................................................. 22
Business................................................................................ 32
Certain Relationships And Transactions.................................................. 43
Selling Securityholders................................................................. 46
Description Of Debentures............................................................... 47
Certain United States Federal Income Tax Consequences................................... 59
Description Of Capital Stock............................................................ 62
Plan Of Distribution.................................................................... 65
Legal Matters........................................................................... 66
Experts................................................................................. 66
Available Information................................................................... 67
Incorporation Of Certain Information By Reference....................................... 67
</TABLE>
$50,000,000
WORLD AIRWAYS, INC.
8% Convertible
SENIOR SUBORDINATED
DEBENTURES DUE 2004
---------------
PROSPECTUS
---------------
June 24, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be borne by the Registrant
in connection with the issuance and distribution of the securities being
registered hereby other than underwriting discounts and commissions. No portion
of such expenses are to be borne by the Selling Security Holders. All expenses
other than the SEC registration fee and the Nasdaq listing fee are estimated.
<TABLE>
<S> <C>
SEC registration fee....................................... $15,152
Nasdaq listing fee......................................... 17,500
Trustee's fees and expenses................................ 2,500
Accounting fees and expenses............................... 10,000
Legal fees and expenses.................................... 25,000
"Blue Sky" fees and expenses (including legal fees)........ 1,000
Costs of printing and engraving............................ 1,000
-------
Total.................................................... $72,152
-------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Bylaws effectively provide that the Registrant shall, to
the full extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as amended from time to time ("Section 145"), indemnify all
person whom it may indemnify pursuant thereto. In addition, the Registrant's
Amended and Restated Certificate of Incorporation eliminates personal liability
of its directors to the full extent permitted by Section 102(b) (7) of the
General Corporation Law of the State of Delaware, as amended from time to time
("Section 102(b) (7)").
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to a matter
as to which they shall have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation, except
that no indemnification shall be made if such person shall have been adjudged
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine upon application that defendant
officers or directors are reasonably entitled to indemnity for such expenses
despite such adjudication of liability.
Section 102(b) (7) provides that a corporation may eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent conduct
in paying dividends or repurchasing
II-1
<PAGE>
stock out of other than lawfully available funds or (iv) for any transaction
from which the director derived an improper personal benefit. No such provision
shall eliminate or limit the liability of a director for any act or omission
occurring prior to the date when such provision becomes effective.
The Company maintains insurance against liabilities under the Securities
Act for the benefit of its officers and directors.
Section 9 of the Registration Rights Agreement (filed as Exhibit 4.3 to
this Registration Statement) provides that the Holders of Transfer Restricted
Securities covered by this Registration statement severally and not jointly will
indemnify and hold harmless the Registrant and each director, officer and
controlling person of the Registrant from and against any liability caused by
any statement or omission in the Registration Statement, in the Prospectus or in
any amendment or supplement thereto, in each case to the extent that the
statement or omission was made in reliance upon and in conformity with written
information furnished to the Registrant by the Holders of Transfer Restricted
Securities covered by this Registration Statement expressly for use therein.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description
------ ------------
<S> <C>
Amended and Restated Certificate of Incorporation of the
*3.1 Company (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1, as amended
(Commission File No. 33-95488) filed on August 8, 1995 (the
"Form S-1").
*3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2
of the Form S-1).
*4.1 Indenture dated as of August 1, 1997 between the Company and
First Union National Bank, as Trustee (the "Indenture").
*4.2 Form of 8% Convertible Subordinated Debenture due 2003
(included in the Indenture).
*4.3 Registration Rights Agreement dated as of August 26, 1997 among
the Company and the Initial Purchasers.
*4.4 Purchase Agreement dated August 21, 1997 among the Company and
the Initial Purchasers.
*5.1 Opinion of Hunton & Williams regarding the legality of the
securities being registered.
*12.1 Ratio of Earnings to Fixed Charges
*23.1 Consent of Hunton & Williams (included in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
*24.1 Power of Attorney (included on the signature page of this
Registration Statement).
*25.1 Form T-1 Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939 of First Union National Bank.
</TABLE>
___________
* Filed previously
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purpose of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
II-2
<PAGE>
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned Registrant hereby further undertakes:
(1) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No.1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in
Herndon, Virginia, on June 22, 1998.
WORLD AIRWAYS, INC.
By: /s/ Russell L. Ray, Jr.
---------------------------
Russell L. Ray, Jr.
Chairman of the Board,
President and Chief Executive Officer
Each of the directors and/or officers of World Airways, Inc. whose
signature appears below hereby appoints T. Coleman Andrews III and Russell L.
Ray, Jr. as his attorneys-in-fact to sign in his name and behalf, in any and all
capacities stated below and to file with the Securities and Exchange Commission,
any and all amendments, including post-effective amendments to this registration
statement, making such changes in the registration statement as appropriate, and
generally to do all such things in their behalf in their capacities as officers
and directors to enable World Airways, Inc. to comply with the provisions of the
Securities Act of 1933, and all requirements of the Securities and Exchange
Commission.
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 1 to the Registration Statement has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Russell L. Ray, Jr. Director, Chairman of the June 22, 1998
- ------------------------------------ Board, President and Chief
Russell L. Ray, Jr. Executive Officer
/s/ James D. Douglas Executive Vice President and Chief June 22, 1998
- ------------------------------------
James D. Douglas Financial Officer
* Director June 22, 1998
- ------------------------------------
A. Scott Andrews
Director June 22, 1998
____________________________________
Daniel J. Altobello
Director June 22, 1998
____________________________________
Ronald R. Fogleman
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
* Director June 22, 1998
- ------------------------------------
Peter M. Sontag
Director June 22, 1998
- ------------------------------------
Lim Kheng Yew
* Director June 22, 1998
- ------------------------------------
John C. Backus, Jr.
/s/ Patrick F. Graham Director June 22, 1998
- ------------------------------------
Patrick F. Graham
Director June 22, 1998
- ------------------------------------
Wan Malek Ibrahim
</TABLE>
* By: /s/ Russell L. Ray, Jr.
-------------------------------
Russell L. Ray, Jr.
As Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------
23.2 Consent of KPMG Peat Marwick LLP.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
World Airways, Inc.:
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Washington, D.C.
June 19, 1998
