AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 4, 1997
REGISTRATION NO. 333-37283
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMTRAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
INDIANA 6719 35-1617970
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
7337 WEST WASHINGTON STREET
INDIANAPOLIS, INDIANA 46231
(317) 247-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MR. KENNETH K. WOLFF
CHIEF FINANCIAL OFFICER
AMTRAN, INC.
7337 WEST WASHINGTON STREET
INDIANAPOLIS, INDIANA 46231
(317) 247-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
WILLIAM P. ROGERS, JR., ESQ.
CRAVATH, SWAINE & MOORE
WORLDWIDE PLAZA
825 EIGHT AVENUE
NEW YORK, NY 10019
(212) 474-1000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] . . . . . . .
------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
________________________________________________________________________________
SUBJECT TO COMPLETION, DATED DECEMBER , 1997
PROSPECTUS
$100,000,000
OFFER FOR ALL OUTSTANDING 10 1/2% SENIOR NOTES DUE 2004
OF
AMTRAN, INC.
[LOGO]
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT MIDNIGHT, NEW YORK
CITY TIME ON , 1997, UNLESS EXTENDED.
------------------------
Amtran, Inc., an Indiana corporation ('Amtran' or the 'Company'), hereby
offers (the 'Exchange Offer'), upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the 'Letter
of Transmittal'), to exchange up to $100,000,000 aggregate principal amount of
its 10 1/2% Senior Exchange Notes due 2004 (the 'Exchange Notes') that have been
registered under the Securities Act of 1933, as amended (the 'Securities Act'),
pursuant to a Registration Statement (as defined herein) of which this
Prospectus constitutes a part, for a like principal amount of its 10 1/2% Senior
Notes due 2004 (the 'Outstanding Notes' and, together with the Exchange Notes,
the 'Notes') with the holders thereof. The terms of the Exchange Notes are
identical in all material respects to the Outstanding Notes except for certain
transfer restrictions and registration rights relating to the Outstanding Notes
and except that, if the Exchange Offer is not consummated or a Shelf
Registration Statement (as defined herein) with respect to the Outstanding Notes
is not declared effective on or prior to January 24, 1998, the interest rate
borne by the Outstanding Notes will increase by amounts specified herein until
the Exchange Offer is consummated. The Outstanding Notes were issued on July 24,
1997 (the 'Issue Date'), pursuant to an offering (the 'Original Offering')
exempt from registration under the Securities Act.
Interest on the Exchange Notes will be payable semi-annually on February 1
and August 1 of each year, commencing February 1, 1998, at a rate of 10 1/2% per
annum. The Exchange Notes are redeemable, at the option of the Company, in whole
or in part, at any time on or after August 1, 2002, initially at 105.25% of
their principal amount, plus accrued interest, declining ratably to 100% of
their principal amount at maturity. In addition, at any time prior to August 1,
2000, the Company may redeem in aggregate up to 35% of the original principal
amount of the Exchange Notes with the proceeds of one or more sales of common
stock, at 110.50% of their principal amount, plus accrued interest. Upon the
occurrence of a Change of Control (as defined herein), each holder of the
Exchange Notes has the right, subject to certain conditions, to require the
Company to purchase such holder's Exchange Notes at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. There can be no assurance that the Company will have
the financial resources necessary to repurchase the Notes upon a Change of
Control.
The Exchange Notes will be unconditionally guaranteed by American Trans
Air, Inc. ('ATA') and each of the other active subsidiaries of the Company
(collectively with ATA, the 'Guarantors'). The Exchange Notes and the Guarantees
(as defined herein) will be general, unsecured senior obligations of the Company
and the Guarantors, respectively, ranking pari passu in right of payment with
all existing and future unsecured unsubordinated obligations, and senior in
right of payment to all existing and future subordinated indebtedness of the
Company and the Guarantors, respectively. At September 30, 1997, on a
consolidated basis, after giving effect to (x) the Original Offering, and (y)
the replacement of certain senior credit facilities with the New Credit Facility
(as defined herein), the Company had approximately $178.8 million of
indebtedness outstanding, approximately $71.7 million of which was secured.
The Company will accept for exchange any and all Outstanding Notes that are
validly tendered and not withdrawn on or prior to midnight, New York City time,
on the date the Exchange Offer expires (the 'Expiration Date'), which will be
, 1997 (20 business days following the commencement of the Exchange
Offer), unless the Exchange Offer is extended. Tenders of Outstanding Notes may
be withdrawn at any time prior to midnight, New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Outstanding Notes being tendered for exchange. Outstanding
Notes may be tendered only in integral multiples of $1,000. See 'The Exchange
Offer.'
For each Outstanding Note accepted for exchange, the holder of such
Outstanding Note will receive an Exchange Note having a principal amount equal
to that of the surrendered Outstanding Note. Interest on the Exchange Notes will
accrue from the last interest payment date on which interest was paid on the
Outstanding Notes surrendered in exchange therefor, or if no interest has been
paid on the Outstanding Notes, from the Issue
(cover continued on next page)
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 16 OF THIS PROSPECTUS FOR A
DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER
THEIR OUTSTANDING NOTES IN THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS DECEMBER , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
(cover continued from previous page)
Date. Holders of Outstanding Notes whose Outstanding Notes are accepted for
exchange will not receive any payment in respect of interest on such Outstanding
Notes otherwise payable on any interest payment date the record date for which
occurs on or after consummation of the Exchange Offer. Consequently, holders who
exchange their Outstanding Notes for Exchange Notes will receive the same
interest payment on February 1, 1998 (the first interest payment date with
respect to the Outstanding Notes and the Exchange Notes) that they would have
received had they not accepted the Exchange Offer. See 'The Exchange
Offer -- Interest on the Exchange Notes.'
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined herein). See 'The Exchange Offer -- Consequences of Exchanging
Outstanding Notes' for a discussion of the Company's belief, based on
interpretations by the staff of the Securities and Exchange Commission (the
'Commission') as set forth in no-action letters issued to third parties, as to
the transferability of the Exchange Notes upon satisfaction of certain
conditions. Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivered a prospectus, a
broker-dealer will not be deemed to admit that it is an 'underwriter' within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Outstanding Notes where
such Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any resale
of Exchange Notes. See 'Plan of Distribution.'
There is no established trading market for the Exchange Notes, and there
can be no assurance regarding the future development of a market for the
Exchange Notes, or the ability of the holders of the Exchange Notes to sell
their Exchange Notes or the price at which such holders may be able to sell
their Exchange Notes. The Company does not currently intend to list the Exchange
Notes on any securities exchange or to seek approval for quotation of the
Exchange Notes through any automated quotation system. Accordingly, there can be
no assurance as to the development or liquidity of any market for the Exchange
Notes.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all of the expenses incident to the Exchange Offer. In the
event the Company terminates the Exchange Offer and does not accept for exchange
any Outstanding Notes, the Company will promptly return the Outstanding Notes to
the holders thereof. See 'The Exchange Offer.'
2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference into this Prospectus the
following documents or information filed with the Commission:
(a) The Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1996;
(b) The Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1997;
(c) The Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1997;
(d) The Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997; and
(e) The Company's Current Report on Form 8-K dated June 19, 1997.
Any statement contained in any documents incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purpose of this Prospectus to the extent that a subsequent statement
contained herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
REPRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT
CHARGE UPON WRITTEN OR ORAL REQUEST FROM KENNETH K. WOLFF, CHIEF FINANCIAL
OFFICER OF THE COMPANY, AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICES LOCATED AT
7337 WEST WASHINGTON STREET, INDIANAPOLIS, INDIANA 46231, TELEPHONE NUMBER (317)
247-4000. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY REQUEST
SHOULD BE MADE AT LEAST 5 DAYS PRIOR TO THE EXPIRATION DATE.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and in accordance
therewith files periodic reports, proxy statements and other information with
the Commission. In addition, pursuant to the Indenture (as defined herein)
covering the Notes, the Company has agreed to file with the Commission the
annual reports and the information, documents and other reports otherwise
required pursuant to Section 13 of the Exchange Act. All such information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 and the website (http://www.sec.gov) maintained by the Commission and
at the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
This Prospectus constitutes a part of a registration statement on Form S-4
(the 'Registration Statement') filed by the Company with the Commission under
the Securities Act. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information contained in the
Registration Statement and the exhibits and schedules thereto and reference is
hereby made to the Registration Statement and the exhibits and schedules thereto
for further information with respect to the Company and the securities offered
hereby. Statements contained herein concerning the provisions of any documents
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission are not necessarily complete, and in each instance reference is made
to the copy of such document so filed. Each such statement is qualified in its
entirety by such reference.
3
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Market data and certain industry forecasts used throughout this Prospectus
were obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. Similarly, internal surveys, industry forecasts and market
research, while believed to be reliable, have not been independently verified,
and the Company makes no representation as to the accuracy of such information.
This Prospectus includes 'forward-looking statements' within the meaning of
various provisions of the Securities Act and the Exchange Act. Such
'forward-looking statements' can be identified by the use of forward-looking
terminology such as 'believes', 'expects', 'may', 'will', 'should', or
'anticipates' or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. All statements, other than
statements of historical facts, included in this Prospectus which address
activities, events or developments which the Company expects or anticipates will
or may occur in the future, including such things as estimated future net
revenues from airline services (including charter and scheduled service), future
capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's business and operations, plans, references
to future success, references to intentions as to future matters and other such
matters are forward-looking statements. See, e.g., 'Summary -- The
Company -- Strategy' and 'Summary -- The Company -- 1996 Restructuring of
Scheduled Service Operations', 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and 'Business.' These statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate in the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, including the risk factors
discussed in this Prospectus; general economic, market or business conditions;
the opportunities (or lack thereof) that may be presented to and pursued by the
Company; competitive actions by other airline carriers; changes in laws or
regulations; and other factors, many of which are beyond the control of the
Company. Consequently, all of the forward-looking statements made in this
Prospectus are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized, that they will have the
expected consequences or effects on the Company or its business or operations.
------------------------
Amtran is an Indiana corporation which was organized in 1984. The Company's
executive offices are located at 7337 West Washington Street, Indianapolis,
Indiana 46231, and its telephone number is (317) 247-4000. The Company's common
stock is traded through the facilities of the Nasdaq Stock Market under the
symbol 'AMTR.'
4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements of the Company and notes thereto included elsewhere in this
Prospectus. All references to the 'Company' in this Prospectus refer to Amtran,
Inc. and its subsidiaries collectively, unless the context otherwise requires.
THE COMPANY
Amtran is a leading provider of charter airline services, and on a targeted
basis scheduled airline services, to leisure and other value-oriented travelers.
Amtran, through its principal subsidiary, ATA, has been in operation for 24
years and currently operates the eleventh largest airline in the United States
in terms of 1996 revenue passenger miles ('RPMs'). ATA provides charter services
throughout the world to independent tour operators, corporations and the U.S.
military. The Company provides scheduled service primarily from its gateway
cities of Chicago-Midway, Indianapolis and Milwaukee to popular vacation
destinations such as Hawaii, Las Vegas, Florida, California, Mexico and the
Caribbean.
CHARTER SERVICE
The Company is the largest charter airline in the United States and
provides charter airline services throughout the world to U.S. and European tour
operators, U.S. military and government agencies and corporations. In 1996 and
for the first nine months of 1997, Amtran derived approximately 41% and 48%,
respectively, of consolidated revenues from charter operations. The charter
business is an attractive niche because it provides contractual revenues that
are more stable than revenues provided by scheduled service. The customer
generally pays a fixed price for the use of the aircraft and assumes the
responsibility and risk for the actual sale of the seats, as well as most of the
risk of fuel price increases. In addition, the Company is the largest domestic
provider of charter airline services. As a result of the Company's 1996
restructuring of its scheduled service operations, as described below (the '1996
Restructuring'), the Company expects that for 1997 as a whole, approximately 46%
of its consolidated revenues will be from charter operations.
Tour Operator Programs
Independent tour operators comprise the largest component of the Company's
charter service operations (representing approximately 30% and 31%,
respectively, of the Company's consolidated revenues for 1996 and the first nine
months of 1997). Independent tour operators typically contract with the Company
to provide repetitive, round-trip patterns to leisure destinations for specified
periods ranging from several weeks to several years. The Company believes that
its long standing relationships with tour operators provide it with a
competitive advantage. In addition, the Company believes that the low cost
leisure travel services provided by independent tour operators have historically
been less volatile than scheduled service operations as indicated by the
Company's 1990 to 1995 revenue and profitability, as compared to the major
scheduled service carriers for the same period.
Military/Government
The Company expects U.S. military and other government flight activity,
which has historically averaged 10-15% of consolidated revenues, to account for
approximately 16% of Amtran's 1997 revenues. The Company has provided charter
service to the U.S. military since 1983. Because this business is generally less
seasonal than leisure travel, it tends to have a stabilizing impact on the
Company's operations and earnings. The U.S. Government awards one year contracts
for its military charter business, and pre-negotiates contract prices for each
type of aircraft a carrier makes available. Such contracts are priced utilizing
the participating airlines' average costs, and are therefore more profitable for
low cost providers such as the Company. The Company believes its fleet of
aircraft, in particular its Boeing 757-200ERs, is well suited for the changing
requirements of military passenger service.
5
SCHEDULED SERVICE
The Company provides scheduled service primarily from its gateway cities of
Chicago-Midway, Indianapolis and Milwaukee to popular vacation destinations such
as Hawaii, Las Vegas, Florida, California, Mexico and the Caribbean. In its
scheduled service operations, the Company focuses primarily on providing low
cost, nonstop or direct flights on routes where it can be a principal provider.
In 1996, based on Department of Transportation ('DOT') statistics, the Company
had the lowest operating expense per available seat mile ('ASM'), approximately
6[c], of the eleven largest U.S. scheduled airlines. Notwithstanding the
Company's competitive cost position and business focus, the Company began to
incur losses in its scheduled service in the second half of 1995. In response to
these losses, the Company, as part of the 1996 Restructuring described below,
reduced its scheduled service by more than one third of its departures and ASMs.
As a result, the Company expects scheduled service operations, which comprised
52% and 45%, respectively, of consolidated revenues in 1996 and the first nine
months of 1997, to comprise approximately 48% of consolidated revenues for full
year 1997. The Company believes that the 1996 Restructuring strengthened its
competitive position and improved both load factors and yields in its scheduled
service operations. The Company has substantially improved the profitability of
these operations in the first nine months of 1997, versus the first nine months
of 1996.
STRATEGY
The Company intends to enhance its position as a leading provider to
independent tour operators, the U.S. Military and of targeted scheduled airline
services by pursuing a strategy designed to increase revenues and profitability.
The key components of this strategy are:
(i) Maintain Low Cost Position. The Company believes it has one of the
lowest operating costs per ASM in the industry, with an average cost per
ASM of approximately 6[c] for the fiscal year ended December 31, 1996 and
for the nine months ended September 30, 1997. The Company believes that
its low cost structure provides a significant competitive advantage,
which allows it to compete effectively in both the charter and scheduled
service markets. The Company has achieved its low cost position primarily
as a result of its route structure, low overhead and distribution costs,
productive and flexible workforce and low aircraft rental and ownership
costs.
(ii) Strengthen Leading Position with Tour Operators. The Company has
successfully operated in the charter service business since 1981, and it
expects to continue to enhance its leading position in this business. By
offering low cost air travel products that can be tailored to meet the
particular needs of its customers, primarily the tour operators, the
Company believes it is able to differentiate itself from most major
airlines, whose principal focus is on scheduled service, as well as from
smaller charter airlines, which do not have comparably diverse fleets or
the ability to provide a similar level of customer support. In addition to
its low cost, the Company believes that its product quality, reputation,
long standing relationships and ability to deliver a customized service
have become increasingly important to tour operators.
(iii) Maintain Leading Position as a Provider to the U.S. Military.
The Company has a long history of serving the military. Its contractor
teaming arrangement and its fleet of preferred aircraft will allow it to
maintain a strong competitive position for acquiring and servicing current
and future military charter contracts.
(iv) Selectively Participate in Scheduled Service. The Company's
strategy for its scheduled service is to focus primarily on providing low
cost, nonstop or direct flights from airports where there is only limited
competition. The Company believes that its high performance Boeing 757 and
727 aircraft give it a competitive advantage in the Chicago-Midway market.
Unlike the aircraft used by most of the Company's competitors at
Chicago-Midway, the Boeing 757 and 727 can fly larger passenger capacities
substantially longer distances while operating from the airport's short
runways. In Indianapolis, the Company has a name recognition advantage by
being the city's hometown airline. In the Milwaukee market, the Company is
the only low cost scheduled alternative. The Company significantly reduced
its scheduled service operations in 1996 by exiting, or reducing service
to, unprofitable markets such as Boston and intra-Florida and has
substantially improved its
6
profitability in the first nine months of 1997, versus the first nine
months of 1996. The Company is reviewing the opportunity of adding to its
Chicago-Midway routes by up to four destinations by the spring of 1998.
(v) Capitalize on Selected Growth Opportunities. The Company seeks to
increase revenues and profitability by capitalizing on selected growth
opportunities in its core businesses. The Company believes that, as a
result of its low cost structure and its strong relationships with tour
operators and military contractors, it is well positioned to capture
additional opportunities to serve these markets. The Company intends to
purchase additional aircraft to meet demand from its military and tour
operator charter customers, and potentially scheduled service. In addition,
at various times since the second quarter of 1996 the Company has actively
considered possible business combinations with other air carriers and other
providers of airline related services. The Company intends to continue to
evaluate such transactions. Accordingly, it is possible that the Company
will enter into a transaction in the first half of 1998 or thereafter that
will result in a merger or other change of control of the Company.
1996 RESTRUCTURING OF SCHEDULED SERVICE OPERATIONS
An analysis by the Company in 1996 of the profitability of its scheduled
service and charter service business units revealed that a significant number of
scheduled service markets being served by the Company had become unprofitable at
that point in time. The Company believes that several key factors contributed to
the deterioration of the profitability of its scheduled service in late 1995 and
1996, including (i) a significant increase in competition from larger carriers
in the scheduled service markets served by the Company, (ii) the negative impact
on low fare carriers resulting from unfavorable media coverage of the effects of
the May 1996 ValuJet Airlines, Inc. ('ValuJet') accident in Florida, (iii) a
significant increase in fuel costs and (iv) a federal excise tax on jet fuel
beginning in the fourth quarter of 1995.
In August 1996, the Company announced a significant reduction in scheduled
service operations. More than one-third of scheduled service departures and ASMs
were included in this schedule reduction. The Company eliminated its
unprofitable Boston and intra-Florida operations. The Company also exited, or
reduced in frequency, operations to other selected markets from Chicago-Midway,
Indianapolis and Milwaukee. In conjunction with its scheduled service reduction,
the Company announced a 15% reduction of its work force, including both
employees and contractors.
In addition, in 1996 the Company reconfigured its mix of aircraft. The
Company reduced the number of Boeing 757-200 aircraft it operates from eleven to
seven, and reduced operating costs by switching to an all Rolls-Royce powered
Boeing 757 fleet. The commonality of aircraft and engines benefits the Company
in the form of decreased maintenance and training costs.
NEW CHIEF EXECUTIVE OFFICER
On June 19, 1997, the Company announced the election of John P. Tague as
President and Chief Executive Officer of the Company. Mr. Tague originally
joined the Company in 1991, as Vice President of Marketing, and was elected
President and Chief Operating Officer in September 1993, a position he held
until his resignation in 1995. Mr. Tague subsequently served as Co-Chairman and
Chief Executive Officer of the Pointe Group, an aviation consulting firm, and as
Chief Executive Officer for both Vanguard Airlines, Inc. and Air South Airlines,
Inc. Mr. Tague brings over twelve years of management experience in the airline
industry to the Company.
7
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $100,000,000 aggregate
principal amount of Outstanding Notes for an equal aggregate principal amount of
Exchange Notes. The Exchange Notes are obligations of the Company entitled to
the benefits of the Indenture relating to the Outstanding Notes. The form and
terms of the Exchange Notes are the same as the form of the Outstanding Notes
except that the Exchange Notes have been registered under the Securities Act,
and following the completion of the Exchange Offer, the Exchange Notes generally
will not be entitled to a contingent increase in the interest rate otherwise
provided under certain circumstances.
Securities Offered........................ Up to $100,000,000 aggregate principal amount of 10 1/2% Senior
Exchange Notes due August 1, 2004, which have been registered under
the Securities Act. The terms of the Exchange Notes are identical
in all material respects to the Outstanding Notes except for
certain transfer restrictions and registration rights relating to
the Outstanding Notes and except that, if the Exchange Offer is not
consummated or a Shelf Registration Statement with respect to the
Outstanding Notes is not declared effective on or prior to January
24, 1998, the interest rate borne by the Outstanding Notes will
increase by amounts specified herein until the Exchange Offer is
consummated. See 'Registration Rights Agreement for Outstanding
Notes.'
The Exchange Offer........................ The Exchange Notes are being offered in exchange for a like principal
amount of Outstanding Notes validly tendered pursuant to the
Exchange Offer. As of the date hereof, $100,000,000 in aggregate
principal amount of Outstanding Notes are outstanding. The Company
will issue the Exchange Notes to tendering holders of Outstanding
Notes on or promptly after the Expiration Date. The issuance of the
Exchange Notes is intended to satisfy the obligations of the
Company contained in the Registration Rights Agreement. For
procedures on tendering, see 'The Exchange Offer' and 'Registration
Rights Agreement for Outstanding Notes.'
Expiration of the Exchange Offer.......... Midnight, New York City time, on the Expiration Date, unless the
Exchange Offer is extended, in which case the term 'Expiration
Date' means the latest date and time to which the Exchange Offer is
extended. See 'The Exchange Offer -- Terms of the Exchange Offer;
Period for Tendering Outstanding Notes.'
Tenders; Withdrawal....................... The tender of Outstanding Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date. Any Outstanding
Notes not accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the Exchange
Offer.
Conditions to the Exchange Offer.......... The Exchange Offer shall not be subject to any conditions, other than
that the Exchange Offer does not violate applicable law or any
applicable interpretation of the staff of the Commission. There can
be no assurance that any such condition will not occur. Holders of
Outstanding Notes will
8
have certain rights against the Company under the Registration
Rights Agreement should the Company fail to consummate the Exchange
Offer. See 'The Exchange Offer -- Certain Conditions to the
Exchange Offer.'
Federal Income Tax Considerations......... The exchange pursuant to the Exchange Offer should not be a taxable
event for federal income tax purposes. See 'Certain United States
Federal Income Tax Considerations.'
Exchange Agent............................ First Security Bank, N.A., the Trustee under the Indenture, is
serving as the exchange agent (the 'Exchange Agent') in connection
with the Exchange Offer.
Use of Proceeds........................... There will be no cash proceeds payable to the Company from the
issuance of the Exchange Notes pursuant to the Exchange Offer. See
'Use of Proceeds' for a description of the use of proceeds from the
issuance of the Outstanding Notes.
9
CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES
Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the provisions in the Indenture regarding transfer and exchange of the
Outstanding Notes and the restrictions on transfer of such Outstanding Notes as
set forth in the legend thereon as a consequence of the issuance of the
Outstanding Notes pursuant to exemptions from, or in transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. In general, the Outstanding Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register Outstanding Notes under the Securities Act. See 'Registration Rights
Agreement for Outstanding Notes.' Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued to third parties, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Outstanding Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
'affiliate' of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
with any person to participate in the distribution of such Exchange Notes.
However, the Company does not intend to request the Commission to consider, and
the Commission has not considered, the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer as in such
other circumstances. Each holder, other than a broker-dealer, must acknowledge
that (i) the Exchange Notes received by such holder will be acquired in the
ordinary course of its business, (ii) at the time of the consummation of the
Exchange Offer such holder will have not engaged in, and does not intend to
engage in, a distribution of Exchange Notes and has no arrangement or
understanding to participate in a distribution of Exchange Notes and (iii) such
holder is not an affiliate of the Company within the meaning of Rule 405 of the
Securities Act or if it is such an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act, to the
extent applicable. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Outstanding Notes must acknowledge that such Outstanding
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities and that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See 'Plan of Distribution.'
In addition, to comply with state securities laws, the Exchange Notes may not be
offered or sold in any state unless they have been registered or qualified for
sale in such state or an exemption from registration or qualification is
available and is complied with. The offer and sale of the Exchange Notes to
'qualified institutional buyers' (as such term is defined under Rule 144A of the
Securities Act) is generally exempt from registration or qualification under
state securities laws. The Company currently does not intend to register or
qualify the sale of the Exchange Notes in any state where an exemption from
registration or qualification is required and not available. See 'The Exchange
Offer -- Consequences of Exchanging Outstanding Notes' and 'Registration Rights
Agreement for Outstanding Notes.'
10
SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
The terms of the Exchange Notes are identical in all material respects to
the terms of the Outstanding Notes, except for certain transfer restrictions and
registration rights relating to the Outstanding Notes and except that, if an
exchange offer with respect to the Exchange Notes is not consummated by January
24, 1998, the rate per annum at which the Outstanding Notes bear interest will
be increased temporarily. See 'Registration Rights Agreement for Outstanding
Notes.' Interest on the Exchange Notes will accrue from the last interest
payment date on which interest was paid on the Outstanding Notes surrendered in
exchange therefor, or if no interest has been paid on the Outstanding Notes,
from the Issue Date. Holders of Outstanding Notes whose Outstanding Notes are
accepted for exchange will not receive any payment in respect of interest on
such Outstanding Notes otherwise payable on any interest payment date the record
date for which occurs on or after consummation of the Exchange Offer.
Consequently, holders who exchange their Outstanding Notes for Exchange Notes
will receive the same interest payment on February 1, 1998 (the first interest
payment date with respect to the Outstanding Notes and the Exchange Notes) that
they would have received had they not accepted the Exchange Offer. See 'The
Exchange Offer -- Interest on the Exchange Notes.'
Securities Offered........................ Up to $100,000,000 aggregate principal amount of 10 1/2% Senior
Exchange Notes due August 1, 2004, which have been registered under
the Securities Act, issued by the Company.
Interest.................................. Interest on the Notes is payable semiannually in cash on February 1
and August 1, commencing on February 1, 1998.
Optional Redemption by the Company........ The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after August 1, 2002, initially at 105.25%
of their principal amount, plus accrued and unpaid interest, if
any, declining to 100% of their principal amount, plus accrued and
unpaid interest, if any, at maturity. See 'Description of the
Notes -- Optional Redemption.' In addition, at any time prior to
August 1, 2000, the Company may redeem up to 35% of the aggregate
principal amount of the Notes with the proceeds of sales of common
stock by the Company at a redemption price of 110.50% of their
principal amount; provided that at least $65.0 million aggregate
principal amount of Notes remains outstanding after each such
redemption.
Ranking................................... The Notes will rank pari passu with all unsecured, unsubordinated
indebtedness of the Company existing or created in the future, will
be effectively subordinated to the Company's obligations under
secured indebtedness to the extent of such security and will be
senior to all subordinated indebtedness of the Company created in
the future. At September 30, 1997, on a consolidated basis, after
giving effect to (x) the Original Offering, and (y) the replacement
of certain senior credit facilities with the New Credit Facility,
the Company had approximately $178.8 million of indebtedness
outstanding, approximately $71.7 million of which was secured. See
'Description of the Notes -- Ranking.'
11
Guarantee................................. All payments with respect to the Notes (including principal and
interest) are unconditionally guaranteed on an unsecured
unsubordinated basis jointly and severally by each of the active
subsidiaries of the Company as of July 24, 1997 (the 'Closing
Date'), consisting of American Trans Air, Inc., Ambassadair Travel
Club, Inc., ATA Vacations, Inc., Amber Travel, Inc., American Trans
Air Training Corporation, American Trans Air ExecuJet, Inc. and
Amber Air Freight Corporation (collectively, the 'Guarantors').
Such guarantees (the 'Guarantees') will rank pari passu with all
existing and future unsecured unsubordinated indebtedness of the
Guarantors, will be effectively subordinated to secured
indebtedness of the Guarantors to the extent of such security and
will be senior in right of payment to all future subordinated
indebtedness of the Guarantors. At September 30, 1997, after giving
effect to the Original Offering and the application of the net
proceeds thereof, including to repay certain Guarantor
indebtedness, the Guarantors (on a consolidated basis excluding
indebtedness owed to the Company and indebtedness of Amtran) had
approximately $78.8 million of indebtedness outstanding (other than
the Guarantees), $71.7 million of which was secured indebtedness.
Certain Covenants......................... The Indenture will contain certain covenants for the benefit of the
holders of the Notes, including, among other things, covenants
limiting the incurrence of indebtedness, restricted payments,
dividend and other payment restrictions affecting restricted
subsidiaries, the issuance and sale of capital stock of restricted
subsidiaries, the issuance of guarantees by restricted
subsidiaries, transactions with shareholders and affiliates, liens,
sale-leaseback transactions, asset sales and certain mergers and
consolidations. See 'Description of the Notes -- Covenants.'
Change of Control......................... Upon a Change of Control (as defined in 'Description of the Notes'),
each holder of the Notes will have the right, subject to certain
conditions, to require the Company to purchase such holder's Notes
at a purchase price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of purchase.
There can be no assurance that the Company will have the financial
resources necessary to purchase the Notes upon a Change of Control.
See 'Description of the Notes -- Repurchase of Notes upon a Change
of Control.'
Book-Entry; Delivery and Form............. The Exchange Notes will be represented by one permanent global
Exchange Note in definitive, fully registered form deposited with a
custodian for, and registered in the name of a nominee of, The
Depository Trust Company ('DTC') See 'Description of the
Notes -- Book-Entry; Delivery and Form.'
12
USE OF PROCEEDS
There will be no cash proceeds payable to the Company from the Exchange
Offer.
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes contemplated in this Prospectus,
the Company will receive Outstanding Notes in like principal amount, the form
and terms of which are the same as the form and terms of the Exchange Notes
(which they replace), except as otherwise described herein. The Outstanding
Notes surrendered in exchange for Exchange Notes will be retired and canceled
and cannot be reissued. Accordingly, the issuance of the Exchange Notes will not
result in any increase or decrease in the indebtedness of the Company.
The net proceeds from the Original Offering were approximately $97.3
million. The net proceeds from the Original Offering were used by the Company to
repay bank indebtedness and for general corporate purposes, which may include
the purchase of additional aircraft and the refinancing of existing aircraft.
See 'Use of Proceeds.'
RISK FACTORS
For a description of certain factors that should be considered by holders
who tender their Outstanding Notes in the Exchange Offer, see 'Risk Factors'
beginning on page 16.
13
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary consolidated financial data are derived from the
consolidated financial statements of Amtran for the periods presented. The
consolidated financial statements for each of the five years ended December 31,
1996, have been audited by Ernst & Young LLP, independent auditors. The
consolidated financial data for the nine month periods ended September 30, 1996
and 1997 are unaudited but include all adjustments, consisting only of normal
recurring adjustments, which, in the opinion of management, are necessary for a
fair presentation of the financial position and results of operations for these
periods. The results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year. The
consolidated financial data should be read in conjunction with the consolidated
financial statements of the Company and notes thereto and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations'
included elsewhere in this Prospectus.
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Operating revenues...................... $421,790 $467,909 $580,522 $715,009 $750,851 $602,228 $597,262
Depreciation and amortization(1)........ 40,820 37,418 46,178 55,827 61,661 47,173 45,994
Operating income (loss)(2).............. 2,592 6,620 8,415 17,936 (36,056) (16,573) 14,076
Interest expense........................ 6,898 3,872 3,656 4,163 4,465 2,803 5,835
Income (loss) before income taxes....... (2,643) 3,866 5,879 14,653 (39,581) (18,645) 9,412
Net income (loss)....................... (2,140) 3,035 3,486 8,524 (26,674) (12,565) 4,220
Net income (loss) per adjusted
share(3).............................. (0.24) 0.28 0.30 0.74 (2.31) (1.09) 0.36
BALANCE SHEET DATA (AT END OF PERIOD):
Cash.................................... $ 35,719 $ 45,024 $ 61,752 $ 92,741 $ 73,382 $ 72,802 $ 82,208
Non-cash working capital
(deficiency)(4)....................... (62,308) (48,601) (68,166) (80,639) (65,472) (58,975) (80,204)
Property and equipment, net............. 166,882 172,244 223,104 240,768 224,540 246,041 267,096
Total assets............................ 239,029 269,830 346,288 413,137 370,287 403,625 422,816
Short-term debt (including current
maturities)........................... 20,375 18,242 8,447 3,606 30,271 29,133 4,186
Long-term debt.......................... 67,574 61,090 109,659 134,641 119,786 129,908 174,656
Total debt.............................. 87,949 79,332 118,106 138,247 150,057 159,041 178,842
Shareholders' equity(5)................. 32,469 69,941 72,753 81,185 54,744 69,466 59,409
OTHER FINANCIAL DATA:
EBITDAR(6).............................. $ 82,446 $ 89,584 $103,868 $130,381 $ 91,972 $ 83,233 $102,999
EBITDA(6)............................... 45,075 45,156 55,713 74,643 26,545 31,331 61,241
Net cash provided by operating
activities............................ 53,741 33,896 75,297 87,078 32,171 27,343 70,732
Net cash used in investing activities... (28,325) (37,440) (80,400) (44,032) (63,161) (53,711) (60,652)
Net cash provided by (used in) financing
activities............................ (15,884) 12,849 21,831 (12,057) 11,631 6,429 (1,254)
Ratio of earnings to fixed charges(7)... -- 1.24 1.32 1.60 -- -- 1.36
Deficiency of earnings available to
cover fixed charges(7)................ $ 2,643 -- -- -- $ 40,931 $ 21,205 --
Pro forma interest expense.............. $ 10,744 8,512
Pro forma ratio of earnings to fixed
charges(7)............................ -- -- 1.18
Pro forma deficiency of earnings
available to cover fixed charges(7)... $ 47,359 -- --
(footnotes on next page)
14
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- -------- --------
SELECTED OPERATING DATA FOR PASSENGER
SERVICE(8):
Available seat miles (millions)(9)... 7,521.2 8,232.5 10,443.1 12,521.4 13,295.5 10,706.6 9,731.1
Revenue passenger miles
(millions)(10)..................... 5,547.1 5,593.5 7,158.8 8,907.7 9,172.4 7,480.4 7,055.9
Passenger load factor(11)............ 73.8% 67.9% 68.6% 71.1% 69.0% 69.9% 72.5%
Revenue per available seat mile...... 5.61[c] 5.68[c] 5.56[c] 5.71[c] 5.65[c] 5.62[c] 6.14[c]
Operating expense per ASM(12)........ 5.57[c] 5.60[c] 5.48[c] 5.56[c] 5.92[c] 5.78[c] 5.99[c]
Block hours flown(13)................ 65,583 76,542 103,657 126,295 138,114 111,289 104,683
Average daily aircraft utilization
(block hours per day)(14):
Lockheed L-1011................. 7.36 7.07 7.24 8.88 6.55 7.02 6.79
Boeing 727-100.................. 5.28 -- -- -- -- -- --
Boeing 727-200ADV............... -- 7.96 8.24 9.28 7.62 8.04 7.86
Boeing 757-200.................. 9.73 10.26 10.91 11.71 11.06 11.25 10.89
Total aircraft....................... 25 31 41 46 45 49 45
- ------------
(1) As of January 1, 1992, Amtran lengthened its estimate of the useful lives
of its L-1011 aircraft, which reduced depreciation expense by $3.4 million
in 1992.
(2) Amtran has reclassified gain (loss) on sale of operating assets for
1992-1995 from nonoperating gain (loss) to operating income (loss) to be
consistent with the 1996 presentation. Also, in the third quarter of 1996,
Amtran recorded a $4.7 million loss on the disposal of leased assets
associated with both Boeing 757-200 aircraft transactions. See
'Business -- 1996 Restructuring of Scheduled Service Operations.'
(3) Net income (loss) per adjusted share is based on average shares outstanding
during the period, adjusted to give effect to the reclassification effected
in December 1992 and the retroactive effect of the stock dividend
distributed in March 1993, which resulted in 9,090,000 shares outstanding
during all periods presented.
(4) Non-cash working capital consists of total current assets (excluding cash)
less total current liabilities (excluding current maturities of long term
debt).
(5) No dividends were paid in any of the periods presented.
(6) EBITDAR represents net income plus interest expense (net of capitalized
interest), income tax expense, depreciation, amortization and aircraft
rentals. EBITDA represents net income plus interest expense (net of
capitalized interest), income tax expense, depreciation and amortization.
EBITDAR and EBITDA are presented because each is a widely accepted
financial indicator of a company's ability to incur and service debt.
However, EBITDAR and EBITDA should not be considered in isolation, as a
substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity.
(7) The 'ratio of earnings to fixed charges' represents earnings divided by
fixed charges, as defined in the following paragraph. The 'deficiency'
represents the amount of fixed charges in excess of earnings.
For purposes of these computations, earnings consist of income (loss)
before income taxes, plus fixed charges, adjusted to exclude the amount of
any interest capitalized during the period. Fixed charges include the total
of: (i) interest, whether expensed or capitalized; (ii) amortization of
debt expense relating to any indebtedness, whether expensed or capitalized;
and (iii) such portion of rental expense as can be demonstrated to be
representative of the interest factor.
(8) The operating data (other than revenue per ASM and operating expense per
ASM) pertain only to ATA and do not include information for other
subsidiaries of Amtran.
(9) 'Available seat miles' or 'ASMs' represent the number of seats available
for sale to passengers multiplied by the number of miles those seats are
flown.
(10) 'Revenue passenger miles' or 'RPMs' represent the number of miles flown by
revenue passengers.
(11) 'Passenger load factor' represents revenue passenger miles divided by
available seat miles.
(12) 'Operating expense per ASM' for any period represents the amount determined
by dividing total operating expense for such period by the total ASMs for
such period.
(13) 'Block hours flown' for any aircraft represents the elapsed time computed
from the moment the aircraft first moves under its own power from the
boarding ramp at one airport to the time it comes to rest at the boarding
ramp of the next point of landing.
(14) 'Average daily aircraft utilization' is determined with respect to each
aircraft type for any period by dividing the block hours flown by all
aircraft of such type during such period by the number of days during such
period that aircraft of such type were owned or leased by the Company.
15
RISK FACTORS
This Prospectus contains certain forward-looking statements. While the
Company believes these statements are reasonable, prospective holders of the
Exchange Notes should be aware that actual results could differ materially from
those projected by such forward-looking statements as a result of the risk
factors set forth below or other factors.
Prospective holders of the Exchange Notes should consider carefully the
following factors as well as the other information and data included in this
Prospectus before tendering their Outstanding Notes in the Exchange Offer. The
Company cautions the reader, however, that this list of factors may not be
exhaustive and that these or other factors could have an adverse effect on the
Company's ability to service its indebtedness, including principal and interest
payments on the Exchange Notes.
SUBSTANTIAL LEVERAGE
At September 30, 1997, on a consolidated basis, after giving effect to (x)
the Original Offering, and (y) the replacement of certain senior credit
facilities with the New Credit Facility, the Company had approximately $178.8
million of indebtedness outstanding, approximately $71.7 million of which was
secured. Total shareholders' equity of the Company on a consolidated basis as of
September 30, 1997 was approximately $59.4 million. As of September 30, 1997,
after giving effect to the Offering, the application of the net proceeds thereof
and entering into the New Credit Facility, the Company's total debt was 75.1% of
total capitalization, which represents significant financial leverage, even in
the highly leveraged airline industry. In addition, the Company had substantial
obligations under operating leases for aircraft. See 'Capitalization' and
'Business -- Aircraft Fleet.'
On a pro forma basis, after giving effect to the Original Offering as if it
had occurred at the beginning of the period, the Company would have had interest
expense of approximately $10.7 million and $8.5 million, respectively, for 1996
and for the nine months ended September 30, 1997 which would have resulted in an
EBITDA to interest expense ratio for the Company of approximately 2.5 times and
7.2 times, respectively. Earnings of the Company were insufficient to cover
fixed charges by approximately $2.6 million and $40.9 million for the years
ended December 31, 1992 and 1996, respectively. The Company's ability to satisfy
its obligations will be dependent upon its future performance, which is subject
to general economic conditions and to financial, business and other factors,
including factors beyond the Company's control. The Company's operating results
and cash flow could be adversely affected by such factors as price competition,
increases in fuel costs, a downturn in general economic conditions and adverse
regulatory changes.
The degree to which the Company and the Guarantors are leveraged could have
important consequences to holders of Notes, including the following: (i) the
Company's and the Guarantors' ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other purposes
may be impaired; (ii) the Company's and the Guarantors' degree of leverage and
related debt service obligations, as well as their obligations under operating
leases for aircraft, may make them more vulnerable than some of their
competitors in a prolonged economic downturn; and (iii) the Company's and the
Guarantors' financial position may restrict their ability to exploit new
business opportunities and limit their flexibility to respond to changing
business conditions. The Company's and the Guarantors' competitive positions may
also be affected by the fact that they may be more highly leveraged than some of
their competitors.
EFFECTIVE SUBORDINATION OF NOTES TO SECURED OBLIGATIONS OF SUBSIDIARIES
Claims of secured creditors of the Company's subsidiaries will have
priority to the extent of the security interests granted in the assets of such
subsidiaries over the claims of the Company and the holders of the Company's
indebtedness, including the Notes. ATA has implemented a new four-year secured
revolving credit facility (the 'New Credit Facility'), which provides for a $50
million revolving line of credit for general working capital purposes. Amounts
owed under the New Credit Facility are secured by a first priority perfected
security interest in certain aircraft and related engines. Accordingly, the
lenders under the New Credit Facility have priority over the holders of the
Notes with respect to,
16
and to the extent of, the pledged assets, and the Notes will be effectively
subordinated to such secured indebtedness, and to any other secured
indebtedness, of the Company's subsidiaries.
LIQUIDITY AND DEBT SERVICE
Although the Company, like most other airlines, generally operates with a
working capital deficit, it has been able to meet its obligations as they have
become due. In order to meet short-term cash needs, ATA maintains bank credit
facilities. In July 1997, in connection with the offering of the Outstanding
Notes, ATA amended its principal bank credit facility to provide the New Credit
Facility. At September 30, 1997, the Company's current assets were $146.9
million, and current liabilities were $149.1 million. If the Existing Credit
Facility had not been partially drawn, at September 30, 1997 cash (and therefore
current assets) and long-term liabilities would decrease by approximately $25.0
million. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Credit Facilities'
and 'Description of the New Credit Facility.'
The Company will be required to make no payments on the New Credit Facility
of $50.0 million until its maturity date of April 1, 2001. The Company expects
to incur expenses under non-cancellable operating leases during 1997, 1998,
1999, 2000 and 2001 and thereafter of $61.1 million, $52.1 million, $49.9
million, $36.8 million, $34.6 million and $220.6 million, respectively. Under
the New Credit Facility, the Company is required during the years ended 1997,
1998, 1999, 2000 and 2001 and thereafter to make payments on long-term debt
totalling $10.3 million, $31.5 million, $1.5 million, $1.5 million, $39.2
million and $117.7 million, respectively. The Company may seek to supplement its
current sources of financing with other sources of long-term financing,
including vendor financing, sale-leaseback transactions and public and private
debt. The Company may from time to time also seek additional equity financing.
There can be no assurance that any such external financing would be available on
satisfactory terms.
The Company currently expects that capital expenditures for 1997 will total
approximately $112.5 million. Such expenditures will be mainly for scheduled
heavy maintenance on the Company's aircraft. See 'Business -- Aircraft Fleet.'
NET LOSSES AND RESTRUCTURING
For the year ended 1996 the Company incurred operating and net losses of
$36.1 million and $26.7 million, respectively, as compared to operating and net
income of $17.9 million and $8.5 million, respectively, during 1995. The losses
in the 1996 period reflected a number of factors, including: (i) a significant
increase in competition from larger carriers in the scheduled service markets
served by the Company, (ii) the negative impact on low fare carriers resulting
from unfavorable media coverage of the effects of the ValuJet accident in
Florida and, to a lesser extent, the Company's own decompression incident, (iii)
a significant increase in fuel costs and (iv) a federal excise tax on jet fuel
that became effective on October 1, 1995. As a result, the Company entered into
the 1996 Restructuring. Although the Company realized a profit for the first six
months of 1997, there can be no assurance that the Company will continue to be
profitable. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
STRATEGIC ALTERNATIVES
In the second and third quarters of 1996, the Company undertook an analysis
of the profitability of its scheduled service, military and tour operator
operations, as well as the relative economics of the Company's three aircraft
fleet types. As a result of that analysis, among other things, the Company
significantly reduced its scheduled service operations, entered into
arrangements to reduce the growth of its Boeing 757 fleet and reallocated
aircraft from scheduled service to charter operations. The Company is continuing
to evaluate the profitability of each segment of its operations and to consider
further restructuring or other alternatives with respect to those operations.
See 'Business -- 1996 Restructuring of Scheduled Service Operations.'
In addition, at various times since the second quarter of 1996 the Company
has actively considered possible business combinations with other air carriers
and other providers of airline related services.
17
The Company intends to continue to evaluate such transactions. Accordingly, it
is possible that the Company will enter into a transaction in the first half of
1998 or thereafter that will result in a merger or other change of control of
the Company.
The New Credit Facility may be accelerated upon a merger or consolidation
of the Company or ATA, including any such transaction resulting in a change of
control of the Company or ATA. If any of the Company's credit facilities were to
be accelerated, there can be no assurance that the Company would have sufficient
liquidity to satisfy such obligations or that it would be able to secure
alternative financing. Failure to satisfy such obligations could cause a default
under the Notes and accelerate payment of principal and accrued interest
thereon. See 'Description of the Notes -- Events of Default.'
RESTRICTIONS UNDER FINANCING AGREEMENTS
The financing agreements relating to the Company's outstanding indebtedness
impose significant operating and financial restrictions on the Company. For
example, the New Credit Facility is secured by liens on certain Company-owned
L-1011 aircraft and engines. In addition, the New Credit Facility prohibits or
restricts in many respects the Company's ability to incur additional
indebtedness, create material liens on its assets, sell assets or engage in
mergers or consolidations, redeem or repurchase Notes, make certain investments,
pay cash dividends or engage in other significant transactions. See 'Description
of the New Credit Facility.'
Under certain of such financing agreements, the Company is required to
maintain compliance with certain specified covenants, restrictions, financial
ratios and other financial and operating tests. The Company's ability to comply
with any of the foregoing restrictions and with loan repayment provisions will
depend upon its future performance, which will be subject to prevailing economic
conditions and other factors, including factors beyond the control of the
Company. A failure to comply with any of these obligations could result in an
event of default under one or more of such financing agreements, which could
permit acceleration of the debt under such instrument and acceleration of debt
under the Company's other principal financing agreements and termination of the
Company's aircraft operating leases, some of which contain cross-default or
cross-acceleration provisions. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Credit Facilities.'
POSSIBLE LIMITATION ON NOL CARRYFORWARDS
The Company has approximately $81.7 million of net operating loss
carryforwards and $4.7 million of investment and other tax credit carryforwards
(as of December 31, 1996) which may, depending on the circumstances, be
available to reduce U.S. federal income taxes payable by the Company in the
future. However, if the Company undergoes an 'ownership change' within the
meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the
'Code'), the Company's utilization of its net operating loss carryforwards and
investment tax credit carryforwards could be subject to limitation.
In general, an ownership change under Section 382 will occur if, over a
three-year period, certain stockholders who own directly or indirectly 5% or
more of the capital stock of the corporation (including the so-called 'public
group') increase their percentage ownership by more than 50 percentage points in
the aggregate. The effect on the Company of the imposition of a limitation on
the use of its tax attributes in the event of an ownership change in the future
would depend on a number of factors, including the profitability of the Company
and the timing of the sale of certain assets, some of which factors are beyond
the control of the Company. The impact on the Company of such a limitation could
be materially adverse under certain circumstances. In addition, for financial
reporting purposes, such an ownership change could, in certain circumstances,
require the Company to reduce the amount of its deferred tax benefits, with a
resulting charge to earnings.
BONDING REQUIREMENTS
Under current DOT regulations with respect to charter transportation
originating in the United States, all charter airline tickets must generally be
paid for in cash and all funds received from the sale of charter seats (and in
some cases the costs of land arrangements) must be placed into escrow by the
18
tour operator or protected by a surety bond satisfying certain prescribed
standards. Currently, the Company provides a third-party bond which is unlimited
in amount in order to satisfy its obligations under these regulations. Under the
terms of its bonding arrangements, the issuer of the bond has the right to
terminate the bond at any time on 30 days' notice. The Company provides a $2.5
million letter of credit to secure its potential obligations to the issuer of
the bond. If the bond were to be materially limited or canceled, the Company,
like all other U.S. charter airlines, would be required to escrow funds to
comply with the DOT requirements summarized above. Compliance with such
requirements would reduce the Company's liquidity and require it to fund higher
levels of working capital ranging up to $16.0 million based on anticipated 1997
peak travel periods.
INSURANCE COVERAGE
The Company is subject to potential losses which may be incurred in the
event of an aircraft accident. Any such accident could involve not only repair
or replacement of a damaged aircraft and its consequent temporary or permanent
loss from service, but also potential claims of injured passengers and others.
The Company is required by the DOT to carry liability insurance on each of its
aircraft. The Company currently maintains public liability insurance in the
amount of $1.25 billion. Although the Company currently believes its insurance
coverage is adequate, there can be no assurance that the amount of such coverage
will not be changed or that the Company will not be forced to bear substantial
losses from accidents. Substantial claims resulting from an accident could have
a material adverse effect on the business, financial condition and results of
operations of the Company, and could seriously inhibit passenger acceptance of
the Company's services. The Company's insurance policies also impose certain
geographic restrictions on where the Company may provide airline service. See
'Business -- Insurance.'
CUSTOMERS
The Company's largest customer during each of 1994, 1995 and 1996 was the
U.S. military, accounting for approximately 16%, 11% and 11%, respectively, of
the Company's total operating revenues. The Company expects that during 1997 the
U.S. military will continue to be its largest customer and will account for
approximately 16% of operating revenues. In 1996, the Company's five largest
non-military customers accounted for approximately 22% of total operating
revenues, and the Company's ten largest non-military customers accounted for
approximately 30% of total operating revenues. No single non-military customer
accounted for more than 10% of total operating revenues during this period.
The Company is subject to the risk that a customer which has contracted
with the Company will cancel or default on its contract or contracts and the
Company will be unable to obtain other business to cover the resulting loss in
revenues. If the size of the contract or contracts is significant enough, any
such default or cancelation could have a material adverse effect on the Company.
Included in the Company's scheduled service sales are bulk sales agreements
with tour operators. Under these arrangements, which are very similar to charter
sales, the tour operator may take up to 85% of an aircraft as a bulk-seat
purchase. To minimize its exposure in the event of non-payment by a tour
operator, the Company requires bonding or a security deposit for a significant
portion of the bulk-seat fare; however, the Company is still responsible for
providing travel to customers who have purchased tickets under bulk-sale
agreements.
EFFECTS OF SEASONALITY OF BUSINESS ON THE COMPANY
The Company's airline businesses are significantly affected by seasonal
factors. Typically, the Company experiences reduced demand during the second and
fourth quarters as demand for leisure airline services during such periods is
lower relative to other times of the year. The Company has recently experienced
its strongest operating results in the first quarter. As a result, the Company's
results of operations for any one quarter are not necessarily indicative of the
Company's annual results of operations.
19
EMPLOYEE RELATIONS
In June 1991, the Company's flight attendants elected the Association of
Flight Attendants ('AFA') as their representative. In December 1994, the flight
attendants ratified a four-year collective bargaining agreement. In June 1993,
the Company's cockpit crews elected the International Brotherhood of Teamsters
('IBT') as their representative. Following three years of negotiations, in
September 1996 a four-year collective bargaining agreement was ratified by the
cockpit crews. The Company believes that its relations with its employees are
good. However, the existence of a significant dispute with any sizable number of
its employees could have a material adverse effect on the Company's operations.
RELIANCE ON TRAVEL AGENTS AND TOUR OPERATORS FOR TICKET SALES
Approximately 65% and 67% of the Company's revenues for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively,
were derived from tickets sold by travel agents or tour operators. Travel agents
and tour operators generally have a choice between one or more airlines when
booking a customer's flight. Accordingly, any effort by travel agencies or tour
operators to favor another airline or to disfavor the Company could adversely
impact the Company. The Company's relations with travel agencies and tour
operators could be affected for instance, by override commissions offered by
other airlines, by an increase in the Company's arrangements with other
distributors of its tickets or by the introduction of alternative methods of
selling tickets. Although management intends to continue to offer attractive and
competitive products to travel agencies and tour operators and to maintain
favorable relations with travel agencies and tour operators, there can be no
assurance that travel agencies or tour operators will not disfavor the Company
or favor other airlines in the future.
INDUSTRY CONDITIONS AND COMPETITION
The Company's products and services face varying degrees of competition in
diverse markets. The Airline Deregulation Act of 1978 has substantially
eliminated governmental authority to regulate domestic routes and fares and has
increased the ability of airlines to compete with higher flight frequencies and
lower fares. The Company generally competes on the basis of price, availability
of equipment, quality of service and convenience. In the leisure travel market,
the Company's principal focus of operations, the Company faces significant
competition from a large number of U.S., European and Mexican charter and
scheduled airlines, many of which are larger and have substantially greater
financial resources than the Company. The scheduled carriers compete for leisure
travel customers in a variety of ways, including wholesaling discounted seats on
scheduled flights to tour operators, promoting to travel agents prepackaged
tours for sale to retail customers and selling discounted, excursion airfare-
only products to the public. As a result, all charter airlines, including the
Company, generally are required to compete for customers against the lowest
revenue-generating seats of the scheduled airlines. During periods of dramatic
fare cuts by the scheduled airlines, the Company is forced to respond
competitively to these deeply discounted seats.
The Company also competes against scheduled airlines on the basis of
convenience. Due in part to the creation of numerous hub-and-spoke route
systems, many smaller cities are not served by direct or nonstop flights to
leisure destinations, and many secondary leisure destinations do not receive
direct or nonstop service from more than a few major U.S. cities. The Company
targets these markets by providing travelers with nonstop service to leisure
destinations on a limited-frequency basis.
In the United States, there are few barriers to entry into the airline
business, apart from the need for certain government licenses and the need for
and availability of financing, particularly for those seeking to operate on a
small scale with limited infrastructure and other support systems. As a result,
the Company may face increased competition from start-up airlines in selected
markets from time to time.
The emergence in recent years of several new carriers, typically with low
cost structures, has further increased the competitive pressures on U.S.
airlines. In some cases, the new entrants have initiated or triggered price
discounting. Aircraft, skilled labor and gates at most airports continue to be
available to
20
start-up carriers. The commencement of service by new carriers on ATA's routes
could negatively impact ATA's operating results. Although the domestic airline
industry has at present abandoned deeply discounted general pricing structures,
and fare levels have continued to increase from 1992 levels, significant
industry-wide discounts could be reimplemented at any time, and the introduction
of broadly available, deeply discounted fares by a major U.S. airline would
result in lower yields for the entire industry and could have a material adverse
effect on the Company's operating results.
The Company also competes directly against other charter airlines. In the
United States, these charter airlines are smaller in size than the Company. In
Europe, several charter airlines are at least as large or larger than the
Company. Certain of these charter airlines are affiliates of major scheduled
airlines or tour operators. As a result, in addition to greater access to
financial resources, these charter airlines may have greater distribution
capabilities, including, in certain cases, exclusive or preferential
relationships with affiliated tour operators.
Based upon bilateral aviation agreements between the U.S. and other
nations, and, in the absence of such agreements, comity and reciprocity
principles, the Company's charter operations are generally not restricted as to
the number or frequency of its flights to and from most destinations in Europe.
However, these agreements and reciprocity principles generally restrict the
Company to the carriage of passengers and cargo on flights which either
originate in the U.S. and terminate in a single European nation, or which
originate in a single European nation and terminate in the U.S. Proposals for
any additional charter service must generally be specifically approved by the
civil aeronautics authorities in the relevant countries. Approval of such a
proposal is typically based on considerations of comity and reciprocity and
cannot be guaranteed. As a consequence, the Company typically does not compete
in the large intra-European travel market. See 'Business -- Regulation.'
AIRCRAFT FUEL
Because fuel costs are a significant portion of the Company's operating
costs (approximately 21% for 1996 and 20% for the first nine months of 1997),
significant changes in fuel costs would materially affect the Company's
operating results. Fuel prices continue to be impacted by, among other factors,
political and economic influences that the Company cannot control. In the event
of a fuel supply shortage resulting from a disruption of oil imports or other
events, higher fuel prices or the curtailment of scheduled service could result.
However, the Company has been able to reduce certain of the risks associated
with a rise in fuel costs. For each of 1995 and 1996, approximately 52% and 49%,
respectively, of the Company's total operating revenues were derived from
contracts which enabled the Company to pass through increases in fuel costs,
including contracts with the U.S. military. The Company is exposed to increases
in fuel costs that occur within 14 days of flight time, to all increases
associated with its scheduled service (other than bulk seat sales) and to
increases affecting contracts that do not include fuel cost escalation
provisions. The Company is also exposed to the risk that a substantial rise in
fuel costs could cause a reduction in leisure travel and/or the cancellation or
renegotiation of previously-booked commitments from tour operators.
EFFECT OF GENERAL ECONOMIC CONDITIONS
The profitability of the Company's operations is influenced by the
condition of the U.S. and European economies, including fluctuations in currency
exchange rates, that may impact the demand for leisure travel and the Company's
competitive pricing position. The vast majority of the Company's charter and
scheduled airline business, other than military, is leisure travel. Because
leisure travel is discretionary, the Company has historically tended to
experience somewhat weaker financial results during economic downturns and other
events affecting international leisure travel, such as the Persian Gulf War.
Nevertheless, the Company's performance during these periods has been
significantly better than that of the U.S. airline industry as a whole.
REGULATORY MATTERS
The Company is subject to regulation by the DOT and the Federal Aviation
Administration (the 'FAA') under the provisions of the Federal Aviation Act of
1958, as amended (the 'Federal Aviation
21
Act'), and by certain other governmental agencies. The DOT regulates principally
economic issues affecting air service, including, among other matters, air
carrier certification and fitness, insurance, certain leasing arrangements,
allocation of route rights and authorization of proposed scheduled and charter
operations, consumer protection and competitive practices. The FAA primarily
regulates flight operations, especially matters affecting air safety, including,
among other matters, airworthiness requirements for each type of aircraft the
Company operates and pilot and crew certification. The Company believes it is in
compliance with all requirements necessary to maintain in good standing its
operating authority granted by the DOT and its air carrier operating certificate
issued by the FAA. A modification, suspension or revocation of any of the
Company's DOT or FAA authorizations or certificates could have a material
adverse effect upon the Company.
In the last several years, the FAA has issued a number of maintenance
directives and other regulations relating to, among other things, collision
avoidance systems, airborne windshear avoidance systems, noise abatement and
increased inspection requirements. ATA expects to continue to incur expenditures
for the purpose of complying with the FAA's noise and aging aircraft
regulations.
On June 17, 1996, ValuJet temporarily suspended its flight operations at
the request of the FAA after an intensive inspection by the FAA. As a result of
events related to ValuJet, the FAA has announced that it will be increasing its
scrutiny of airlines, particularly in the areas of contract maintenance and
contract training. The Company currently maintains ten permanent maintenance
facilities and operates an internal training corporation. See
'Business -- Aircraft Fleet -- Maintenance and Support' and 'Business -- Other
Activities.' Additional operational or maintenance requirements mandated by the
FAA could have a material adverse impact on the Company.
The Company has a Certificate of Public Convenience and Necessity from the
DOT and an operating certificate from the FAA. Each such authority is subject to
continued compliance with applicable stated rules and regulations pertaining to
the airline industry, including any new rules or regulations that may be adopted
in the future.
The Company is subject to the jurisdiction of the Federal Communications
Commission regarding the use of radio facilities. In addition, the Company is
subject to regulation on its international flights by the Commerce Department,
the Customs Service, the Immigration and Naturalization Service, and the Animal
and Plant Health Inspection Service of the Department of Agriculture. Also,
while its aircraft are in foreign countries on international flights, the
Company must comply with the requirements of similar authorities in such
countries. The Company is also subject to compliance with standards for aircraft
exhaust emissions promulgated by the Environmental Protection Agency (the 'EPA')
pursuant to the Clean Air Act of 1970, as amended. The Company is also subject
to regulations adopted by the various local authorities which operate the
airports it serves throughout its route network, including but not limited to
aircraft noise regulations and curfews. While the Company intends to maintain
all appropriate government licenses and to comply with all appropriate
standards, there can be no assurance that such licenses can be maintained or
that such standards will not be changed in the future. See
'Business -- Regulation.'
At its aircraft line maintenance facilities, the Company uses materials
which are regulated as hazardous under federal, state and local law. The Company
is required to maintain programs to protect the safety of its employees who use
these materials and to manage and dispose of any waste generated by the use of
these materials in compliance with all such laws. More generally, the Company is
also subject at these facilities to federal, state and local regulations
relating to protection of the environment and to discharge of materials into the
environment. The Company does not expect that the costs associated with ongoing
compliance with any such regulations at these facilities will have a material
adverse effect upon the Company's capital expenditures, earnings or competitive
position.
Additional laws and regulations have been proposed from time to time which
could significantly increase the cost of airline operations by, for instance,
imposing additional requirements or restrictions on operations. Laws and
regulations also have been considered from time to time that would prohibit or
restrict the ownership and/or transfer of airline routes or takeoff and landing
slots. Also, the award of international routes to U.S. carriers (and their
retention) is regulated by treaties and related agreements between the United
States and foreign governments which are amended from time to time. The
22
Company cannot predict what laws and regulations will be adopted or what changes
to international air transportation treaties will be effected, if any, or how
they will affect ATA.
LOW MARGINS AND HIGH FIXED COSTS
The airline industry as a whole and scheduled service in particular is
characterized by low gross profit margins and high fixed costs. The costs of
operating each flight do not vary significantly with the number of passengers
carried and, therefore, a relatively small change in the number of passengers or
in fare pricing or traffic mix could, in the aggregate, have a significant
effect on operating and financial results. Accordingly, a minor shortfall from
expected revenue levels could have a material adverse effect on the Company's
growth or financial performance.
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Company to repurchase all or a portion of such holder's Notes at
101% of the principal amount of the Notes, together with accrued and unpaid
interest to the date of repurchase. If a Change of Control were to occur, the
Company may not have the financial resources to repay the Notes, its credit
facilities and any other indebtedness that would become payable upon the
occurrence of such Change of Control. See ' -- Strategic Alternatives.' The
'Repurchase of Notes upon a Change of Control' covenant requiring the Company to
repurchase the Notes will, unless consents are obtained, require the Company to
repay all indebtedness then outstanding which by its terms would prohibit such
Note repurchase, including in particular the New Credit Facility, either prior
to or concurrently with such Note repurchase. See 'Description of the
Notes -- Repurchase of Notes upon a Change of Control' and 'Description of the
New Credit Facility.'
FRAUDULENT TRANSFER LAWS
Under federal or state fraudulent transfer laws, if a court of competent
jurisdiction were to find, in a lawsuit by an unpaid creditor or a
representative of creditors, a trustee in bankruptcy or a debtor-in-possession,
that the Company issued the Notes with the intent to hinder, delay or defraud
present or future creditors, or received less than a reasonably equivalent value
or fair consideration for any such indebtedness, and at the time of such
incurrence (i) was insolvent, (ii) was rendered insolvent by reason of such
incurrence, (iii) was engaged or about to engage in a business or transaction
for which its remaining assets constituted unreasonably small capital to carry
on its business or (iv) intended to incur, or believed or reasonably should have
believed that it would incur, debts beyond its ability to pay as such debts
matured, such court could avoid the Company's obligations to the holders of the
Notes, subordinate the Company's obligations to the holders of the Notes to all
other indebtedness of the Company or take other action detrimental to the
holders of the Notes. In that event, there can be no assurance that any
repayment of principal and accrued interest on the Notes could ever be recovered
by the holders of the Notes. Any Guarantee may also be subject to challenge
under fraudulent transfer laws and, in any case, will be limited to amounts that
any such Guarantor can guarantee without violating such laws. See 'Description
of the Exchange Notes -- Guarantee.'
LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Outstanding Notes are currently owned by a small number of beneficial
owners. The Outstanding Notes have not been registered under the Securities Act
and are subject to significant restrictions on resale. The Exchange Notes will
be a new issue of securities for which there is currently no trading market.
There can be no assurance regarding the future development of a market for the
Exchange Notes, or the ability of holders of the Exchange Notes to sell their
Exchange Notes or the price at which holders may be able to sell their Exchange
Notes. If the Exchange Notes are traded after their initial issuance, they may
trade at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities and other factors, including
general economic conditions and the financial condition and performance of, and
prospects for, the Company. To the extent that Outstanding Notes are tendered
and accepted in the Exchange Offer, the trading market for
23
untendered and tendered but unaccepted Outstanding Notes could be adversely
affected. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange, or for quotation of the Exchange Notes on any
automated quotation system.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Outstanding Notes pursuant
to the Exchange Offer will be made only after a timely receipt by the Company of
Outstanding Notes, a properly completed and duly executed Letter of Transmittal
or an Agent's Message (as defined herein) in lieu thereof and all other required
documents. Therefore, holders of the Outstanding Notes desiring to tender their
Outstanding Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. The Company is under no duty to give notification of
defects or irregularities with respect to the tenders of Outstanding Notes for
exchange. Outstanding Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions on transfer thereof. See 'The Exchange
Offer.'
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF EXCHANGE
NOTES
Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the provisions in the Indenture regarding transfer and exchange of the
Outstanding Notes and the restrictions on transfer of such Outstanding Notes as
set forth in the legend thereon as a consequence of the issuance of the
Outstanding Notes pursuant to exemptions from, or in transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. In general, the Outstanding Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register Outstanding Notes under the Securities Act. Based on interpretations by
the staff of the Commission, as set forth in no-action letters issued to third
parties, the Company believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Outstanding Notes may be offered for resale,
resold or otherwise transferred by holders thereof (other than any such holder
which is an 'affiliate' of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such Exchange
Notes. However, the Company does not intend to request the Commission to
consider, and the Commission has not considered, the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Each holder, other than a broker-dealer,
must acknowledge that (i) the Exchange Notes received by such holder will be
acquired in the ordinary course of its business, (ii) at the time of the
consummation of the Exchange Offer such holder will have not engaged in, and
does not intend to engage in, a distribution of Exchange Notes and has no
arrangement or understanding to participate in a distribution of Exchange Notes
and (iii) such holder is not an affiliate of the Company within the meaning of
Rule 405 of the Securities Act or if it is such an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act, to the extent applicable. If any holder is an affiliate of the
Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirement of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an 'underwriter' within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other
24
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See 'Plan of Distribution.' However,
to comply with state securities laws, the Exchange Notes may not be offered or
sold in any state unless they have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
complied with. The offer and sale of the Exchange Notes to 'qualified
institutional buyers' (as such term is defined under Rule 144A of the Securities
Act) is generally exempt from registration or qualification under state
securities laws. The Company currently does not intend to register or qualify
the sale of the Exchange Notes in any state where an exemption from registration
or qualification is required and not available. See 'The Exchange
Offer -- Consequences of Failure to Exchange and Requirements for Transfer for
Exchange Notes.'
25
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OUTSTANDING NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept for
exchange Outstanding Notes which are properly tendered on or prior to the
Expiration Date and not withdrawn as permitted below. As used herein, the term
'Expiration Date' means midnight, New York City time, on 1997;
provided, however, that if the Company, in its sole discretion, has extended the
period of time for which the Exchange Offer is open, the term 'Expiration Date'
means the latest time and date to which the Exchange Offer is extended.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of the Outstanding Notes is outstanding. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about , 1997, to
all holders of Outstanding Notes known to the Company. The Company's obligation
to accept Outstanding Notes for exchange pursuant to the Exchange Offer is
subject to certain conditions as set forth below under ' -- Certain Conditions
to the Exchange Offer.'
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer remains open, and
thereby delay acceptance for exchange of any Outstanding Notes, by giving oral
or written notice of such extension in the manner described below. During any
such extension, all Outstanding Notes previously tendered will remain subject to
the Exchange Offer and may be accepted for exchange by the Company. Any
Outstanding Notes not accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as promptly as practicable after
the expiration or termination of the Exchange Offer.
Outstanding Notes tendered in the Exchange Offer must be in denominations
of principal amounts of $1,000 and any integral multiples thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Outstanding Notes not theretofore
accepted for exchange, upon the occurrence of any of the events specified below
under ' -- Certain Conditions to the Exchange Offer.' The Company will give oral
or written notice of any extension, amendment, non-acceptance or termination to
the holders of the Outstanding Notes as promptly as practicable, such notice in
the case of any extension to be issued by means of press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
The tender to the Company of Outstanding Notes by a holder thereof as set
forth below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Outstanding Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal or (in the case of a book-entry
transfer) an Agent's Message in lieu of such Letter of Transmittal, to the
Exchange Agent at the address set forth below under ' -- Exchange Agent' on or
prior to the Expiration Date. In addition, either (i) certificates for such
Outstanding Notes must be received by the Exchange Agent along with the Letter
of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a
'Book-Entry Confirmation') of such Outstanding Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
('DTC' or the 'Book-Entry Transfer Facility') pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date with the Letter of Transmittal or Agent's Message
in lieu of such Letter of Transmittal, or (iii) the holder must comply with the
guaranteed delivery procedures described below. The term 'Agent's Message' means
a message, transmitted by the Book-Entry Transfer Facility to and received by
the Exchange Agent and forming a part of a Book-Entry Confirmation, which states
that the Book-Entry Transfer Facility has received an express acknowledgment
from the tendering participant, which acknowledgment states that such
participant has received and agrees to be bound by, and makes the
representations and warranties contained in, the
26
Letter of Transmittal and that the Company may enforce such Letter of
Transmittal against such participant. THE METHOD OF DELIVERY OF THE OUTSTANDING
NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED
THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. NO LETTER OF TRANSMITTAL OR
OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States (collectively, 'Eligible Institutions'), unless the Outstanding
Notes tendered pursuant thereto are tendered (i) by a registered holder of the
Outstanding Notes who has not completed the box entitled 'Special Issuance
Instructions' or 'Special Delivery Instructions' on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. If Outstanding Notes are
registered in the name of a person other than a signer of the Letter of
Transmittal, the Outstanding Notes surrendered for exchange must be endorsed by,
or be accompanied by a written instrument or instruments of transfer or
exchange, in satisfactory form as determined by the Company in its sole
discretion, duly executed by, the registered holder with the signature thereon
guaranteed by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder or holders of any Outstanding Notes listed therein, such
Outstanding Notes must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the name of the registered holder or
holders appears on the Outstanding Notes.
If the Letter of Transmittal or any Outstanding Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Outstanding Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Outstanding Notes not properly tendered or to not
accept any particular Outstanding Notes the Company's acceptance of which would,
in the opinion of the Company or its counsel, be unlawful. The Company also
reserves the absolute right to waive any defects or irregularities or conditions
of the Exchange Offer as to any particular Outstanding Notes either before or
after the Expiration Date (including the right to waive the ineligibility of any
holder who seeks to tender Outstanding Notes in the Exchange Offer). The
Company's interpretation of the terms and conditions of the Exchange Offer as to
any particular Outstanding Notes either before or after the Expiration Date
(including the Letter of Transmittal and the instructions therein) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Outstanding Notes must be cured within such time as
the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Outstanding Notes nor shall any of
them incur any liability for failure to give such notification. Tenders of
Outstanding Notes will not be deemed to have been made until such irregularities
have been cured or waived. Any Outstanding Notes received by the Exchange Agent
that are not properly tendered and as to which the defects or irregularities
have not been cured or waived will be returned without cost by the Exchange
Agent to the tendering holder of such Outstanding Notes unless otherwise
provided in the Letter of Transmittal as soon as practicable following the
Expiration Date.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Outstanding Notes that remain outstanding
subsequent to the Expiration Date, or, as set forth under ' -- Certain
Conditions to the Exchange Offer,' to terminate the Exchange Offer and (b)
to the
27
extent permitted by applicable law, purchase Outstanding Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers may differ from the terms of the Exchange Offer.
By tendering, each holder of Outstanding Notes will represent to the
Company that, among other things, the Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is the holder,
and that neither the holder nor any other person has any arrangement or
understanding with any person to participate in the distribution of the Exchange
Notes. In the case of a holder that is not a broker-dealer, each such holder, by
tendering, will also represent to the Company that such holder is not engaged
in, or intends to engage in, a distribution of the Exchange Notes. If any holder
or any such other person is an 'affiliate,' as defined under Rule 405 of the
Securities Act, of the Company, or is engaged in or intends to engage in or has
an arrangement or understanding with any person to participate in a distribution
of such Exchange Notes to be acquired pursuant to the Exchange Offer, such
holder or any such other person (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Outstanding Notes, where such
Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See 'Plan of Distribution.' The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Outstanding
Notes properly tendered and will issue the Exchange Notes promptly, after
acceptance of the Outstanding Notes. See ' -- Certain Conditions to the Exchange
Offer'.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted properly tendered Outstanding Notes for exchange when, as and if the
Company has given oral or written notice thereof to the Exchange Agent, with
written confirmation of any oral notice to be given promptly thereafter.
For each Outstanding Note accepted for exchange, the holder of such
Outstanding Note will receive an Exchange Note having a principal amount equal
to that of the surrendered Outstanding Note. Interest on the Exchange Notes will
accrue from July 24, 1997. Holders of Outstanding Notes whose Outstanding Notes
are accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on such Outstanding Notes accrued from July 24,
1997 to the date of the issuance of the Exchange Notes. Consequently, holders
who exchange their Outstanding Notes for Exchange Notes will receive the same
interest payment on February 1, 1998 (the first interest payment date with
respect to the Outstanding Notes and the Exchange Notes) that they would have
received had they not accepted the Exchange Offer.
In all cases, issuance of Exchange Notes for Outstanding Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) certificates for such Outstanding
Notes or a timely Book-Entry Confirmation of such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility, (ii) a properly
completed and duly executed Letter of Transmittal or an Agent's Message in lieu
thereof and (iii) all other required documents. If any tendered Outstanding
Notes are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer or if Outstanding Notes are submitted for a greater principal
amount that the holder desired to exchange, such unaccepted or non-exchanged
Outstanding Notes will be returned without expense to the tendering holder
thereof (or, in the case of Outstanding Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry procedures described below, such non-exchanged Outstanding
Notes will be
28
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Outstanding Notes at the Book- Entry Transfer Facility for purposes of
the Exchange Offer within two business days after the date of this Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Outstanding Notes by causing
the Book-Entry Transfer Facility to transfer such Outstanding Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Outstanding Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal (or a facsimile thereof
or an Agent's Message in lieu thereof), with any required signature guarantees
and any other required documents, must, in any case, be transmitted to and
received by the Exchange Agent at one of the addresses set forth below, under
' -- Exchange Agent' on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder desires to tender its Outstanding Notes and (i)
whose Outstanding Notes are not immediately available, or (ii) who cannot
deliver their Outstanding Notes, the Letter of Transmittal, or any other
required documents to the Exchange Agent prior to the Expiration Date, or if
such holder cannot complete the procedure for book-entry transfer on a timely
basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Outstanding Notes,
the certificate number or numbers of such Outstanding Notes and the
principal amount of Outstanding Notes tendered, stating that the tender is
being made thereby, and guaranteeing that, within three New York Stock
Exchange ('NYSE') trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered
Outstanding Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, together with a properly completed and
duly executed Letter of Transmittal (or a facsimile thereof or an Agent's
Message in lieu thereof), with any required signature guarantees and any
other documents required by the Letter of Transmittal, will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) The certificates for all physically tendered Outstanding Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be,
together with a properly completed and duly executed Letter of Transmittal
(or a facsimile thereof or an Agent's Message in lieu thereof) with any
required signature guarantees, and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within three New
York Stock Exchange ('NYSE') trading days after the date of execution of
the Notice of Guaranteed Delivery.
WITHDRAWAL OF RIGHTS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to midnight, New York City time, on the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to
midnight, New York City time, on the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having tendered the
Outstanding Notes to be withdrawn (the 'Depositor'), (ii) include a statement
that the Depositor is withdrawing its election to have Outstanding Notes
exchanged, and identify the Outstanding Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Outstanding Notes),
and
29
(iii) where certificates for Outstanding Notes have been transmitted, specify
the name in which such Outstanding Notes are registered, if different from that
of the withdrawing holder. If certificates for Outstanding Notes have been
delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates the withdrawing holder must also submit the serial
numbers of the particular certificates to be withdrawn and signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Outstanding Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Outstanding Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) for such withdrawal
notices will be determined by the Company, whose determination shall be final
and binding on all parties. Any Outstanding Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no
Exchange Notes will be issued with respect thereto unless the Outstanding Notes
so withdrawn are validly retendered. Any Outstanding Notes which have been
tendered but which are not accepted for exchange for any reason will be returned
to the holder thereof without cost to such holder (or, in the case of
Outstanding Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Outstanding Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Outstanding
Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be
re-tendered by following one of the procedures described above under
' -- Procedures for Tendering Outstanding Notes' at any time prior to midnight,
New York City time, on the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
The Exchange Offer is not subject to any conditions, other than that the
Exchange Offer does not violate applicable law or any applicable interpretation
of the staff of the Commission. There can be no assurance that any such
condition will not occur. Holders of Outstanding Notes will have certain rights
against the Company under the Registration Rights Agreement should the Company
fail to consummate the Exchange Offer.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Outstanding Notes and
return any Outstanding Notes that have been tendered to the holders thereof,
(ii) extend the Exchange Offer and retain all Outstanding Notes tendered prior
to the Expiration Date, subject to the rights of such holders of tendered
Outstanding Notes to withdraw their tendered Outstanding Notes, or (iii) waive
such termination event with respect to the Exchange Offer and accept all
properly tendered Outstanding Notes that have not been withdrawn. If such waiver
constitutes a material change in the Exchange Offer, the Company will disclose
such change by means of a supplement to this Prospectus that will be distributed
to each registered holder of Outstanding Notes, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders of the Outstanding Notes, if the Exchange Offer would otherwise expire
during such period.
EXCHANGE AGENT
First Security Bank, N.A., the Trustee under the Indenture, has been
appointed as Exchange Agent for the Exchange Offer. All executed Letters of
Transmittal should be directed to the Exchange Agent at one of the addresses set
forth below. Questions and requests for assistance and requests for
30
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Mail or Overnight Courier Facsimile Transmission Number By Hand
First Security Bank, N.A. (801) 246-5053 First Security Bank, N.A.
Corporate Trust Services (For Eligible Corporate Trust Services
79 South Main Street Institutions Only) Attention: Mr. Larry Montgomery
Salt Lake City, UT 84111 Personal and Confidential
Attention: Mr. Larry Montgomery Confirm by Telephone c/o IBJ Schroder Bank & Trust Company
Personal and Confidential One State Street Plaza
(If by Mail, Registered or (801) 246-5822 New York, NY 10004
Certified Mail Recommended)
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated to be $200,000.
TRANSFER TAXES
Holders who tender their Outstanding Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Company to register Exchange Notes in the name of, or request
that Outstanding Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon.
CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES
Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the provisions in the Indenture regarding transfer and exchange of the
Outstanding Notes and the restrictions on transfer of such Outstanding Notes as
set forth in the legend thereon as a consequence of the issuance of the
Outstanding Notes pursuant to exemptions from, or in transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. In general, the Outstanding Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register Outstanding Notes under the Securities Act. See 'Registration Rights
Agreement for Outstanding Notes.' Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued to third parties, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Outstanding Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
'affiliate' of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
with any person to participate in the distribution of such Exchange Notes.
However, the Company does not intend to request the Commission to consider, and
the Commission has not considered, the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer as in such
other circumstances. Each holder, other than a broker-dealer, must acknowledge
that (i) the
31
Exchange Notes received by such holder will be acquired in the ordinary course
of its business, (ii) at the time of the consummation of the Exchange Offer such
holder will have not engaged in, and does not intend to engage in, a
distribution of Exchange Notes and has no arrangement or understanding to
participate in a distribution of Exchange Notes and (iii) such holder is not an
affiliate of the Company within the meaning of Rule 405 of the Securities Act or
if it is such an affiliate, that it will comply with the registration and
prospectus delivery requirements of the Securities Act, to the extent
applicable. If any holder is an affiliate of the Company, is engaged in or
intends to engage in or has any arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, such holder (i) could not rely on the applicable interpretations of the
staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirement of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Outstanding Notes must acknowledge that such Outstanding
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities and that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an 'underwriter' within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Outstanding Notes, where such
Outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See 'Plan of Distribution.' In addition, to comply with state securities
laws, the Exchange Notes may not be offered or sold in any state unless they
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with. The offer and
sale of the Exchange Notes to 'qualified institutional buyers' (as such term is
defined under Rule 144A of the Securities Act) is generally exempt from
registration or qualification under state securities laws. The Company currently
does not intend to register or qualify the sale of the Exchange Notes in any
state where an exemption from registration or qualification is required and not
available.
32
USE OF PROCEEDS
There will be no cash payable proceeds to the Company from the Exchange
Offer.
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes contemplated in this Prospectus,
the Company will receive Outstanding Notes in like principal amount, the form
and terms of which are the same as the form and terms of the Exchange Notes
(which they replace), except as otherwise described herein. The Outstanding
Notes surrendered in exchange for Exchange Notes will be retired and canceled
and cannot be reissued. Accordingly, the issuance of the Exchange Notes will not
result in any increase or decrease in the indebtedness of the Company.
The net proceeds of the Original Offering were approximately $97.3 million.
The net proceeds from the Original Offering were used by the Company to repay
bank indebtedness and for general corporate purposes, which may include the
purchase of additional aircraft and the refinancing of existing aircraft.
33
CAPITALIZATION
The following table sets forth at September 30, 1997 the unaudited actual
consolidated capitalization of the Company. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources' and 'Use of Proceeds.'
This table should be read in conjunction with the Consolidated Financial
Statements and related notes thereto appearing elsewhere in this Prospectus.
AT SEPTEMBER 30, 1997
---------------------
(UNAUDITED)
(DOLLARS IN
THOUSANDS)
Cash(1).......................................................................... $ 82,208
-----------
Short-term debt (consisting of current maturities of long-term debt)............. $ 4,186
-----------
Long-term debt
Secured note due October 1998............................................... 27,950
Secured bank debt, due 2001(1).............................................. 25,000
Tax-exempt mortgage bonds, due 2020......................................... 6,000
Tax-exempt mortgage bonds, due 2025......................................... 10,000
10 1/2% Senior Notes due 2004............................................... 100,000
Unsecured debt.............................................................. 5,687
Other notes................................................................. 19
-----------
Total long-term debt................................................... 174,656
-----------
Total debt........................................................ 178,842
-----------
Total shareholders' equity................................... 59,409
-----------
Total capitalization(2)...................................... $ 238,251
-----------
-----------
- ------------
(1) At September 30, 1997, the Company had borrowed $25 million under the New
Credit Facility, the proceeds of which were held in cash. On October 1,
1997, $25 million was repaid.
(2) The completion of the Offering will have no effect on the capitalization of
Amtran or ATA as of September 30, 1997.
34
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
consolidated financial statements of Amtran for the respective periods
presented. The consolidated financial statements for each of the five years
ended December 31, 1996, have been audited by Ernst & Young LLP, independent
auditors. The consolidated financial data for the nine month periods ended
September 30, 1996 and 1997 are unaudited but include all adjustments,
consisting only of normal recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of the financial position and
results of operations for these periods. The results for the nine months ended
September 30, 1997 are not necessarily indicative of the results to be expected
for the full year. The consolidated financial data should be read in conjunction
with the consolidated financial statements of the Company and notes thereto and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' included elsewhere in this Prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Charter............................. $324,064 $292,032 $295,890 $307,091 $310,569 $240,443 $288,928
Scheduled service................... 61,117 138,089 240,675 361,967 386,488 318,788 271,282
Ground package...................... 17,641 17,189 20,248 20,421 22,302 17,606 16,347
Other............................... 18,968 20,599 23,709 25,530 31,492 25,391 20,705
-------- -------- -------- -------- -------- -------- --------
Total operating
revenues................ 421,790 467,909 580,522 715,009 750,851 602,228 597,262
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Salaries, wages and benefits........ 84,254 96,104 113,789 141,072 163,990 126,802 127,981
Fuel and oil........................ 80,217 85,418 106,057 129,636 161,226 126,108 118,890
Handling, landing and navigation
fees.............................. 42,870 48,918 60,872 74,400 70,122 57,353 54,368
Passenger service................... 23,904 20,918 29,804 34,831 32,745 26,364 25,751
Aircraft rentals.................... 37,371 44,428 48,155 55,738 65,427 51,902 41,758
Aircraft maintenance, materials and
repairs........................... 34,037 32,838 46,092 55,423 55,175 42,391 40,083
Depreciation and amortization(1).... 40,820 37,418 46,178 55,827 61,661 47,173 45,994
Other............................... 75,725 95,247 121,160 150,146 176,561 140,708 128,361
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses................ 419,198 461,289 572,107 697,073 786,907 618,801 583,186
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)(2).......... 2,592 6,620 8,415 17,936 (36,056) (16,573) 14,076
-------- -------- -------- -------- -------- -------- --------
Other income (expense):
Gain on sale of surplus
takeoff/landing slots............. 500 -- -- -- -- -- --
Interest income..................... 223 292 191 410 617 476 810
Interest expense.................... (6,898) (3,872) (3,656) (4,163) (4,465) (2,803) (5,835)
Other............................... 940 826 929 470 323 255 361
-------- -------- -------- -------- -------- -------- --------
Other income (expense),
net..................... (5,235) (2,754) (2,536) (3,283) (3,525) (2,072) (4,664)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes...... (2,643) 3,866 5,879 14,653 (39,581) (18,645) 9,412
Income taxes (credits)................. (503) 831 2,393 6,129 (12,907) (6,080) 5,192
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...................... $ (2,140) $ 3,035 $ 3,486 $ 8,524 $(26,674) $(12,565) $ 4,220
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per adjusted
share(3)............................ $ (0.24) $ 0.28 $ 0.30 $ 0.74 $ (2.31) $ (1.09) $ 0.36
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
35
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash............................. $ 35,719 $ 45,024 $ 61,752 $ 92,741 $ 73,382 $ 72,802 $ 82,208
Non-cash working capital
(deficiency)(4)............... (62,308) (48,601) (68,166) (80,639) (65,472) (58,975) (80,204)
Property and equipment, net...... 166,882 172,244 223,104 240,768 224,540 246,041 267,096
Total assets..................... 239,029 269,830 346,288 413,137 370,287 403,625 422,816
Short-term debt (including
current maturities)........... 20,375 18,242 8,447 3,606 30,271 29,133 4,186
Long-term debt................... 67,574 61,090 109,659 134,641 119,786 129,908 174,656
Total debt....................... 87,949 79,332 118,106 138,247 150,057 159,041 178,842
Shareholders' equity(5).......... 32,469 69,941 72,753 81,185 54,744 69,466 59,409
OTHER FINANCIAL DATA:
EBITDAR(6)....................... $ 82,446 $ 89,584 $103,868 $130,381 $ 91,972 $ 83,233 $102,999
EBITDA(6)........................ 45,075 45,156 55,713 74,643 26,545 31,331 61,241
Net cash provided by operating
activities.................... 53,741 33,896 75,297 87,078 32,171 27,343 70,732
Net cash used in investing
activities.................... (28,325) (37,440) (80,400) (44,032) (63,161) (53,711) (60,652)
Net cash provided by (used in)
financing activities.......... (15,884) 12,849 21,831 (12,057) 11,631 6,429 (1,254)
Ratio of earnings to fixed
charges(7).................... -- 1.24 1.32 1.60 -- -- 1.36
Deficiency of earnings available
to cover fixed charges(7)..... $ 2,643 -- -- -- $ 40,931 $ 21,505 --
- ------------
(1) As of January 1, 1992, Amtran lengthened its estimate of the useful lives of
its L-1011 aircraft, which reduced depreciation expense by $3.4 million in
1992.
(2) Amtran has reclassified gain (loss) on sale of operating assets for
1992-1995 from nonoperating gain (loss) to operating income (loss) to be
consistent with the 1996 presentation. Also, in the third quarter of 1996,
Amtran recorded a $4.7 million loss on the disposal of leased assets
associated with both Boeing 757-200 aircraft transactions. See
'Business -- 1996 Restructuring of Scheduled Service Operations.'
(3) Net income (loss) per adjusted share is based on average shares outstanding
during the period, adjusted to give effect to the reclassification effected
in December 1992 and the retroactive effect of the stock dividend
distributed in March 1993, which resulted in 9,090,000 shares outstanding
during all periods presented.
(4) Non-cash working capital consists of total current assets (excluding cash)
less total current liabilities (excluding current maturities of long term
debt).
(5) No dividends were paid in any of the periods presented.
(6) EBITDAR represents net income plus interest expense (net of capitalized
interest), income tax expense, depreciation, amortization and aircraft
rentals. EBITDA represents net income plus interest expense (net of
capitalized interest), income tax expense, depreciation and amortization.
EBITDAR and EBITDA are presented because each is a widely accepted financial
indicator of a company's ability to incur and service debt. However, EBITDAR
and EBITDA should not be considered in isolation, as a substitute for net
income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity.
(7) The 'ratio of earnings to fixed charges' represents earnings divided by
fixed charges, as defined in the following paragraph. The 'deficiency'
represents the amount of fixed charges in excess of earnings.
For purposes of these computations, earnings consist of income (loss) before
income taxes, plus fixed charges, adjusted to exclude the amount of any
interest capitalized during the period. Fixed charges include the total of:
(i) interest, whether expensed or capitalized; (ii) amortization of debt
expense relating to any indebtedness, whether expensed or capitalized; and
(iii) such portion of rental expense as can be demonstrated to be
representative of the interest factor.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Amtran is a leading provider of charter airline services, and on a targeted
basis scheduled airline services, to leisure and other value-oriented travelers.
Amtran, through its principal subsidiary, ATA, has been in operation for 24
years and currently operates the eleventh largest airline in the United States
in terms of 1996 RPMs. ATA provides charter services throughout the world to
independent tour operators, specialty charter customers and the U.S. military.
The Company provides scheduled nonstop service primarily from its gateway cities
of Chicago-Midway, Indianapolis and Milwaukee to popular vacation destinations
such as Hawaii, Las Vegas, Florida, California, Mexico and the Caribbean.
An analysis by the Company in 1996 of the profitability of its scheduled
service and charter service business units revealed that a significant number of
scheduled service markets being served by the Company had become unprofitable at
that point in time. The Company believes that several key factors contributed to
the deterioration of the profitability of its scheduled service in late 1995 and
1996, including (i) a significant increase in competition from larger carriers
in the scheduled service markets served by the Company, (ii) the negative impact
on low fare carriers resulting from unfavorable media coverage of the effects of
the ValuJet accident in Florida, (iii) a significant increase in fuel costs and
(iv) a federal excise tax on jet fuel beginning in the fourth quarter of 1995.
In August 1996, the Company announced a significant reduction in scheduled
service operations. More than one-third of scheduled service departures and ASMs
were included in this schedule reduction. The Company eliminated its Boston and
intra-Florida operations. The Company also exited, or reduced in frequency,
operations to other selected markets from Chicago-Midway, Indianapolis and
Milwaukee. In conjunction with its scheduled service reduction, the Company
completed a 15% reduction of its work force, including both employees and
contractors.
In addition, in 1996 the Company optimized its mix of aircraft. The Company
reduced the number of Boeing 757-200 aircraft from thirteen to seven units. An
advantage of the new fleet configuration is that all seven remaining Boeing
757-200 aircraft have been assigned to mission-specific routes that could not
have been served by the Company's other aircraft. The Company also reduced
operating costs by switching to an all Rolls-Royce powered Boeing 757 fleet. The
commonality of aircraft and engines benefits the Company in the form of
decreased maintenance and training costs.
As a result of the 1996 Restructuring, the Company believes it has
established a better platform from which to pursue its strategy. The Company
also incurred substantial costs in 1996, which it does not expect to incur in
future years.
37
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, operating
revenues and expenses expressed as cents per ASM.
NINE MONTHS ENDED
YEAR ENDING DECEMBER 31, SEPTEMBER 30,
------------------------------- -----------------
1994 1995 1996 1996 1997
---- ---- ----- ----- ----
(CENTS PER ASM)
Operating revenues.............................. 5.56 5.71 5.65 5.62 6.14
Operating expenses:
Salaries, wages and benefits............... 1.09 1.13 1.23 1.18 1.32
Fuel and oil............................... 1.02 1.03 1.21 1.18 1.22
Handling, landing and navigation fees...... 0.58 0.59 0.53 0.54 0.56
Depreciation and amortization.............. 0.44 0.45 0.47 0.44 0.47
Aircraft rentals........................... 0.46 0.44 0.49 0.48 0.43
Aircraft maintenance, materials and
repairs.................................. 0.44 0.44 0.42 0.40 0.41
Passenger service.......................... 0.29 0.28 0.25 0.25 0.26
Crew and other employee travel............. 0.25 0.25 0.27 0.26 0.29
Commissions................................ 0.17 0.20 0.20 0.20 0.20
Ground package cost........................ 0.14 0.13 0.14 0.13 0.14
Other selling expenses..................... 0.08 0.12 0.13 0.13 0.11
Advertising................................ 0.07 0.07 0.08 0.08 0.10
Facilities and other rents................. 0.05 0.06 0.07 0.07 0.07
Disposal of assets......................... -- -- 0.03 0.04 --
Other...................................... 0.40 0.37 0.40 0.40 0.41
---- ---- ----- ----- ----
Total operating expenses.............. 5.48 5.56 5.92 5.78 5.99
---- ---- ----- ----- ----
Operating income (loss)......................... 0.08 0.15 (0.27) (0.16) 0.15
---- ---- ----- ----- ----
---- ---- ----- ----- ----
ASMs (in thousands)............................. 10,443,123 12,521,405 13,295,505 10,706,622 9,731,059
NINE MONTHS ENDED SEPTEMBER 30, 1997, VERSUS NINE MONTHS ENDED SEPTEMBER 30,
1996
OPERATING REVENUES
Total operating revenues for the nine months ended September 30, 1997
decreased 0.8% to $597.3 million from $602.2 million in the nine months ended
September 30, 1996. This decrease was due to a $47.5 million decrease in
scheduled service revenues, a $1.2 million decrease in ground package revenues
and a $4.7 million decrease in other revenues, partially offset by a $48.5
million increase in charter revenues.
Operating revenues for the nine months ended September 30, 1997, were 6.14
cents per ASM, an increase of 9.3% from the nine months ended September 30,
1996, of 5.62 cents per ASM.
Charter Revenues. The Company's charter revenues are derived principally
from independent tour operators, specialty charter customers and from the United
States military. The Company's charter product provides full-service air
transportation to hundreds of customer-designated destinations throughout the
world. Total charter revenues increased 20.2% to $288.9 million in the first
nine months of 1997, as compared to $240.4 million in the same period of 1996.
Charter revenue growth, prior to scheduled service restructuring in late 1996,
had been constrained by the dedication of a significant portion of the Company's
fleet to scheduled service expansion, including the utilization of two Lockheed
L-1011 aircraft for scheduled services to Ireland and Northern Ireland between
May and September 1996. The Company's restructuring strategy, as reflected in
the Company's results of operations during the first nine months of 1997,
included a renewed emphasis on charter revenue sources. The Company believes
that tour operator, specialty charter and military operations are businesses
where the Company's experience and size provide meaningful competitive
advantage. Charter revenues repre-
38
sented 48.4% of total operating revenues in the first nine months of 1997, as
compared to 39.9% in the comparable period of 1996.
Tour Operator Programs. Charter revenues derived from independent tour
operators decreased 0.1% to $184.9 million in the nine months ended September
30, 1997, as compared to $185.0 million in the nine months ended September 30,
1996. Tour operator RPMs decreased 2.9% to 2.804 billion in the nine months
ended September 30, 1997, from 2.888 billion in the comparable 1996 period,
while ASMs decreased 5.1% to 3.391 billion from 3.573 billion. Tour operator
RASM increased 5.2% to 5.45 cents from 5.18 cents between the same periods. Tour
operator passengers boarded increased 1.2% to 1,535,560 in the nine months ended
September 30, 1997, as compared to 1,517,405 in the comparable period of 1996;
tour operator departures decreased 2.9% to 8,712 in the nine months ended
September 30, 1997, as compared to 8,970 in the nine months ended September 30,
1996; and tour operator block hours decreased 4.2% to 30,268 in the nine months
ended September 30, 1997, as compared to 31,589 in the nine months ended
September 30, 1996.
The Company operates in two principal components of the tour operator
business, known as 'track charter' and 'specialty charter.' The larger track
charter business component is generally comprised of low frequency but
repetitive domestic and international flights between city pairs, which support
high passenger load factors and are marketed through tour operators, providing
value-priced and convenient nonstop service to vacation destinations for the
leisure traveler. Since track charter resembles scheduled service in terms of
its repetitive flying patterns between fixed city pairs, it allows the Company
to achieve reasonable levels of crew and aircraft utilization (although less
than for scheduled service), and provides the Company with meaningful protection
from some fuel price increases through the use of fuel escalation reimbursement
clauses in tour operator contracts.
The Company believes that although price is the principal competitive
criterion for its tour operator programs, product quality, reputation for
reliability and delivery of services which are customized to specific needs have
become increasingly important to the buyer of this product. Accordingly, as the
Company continues to emphasize the growth and profitability of this business
unit, it will seek to maintain its low-cost pricing advantage, while
differentiating itself from competitors through the delivery of customized
services and the maintenance of consistent and dependable operations. In this
manner, the Company believes that it will produce significant value for its tour
operator partners by delivering an attractively priced product which exceeds the
leisure traveler's expectations.
Specialty charter is a product which is especially designed to meet the
unique requirements of the customer and is a business characterized by lower
frequency of operation and by greater variation in city pairs served than the
track charter business. Specialty charter includes such diverse contracts as
flying university alumni to football games, transporting political candidates on
campaign trips and moving NASA space shuttle ground crews to alternate landing
sites. The Company also operates an increasing number of trips in
all-first-class configuration for certain corporate and high-end leisure
clients. Although lower utilization of crews and aircraft and infrequent service
to specialty destinations often result in higher average operating costs, the
Company has determined that the revenue premium earned by meeting special
customer requirements usually more than compensates for these increased costs.
In addition, specialty charter programs sometimes permit the Company to increase
overall aircraft utilization by providing filler traffic during periods of low
demand from other programs such as track charter. The Company believes that it
is competitively advantaged to attract this type of business due to the size and
geographic dispersion of its fleet, which reduces costly ferry time for aircraft
and crews and thus permits more competitive pricing. The diversity of the
Company's three fleet types also permits the Company to meet a customer's
particular needs by choosing the aircraft type which provides the most
economical solution for those requirements.
Military Programs. Charter revenues derived from the U.S. military
increased 87.7% to $104.0 million in the nine months ended September 30, 1997,
as compared to $55.4 million in the nine months ended September 30, 1996. U.S.
military RPMs increased 92.6% to 848.6 million in the nine months ended
September 30, 1997, from 440.5 million in the comparable 1996 period, while ASMs
increased 77.1% to 1.751 billion from 988.5 million. Military RASM increased
5.9% to 5.94 cents from 5.61 cents between the same time periods. U.S. military
passengers boarded increased 69.6% to 218,945 in the nine
39
months ended September 30, 1997, as compared to 129,121 in the comparable period
of 1996; U.S. military departures increased 76.6% to 3,917 in the nine months
ended September 30, 1997, as compared to 2,218 in the nine months ended
September 30, 1996; and U.S. military block hours increased 88.6% to 15,071 in
the first nine months of 1997 as compared to 7,989 in the first nine months of
1996.
The Company participates in two related military programs known as 'fixed
award' and 'short-term expansion.' Pursuant to the U.S. military's fixed award
system, each participating airline is awarded certain 'mobilization value
points' based upon the number and type of aircraft made available by that
airline for military flying. In order to increase the number of points awarded,
in 1992 the Company entered into a contractor teaming arrangement with four
other cargo and passenger airlines serving the U.S. military. Under this
arrangement, the team has a greater likelihood of receiving fixed award business
and, to the extent that the award includes passenger transport, the opportunity
for the Company to operate this flying is enhanced, since the Company represents
a significant portion of the total passenger transport capacity of the team. As
part of its participation in this teaming arrangement, the Company pays a
commission to the team, which passes that revenue on to all team members based
upon their mobilization points. All airlines participating in the fixed award
business contract annually with the U.S. military from October 1 to the
following September 30. For each contract year, reimbursement rates are
determined for aircraft types and mission categories based upon operating cost
data submitted by the participating airlines. These contracts generally are not
subject to renegotiation once they become effective.
Short-term expansion business is awarded by the U.S. military first on a
pro rata basis to those carriers who have been awarded fixed contract business,
and then to any other carrier with aircraft availability. Expansion flying is
generally offered to airlines on very short notice.
The U.S. military business grew at a faster year-over-year rate than any
other business unit of the Company during the first nine months of 1997. In the
first nine months of 1997, the Company's U.S. military revenues represented
17.4% of total operating revenues, as compared to 9.2% in the same period of
1996. As a result of the restructuring of scheduled service and the
rationalization of the Company's fleet in 1996, the Company committed four of
its seven remaining Boeing 757-200 aircraft to the U.S. military for the year
ending September 30, 1997. As a result of an analysis undertaken during 1996,
the Company was also successful in more accurately documenting the actual costs
associated with military flying and was therefore able to obtain rate increases
for the contract year ending September 30, 1997. The Company has obtained
additional rate increases for the contract year ending September 30, 1998.
Because military flying is generally less seasonal than leisure travel
programs, the Company believes that a larger U.S. military business operation
will tend to have a stabilizing impact on seasonal earnings fluctuations. The
Company is also contractually protected from changes in fuel prices. The Company
further believes that its fleet of aircraft is competitively advantaged to
serving the transportation needs of the U.S. military. Although foreign bases
have been reduced in troop size, the U.S. military still desires to maintain its
service frequency to those bases and therefore often has a preference for
smaller-capacity, long-range aircraft such as the Company's Boeing 757-200.
Furthermore, in 1993, the Company became the first North American carrier
to receive FAA certification to operate Boeing 757-200 aircraft with 180-minute
Extended Twin Engine Operation (ETOPS), which permits these aircraft to operate
missions over water which can be up to three hours from the nearest alternate
airport. The Company believes that this certification, which applies to all of
the Company's Boeing 757-200 fleet, provides a competitive advantage in
receiving awards of certain military flying. Despite these advantages, the
Company believes that increases in U.S. military flying will moderate in future
periods.
Scheduled Service Revenues. Scheduled service revenues in the nine months
ended September 30, 1997, decreased 14.9% to $271.3 million from $318.8 million
in the nine months ended September 30, 1996. Scheduled service revenues
comprised 45.4% of total operating revenues in the nine months ended September
30, 1997, as compared to 52.9% of operating revenues in the same period of the
prior year. Scheduled service RPMs decreased 16.1% to 3.388 billion from 4.038
billion, while ASMs decreased 23.7% to 4.556 billion from 5.968 billion,
resulting in an increase of 6.7 points in passenger
40
load factor to 74.4% in the nine months ended September 30, 1997, from 67.7% in
the nine months ended September 30, 1996. Scheduled service yield in the nine
months ended September 30, 1997, increased 1.4% to 8.01 cents from 7.90 cents in
the same period of 1996, while RASM increased 11.4% to 5.95 cents from 5.34
cents between the same comparable periods. Scheduled service departures in the
nine months ended September 30, 1997, decreased 11.2% to 23,138 from 26,052 in
the nine months ended September 30, 1996; block hours decreased 15.9% to 58,900
in the nine months ended September 30, 1997, from 70,011 in the same period of
1996; and passengers boarded decreased 20.0% between periods to 2,341,468, as
compared to 2,926,260.
The Company added scheduled service capacity during the second and third
quarters of 1996 which primarily included expanded direct and connecting
frequencies through the Company's four major gateway cities of Chicago-Midway,
Indianapolis, Milwaukee and Boston to west coast and Florida markets already
being served. New seasonal scheduled service was also introduced in the second
and third quarters of 1996 from New York to Shannon and Dublin, Ireland, and
Belfast, Northern Ireland, and from the midwest to Seattle. New year-round
service also commenced to San Diego, California, in the second quarter of 1996.
The introduction of this new capacity coincided closely, however, with the
May 11, 1996 ValuJet accident in Florida and the resulting persistent negative
media attention directed toward airline safety, and especially toward low-fare
airlines. On May 12, the Company experienced a cabin decompression incident on
one of its own flights which, although it resulted in no serious injury to crew
or passengers, nevertheless attracted additional negative media attention,
occurring as it did one day after the ValuJet tragedy. As a consequence, during
the second and third quarters of 1996, the Company estimates that it lost
significant scheduled service revenues from both canceled reservations and
reservations which were never received.
In association with the 1996 restructuring of the Company's scheduled
service operations, a significant reduction in scheduled service was announced
on August 26, 1996. Between September 4 and December 2, 1996, more than
one-third of the scheduled service capacity operating during the 1996 summer
months was eliminated. All scheduled service flights to and from Boston were
eliminated by December 2, 1996, including service to West Palm Beach, San Juan,
Montego Bay, St. Petersburg, Las Vegas, Orlando and Ft. Lauderdale.
Intra-Florida services connecting the cities of Ft. Lauderdale, Orlando, Miami,
Sarasota, St. Petersburg and Ft. Myers were eliminated as of October 27, 1996.
Other selected services from Indianapolis, Chicago-Midway and Milwaukee to
Florida and to west-coast destinations were also reduced or eliminated by
October 27, 1996. The Company's scheduled service between Chicago-Midway and the
cities of Indianapolis and Milwaukee was replaced with a code share agreement
with Chicago Express on October 27, 1996 as discussed further below. In
association with this service reduction, all scheduled service ceased at
Seattle, Grand Cayman, West Palm Beach, Montego Bay, Miami and San Diego.
On October 27, 1996 the Company also implemented a commuter code share
partnership with Chicago Express to provide incremental connecting traffic
between Indianapolis, Milwaukee and other smaller midwestern cities into the
Company's Chicago-Midway connections with certain Florida and west-coast
destinations. This partnership was replaced with a contractual agreement with
Chicago Express effective April 1, 1997, under which the Company now operates
19-seat Jetstream 31 propeller aircraft between its Chicago-Midway hub and the
cities of Indianapolis, Milwaukee, Des Moines, Dayton and Grand Rapids. The
Company has subsequently announced the expansion of this agreement to include
the cities of Lansing, Michigan and Madison, Wisconsin effective in the fourth
quarter of 1997.
After this scheduled service reduction, the Company's early 1997 core
scheduled service flying included flights between Chicago-Midway and five
Florida cities, Las Vegas, Phoenix, Los Angeles and San Francisco; Indianapolis
to four Florida cities, Las Vegas and Cancun; Milwaukee to three Florida cities;
Hawaii service to San Francisco, Los Angeles and Phoenix; and service between
Orlando and San Juan and Nassau.
As a result of the restructuring of scheduled service operations in the
manner described above, the scheduled service component of the Company's
operations was profitable in the first three quarters of 1997. Profitability was
achieved through a combination of significantly higher load factors between
41
periods, generating improved RASM, even though total revenues in scheduled
service declined between years. The Company believes that profitability was
enhanced in this business unit through the selective elimination of flights
which had previously produced below-average load factors and yield, and that the
elimination of intra-Florida flying in particular was a prominent factor in this
improvement. Profitability was further enhanced in certain scheduled service
markets through the reassignment of aircraft fleet types to provide better
balance within markets between revenues, costs, and aircraft operational
capabilities. Yield in the first nine months of 1997 increased 1.4% to 8.01
cents from 7.90 cents in the same period of 1996. Load factor growth was 9.9%
between the nine months ended September 30, 1997 and the comparable period of
1996. Due to the high proportion of fixed versus variable costs associated with
operating a scheduled flight, the positive profit contribution of increased load
factor was more significant than the effect of higher average yields between
periods.
Scheduled service profitability improvement in 1997 was accomplished in
spite of what would normally have been a demand-dampening effect from the
reintroduction of the U.S. departure and 10% federal excise taxes on tickets on
March 7, 1997, which had expired on January 1, 1997. In August 1997, federal
legislation was enacted which indefinitely extends these taxes. The U.S.
departure tax for international destinations was increased from $6 to $12 per
passenger, and a new U.S. arrivals tax of $12 per passenger was added for
passengers arriving into the United States from international cities. Effective
October 1, 1997, the new tax law also changes the method of computation of the
federal excise tax from a simple 10% of ticket sale value to a declining
percentage of ticket sale value (ranging from 9.0% to 7.5%), plus an increasing
inflation-indexed charge per passenger segment flown (ranging from $1 to $3).
The Company does not currently believe that the change in federal excise tax
computation has placed it at either a significant pricing advantage or
disadvantage as compared to the previous computation method. The Company does
believe that certain of its low-fare competitors may be disadvantaged by the new
computation method, however, due to their lower average segment fares and higher
average number of intermediate stops as compared to the Company in similar
markets.
The Company continues to evaluate the profit and loss performance of its
scheduled service business, and the Company may change the level of scheduled
service operations from time to time. The Company began new service in June
1997, between New York's John F. Kennedy International Airport and
Chicago-Midway, Indianapolis and St. Petersburg, and also added several
frequencies between the midwest and the west coast for the summer season. New
York service to Chicago-Midway and St. Petersburg has been retained for the
1997-98 winter season.
Ground Package Revenues. The Company earns ground package revenues through
the sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. The Company markets these ground packages
through its Ambassadair Travel Club subsidiary exclusively to club members and
through its ATA Vacations subsidiary to the general public. For the nine months
ended September 30, 1997, ground package revenues decreased 6.8% to $16.4
million from $17.6 million in the similar 1996 period.
The Company's Ambassadair Travel Club offers hundreds of
tour-guide-accompanied vacation packages to its approximately 34,000 individual
and family members annually. For the nine months ended September 30, 1997, the
Club recorded a 1.5% increase in packages sold over the same 1996 period. For
the nine months ended September 30, 1997, average package revenue increased
10.1% as compared to the same period in 1996.
ATA Vacations offers numerous ground package combinations to the general
public for use on the Company's scheduled service flights throughout the United
States. These packages are marketed through travel agents as well as directly by
the Company's own reservations centers. During the nine months ended September
30, 1997, the number of ground packages sold decreased 2.6% as compared to the
same 1996 period. Reductions in the number of ground packages sold between the
nine month periods was mainly due to the reduction of the Company's scheduled
service operations between years. During the nine months ended September 30,
1997, the average package price decreased by 19.0% as compared to the same 1996
period.
The average revenue earned by the Company for a ground package sale is a
function of the mix of vacation destinations served, the quality and types of
ground accommodations offered and general
42
competitive conditions with other air carriers offering similar products in the
Company's markets, all of which factors can change from period to period.
Other Revenues. Other revenues are comprised of the consolidated revenues
of affiliated companies, together with miscellaneous categories of revenue
associated with the scheduled and charter operations of ATA. Other revenues
decreased 18.5% to $20.7 million in the nine months ended September 30, 1997, as
compared to $25.4 million in the comparable 1996 period, primarily due to a
reduction in revenues earned between periods by providing substitute service to
other airlines, partially offset by increases in other miscellaneous revenue
categories. A substitute service agreement typically provides for the Company to
operate aircraft with its crews on routes designated by the customer airline to
carry the passengers of that airline for a limited period of time.
OPERATING EXPENSES
Salaries, Wages and Benefits. Salaries, wages and benefits include the cost
of salaries and wages paid to the Company's employees, together with the
Company's cost of employee benefits and payroll-related state and federal taxes.
Salaries, wages and benefits expense for the nine months ended September 30,
1997, increased 0.9% to $128.0 million from $126.8 million for the nine months
ended September 30, 1996.
Approximately $2.2 million of the increase between the nine month periods
ending September 30, 1997 and 1996, was attributable to changes made in the
third quarter of 1996 in senior executive positions and associated senior
executive compensation plans. Special compensation totaling $3.0 million was
prepaid to the Company's former President and Chief Executive Officer during the
fourth quarter of 1996 and the first quarter of 1997, which was being amortized
to expense over the anticipated two year term of his employment ending August
1998. Due to his resignation in late May 1997, a one-time charge to expense for
the unamortized $2.0 million prepaid balance was made in the second quarter of
1997 to salaries, wages and benefits, whereas no such charge to expense was
incurred in the prior year.
The cost of salaries and wages earned by cockpit crew members and related
flight operations support staff for the nine months ended September 30, 1997,
were approximately $4.1 million higher than for the same period in 1996. These
cost increases were incurred even though jet block hours flown by cockpit crew
members declined by 11.7% in the nine months ended September 30, 1997, as
compared to the same period in 1996. This increase in the unit cost of cockpit
crews was attributable to the following significant factors: (i) the
implementation of the cockpit crew collective bargaining agreement in August
1996, under which a 7.5% rate increase and more restrictive work rules became
effective; (ii) crew utilization for U.S. military flying is significantly lower
than for scheduled service and tour operator flying, and U.S. military block
hours increased as a percentage of total block hours to 15.3% in the first nine
months of 1997, as compared to 7.2% in the first nine months of 1996; (iii)
cockpit crew shortages during the first three quarters of 1997 resulted in the
need to increase premium pay to cockpit crew members in order to adequately
staff the spring and summer flying schedule; and (iv) cockpit crew productivity
was further reduced by the fleet restructuring completed during 1996, which
increased the percentage of jet block hours flown by three-crew-member aircraft
(Lockheed L-1011 and Boeing 727-200) to 78.8% in the first nine months of 1997,
as compared to 69.6% in the comparable period of 1996. The Company estimates
that, as a result of these factors, a cockpit crew cost per ASM increase
equivalent to approximately $7.1 million was incurred for the nine months ended
September 30, 1997, as compared to the same period of 1996.
The salaries, wages and benefits cost for other employee groups declined by
$5.2 million in the nine months ended September 30, 1997, as compared to the
same period in 1996. These costs declined partially as a result of the decline
in equivalent full-time employment between periods, as well as due to the
restructuring of certain employee benefit plans effective January 1, 1997. Total
equivalent full-time employment declined by 12.7% for the nine months ended
September 30, 1997, as compared to the same period in 1996.
In addition to planned staff reductions completed during the fourth quarter
of 1996, the change in salaries, wages and benefits expense for other employee
groups was significantly affected by reduced
43
employment in Maintenance and Engineering, which accounted for a $1.9 million
reduction in expense in the nine months ended September 30, 1997 as compared to
the nine months ended September 30, 1996. Employment of Maintenance and
Engineering staff, such as airframe and powerplant mechanics and engineers, was
constrained in 1997 by broad shortages in related labor markets attributable to
very strong current demand for these skills within the airline industry. The
Company compensated for some of these shortages in 1997 by acquiring these
skills through third party contract labor vendors. The cost of maintenance
contract labor (which is a component of Aircraft Maintenance, Materials and
Repairs) increased by $2.4 million in the nine months ended September 30, 1997
as compared to the same period in 1996.
Salaries, wages and benefits expense for the nine months ended September
30, 1997, was 1.32 cents per ASM, an increase of 11.9% from the nine months
ended September 30, 1996, of 1.18 cents per ASM.
Fuel and Oil. Fuel and oil expense for the nine months ended September 30,
1997, decreased 5.7% to $118.9 million from $126.1 million in the nine months
ended September 30, 1996. During the nine months ended September 30, 1997, as
compared to the same period in 1996, the Company consumed 7.4% fewer gallons of
jet fuel for flying operations, which resulted in a reduction in fuel expense of
approximately $12.1 million between periods. The reduction in jet fuel consumed
was due to the reduced number of block hours of flying operations between
periods. The Company flew 98,226 jet block hours in the nine months ended
September 30, 1997, as compared to 111,289 jet block hours in the nine months
ended September 30, 1996, a decrease of 11.7% between periods. During the nine
months ended September 30, 1997, the Company's average cost per gallon of fuel
consumed increased by 2.1% as compared to the same period in 1996, which
resulted in an increase in fuel and oil expense of approximately $2.6 million
between years. Virtually all of this jet fuel price increase was experienced
during the first quarter of 1997, as compared to the first quarter of 1996. Also
during the nine months ended September 30, 1997, the Company incurred
approximately $0.6 million in fuel and oil expense to operate the Jetstream 31
aircraft under its agreement with Chicago Express, which agreement was not in
effect in the nine months ended September 30, 1996.
Fuel and oil expense for the nine months ended September 30, 1997, was 1.22
cents per ASM, an increase of 3.4% from the nine months ended September 30,
1996, of 1.18 cents per ASM. The change in the cost per ASM of fuel and oil
expense for this period was partly due to the change in mix of jet block hours
flown from the more-fuel-efficient twin-engine Boeing 757-200 aircraft to the
less-fuel-efficient three-engine Boeing 727-200 and Lockheed L-1011 aircraft. In
the nine months ended September 30, 1997, 21.2% of total jet block hours were
flown by the Boeing 757-200 fleet, as compared to 30.4% in the comparable period
of 1996. Jet fuel prices were also a significant factor between periods in cost
per ASM changes.
Handling, Landing and Navigation Fees. Handling and landing fees include
the costs incurred by the Company at airports to land and service its aircraft
and to handle passenger check-in, security and baggage where the Company elects
to use third-party contract services in lieu of its own employees. Where the
Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are assessed when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees decreased by 5.2% to $54.4 million in
the nine months ended September 30, 1997, as compared to $57.4 million in the
same period of 1996. During the nine months ended September 30, 1997, the
average cost per system jet departure for third-party aircraft handling
increased 8.3% as compared to the same period of 1996, and the average cost of
landing fees per system jet departure increased 6.0% between the same periods.
The absolute number of system-wide jet departures between the nine months ended
September 30, 1997 and 1996, declined by 21.1% to 29,840 from 37,809, which
resulted in approximately $8.6 million in volume-related handling and landing
expense reductions between periods. This volume-related decline was partially
offset, however, by an approximately $3.3 million price-related handling and
landing expense increase between periods attributable to a change in jet
departure mix. Because each airport served by the Company has a different
schedule of fees, including variable prices for different aircraft types,
average handling and landing fee costs are a function of the mix of airports
served and the fleet composition of departing
44
aircraft. On average, handling and landing fee costs for Lockheed L-1011
wide-body aircraft are higher than for narrow-body aircraft, and average costs
at foreign airports are higher than at many U.S. domestic airports. As a result
of the reduction in the Company's narrow-body Boeing 757-200 fleet and the shift
of revenue production towards charter operations, the Company's jet departures
in the nine months ended September 30, 1997 included proportionately more
international and wide-body operations than in the same period of 1996. In the
nine months ended September 30, 1997, 22.3% of the Company's jet departures were
operated with wide-body aircraft, as compared to 19.3% in the comparable period
of 1996, and 24.4% of the Company's jet departures in the nine months ended
September 30, 1997, were from international locations, as compared to 18.4% in
the same period of the prior year. During the nine months ended September 30,
1997, an increase of approximately $1.3 million in air navigation fees and
de-icing costs was also incurred as compared to the same period in 1996.
The cost per ASM for handling, landing and navigation fees increased 3.7%
to 0.56 cents in the nine months ended September 30, 1997, as compared to 0.54
cents in the comparable period of 1996.
Depreciation and Amortization. Depreciation reflects the periodic expensing
of the recorded cost of owned Lockheed L-1011 airframes and engines, and rotable
parts for all fleet types, together with other property and equipment owned by
the Company. Amortization is the periodic expensing of capitalized airframe and
engine overhauls for all fleet types on a units-of-production basis using
aircraft flight hours and cycles (landings) as the units of measure.
Depreciation and amortization expense decreased 2.5% to $46.0 million in the
nine months ended September 30, 1997, as compared to $47.2 million in the
comparable period of 1996.
Depreciation expense attributable to owned airframes and engines decreased
$0.8 million in the nine months ended September 30, 1997, as compared to the
nine months ended September 30, 1996. The Company reduced its year-over-year
investment in engines and airframe improvements due to the restructuring of the
Boeing 757-200 fleet in the fourth quarter of 1996. As a result of the net
reduction of four Boeing 757-200 aircraft at the end of 1996 as compared to the
end of 1995, and the complete elimination of Pratt-&-Whitney-powered Boeing
757-200s from the fleet, some airframe and leasehold improvements were disposed
of, and all spare Pratt & Whitney engines and rotable parts were reclassified as
Assets Held for Sale in the accompanying balance sheet. None of these assets
therefore gave rise to depreciation expense in the first three quarters of 1997.
The Company did increase its investment in computer equipment and furniture and
fixtures between years; placed the west bay of the renovated Midway Hangar No. 2
into service in mid-1996; and incurred increased debt issue costs between years
relating to debt facility and aircraft lease negotiations completed primarily in
the fourth quarter of 1996. These changes, together with increased costs
pertaining to remaining rotable components and the provision for obsolescence of
aircraft parts inventories, resulted in an increase in depreciation expense of
$0.4 million in the nine months ended September 30, 1997 as compared to the same
period of 1996.
Amortization of capitalized engine and airframe overhauls decreased by $0.4
million for the nine months ended September 30, 1997, as compared to the nine
months ended September 30, 1996. Reductions in the cost of overhaul amortization
were partly due to the reduction of total block hours and cycles flown between
comparable periods. This expense was also favorably impacted by the late-1996
restructuring of the Boeing 757-200 fleet and, in particular, the disposal of
all Pratt-&-Whitney-powered Boeing 757-200 aircraft. All unamortized net book
values of engine and airframe overhauls pertaining to the
Pratt-&-Whitney-powered aircraft were charged to the cost of the disposal of
these assets in the third quarter of 1996. The Company's seven remaining
Rolls-Royce-powered Boeing 757-200 aircraft, four of which were delivered new
from the manufacturer in late 1995 and late 1996, are not presently generating
any engine and airframe overhaul expense since the initial post-delivery
overhauls for the Rolls-Royce-powered Boeing 757-200s are not yet due under the
Company's maintenance programs. The net reduction in engine and airframe
amortization expense pertaining to the nine months ended September 30, 1997, as
compared to the same period of 1996 was approximately $4.2 million. Engine and
airframe amortization for the Company's fleet of Boeing 727-200 aircraft
increased by approximately $1.9 million between the nine month periods ended
September 30, 1997 and 1996, due to the ongoing expansion of this fleet type and
due to the completion of new overhauls for Boeing 727-200 aircraft. The increase
between years in engine and airframe amortization expense for
45
the Company's Lockheed L-1011 fleet was approximately $1.2 million, for the nine
months ended September 30, 1997 as compared to the same period of 1996.
The cost of engine overhauls that become worthless due to early engine
failures and which cannot be economically repaired is charged to depreciation
and amortization expense in the period the engine fails. Depreciation and
amortization expense attributable to these write-offs decreased by $0.4 million
between the nine months ended September 30, 1997 and 1996. When these engine
failures can be economically repaired, the related repairs are charged to
aircraft maintenance, materials and repairs expense.
Depreciation and amortization expense per ASM increased 6.8% to 0.47 cents
in the nine months ended September 30, 1997, as compared to 0.44 cents in the
nine months ended September 30, 1996.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost
of expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for base and line maintenance activities, and other
non-capitalized direct costs related to fleet maintenance, including spare
engine leases, parts loan and exchange fees, and related shipping costs.
Aircraft maintenance, materials and repairs expense decreased 5.4% to $40.1
million in the nine months ended September 30, 1997, from $42.4 million in the
same period of 1996. The cost per ASM increased 2.5% to 0.41 cents in the nine
months ended September 30, 1997, from 0.40 cents in the same period of 1996.
Repair costs were $4.0 million lower for the nine months ended September
30, 1997, as compared to the same period of 1996. This was due to a reduction in
both the total number of repairs performed and the average unit cost of repairs
between periods. Negotiations were completed in early 1997 with several repair
vendors which resulted in reduced unit charges for some repair activity.
Additionally, the Company established a maintenance disposition board in late
1996 which carefully reviews significant repair decisions in light of
anticipated fleet requirements and the available quantity of serviceable
components in stock.
The cost of expendable parts consumed increased $0.5 million between the
nine-month periods ended September 30, 1997 and 1996. The periodic variations in
the cost of expendable parts consumed are closely related to seasonal
differences in the Company's heavy maintenance check programs for its fleet,
which were scheduled more effectively into lower periods of aircraft utilization
in 1997 than they were in 1996, when aircraft availability was more constrained
due to several late deliveries of Boeing 727-200 aircraft.
The cost of maintenance contract labor increased by $2.4 million for the
nine months ended September 30, 1997, as compared to the same period in 1996. As
explained above under 'Salaries, Wages and Benefits', the Company increased its
utilization of maintenance contract labor in 1997 to compensate for some
shortages of experienced airframe and powerplant mechanics and engineers.
The cost of parts loans and exchanges declined by $1.3 million in the nine
months ended September 30, 1997, as compared to the same period of 1996, due to
improved internal procedures to limit the need for such loans and exchanges.
All of the Company's aircraft under operating leases have certain return
conditions applicable to the maintenance status of airframes and engines as of
the termination of the lease. The Company accrues estimated return condition
costs as a component of maintenance, materials and repairs expense based upon
the actual condition of the aircraft as each lease termination date approaches,
and based upon the Company's ability to estimate the expected cost of conforming
to these conditions. Return condition expenses accrued in the nine months ended
September 30, 1997 were $0.8 million higher than for the nine months ended
September 30, 1996. This increase was primarily due to changes in the mix of
aircraft leases and associated return conditions which became effective between
years.
Aircraft Rentals. Aircraft rentals expense in the nine months ended
September 30, 1997, decreased 19.5% to $41.8 million from $51.9 million in the
same period of 1996. These decreases were primarily attributable to the
restructuring of the Company's Boeing 757-200 fleet in the fourth quarter of
1996, as a result of which the number of Boeing 757-200 aircraft operated by the
Company was reduced by four units. The reduction in the size of the Boeing
757-200 fleet was an integral component of the Company's 1996 restructuring of
scheduled service, based upon profitability analysis which disclosed that, for
some uses of the Boeing 757-200 in the Company's markets, it was more profitable
to substitute other aircraft
46
with lower ownership costs. Aircraft rentals expense declined $12.8 million
between the nine month periods ended September 30, 1997 and 1996, as a result of
the Boeing 757-200 fleet restructuring.
Four additional Boeing 727-200 aircraft were acquired and financed by
sale/leasebacks at various times during the first three quarters of 1996, while
one Boeing 727-200 aircraft previously on an operating lease was purchased
during the second quarter of 1996. The net increase in leased Boeing 727-200
aircraft between years added approximately $2.7 million in aircraft rentals
expense during the nine months ended September 30, 1997, as compared to the same
period of 1996.
Aircraft rentals expense for the nine months ended September 30, 1997, was
0.43 cents, a decrease of 10.4% from 0.48 cents for the same period of 1996. The
period-to-period decrease in the size of the Boeing 757-200 fleet was a
significant factor in these changes since the rental cost of ASMs produced by
this fleet type is significantly higher than for the Company's other aircraft.
With the reduction in the higher-ownership-cost Boeing 757-200 aircraft in late
1996, the Company anticipates that the cost per ASM produced by its leased
aircraft fleet will continue to be lower in future quarters.
Crew and Other Employee Travel. Crew and other employee travel is primarily
the cost of air transportation, hotels and per diem reimbursements to cockpit
and cabin crew members that is incurred to position crews away from their bases
to operate all Company flights throughout the world. The cost of air
transportation is generally more significant for the charter business unit since
these flights often operate between cities in which Company crews are not
normally based and may involve extensive international positioning of crews.
Hotel and per diem expenses are incurred for both scheduled and charter
services, although higher per diem and hotel rates generally apply to
international assignments.
The cost of crew and other employee travel was unchanged at $27.7 million
for the nine months ended September 30, 1997 and 1996. During the first nine
months of 1997, the Company's average full-time-equivalent cockpit and cabin
crew employment was 13.5% lower as compared to the prior year, even though jet
block hours decreased by only 11.7% between periods. Although the Company did
experience some crew shortages in the first quarter of 1996 associated with
severe winter weather, shortages of both cockpit and cabin crews were more
chronic in the first nine months of 1997, and per-crew-member travel costs were
consequently higher since crews spent greater amounts of time away from their
bases to operate the Company's schedule. In addition, average crew travel costs
for the U.S. military and specialty charter businesses are much higher than for
track charter and scheduled service since these flights more often operate away
from crew bases.
The cost per ASM for crew and other employee travel increased 11.5% to 0.29
cents in the nine months ended September 30, 1997, from 0.26 cents in the same
period of 1996.
Passenger Service. Passenger service expense includes the onboard costs of
meal and non-alcoholic beverage catering, the cost of alcoholic beverages and
in-flight movie headsets sold, and the cost of onboard entertainment programs,
together with certain costs incurred for mishandled baggage and passengers
inconvenienced due to flight delays or cancellations. For the nine-month periods
ended September 30, 1997 and 1996, catering represented 82.8% and 80.3%,
respectively, of total passenger service expense.
The cost of passenger service decreased 2.3% to $25.8 million in the nine
months ended September 30, 1997, from $26.4 million in the same period of 1996.
This reduction was partly caused by fewer system-wide jet passengers boarded,
which declined by 13.2% to 4,043,535 in the nine months ended September 30,
1997, as compared to 4,659,399 in the same period of 1996. However, the average
cost to cater each passenger boarded increased 10.7% between the nine-month
periods ended September 30, 1997 and 1996. Catering unit cost increased due to a
change in the mix of passengers boarded from fewer scheduled service toward more
charter and military passengers; the latter passengers, particularly military,
are the most expensive passengers to cater in the Company's business mix. For
the nine months ended September 30, 1997 military and charter passengers
accounted for 43.4% of passengers boarded, as compared to 35.3% of passengers
boarded in the nine months ended September 30, 1996.
The cost per ASM of passenger service increased 4.0% to 0.26 cents in the
nine months ended September 30, 1997, from 0.25 cents in the same period of
1996.
47
Commissions. The Company incurs significant commissions expense in
association with the sale by travel agents of single seats on scheduled service.
In addition, the Company pays commissions to secure some tour operator and
military business. Commissions expense decreased 9.7% to $19.6 million in the
nine months ended September 30, 1997 from $21.7 million in the same period of
1996. Scheduled service commissions expense declined by $3.6 million, between
the nine-month periods ended September 30, 1997 and 1996, as a result of the
decline in scheduled service revenues earned between periods, partially offset
by non-recurring commission charges in the third quarter of 1996 (associated
with scheduled service restructuring and resulting flight cancellations) for
involuntary refunds of tickets issued by travel agencies for which related
commissions were not refunded to the Company. Military and tour operator
commissions expense increased by $1.8 million, between the same set of
comparative periods, due to the increased level of commissionable revenues
earned in those business units in 1997 as compared to 1996.
The cost per ASM of commissions expense was unchanged at 0.20 cents for the
nine month periods ended September 30, 1997 and 1996.
Ground Package Cost. Ground package cost includes the expenses incurred by
the Company for hotels, car rental companies, cruise lines and similar vendors
to provide ground and cruise accommodations to Ambassadair and ATA Vacations
customers. Ground package cost decreased 1.4% to $14.0 million in the nine
months ended September 30, 1997, as compared to $14.2 million in the same period
of 1996. The decrease in cost between the nine months ended September 30, 1997
and 1996 was attributable to nominal changes in both the average cost and the
number of ground packages sold.
Ground package cost per ASM increased by 7.7% to 0.14 cents in the nine
months ended September 30, 1997, from 0.13 cents in the same period of 1996. The
higher cost per ASM in 1997 resulted from a greater decline in total ASMs as
compared to the decline in ground package sales volumes between periods.
Other Selling Expenses. Other selling expenses are comprised of (i) booking
fees paid to computer reservation systems (CRSs) to reserve single-seat sales
for scheduled service; (ii) credit card discount expenses incurred when selling
single seats and ground packages to customers using credit cards for payment;
(iii) costs of providing toll-free telephone services, primarily to single-seat
and vacation package customers who contact the Company directly to book
reservations; and (iv) miscellaneous other selling expenses that are primarily
associated with single-seat sales. Other selling expenses decreased 24.3% to
$10.9 million in the nine months ended September 30, 1997, as compared to $14.4
million in the same period of 1996.
Credit card discount expense decreased $0.7 million in the nine months
ended September 30, 1997, as compared to the same periods in 1996, as a result
of the reduction in size of the scheduled service business unit of the Company
and the consequent reduction in total credit card sales, and due to a reduction
in the blended credit card discount rate between years. CRS fees decreased $1.8
million, in the nine months ended September 30, 1997, as compared to the same
periods in 1996, due to less bookings made for the smaller scheduled service
business unit between periods. Toll-free telephone usage declined by $0.9
million between the nine months ended September 30, 1997 and 1996 due to less
usage and lower rates.
Other selling cost per ASM declined 15.4% to 0.11 cents in the nine months
ended September 30, 1997, as compared to 0.13 cents in the same period of 1996.
Advertising. Advertising expense increased 19.5% to $9.8 million in the
nine months ended September 30, 1997, as compared to $8.2 million in the nine
months ended September 30, 1996. The Company incurs advertising costs primarily
to support single-seat scheduled service sales and the sale of air-and-ground
packages. Advertising support for these lines of business was increased in 1997
consistent with the Company's overall strategy to enhance RASM in these
businesses through increases in load factor and yield. Additionally, advertising
was comparatively low in the third quarter of 1996 due to the restructuring of
numerous scheduled service markets which was initiated in the latter part of
that quarter.
The cost per ASM of advertising increased 25.0% to 0.10 cents in the nine
months ended September 30, 1997, as compared to 0.08 cents in the same period of
1996. These increases in cost per ASM resulted from higher absolute advertising
dollars being spent in a period of declining ASMs, but
48
was nevertheless an integral part of the Company's successful strategy in 1997
to enhance profitability in the scheduled service business.
Facility and Other Rentals. Facility and other rentals includes the cost of
all ground facilities that are leased by the Company such as airport space,
regional sales offices and general offices. The cost of facility and other
rentals decreased 8.3% to $6.6 million for the nine months ended September 30,
1997 as compared to $7.2 million in the nine months ended September 30, 1996.
There were some changes in specific facilities utilized by the Company between
periods, such as the addition of hangar space at Chicago-Midway and the
elimination of airport facilities at Boston. The Company reduced total facility
expense between years through the sublease of excess airport facilities to third
parties. The cost per ASM for facility and other rentals was unchanged at 0.07
cents for the nine months ended September 30, 1997 and 1996.
Other Operating Expenses. Other operating expenses decreased 6.6% to $39.8
million in the nine months ended September 30, 1997, as compared to $42.6
million in the same period in 1996. Other operating expenses which experienced
significant increases between both sets of comparative periods included the cost
of the Chicago Express commuter agreement effective April 1, 1997 and the cost
of property and sales taxes. Other operating expenses which experienced
significant decreases between both sets of comparative periods included the cost
of insurance and the cost of professional consulting fees. Many other categories
of other operating expenses were lower in 1997 than in 1996 primarily due to the
smaller size of the airline between periods.
Other operating cost per ASM increased 2.5% to 0.41 cents in the nine
months ended September 30, 1997, as compared to 0.40 cents in the same period of
1996.
Interest Income and Expense. Interest expense increased 107.1% to $5.8
million in the nine months ended September 30, 1997, as compared to $2.8 million
in the same period of 1996. The increase in interest expense between comparative
periods was primarily due to the change in the Company's capital structure which
resulted from the two financings completed on July 24, 1997, at which time the
Company (i) sold $100.0 million principal amount of 10.5% unsecured seven year
notes, and (ii) entered into a new $50.0 million secured revolving credit
facility, thereby replacing the former secured revolving credit facility of
$122.0 million.
The capital structure of the Company prior to completing these new
financings provided for outstanding borrowings under the former credit facility
of $122.0 million to be routinely adjusted to meet the expected cash flow
requirements of the Company, thereby minimizing the level of borrowings on which
interest would be paid. Under the new capital structure of the Company, the
level of borrowings outstanding under the 10.5% notes will remain fixed at
$100.0 million without regard to actual cash requirements at any point in time.
During the nine months ended September 30, 1997, the weighted average borrowings
outstanding were approximately $99.4 million, as compared to $75.1 million in
the same period of 1996.
The weighted average effective interest rate applicable to the Company's
outstanding borrowings was 8.42% for the nine months ended September 30, 1997 as
compared to 8.13% in the same period of 1996. The increase in the weighted
average effective interest rates between comparative periods was primarily due
to the 10.5% effective interest rate applicable to the $100.0 million in
unsecured notes issued on July 24, 1997, which was higher than the average
effective interest rate of 8.92% applicable to borrowings under the former
credit facility during the nine months ended September 30, 1996.
In order to minimize the interest expense impact of the $100.0 million
10.5% unsecured notes, the Company invested excess cash balances and thereby
earned $0.8 million in interest income in the nine months ended September 30,
1997, an increase of 60.0% over $0.5 million earned in the same period of 1996.
INCOME TAX EXPENSE
For the nine months ended September 30, 1997, income tax expense of $5.2
million was recorded, as compared to a tax credit of $6.1 million in the same
period of 1996. The effective tax rates for the nine months ended September 30,
1997 and 1996 were 55.2% and 32.6%, respectively.
49
Income tax expense and credits between periods were significantly affected
by the non-deductibility for federal income tax purposes of 50% of amounts paid
for crew per diem. The effect of this permanent difference on the effective
income tax rate for financial accounting purposes becomes more pronounced in
cases where before-tax income or loss approaches zero, which was one reason for
the higher effective tax rates applicable to the nine month period ended
September 30, 1997 as compared to the comparable period of 1996.
Income tax expense and the effective tax rate for the nine months ended
September 30, 1997 were also significantly affected by the one-time $2.0 million
charge to salaries, wages and benefits in the second quarter of 1997 for the
prepaid executive compensation package provided to the Company's former
President and Chief Executive Officer. Of the total compensation paid to this
former executive of the Company in 1997, approximately $1.7 million is
non-deductible against the Company's federal income taxes, and thus constitutes
an additional significant permanent difference between income for federal income
tax purposes and financial accounting income which did not exist in 1996.
YEAR ENDED DECEMBER 31, 1996, VERSUS YEAR ENDED DECEMBER 31, 1995
OPERATING REVENUES
Total operating revenues in 1996 increased 5.0% to $750.9 million from
$715.0 million in 1995. This increase was due to a $24.5 million increase in
scheduled service revenues, a $3.5 million increase in charter revenues, a $1.9
million increase in ground package revenues, and a $6.0 million increase in
other revenues.
Scheduled Service Revenues. Scheduled service revenues in 1996 increased
6.8% to $386.5 million from $362.0 million in 1995. Scheduled service revenues
comprised 51.5% of total operating revenues in 1996, as compared to 50.6% of
operating revenues in 1995. Scheduled service RPMs increased 5.2% to 4.918
billion from 4.673 billion, while ASMs increased 10.6% to 7.305 billion from
6.605 billion, resulting in a reduction in passenger load factor to 67.3% in
1996 from 70.9% in 1995. Yield on scheduled service in 1996 increased 1.4% to
7.86 cents per RPM from 7.75 cents per RPM in 1995. Scheduled service departures
in 1996 increased 14.1% to 31,467 from 27,573 in 1995, while passengers boarded
increased 7.5% over such period to 3,551,141, as compared to 3,304,369.
Charter Revenues. Total charter revenues increased 1.1% to $310.6 million
in 1996, as compared to $307.1 million in 1995. Charter revenue growth, prior to
scheduled service restructuring in late 1996, was constrained by the dedication
of a significant portion of the Company's fleet to scheduled service expansion,
including the utilization of two Lockheed L-1011 aircraft for scheduled services
to Ireland and Northern Ireland between May and September 1996.
The analysis of profitability by business component which was performed by
the Company for the six quarters ended June 30, 1996, disclosed that both
military and tour operator components had produced consistent profits over the
period studied. The Company's Lockheed L-1011 fleet performed well in a charter
environment based upon relatively low frequency of operating and high passenger
load factors, and the Boeing 757-200 performed well in the military business
component while the Boeing 727-200 worked well with certain tour operators. The
Company began to implement strategies to improve the financial performance of
charter operations in the third and fourth quarters of 1996, and both tour
operator and military flying are expected to play a role of growing significance
in the Company's future business operations.
Charter revenues derived from independent tour operators (including the
Ambassadair Travel Club) decreased 1.4% to $226.4 million in 1996, as compared
to $229.5 million in 1995. Tour operator revenues comprised 30.2% of operating
revenues in 1996, as compared to 32.1% of operating revenues in 1995. Tour
operator ASMs decreased 2.0% to 4.363 billion from 4.450 billion and the revenue
per ASM (RASM) on tour operator revenues in 1996 increased 0.6% to 5.19 cents,
as compared to 5.16 cents in 1995. Tour operator passengers boarded increased
0.8% to 1,854,262 in 1996, as compared to 1,839,386 in 1995, and tour operator
departures decreased 3.6% to 10,920 in 1996, as compared to 11,324 in 1995.
50
Charter revenues derived from the U.S. military increased 8.7% to $84.2
million in 1996, as compared to $77.5 million in 1995. Military revenues
comprised 11.2% of total operating revenues in 1996, as compared to 10.8% of
total operating revenues in 1995. U.S. military ASMs increased 4.3% to 1.442
billion from 1.382 billion. The RASM on U.S. military revenues in 1996 increased
4.1% to 5.84 cents as compared to 5.61 cents in 1995. U.S. military passengers
boarded decreased 6.6% to 185,575 in 1996, as compared to 198,711 in 1995, and
U.S. military departures decreased 8.1% to 3,414 in 1996, as compared to 3,713
in 1995.
Ground Package Revenues. Ground package revenues increased 9.3% to $22.3
million in 1996, as compared to $20.4 million in 1995.
In 1996, total vacation packages sold by the Company's Ambassadair Travel
Club increased 2.4% as compared to 1995, and the average price of each ground
package sold increased 18.0% as compared to the prior year.
During 1996, the number of ATA Vacations ground packages sold increased
21.8% as compared to 1995, but the average price of each ground package sold
decreased 16.9% as compared to the prior year. The average price paid to the
Company for a ground package sale is a function of the mix of vacation
destinations served, the quality and types of ground accommodations offered, and
general competitive conditions with other air carriers offering similar products
in the Company's markets. Some ATA Vacations markets have experienced price
reductions in 1996 due to intense price competition. The average gross margin on
ATA Vacations ground packages sold in 1996 declined to 21.6% as compared to
26.6% in 1995, while the average gross margin on Ambassadair Travel Club ground
package sales declined to 14.5% in 1996, as compared to 15.9% in the prior year.
Other Revenues. Other revenues increased 23.5% to $31.5 million in 1996, as
compared to $25.5 million in 1995. Approximately $3.8 million of the revenue
increase between years was attributable to an increase in the number of block
hours of substitute service provided by the Company to other airlines. A
substitute service agreement typically provides for the Company to operate an
aircraft with its own crews on routes designated by the customer airline to
carry the passengers of that airline for a limited period of time. The remaining
increase in other revenues between periods was primarily due to revenue growth
in several of the Company's affiliated businesses.
OPERATING EXPENSES
Salaries, Wages and Benefits. Salaries, wages and benefits expense for 1996
increased 16.2% to $164.0 million from $141.1 million in 1995. Approximately
$15.9 million of the increase in 1996 was attributable to the addition of
cockpit and cabin crews, reservations agents, base station staff and maintenance
staff to support the Company's growth in capacity between periods, and
approximately $3.6 million of the increase was attributable to the related
growth in employee benefits costs. Average Company full-time-equivalent
employees increased by 11.7% in 1996 as compared to the prior year, although the
reduction-in-force implemented in late 1996 resulted in approximately 6.1% fewer
full-time-equivalent employees in the fourth quarter of 1996 as compared to the
fourth quarter of 1995. The Company substantially completed this reduction in
force in the fourth quarter of 1996, and recorded $183,000 in related severance
costs in 1996.
Salaries, wages and benefits expense in 1996 was 1.23 cents per ASM, an
increase of 8.9% from a cost of 1.13 cents per ASM in 1995. The cost per ASM
increased partially as a result of a 3.4% increase in the average rate of pay
for the Company's employees as compared to the prior year. In addition, the
Company has increased employment in several maintenance and base station
locations in lieu of continuing the use of third-party contractors, as it
believes it can provide more reliable operations and better customer service at
a lower total cost by using its own employees in these selected locations. The
Company has experienced related savings in the expense lines of handling,
landing and navigation fees, and in aircraft maintenance, materials and repairs,
as further described in those following sections.
Fuel and Oil. Fuel and oil expense for 1996 increased 24.4% to $161.2
million from $129.6 million in 1995, due to an increase in fuel consumed to
operate the Company's expanded block hours of flying, an increase in the average
price paid per gallon of fuel consumed and the imposition of a 4.3-cent-per-
gallon excise tax on jet fuel consumed for domestic use effective October 1,
1995.
51
During 1996, the Company consumed 7.4% more gallons of jet fuel for flying
operations and flew 9.4% more block hours than in 1995, which accounted for
approximately $9.l million in additional fuel and oil expense between years
(excluding price and tax changes). The growth in gallons of fuel consumed was
lower than the growth in block hours flown between years due to a change in the
mix of block hours flown by fleet type. Of greatest significance was the 4.1%
reduction of total block hours flown by the Lockheed L-1011 fleet between
periods, since the fuel burn per block hour for this wide-body aircraft is
approximately twice as high as the burn rates for the Company's other fleet
types.
During 1996, the Company's average price paid per gallon of fuel consumed
(excluding the excise tax described in the following paragraph) increased by
12.8% as compared to 1995. Fuel price increases paid by the Company reflected
generally tighter supply conditions for aviation fuel, which persisted
throughout most of 1996 as compared to the prior year. The Company estimates
that the year-over-year increase in average price paid for jet fuel resulted in
approximately $16.1 million in additional fuel and oil expense between periods.
On October 1, 1995, the Company became subject to a 4.3-cent-per-gallon
excise tax on jet fuel consumed for domestic use by commercial air carriers. The
effect of this tax in the first three quarters of 1996, as compared to the first
three quarters of 1995, was to increase the Company's cost of jet fuel by
approximately $6.4 million.
Fuel and oil expense for 1996 was 1.21 cents per ASM, an increase of 17.5%
as compared to 1.03 cents per ASM in 1995. The increase in the cost per ASM of
fuel and oil expense was primarily as a result of higher prices and the new
excise tax, partially offset by the expanded use of the more fuel efficient
twin-engine Boeing 757-200 aircraft in the Company's fleet. During 1996, the
Company's Boeing 757-200 aircraft accounted for 29.4% of total block hours
flown, as compared to 27.8% of total block hours flown in 1995. Due to the
reduction of the Company's Boeing 757-200 fleet in late 1996, the Company's mix
of block hours flown in future years is expected to reflect a lower proportion
of fuel-efficient Boeing 757-200 block hours, and a higher proportion of the
less-fuel-efficient Boeing 727-200 and Lockheed L-1011 fleet types.
Handling, Landing and Navigation Fees. Handling, landing and navigation
fees decreased by 5.8% to $70.1 million in 1996, as compared to $74.4 million in
1995. During 1996, the average cost per system departure for third-party
aircraft handling declined 15.0% as compared to the prior year, and the average
cost of landing fees per system departure decreased 12.2% between the same
periods.
Because each airport served by the Company has a different schedule of
fees, including variable prices for different aircraft types, average handling
and landing fee costs are a function of the mix of airports served as well as
the fleet composition of departing aircraft. On average, these costs for narrow-
body aircraft are less than for wide-body aircraft, and the average costs at
domestic U.S. airports are less than the average costs at most foreign airports.
In 1996, 80.6% of the Company's departures were operated with narrow-body
aircraft, as compared to 77.6% in 1995, and 81.1% of the Company's departures
were from U.S. domestic locations, as compared to 79.6% in 1995.
The implementation by the Company in 1996 of a policy of 'self-handling' at
four domestic U.S. airports with significant operations resulted in lower
absolute third-party handling costs for these locations and contributed to lower
system average contract handling costs per departure for 1996, as compared to
1995. The Company incurred higher salaries, wages and benefits expense as a
result of this policy change, as noted in 'Salaries, Wages and Benefits.'
The cost per ASM for handling, landing and navigation fees decreased 10.2%
to 0.53 cents in 1996 from 0.59 cents in 1995.
Aircraft Rentals. Aircraft rentals expense for 1996 increased 17.4% to
$65.4 million from $55.7 million in 1995. This increase was attributable to
continued growth in the size of the Company's leased aircraft fleet, although
the Company significantly reduced the size of its Boeing 757-200 fleet in the
fourth quarter of 1996, as is more fully described in 'Disposal of Assets.'
The addition of three leased Boeing 757-200 aircraft in the first three
quarters of 1996 resulted in approximately $10.6 million of increased aircraft
rentals for that time period, as compared to the prior year. The subsequent
reduction of this fleet type by a net four units (after including two new
deliveries from the manufacturer in December 1996) resulted in a year-over-year
fourth quarter reduction of
52
aircraft rent expense of approximately $3.6 million. The reduction in the size
of the Boeing 757-200 fleet was an integral component of the Company's
restructuring of scheduled service, based upon profitability analysis which
disclosed that for some uses of the Boeing 757-200 in the Company's markets
prior to restructuring, it was more profitable to substitute other aircraft with
lower ownership costs.
Several additional Boeing-727-200 and Lockheed L-1011 aircraft leased in
1996 contributed $2.8 million and $0.5 million, respectively, in incremental
aircraft rentals between years. Aircraft rentals expense was reduced by $0.6
million for the first four months of 1996, as compared to the prior year, due to
the purchase of four Pratt & Whitney spare engines in May 1995, which had been
previously leased. Due to the elimination of all Pratt-&-Whitney-powered Boeing
757-200 aircraft from the Company's fleet, the Company has reclassified these
owned spare engines as 'Assets Held for Sale' in the accompanying balance sheet,
and is actively marketing these assets to users of Pratt-&-Whitney-powered
aircraft.
Aircraft rentals expense for 1996 was 0.49 cents per ASM, an increase of
11.4% from 0.44 cents per ASM in 1995. The period-over period increase in the
size of the Boeing 757-200 feet was a significant factor in this change, since
the rental cost of ASMs produced by this fleet type is significantly higher than
for the Company's other aircraft.
Depreciation and Amortization. Depreciation and amortization expense for
1996 increased 10.6% to $61.7 million from $55.8 million in 1995.
Depreciation expense attributable to owned airframes and engines, and other
property and equipment owned by the Company, increased $2.9 million in 1996 as
compared to the prior year. The Company increased its year-over-year ownership
of engines and rotable aircraft components to support the expanding fleet, and
increased its investment in computer equipment and furniture and fixtures. The
Company also placed the west bay of the renovated Midway Hangar No. 2 into
service in mid-1996 and incurred increased debt issue costs between years
related to debt facility and aircraft lease negotiations completed in 1996.
Amortization of capitalized engine and airframe overhauls increased $1.9
million in 1996 as compared to the prior year, after including the offsetting
amortization of approximately $1.0 million in associated manufacturers' credits.
The increasing cost of overhaul amortization reflects the increase in the number
of aircraft added to the Company's fleet and the increase in cycles and block
hours flown between years. New aircraft introduced into the Company's fleet
generally do not require airframe or engine overhauls until one or more years
after first entering service. Therefore, the resulting amortization of these
overhauls generally occurs on a delayed basis from the date the aircraft is
placed into service. Accordingly, the Company anticipates that the average cost
of engine and airframe amortization per block hour and cycle will increase in
future years for all fleet types, as all aircraft receive their initial engine
and airframe overhauls after being placed into service.
Depreciation and amortization expense attributable to write-offs relating
to the cost of engine overhauls that become worthless due to early engine
failures, and which cannot be economically repaired increased $1.1 million
between years.
Depreciation and amortization cost per ASM increased 4.4% to 0.47 cents in
1996, as compared to 0.45 cents in 1995.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance,
materials and repairs expense decreased 0.4% to $55.2 million in 1996, as
compared to $55.4 million in 1995. The cost per ASM decreased by 4.8% to 0.42
cents in 1996, as compared to 0.44 cents in the prior year.
Although the cost of repairs for repairable and rotable components
increased $1.4 million between periods, the cost of expendable parts consumed
decreased $2.1 million, and the cost of parts loans and exchanges increased $0.6
million. Aircraft maintenance, materials and repairs cost was also reduced by
$0.8 million in 1996, as compared to 1995, due to a planned reduction in the use
of third-party maintenance staff in favor of using more Company maintenance
employees for both base and line maintenance activities. The Company incurred
higher salaries, wages and benefits expense as a result of this policy change,
as noted above.
53
The cost of the Company's maintenance, materials and repairs remained
essentially unchanged in 1996, as contrasted to the 6.2% increase in ASMs
between years, and the 9.4% increase in block hours. This favorable comparison
is partly due to the significant expansion of the Company's fleet during 1996.
The more favorable comparison to block hours between years is also indicative of
the faster growth in the Company's twin-engine Boeing 757-200 fleet, which is
composed of newer and more technologically advanced aircraft which require
relatively less routine maintenance than the Company's older three-engine
Lockheed L-1011 and Boeing 727-200 fleets. The Boeing 757-200 fleet accounted
for 29.4% of block hours in 1996, as compared to 27.8% in 1995. Nevertheless,
due to the reduction of the Company's Boeing 757-200 fleet in late 1996, the
Company's mix of block hours flown in future years is expected to reflect a
lower proportion of Boeing 757-200 block hours, and a higher proportion of block
hours flown by the older three-engine Lockheed L-1011 and Boeing 727-200 fleets.
Return condition expenses accrued in 1996 were $1.1 million more than in
1995. This increase was primarily due to changes in the mix of aircraft leases
and associated return conditions which became effective during 1996, offset by
both the extensive restructuring of the Boeing 757-200 fleet and the
sale/leaseback of six hushkitted Boeing 727-200 aircraft during 1996 under new
lease terms and conditions.
Crew and Other Employee Travel. The cost of crew and other employee travel
increased 14.0% to $35.9 million in 1996, as compared to $31.5 million in 1995.
During 1996, the Company increased its average full-time-equivalent crew head
count by 4.1% as compared to the prior year, even though departures increased by
8.4% and block hours increased by 9.4% between periods. In the first quarter of
1996, the Company experienced crew shortages, which were exacerbated by severe
winter weather, which caused significant flight delays, diversions and
cancellations. The Company's crew complement in the third quarter of 1996 was
again insufficient to effectively operate the flying schedule and resulted in
more crew time being spent away from base during that quarter.
The cost per ASM for crew and other employee travel increased 8.0% to 0.27
cents in 1996, as compared to 0.25 cents in the prior year. This increase in
unit cost was approximately equivalent to a 9.0% average increase in the cost
per crew member of hotel, positioning and per diem expenses between years.
Passenger Service. For 1996 and 1995, catering represented 80.3% and 84.9%,
respectively, of total passenger service expense. The cost of passenger service
decreased 6.0% in 1996 to $32.7 million, as compared to $34.8 million in 1995.
Although total passengers boarded increased by 5.8% to 5.68 million in 1996, as
compared to 5.37 million in 1995, the average cost to cater each passenger
declined 19.1% between years due to a planned reduction in catering service
levels in select charter and scheduled service markets beginning in the second
quarter of 1995. This cost reduction was partially offset by a 6.6% increase in
military passengers boarded between years, who are the most expensive passengers
to cater in the Company's business mix.
The cost of servicing passengers who were inconvenienced by trip
interruptions increased by $1.4 million between years. Approximately $0.7
million of this increase was incurred in association with the severe winter
weather and consequent flight schedule disruptions which occurred in the first
quarter of 1996.
The cost per ASM of passenger service decreased 10.7% to 0.25 cents in
1996, as compared to 0.28 cents in the prior year. The lower cost per ASM was
primarily due to the lower cost of catering per passenger boarded, partially
offset by the higher cost per ASM of servicing inconvenienced passengers.
Commissions. Commissions expense increased 7.7% to $26.7 million in 1996,
as compared to $24.8 million in 1995. The primary reason for the increase
between years was the corresponding increase in scheduled service revenues
earned, approximately two-thirds of which was generated through travel agencies
which received a commission on such sales. The cost per ASM of commissions
expense was unchanged at 0.20 cents for both 1996 and 1995.
Ground Package Cost. Ground package cost increased 14.5% to $18.2 million
in 1996, as compared to $15.9 million in 1995. This increase in cost is
primarily due to the increase in the number of ground packages sold between
periods. In 1996, Ambassadair sold 2.4% more ground packages, and ATA Vacations
sold 21.8% more ground packages, than in 1995. The average cost of each ground
package
54
sold by Ambassadair increased 19.9% between years, while the average price of
each ground package sold by ATA Vacations decreased by 11.2% between periods.
Ground package cost per ASM increased by 7.7% to 0.14 cents in 1996, as
compared to 0.13 cents in 1995, which reflects the comparatively faster growth
in ground package sales produced by Ambassadair and ATA Vacations as compared to
the overall ASM growth of the Company between years.
Other Selling Expenses. Other selling expenses increased 18.1% to $17.6
million in 1996, as compared to $14.9 million in 1995. Approximately $1.1
million and $0.2 million, respectively, of this increase was attributable to
more credit card discounts and CRS fees incurred to support the growth in
scheduled service between years. Another $1.2 million of the increase was due to
higher usage of toll-free telephone service between periods, some of which was
associated with the accommodation of passengers onto other carriers' flights due
to the Company's reduction of scheduled service in the third and fourth quarters
of 1996.
Other selling cost per ASM increased 8.3% to 0.13 cents in 1996, as
compared to 0.12 cents in 1995.
Advertising. Advertising expense increased 15.7% to $10.3 million in 1996,
as compared to $8.9 million in 1995. Advertising support for single-seat
scheduled service sales and the sale of ground packages increased consistent
with the growth in associated revenues and the need to meet competitive actions
in the Company's markets.
The cost per ASM of advertising increased 14.3% to 0.08 cents in 1996, as
compared to 0.07 cents in 1995.
Facilities and Other Rentals. The cost of facilities and other rentals
increased 29.7% to $9.6 million in 1996, as compared to $7.4 million in 1995.
The increase in expense noted for 1996 was partly attributable to higher
facility costs resulting from the Company becoming a signatory carrier at
Orlando International Airport, together with a year-over-year increase in
facility costs for Boston operations prior to the elimination of scheduled
service at Boston in the fourth quarter of 1996. The increased facility costs at
Orlando International Airport have associated savings in lower handling and
landing fees for the Company's flights at Orlando International Airport.
Also in 1996, the Company incurred facility rental expense in association
with the late 1995 sale/leaseback of the Indianapolis hangar to the City of
Indianapolis, for the Chicago-Midway Hangar No. 2 and for the new Chicago
Reservations facility, which was first occupied in September 1995.
The cost per ASM for facility and other rents increased 16.7% to 0.07 cents
in 1996, as compared to 0.06 cents in 1995.
Disposal of Assets. During the third quarter of 1996, the Company committed
to a plan to dispose of up to seven Boeing 757-200 aircraft. A letter of intent
(the 'Letter of Intent') was signed with a major lessor on July 29, which
included the cancellation of operating leases on five aircraft and the return of
those aircraft to the lessor before the end of 1996. Negotiations also commenced
with a major lessor during the third quarter for the cancellation of operating
leases on two additional aircraft in 1996.
During the third quarter, the Company recorded a loss on disposal of the
initial five aircraft according to the terms and conditions negotiated and
agreed in the Letter of Intent. An estimate of the expected loss on disposal of
the additional two aircraft was also recorded in the third quarter, although a
specific Letter of Intent had not yet been signed. The total loss on disposal
recorded in the third quarter was $4.7 million for all aircraft. These aircraft
transactions were all completed during the fourth quarter of 1996, at which time
the estimated loss on disposal was reduced by $0.2 million to an actual loss of
$4.5 million.
The source of the loss on the termination of these aircraft leases was
primarily from the write-off of the unused net book value of the associated
airframe and engine overhauls. For several aircraft, the Company was required to
meet additional maintenance return conditions associated with airframes and
engines, the cost of which was charged to the loss on disposal. These costs were
partially offset by cash proceeds received from the lessor and by the
application of associated deferred aircraft rent credits and manufacturers'
credits.
55
In addition to these costs, the Company owns four spare Pratt & Whitney
engines, together with consumable, repairable and rotable components that are
specific to the Pratt-&-Whitney-powered Boeing 757-200s. The net book value of
these engines and parts approximates $14.1 million as of December 31, 1996. The
Company was actively seeking to sell these assets and therefore reclassified
their net book value as Assets Held For Sale under current assets in the
accompanying balance sheet.
Other Expenses. Other operating expenses increased 15.2% to $53.8 million
in 1996, as compared to $46.7 million in 1995. Significant components of the
year-over-year variances include increases in substitute service and passenger
reprotection costs, professional fees, data communications costs, insurance
costs and consulting fees in connection with the detailed route profitability
study.
Other operating cost per ASM increased 8.1% to 0.40 cents in 1996, as
compared to 0.37 cents in 1995.
INCOME TAX EXPENSE
In 1996, the Company recorded ($12.9) million in tax credits applicable to
the loss before income taxes for that year, while income tax expense of $6.1
million was recognized pertaining to income before taxes for 1995. The effective
tax rate applicable to tax credits in 1996 was 32.6%, and the effective tax rate
for income earned in 1995 was 41.8%. The Company's effective income tax rates
were unfavorably affected by the permanent non-deductibility from taxable income
of 50% of crew per diem expenses incurred in both years. The impact of these
permanent differences on effective tax rates becomes more pronounced as taxable
income declines or losses increase.
YEAR ENDED DECEMBER 31, 1995, VERSUS YEAR ENDED DECEMBER 31, 1994
OPERATING REVENUES
Total operating revenues for 1995 increased $134.5 million, or 23.2%, to
$715.0 million. This increase from 1994 was due to a $121.3 million increase in
scheduled service revenues, a $11.2 million increase in charter revenues, a $0.2
million increase in ground package sales and a $1.8 million increase in other
revenues.
Operating revenues for 1995 were 5.71 cents per ASM, an increase of 2.7%
from 1994 revenues of 5.56 cents per ASM.
Scheduled Service Revenues. Scheduled service revenues increased 50.4% from
$240.7 million in 1994 to $362.0 million in 1995. The majority of this increase
was due to strong scheduled service traffic growth between periods, together
with an improvement in scheduled service yield.
Scheduled service RPMs increased 46.9% in 1995 compared to 1994 on a
capacity increase of 39.5% in ASMs between years, resulting in an improved
passenger load factor of 70.8% in 1995 as compared to 67.2% in 1994. Passengers
boarded increased 47.3% from 2.24 million in 1994 to 3.30 million in 1995.
Scheduled service departures increased 39.4% from 19,800 in 1994 to 27,600 in
1995. The Company increased scheduled service traffic from Indianapolis,
Chicago-Midway, Milwaukee and Boston to Florida, Las Vegas, Hawaii and selected
Caribbean destinations. Scheduled service flown in 1995 from St. Louis and
Boston had no comparable service in 1994. The Company ceased scheduled service
operations in St. Louis in August 1995, but continued to serve important charter
markets from St. Louis.
Scheduled service yield in 1995 was 7.75 cents per RPM, an increase of 2.4%
over the 1994 scheduled service yield of 7.57 cents per RPM. This yield
improvement was achieved gradually throughout 1995 as the result of several
revenue enhancement initiatives. During the first quarter of 1995, the Company
installed a yield management system which allowed for the introduction of
multiple fare levels for various classes of the Company's inventory of scheduled
service seats. These yield management procedures were applied with increasing
effectiveness through the final three quarters of 1995. Whereas first quarter
1995 yields were 15.2% lower than the first quarter of 1994, second quarter 1995
yields were 4.8% higher than the second quarter of 1994; third quarter 1995
yields were 10.0% higher than the third quarter of 1994; and fourth quarter 1995
yields were 9.7% higher than the fourth quarter of 1994.
56
In the third quarter of 1994, the Company increased its level of
participation and effectiveness of schedule display in several important CRSs
used by travel agencies. In May 1995, the Company also introduced connecting
fares which offered new displays of multiple-city pairs for sale in CRS systems
which had previously not been offered against competing carriers serving those
connecting markets.
Charter Revenues. Charter revenues increased 3.8% from $295.9 million in
1994 to $307.1 million in 1995. Charter revenues derived from independent tour
operators increased 12.5% from $204.0 million in 1994 to $229.5 million in 1995.
Most of this revenue increase was derived from stronger tour operator traffic
between years, while tour operator yield improved 0.8% from 6.21 cents per RPM
in 1994 to 6.26 cents per RPM in 1995. Tour operator RPMs increased 12.0% from
3.17 billion in 1994 to 3.55 billion in 1995, while ASMs increased 11.0% from
4.01 billion in 1994 to 4.45 billion in 1995, resulting in an improved passenger
load factor of 79.8% in 1995 as compared to 79.1% in the prior year. Passengers
boarded increased 7.0% from 1.72 million in 1994 to 1.84 million in 1995, while
departures increased 9.7% from 10,300 in 1994 to 11,300 in 1995. Tour operator
departures for both 1994 and 1995 served numerous U.S. leisure destinations,
together with cities in Europe, Mexico, South America and Asia.
Charter revenues derived from the U.S. military decreased 15.6% from $91.8
million in 1994 to $77.5 million in 1995. Military revenues were unfavorably
impacted by declines in both traffic and yield between periods. Military RPMs
declined 9.9% from 0.71 billion in 1994 to 0.64 billion in 1995, while ASMs
decreased 12.1% from 1.57 billion in 1994 to 1.38 billion in 1995, resulting in
an improved passenger load factor of 46.4% in 1995 as compared to 45.2% in the
prior year. Passengers boarded decreased 13.0% from 0.23 million in 1994 to 0.20
million in 1995, while departures declined 14.0% from 4,300 in 1994 to 3,700 in
1995.
The Company and other competing air carriers are compensated for U.S.
military flying based upon reimbursement rates set by the United States
government. These reimbursement rates have generally declined over the last
several contract years, resulting in lower yields for this business segment.
Military yield in 1995 declined 6.1% to 12.11 cents per RPM as compared to 12.89
cents per RPM in 1994. Although the Company's military yields are comparatively
higher than for tour operators and scheduled service business segments, military
passenger load factors are comparatively much lower, and the Company can incur
substantial non-recurring costs to accommodate military flying which often
becomes available on short notice. The Company's reduction of military ASMs in
1995 was largely the result of decisions to deploy the Company's aircraft into
selected scheduled service and tour operator markets, where the Company believed
that more repetitive frequencies and more predictable revenues and costs could
be achieved in the long-term.
Ground Package Revenues. Ground package revenues increased 1.0% from $20.2
million in 1994 to $20.4 million in 1995. Ground packages, such as hotel and car
rentals, are sold in conjunction with the Company's air transportation product
to Ambassadair Travel Club members and to the general public through ATA
Vacations, Inc., its tour operator subsidiary.
Other Revenues. Other revenues increased 7.6% from $23.7 million in 1994 to
$25.5 million in 1995. Significant components of the change in other revenue
between 1994 and 1995 include a $2.1 million reduction in revenues derived from
subcontracting the Company's aircraft to fly short-term substitute service for
other airlines; a $1.0 million increase in administrative ticketing fees charged
to scheduled service passengers; a $0.7 million increase from the onboard sale
of liquor and headsets; a $0.6 million increase in cargo revenues; a $0.5
million increase from the sale of trip protection insurance to passengers
purchasing tour packages; a $0.5 million increase in commissions earned for the
sale of car rentals; and a $0.4 million increase in excess baggage fees.
OPERATING EXPENSES
Total operating expenses increased 21.8% from $572.1 million in 1994 to
$697.1 million in 1995. Operating expense increases were principally due to
increases in scheduled service capacity, traffic and passengers boarded between
years which affected most expense categories.
Operating cost per ASM increased 1.5% from 5.48 cents in 1994 to 5.56 cents
in 1995. This increase in cost per ASM generally reflects growth in the
distribution costs of single-seat sales (such as travel agency commissions and
CRS fees), salaries and benefits, fuel and oil, aircraft handling and facility
57
rents, partially offset by reductions in the cost per ASM of aircraft rentals,
passenger service, ground package cost, and other operating expenses. There was
no change in cost per ASM between years for aircraft maintenance materials and
repairs, crew and other employee travel, and advertising.
Salaries, Wages and Benefits. This expense increased 24.0% from $113.8
million in 1994 to $141.1 million in 1995. The majority of the increase was due
to the addition of new employees (primarily cockpit and cabin crew, base
station, maintenance and reservations staff) to support the growth in scheduled
service and the addition of new aircraft to the Company's fleet. The Company
recorded additional vacation accrual costs of $1.4 million in 1995 to recognize
the phased implementation of a new vacation policy which became applicable to
most employees during 1995. The Company also recorded variable compensation
costs in association with higher 1995 profits which were not incurred in 1994.
These additional 1995 benefit and compensation costs contributed to a 3.7%
increase in the cost per ASM from 1.09 cents in 1994 to 1.13 cents in 1995.
The Company implemented a collective bargaining agreement with flight
attendants in December 1994, at which time this employee group received a base
pay rate increase of approximately 5%, together with some adjustments to
variable pay factors. In December 1995, the Company reached a tentative
agreement with cockpit crews on a collective bargaining agreement covering that
group of employees. In February of 1996, the Company was notified that the
cockpit crews had failed to ratify the tentative agreement. A new tentative
four-year collective bargaining agreement was reached with cockpit crews on
August 6, 1996, which was subsequently ratified by the IBT on September 23,
1996.
Fuel and Oil. The cost of fuel and oil increased 22.1% from $106.1 million
in 1994 to $129.6 million in 1995. Although the average price paid for fuel was
slightly higher in 1995, this unfavorable price effect was partially offset by
the fact that a larger proportion of the block hours in 1995 were flown by the
more fuel-efficient Boeing 757-200 fleet.
Total block hours flown increased 21.8% from 103,700 hours in 1994 to
126,300 hours in 1995. The Company's Boeing 757-200 fleet accounted for 27.8% of
block hours in 1995, as compared to 24.0% in 1994. The less fuel-efficient
Lockheed L-1011 fleet accounted for 28.1% of 1995 block hours, as compared to
30.8% in 1994. Block hours for the Boeing 727-200 fleet were also lower in 1995,
accounting for 44.1% of block hours as compared to 45.2% in 1994.
Effective October 1, 1995, the Company became subject to a 4.3
cent-per-gallon excise tax on jet fuel consumed for domestic use by commercial
air carriers. The effect of this tax in the fourth quarter of 1995 was to
increase the Company's cost of fuel subject to this tax by approximately 6%,
which added $1.6 million to total fuel and oil expense in the fourth quarter of
1995. The fuel tax caused the Company's 1995 cost per ASM for fuel and oil to
increase by 1.0% to 1.03 cents from 1.02 cents in 1994.
Handling, Landing and Navigation Fees. Handling, landing and navigation
fees increased 22.2% from $60.9 million in 1994 to $74.4 million in 1995. Most
of this increase was attributable to a 23.3% increase in the total number of
departures between years, from 34,700 in 1994 to 42,800 in 1995.
The average cost per departure declined 1.0% in 1995 as compared to 1994.
Because each airport served by the Company has a different schedule of fees
(including variable prices for different aircraft types), average departure
costs are a function of the mix of airports served and the fleet composition of
departing aircraft. On average, operations to international airports are more
expensive per departure than for U.S. domestic airports. In 1995, the share of
the Company's departures which operated from international airports declined
from 22.5% to 20.4% because the Company's growth in 1995 was concentrated mostly
in domestic scheduled service markets.
The cost per ASM for handling, landing and air navigation fees increased
1.7% from 0.58 cents in 1994 to 0.59 cents in 1995. This increase resulted from
a small decline in the average number of ASMs per departure between years and is
indicative of the growing proportion of departures which employ the Company's
smaller-capacity Boeing 727-200 and Boeing 757-200 aircraft rather than the
larger Lockheed L-1011 wide-body. In 1995, the percentage of departures made
with narrow-body aircraft increased to 77.6%, as compared to 75.0% in 1994.
Depreciation and Amortization. Depreciation and amortization expense
increased 20.8% from $46.2 million in 1994 to $55.8 million in 1995. The cost
per ASM increased 2.3% from 0.44 cents in 1994 to 0.45 cents in 1995.
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Depreciation expense increased approximately $5.0 million in 1995 as
compared to 1994 due to the addition of one Lockheed L-1011 and four Pratt &
Whitney engines, together with the purchase of other property, furniture and
equipment to support the Company's growth in operations.
Amortization of airframe and engine overhauls increased $4.6 million in
1995 as compared to 1994, net of $3.3 million in overhaul credits earned by the
Company under an engine purchase agreement with Rolls-Royce Commercial Aero
Engines Limited. The increasing cost of amortization expense reflects the recent
increase in the number of aircraft added to the Company's fleet. New aircraft
introduced into the fleet generally do not require airframe or engine overhauls
until as many as 12 or more months after first entering service. Therefore,
resulting amortization of these overhauls generally occurs on a delayed basis
from the date the aircraft is placed into service.
Aircraft Rentals. Aircraft rental expense increased 15.6% from $48.2
million in 1994 to $55.7 million in 1995. This increase in expense was due to
the addition of leased Lockheed L-1011, Boeing 757-200 and Boeing 727-200
aircraft into the Company's fleet during 1995, offset partially by reduced lease
costs on certain Boeing 757-200 aircraft under terms of operating leases
renegotiated in late 1994, and by the purchase of four previously leased Pratt &
Whitney engines.
Aircraft rental cost per ASM decreased 4.3% from 0.46 cents in 1994 to 0.44
cents in 1995. The year-over-year benefit realized from Boeing 757-200 operating
lease renegotiations in late 1994 was a significant factor in this change since
the ownership costs of each Boeing 757-200 aircraft are comparatively higher
than for the Company's other fleet types.
Aircraft Maintenance, Materials and Repairs. The cost of aircraft
maintenance, materials and repairs increased 20.2% from $46.1 million in 1994 to
$55.4 million in 1995. The cost per ASM remained unchanged at 0.44 cents for
both 1995 and 1994.
The cost of the Company's maintenance, materials and repairs increased in
1995 at approximately the same rate as the 19.9% increase in ASMs between years
and slightly slower than the 21.8% increase in block hours. The more favorable
comparison to block hours between years is indicative of the faster growth in
the twin-engine Boeing 757-200 fleet, which is also composed of newer and more
technologically advanced aircraft which require relatively less routine
maintenance than the Company's older three-engine Lockheed L-1011 and Boeing
727-200 fleets. The Boeing 757-200 fleet accounted for 27.8% of block hours in
1995, as compared to 24.0% in 1994.
All of the Company's aircraft under operating leases have certain return
conditions applicable to the maintenance status of airframes and engines as of
the termination of the lease. The Company accrues estimated return condition
costs as a component of maintenance, materials and repairs expense based upon
the actual condition of the aircraft as each lease termination date approaches.
Return condition expenses accrued in 1995 were $1.1 million less than in 1994,
primarily due to a change in return conditions negotiated on certain Boeing
757-200 aircraft leases in late 1994.
Passenger Service. The most significant portion of passenger service cost
is catering, which represented 84.9% and 85.8%, respectively, of total passenger
service expense in 1995 and 1994.
The cost of passenger service increased 16.8% from $29.8 million in 1994 to
$34.8 million in 1995. This increase was primarily due to the 26.7% increase in
the total number of passengers boarded from 4.24 million in 1994 to 5.37 million
in 1995. The cost of passenger service increased less rapidly than the increase
in passengers boarded due to a reduction in catering service levels in select
charter and scheduled service markets beginning late in the second quarter of
1995. In addition to this planned reduction in catering, the 13.0% reduction in
military passengers boarded between years also reduced the average cost of
catering since military catering is one of the most expensive per passenger in
the Company's business mix.
The cost per ASM of passenger service declined 3.4% from 0.29 cents in 1994
to 0.28 cents in 1995. This reduction was primarily due to reduced catering
costs, as the cost per ASM of the total of other components of passenger service
did not change materially between years.
Crew and Other Employee Travel. The cost of crew and other employee travel
increased 20.2% from $26.2 million in 1994 to $31.5 million in 1995. The cost
per ASM remained unchanged at 0.25 cents for both years.
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Commissions. Commissions expense increased 41.7% from $17.5 million in 1994
to $24.8 million in 1995. The cost of commissions per ASM increased 17.6% from
0.17 cents in 1994 to 0.20 cents in 1995.
Scheduled service commissions expense accounted for all of the increase in
this cost in 1995, which was consistent with the significant growth in
commissionable scheduled service sold by travel agencies. The average rate of
commission paid to travel agencies declined slightly between years due to the
elimination of selected sales incentives. The average percentage of revenues
sold by travel agencies increased between years due to the Company's
implementation of full participation in several CRSs in the third quarter of
1994 and because of the introduction of connecting fares in the second quarter
of 1995 which offered significantly expanded ATA schedule choices to travel
agencies.
Commissions paid for military flying were reduced in 1995 due to the
reduction in military departures between years. Commissions paid for tour
operator departures also declined slightly between years.
Ground Package Cost. Ground package cost for 1995 increased 7.4% from $14.8
million in 1994 to $15.9 million in 1995. The cost per ASM declined 7.1% from
0.14 cents in 1994 to 0.13 cents in 1995. The cost per ASM declined between
years due to the slower growth in ground package sales as compared to overall
growth in the Company's capacity as measured by ASMs. The cost of ground
accommodations sold to Ambassadair and ATA Vacations customers increased in some
markets in 1995, resulting in slightly lower gross margins in 1995 as compared
to 1994.
Other Selling Expenses. Other selling expenses are comprised primarily of
fees paid to CRS and the cost of inbound reservations lines provided for the use
of the Company's customers. These costs increased 86.3% from $8.0 million in
1994 to $14.9 million in 1995 and were generally incurred to support the sale of
scheduled services. Other selling cost per ASM increased 50.0% from 0.08 cents
in 1994 to 0.12 cents in 1995. Scheduled service passengers boarded increased
47.3% from 2.24 million to 3.30 million over the same comparative period, while
scheduled service ASMs increased 39.5% from 4.73 billion to 6.60 billion between
years.
The Company participates in SABRE as a multi-host user and is also
displayed in Galileo, Worldspan and System One. These CRSs, which display
competitive schedules and fares for all participating airlines, offer different
levels of services at different transaction costs. In order to expand the
Company's visibility of schedules and fares with travel agencies, the Company's
CRS service levels were increased in all of these systems effective in July
1994, resulting in a significant increase in billable transactions and higher
transaction rates. Although the Company believes that CRS participation has been
essential to rapid development of name recognition and sales in the Company's
new markets, more economic scheduled service distribution alternatives to CRSs
are now being evaluated.
Advertising. Advertising expense for 1995 increased 14.1% from $7.8 million
in 1994 to $8.9 million in 1995. The cost per ASM remained unchanged between
years at 0.07 cents. The Company incurs advertising costs primarily to support
scheduled service sales. Scheduled service ASMs increased 39.5% in 1995 compared
to 1994, and the cost of advertising per scheduled service ASM declined 18.8%
from 0.16 cents in 1994 to 0.13 cents in 1995.
Facilities and Other Rents. The cost of facilities and other rents
increased 34.5% from $5.5 million in 1994 to $7.4 million in 1995. The cost per
ASM increased 20.0% from 0.05 cents in 1994 to 0.06 cents in 1995. The
significant portion of growth in facilities leasing has originated from the
expansion of scheduled services, which has required the Company to add new
leased facilities at airport locations to accommodate the space needs of airport
passenger service and maintenance staff. The rate of increase in facilities
costs between years (34.5%) has been slightly lower than the 39.5% rate of
increase in scheduled service ASMs since the utilization of the Company's
facilities has improved with expanded scheduled service frequencies at certain
airports.
Other Expenses. Other expenses increased 12.5% from $41.5 million in 1994
to $46.7 million in 1995. The cost per ASM for other expenses declined 7.5% from
0.40 cents in 1994 to 0.37 cents in 1995. Significant components of the increase
of $6.6 million in other expenses between years include: $2.0 million in
additional general, hull and liability insurance expense associated with the
Company's expanded size and flying activity; $1.5 million in additional property
and sales taxes assessed on the Company's expanding asset base and purchasing
activity; and $1.5 million in additional communications
60
costs related to the Company's data network infrastructure for worldwide airport
operations. In 1995, the Company recognized a gain of $1.3 million on a
transaction with the City of Indianapolis involving the Company's headquarters
facility (see Note 6 of Notes to Consolidated Financial Statements included
elsewhere in this Memorandum). There was no comparable gain recognized in 1994.
INCOME TAX EXPENSE
Income tax expense increased 154.2% from $2.4 million in 1994 to $6.1
million in 1995. The effective income tax rates were 41.8% and 40.7% for 1995
and 1994, respectively. Income tax expense increased in close proportion to the
149.2% increase in taxable income between years. The effective tax rate for 1994
included a more significant negative impact from non-deductible crew per diem
expense than did 1995. However, this effect was more than offset by the 1994 tax
benefit of adjustments in state tax rates and other tax reserve adjustments
recognized in that year.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The Company has historically financed its working capital and capital
expenditure requirements from cash flow from operations and long-term borrowings
from banks and other lenders. As described further below, in the third quarter
of 1997 the Company completed two separate financings designed to lengthen the
maturity of its long-term debt and diversify its credit sources, including the
issuance of the 10 1/2% Notes and the replacement of the former credit facility
with one of lesser borrowing availability.
For the nine months ended September 30, 1997 and 1996, net cash provided by
operating activities was $70.7 million and $27.3 million, respectively. The
increase in cash provided by operating activities between periods was
attributable to such factors as increased earnings, growth in scheduled service
air traffic liability associated with advanced ticket sales, the liquidation of
certain assets held for sale, and other factors. For 1996, 1995 and 1994, net
cash provided by operating activities was $32.2 million, $87.1 million and $75.3
million, respectively.
Net cash used in investing activities was $60.7 million and $53.7 million,
respectively, for the nine months ended September 30, 1997 and 1996. Such
amounts included cash capital expenditures totaling $63.5 million in the nine
months ended September 30, 1997, and $87.6 million in the same period of 1996,
for engine overhauls, airframe improvements and the purchase of rotable parts.
Proceeds from the sale of assets totaled $8.0 million for the nine months ended
September 30, 1997, and $30.2 million for the comparable period of 1996. Such
proceeds were primarily attributable to sale/leaseback transactions completed in
both years for Boeing 727-200 aircraft, although four such transactions were
completed in the 1996 period as compared to one such transaction in 1997. Cash
capital expenditures for the nine month periods ended September 30, 1997 and
1996 were supplemented with other capital expenditures, financed directly with
debt, totaling $30.7 million and $14.2 million, respectively. The $30.7 million
in new debt issued in 1997 was to directly finance the purchase of a Boeing
757-200 aircraft which had previously been subject to a month-to-month operating
lease.
The Company's capital spending program in the first nine months of 1997 was
reduced as compared to the prior year due to (i) the reduction of the fleet by
four units between years, and the absence of any aircraft deliveries during the
first nine months of 1997; and (ii) the accomplishment of statutory requirements
for a 65% Stage 3 fleet as of December 31, 1996, which resulted in the
hushkitting of six Boeing 727-200 aircraft during calendar year 1996. Although
the Company elected to hushkit an additional Boeing 727-200 aircraft during the
third quarter of 1997, the Company is not required to increase its Stage 3 fleet
composition until December 31, 1998, at which time 75% of the Company's fleet
must meet Stage 3 requirements. The Company currently expects to meet Stage 3
fleet requirements through additional hushkitting of Boeing 727-200 aircraft and
through future deliveries of other Stage-3-compliant aircraft.
Net cash used in investing activities was $63.2 million, $44.0 million and,
$80.4 million for 1996, 1995 and 1994, respectively. Such amounts primarily
reflected cash capital expenditures totaling $69.9 million, $57.8 million and
$81.0 million in 1996, 1995 and 1994, respectively, for engine overhauls,
61
airframe improvements and the purchase of aircraft, engines and rotable parts.
These cash capital expenditures were supplemented by other capital expenditures
of $31.7 million in 1995 and $15.9 million in 1994 which were financed directly
with debt. The Company currently expects that capital expenditures for 1997 will
total approximately $112.5 million. Such expenditures will be mainly for
scheduled heavy maintenance on the Company's aircraft.
Net cash used in financing activities was $1.3 million in the nine months
ended September 30, 1997, compared with net cash provided by financing
activities of $6.4 million in the nine months ended September 30, 1996. Debt
proceeds in the 1996 period included the addition of $15.0 million in credit
facility availability for financing the installation of hushkits on Boeing
727-200 aircraft. Debt proceeds in the 1997 period included both the proceeds
from the issuance of the unsecured 10 1/2% Notes and the proceeds from borrowing
against the New Credit Facility as of September 30, 1997. Payments on long-term
debt in the 1997 period included the repayment of the former credit facility.
In 1995, $21.6 million in proceeds were generated from the sale of certain
facilities and equipment. Net cash provided by (used in) financing activities
was $11.6 million in 1996, $(12.1) million in 1995 and $21.8 million in 1994.
AIRCRAFT FLEET ADJUSTMENTS
In November 1994, the Company signed a purchase agreement for six new
Boeing 757-200s which, as subsequently amended, now provides for seven total
aircraft to be delivered between late 1995 and late 1998. In conjunction with
the Boeing purchase agreement, the Company entered into a separate agreement
with Rolls-Royce Commercial Aero Engines Limited for 15 RB211-535E4 engines to
power the seven Boeing 757-200 aircraft and to provide one spare engine. Under
the Rolls-Royce agreement, which became effective January 1, 1995, Rolls-Royce
has provided the Company various spare parts credits and engine overhaul cost
guarantees. If the Company does not take delivery of the engines, a prorated
amount of the credits that have been used are required to be refunded to
Rolls-Royce. The aggregate purchase price under these two agreements is
approximately $50.0 million per aircraft, subject to escalation. The Company
accepted delivery of the first four aircraft under these agreements in September
and December 1995, and November and December 1996, all of which were financed
under leases accounted for as operating leases. The final three deliveries under
this agreement are scheduled for November 1997, July 1998 and December 1998.
Advanced payments and interest totaling approximately $24.0 million ($8.0
million per aircraft) are required prior to delivery of the three remaining
aircraft, with the remaining purchase price payable at delivery. As of September
30, 1997 and 1996, the Company had recorded $12.8 million and $23.4 million,
respectively, in advanced payments and interest applicable to aircraft scheduled
for future delivery. The Company intends to finance future deliveries under this
agreement through sale/leaseback transactions accounted for as operating leases.
In the first quarter of 1996, the Company purchased four Boeing 727-200
aircraft, financing all of these through sale/leasebacks accounted for as
operating leases by the end of the third quarter of 1996. In the second quarter
of 1996, the Company purchased a fifth Boeing 727-200 aircraft which had been
previously financed by the Company through a lease accounted for as an operating
lease. This aircraft was financed through a separate bridge debt facility until
the completion of a sale/leaseback transaction during the third quarter of 1997.
On July 29, 1996, the Company entered into a letter of intent with a major
lessor to cancel several Boeing 757-200 and Lockheed L-1011 operating aircraft
leases then in effect. Under the terms of the letter of intent, the Company
canceled leases on five Boeing 757-200 aircraft powered by Pratt & Whitney
engines and returned these aircraft to the lessor by the end of 1996. The
Company was required to meet certain return conditions associated with several
aircraft, such as providing maintenance checks to airframes. The lessor
reimbursed the Company for certain leasehold improvements made to some aircraft
and credited the Company for certain prepayments made in earlier years to
satisfy qualified maintenance expenditures for several aircraft over their
original lease terms. The cancellation of these leases reduced the Company's
fleet of Pratt-&-Whitney-powered Boeing 757-200 aircraft from seven to two
units. The Company also agreed to terminate existing operating leases on three
Lockheed L-1011 aircraft and to purchase the airframes pertaining to these
aircraft for $1.5 million, while signing a new operating lease covering only the
nine related engines. The Lockheed
62
L-1011 airframe and engine portion of this transaction was not completed until
the second quarter of 1997. The lessor also provided the Company with
approximately $6.9 million in additional unsecured financing for a term of seven
years. This transaction resulted in the recognition of a $2.3 million loss on
disposal of assets in the third quarter of 1996.
The Company also agreed to purchase one Rolls-Royce-powered Boeing 757-200
aircraft from the same lessor in the fourth quarter of 1996. This purchase was
not completed in 1996, and the aircraft was acquired from the lessor on a
short-term rental agreement pending the completion of the purchase in September
1997. The Company financed this purchase through the issuance of a $30.7 million
note maturing on October 15, 1998. The note requires monthly payments of
$400,000 in principal and interest from October 15, 1997 through September 15,
1998, with the balance due at maturity. Interest of 7.08% applies to the twelve
monthly payments, while interest of 8.08% applies to the balance due at
maturity. The Company currently intends to sell this aircraft and repay this
note, subject to a short-term rental agreement under which the aircraft would
continue to be operated by the Company until the July 1998 delivery of a
replacement Boeing 757-200 from the manufacturer. The temporary acquisition of
this aircraft in late 1996, together with the delivery of two new
Rolls-Royce-powered Boeing 757-200 aircraft from the manufacturer in the fourth
quarter of 1996, and the return of the last two Pratt-&-Whitney-powered Boeing
757-200 aircraft discussed in the next paragraph, resulted in an all-Rolls-
Royce-powered Boeing 757-200 fleet of seven units by the end of 1996.
In September 1996, the Company began negotiations with a major lessor to
cancel existing operating leases on the Company's remaining two
Pratt-&-Whitney-powered Boeing 757-200 aircraft. These aircraft were returned to
the lessor by the end of 1996. This transaction resulted in the recognition of a
$2.4 million loss on disposal of assets in the third quarter of 1996.
ISSUANCE OF UNSECURED NOTES
On July 24, 1997, the Company completed two separate financings designed to
lengthen the maturity of the Company's long-term debt and diversify its credit
sources. On that date, the Company (i) sold $100.0 million principal amount of
unsecured seven year notes in a private offering under Rule 144A, and (ii)
entered into a new secured revolving credit facility.
The unsecured senior notes mature on August 1, 2004. Each note bears
interest at the effective annual rate of 10.5%, payable on February 1 and August
1 of each year beginning February 1, 1998. The Company is obligated to
consummate a registered exchange offer for the notes, or cause a registration
statement with respect to the resale of the notes to be declared effective, on
or prior to January 24, 1998, or the effective interest rate applicable to the
notes will increase to 11.0% per annum until such registration becomes
effective. The notes rank pari passu with all unsecured, unsubordinated
indebtedness of the Company existing now or created in the future, are
effectively subordinated to the Company's obligations under secured indebtedness
to the extent of such security, and will be senior to any subordinated
indebtedness of the Company created in the future. All payments of interest and
principal are unconditionally guaranteed on an unsecured, unsubordinated basis,
jointly and severally, by each of the active subsidiaries of the Company. The
Company may redeem the notes, in whole or in part, at any time on or after
August 1, 2002, initially at 105.25% of their principal amount plus accrued
interest, declining ratably to 100.0% of their principal amount plus accrued
interest at maturity. At any time prior to August 1, 2000, the Company may
redeem up to 35.0% of the original aggregate principal amount of the notes with
the proceeds of sales of common stock, at a redemption price of 110.5% of their
principal amount (plus accrued interest), provided that at least $65.0 million
in aggregate principal amount of the notes remains outstanding after such
redemption. The notes are subject to covenants for the benefit of the note
holders, including, among other things, limitations on: (1) the incurrence of
additional indebtedness; (ii) the making of certain restricted payments; (iii)
the creation of consensual restrictions on the payment of dividends and other
payments by certain subsidiaries; (iv) the issuance and sale of capital stock by
certain subsidiaries; (v) the issuance of guarantees by certain subsidiaries;
(vi) certain transactions with shareholders and affiliates; (vii) the creation
of liens on certain assets or properties; (viii) certain types of sale/leaseback
transactions; and (ix) certain sales, transfers or other dispositions of assets.
63
The net proceeds of the unsecured notes were approximately $97.3 million,
after application of costs and fees of issuance. The Company used a portion of
the net proceeds to repay in full the Company's prior bank facility and will use
the balance of the proceeds for general corporate purposes, which may include
the purchase of additional aircraft and/or the refinancing of existing leased
aircraft.
CREDIT FACILITIES
Concurrently with the issuance of the unsecured notes, on July 24, 1997 the
Company entered into a new $50.0 million revolving credit facility that includes
up to $25.0 million for stand-by letters of credit. ATA is the borrower under
the new credit facility, which is guaranteed by the Company and each of the
Company's other active subsidiaries. The principal amount of the new facility
matures on April 1, 2001, and borrowings are secured by certain Lockheed L-1011
aircraft and engines. The loan-to-value ratio for collateral securing the new
facility may not exceed 75% at any time. Borrowings under the new facility bear
interest, at the option of ATA, at either (i) LIBOR plus 1.50% to 2.50%
(depending upon certain financing ratios); or (ii) the agent bank's prime rate
plus 0.0% to 0.5% (depending upon certain financial ratios). The facility
contains various covenants including, among other things: (i) limitations on
incurrence of debt and liens on assets; (ii) limitations on capital
expenditures; (iii) restrictions on payment of dividends and other distributions
to stockholders; (iv) limitations on mergers and the sale of assets; (v)
restrictions on the prepayment or redemption of certain indebtedness including
the 10.5% notes; and (vi) maintenance of certain financial ratios such as
minimum tangible net worth, cash flow to interest expense and aircraft rentals
and total adjusted liabilities to tangible net worth.
The Company's former credit facility had initially provided a maximum of
$125.0 million, including $25.0 million for stand-by letters of credit, subject
to the maintenance of certain collateral value including certain owned Lockheed
L-1011 aircraft, certain receivables, and certain rotables and spare parts. As a
result of the Company's need to restructure its scheduled service business, the
Company renegotiated certain terms of the former credit facility effective
September 30, 1996, including the modification of certain loan covenants to take
into account the expected losses in the third and fourth quarters of 1996. In
return for this covenant relief, the Company agreed to implement changes to the
underlying collateral for the former facility and to change the interest rates
applicable to borrowings under the facility. The Company pledged additional
owned engines and equipment as collateral for the facility as of the
implementation date of the new agreement. The Company further agreed to reduce
the $63.0 million of borrowing availability secured by the owned Lockheed L-1011
fleet by $1.0 million per month from April 1997 through September 1997, and by
$1.5 million per month from October 1997 through April 1999. Loans under the
renegotiated facility were subject to interest, at the Company's option, at
either (i) prime to prime plus 0.75%, or (ii) the Eurodollar rate plus 1.50% to
2.75%. The former facility was scheduled to mature on April 1, 1999, and
contained various covenants and events of default, including: maintenance of a
specified debt-to-equity ratio and a minimum level of net worth; achievement of
a minimum level of cash flow; and restrictions on aircraft acquisitions, liens,
loans to officers, change of control, indebtedness, lease commitments and
payment of dividends.
At December 31, 1996, the Company had classified $19.9 million of former
credit facility borrowings to current maturities of long-term debt. Of this
amount, $10.5 million was attributable to the scheduled reduction of
availability secured by the owned Lockheed L-1011 fleet during the 12 months
ending December 31, 1997. The remaining $9.4 million represented the amount of
the spare Pratt & Whitney engines which were pledged to the credit facility and
which were to be repaid from the anticipated sale. The net book value of these
spare engines, which approximates estimated market value, is classified as
Assets Held for Sale in the accompanying balance sheet. In July, 1997, the
Company sold two of the four spare Pratt & Whitney engines, and the Company
continues to market the remaining two spare engines and parts to users of Pratt
& Whitney powerplants.
As of September 30, 1997, the Company had borrowed $25.0 million against
the new credit facility, all of which borrowings were repaid on October 1, 1997.
As of December 31, 1996, the Company had borrowed the maximum amount then
available against the former credit facility, of which $46.0 million was repaid
on January 2, 1997.
The Company also maintains a $5.0 million revolving credit facility
available for its short-term borrowing needs and for securing the issuance of
letters of credit. Borrowings against this credit facility
64
bear interest at the lender's prime rate plus 0.25% per annum. There were no
borrowings against this facility as of September 30, 1997 or 1996; however, the
Company did have outstanding letters of credit secured by this facility
aggregating $3.6 million and $4.0 million, respectively.
STOCK REPURCHASE PROGRAM
In February 1994, the Board of Directors approved the repurchase of up to
250,000 shares of the Company's common stock. During 1996, the Company
repurchased 16,000 shares, bringing the total number of shares it has
repurchased under the program to 185,000 shares. No shares were repurchased
during the first nine months of 1997. The Company does not currently expect to
complete this stock repurchase program.
OTHER CAPITAL USES
In the third quarter of 1995, the Company completed the lease of Hangar No.
2 at Chicago's Midway Airport for an initial lease term of ten years, subject to
two five-year renewal options. Under this lease, the Company acquired the use of
both the west and east bays of the hangar and associated ramp and parking areas.
The Company is obligated to perform certain lease-mandated improvements to the
west bay and may, at its option, perform additional improvements to the east
bay. In the fourth quarter of 1995, the Company financed these improvements,
together with separate passenger terminal improvements at Midway, through the
issuance of $6 million in tax-exempt bonds. Initial construction activities in
the west bay area began in the fourth quarter of 1995.
RECENT DEVELOPMENTS
On September 15, 1997 the Company purchased one Boeing 757-200 aircraft
which had previously been on an operating lease. The Company paid cash of $5.0
million, and executed a $30,650,000 note for the remainder of the purchase
price. The note provides for monthly payments of $400,000 in principal and
interest from October 15, 1997 through September 15, 1998, with the remainder of
the note payable in full on October 15, 1998. Interest of 7.08% applies to the
initial twelve payments, and the final payment is subject to interest of 8.08%.
The purchase of this aircraft will increase the current portion of long-term
debt at September 30, 1997 by $2,700,000, and long-term debt by $27,950,000.
65
BUSINESS
GENERAL
Amtran is a leading provider of charter airline services, and on a targeted
basis scheduled airline services, to leisure and other value-oriented travelers.
Amtran, through its principal subsidiary, ATA, has been in operation for 24
years and currently operates the eleventh largest airline in the United States
in terms of 1996 RPMs. ATA provides charter services throughout the world to
independent tour operators, corporations and the U.S. military. The Company
provides scheduled service primarily from its gateway cities of Chicago-Midway,
Indianapolis and Milwaukee to popular vacation destinations such as Hawaii, Las
Vegas, Florida, California, Mexico and the Caribbean.
CHARTER SERVICE
The Company is the largest charter airline in the United States and
provides charter airline services throughout the world to U.S. and European tour
operators, U.S. military and government agencies and to corporations. In 1996
and for the first nine months of 1997, Amtran derived approximately 41% and 48%,
respectively, of consolidated revenues from charter operations. The charter
business is an attractive niche because it provides contractual revenues that
are more stable than revenues provided by scheduled service. The customer
generally pays a fixed price for the use of the aircraft and assumes the
responsibility and risk for the actual sale of the seats, as well as most of the
risk of fuel price increases. In addition, the Company is the largest domestic
provider of charter airline services. As a result of the 1996 Restructuring, the
Company expects that for 1997 as a whole, approximately 46% of its consolidated
revenues will be from charter operations.
TOUR OPERATOR PROGRAMS
Independent tour operators comprise the largest component of the Company's
charter service operations (representing approximately 30% and 31%,
respectively, of the Company's consolidated revenues for 1996 and the first nine
months of 1997). Independent tour operators typically contract with the Company
to provide repetitive, round-trip patterns to leisure destinations for specified
periods ranging from several weeks to several years. The Company believes that
its long standing relationships with tour operators provide it with a
competitive advantage. In addition, the Company believes that the low cost
leisure travel services provided by independent tour operators have historically
been less volatile than scheduled service operations as indicated by the
Company's 1990 to 1995 revenue and profitability, as compared to the major
scheduled service carriers for the same period.
MILITARY/GOVERNMENT
The Company expects U.S. military and other government flight activity,
which has historically averaged 10-15% of consolidated revenues, to account for
approximately 16% of Amtran's 1997 revenues. The Company has provided charter
service to the U.S. military since 1983. Because this business is generally less
seasonal than leisure travel, it tends to have a stabilizing impact on the
Company's operations and earnings. The U.S. Government awards one year contracts
for its military charter business, and pre-negotiates contract prices for each
type of aircraft a carrier makes available. Such contracts are priced utilizing
the participating airlines' average costs, and are therefore more profitable for
low cost providers such as the Company. The Company believes its fleet of
aircraft, in particular its Boeing 757-200ERs, is well suited for the changing
requirements of military passenger service.
SCHEDULED SERVICE
The Company provides scheduled nonstop service primarily from its gateway
cities of Chicago-Midway, Indianapolis, and Milwaukee to popular vacation
destinations such as Hawaii, Las Vegas, Florida, California, Mexico and the
Caribbean. In its scheduled service operations, the Company focuses primarily on
providing low cost, nonstop or direct flights on routes where it can be a
principal provider. In 1996, based on DOT statistics, the Company had the lowest
operating expense per ASM, approximately 6, of the eleven largest U.S. scheduled
airlines. Notwithstanding the Company's
66
competitive cost position and business focus, the Company began to incur losses
in its scheduled service in the second half of 1995. In response to these
losses, the Company, as part of the 1996 Restructuring described below, reduced
its scheduled service by more than one third of its departures and ASMs. As a
result, the Company expects scheduled service operations, which comprised 52%
and 45%, respectively, of consolidated revenues in 1996 and the first nine
months of 1997, to comprise approximately 48% of consolidated revenues in 1997.
The Company believes that the 1996 Restructuring strengthened its competitive
position and improved both load factors and yields in its scheduled service
operations. The Company has substantially improved the profitability of these
operations in the first nine months of 1997, versus the first nine months of
1996.
FLEET/OPERATIONS
As of September 30, 1997, the Company operated a fleet of 45 aircraft
consisting of 14 Lockheed L-1011s, 24 Boeing 727-200ADVs and 7 Boeing 757-200s.
This fleet gives the Company the flexibility to respond to a wide variety of
market opportunities. To support its operations, the Company has a Maintenance
and Engineering Center at Indianapolis International Airport, maintains
permanent support facilities at ten other U.S. airports and has the ability to
dispatch maintenance and operational personnel and equipment as necessary to
support temporary operations throughout the world.
STRATEGY
The Company intends to enhance its position as a leading provider to
independent tour operators, the U.S. Military and of targeted scheduled airline
services by pursuing a strategy designed to increase revenues and profitability.
The key components of this strategy are:
(i) Maintain Low Cost Position. The Company believes it has one of the
lowest operating costs per ASM in the industry, with an average cost per
ASM of approximately 6[c] for the fiscal year ended December 31, 1996, and
for the nine months ended September 30, 1997. The Company believes that
its low cost structure provides a significant competitive advantage,
which allows it to compete effectively in both the charter and scheduled
service markets. The Company has achieved its low cost position primarily
as a result of its route structure, low overhead and distribution costs,
productive and flexible workforce and low aircraft rental and ownership
costs.
(ii) Strengthen Leading Position with Tour Operators. The Company has
successfully operated in the charter service business since 1981, and it
expects to continue to enhance its leading position in this segment. By
offering low cost air travel products that can be tailored to meet the
particular needs of its customers, primarily the tour operators, the
Company believes it is able to differentiate itself from most major
airlines, whose principal focus is on scheduled service, as well as from
smaller charter airlines, which do not have comparably diverse fleets or
the ability to provide a similar level of customer support. In addition to
its low cost, the Company believes that its product quality, reputation,
long standing relationships and ability to deliver a customized service
have become increasingly important to tour operators.
(iii) Maintain Leading Position as a Provider to the U.S. Military.
The Company has a long history of serving the military. Its contractor
teaming arrangement and its fleet of preferred aircraft will allow it to
maintain a strong competitive position for acquiring and servicing current
and future military charter contractors.
(iv) Selectively Participate in Scheduled Service. The Company's
strategy for its scheduled service is to focus primarily on providing low
cost, nonstop or direct flights from airports where there is only limited
competition. The Company believes that its high performance Boeing 757 and
727 aircraft give it a competitive advantage in the Chicago-Midway market.
Unlike the aircraft used by most of the Company's competitors at
Chicago-Midway, the Boeing 757 and 727 can fly larger passenger capacities
substantially longer distances while operating from the airport's short
runways. In Indianapolis, the Company has a name recognition advantage by
being the city's home town airline. In the Milwaukee market, the Company is
the only low cost scheduled alternative. The Company significantly reduced
its scheduled service operations in 1996 by exiting, or reducing service
to, unprofitable markets such as Boston and intra-Florida and has
substantially improved its profitability in the first nine months of 1997,
versus the first nine months of 1996. The Company is
67
reviewing the opportunity of adding to its Chicago-Midway routes by up to
four destinations by the spring of 1998.
(v) Capitalize on Selected Growth Opportunities. The Company seeks to
increase revenues and profitability by capitalizing on selected growth
opportunities in its core businesses. The Company believes that, as a
result of its low cost structure and its strong relationships with tour
operators and military contractors, it is well positioned to capture
additional opportunities to serve these markets. The Company intends to
purchase additional aircraft to meet demand from its military and tour
operator charter customers, and potentially scheduled service. In addition,
at various times since the second quarter of 1996 the Company has actively
considered possible business combinations with other air carriers and other
providers of airline related services. The Company intends to continue to
evaluate such transactions. Accordingly, it is possible that the Company
will enter into a transaction in the first half of 1998 or thereafter that
will result in a merger or other change of control of the Company.
1996 RESTRUCTURING OF SCHEDULED SERVICE OPERATIONS
An analysis by the Company in 1996, of the profitability of its scheduled
service and charter service business units revealed that a significant number of
scheduled service markets being served by the Company had become unprofitable at
that point in time. This analysis also showed that the Company's charter
operations were generally profitable during the same periods, although results
from these operations were also adversely affected by many of the factors that
affected scheduled service.
The Company believes that several key factors contributed to the
deterioration of profitability of scheduled service over this time period.
Beginning in January 1996, a growing amount of low-fare competition entered the
Boston-Florida and midwest-Florida markets, which increased total capacity in
these markets and decreased the average fares earned by the Company. Operating
revenues in all scheduled service markets were further adversely affected by the
ValuJet accident in Florida on May 11. This event focused significant negative
media attention on airline safety, and on low-fare carriers in particular. In
spite of the Company's excellent safety record since its inception in 1973,
during which no serious injuries or fatalities had ever occurred, the Company
estimates that it lost significant scheduled service revenues in the second and
third quarters of 1996 from canceled reservations and reservations which were
never received. Additionally, effective October 1, 1995, the Company became
subject to a federal excise tax of 4.3 per gallon on jet fuel consumed in
domestic use, which added approximately 3.5 to the average cost of each gallon
of jet fuel purchased. During 1996, the market price of jet fuel also increased
significantly as compared to prices paid in comparable 1995 periods, largely due
to tight jet fuel inventories relative to demand throughout this period. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
In August 1996, the Company announced a significant reduction in scheduled
service operations. More than one-third of scheduled service departures and ASMs
were included in this schedule reduction. The Company eliminated its
unprofitable Boston and intra-Florida operations. The Company also exited, or
reduced in frequency, operations to other selected markets from Chicago-Midway,
Indianapolis and Milwaukee. Exited operations were phased out over a three-month
period ended December 2, 1996. The Company believes this process strengthened
its competitive position and improved both load factors and yields in its
remaining scheduled service operations. The Company has substantially improved
its profitability of these operations in the first nine months of 1997, versus
the first nine months of 1996.
In conjunction with its scheduled service reduction, the Company announced
a 15% reduction of its work force, including both employees and contractors. A
significant portion of this reduction in force was attributable to furloughs of
cockpit and cabin crews, with the remainder attributable to base station and
administrative staff. Maintenance staff reductions were accomplished primarily
through the reduction of base and line maintenance contract labor.
In addition, in 1996 the Company reconfigured its mix of aircraft. The
Company reduced the number of Boeing 757-200 aircraft it operates from eleven to
seven, all of which are powered by Rolls-Royce engines. One advantage of the new
fleet configuration is that all seven remaining Boeing 757-200 aircraft have
been assigned to mission-specific routes that could not have been served
68
by the Company's other aircraft. The commonality of aircraft and engines
benefits the Company in the form of decreased maintenance and training costs.
The Company sold two surplus spare engines with a net book value of $5.0 million
in the third quarter of 1997 and expects to sell two remaining engines and parts
inventory with a net book value of $8.8 million within the next twelve months.
In the third quarter of 1996, the Company recorded a loss on disposal of assets
associated with both Boeing 757-200 aircraft transactions of $4.7 million.
As noted above, the Company's tour operator and military operations were
profitable for 1996, and the Company has allocated additional aircraft to these
operations. As a result, the Company was able to contract for significantly more
tour operator and military flights than it had at the same time last year.
Additionally, after adjusting for the reduction in scheduled service capacity,
bookings for the remaining scheduled service are ahead of the same time as of
last year.
NEW CHIEF EXECUTIVE OFFICER
On June 19, 1997, the Company announced the election of John P. Tague as
President and Chief Executive Officer of the Company. Mr. Tague originally
joined the Company in 1991, as Vice President of Marketing, and was elected
President and Chief Operating Officer in September 1993, a position he held
until his resignation in 1995. Mr. Tague subsequently served as Co-Chairman and
Chief Executive Officer of the Pointe Group, an aviation consulting firm, and as
Chief Executive Officer for both Vanguard Airlines, Inc. and Air South Airlines,
Inc. Mr. Tague brings over twelve years of management experience in the airline
industry to the Company.
BACKGROUND
ATA flew its maiden flight on a Boeing 720 between Indianapolis and Orlando
in December 1973. It was certificated as a public charter carrier in 1981 and as
a scheduled air carrier in 1985. ATA grew from flying approximately 355 million
RPMs in 1982, its first full year as a public charter carrier, to approximately
9.2 billion RPMs in 1996. In 1973, the Company's fleet consisted of a single
leased Boeing 720. As of September 30, 1997, the Company operated a fleet of 45
aircraft. The following table illustrates the growth of the Company over the
past ten years:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
(DOLLARS IN MILLIONS)
Operating
revenues.......... $ 254.4 $ 253.9 $ 279.1 $ 371.4 $ 414.0 $ 421.8 $ 467.9 $ 580.5 $ 715.0 $ 750.9
EBITDA(1)........... $ 34.0 $ 49.9 $ 47.5 $ 45.5 $ 61.9 $ 45.1 $ 45.2 $ 55.7 $ 74.6 $ 26.5
Net income (loss)... $ 3.2 $ 7.0 $ 4.4 $ (2.0) $ 5.6 $ (2.1) $ 3.0 $ 3.5 $ 8.5 $ (26.7)
Total assets........ $ 183.0 $ 193.4 $ 238.4 $ 251.8 $ 237.4 $ 239.0 $ 269.8 $ 346.3 $ 413.1 $ 370.3
Block hours......... 48,870 42,642 49,222 57,847 60,177 65,583 76,542 103,657 126,295 138,114
ASMs (in
millions)......... 5,287 4,857 5,374 6,755 7,111 7,521 8,232 10,443 12,522 13,296
Employees (at period
end).............. 1,675 1,789 2,134 2,310 2,205 2,412 3,418 4,136 4,830 4,435
- ------------
(1) EBITDA represents net income plus interest expense (net of capitalized
interest), income tax expense, depreciation and amortization.
SERVICES OFFERED
The Company generally provides its airline services to its customers in the
form of charter and scheduled service. The following table provides a summary of
the Company's total revenue for the periods indicated:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ -------- ---------
(DOLLARS IN MILLIONS)
Charter
Tour operator............. $276.9 $213.7 $204.0 $229.5 $226.4 $185.0 $ 184.9
Military.................. 47.1 78.4 91.8 77.5 84.2 55.4 104.0
------ ------ ------ ------ ------ -------- ---------
Total charter............. 324.0 292.1 295.8 307.0 310.6 240.4 288.9
Scheduled service.............. 61.1 138.0 240.7 362.0 386.5 318.8 271.3
Other.......................... 36.7 37.8 44.0 46.0 53.8 43.0 37.1
------ ------ ------ ------ ------ -------- ---------
Total..................... $421.8 $467.9 $580.5 $715.0 $750.9 $602.2 $ 597.3
------ ------ ------ ------ ------ -------- ---------
------ ------ ------ ------ ------ -------- ---------
69
CHARTER SALES
As illustrated in the above table, charter sales represented 41.4% of the
Company's total revenues for 1996 and 48.4% for the nine months ended September
30, 1997. The Company's principal customers for charter sales are tour
operators, military and government agencies, sponsors of incentive travel
packages and specialty charter customers.
TOUR OPERATOR PROGRAMS
Sales to tour operators accounted for approximately 33% of the Company's
ASMs for 1996 and 35% for the nine months ended September 30, 1997. These
leisure market programs are generally contracted for repetitive, round-trip
patterns, operating over extended periods of time. In such an arrangement, the
tour operator pays a fixed price for use of the aircraft (which includes the
services of the cockpit crew and flight attendants, together with check-in,
baggage handling and maintenance services, catering and all necessary aircraft
handling services) and assumes responsibility and risk for the actual sale of
the available aircraft seats. Because the Company operates primarily on a
contract basis, it can, subject to competitive constraints, structure the terms
of each contract to reflect the costs of providing the specific service,
together with an acceptable return.
In connection with its sales to tour operators, the Company seeks to
minimize its exposure to unexpected changes in operating costs. Under its
contracts with tour operators, the Company is able to pass through most
increases in fuel costs from a contracted price. Under these contracts, if the
fuel increase causes the tour operator's price to rise in excess of 10%, the
tour operator has the option of canceling the contract. These contracts provide
that the final fuel price is to be determined based on a blended average of the
Company's fuel costs two weeks prior to the flight date. The Company is exposed
to increases in fuel costs that occur within 14 days of flight time, to all
increases associated with its scheduled service (other than bulk-seat sales) and
to increases affecting any contracts that do not include fuel cost escalation
provisions. See 'Risk Factors -- Aircraft Fuel.'
The Company believes that although price is the principal competitive
criterion, product quality, reputation and the ability to deliver a service that
is customized to the customer's particular needs have become increasingly
important to independent tour operators. Accordingly, the Company seeks to
differentiate itself through increased emphasis on its ability to deliver
customized in-flight service (such as food service, foreign language flight
attendants and movie selections), consistency of product delivery, customer
handling, delivery support and operational reliability for the tour operator.
The ability to deliver a low cost tour product exceeding the leisure traveler's
quality expectations provides a significant marketing advantage to the tour
operator.
Although the Company serves tour operators on a worldwide basis, its
primary customers are U.S.-based and European-based tour operators. European
tour operators accounted for 4.59% of consolidated revenues for 1996, and 4% for
the ten months ended October 31, 1997. In addition, contracts with most European
tour operators establish prices payable to the Company in U.S. dollars, thereby
reducing the Company's recorded foreign currency gains and losses to immaterial
amounts in both periods. For 1996, the Company's five largest tour operator
customers represented approximately 22% of the Company's consolidated revenues,
and the ten largest tour operator customers represented approximately 30% of the
Company's consolidated revenues.
MILITARY/GOVERNMENT
In 1996 military/government sales were 11.2% of the Company's total
revenues and 10.8% of total ASMs, and 17.4% and 18.0%, respectively, for the
first nine months of 1997. Traditionally, the Company's focus has been on
short-term 'contract expansion' business which is routinely awarded by the U.S.
Government based on price and availability of appropriate aircraft. The U.S.
Government awards one year contracts for its military charter business, and
pre-negotiates contract prices for each type of aircraft a carrier makes
available. Such contracts are awarded based upon the participating airlines'
average costs, and are therefore more profitable for low cost providers such as
Amtran. The short-term expansion business is awarded pro rata to the carriers
with aircraft availability who have been awarded the most fixed-award business,
and then to any additional carrier that has aircraft available. The Company's
contractor teaming arrangement with four other cargo and passenger airlines
significantly increases the likelihood that the team will receive both
fixed-award and contract expansion business, and increases the Company's
opportunity to provide such services because the Company represents a
significant portion of the team's passenger transport capacity. See
' -- Sales and Marketing.'
70
Military and other government flight activity is expected to remain a
significant factor in the Company's business mix. Because this business is
generally less seasonal than leisure travel, it tends to have a stabilizing
impact on the Company's operations and earnings. The Company believes its fleet
of aircraft is well suited for the changing requirements of military passenger
service. Although the military is reducing its troop size at foreign bases, the
military still desires to maintain its schedule frequency to these bases.
Therefore, the military has a need for smaller capacity aircraft possessing
long-range capability, such as the Company's Boeing 757-200ER aircraft. In 1993,
the Company became the first North American carrier to receive FAA certification
to operate Boeing 757-200 aircraft with 180-minute ETOPS. This certification
permits specially equipped Boeing 757-200 aircraft to participate in long-range
missions over water in which the aircraft may be up to three hours from the
nearest alternate airport. All of the Company's Boeing 757-200s are so equipped
and certified. The Company believes that this 180-minute ETOPS capability has
enhanced the Company's ability to obtain awards for certain long-range missions.
The Company is subject to biennial inspections by the military as a
condition of retaining its eligibility to perform military charter flights. The
last such inspection was undertaken in 1995 and the next is expected to occur in
the third or fourth quarter of 1997. As a result of the Company's military
business, it has been required to implement measures beyond those required by
the DOT, FAA, and other government agencies.
OTHER CHARTER SERVICES
Incentive Travel Programs. Many corporations offer travel to leisure
destinations or special events as incentive awards for employees. The Company
has historically provided air travel for many corporate incentive programs.
Incentive travel customers range from national incentive marketing companies to
large corporations that handle their incentive travel programs on an in-house
basis.
The Company believes that its flexibility, diversity of aircraft and
attention to detail have helped to establish it as one of the leaders in
providing the air portion of incentive travel airline charter service.
Generally, incentive travel operations are a demanding and highly customized
part of the charter airline business. Incentive travel operations can vary from
a single round-trip to an extensive overseas pattern involving thousands of
employees and their families.
Specialty Charters. The Company operates a significant number of specialty
charter flights. These programs are normally contracted on a single round-trip
basis and vary extensively in nature, from flying university alumni to a
football game, to transporting political candidates on campaign trips, to moving
the NASA space shuttle ground crew to an alternate landing site. Traditionally,
these flights which are arranged on very short notice based on aircraft
availability, allow the Company to increase aircraft utilization during off-peak
periods.
The Company believes it is able to attract this business due to its fleet
size and diversity of aircraft. The size and location of the Company's fleet
reduces nonproductive ferry time for aircraft and crews, resulting in more
competitive pricing. The diversity of aircraft types in its fleet also allows
the Company to better match a customer's particular needs with the type of
aircraft best suited to satisfy those requirements.
SCHEDULED SERVICE SALES
In scheduled service, the Company markets air travel, as well as packaged
leisure travel products, directly to retail consumers in selected markets.
During 1996, scheduled service provided 51.5% of the Company's consolidated
revenues and 54.9% of ASMs, and 45.4% and 46.8%, respectively, during the first
nine months of 1997. The Company's strategy for its scheduled service is to
offer routine, low-frequency service which stresses nonstop convenience and a
simplified pricing structure oriented to the buyer of leisure travel services.
The Company focuses primarily on serving selected leisure destinations with low
cost, nonstop or direct flights from cities which do not have service or where
there is only limited competition.
The Company's scheduled service operations link the Company's gateway
cities of Indianapolis, Chicago-Midway and Milwaukee with several popular
vacation destinations such as Hawaii, Las Vegas,
71
Florida and the Caribbean. In August 1996, the Company announced a significant
reduction in scheduled service operations. More than one-third of scheduled
service departures and ASMs were included in this schedule reduction. The
Company completely eliminated its unprofitable Boston and intra-Florida
operations. The Company also exited, or reduced in frequency, operations to
other selected markets from Chicago-Midway, Indianapolis and Milwaukee. The
Company is continuing to evaluate its scheduled service operations and believes
that it may be able, on a selective basis, to expand this business.
Included in the Company's scheduled service sales are bulk sales agreements
with tour operators. Under these arrangements, which are very similar to charter
sales, the tour operator may take up to 85% of an aircraft as a bulk-seat
purchase. The portion which the Company retains is sold through its own
scheduled service distribution. The advantage for the tour operators is that
their product appears in the CRS and through other scheduled service
distribution channels. Under this arrangement, the Company is obligated to
provide service to the tour operators' customers even in the event of
non-payment by the tour operator. To minimize its exposure under these
arrangements, the Company requires bonding or a security deposit for a
significant portion of the bulk-seat fare. Bulk seat sales amounted to $67.3
million in 1996 and $56.0 million in the first nine months of 1997, which
represented 9.0% and 9.4%, respectively, of the Company's total consolidated
revenue for such periods.
OTHER REVENUES
In addition to its core charter and scheduled service businesses, the
Company operates several other smaller businesses that complement its core
businesses. In aggregate, these businesses accounted for 7.1% of the Company's
revenues in 1996 and 6.2% in the first nine months of 1997.
SALES AND MARKETING
CHARTER SALES
TOUR OPERATOR PROGRAMS
The Company markets its charter services to tour operators primarily
through its own sales force. The charter sales department's principal office is
in Indianapolis, but it also has offices in Orlando, New York, San Francisco,
Seattle, Boston, Chicago, Detroit, London and Frankfurt. Through this sales
force, the Company markets its charter, sub-service, military and specialty
products. While most of ATA's charter or customized sales are transacted
directly with the end customer, the Company also utilizes brokers with certain
customers.
In general, tour operators either package the Company's flights with
traditional ground components (e.g., hotels, rental cars, attractions) or sell
only the airline passage ('airfare only'). Tickets on the Company's flights
contracted to tour operators are issued by the tour operator either directly
to passengers or through retail travel agencies. Under the current DOT
regulations with respect to charter transportation originating in the United
States, all charter airline tickets must generally be paid for in cash and all
funds received from the sale of charter seats (and in some cases the costs of
land arrangements) must be placed into escrow by the tour operator or protected
by a surety bond satisfying certain prescribed standards. Currently, the Company
provides a third-party bond which is unlimited in amount in order to satisfy
its obligations under these regulations. Under the terms of its bonding
arrangements, the issuer of the bond has the right to terminate the bond at
any time on 30 days' notice. The Company provides a $2.5 million letter of
credit to secure its potential obligations to the issuer of the bond. If the
bond were to be materially limited or canceled, the Company, like all other U.S.
charter airlines, would be required to escrow funds to comply with the DOT
requirements summarized above. Compliance with such requirements would reduce
the Company's liquidity and require it to fund higher levels of working capital
ranging up to $16.0 million based on anticipated 1997 peak travel periods. See
' -- Regulation.'
In general, the Company enters into contracts with tour operators four to
nine months in advance of the commencement of the service to be provided.
Pursuant to these contracts, tour operators, who are often thinly capitalized,
are required generally to pay to the Company at the time the contract is
executed a deposit for as much as one week's revenue due under the contract (in
the case of recurring
72
pattern contracts) to 10% to 30% of the total charter payment (in the case
of nonrecurring pattern contracts). Tour operators are required to pay
the remaining balance of the charter payment to the Company at least
two weeks prior to the flight date. In the event the tour operator fails
to make the remaining payment when due, the Company must either cancel the
flight at least ten days prior to the flight date or, pursuant to DOT
regulations, perform under the contract notwithstanding the breach by the tour
operator. In the event the tour operator cancels or defaults under the contract
with the Company or otherwise notifies the Company that such tour operator no
longer needs charter service, the Company is entitled under the contract to keep
the contractually established cancellation fees, which may be more or less than
the deposit. Whether the Company elects to exercise this right in a particular
case will depend upon a number of factors, including the Company's ability to
redeploy the aircraft, the amount of money on deposit or secured by a letter or
credit, the relationship the Company has with the tour operator and the general
market conditions existing at the time. The Company may choose to renegotiate a
contract with a tour operator from time to time based on market conditions. As
part of any such renegotiations a tour operator may seek to reduce the per-seat
price or the number of flights or seats per flight which the tour operator is
obligated to purchase.
MILITARY/GOVERNMENT
Traditionally, the Company's focus has been on short-term contract
expansion business which is routinely awarded by the U.S. Government based on
price and availability of appropriate aircraft. The short-term expansion
business is awarded pro rata to the carriers with aircraft availability who have
been awarded the most fixed-award business, and then to any additional carrier
that has aircraft available. Pursuant to the military's fixed-award system, each
participating airline is given certain 'mobilization value points' based on the
number and type of aircraft then available from such airline. A participant may
increase the number of its mobilization value points by teaming up with one or
more other airlines to increase the total number of mobilization value points of
the team. Generally, a charter passenger airline will seek to team up with one
or more cargo airlines and vice versa. When the military determines its
requirements for a particular period, it determines how much of each particular
type of service it will need (e.g., narrow-body, passenger service). It will
then award each type of business to those carriers or teams that have committed
to make available that type of aircraft and service, with the carriers or teams
with the highest amount of mobilization value points given a preference. When an
award is presented to a team, the charter passenger airline will generally
perform the passenger part of the award and a cargo airline will perform the
cargo part of the award.
In 1992, the Company entered into a contractor teaming arrangement with
four other cargo and passenger airlines serving the military. The contractor
teaming participants for military operations are Federal Express, Polar Air,
Atlas Air and Air Transport International. ATA represents 100% of the passenger
portion of the contractor teaming arrangement. If the Company used only its own
mobilization value points, it would be entitled to a fixed-award of
approximately 1% of total awards under the system; however, when all of the
Company's team members are taken into account, their portion of the fixed-award
is approximately 34% of total awards under the system. As a result, the
contractor teaming arrangement significantly increases the likelihood that the
team will receive a fixed-award contract, and, to the extent the award includes
passenger transport, increases the Company's opportunity to provide such service
because the Company represents a significant portion of the team's passenger
transport capacity. In addition, since the expansion business is also awarded as
a function of the fixed-award system, the Company, through its contractor
teaming arrangement, should also receive a greater percentage of the short-term
expansion business. As part of its participation in this contract teaming
arrangement, the Company pays certain utilization fees to other team members.
SCHEDULED SERVICE
In scheduled service, the Company markets air travel, as well as packaged
leisure travel products, directly, as well as through travel agents, to retail
consumers in selected markets. Approximately 67% of the Company's scheduled
service tickets are sold by travel agents through computer reservation systems
that have been developed and are controlled by other airlines. Travel agents
generally receive commissions based on the price of tickets sold. Accordingly,
airlines compete not only with respect to the price of tickets sold but also
with respect to the amount of commissions paid. Airlines often pay additional
commissions in connection with special revenue programs. Federal regulations
have been promulgated that are intended to diminish preferential schedule
displays and other practices with
73
respect to the reservation systems that place the Company and other similar
users at a competitive disadvantage to the airlines controlling the systems.
The Company believes that by reducing its scheduled service operations to a
few selected markets, its marketing and advertising expenditures are much more
effective. The Company believes this process will strengthen its competitive
position and improve both load factors and yields in its scheduled service
operations.
AIRCRAFT FLEET
As of September 30, 1997, the Company operated a fleet of 14 Lockheed
L-1011s, 24 Boeing 727-200ADVs and 7 Boeing 757-200s.
Lockheed L-1011 Aircraft. The Company's 14 Lockheed L-1011 aircraft are
wide-body aircraft, 12 of which have a range of 2,971 nautical miles and 2 of
which have a range of 3,425 nautical miles. These aircraft conform to the FAA's
Stage 3 noise requirements and have a low ownership cost relative to most other
wide-body aircraft types. See ' -- Environmental Matters.' As a result, the
Company believes these aircraft offer a competitive advantage when operated on
long-range routes, such as on transatlantic, Caribbean and West Coast-Hawaii
routes. These aircraft have an average age of approximately 22 years. As of
September 30, 1997, thirteen of these aircraft were owned by the Company and one
was under an operating lease that expires in March 2001. Certain of the L-1011
aircraft owned by the Company are subject to mortgages and other security
interests granted in favor of the Company's lenders under its bank credit. The
terms of such security arrangements prohibit any sale or lease of such aircraft
without the consent of the secured party, subject, however, to certain
exceptions, including in most cases leases not in excess of six months where the
Company maintains operational control of the property. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources Credit Facilities.'
Boeing 727-200ADV Aircraft. The Company's 24 Boeing 727-200ADV aircraft are
narrow-body aircraft equipped with high thrust, JT8D-15/-15A/-17/-17A engines
and have a range of 2,050 nautical miles. These aircraft, of which 15 conform to
Stage 2 and 9 conform to Stage 3 noise requirements as of September 30, 1997,
have an average age of approximately 17 years. The Company leases all of these
aircraft, with initial lease terms that expire between December 1997 and
September 2003, subject to the Company's right to extend each lease for varying
terms. The Company may be required prior to December 31, 1998 and will be
required prior to December 31, 1999, to make expenditures for engine 'hushkits'
or to acquire replacement aircraft so that its entire fleet conforms to Stage 3
noise requirements in accordance with FAA regulations. In general, the lessors
of the Company's Boeing 727-200ADVs have agreed to finance hushkits for these
aircraft which, if accepted by the Company, will result in an automatic
extension of the lease term for each aircraft. Although Boeing 727-200ADV
aircraft are subject to the FAA's Aging Aircraft program, the Company does not
expect that its cost of compliance for these aircraft over the next two years
will be material. See ' -- Regulation.'
Boeing 757-200ADV Aircraft. The Company's 7 Boeing 757-200 aircraft are
modern, narrow-body aircraft, all of which have a range of 3,679 nautical miles.
These aircraft, six of which are leased, have an average age of approximately 3
years and meet Stage 3 noise requirements. The Company's Boeing 757-200s have
higher ownership costs than the Company's Lockheed L-1011 and Boeing 727-200ADV
aircraft, but relatively low operational costs. In addition, unlike most other
aircraft of similar size, the Boeing 757-200 has the capacity to operate on
extended flights over water. The leases for the Company's Boeing 757-200
aircraft have initial terms that expire on various dates between October 1997
and March 2015, subject to the Company's right to extend each lease for varying
terms.
FLIGHT OPERATIONS
Worldwide flight operations are planned and controlled by the Company's
Flight Operations Group operating out of its facilities located in Indianapolis,
Indiana, which are staffed on a 24-hour basis seven days a week. Logistical
support necessary for extended operations away from the Company's fixed bases
are coordinated through its global communications network. ATA's complex
operating environment demands a high degree of skill and flexibility from its
Flight Operations Group.
74
In order to enhance the reliability of its service, the Company seeks to
maintain at least two spare L-1011 and three spare Boeing 727 aircraft at all
times. The spare aircraft can be dispatched on short notice to most locations in
the world where a substitute aircraft is needed for mechanical or other reasons.
The spare aircraft allows the Company to provide to its customers a dispatch
reliability that is hard for an airline of comparable or smaller size to match.
MAINTENANCE AND SUPPORT
The Company's Maintenance and Engineering Center is located at Indianapolis
International Airport. The 120,000 square-foot facility was designed to meet the
maintenance needs of the Company's operations as well as provide contract
control of purchased services. The Company performs approximately 75% of its own
maintenance work, excluding engine overhauls and L-1011 and 727 heavy airframe
checks.
The Company currently maintains ten permanent maintenance facilities,
including its Indianapolis facility. In addition, the Company utilizes 'Road
Teams,' which are dispatched as flight operations require to arrange for and
supervise maintenance services at temporary locations. The Company sends Road
Teams to oversee the 25% of its airframe maintenance not performed in house.
The Maintenance and Engineering Center is an FAA-certificated repair
station and has the expertise to perform routine, as well as non-routine,
maintenance on L-1011, 727, and 757 aircraft. Capabilities of the Maintenance
and Engineering Center include: (i) airworthiness directive and service bulletin
compliance; (ii) modular teardown and buildup of Rolls Royce RB211-22B engines;
(iii) nondestructive testing, including radiographics, x-ray, ultrasound,
magnetic particle and eddy current; (iv) avionics component repair; (v) on-wing
engine testing; (vi) interior modification; (vii) repair and overhaul of
accessories and components, including hydraulic units and wheel and brake
assemblies; and (viii) sheet metal repair with hot bonding and composite
material capabilities. The Company contracts with third parties for certain
engine and airframe overhaul and other services if the Company does not have the
technical capability or facility capacity, or if such services can be obtained
on a more cost-effective basis from outside sources.
FUEL PRICE RISK MANAGEMENT
Most of the Company's contracts with independent tour operators include fuel
price reimbursement clauses. Such clauses generally state that if the Company's
cost of fuel per gallon to perform the contract meets or exceeds a stated
trigger price, fuel costs in excess of the trigger price are required to be
reimbursed to the Company by the tour operator. Protection under such fuel
escalation provisions is generally limited to those price increases which occur
14 or more days prior to flight date. Fuel price increases which occur during
the last 14 days prior to flight date are the responsibility of the Company. In
addition, if the fuel price increase exceeds 10% of the contractual trigger
price, the tour operator generally has the right to cancel the contract. Tour
operator revenues subject to such fuel price reimbursement clauses represented
approximately 30% and 31%, respectively, of consolidated revenues for 1996 and
the nine months ended September 30, 1997.
The Company's contract with the U.S. military also includes a fuel
price guarantee. If the actual cost of fuel consumed is less than the guaranteed
price, the Company is required to reimburse the U.S. military for the excess
revenues received. If the actual cost of fuel consumed is more than the
guaranteed price, the U.S. military reimburses the Company for the additional
costs incurred. In this manner, the Company is guaranteed to pay the actual cost
of fuel up to the maximum price specified in the contract. This fuel price
guarantee is renegotiated each contract year. Military revenues subject to the
fuel price guarantee represented approximately 11% and 17%, respectively, of
consolidated revenues for 1996 and the nine months ended September 30, 1997.
Within the Company's scheduled service business unit are included bulk
seat sales to tour operators. Under these contracts, which are very similar to
tour operator agreements, the bulk seat contractor may purchase up to 85% of the
available seats on scheduled service flights. Most of these agreements also
provide for fuel escalation reimbursements to be made to the Company in a manner
similar to tour operator agreements described above. Scheduled service bulk seat
revenues subject to such fuel price reimbursement clauses represented
approximately 9% of consolidated revenues for both 1996 and the nine months
ended September 30, 1997.
The Company closely monitors jet fuel spot prices and crude oil and
heating oil futures markets to provide early indications of potential shifts in
jet fuel prices for timely management review and action. The Company does not
engage in any material fuel hedging activities.
COMPETITION
The Company competes in a number of different markets because it offers
different products and services, and the nature and intensity of such
competition varies from market to market. In marketing its charter and scheduled
airline services, the Company emphasizes its ability to provide a simplified
product designed to meet the primary needs of leisure travelers. This includes
offering low fares, nonstop or direct flights from the customer's city of origin
and in-flight services that are comparable to standard coach service on
scheduled airlines. By offering low cost air travel products that can be
tailored to meet the specific needs of its customers, particularly independent
tour operators, the Company believes it is able to differentiate itself from
most major scheduled airlines, whose principal focus is on frequent scheduled
service on established routes, as well as from smaller charter airlines, which
often do not have comparably diverse fleets or the ability to provide similar
support or customization.
In the United States, there are few barriers to entry into the airline
business, apart from the need for certain government licenses and the need for
and availability of financing, particularly for those seeking to operate on a
small scale with limited infrastructure and other support systems. As a result,
the Company may face increased competition from startup airlines in selected
markets from time to time. In the leisure travel market, the Company's principal
business, the competition for airline passengers is significant. The Company
competes with both scheduled and charter airlines, both in the U.S. and
internationally. The Company generally competes on the basis of price,
availability of equipment, quality of service and convenience. See 'Risk
Factors -- Industry Conditions and Competition.'
COMPETITION FROM SCHEDULED AIRLINES
The Company competes against U.S., European and Mexican scheduled airlines,
most of which are significantly larger than the Company and many of which have
greater access to capital than the
75
Company. These airlines compete for leisure travel customers in a variety of
ways, including wholesaling to tour operators discounted seats on scheduled
flights, promoting prepackaged tours to travel agents for sale to retail
customers and selling discounted, airfare-only products to the public. As a
result, all charter airlines, including the Company, generally are required to
compete for customers against the lowest revenue-generating seats of the
scheduled airlines.
Charter airlines generally have a lower cost structure than most scheduled
airlines. The major scheduled airlines typically incur higher costs related to
labor, marketing, reservation systems and airport facilities, among other items.
Because of their cost structures, the scheduled airlines generally do not
compete directly with charter airlines on a price basis. However, during periods
of dramatic fare cuts by the scheduled airlines, the Company is forced to
compete against these deeply discounted seats. The scheduled airlines do compete
with charter airlines by selling excess capacity to tour operators and
consolidators at bulk rates and also selling charter services on a limited
basis.
The Company's charter service also competes against the scheduled airlines
on the basis of convenience and quality of service. As the U.S. scheduled
airline industry has consolidated, the traffic patterns have evolved into what
is commonly referred to as the 'hub-and-spoke' system. Partially as a result of
the creation of numerous hub-and-spoke route systems, many smaller cities are
not served by direct or nonstop flights to leisure destinations, and many
secondary leisure destinations do not receive direct or nonstop service from
more than a few major U.S. cities. The Company, through tour operators, targets
these markets by offering nonstop service to leisure destinations on a
limited-frequency basis designed to appeal to the leisure traveler and to
provide relatively high load factors. The Company believes that a significant
amount of its charter flights provide nonstop convenience to destinations not
available to passengers through scheduled airlines.
The Company competes directly with several scheduled airlines on certain
leisure routes, particularly in the Indianapolis, Milwaukee and Chicago-Midway
markets. Although several airlines serve these markets, historically, the
Company has been able to compete successfully for the leisure customer. The
Company is continually evaluating these markets for their future potential.
COMPETITION FROM CHARTER AIRLINES
In addition to competing with major domestic, European and Mexican
scheduled airlines, the Company also faces competition from charter airlines. In
the U.S., the Company competes primarily with Sun Country and Miami Air, two
smaller U.S. charter airlines. This is the lowest number of charter carriers
competing for business in many years, a situation that could promote additional
entries into the charter market. In Europe, the Company competes with several
large European charter airlines, many of which are part of entities which also
own tour operators and travel agencies or scheduled airlines. To date, the
Company has been able to compete successfully against both the U.S. and European
charter airlines. In the case of the European charter airlines, the Company
believes that its success has been primarily due to the higher operating costs
of such European airlines. In Mexico, the Company competes against several
Mexican charter airlines operating charters between the U.S. and Mexico.
Based upon bilateral aviation agreements between the U.S. and other
nations, and, in the absence of such agreements, comity and reciprocity
principles, the Company, as a charter carrier, is generally not restricted as to
the number of frequency of its flights to and from most destinations in Europe.
However, these agreements generally restrict the Company to the carriage of
passengers and cargo on flights which either originate in the U.S. and terminate
in a single European nation, or which originate in a single European nation and
terminate in the U.S. Proposals for any additional charter service must
generally be specifically approved by the civil aeronautics authorities in the
relevant countries. Approval of such a proposal is typically based on
considerations of comity and reciprocity and cannot be guaranteed. See
' -- Regulation.'
PROPERTIES
The Company leases three adjacent office buildings in Indianapolis,
consisting of approximately 136,000 square feet. These buildings are located
approximately one mile from the Indianapolis International Airport and are used
for headquarters staff and for the operation of the Indianapolis reservations
center.
76
The Company's Maintenance and Engineering Center is located at Indianapolis
International Airport. This 120,000 square-foot facility was designed to meet
the base maintenance needs of the Company's operations, as well as to provide
support services for other maintenance locations. The Indianapolis Maintenance
and Engineering Center is an FAA-certificated repair station and has the
capability to perform routine, as well as non-routine, maintenance on the
Company's aircraft.
In 1995, the Company completed the lease of Hangar No. 2 at Chicago's
Midway Airport for an initial lease term of ten years, subject to two five-year
renewal options. With the reduction in scheduled service in 1996, the Company is
reconsidering other options for the use of this hangar.
Also in 1995, the Company relocated and expanded its Chicago area
reservations unit to an 18,700 square-foot facility located near Chicago's
O'Hare Airport. This new property is expected to accommodate the continued
growth of the Company's scheduled service into the foreseeable future.
INSURANCE
The Company carries types and amounts of insurance customary in the airline
industry, including coverage for public liability, passenger liability, property
damage, aircraft loss or damage, baggage and cargo liability and workers
compensation. Under the Company's current insurance policies, it will not be
covered by such insurance were it to fly, without the consent of its insurance
provider, to certain high risk countries. The Company does not consider the
inability to operate into or out of any of these countries to be a significant
limitation on its business. The Company will support certain U.S. government
operations in areas where its insurance policy does not provide coverage for
losses when the U.S. government provides sufficient replacement insurance
coverage.
EMPLOYEES
As of September 30, 1997, the Company had 4,793 employees. In June 1991,
the Company's flight attendants elected the AFA as their representative. In
December 1994, the flight attendants ratified a four-year collective agreement.
In June 1993, the Company's cockpit crews elected the IBT as their
representative. In September 1996, following three years of negotiation, a
four-year collective agreement was ratified by the cockpit crews.
The Company believes that its relations with its employees are good.
However, the existence of a significant dispute with any sizable number of its
employees could have a material adverse effect on the Company's operations.
REGULATION
The Company is an air carrier subject to the jurisdiction of and regulation
by the DOT and the FAA. The DOT is primarily responsible for regulating consumer
protection and other economic issues affecting air services and determining a
carrier's fitness to engage in air transportation. In 1981, the Company was
granted a Certificate of Public Convenience and Necessity pursuant to Section
401 of the Federal Aviation Act authorizing it to engage in air transportation.
The Company is also subject to the jurisdiction of the FAA with respect to its
aircraft maintenance and operations. The FAA requires each carrier to obtain
an operating certificate and operations specifications authorizing the carrier
to operate to specific airports using specified equipment. All of the Company's
aircraft must have and maintain certificates of airworthiness issued by the FAA.
The Company holds an FAA air carrier operating certificate under Part 121 of
the Federal Aviation Regulations.
The Company believes it is in compliance with all requirements necessary to
maintain in good standing its operating authority granted by the DOT and its air
carrier operating certificate issued by the FAA. A modification, suspension or
revocation of any of the Company's DOT or FAA authorizations or certificates
could have a material adverse effect upon the Company.
The FAA has issued a series of Airworthiness Directives under its 'Aging
Aircraft' program which are applicable to the Company's Lockheed L-1011 and
Boeing 727-200 aircraft. The Company does not currently expect the future cost
of these directives to be material.
Several aspects of airline operations are subject to regulation or
oversight by Federal agencies other than the DOT and FAA. The United States
Postal Service has jurisdiction over certain aspects of the transportation of
mail and related services provided by the Company through its cargo affiliate.
Labor relations in the air transportation industry are generally regulated under
the Railway Labor Act,
77
which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions arising under collective
bargaining agreements. The Company is subject to the jurisdiction of the
Federal Communications Commission regarding the utilization of its radio
facilities. In addition, the Immigration and Naturalization Service, the U.S.
Customs Service, and the Animal and Plant Health Inspection Service of the
Department of Agriculture have jurisdiction over inspection of the Company's
aircraft, passengers and cargo to ensure the Company's compliance with U.S.
immigration, customs and import laws. The Commerce Department also regulates
the export and reexport of the Company's U.S.-manufactured aircraft and
equipment.
In addition to various federal regulations, local governments and
authorities in certain markets have adopted regulations governing various
aspects of aircraft operations, including noise abatement, curfews and use of
airport facilities. Many U.S. airports have adopted or are considering adopting
a 'Passenger Facility Charge' of up to $3.00 generally payable by each passenger
departing from the airport. This charge must be collected from passengers by
transporting air carriers, such as ATA, and must be remitted to the applicable
airport authority. Airport operators must obtain approval of the FAA before they
may implement a Passenger Facility Charge.
Based upon bilateral aviation agreements between the U.S. and other
nations, and, in the absence of such agreements, comity and reciprocity
principles, the Company, as a charter carrier, is generally not restricted as to
the frequency of its flights to and from most destinations in Europe. However,
these agreements generally restrict the Company to the carriage of passengers
and cargo on flights which either originate in the U.S. and terminate in a
single European nation, or which originate in a single European nation and
terminate in the U.S.
Proposals for any additional charter service must generally be specifically
approved by the civil aeronautics authorities in the relevant countries.
Approval of such requests is typically based on considerations of comity and
reciprocity and cannot be guaranteed.
ENVIRONMENTAL MATTERS
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. These regulations require that the
Company achieve a 75% Stage 3 fleet by December 31, 1998. In general, the
Company would be prohibited from operating any Stage 2 aircraft after December
31, 1999. As of September 30, 1997, 67% of the Company's fleet met Stage 3
requirements. The Company expects to meet future Stage 3 fleet requirements
through Boeing 727-200 hushkit modifications, combined with additional future
deliveries of Stage 3 aircraft.
In addition to the aircraft noise regulations administered by the FAA, the
EPA regulates operations, including air carrier operations, which affect the
quality of air in the United States. The Company has made all necessary
modifications to its operating fleet to meet fuel-venting requirements and
smoke-emissions standards.
The Company maintains on its property in Indiana two underground storage
tanks which contain quantities of deicing fluid and emergency generator fuel.
These tanks are subject to various EPA and State of Indiana regulations. The
Company believes it is in substantial compliance with applicable regulatory
requirements with respect to these storage facilities.
At its aircraft line maintenance facilities, the Company uses materials
which are regulated as hazardous under federal, state and local law. The Company
maintains programs to protect the safety of its employees who use these
materials and to manage and dispose of any waste generated by the use of these
materials, and believes that it is in substantial compliance with all applicable
laws and regulations.
LEGAL PROCEEDINGS
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints which are normal and reasonably foreseeable in
light of the nature of the Company's business. The majority of these suits are
covered by insurance. In the opinion of management, the resolution of these
claims will not have a material adverse effect on the business, operating
results or financial condition of the Company.
78
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following serve as executive officers and directors of the Company:
NAME AGE POSITION
- ------------------------------------------ --- -----------------------------------------------------
J. George Mikelsons....................... 60 Chairman of the Board of Directors
John P. Tague............................. 35 President, Chief Executive Officer and Director
James W. Hlavacek......................... 61 Executive Vice President, Chief Operating Officer and
Director
Kenneth K. Wolff.......................... 51 Executive Vice President, Chief Financial Officer and
Director
Dalen D. Thomas........................... 30 Senior Vice President, Marketing, Sales and Strategic
Planning and Director
Robert A. Abel............................ 43 Director
William P. Rogers, Jr. ................... 46 Director
Andrejs P. Stipnieks...................... 56 Director
J. George Mikelsons is the founder, Chairman of the Board of Directors and,
prior to the Company's initial public offering in May 1993, was the sole
shareholder of Amtran. Mr. Mikelsons founded American Trans Air, Inc. and
Ambassadair Travel Club, Inc. in 1973. Mr. Mikelsons currently serves on several
boards of directors, including the Allison Engine Company, where he is Chairman
of the Board, the Indianapolis Convention and Visitors Association, where he is
a member of the Executive Committee, the Air Transport Association, the National
Air Carrier Association and TWC Resources Corporation (formerly the Indianapolis
Water Company). Mr. Mikelsons has been an airline Captain since 1966 and remains
current on several jet aircraft.
John P. Tague was appointed President and Chief Executive Officer, and
elected a Director, in June 1997. Mr. Tague originally joined the Company in
1991, and in 1993 was promoted to the position of President and Chief Operating
Officer. Mr. Tague resigned from the Company in 1995, and founded and served as
Co-Chairman and Chief Executive Officer of the Pointe Group, an aviation
consulting firm. Recently, Mr. Tague served as the Chief Executive Officer of
both Vanguard Airlines, Inc. and Air South Airlines, Inc. Mr. Tague has over 12
years of management experience in the airline industry.
James W. Hlavacek was appointed Chief Operating Officer in 1995. He
continues to serve as Executive Vice President and President of ATA Training
Corporation. From 1986 to 1989, he was Vice President of Operations. Mr.
Hlavacek has been a commercial airline pilot for more than 30 years and has held
the rank of Captain for nearly 27 years. He was ATA's Chief Pilot from 1985 to
1986. Mr. Hlavacek is a graduate of the University of Illinois.
Kenneth K. Wolff was appointed Executive Vice President and Chief Financial
Officer in 1991. From 1990 to 1991, he was Senior Vice President and Chief
Financial Officer. From 1989 to 1990, he was President and Chief Executive
Officer of First of America Bank -- Indianapolis (which is a lender under
certain of the Company's credit facilities). From 1988 to 1989, he was President
and Chief Operating Officer of such bank. Prior to his appointment as President,
he held various positions at the bank since 1969. He is a graduate of Purdue
University with a B.S. Degree in Industrial Management. Mr. Wolff also holds a
Masters in Business Administration from Indiana University and was a member of
the faculty there for five years.
Dalen D. Thomas was appointed Senior Vice President, Marketing, Sales and
Strategic Planning, and was elected a Director, in August 1996. Mr. Thomas
worked at Bain & Company, Inc. for seven years. While at Bain, he worked on the
team that restructured Continental Airlines. He graduated and received a Masters
in Business Administration from Stanford University.
Robert A. Abel is a director in the public accounting firm of Blue & Co.,
LLC. Mr. Abel is a magna cum laude graduate of Indiana State University with a
B.S. Degree in Accounting. He is a certified public accountant with over 18
years of experience in the areas of auditing and corporate tax and has been
involved with aviation accounting and finance since 1976.
William P. Rogers, Jr., is a partner in the New York law firm of Cravath,
Swaine & Moore. After graduating from Case Western Reserve University School of
Law in 1978, he served as a clerk in the
79
United States Court of Appeals for the Sixth Circuit based in Cincinnati. He
joined the Cravath firm a year later and became a partner in 1985. His practice
includes a wide variety of corporate matters, including public and private
financings, mergers and acquisitions and corporate restructurings.
Andrejs P. Stipnieks is a Senior Government Solicitor in the Office of
Commercial Law. Australian Government Solicitor's Office. He graduated from the
University of Adelaide, South Australia, and is a Barrister and Solicitor of the
Supreme Courts of South Australia and the Australian Capital Territory and of
the High Court of Australia. He has specialized in transport law and practice,
especially aviation law and practice and represented Australia on the Legal
Committee of the International Civil Aviation Organization at Montreal in 1983.
80
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 30, 1997, the number of
outstanding shares of Common Stock of the Company owned by any person known by
management to beneficially own more than 5% of such stock and by all directors
and executive officers of the Company as a group:
NUMBER OF
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OF INDIVIDUAL/GROUP OWNED OF CLASS
- ----------------------------------------------------------------------------- ------------ ---------
J. George Mikelsons.......................................................... 8,477,500 73.0
Heartland Advisors, Inc. ................................................... 633,500(2) 5.5
790 N. Milwaukee Street
Milwaukee, WI 53202
Dimensional Fund Advisors Inc. ............................................. 627,400(3) 5.4
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
All directors and executive officers as a group(1) (excluding J. George
Mikelsons)................................................................. 263,300(4) -- (5)
- ------------
(1) Group consists of six persons (Messrs. Hlavacek, Wolff, Thomas, Abel, Rogers
and Stipnicks).
(2) Heartland Advisors, Inc. ('Heartland'), a registered investment advisor,
filed with the Commission its statement on Schedule 13F, dated June 30,
1997, to the effect that it has sole voting and sole dispositive power over
all these shares. Such statement of Heartland's beneficial ownership, voting
power, dispositive owner and percent of class as stated herein, is based
solely on information stated therein.
(3) Dimensional Fund Advisors Inc. ('Dimensional'), a registered investment
advisor, has filed with the Commission its statement on Schedule 13F, dated
September 30, 1997, to the effect that it has sole voting power over 413,400
shares, and sole dispositive power over 627,400 shares. Such statement of
Dimensional's beneficial ownership, voting power, dispositive power and
percent of class as stated herein, is based solely on information stated
therein. Dismensional is deemed to have beneficial ownership of 627,400
shares of Amtran, Inc. stock as of September 30, 1997, all of which shares
are held in portfolios of DFA Investment Dimensions Group Inc., a registered
open-end investment company, or in a series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves as
investment manager. Dimensional disclaims beneficial ownership of all of
such shares.
(4) Includes (a) presently exercisable options to purchase 36,000 shares each
granted to Messrs. Wolff and Hlavacek on July 7, 1993, under the Company's
1993 Incentive Stock Plan for Key Employees; (b) presently exercisable
options to purchase 10,000 shares each granted to Messrs. Hlavacek and Wolff
on February 25, 1994, under said Plan; (c) presently exercisable options to
purchase 12,000 shares each granted to Messrs. Wolff and Hlavacek on
February 14, 1995, under said Plan; (d) presently exercisable options to
purchase 10,000 shares each granted to Messrs. Wolff and Hlavacek on March
21, 1996, under said Plan; (e) presently exercisable options to purchase
75,000 shares granted to Mr. Thomas on August 9, 1996, under the Company's
1996 Incentive Stock Plan; and (f) presently exercisable options to purchase
3,500 shares each granted to Messrs. Abel, Rogers and Stipnicks under the
Company's Stock Option Plan for Non-Employee Directors.
(5) Represents less than 3% of the outstanding stock of the Company.
CERTAIN RELATED PARTY TRANSACTIONS
Mr. Mikelsons is the sole owner of Betaco, Inc., a Delaware corporation
('Betaco'). Betaco currently owns two helicopters (a Bell 206B JetRanger III and
an Aerospatiale 355F2), both of which are leased to ATA. The lease for the
JetRanger III currently requires a monthly payment of $7,000 and provides either
party the right to terminate the lease upon six months' notice. The lease for
the Aerospatiale 355F2 is on an 'as used' basis. The Company believes that the
current terms of the leases with Betaco for this equipment are, in general, no
less favorable to the Company than those that could be obtained from third
parties.
Prior to January 1, 1997, the Company had an arrangement with Betaco under
which Betaco made certain vessels available to the Company and the Company paid
or reimbursed certain cash operating expenses relating to the use and
maintenance of these vessels. Such arrangement was terminated as of January 1,
1997. For the year ending December 31, 1996, the Company made payments totaling
$194,000 pursuant to this arrangement.
81
DESCRIPTION OF THE NEW CREDIT FACILITY
Concurrently with the closing of the Original Offering, the Company entered
into the New Credit Facility. The following summary of the material provisions
of the New Credit Facility does not purport to be complete, and is subject to,
and qualified in its entirety by reference to, the New Credit Facility, a copy
of which is available from the Company upon request.
ATA is the borrower under the New Credit Facility which is guaranteed by
the Company and each of the Company's other subsidiaries (including future
subsidiaries) that are Guarantors. NBD Bank, N.A. is the agent bank (the 'Agent
Bank') under the New Credit Facility. The New Credit Facility provides for a $50
million revolving line of credit, including up to $25 million for stand-by
letters of credit. The New Credit Facility will terminate, and all amounts
borrowed thereunder will become due and payable on April 1, 2001. Borrowings
under the New Credit Facility are secured by certain L-1011 aircraft and engines
and such additional assets as may be required to provide a loan to value ratio
not in excess of 75%.
So long as no event of default (as defined in the New Credit Facility) is
continuing, borrowings under the New Credit Facility bear interest, at the
option of ATA, at either (i) LIBOR plus 1.50% to 2.50% (depending on certain
financial ratios) or (ii) the Agent Bank's prime rate plus 0% to 0.50%
(depending on certain financial ratios). ATA incurs a quarterly commitment fee
ranging from 0.25% to 0.50% per annum on the average unused portion of the
commitment (depending on certain financial ratios).
The New Credit Facility contains covenants which, absent the prior written
consent of the Required Banks (as defined in the New Credit Facility), among
other things, limit the amount of debt that the Company, ATA or any of their
subsidiaries may incur, limit the placement of liens on the Company's, ATA's or
any of their subsidiaries' assets, restrict the ability of the Company, ATA or
any of their subsidiaries to make capital expenditures, restrict the payment of
dividends, distributions to stockholders and other similar payments, restrict
the ability of the Company, ATA or any of their subsidiaries to merge with or
into another person or sell or dispose of their assets and prevent the Company,
ATA or any of their subsidiaries from prepaying or redeeming indebtedness,
including the Notes. Further, covenants require that, for specified periods, ATA
maintain a minimum tangible net worth of at least $50 million plus 50% of net
profits as of the end of each fiscal quarter, certain specified ratios of cash
flow to interest expense and aircraft rentals, and total adjusted liabilities to
tangible net worth.
Among other events of default, a reduction below 51% in (i) J. George
Mikelsons' or his heirs' beneficial ownership of the Company's outstanding
capital stock, or (ii) the Company's beneficial ownership of ATA's outstanding
capital stock, are both specified as events of default.
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DESCRIPTION OF THE NOTES
The Outstanding Notes were, and the Exchange Notes will be, issued under an
Indenture, dated as of July 24, 1997 (the 'Indenture'), among the Company, as
issuer, American Trans Air, Inc., Ambassadair Travel Club, Inc., ATA Vacations,
Inc. (formerly Amber Tours, Inc.), Amber Travel, Inc., American Trans Air
Training Corporation, American Trans Air ExecuJet, Inc., and Amber Air Freight
Corporation, as guarantors (collectively, the 'Guarantors'), and First Security
Bank, N.A., as trustee (the 'Trustee'). The following summary of certain
provisions of the Indenture and the Notes does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Indenture, including the definitions of certain terms therein and those
terms made a part thereof by the Trust Indenture Act of 1939, as amended (the
'Trust Indenture Act'). Copies of the Indenture and the Notes are available upon
request from the Company. Whenever particular defined terms of the Indenture not
otherwise defined herein are referred to, such defined terms are incorporated
herein by reference. For definitions of certain capitalized terms used in the
following summary, see ' -- Certain Definitions.'
GENERAL
The Notes are unsecured senior obligations of the Company, initially
limited to $100 million aggregate principal amount, and will mature on August 1,
2004. Each Note will initially bear interest at 10 1/2% per annum from the
Closing Date or from the most recent Interest Payment Date to which interest has
been paid or provided for, payable semiannually (to Holders of record at the
close of business on the January 15 or July 15 immediately preceding the
Interest Payment Date) on February 1 and August 1 of each year, commencing
February 1, 1998.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York; provided that, at the
option of the Company, payment of interest may be made by check mailed to the
Holders at their addresses as they appear in the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See ' -- Book-Entry; Delivery and Form.' No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
For each Outstanding Note accepted for exchange, the Holder thereof will
receive an Exchange Note having a principal amount equal to that of the
surrendered Outstanding Note.
The terms of the Exchange Notes are identical in all material respects to
the terms of the Outstanding Notes, except for certain transfer restrictions and
registration rights relating to the Outstanding Notes and except that, if an
exchange offer with respect to the Exchange Notes is not consummated or a Shelf
Registration Statement with respect to the Outstanding Notes is not declared
effective on or prior to January 24, 1998, the rate per annum at with the
Outstanding Notes bear interest will be increased temporarily. See 'Registration
Rights Agreement for Outstanding Notes.'
All Outstanding Notes and Exchange Notes will be treated as a single class
of securities for all purposes under the Indenture.
OPTIONAL REDEMPTION
In the event that more than 98% of the outstanding principal amount of the
Notes are tendered pursuant to an Offer to Purchase, as required by the
'Limitation on Asset Sales' or 'Repurchase of Notes upon a Change of Control'
covenant, the balance of the Notes will be redeemable, at the Company's option,
in whole or in part, at any time or from time to time thereafter and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at a Redemption Price equal to the price specified in such Offer to
Purchase plus accrued and unpaid interest, if any, to the Redemption Date
(subject to the right
83
of Holders of record on the relevant Regular Record Date that is on or prior to
the Redemption Date to receive interest due on an Interest Payment Date).
The Notes will also be redeemable, at the Company's option, in whole or in
part, at any time or from time to time, on or after August 1, 2002 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holders' last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest, if any, to the Redemption
Date (subject to the right of Holders of record on the relevant Regular Record
Date that is on or prior to the Redemption Date to receive interest due on an
Interest Payment Date), if redeemed during the 12-month period commencing August
1 of the years set forth below:
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- ----------
2002................................................................... 105.250%
2003................................................................... 102.625%
In addition, at any time prior to August 1, 2000, the Company may redeem up
to 35% of the principal amount of the Notes with the proceeds of one or more
sales of its Common Stock, at any time or from time to time in part, at a
Redemption Price (expressed as a percentage of principal amount) of 110.500%,
plus accrued and unpaid interest to the Redemption Date (subject to the rights
of Holders of record on the relevant Regular Record Date that is prior to the
Redemption Date to receive interest due on an Interest Payment Date); provided
that at least $65 million aggregate principal amount of Notes remains
outstanding after each such redemption.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, by lot
or by such other method as the Trustee in its sole discretion shall deem to be
fair and appropriate; provided that no Note of $1,000 in principal amount or
less shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
SINKING FUND
There will be no sinking fund payments for the Notes.
GUARANTEE
The Company's obligations under the Notes are fully and unconditionally
guaranteed (the 'Note Guarantees') on an unsecured, unsubordinated basis,
jointly and severally, by the Guarantors; provided that no Note Guarantee shall
be enforceable against any Guarantor in an amount in excess of the net worth of
such Guarantor at the time that determination of such net worth is, under
applicable law, relevant to the enforceability of such Note Guarantee. Such net
worth shall include any claim of such Guarantor against the Company for
reimbursement and any claim against any other Guarantor for contribution.
Each Note Guarantee, other than the Note Guarantee provided by ATA, will
provide by its terms that it shall be automatically and unconditionally released
and discharged upon any sale, exchange or transfer to any Person that is not an
Affiliate of the Company, of all of the Company's and each Restricted
Subsidiary's Capital Stock issued by, or all or substantially all the assets of,
such Guarantor (which sale, exchange or transfer is not prohibited by the
Indenture).
84
RANKING
The Indebtedness evidenced by the Notes and the Note Guarantees will rank
pari passu in right of payment with all existing and future unsubordinated
indebtedness of the Company and the Guarantors, respectively, and senior in
right of payment to all existing and future subordinated indebtedness of the
Company and the Guarantors, respectively. The Notes and Note Guarantees will
also be effectively subordinated to all existing and future secured indebtedness
of the Company and the Guarantors, to the extent of such security. At September
30, 1997, on a consolidated basis, after giving effect to (x) the Original
Offering and (y) the replacement of certain senior credit facilities with the
New Credit Facility, the Company had approximately $178.8 million of
indebtedness outstanding, approximately $71.7 of which was secured. At September
30, 1997, after giving effect to the offering and the application of the net
proceeds thereof, including to repay certain indebtedness of the Guarantors (on
a consolidated basis excluding indebtedness owed to the Company and indebtedness
of Amtran) had approximately $78.8 million of indebtedness outstanding (other
than the Guarantees), $71.7 million of which was secured indebtedness. See
'Capitalization.' The Credit Agreement is secured by thirteen L-1011 aircraft
and related engines, including spares and may be secured by other assets as
provided thereunder. See 'Description of the New Credit Facility.' The Notes
will be effectively subordinated to such indebtedness to the extent of such
security interests. See 'Risk Factors -- Effective Subordination of Notes to
Secured Obligations of Subsidiaries.'
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
'Acquired Indebtedness' means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
'Adjusted Consolidated Net Income' means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income of any Person that is not a Restricted Subsidiary, except to
the extent of the amount of dividends or other distributions actually paid to
the Company or any of its Restricted Subsidiaries by such Person during such
period; (ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of the
'Limitation on Restricted Payments' covenant described below (and in such case,
except to the extent includable pursuant to clause (i) above), the net income
(or loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or all or substantially all of the property and assets
of such Person are acquired by the Company or any of its Restricted
Subsidiaries; (iii) the net income of any Restricted Subsidiary which is not a
Guarantor to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the 'Limitation on Restricted Payments'
covenant described below, any amount paid or accrued as dividends on Preferred
Stock of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary
gains and extraordinary losses.
85
'Adjusted Consolidated Net Tangible Assets' means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the 'Commission Reports and Reports to Holders'
covenant.
'Affiliate' means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, 'control'
(including, with correlative meanings, the terms 'controlling,' 'controlled by'
and 'under common control with'), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
'Asset Acquisition' means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; provided that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
'Asset Disposition' means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary of the Company or (ii) all or substantially all of the
assets that constitute a division or line of business of the Company or any of
its Restricted Subsidiaries.
'Asset Sale' means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary
(other than directors' qualifying shares), (ii) all or substantially all of the
property and assets of an operating unit or business of the Company or any of
its Restricted Subsidiaries or (iii) any other property and assets of the
Company or any of its Restricted Subsidiaries outside the ordinary course of
business of the Company or such Restricted Subsidiary and, in each case, that is
not governed by the provisions of the Indenture applicable to mergers,
consolidations and sales of assets of the Company; provided that 'Asset Sale'
shall not include (a) sales or other dispositions of inventory, receivables and
other current assets, (b) sales or other dispositions of assets for
consideration at least equal to the fair market value of the assets sold or
disposed of, to the extent that the consideration received would satisfy clause
(B) of the 'Limitation on Asset Sales' covenant or (c) sales or other
dispositions of assets in a single transaction or series of related transactions
having a fair market value, as determined in good faith by the Board of
Directors, of $2 million or less.
'Average Life' means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
'Capital Stock' means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
86
'Capitalized Lease' means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
'Capitalized Lease Obligations' means the discounted present value of the
rental obligations under a Capitalized Lease.
'Change of Control' means such time as (i) (x) a 'person' or 'group'
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes
the ultimate 'beneficial owner' (as defined in Rule 13d-3 under the Exchange
Act) of more than 35% of the total voting power of the Voting Stock of the
Company on a fully diluted basis and such ownership represents a greater
percentage of the total voting power of the Voting Stock of the Company, on a
fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date and (y) immediately following the occurrence of the
events specified in subsection (x), there shall have occurred any downgrading,
or notice shall have been given of any intended or potential downgrading, in the
rating accorded any of the Company's securities or (ii) individuals who on the
Closing Date constitute the Board of Directors (together with any new directors
whose election by the Board of Directors or whose nomination by the Board of
Directors for election by the Company's stockholders was approved by a vote of
at least two-thirds of the members of the Board of Directors then in office who
either were members of the Board of Directors on the Closing Date or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the members of the Board of Directors then in
office.
'Closing Date' means the date on which the Notes are originally issued
under the Indenture.
'Consolidated EBITDA' means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses
arising out of sales of assets), (iii) depreciation expense, (iv) amortization
expense and (v) all other non-cash items reducing Adjusted Consolidated Net
Income (other than items that will require cash payments and for which an
accrual or reserve is, or is required by GAAP to be, made), less all non-cash
items increasing Adjusted Consolidated Net Income, all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries in conformity
with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned
Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not
otherwise reduced in the calculation of Adjusted Consolidated Net Income in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied by
(B) the quotient of (1) the number of shares of outstanding Common Stock of such
Restricted Subsidiary not owned on the last day of such period by the Company or
any of its Restricted Subsidiaries divided by (2) the total number of shares of
outstanding Common Stock of such Restricted Subsidiary on the last day of such
period.
'Consolidated Interest Expense' means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation but
without duplication, amortization of original issue discount on any Indebtedness
and the interest portion of any deferred purchase price payment obligation,
calculated in accordance with the effective interest method of accounting; all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing; the net costs associated with
Interest Rate Agreements; and Indebtedness that is Guaranteed or secured by the
Company or any of its Restricted Subsidiaries) and the interest component of
rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled
to be paid or to be accrued by the Company and its Restricted Subsidiaries
during such period; excluding, however, (i) any amount of such interest of any
Restricted Subsidiary if the net income of such Restricted Subsidiary is
excluded in the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof (but only in the same proportion as the
net income of such Restricted Subsidiary is excluded from the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof), (ii) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Notes or the Credit Agreement,
all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP, and (iii) any interest or
other
87
financing costs associated with loans to students of the Company's training
academy, unless such costs are paid by the Company or any Restricted Subsidiary.
'Consolidated Net Worth' means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
'Credit Agreement' means the credit agreement among ATA, NBD Bank, N.A., as
agent, the lenders named therein, the Company and the other Guarantors, as
guarantors, together with all other loan or credit agreements entered into from
time to time with one or more banks or other institutional lenders and all
instruments and documents executed or delivered pursuant thereto, in each case
as such agreements, instruments or documents may be amended (including any
amendment and restatement thereof), supplemented, replaced or otherwise modified
from time to time in one or more successive transactions (including any such
transaction that changes the amount available, replaces the relevant agreement
or changes one or more lenders).
'Currency Agreement' means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
'Default' means any event that is, or after notice or passage of time or
both would be, an Event of Default.
'Disqualified Stock' means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an 'asset sale' or 'change of control'
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the 'asset sale' or 'change of control' provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in 'Limitation on Asset Sales' and
'Repurchase of Notes upon a Change of Control' covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
'Limitation on Asset Sales' and 'Repurchase of Notes upon a Change of Control'
covenants described below.
'Existing Stockholders' means J. George Mikelsons, his spouse, his issue,
any trust for any of the foregoing and any Affiliate of any of the foregoing.
'fair market value' means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution.
'GAAP' means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture (i) shall be computed in conformity with GAAP applied on a
consistent basis, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of the
Indenture
88
shall be made without giving effect to (A) the amortization of any expenses
incurred in connection with the offering of the Notes and (B) except as
otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17 and (ii) shall, insofar as
they involve the treatment for financial reporting purposes of amounts incurred
with engine overhauls, reflect the accounting policy of the Company as in effect
as of the Closing Date.
'Guarantee' means, without duplication, any obligation, contingent or
otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of
any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services (unless such purchase arrangements are on arm's-length
terms and are entered into in the ordinary course of business), to take-or-pay,
or to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness of
the payment thereof or to protect such obligee against loss in respect thereof
(in whole or in part); provided that the term 'Guarantee' shall not include
endorsements for collection or deposit in the ordinary course of business. The
term 'Guarantee' used as a verb has a corresponding meaning.
'Incur' means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an 'Incurrence' of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
'Indebtedness' means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all Capitalized
Lease Obligations, (vi) all Indebtedness of other Persons secured by a Lien on
any asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at such date of determination and (B) the
amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed
by such Person to the extent such Indebtedness is Guaranteed by such Person and
(viii) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation, provided (A) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the face amount of such Indebtedness less the remaining unamortized portion
of the original issue discount of such Indebtedness at the time of its issuance
as determined in conformity with GAAP, (B) that money borrowed and set aside at
the time of the Incurrence of any Indebtedness in order to prefund the payment
of the interest on such Indebtedness shall not be deemed to be 'Indebtedness'
and (C) that Indebtedness shall not include any liability for federal, state,
local or other taxes.
'Interest Coverage Ratio' means, on any Transaction Date, the ratio of (i)
the aggregate amount of Consolidated EBITDA for the then most recent four fiscal
quarters prior to such Transaction Date for which reports have been filed with
the Commission (the 'Four Quarter Period') to (ii) the aggregate Consolidated
Interest Expense during such Four Quarter Period. In making the foregoing
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calculation, (A) pro forma effect shall be given to any Indebtedness Incurred or
repaid during the period (the 'Reference Period') commencing on the first day of
the Four Quarter Period and ending on the Transaction Date (other than
Indebtedness Incurred or repaid under a revolving credit or similar arrangement
to the extent of the commitment thereunder (or under any predecessor revolving
credit or similar arrangement) in effect on the last day of such Four Quarter
Period unless any portion of such Indebtedness is projected, in the reasonable
judgment of the senior management of the Company, to remain outstanding for a
period in excess of 12 months from the date of the Incurrence thereof), in each
case as if such Indebtedness had been Incurred or repaid on the first day of
such Reference Period; (B) Consolidated Interest Expense attributable to
interest on any Indebtedness (whether existing or being Incurred) computed on a
pro forma basis and bearing a floating interest rate shall be computed as if the
rate in effect on the Transaction Date (taking into account any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term in excess of 12 months or, if shorter, at least equal to the
remaining term of such Indebtedness) had been the applicable rate for the entire
period; (C) pro forma effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving pro forma effect to the application of proceeds
of any Asset Disposition) that occur during such Reference Period as if they had
occurred and such proceeds had been applied on the first day of such Reference
Period; and (D) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of proceeds
of any asset disposition) that have been made by any Person that has become a
Restricted Subsidiary or has been merged with or into the Company or any
Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions
that occurred on the first day of such Reference Period; provided that to the
extent that clause (C) or (D) of this sentence requires that pro forma effect be
given to an Asset Acquisition or Asset Disposition, such pro forma calculation
shall be based upon the four full fiscal quarters immediately preceding the
Transaction Date of the Person, or division or line of business of the Person,
that is acquired or disposed for which financial information is available.
'Interest Rate Agreement' means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
'Investment' in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the 'Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries' covenant; provided that the
fair market value of the Investment remaining in any Person that has ceased to
be a Restricted Subsidiary shall not exceed the aggregate amount of Investments
previously made in such Person valued at the time such Investments were made
less the net reduction of such Investments. For purposes of the definition of
'Unrestricted Subsidiary' and the 'Limitation on Restricted Payments' covenant
described below, (i) 'Investment' shall include the fair market value of the
assets (net of liabilities (other than liabilities to the Company or any of its
Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary
at the time that such Unrestricted Subsidiary is designated a Restricted
Subsidiary shall be considered a reduction in outstanding Investments and (iii)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer.
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'Lien' means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
'Moody's' means Moody's Investors Service, Inc. and its successors.
'Net Cash Proceeds' means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
'Note Guarantee' means any Guarantee of the Notes by a Guarantor.
'Offer to Purchase' means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the 'Payment Date'); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer to
Purchase will be required to surrender the Note, together with the form entitled
'Option of the Holder to Elect Purchase' on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; (vii) that Holders whose
Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or integral multiples thereof; and (viii) if more than 98% of the
outstanding principal amount of the Notes is tendered pursuant to an Offer to
Purchase, the Company shall have the right to redeem the balance of the Notes at
the purchase price specified in such Offer to Purchase, plus (without
duplication) accrued and unpaid interest, if any, to the Redemption Date on the
principal amount of the Notes to be redeemed. On the Payment Date, the Company
shall (i) accept for payment on a pro rata basis Notes or portions thereof
tendered pursuant to an Offer to
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Purchase; (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all Notes or portions thereof so accepted; and (iii) deliver,
or cause to be delivered, to the Trustee all Notes or portions thereof so
accepted together with an Officers' Certificate specifying the Notes or portions
thereof accepted for payment by the Company. The Paying Agent shall promptly
mail to the Holders of Notes so accepted payment in an amount equal to the
purchase price, and the Trustee shall promptly authenticate and mail to such
Holders a new Note equal in principal amount to any unpurchased portion of the
Note surrendered; provided that each Note purchased and each new Note issued
shall be in a principal amount of $1,000 or integral multiples thereof. The
Company will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The Trustee shall act as the Paying Agent
for an Offer to Purchase. The Company will comply with Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable, in the event that the Company
is required to repurchase Notes pursuant to an Offer to Purchase.
'Permitted Investment' means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; (iv) stock, obligations or securities received in
settlement or satisfaction of judgments or claims; (v) loans or advances to
employees in the ordinary course of business; and (vi) the non-cash portion of
the consideration received for any Asset Sale.
'Permitted Liens' means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) each such Lien is created
solely for the purpose of securing Indebtedness Incurred to finance the costs
(including transaction costs and the costs of improvement or construction) of
the item of property or assets subject thereto and such Lien is created prior
to, at the time of or within twelve months after, the later of the acquisition,
the completion of construction or the commencement of full operation of such
property or assets (b) the principal amount of the Indebtedness secured by such
Lien does not exceed 100% of such costs and (c) any such Lien shall not extend
to or cover any property or assets other than such item of property or assets
and any improvements on such item; (vii) Liens upon aircraft, engines and
buyer-furnished equipment attached thereto or incorporated therein other than as
permitted by the foregoing clause (vi); provided that, after giving effect
thereto and the Indebtedness secured thereby, the book value of assets of the
Company not subject to any Lien (other than Liens described in clauses (i)
through (v), (xiii) and (xvi) of the definition of 'Permitted Liens') shall be
not less than $125 million; (viii) leases or subleases granted to others that do
not materially interfere with the ordinary course of business of the Company and
its Restricted Subsidiaries, taken as a whole; (ix) Liens encumbering property
or assets under
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construction arising from progress or partial payments by a customer of the
Company or its Restricted Subsidiaries relating to such property or assets; (x)
any interest or title of a lessor in the property subject to any Capitalized
Lease or operating lease; (xi) Liens arising from filing Uniform Commercial Code
financing statements regarding leases; (xii) Liens on property of, or on shares
of Capital Stock or Indebtedness of, any Person existing at the time such Person
becomes, or becomes a part of, any Restricted Subsidiary; provided that such
Liens do not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets acquired; (xiii) Liens
with respect to the assets of a Restricted Subsidiary granted by such Restricted
Subsidiary to the Company or a Wholly Owned Restricted Subsidiary to secure
Indebtedness owing to the Company or such other Restricted Subsidiary; (xiv)
Liens arising from the rendering of a final judgment or order against the
Company or any Restricted Subsidiary that does not give rise to an Event of
Default; (xv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof; (xvi) Liens in favor of customs
and revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (xvii) Liens encumbering
customary initial deposits and margin deposits, and other Liens that are within
the general parameters customary in the industry and incurred in the ordinary
course of business, in each case, securing Indebtedness under Interest Rate
Agreements and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed solely
to protect the Company or any of its Restricted Subsidiaries from fluctuations
in interest rates, currencies or the price of commodities; (xviii) Liens arising
out of conditional sale, title retention, consignment or similar arrangements
for the sale of goods entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business in accordance with the past
practices of the Company and its Restricted Subsidiaries prior to the Closing
Date; and (xix) Liens on or sales of receivables.
'Restricted Subsidiary' means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
'S&P' means Standard & Poor's Ratings Service and its successors.
'Significant Subsidiary' means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
'Stated Maturity' means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
'Subsidiary' means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
'Temporary Cash Investment' means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated 'A'
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in
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clause (ii) above, (iv) commercial paper, maturing not more than 90 days after
the date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of 'P-1' (or higher) according to Moody's or 'A-1' (or higher) according
to S&P, and (v) securities with maturities of six months or less from the date
of acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least 'A' by S&P or
Moody's.
'Trade Payables' means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
'Transaction Date' means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
'Unrestricted Subsidiary' means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an 'Incurrence' of such Indebtedness and an 'Investment' by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the 'Limitation on Restricted
Payments' covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the 'Limitation on Indebtedness' and 'Limitation on
Restricted Payments' covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that (i) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation and (ii) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
(and shall be deemed to have been Incurred) for all purposes of the Indenture.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
'Voting Stock' means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
'Wholly Owned' means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes, the Note
Guarantees and Indebtedness existing on the Closing Date); provided that the
Company may Incur Indebtedness if, after giving effect to the Incurrence of
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such Indebtedness and the receipt and application of the proceeds therefrom, the
Interest Coverage Ratio would be greater than 3:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness of the Company or any Restricted Subsidiary that is a Guarantor
outstanding at any time under the Credit Agreement; provided, that after giving
effect to the Incurrence of any such Indebtedness, the book value of assets of
the Company not subject to any Lien (other than Liens described in clauses (i)
through (v), (xiii) and (xvi) of the definition of 'Permitted Liens') shall not
be less than $125 million; (ii) Indebtedness owed (A) to the Company evidenced
by an unsubordinated promissory note or (B) to any of its Restricted
Subsidiaries; provided that any event which results in any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of
such Indebtedness (other than to the Company or another Restricted Subsidiary)
shall be deemed, in each case, to constitute an Incurrence of such Indebtedness
not permitted by this clause (ii); (iii) Indebtedness issued in exchange for, or
the net proceeds of which are used to refinance or refund, then outstanding
Indebtedness Incurred under clause (v) of this paragraph and any refinancings
thereof in an amount not to exceed the amount so refinanced or refunded (plus
premiums, accrued interest, fees and expenses); provided that Indebtedness the
proceeds of which are used to refinance or refund the Notes or Indebtedness that
is pari passu with, or subordinated in right of payment to, the Notes or Note
Guarantees shall only be permitted under this clause (iii) if (A) in case the
Notes are refinanced in part or the Indebtedness to be refinanced is pari passu
with the Notes or Note Guarantees, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made pari passu with, or subordinate in right of
payment to, the remaining Notes or Note Guarantees, as the case may be, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes or Note Guarantees, as the case may be, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made subordinate in
right of payment to the Notes or the Note Guarantees, as the case may be, at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes or the Note Guarantees, as the case may be, and (C) such new
Indebtedness, determined as of the date of Incurrence of such new Indebtedness,
does not mature prior to the Stated Maturity of the Indebtedness to be
refinanced or refunded, and the Average Life of such new Indebtedness is at
least equal to the remaining Average Life of the Indebtedness to be refinanced
or refunded; and provided further that in no event may Indebtedness of the
Company be refinanced by means of any Indebtedness of any Restricted Subsidiary
pursuant to this clause (iii) (other than pursuant to an Offer to Purchase);
(iv) Indebtedness (A) in respect of performance, surety or appeal bonds provided
in the ordinary course of business, (B) under Currency Agreements and Interest
Rate Agreements; provided that such agreements (a) are designed solely to
protect the Company or its Restricted Subsidiaries against fluctuations in
foreign currency exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder; and (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
(other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company, to the extent
the net proceeds thereof are promptly (A) used to purchase Notes tendered in an
Offer to Purchase made as a result of a Change in Control or (B) deposited to
defease the Notes as described below under 'Defeasance'; (vi) Guarantees of the
Notes, Guarantees by the Company or Restricted Subsidiaries of Indebtedness of
ATA under the Credit Agreement, and Guarantees of Indebtedness of the Company by
any Restricted Subsidiary provided the Guarantee of such Indebtedness is
permitted by and made in accordance with the 'Limitation on Issuance of
Guarantees by Restricted Subsidiaries' covenant described below; (vii)
Indebtedness of the Company or any Restricted Subsidiary Incurred to finance
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the cost of aircraft, engines and buyer-furnished equipment attached thereto or
incorporated therein; provided, that such Indebtedness is created solely for the
purpose of financing the costs (including transaction costs and the costs of
improvement or construction) of property or assets and is incurred prior to, at
the time of or within 12 months after, the later of the acquisition, the
completion of construction or the commencement of full operation of such
property or assets, and (b) the principal amount of such Indebtedness does not
exceed 100% of such costs; and (viii) Indebtedness of the Company (in addition
to Indebtedness permitted under clauses (i) through (vii) above) in an aggregate
principal amount outstanding at any time not to exceed $10 million.
(b) Notwithstanding any other provision of this 'Limitation on
Indebtedness' covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this 'Limitation on Indebtedness'
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this 'Limitation on Indebtedness' covenant, (1) Indebtedness Incurred under the
Credit Agreement on or prior to the Closing Date shall be treated as Incurred
pursuant to clause (i) of the second paragraph of this 'Limitation on
Indebtedness' covenant, (2) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (3) any Liens
granted pursuant to the equal and ratable provisions referred to in the
'Limitation on Liens' covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this 'Limitation on
Indebtedness' covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses (other than Indebtedness referred to in clause (1) of the preceding
sentence), the Company, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
holder) of 5% or more of the Capital Stock of the Company, (iii) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company or any Guarantor that is subordinated in right of
payment to the Notes or to a Guarantor's Note Guarantee, as the case may be, or
(iv) make any Investment, other than a Permitted Investment, in any Person (such
payments or any other actions described in clauses (i) through (iv) above being
collectively 'Restricted Payments') if, at the time of, and after giving effect
to, the proposed Restricted Payment: (A) a Default or Event of Default shall
have occurred and be continuing, (B) the Company could not Incur at least $1.00
of Indebtedness under the first paragraph of the 'Limitation on Indebtedness'
covenant or (C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a Board Resolution)
made after the Closing Date shall exceed the sum of (1) 50% of the aggregate
amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated
Net Income is a loss, minus 100% of the amount of such loss) (determined by
excluding income resulting from transfers of assets by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative
basis during the period (taken as one accounting period) beginning on the first
day of the fiscal quarter immediately following the Closing Date and ending on
the last day of the last
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fiscal quarter preceding the Transaction Date for which reports have been filed
with the Commission or provided to the Trustee pursuant to the 'Commission
Reports and Reports to Holders' covenant, plus (2) the aggregate Net Cash
Proceeds received by the Company after the Closing Date from the issuance and
sale permitted by the Indenture of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Subsidiary of the Company, including an issuance
or sale permitted by the Indenture of Indebtedness of the Company for cash
subsequent to the Closing Date upon the conversion of such Indebtedness into
Capital Stock (other than Disqualified Stock) of the Company, or from the
issuance to a Person who is not a Subsidiary of the Company of any options,
warrants or other rights to acquire Capital Stock of the Company (in each case,
exclusive of any Disqualified Stock or any options, warrants or other rights
that are redeemable at the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the Notes), plus (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments) in any
Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the
sale of any such Investment (except, in each case, to the extent any such
payment or proceeds are included in the calculation of Adjusted Consolidated Net
Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
'Investments'), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary, minus (4) the sum of the amounts by which the Pro Forma
Consolidated Net Worth after giving effect to each consolidation, merger and
sale of assets effectuated pursuant to clause (iii) under the 'Consolidation,
Merger and Sale of Assets' covenant was less than the Base Consolidated Net
Worth immediately prior to such consolidation, merger and sale of assets, plus
(5) $5 million.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the 'Limitation on Indebtedness' covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company or
an Unrestricted Subsidiary (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock (other than Disqualified Stock)
of the Company (or options, warrants or other rights to acquire such Capital
Stock); (iv) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of the
Company or any Guarantor which is subordinated in right of payment to the Notes
or the Note Guarantees, as the case may be, in exchange for, or out of the
proceeds of, a substantially concurrent offering of, shares of the Capital Stock
(other than Disqualified Stock) of the Company or any Guarantor (or options,
warrants or other rights to acquire such Capital Stock); (v) payments or
distributions, to dissenting stockholders pursuant to applicable law, pursuant
to or in connection with a consolidation, merger or transfer of assets that
complies with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of the Company; (vi) Investments acquired in exchange for Capital Stock
(other than Disqualified Stock) of the Company; provided that, except in the
case of clauses (i) and (iii), no Default or Event of Default shall have
occurred and be continuing or occur as a consequence of the actions or payments
set forth therein; or (vii) the purchase or redemption of subordinated
Indebtedness pursuant to asset sale or change of control provisions contained in
the Indenture or other governing instrument relating thereto; provided, however,
that (a) no offer or purchase obligation may be triggered in respect of such
Indebtedness unless a corresponding obligation also arises for the Notes and (b)
in all events, no repurchase or redemption of such Indebtedness may be
consummated unless and until the Company shall have satisfied all repurchase
obligations with respect to any required purchase offer made with respect to the
Notes.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clause (vi)
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thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (iii) and (iv), shall be included in calculating whether the
conditions of clause (C) of the first paragraph of this 'Limitation on
Restricted Payments' covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is pari passu with the Notes, then the Net Cash
Proceeds of such issuance shall be included in clause (C) of the first paragraph
of this 'Limitation on Restricted Payments' covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary that is not a Guarantor to (i) pay dividends or make any other
distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (iii) make loans or advances to the Company or any other Restricted
Subsidiary or (iv) transfer any of its property or assets to the Company or any
other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Credit Agreement, the
Indenture or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements; provided
that the encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to the
Holders than those encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law; (iii) existing with respect to any Person or the
property or assets of such Person acquired by the Company or any Restricted
Subsidiary, existing at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not applicable to
any Person or the property or assets of any Person other than such Person or the
property or assets of such Person so acquired; (iv) in the case of clause (iv)
of the first paragraph of this 'Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries' covenant, (A) that restrict in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary; or (vi)
contained in the terms of any Indebtedness or any agreement pursuant to which
such Indebtedness was issued if (A) the encumbrance or restriction applies only
in the event of a payment default or a default with respect to a financial
covenant contained in such Indebtedness or agreement, (B) the encumbrance or
restriction is not materially more disadvantageous to the Holders of the Notes
than is customary in comparable financings (as determined by the Company) and
(C) the Company determines that any such encumbrance or restriction will not
materially affect the Company's ability to make principal or interest payments
on the Notes. Nothing contained in this 'Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries' covenant shall prevent
the Company or any Restricted Subsidiary from (1) creating, incurring, assuming
or suffering to exist any Liens otherwise permitted in the 'Limitation on Liens'
covenant or (2) restricting the sale or other disposition of property or assets
of the Company or any of its Restricted Subsidiaries that secure Indebtedness of
the Company or any of its Restricted Subsidiaries.
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Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; or (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the 'Limitation on Restricted Payments' covenant if made on the
date of such issuance or sale.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary that is not a
Guarantor, directly or indirectly, to Guarantee any Indebtedness of the Company
which is pari passu with or subordinate in right of payment to the Notes
('Guaranteed Indebtedness'), unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee (a 'Subsidiary Guarantee') of payment of the Notes by
such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee; provided that this
paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary
that existed at the time such Person became a Restricted Subsidiary and was not
Incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the
Notes or the Note Guarantees, then the Guarantee of such Guaranteed Indebtedness
shall be pari passu with, or subordinated to, the Subsidiary Guarantee or (B)
subordinated to the Notes or the Note Guarantees, then the Guarantee of such
Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at
least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes or the Note Guarantees, as the case may be.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors, or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned
99
Restricted Subsidiaries or solely between Wholly Owned Restricted Subsidiaries;
(iii) the payment of reasonable and customary regular compensation (whether in
cash or securities) and expense reimbursements to directors of the Company who
are not employees of the Company; (iv) any payments or other transactions
pursuant to any tax-sharing agreement between the Company and any other Person
with which the Company files a consolidated tax return or with which the Company
is part of a consolidated group for tax purposes; or (v) any Restricted Payments
not prohibited by the 'Limitation on Restricted Payments' covenant.
Notwithstanding the foregoing, any transaction or series of related transactions
covered by the first paragraph of this 'Limitation on Transactions with
Shareholders and Affiliates' covenant and not covered by clauses (ii) through
(v) of this paragraph, (a) the aggregate amount of which exceeds $1 million in
value, must be approved or determined to be fair in the manner provided for in
clause (i)(A) or (B) above and (b) the aggregate amount of which exceeds $3
million in value, must be determined to be fair in the manner provided for in
clause (i)(B) above.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes (or in the case of a Lien on assets or properties of a Guarantor, the Note
Guarantee of such Guarantor) and all other amounts due under the Indenture to be
directly secured equally and ratably with (or, if the obligation or liability to
be secured by such Lien is subordinated in right of payment to the Notes or the
Note Guarantee, prior to) the obligation or liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date, including Liens securing obligations under the Credit Agreement;
(ii) Liens granted after the Closing Date on any assets or Capital Stock of the
Company or its Restricted Subsidiaries created in favor of the Holders; (iii)
Liens with respect to the assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary to
secure Indebtedness owing to the Company or such other Restricted Subsidiary;
(iv) Liens securing Indebtedness which is Incurred to refinance secured
Indebtedness which is permitted to be Incurred under clause (iii) of the second
paragraph of the 'Limitation on Indebtedness' covenant; provided that such Liens
do not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (v) Liens on any property or assets of a
Restricted Subsidiary securing Indebtedness of such Restricted Subsidiary
permitted under the 'Limitation on Indebtedness' covenant; or (vi) Permitted
Liens.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the 'Limitation on
Asset Sales' covenant described below.
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Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
(including the fair market value, as determined in good faith by the Board of
Directors, of any non-cash consideration) consists of (w) cash, (x) Temporary
Cash Investments, (y) marketable securities which are liquidated for cash within
90 days following the consummation of such Asset Sale, and (z) the assumption of
Indebtedness of the Company or any Restricted Subsidiary (other than the Notes
and the Note Guarantees); provided, that (1) such Indebtedness is not
subordinate in right of payment to the Notes and the Note Guarantees and (2) the
Company or such Restricted Subsidiary is irrevocably released and discharged
from such Indebtedness. In the event and to the extent that the Net Cash
Proceeds received by the Company or any of its Restricted Subsidiaries from one
or more Asset Sales occurring on or after the Closing Date in any period of 12
consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of the Company and its Subsidiaries has
been filed with the Commission), then the Company shall or shall cause the
relevant Restricted Subsidiary to (i) within twelve months after the date Net
Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible
Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently
repay unsubordinated Indebtedness of the Company, or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the 'Limitation on Issuances of
Guarantees by Restricted Subsidiaries' covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment and (ii) apply
(no later than the end of the 12-month period referred to in clause (i)) such
excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as
provided in the following paragraph of this 'Limitation on Asset Sales'
covenant. The amount of such excess Net Cash Proceeds required to be applied (or
to be committed to be applied) during such 12-month period as set forth in
clause (i) of the preceding sentence and not applied as so required by the end
of such period shall constitute 'Excess Proceeds.'
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
'Limitation on Asset Sales' covenant totals at least $10 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount of the Notes, plus, in
each case, accrued interest (if any) to the Payment Date. In the event that more
than 98% of the outstanding principal amount of the Notes are tendered pursuant
to such Offer to Purchase, the balance of the Notes will be redeemable, at the
Company's option, in whole or in part, at any time or from time to time
thereafter, at a Redemption Price equal to the price specified in such Offer to
Purchase plus accrued and unpaid interest, if any, to the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record Date
that is on or prior to the Redemption Date to receive interest due on an
Interest Payment Date).
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest (if any) to the Payment Date. In the event that more than 98% of the
outstanding principal amount of the Notes are tendered pursuant to such Offer to
Purchase, the balance of the Notes will be redeemable, at the Company's option,
in whole or in part, at any time or from time to time thereafter, at a
Redemption Price equal to the price specified in such
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Offer to Purchase plus accrued and unpaid interest, if any, to the Redemption
Date (subject to the right of Holders of record on the relevant Regular Record
Date that is on or prior to the Redemption Date to receive interest due on an
Interest Payment Date).
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, including in particular the New Credit Facility, either prior to or
concurrently with such Note repurchase. See 'Description of the New Credit
Facility.'
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company or any Guarantor is then required to file
reports with the Commission, the Company and each Guarantor shall file with the
Commission all such reports and other information as they would be required to
file with the Commission by Sections 13(a) or 15(d) under the Exchange Act if
they were subject thereto. The Company shall supply the Trustee and each Holder
or shall supply to the Trustee for forwarding to each such Holder, without cost
to such Holder, copies of such reports and other information.
EVENTS OF DEFAULT
The following events will be defined as 'Events of Default' in the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) default in the payment of interest on any Note when
the same becomes due and payable, and such default continues for a period of 30
days; (c) default in the performance or breach of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of the Company or a Guarantor or the failure to
make or consummate an Offer to Purchase in accordance with the 'Limitation on
Asset Sales' or 'Repurchase of Notes upon a Change of Control' covenant; (d) the
Company or a Guarantor defaults in the performance of or breaches any other
covenant or agreement of the Company or a Guarantor in the Indenture or under
the Notes (other than a default specified in clause (a), (b) or (c) above) and
such default or breach continues for a period of 30 consecutive days after
written notice by the Trustee or the Holders of 25% or more in aggregate
principal amount of the Notes; (e) there occurs with respect to any issue or
issues of Indebtedness of the Company, any Guarantor or any Significant
Subsidiary having an outstanding principal amount of $10 million or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (I) an event of default that has caused
the holder thereof to declare such Indebtedness to be due and payable prior to
its Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (f) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $10 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company, any Guarantor or any
Significant Subsidiary and shall not be paid or discharged, and there shall be
any period of 30 consecutive days during which a stay of enforcement of such
final judgment or order, by reason of a pending appeal or otherwise, shall not
be in effect; (g) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of the Company or any Significant Subsidiary in
an involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, (B) appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company or
any Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 30 consecutive days; (h) the Company or any Significant Subsidiary (A)
commences a
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voluntary case under any applicable bankruptcy, insolvency or other similar law
now or hereafter in effect, or consents to the entry of an order for relief in
an involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors or (i) any Note Guarantee ceases to be in full force and effect
(except pursuant to its terms) or is declared null and void or any Guarantor
denies that it has any further liability under any Note Guarantee, or gives
notice to such effect.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company or any Guarantor)
occurs and is continuing under the Indenture, the Trustee or the Holders of at
least 25% in aggregate principal amount of the Notes, then outstanding, by
written notice to the Company (and to the Trustee if such notice is given by the
Holders), may, and the Trustee at the request of such Holders shall, declare the
principal of, premium, if any, and accrued interest on the Notes to be
immediately due and payable. Upon a declaration of acceleration, such principal
of, premium, if any, and accrued interest shall be immediately due and payable.
In the event of a declaration of acceleration because an Event of Default set
forth in clause (e) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied or cured by the Company, any Guarantor or the relevant Significant
Subsidiary or waived by the holders of the relevant Indebtedness within 60 days
after the declaration of acceleration with respect thereto. If an Event of
Default specified in clause (g) or (h) above occurs with respect to the Company
or any Significant Subsidiary, the principal of, premium, if any, and accrued
interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount of the outstanding Notes by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have been
cured or waived and (ii) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see ' -- Modification and Waiver.'
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture will require certain officers of the Company and each
Guarantor to deliver to the Trustee on or before a date not more than 90 days
after the end of each fiscal year, an Officers' Certificate stating whether or
not such officers know of any Default or Event of Default that occurred during
such fiscal year. The Company and each Guarantor will also be obligated to
notify the Trustee of any default or defaults in the performance of any
covenants or agreements under the Indenture.
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CONSOLIDATION, MERGER AND SALE OF ASSETS
Neither the Company nor any Guarantor will consolidate with, merge with or
into, or sell, convey, transfer, lease or otherwise dispose of all or
substantially all of its property and assets (as an entirety or substantially an
entirety in one transaction or a series of related transactions) to, any Person
or permit any Person to merge with or into the Company or any Guarantor unless:
(i) the Company or the Guarantor shall be the continuing Person, or the Person
(if other than the Company or the Guarantor) formed by such consolidation or
into which the Company or the Guarantor is merged or that acquired or leased
such property and assets of the Company or the Guarantor shall be a corporation
organized and validly existing under the laws of the United States of America or
any jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the obligations of the
Company or the Guarantor, as the case may be, on all of the Notes or the Note
Guarantees, as the case may be, and under the Indenture; (ii) immediately after
giving effect to such transaction, no Default or Event of Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Company or any Guarantor, as the case may
be, or any Person becoming the successor obligor of the Notes or the Note
Guarantees, as the case may be, shall have a Consolidated Net Worth (a 'Pro
Forma Consolidated Net Worth') which is equal to or greater than the
Consolidated Net Worth of the Company or the Guarantor, as the case may be,
immediately prior to such transaction (the 'Base Consolidated Net Worth'), or if
the Pro Forma Consolidated Net Worth is less than the Base Consolidated Net
Worth, the amount by which the Pro Forma Consolidated Net Worth is less than the
Base Consolidated Net Worth shall, if considered as a Restricted Payment, be
permitted to be paid at the time under the 'Limitation on Restricted Payments'
covenant; (iv) immediately after giving effect to such transaction on a pro
forma basis the Company or any Guarantor, as the case may be, or any Person
becoming the successor obligor of the Notes or the Note Guarantees, as the case
may be, could Incur at least $1.00 of Indebtedness under the first paragraph of
the 'Limitation on Indebtedness' covenant; provided that this clause (iv) shall
not apply to a consolidation or merger with or into a Wholly Owned Restricted
Subsidiary with a positive net worth; and provided further that, in connection
with any such merger or consolidation, no consideration (other than Capital
Stock (other than Disqualified Stock) in the surviving Person, the Company or
any Guarantor) shall be issued or distributed to the stockholders of the Company
or the Guarantor; and (v) the Company delivers to the Trustee an Officers'
Certificate (attaching the arithmetic computations to demonstrate compliance
with clauses (iii) and (iv)) and Opinion of Counsel, in each case stating that
such consolidation, merger or transfer and such supplemental indenture complies
with this provision and that all conditions precedent provided for herein
relating to such transaction have been complied with; provided, however, that
clauses (iii) and (iv) above do not apply if, in the good faith determination of
the Board of Directors of the Company, whose determination shall be evidenced by
a Board Resolution, the principal purpose of such transaction is to change the
state of incorporation of the Company or any Guarantor; and provided further
that any such transaction shall not have as one of its purposes the evasion of
the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that the Company and
each Guarantor will be deemed to have paid and will be discharged from any and
all obligations in respect of the Notes and the Note Guarantees on the 123rd day
after the deposit referred to below, and the provisions of the Indenture will no
longer be in effect with respect to the Notes and the Note Guarantees (except
for, among other matters, certain obligations to register the transfer or
exchange of the Notes, to replace stolen, lost or mutilated Notes, to maintain
paying agencies and to hold monies for payment in trust) if, among other things,
(A) the Company or the Guarantors have deposited with the Trustee, in trust,
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, (B) the Company has
delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect that
Holders will not recognize income, gain or loss for federal income tax purposes
as a result of the Company's exercise of its option under this 'Defeasance'
provision and will be subject to federal income tax on the same amount and in
the
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same manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, which Opinion of Counsel must be
based upon (and accompanied by a copy of) a ruling of the Internal Revenue
Service to the same effect unless there has been a change in applicable federal
income tax law after the Closing Date such that a ruling is no longer required
or (y) a ruling directed to the Trustee received from the Internal Revenue
Service to the same effect as the aforementioned Opinion of Counsel and (ii) an
Opinion of Counsel to the effect that the creation of the defeasance trust does
not violate the Investment Company Act of 1940, (C) immediately after giving
effect to such deposit on a pro forma basis, no Event of Default, or event that
after the giving of notice or lapse of time or both would become an Event of
Default, shall have occurred and be continuing on the date of such deposit or
during the period ending on the 123rd day after the date of such deposit, and
such deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound and (D) if at such time the Notes are listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of Counsel to the
effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clauses (iii) and (iv) under 'Consolidation,
Merger and Sale of Assets' and all the covenants described herein under
'Covenants,' clause (c) under 'Events of Default' with respect to such clauses
(iii) and (iv) under 'Consolidation, Merger and Sale of Assets,' clause (d) with
respect to such other covenants and clauses (e) and (f) under 'Events of
Default' shall be deemed not to be Events of Default upon, among other things,
the deposit with the Trustee, in trust, of money and/or U.S. Government
Obligations that through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes, the satisfaction of the provisions described in
clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the
Company to the Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments and the Guarantors' Note Guarantees with respect
to such payments will remain in effect.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company,
the Guarantors and the Trustee with the consent of the Holders of not less than
a majority in aggregate principal amount of the outstanding Notes; provided,
however, that no such modification or amendment may, without the consent of each
Holder affected thereby, (i) change the Stated Maturity of the principal of, or
any installment of interest on, any Note, (ii) reduce the principal amount of,
or premium, if any, or interest on, any Note, (iii) change the place or currency
of payment of principal of, or premium, if any, or interest on, any Note, (iv)
impair the right to institute suit for the enforcement of any payment on or
after the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose Holders is necessary to modify or amend
the Indenture, (vi) waive a default in the payment of principal of, premium, if
any, or interest on the Notes, (vii) reduce the percentage or aggregate
principal amount of
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outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults or (viii) release any Guarantor from its Note Guarantee or otherwise
modify the terms of the Note Guarantees in a material respect adverse to the
Holders.
Modifications and amendments of the Indenture may be made by the Company,
the Guarantors and the Trustee without notice to or the consent of any Holder
(i) to cure any ambiguity, defect or inconsistency, (ii) to comply with the
'Consolidation, Merger and Sale of Assets' covenant, (iii) to comply with any
requirements of the Commission in connection with the qualification of the
Indenture under the Trust Indenture Act, (iv) to evidence and provide for the
acceptance of appointment by a successor Trustee, (v) to provide for
uncertificated Notes in addition to or in place of certificated Notes, (vi) to
add one or more Subsidiary Guarantees on the terms required by the Indenture, or
(vii) to make any change that does not adversely affect the rights of any Holder
in any material respect.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company or the Guarantors in the
Indenture, or in any of the Notes or because of the creation of any Indebtedness
represented thereby, shall be had against any incorporator, stockholder,
officer, director, employee or controlling person of the Company or the
Guarantors or of any successor Person thereof. Each Holder, by accepting the
Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company or a Guarantor, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The Exchange Notes will be represented by one permanent global Exchange
Note in definitive, fully registered form without interest coupons (the 'Global
Exchange Note') and will be deposited with the Trustee as custodian for, and
registered in the name of a nominee of, DTC.
Ownership of beneficial interests in the Global Exchange Note will be
limited to persons who have accounts with DTC ('participants') or persons who
hold interests through participants. Ownership of beneficial interests in the
Global Exchange Note will be shown on, and the transfer of that ownership will
be effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Exchange Note, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by the Global
Exchange Note for all purposes under the Indenture and the Notes. No beneficial
owner of an interest in the Global Exchange Note will be able to transfer that
interest except in accordance with DTC's applicable procedures, in addition to
those provided for under the Indenture.
Payments of the principal of, and interest on, the Global Exchange Note
will be made to DTC or its nominee, as the case may be, as the registered owner
thereof. Neither the Company, the Trustee nor
106
any Paying Agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Exchange Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Exchange Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Exchange
Note as shown on the records of DTC or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in such Global
Exchange Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by
a holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in the Global Exchange Note is credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Notes, DTC will exchange the Global Exchange
Note for definitive Exchange Notes in certificated form, which it will
distribute to its participants.
The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a 'banking organization'
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a 'clearing corporation' within the meaning of the Uniform Commercial
Code and a 'Clearing Agency' registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ('indirect participants').
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Exchange Note among participants
of DTC it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the Trustee will have any responsibility for the performance by DTC
or its respective participants or indirect participants of its respective
obligations under the rules and procedures governing its operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Exchange Note and a successor depositary is not appointed by the
Company within 90 days, the Company will issue definitive Exchange Notes in
certificated form in exchange for the Global Exchange Note.
107
REGISTRATION RIGHTS AGREEMENT FOR OUTSTANDING NOTES
Holders of Exchange Notes are not entitled to any registration rights with
respect to the Exchange Notes. The Company has agreed pursuant to the
registration rights agreement (the 'Registration Rights Agreement'), for the
benefit of the holders of the Notes, that the Company will, at its cost, (i) as
expeditiously as possible prepare and file a Registration Statement with the
Commission with respect to a registered offer to exchange the Outstanding Notes
for Exchange Notes of the Company having terms substantially identical in all
material respects to the Outstanding Notes (except that the Exchange Notes will
not contain terms with respect to transfer restrictions), (ii) promptly commence
the Exchange Offer after the Registration Statement has been declared effective
and (iii) use its best efforts to cause the Exchange Offer to be consummated not
later than 60 days after the date the Registration Statement has been declared
effective. Upon the effectiveness of the Registration Statement, the Company
will offer the Exchange Notes in exchange for the surrender of the Outstanding
Notes. The Company will keep the Exchange Offer open for not less than 20
business days (or longer if required by applicable law) after the date notice of
the Exchange Offer is mailed to the holders of the Notes. For each Outstanding
Note surrendered to the Company pursuant to the Exchange Offer, the holder of
such Outstanding Note will receive an Exchange Note having a principal amount
equal to that of the surrendered Outstanding Note. The Exchange Notes will bear
interest from July 24, 1997, payable semiannually on February 1 and August 1 of
each year commencing on February 1, 1998, at the rate of 10 1/2% per annum.
Holders of Outstanding Notes accepted for exchange will be deemed to have waived
the right to receive any payment in respect of interest on the Outstanding Notes
accrued from July 24, 1997 until the date of the issuance of the Exchange Notes.
Consequently holders who exchange their Outstanding Notes for Exchange Notes
will receive the same interest payment on February 1, 1998 (the first interest
payment date with respect to the Outstanding Notes and the Exchange Notes) that
they would have received had they not accepted the Exchange Offer.
In the event that (i) the Company determines that the Exchange Offer is not
available or may not be consummated as soon as practicable after the last date
upon which Outstanding Notes may be accepted for exchange because it would
violate applicable law or the applicable interpretations of the staff of the
Commission, (ii) the Exchange Offer is not for any other reason consummated by
January 24, 1998 or (iii) the Exchange Offer has been completed and in the
opinion of counsel for the Placement Agents a Registration Statement must be
filed and a prospectus must be delivered by the Placement Agents in connection
with any offering or sale of Notes, the Company will use its best efforts to
cause to be filed as soon as practicable after such determination, date or
notice of such opinion of counsel is given to the Company, as the case may be,
(a) a Shelf Registration Statement (the 'Shelf Registration Statement') covering
resales of the Outstanding Notes and to have such Shelf Registration Statement
to be declared effective by the Commission. The Company has agreed to use its
best efforts to keep the Shelf Registration Statement continuously effective
until July 24, 1999 or such shorter period that will terminate when all of the
Outstanding Notes are sold pursuant to the Shelf Registration Statement. The
Company will, in the event a Shelf Registration Statement is filed, among other
things, provide to each holder for whom such Shelf Registration Statement was
filed copies of the prospectus which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement has
become effective and take certain other actions pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
In the event the Exchange Offer is not consummated and a Shelf Registration
Statement is not declared effective on or prior to January 24, 1998 (a 'Failure
to Register'), additional interest will accrue on the Outstanding Notes at the
rate of 0.5% per annum until the date on which such Failure to Register has been
cured. Such interest is payable in addition to any other interest payable from
time to time in respect of the Outstanding Notes.
The Company will be entitled to close the Exchange Offer 20 business days
after the commencement thereof provided that it has accepted all Outstanding
Notes theretofore validly tendered in accordance with the terms of the Exchange
Offer.
108
In the case of a Shelf Registration Statement, the Company may suspend the
availability of such Shelf Registration Statement (i) during any consecutive
365-day period, for up to two periods of up to 30 consecutive days each (except
that none of such periods may occur during the 60-day period immediately prior
to the maturity of the Notes) if the Company's Board of Directors determines in
good faith that there is a valid purpose for the suspension and (ii) upon giving
notice to the holders of the Outstanding Notes of the happening of any event
during the period a Shelf Registration Statement is effective which makes any
statement made in such Shelf Registration Statement or the related prospectus
untrue in any material respect or which requires the making of any changes in
such Shelf Registration Statement or prospectus in order to make the statements
therein not misleading, until such holder receives copies of a supplemented or
amended prospectus, provided, that any such notice pursuant to this clause (ii)
may be given only twice during any 365-day period and any suspension may not
exceed 30 days for each such suspension and there may not be more than two
suspensions in effect during any 365 day period.
The summary herein 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, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the principal United States
federal income tax consequences of the purchase, ownership and disposition of
the Notes to initial purchasers of Outstanding Notes who are United States
Holders (as defined below) and the principal United States federal income and
estate tax consequences of the purchase, ownership, exchange and disposition of
the Notes to initial purchasers of Outstanding Notes who are Foreign Holders (as
defined below). This discussion was prepared by representatives of the Company
and is based on currently existing provisions of the Code, existing, temporary
and proposed Treasury regulations promulgated thereunder, and administrative and
judicial interpretations thereof, all as in effect or proposed on the date
hereof and all of which are subject to change, possibly with retroactive effect,
or different interpretations. This discussion does not address the tax
consequences to subsequent purchasers of Notes and is limited to purchasers of
Outstanding Notes who hold the Notes as capital assets, within the meaning of
section 1221 of the Code. This discussion also does not address the tax
consequences to Foreign Holders that are subject to United States federal income
tax on a net basis on income realized with respect to a Note because such income
is effectively connected with the conduct of a U.S. trade or business. Such
Foreign Holders are generally taxed in a similar manner to United States
Holders, but certain special rules do apply. Moreover, this discussion is for
general information only and does not address all of the tax consequences that
may be relevant to particular initial purchasers of Outstanding Notes in light
of their personal circumstances or to certain types of initial purchasers of
Outstanding Notes (such as certain financial institutions, insurance companies,
tax-exempt entities, dealers in securities or persons who have hedged the risk
of owning a Note).
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
As used herein, the term 'United States Holder' means a holder of a Note
that is, for United States federal income tax purposes, (a) a citizen or
resident of the United States, (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof or (c) an estate or trust the income of which is subject to
United States federal income taxation regardless of source.
109
Payment of Interest on Notes. Interest paid or payable on a Note will be
taxable to a United States Holder as ordinary interest income, generally at the
time it is received or accrued, in accordance with such holder's regular method
of accounting for United States federal income tax purposes.
Sale, Exchange or Retirement of the Notes. The exchange of an Outstanding
Note by a United States Holder for an Exchange Note should not constitute a
taxable exchange. For purposes of determining gain or loss on the subsequent
sale or exchange of the Exchange Notes, a Holder's basis in the Exchange Notes
should be the same as the Holder's basis in the Outstanding Notes exchanged
therefor. Holders should be considered to have held the Exchange Notes from the
time of their original acquisition of the Outstanding Notes.
Upon the sale, exchange, redemption, retirement at maturity or other
disposition of a Note, a United States Holder generally will recognize taxable
gain or loss equal to the difference between the sum of cash plus the fair
market value of all other property received on such disposition (except to the
extent such cash or property is attributable to accrued but unpaid interest,
which will be taxable as ordinary income and such United States Holder's
adjusted tax basis in the Note. A United States Holder's adjusted tax basis in a
Note generally will equal the cost of the Note to such United States Holder,
less any principal payments received by such United States Holder.
Gain or loss recognized on the disposition of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if, at the time
of such disposition, the United States Holder's holding period for the Note is
more than one year.
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements may apply to certain payments of principal,
premium, if any, and interest on a Note, and to proceeds of the sale or
redemption of a Note before maturity. The Company, its agent, a broker, the
Trustee or any paying agent, as the case may be, will be required to withhold
from any payment that is subject to backup withholding a tax equal to 30% of
such payment if a United States Holder fails to furnish his taxpayer
identification number (social security or employer identification number),
certify that such number is correct, certify that such holder is not subject to
backup withholding or otherwise comply with the applicable requirements of the
backup withholding rules. Certain United States Holders, including all
corporations, are not subject to backup withholding and information reporting
requirements. Any amounts withheld under the backup withholding rules from a
payment to a United States Holder will be allowed as a credit against such
United States Holder's United States federal income tax and may entitle the
holder to a refund, provided that the required information is furnished to the
Internal Revenue Service ('IRS').
UNITED STATES FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
As used herein, the term 'Foreign Holder' means a holder of a Note that is,
for United States federal income tax purposes, (a) a nonresident alien
individual, (b) a foreign corporation, (c) a nonresident alien fiduciary of a
foreign estate or trust or (d) a foreign partnership.
Payment of Interest on Notes. In general, payments of interest received by
a Foreign Holder will not be subject to a United States federal withholding tax,
provided that (i)(a) the Foreign Holder does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote, (b) the Foreign Holder is not a controlled foreign
corporation that is related to the Company actually or constructively through
stock ownership, (c) the Foreign Holder is not a bank receiving interest
described in Section 881(c)(3)(A) of the Code, and (d) either (I) the beneficial
owner of the Note, under penalties of perjury, provides the Company or its agent
with such beneficial owner's name and address and certifies on Form W-8 (or a
suitable substitute form) that it is not a United States Holder or (II) a
securities clearing or business (a 'financial institution') holds the Note and
provides a statement to the Company or its agent under penalties or perjury in
which it certifies that such an IRS Form W-8 (or a suitable substitute) has been
received by it from the beneficial owner of the Notes or qualifying intermediary
and furnishes the Company or its agent a copy thereof or (ii) the Foreign Holder
is entitled to the benefits of an income tax treaty under which interest on the
Notes is exempt from United States withholding tax and the Foreign Holder or
such Foreign Holder's agent provides a properly executed IRS Form 1001 claiming
the exemption. Payments of interest not
110
exempt from United States federal withholding tax as described above will be
subject to such withholding tax at the rate of 30% (subject to reduction under
an applicable income tax treaty).
Sale, Exchange or Retirement of the Notes. The exchange of an Outstanding
Note by a Foreign Holder for an Exchange Note should not constitute a taxable
exchange. For purposes of determining gain or loss on the subsequent sale or
exchange of the Exchange Notes, a Holder's basis in the Exchange Notes should be
the same as the Holder's basis in the Outstanding Notes exchanged therefor.
Holders should be considered to have held the Exchange Notes from the time of
their original acquisition of the Outstanding Notes. Moreover, a Foreign Holder
generally will not be subject to United States federal income tax (and generally
no tax will be withheld) with respect to gain realized on the sale, exchange,
redemption, retirement at maturity or other disposition of a Note unless the
Foreign Holder is an individual who is present in the United States for a period
or periods aggregating 183 or more days in the taxable year of the disposition
and, generally, either has a 'tax home' or an 'office or other fixed place of
business' in the United States.
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements do not apply to payments of interest made by
the Company or a paying agent to Foreign Holders if the certification described
above under ' -- United States Federal Income Taxation of Foreign
Holders -- Payment of Interest on Notes' is received, provided that the payor
does not have actual knowledge that the holder is a United States Holder. If any
payments of principal and interest are made to the beneficial owner of a Note by
or through the foreign office of a foreign custodian, foreign nominee or other
foreign agent of such beneficial owner, or if the foreign office of a foreign
'broker' (as defined in applicable Treasury regulations) pays the proceeds of
the sale of a Note or a coupon to the seller thereof, backup withholding and
information reporting will not apply. Information reporting requirements (but
not backup withholding) will apply, however, to a payment by a foreign office of
a broker that is a United States person, that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States, or that is a 'controlled foreign corporation' (generally, a foreign
corporation controlled by certain United States shareholders) with respect to
the United States unless the broker has documentary evidence in its records that
the holder is a Foreign Holder and certain other conditions are met or the
holder otherwise establishes an exemption. Payment by a United States office of
a broker is subject to both backup withholding at a rate of 31% and information
reporting unless the holder certifies under penalties of perjury that it is a
Foreign Holder or otherwise establishes an exemption.
The procedures described above for withholding tax on interest payments,
and some of the associated backup withholding and information reporting rules,
are currently the subject of new proposed regulations, which are proposed to be
effective for payments made after December 31, 1997, subject to certain
transition rules. The proposed regulations, if adopted in their current form,
would not substantially change the treatment of Foreign Holders described above,
except that a Form W-8 generally would be required for certification purposes.
Federal Estate Taxes. Subject to applicable estate tax treaty provisions,
Notes held at the time of death (or Notes transferred before death but subject
to certain retained rights or powers) by an individual who at the time of death
is a Foreign Holder will not be included in such Foreign Holder's gross estate
for United States federal estate tax purposes provided that the individual does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote or hold the Notes
in connection with a U.S. trade or business.
111
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of Outstanding Notes that were acquired
for the account of such broker-dealer as a result of market-making or other
trading activities (other than Outstanding Notes acquired directly from the
Company or any affiliate of the Company) may exchange such Outstanding Notes for
Exchange Notes pursuant to the Exchange Offer; provided, however, that each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Outstanding Notes where
such Outstanding Notes were acquired as a result of market-making activities or
other trading activities. The Company has agreed that for a period of 180 days
after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resales.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other holder of Exchange Notes. Exchange Notes received
by broker-dealers for their own account pursuant to the Exchange Offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Exchange Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Exchange Notes may be
deemed to be an 'underwriter' within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an 'underwriter' within the meaning of the Securities
Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the Exchange Notes in
connection with the Exchange Offer are being passed upon for the Company by
Cravath, Swaine & Moore, New York, New York. William P. Rogers, Jr., a partner
at Cravath, Swaine & Moore, is a director of the Company, and beneficially owns
4,500 shares of common stock of the Company and options to purchase 4,000 shares
of such common stock.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
included in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
112
AMTRAN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Audited Financial Statements:
Reports of Independent Auditors....................................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995............................................. F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994............ F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1996, 1995
and 1994............................................................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994............ F-6
Notes to Consolidated Financial Statements............................................................ F-7
Unaudited Interim Financial Statements
Consolidated Balance Sheet at September 30, 1997 and 1996............................................. F-17
Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1997
and 1996............................................................................................. F-18
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996........... F-19
Notes to Consolidated Financial Statements............................................................ F-20
F-1
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
Board of Directors
AMTRAN, INC.
We have audited the accompanying consolidated balance sheets of Amtran,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Amtran, Inc.
and subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Indianapolis, Indiana
February 7, 1997
F-2
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 73,382 $ 92,741
Receivables, net of allowance for doubtful accounts (1996 -- $1,274;
1995 -- $1,303)................................................................... 20,239 24,158
Inventories, net................................................................... 13,888 13,959
Assets held for sale............................................................... 14,112 --
Prepaid expenses and other current assets.......................................... 14,672 25,239
--------- ---------
Total current assets.......................................................... 136,293 156,097
--------- ---------
Property and equipment:
Flight equipment................................................................... 381,186 384,476
Facilities and ground equipment.................................................... 51,874 40,290
--------- ---------
433,060 424,766
Accumulated depreciation........................................................... (208,520) (183,998)
--------- ---------
224,540 240,768
Deposits and other assets............................................................... 9,454 16,272
--------- ---------
Total Assets............................................................. $ 370,287 $ 413,137
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................................... $ 30,271 $ 3,606
Accounts payable................................................................... 13,671 11,152
Air traffic liabilities............................................................ 49,899 56,531
Accrued expenses................................................................... 64,813 76,312
--------- ---------
Total current liabilities..................................................... 158,654 147,601
Long-term debt, less current maturities................................................. 119,786 134,641
Deferred income taxes................................................................... 20,216 37,949
Other deferred items.................................................................... 16,887 11,761
Commitments and contingencies
Shareholders' equity:
Preferred stock; authorized 10,000,000 shares; none issued......................... -- --
Common stock, without par value; authorized 30,000,000 shares; issued
11,799,852 -- 1996; 11,790,752 -- 1995............................................ 38,341 38,259
Additional paid-in capital......................................................... 15,618 15,821
Treasury stock: 185,000 shares -- 1996; 169,000 shares -- 1995..................... (1,760) (1,581)
Retained earnings.................................................................. 4,678 31,352
Deferred compensation -- ESOP...................................................... (2,133) (2,666)
--------- ---------
54,744 81,185
--------- ---------
Total Liabilities and Shareholders' Equity............................... $ 370,287 $ 413,137
--------- ---------
--------- ---------
See accompanying notes.
F-3
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Operating revenues:
Scheduled service.............................................. $ 386,488 $ 361,967 $ 240,675
Charter........................................................ 310,569 307,091 295,890
Ground package................................................. 22,302 20,421 20,248
Other.......................................................... 31,492 25,530 23,709
----------- ----------- -----------
Total operating revenues.................................. 750,851 715,009 580,522
----------- ----------- -----------
Operating expenses:
Salaries, wages and benefits................................... 163,990 141,072 113,789
Fuel and oil................................................... 161,226 129,636 106,057
Handling, landing and navigation fees.......................... 70,122 74,400 60,872
Aircraft rentals............................................... 65,427 55,738 48,155
Depreciation and amortization.................................. 61,661 55,827 46,178
Aircraft maintenance, materials and repairs.................... 55,175 55,423 46,092
Crew and other employee travel................................. 35,855 31,466 26,171
Passenger service.............................................. 32,745 34,831 29,804
Commissions.................................................... 26,677 24,837 17,469
Ground package cost............................................ 18,246 15,926 14,767
Other selling expenses......................................... 17,563 14,934 8,008
Advertising.................................................... 10,320 8,852 7,759
Facilities and other rentals................................... 9,625 7,414 5,500
Disposal of assets............................................. 4,475 -- --
Other.......................................................... 53,800 46,717 41,486
----------- ----------- -----------
Total operating expenses.................................. 786,907 697,073 572,107
----------- ----------- -----------
Operating income (loss)............................................. (36,056) 17,936 8,415
Other income (expense):
Interest income................................................ 617 410 191
Interest (expense)............................................. (4,465) (4,163) (3,656)
Other.......................................................... 323 470 929
----------- ----------- -----------
Total other expenses...................................... (3,525) (3,283) (2,536)
----------- ----------- -----------
Income (loss) before income taxes................................... (39,581) 14,653 5,879
Income taxes (credits).............................................. (12,907) 6,129 2,393
----------- ----------- -----------
Net income (loss)................................................... $ (26,674) $ 8,524 $ 3,486
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per share......................................... $ (2.31) $ 0.74 $ 0.30
----------- ----------- -----------
----------- ----------- -----------
Average shares outstanding.......................................... 11,535,425 11,481,861 11,616,196
See accompanying notes.
F-4
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ADDITIONAL DEFERRED
COMMON TREASURY PAID-IN RETAINED COMPENSATION
STOCK STOCK CAPITAL EARNINGS ESOP
------- -------- ---------- --------- ------------
Balance, December 31, 1993.......................... $37,667 $ -- $ 16,132 $ 19,342 $ (3,200)
Net income..................................... -- -- -- 3,486 --
Issuance of common stock for ESOP.............. -- -- (46) -- 267
Restricted stock grants........................ 274 -- (78) -- --
Purchase of 115,000 shares of treasury stock... -- (1,091) -- -- --
------- -------- ---------- --------- ------------
Balance, December 31, 1994.......................... 37,941 (1,091) 16,008 22,828 (2,933)
Net income..................................... -- -- -- 8,524 --
Issuance of common stock for ESOP.............. -- -- (111) -- 267
Restricted stock grants........................ 152 -- (19) -- --
Stock options exercised........................ 166 -- (57) -- --
Purchase of 54,000 shares of treasury stock.... -- (490) -- -- --
------- -------- ---------- --------- ------------
Balance, December 31, 1995.......................... 38,259 (1,581) 15,821 31,352 (2,666)
Net loss....................................... -- -- -- (26,674) --
Issuance of common stock for ESOP.............. -- -- (173) -- 533
Restricted stock grants........................ 32 -- (7) -- --
Stock options exercised........................ 50 -- (23) -- --
Purchase of 16,000 shares of treasury stock.... -- (179) -- -- --
------- -------- ---------- --------- ------------
Balance, December 31, 1996.......................... $38,341 $ (1,760) $ 15,618 $ 4,678 $ (2,133)
------- -------- ---------- --------- ------------
------- -------- ---------- --------- ------------
See accompanying notes.
F-5
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
Operating activities:
Net income (loss)............................................................... $(26,674) $ 8,524 $ 3,486
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.............................................. 61,661 55,827 46,178
Deferred income taxes (credits)............................................ (13,246) 4,025 2,226
Other non-cash items....................................................... 28,185 9,699 2,131
Changes in operating assets and liabilities:
Receivables................................................................ 3,919 (6,768) (1,728)
Inventories................................................................ (948) 2,739 (3,027)
Assets held for sale....................................................... (14,112) -- --
Prepaid expenses........................................................... 6,081 (4,061) (3,572)
Accounts payable........................................................... 2,519 (166) (4,243)
Air traffic liabilities.................................................... (6,632) 10,466 1,293
Accrued expenses........................................................... (8,582) 6,793 32,553
-------- ------- -------
Net cash provided by operating activities....................................... 32,171 87,078 75,297
-------- ------- -------
Investing activities:
Proceeds from sales of property and equipment.............................. 529 21,564 358
Capital expenditures....................................................... (69,884) (57,835) (81,015)
Reductions of (additions to) other assets.................................. 6,194 (7,761) 257
-------- ------- -------
Net cash used in investing activities........................................... (63,161) (44,032) (80,400)
-------- ------- -------
Financing activities:
Proceeds from long-term debt............................................... 21,390 6,000 45,000
Payments on long-term debt................................................. (9,580) (17,567) (22,078)
Purchase of treasury stock................................................. (179) (490) (1,091)
-------- ------- -------
Net cash provided by (used in) financing activities............................. 11,631 (12,057) 21,831
-------- ------- -------
Increase (decrease) in cash and cash equivalents................................ (19,359) 30,989 16,728
Cash and cash equivalents, beginning of period.................................. 92,741 61,752 45,024
-------- ------- -------
Cash and cash equivalents, end of period........................................ $ 73,382 $92,741 $61,752
-------- ------- -------
-------- ------- -------
Supplemental disclosures:
Cash payments for:
Interest.............................................................. $ 3,823 $ 4,515 $ 3,376
Income taxes.......................................................... 515 1,069 835
Financing and investing activities not affecting cash:
Issuance of long-term debt directly for capital expenditures............... $ -- $31,708 $15,851
See accompanying notes.
F-6
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND BUSINESS DESCRIPTION
The consolidated financial statements include the accounts of Amtran, Inc.
(the 'Company') and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The Company operates principally in one business segment through American
Trans Air, Inc. ('ATA'), its principal subsidiary, which accounts for
approximately 95% of the Company's operating revenues. ATA is a
U.S.-certificated air carrier providing domestic and international charter and
scheduled passenger services. Approximately 51.5% of the Company's 1996
operating revenues were generated through scheduled services to such
destinations as Hawaii, Las Vegas, Florida and the Caribbean, while
approximately 41.4% of 1996 operating revenues were derived from charter
operations with independent tour operators and U.S. military services to
numerous destinations throughout the world.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents are carried at cost and are primarily comprised of
investments in U.S. Treasury bills and time deposits which are purchased with
original maturities of three months or less (see Note 2).
ASSETS HELD FOR SALE
Assets held for sale are carried at the lower of net book value or
estimated net realizable value.
INVENTORIES
Inventories consist primarily of expendable aircraft spare parts, fuel and
other supplies. Aircraft parts inventories are stated at cost and reduced by an
allowance for obsolescence. The obsolescence allowance is provided by amortizing
the cost of the aircraft parts inventory, net of an estimated residual value,
over its estimated useful service life. The obsolescence allowance at December
31, 1996 and 1995, was $6.6 million and $5.6 million, respectively. Inventories
are charged to expense when consumed.
REVENUE RECOGNITION
Revenues are recognized when the transportation is provided. Customer
flight deposits and unused passenger tickets sold are included in air traffic
liability. As is customary within the industry, the Company performs periodic
evaluations of this estimated liability, and any adjustments resulting
therefrom, which can be significant, are included in the results of operations
for the periods in which the evaluations are completed.
PASSENGER TRAFFIC COMMISSIONS
Passenger traffic commissions are recognized as expense when the
transportation is provided and the related revenue is recognized. The amount of
passenger traffic commissions paid but not yet recognized as expense is included
in prepaid expenses and other current assets in the accompanying consolidated
balance sheets.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated to residual
value over its estimated useful service life using the straight-line method.
Advanced payments for future aircraft purchases are
F-7
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded at cost. As of December 31, 1996 and 1995, the Company had made
advanced payments for future aircraft deliveries totaling $2.7 million and $4.9
million, respectively. The estimated useful service lives for the principal
depreciable asset classifications are as follows:
ASSET ESTIMATED USEFUL SERVICE LIFE
- --------------------------------------------------- ---------------------------------------------------
Aircraft and related equipment:
Lockheed L-1011............................... 16 years
Major rotable parts, avionics and assemblies....... Life of equipment to which applicable (Generally
ranging from 10 - 16 years)
Improvements to leased flight equipment............ Period of benefit or term of lease
Other property and equipment....................... 3 - 7 years
The costs of major airframe and engine overhauls are capitalized and
amortized over their estimated useful lives based upon usage (or to earlier
fleet common retirement dates) for both owned and leased aircraft.
FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents, receivables and both
variable-rate and fixed-rate debt (see Note 5) approximate fair value. The fair
value of fixed-rate debt, including current maturities, is estimated using
discounted cash flow analysis based on the Company's current incremental rates
for similar types of borrowing arrangements.
INCOME (LOSS) PER SHARE
Income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding plus common share
equivalents arising from restricted shares issued during the period. No effect
has been given to options outstanding under the Company's incentive stock plans,
as no material dilutive effect would result from their exercise (see Note 9).
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
Cash.............................................................................. $18,523 $21,714
U.S. Treasury bill repurchase agreements.......................................... 54,859 71,027
------- -------
$73,382 $92,741
------- -------
------- -------
Cash equivalents of $6.3 million and $6.0 million at December 31, 1996 and
1995, respectively, are pledged to collateralize amounts which could become due
under letters of credit. At December 31, 1996 and 1995, there were no amounts
drawn against letters of credit (see Note 4).
F-8
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
The Company's property and equipment consisted of the following:
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
Flight equipment, including airframes, engines and other........................ $381,186 $384,476
Less accumulated depreciation................................................... 182,392 163,846
-------- --------
198,794 220,630
-------- --------
Facilities and ground equipment................................................. 51,874 40,290
Less accumulated depreciation................................................... 26,128 20,152
-------- --------
25,746 20,138
-------- --------
$224,540 $240,768
-------- --------
-------- --------
4. SHORT-TERM BORROWINGS
The Company maintains a $5.0 million revolving credit facility available
for its short-term borrowing needs and for issuance of letters of credit. The
credit facility is available until June 1997 and is collateralized by certain
aircraft engines. Borrowings against the facility bear interest at the bank's
prime rate plus .25%. There were no borrowings against this credit facility at
December 31, 1996 or 1995. At December 31, 1996 and 1995, the Company had
outstanding letters of credit aggregating $4.1 million and $2.9 million,
respectively, under such facility.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
Notes payable to banks; prime to prime plus .75% (8.25% and 9% at December 31,
1996), payable in varying installments through April 1999..................... $123,246 $112,337
Note payable to institutional lender; fixed rate of 7.8% payable in varying
installments through September 2003........................................... 9,106 2,860
City of Indianapolis Economic Development Revenue Bond; 9.88%, payable in
quarterly installments through July 1997...................................... 875 1,375
City of Chicago variable rate special facility revenue bonds (4.75% at December
31, 1996), payable in December 2020........................................... 6,000 6,000
Notes payable to banks and institutional lenders................................ -- 4,205
Capitalized lease obligations and other......................................... 10,830 11,470
-------- --------
150,057 138,247
Less current maturities......................................................... 30,271 3,606
-------- --------
$119,786 $134,641
-------- --------
-------- --------
The Company's 1996 credit facility provides a maximum of $125.0 million,
including a $25.0 million letter of credit facility. The collateral for the
facility consists of certain owned Lockheed L-1011 aircraft, certain receivables
and certain rotables and spare parts. Effective September 30, 1996, the Company
renegotiated certain terms of the bank credit facility along with the
modification of certain loan covenants. In return for this covenant relief, the
Company has agreed to implement changes to the underlying collateral for the
facility and to change the interest rate applicable to borrowings under the
facility. The Company has pledged additional owned engines and equipment as
collateral for the facility
F-9
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as of the implementation date of the new agreement. The Company has further
agreed to begin reducing the maximum borrowing availability of $63.0 million
collateralized by the owned Lockheed L-1011 fleet by $1.0 million per month from
April 1997 through September 1997, and by $1.5 million per month from October
1997 through April 1999. Loans outstanding under the renegotiated facility bear
interest, at the Company's option, at either (i) prime to prime plus 0.75%, or
(ii) the Eurodollar rate plus 1.50% to 2.75%. The facility matures on April 1,
1999, and contains various covenants and events of default, including:
maintenance of a specified debt-to-equity ratio and a minimum level of net
worth; achievement of a minimum level of cash flow; and restrictions on aircraft
acquisitions, liens, loans to officers, change of control, indebtedness, lease
commitments and payment of dividends.
In December 1995, the Company issued $6.0 million in variable rate special
revenue bonds through the City of Chicago. The Company is obligated to perform
certain mandatory improvements to its Chicago-Midway Airport Maintenance
facility with the bond proceeds.
In December 1995, the Company entered into a sale/lease transaction with
the City of Indianapolis on its maintenance facility at the Indianapolis
International Airport which resulted in the advance of $10.0 million in cash to
the Company, as secured by the maintenance facility. The Company is obligated to
pay $0.6 million per year to the City of Indianapolis for five years, which
represents interest on the City's associated outstanding debt obligation. As of
December 2000, the Company is required to repay the advance of $10.0 million to
the City of Indianapolis, and may elect to repay the balance using special
facility bonds underwritten by the City's Airport Authority, or by using the
Company's own funds.
At December 31, 1996, the Company has reclassified $19.9 million of bank
credit facility borrowings from long-term debt to current maturities of
long-term debt. Of this amount, $10.5 million is attributable to the scheduled
reduction of availability collateralized by the owned Lockheed L-1011 fleet over
the next 12 months. The remaining $9.4 million represents the amount of the
spare Pratt & Whitney engines which are pledged to the bank facility and which
will be repaid from the anticipated sale of the engines. The estimated market
value of these spare engines is classified under current assets.
The Company has made voluntary prepayments of long-term debt which has had
the effect of reducing interest expense by approximately $5.9 million and $5.5
million during 1996 and 1995, respectively. The Company reborrowed the full
amounts available to it as of December 31, 1996 and 1995.
Future maturities of long-term debt are as follows:
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
1997.................................................. $ 30,271
1998.................................................. 19,486
1999.................................................. 79,615
2000.................................................. 1,483
2001.................................................. 1,476
Thereafter............................................ 17,726
-----------------
$ 150,057
-----------------
-----------------
Interest capitalized in connection with long-term asset purchase agreements
was $1.4 million and $1.3 million in 1996 and 1995, respectively.
6. LEASE COMMITMENTS
At December 31, 1996, the Company had aircraft leases on four Lockheed
L-1011s, 23 Boeing 727-200s, and seven Boeing 757-200s. The Lockheed L-1011s
have an initial term of 60 months. The Boeing 757-200s have initial lease terms
that expire from 1997 through 2015. The Boeing 727-200s have initial terms of
three to seven years.
F-10
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is responsible for all maintenance costs on these aircraft and
must meet specified airframe and engine return conditions. The Company had
previously been required to make maintenance reserve payments based upon the
usage of certain leased aircraft, but is no longer subject to such requirements.
As of December 31, 1996, the Company had other long-term leases related to
certain ground facilities, including terminal space and maintenance facilities,
with original lease terms that vary from 3 to 40 years and expire at various
dates through 2035. The lease agreements relating to the ground facilities,
which are primarily owned by governmental units or authorities, generally do not
provide for transfer of ownership nor do they contain options to purchase.
In December 1995, the Company sold its option to purchase its headquarters
facility to the City of Indianapolis for $2.9 million, and thereafter entered
into a capital lease agreement with the City relating to the continued use of
the headquarters and maintenance facility. A gain on the sale of the option
equal to $1.3 million was recognized in income in 1995, with the remainder of
the gain to be amortized to income during the periods the headquarters
facilities are used. The headquarters agreement has an initial term of four
years, with two options to extend of three and five years, respectively, and is
cancelable after two years with advance notice. The maintenance facility lease
has a term of 39 years. The Company is responsible for maintenance, taxes,
insurance and other expenses incidental to the operation of the facilities.
Future minimum lease payments at December 31, 1996, for noncancelable
operating leases with initial terms of more than one year are as follows:
FACILITIES
FLIGHT AND GROUND
EQUIPMENT EQUIPMENT TOTAL
--------- ---------- --------
(IN THOUSANDS)
1997.................................................. $ 55,513 $ 5,572 $ 61,085
1998.................................................. 46,890 5,229 52,119
1999.................................................. 45,205 4,662 49,867
2000.................................................. 32,272 4,505 36,777
2001.................................................. 31,457 3,143 34,600
Thereafter............................................ 200,209 20,377 220,586
--------- ---------- --------
$411,546 $ 43,488 $455,034
--------- ---------- --------
--------- ---------- --------
Rental expense for all operating leases in 1996, 1995 and 1994 was $65.0
million, $63.0 million and $53.0 million, respectively, including maintenance
reserve payments of $3.4 million in 1994.
7. INCOME TAXES
The provision for income tax expense (credit) consisted of the following:
DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------ ------
(IN THOUSANDS)
Federal
Current................................................... $ -- $1,280 $ (14)
Deferred.................................................. (11,798) 4,399 2,357
-------- ------ ------
(11,798) 5,679 2,343
State
Current................................................... 161 107 181
Deferred.................................................. (1,270) 343 (131)
-------- ------ ------
(1,109) 450 50
-------- ------ ------
Income tax expense (credit)............................... $(12,907) $6,129 $2,393
-------- ------ ------
-------- ------ ------
F-11
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differed from the amount obtained by
applying the statutory federal income tax rate to income before income taxes as
follows:
DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------ ------
(IN THOUSANDS)
Federal income taxes at statutory rate (credit)................ $(13,457) $4,982 $1,999
State income taxes, net of federal benefit..................... (732) 535 295
Non-deductible expenses........................................ 1,282 998 1,155
Benefit of change in estimate of state income tax rate......... -- (258) (468)
Benefit of tax reserve adjustments............................. -- (203) (610)
Other, net..................................................... -- 75 22
-------- ------ ------
Income tax expense (credit).................................... $(12,907) $6,129 $2,393
-------- ------ ------
-------- ------ ------
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. The principal temporary differences relate to the use of accelerated
methods of depreciation and amortization for tax purposes. Deferred income tax
liability components are as follows:
DECEMBER 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
Deferred tax liabilities:
Tax depreciation in excess of book depreciation................... $56,885 $57,167
Other taxable temporary differences............................... 476 228
------- -------
Deferred tax liabilities..................................... 57,361 57,395
Deferred tax assets:
Amortization of lease credits..................................... 2,044 2,109
Tax benefit of net operating loss carryforwards................... 29,852 17,420
Investment and other tax credit carryforwards..................... 4,720 4,506
Other deductible temporary differences............................ 4,928 4,296
------- -------
Deferred tax assets.......................................... 41,544 28,331
Deferred taxes classified as:
Current asset.......................................................... 4,399 8,885
------- -------
Non-current liability.................................................. $20,216 $37,949
------- -------
------- -------
At December 31, 1996, for federal tax reporting purposes, the Company had
approximately $81.7 million of net operating loss carryforwards available to
offset future federal taxable income and $4.7 million of investment and other
tax credit carryforwards available to offset future federal tax liabilities. The
net operating loss carryforwards expire as follows: 2002, $11.9 million; 2003,
$8.1 million; 2004, $9.0 million; 2005, $3.6 million; 2009, $14.8 million; 2011,
$34.4 million. Investment tax credit carryforwards of $.9 million expire
principally in 2000 and other tax credit carryforwards of $3.8 million have no
expiration dates.
8. RETIREMENT PLAN
The Company has a defined contribution 401(k) savings plan which provides
for participation by substantially all the Company's employees who have
completed one year of service. The Company has elected to contribute an amount
equal to 30% of the amount contributed by each participant up to the first six
percent of eligible compensation. Company matching contributions expensed in
1996, 1995 and 1994 were $1.3 million, $1.2 million, and $1.0 million,
respectively.
F-12
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1993, the Company added an Employee Stock Ownership Plan ('ESOP')
feature to its existing 401(k) savings plan. The ESOP used the proceeds of a
$3.2 million loan from the Company to purchase 200,000 shares of the Company's
common stock. The selling shareholder was the Company's principal shareholder.
The Company recognized $0.3 million, $0.4 million, and $0.2 million in 1996,
1995 and 1994, respectively, as compensation expense related to the ESOP. Shares
of common stock held by the ESOP will be allocated to participating employees
annually as part of the Company's 401(k) savings plan contribution. The fair
value of the shares allocated during the year is recognized as compensation
expense.
9. SHAREHOLDERS' EQUITY
In the first quarter of 1994, the Board of Directors approved the
repurchase of up to 250,000 shares of the Company's common stock. As of December
31, 1996, the Company had repurchased 185,000 shares at a total cost of $1.8
million.
The Company's 1993 Incentive Stock Plan (1993 Plan) authorizes the grant of
options to key employees for up to 900,000 shares of the Company's common stock.
The Company's 1996 Incentive Stock Plan for key employees (1996 Plan),
authorizes the grant of options to key employees for up to 3,000,000 shares of
the Company's common stock. Options granted have 5 to 10-year terms and
generally vest and become fully exercisable over specified periods up to three
years of continued employment.
A summary of common stock option changes follows:
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at December 31, 1994.............................. 313,050 $13.73
Granted....................................................... 190,000 $ 8.71
Exercised..................................................... 10,417 $10.56
Canceled...................................................... 97,333 $11.73
---------
Outstanding at December 31, 1995.............................. 395,300 $11.92
Granted....................................................... 1,302,400 $ 7.87
Exercised..................................................... 3,100 $ 8.94
Canceled...................................................... 64,700 $10.87
---------
Outstanding at December 31, 1996.............................. 1,629,900 $ 8.74
---------
---------
Options exercisable at December 31, 1996...................... 497,015 $ 9.99
---------
---------
During 1996, the Company adopted FASB Statement No. 123 'Accounting for
Stock-Based Compensation' (FAS 123) with respect to its stock options. As
permitted by FAS 123, the Company has elected to continue to account for
employee stock options following Accounting Principles Board Opinion No. 25,
'Accounting for Stock Issued to Employees' (APB 25) and related Interpretations.
Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The weighted-average fair value of options granted during 1996 and 1995 is
estimated at $4.49 and $5.74 per share, respectively, on the grant date. These
estimates were made using the Black-Scholes option pricing model with the
following weighted-average assumptions for 1996 and 1995, respectively:
risk-free interest rates of 6% and 7.92%; expected market price volatility of
.48 and .40; weighted-average expected option life equal to the contractual
term; estimated forfeitures of 5%; and no dividends.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models use highly
subjective assumptions including the expected stock price volatility.
F-13
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employees' stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period (1 to 3 years).
Therefore, because FAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1998.
The Company's pro forma information follows:
1996 1995
------------------ ------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net income (loss) as reported.................................... $(26,674) $8,524
Net income (loss) pro forma...................................... (28,864) 8,456
Earnings (loss) per share as reported............................ (2.31) .74
Earnings (loss) per share pro forma.............................. (2.50) .74
Options outstanding at December 31, 1996 expire from August 2001 to
February 2006. A total of 2,270,100 shares are reserved for future grants as of
December 31, 1996 under the 1993 and 1996 Plans. The following table summarizes
information concerning outstanding and exercisable options at December 31, 1996:
Range of Exercise Prices......................................... $7 - 11 $12 - 16
Options outstanding:
Weighted-Average Remaining Contractual Life................. 3.3 years 8.3 years
Weighted-Average Exercise Price............................. $7.48 $14.28
Number...................................................... 1,328,700 301,200
Options exercisable:
Weighted-Average Exercise Price............................. $7.67 $16.00
Number...................................................... 358,315 138,700
10. MAJOR CUSTOMER
The United States Government is the only customer that accounted for more
than 10% of consolidated revenues. U.S. Government revenues accounted for 11%,
11% and 16% of consolidated revenues for 1996, 1995 and 1994, respectively.
11. COMMITMENTS AND CONTINGENCIES
In November 1994, the Company signed a purchase agreement for six new
Boeing 757-200s which, as subsequently amended, provides for deliveries of
aircraft between 1995 and 1998. As of December 31, 1996, the Company had taken
delivery of four Boeing 757-200s under this purchase agreement and financed
those aircraft using operating leases. In conjunction with the Boeing purchase
agreement, the Company entered into a separate agreement with Rolls-Royce
Commercial Aero Engines Limited for 13 RB211-535E4 engines to power the six
Boeing 757 aircraft and to provide one spare engine. Under the Rolls-Royce
agreement, which was effective January 1, 1995, Rolls-Royce provides the Company
various credits for spare parts and maintenance purchases, together with engine
overhaul cost guarantees for certain qualified Rolls-Royce engines currently
used by the Company.
If the Company does not take delivery of the purchased engines, the credits
and cost guarantees that have been used are refundable to Rolls-Royce. These two
agreements have an aggregate purchase price of approximately $50.0 million per
aircraft, subject to escalation. Advance payments totaling approximately $22.0
million ($11.0 million per aircraft) are required to be made for the undelivered
aircraft, with the balance due upon delivery. As of December 31, 1996 and 1995,
the Company had
F-14
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
made $2.7 million and $5.0 million in advanced payments, respectively,
pertaining to aircraft deliveries scheduled to take place within one year.
In the first quarter of 1996, the Company purchased four additional Boeing
727-200 aircraft, and had financed all of these through sale/leasebacks
accounted for as operating leases by the end of the third quarter of 1996. In
the second quarter of 1996, the Company purchased a fifth Boeing 727-200
aircraft which had been previously financed by the Company through an operating
lease. This aircraft was financed through the separate bridge debt facility as
of September 30, 1996, but is expected to be financed long-term through a
sale/leaseback transaction.
The Company entered into an agreement in October 1995 with a supplier which
provides for the purchase of four engine hushkits and for the option to purchase
three additional hushkits on the same terms, for installation on newly acquired
Boeing 727-200 aircraft.
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints which are normal and reasonably foreseeable in
light of the nature of the Company's business. The majority of these suits are
covered by insurance. In the opinion of management, the resolution of these
claims will not have a material adverse effect on the business, operating
results or financial condition of the Company.
F-15
AMTRAN, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1996 QUARTERLY FINANCIAL SUMMARY
(UNAUDITED)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues......................................... $207,135 $195,395 $199,698 $ 148,623
Operating expenses......................................... 201,918 198,498 218,776 168,106
Operating income (loss).................................... 5,217 (3,103) (19,078) (19,483)
Other expenses............................................. (855) (471) (355) (1,453)
Income (loss) before income taxes.......................... 4,362 (3,574) (19,433) (20,936)
Income taxes (credits)..................................... 2,009 (1,289) (6,800) (6,827)
Net income (loss).......................................... $ 2,353 $ (2,285) $(12,633) $ (14,109)
Net income (loss) per share................................ $ .21 $ (.20) $ (1.09) $ (1.23)
1995 QUARTERLY FINANCIAL SUMMARY
(UNAUDITED)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenues......................................... $182,618 $173,338 $194,427 $ 164,626
Operating expenses......................................... 171,811 167,332 186,783 171,147
Operating income (loss).................................... 10,807 6,006 7,644 (6,521)
Other expenses............................................. (825) (597) (758) (1,103)
Income (loss) before income taxes.......................... 9,982 5,409 6,886 (7,624)
Income taxes (credits)..................................... 4,578 2,085 3,295 (3,829)
Net income (loss).......................................... $ 5,404 $ 3,324 $ 3,591 $ (3,795)
Net income (loss) per share................................ $ .46 $ .29 $ .31 $ (.32)
F-16
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
SEPTEMBER 30,
----------------------
1997 1996
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 82,208 $ 72,802
Receivables, net of allowance for doubtful accounts (1997 -- $1,403;
1996 -- $1,182)................................................................... 21,065 27,340
Inventories, net................................................................... 14,175 14,457
Assets held for sale............................................................... 8,842 13,883
Prepaid expenses and other current assets.......................................... 20,594 17,020
--------- ---------
Total current assets.......................................................... 146,884 145,502
Property and equipment:
Flight equipment................................................................... 453,805 394,172
Facilities and ground equipment.................................................... 53,635 49,803
--------- ---------
507,440 443,975
Accumulated depreciation........................................................... (240,344) (197,934)
--------- ---------
267,096 246,041
Deposits and other assets............................................................... 8,836 12,082
--------- ---------
Total Assets.................................................................. $ 422,816 $ 403,625
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................................... $ 4,186 $ 29,133
Accounts payable................................................................... 6,151 9,640
Air traffic liabilities............................................................ 63,638 49,192
Accrued expenses................................................................... 75,091 72,843
--------- ---------
Total current liabilities............................................................... 149,066 160,808
Long-term debt, less current maturities................................................. 174,656 129,908
Deferred income taxes................................................................... 28,711 29,408
Other deferred items.................................................................... 10,974 14,005
Commitments and contingencies
Shareholders' equity:
Preferred stock: authorized 10,000,000 shares; none issued......................... -- --
Common stock, without par value: Authorized 30,000,000 shares; issued
11,798,852 -- 1997; 11,793,852 -- 1996............................................ 38,359 38,309
Additional paid-in capital......................................................... 15,513 17,397
Treasury stock: 185,000 shares -- 1997; 185,000 shares -- 1996..................... (1,760) (1,760)
Retained earnings.................................................................. 8,897 18,787
Deferred compensation.............................................................. -- (1,134)
Deferred compensation -- ESOP...................................................... (1,600) (2,133)
--------- ---------
59,409 69,466
--------- ---------
Total Liabilities and Shareholders' Equity.................................... $ 422,816 $ 403,625
--------- ---------
--------- ---------
See accompanying notes.
F-17
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ -----------------------------------
1997 1996 1997 1996
--------------- ----------------- --------------- ----------------
(UNAUDITED) (UNAUDITED)
Operating revenues:
Charter......................... $ 95,563 $ 84,213 $ 288,928 $240,443
Scheduled service............... 102,024 102,669 271,282 318,788
Ground package.................. 5,322 4,744 16,347 17,606
Other........................... 7,881 8,072 20,705 25,391
--------------- ----------------- --------------- ----------------
Total operating revenues... 210,790 199,698 597,262 602,228
--------------- ----------------- --------------- ----------------
Operating expenses:
Salaries, wages and benefits.... 43,574 44,896 127,981 126,802
Fuel and oil.................... 41,820 45,437 118,890 126,108
Handling, landing and navigation
fees.......................... 19,906 21,006 54,368 57,353
Depreciation and amortization... 16,558 16,468 45,994 47,173
Aircraft rentals................ 13,474 17,506 41,758 51,902
Aircraft maintenance, materials
and repairs................... 15,158 14,508 40,083 42,391
Crew and other employee
travel........................ 10,378 10,442 27,684 27,685
Passenger service............... 9,977 9,450 25,751 26,364
Commissions..................... 6,964 6,724 19,553 21,688
Ground package cost............. 4,548 4,074 14,042 14,165
Other selling expenses.......... 4,122 4,294 10,916 14,449
Advertising..................... 3,160 2,339 9,818 8,161
Facility and other rentals...... 2,200 2,786 6,551 7,214
Disposal of assets.............. -- 4,744 -- 4,744
Other operating expenses........ 13,625 14,102 39,797 42,602
--------------- ----------------- --------------- ----------------
Total operating expenses... 205,464 218,776 583,186 618,801
--------------- ----------------- --------------- ----------------
Operating income (loss).............. 5,326 (19,078) 14,076 (16,573)
Other income (expense):
Interest income................. 585 208 810 476
Interest (expense).............. (2,515) (626) (5,835) (2,803)
Other........................... 178 63 361 255
--------------- ----------------- --------------- ----------------
Other expenses....................... (1,752) (355) (4,664) (2,072)
--------------- ----------------- --------------- ----------------
Income (loss) before income taxes.... 3,574 (19,433) 9,412 (18,645)
Income taxes (credits)............... 1,828 (6,800) 5,192 (6,080)
--------------- ----------------- --------------- ----------------
Net income (loss).................... $ 1,746 $ (12,633) $ 4,220 $(12,565)
--------------- ----------------- --------------- ----------------
--------------- ----------------- --------------- ----------------
Net income (loss) per share.......... $ 0.15 $ (1.09) $ 0.36 $ (1.09)
--------------- ----------------- --------------- ----------------
--------------- ----------------- --------------- ----------------
Average shares outstanding........... 11,586,330 11,592,583 11,577,706 11,526,398
See accompanying notes.
F-18
AMTRAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1997 1996
--------------- ----------------
(UNAUDITED)
Operating activities:
Net income (loss)...................................................... $ 4,220 $(12,565)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization..................................... 45,994 47,173
Deferred income taxes............................................. 8,495 (6,036)
Other non-cash items.............................................. (1,653) 24,064
Changes in operating assets and liabilities:
Receivables............................................................ (826) (3,182)
Inventories............................................................ (1,103) (1,134)
Assets held for sale................................................... 5,206 (13,883)
Prepaid expenses....................................................... (6,024) 5,745
Accounts payable....................................................... (7,521) (1,512)
Air traffic liabilities................................................ 13,739 (7,339)
Accrued expenses....................................................... 10,205 (3,988)
--------------- ----------------
Net cash provided by operating activities.................... 70,732 27,343
--------------- ----------------
Investing activities:
Proceeds from sale of assets........................................... 7,959 30,222
Capital expenditures................................................... (63,519) (87,597)
Reductions of (additions to) other assets.............................. (5,092) 3,664
--------------- ----------------
Net cash used in investing activities........................ (60,652) (53,711)
--------------- ----------------
Financing activities:
Proceeds from long-term debt........................................... 125,000 19,250
Payments on long-term debt............................................. (126,254) (12,642)
Purchase of common stock............................................... -- (179)
--------------- ----------------
Net cash provided by (used in) financing activities.......... (1,254) 6,429
--------------- ----------------
Increase (decrease) in cash and cash equivalents............................ 8,826 (19,939)
Cash and cash equivalents, beginning of period.............................. 73,382 92,741
--------------- ----------------
Cash and cash equivalents, end of period.................................... $ 82,208 $ 72,802
--------------- ----------------
--------------- ----------------
Supplemental disclosures:
Cash payments (refunds) for:
Interest.......................................................... $ 5,043 $ 2,679
Income taxes...................................................... (314) 501
Financing and investing activities not affecting cash:
Issuance of long-term debt directly for capital expenditures...... $ 30,650 $ 14,186
See accompanying notes.
F-19
AMTRAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of Amtran, Inc.
and subsidiaries (the 'Company') have been prepared in accordance with
instructions for reporting interim financial information on Form 10-Q and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles.
The consolidated financial statements for the quarters ended September 30,
1997 and 1996 reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows for such periods.
Results for the nine months ended September 30, 1997, are not necessarily
indicative of results to be expected for the full fiscal year ending December
31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K/A for the year ended December 31, 1996.
2. ACCOUNTING PRONOUNCEMENTS PENDING ADOPTION
In February 1997, the Financial Accounting Standards Board issued Statement
128, 'Earnings Per Share,' which establishes new standards for the calculation
of earnings per share effective for interim and annual periods ending after
December 15, 1997. Subsequent to this effective date, all prior period earnings
per share amounts disclosed in financial statements are required to be restated
to conform to the new standards under Statement 128. Due to the small number of
dilutive common stock equivalents currently included in earnings per share
calculations, the Company does not currently expect that the impact from
restatement of prior period earnings per share will be material.
3. SUBSEQUENT DEBT TRANSACTIONS
On July 24, 1997, the Company completed two separate financings designed to
lengthen the maturity of the Company's long-term debt and diversify its credit
sources. On that date the Company (i) sold $100.0 million principal amount of
10.5% unsecured seven year notes in a private offering under Rule 144A, and (ii)
entered into a new $50.0 million secured revolving credit facility. The net
proceeds of the unsecured notes were approximately $97.3 million, after
application of costs and fees of issuance. The Company used a portion of the net
proceeds to repay in full the Company's prior bank facility and will use the
balance of the proceeds for general corporate purposes, which may include the
purchase of additional aircraft and/or the refinancing of existing leased
aircraft.
F-20
_____________________________ _____________________________
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE 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 AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Incorporation of Certain Documents by Reference............................................................................ 3
Available Information...................................................................................................... 3
Disclosure Regarding Forward-Looking Statements............................................................................ 4
Prospectus Summary......................................................................................................... 5
Risk Factors............................................................................................................... 16
The Exchange Offer......................................................................................................... 26
Use of Proceeds............................................................................................................ 33
Capitalization............................................................................................................. 34
Selected Consolidated Financial Data....................................................................................... 35
Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 37
Business................................................................................................................... 66
Management................................................................................................................. 79
Principal Shareholders..................................................................................................... 81
Certain Related Party Transactions......................................................................................... 81
Description of the New Credit Facility..................................................................................... 82
Description of the Notes................................................................................................... 83
Registration Rights Agreement for Outstanding Notes........................................................................ 108
Certain United States Federal Income Tax Considerations.................................................................... 109
Plan of Distribution....................................................................................................... 112
Legal Matters.............................................................................................................. 112
Experts.................................................................................................................... 112
Index to Consolidated Financial Statements................................................................................. F-1
$100,000,000
AMTRAN, INC.
10 1/2% SENIOR EXCHANGE
NOTES DUE 2004
---------------------
PROSPECTUS
---------------------
DECEMBER , 1997
_____________________________ _____________________________
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Information relating to indemnification of directors and officers is
incorporated by reference herein from Item 14 of the Company's Registration
Statement on Form S-1 (No. 33-59630).
ITEM 21. EXHIBITS.
EXHIBIT
NUMBER'D' DESCRIPTION
-------- -----------------------------------------------------------------------------------------------------
*3.1 -- Restated Articles of Incorporation of the Company.
*3.2 -- By-laws of the Company.
4.1 -- Indenture, dated as of July 24, 1997, between the Company, the Guarantors and First Security Bank,
N.A., as trustee.
4.2 -- Form of 10 1/2% Senior Exchange Note due 2004 (included in Exhibit 4.1).
4.3 -- Placement Agreement, dated July 17, 1997, between the Company, the Guarantors and Morgan Stanley &
Co. Incorporated and Salomon Brothers Inc.
4.4 -- Registration Rights Agreement, dated July 24, 1997, between the Company, the Guarantors and Morgan
Stanley & Co. Incorporated and Salomon Brothers Inc.
5.1 -- Opinion of Brian T. Hunt, General Counsel of the Company.
5.2 -- Opinion of Cravath, Swaine & Moore.
10.1 -- Credit Agreement, dated July 24, 1997, among ATA, the Company, NBD Bank, N.A., as agent, and the
banks party thereto.
10.2 -- Guarantee Agreement, dated July 24, 1997, among the Company, Ambassadair Travel Club, Inc., ATA
Vacations, Inc., Amber Travel, Inc., American Trans Air Training Corporation, American Trans Air
ExecuJet, Inc., Amber Air Freight Corporation and the lenders party thereto.
10.3 -- Security Agreement, dated July 24, 1997, between ATA and NBD Bank, N.A. as agent.
11.1 -- Statement re computation of per share earnings.
**12.1 -- Statements re computation of ratios.
**23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Brian T. Hunt, General Counsel of the Company (included in Exhibit 5.1).
23.3 -- Consent of Cravath, Swaine & Moore (included in Exhibit 5.2).
24.1 -- Powers of Attorney (contained on signature page).
25.1 -- Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of First Security
Bank, N.A. on Form T-1.
**99.1 -- Form of Letter of Transmittal.
**99.2 -- Form of Notice of Guaranteed Delivery.
**99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.
**99.4 -- Form of Letter to Clients.
- ------------
'D' Unless otherwise indicated, the exhibits have been previously filed as part
of this Registration Statement.
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-59630), and incorporated herein by reference.
** Filed herewith.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
II-1
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated document by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Indianapolis, State of
Indiana, on this 4th day of December, 1997.
AMTRAN, INC.
By /s/ J. GEORGE MIKELSONS
-----------------------------------
J. GEORGE MIKELSONS
CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLES DATES
- ------------------------------------------ -------------------------------------------- -------------------
/s/ J. GEORGE MIKELSONS Chairman of the Board of Directors December 4, 1997
- ------------------------------------------
(J. GEORGE MIKELSONS)
* President and Chief Executive Officer and December 4, 1997
- ------------------------------------------ Director (Principal Executive Officer)
(JOHN P. TAGUE)
* Executive Vice President and Chief Operating December 4, 1997
- ------------------------------------------ Officer and Director
(JAMES W. HLAVACEK)
* Executive Vice President and Chief Financial December 4, 1997
- ------------------------------------------ Officer and Director (Principal Financial
(KENNETH K. WOLFF) and Accounting Officer)
* Senior Vice President, Sales, Marketing and December 4, 1997
- ------------------------------------------ Strategic Planning and Director
(DALEN D. THOMAS)
Director , 1997
- ------------------------------------------
(ROBERT A. ABEL)
* Director December 4, 1997
- ------------------------------------------
(WILLIAM P. ROGERS, JR.)
/s/ ANDREJS P. STIPNIEKS Director December 4, 1997
- ------------------------------------------
(ANDREJS P. STIPNIEKS)
*By /S/ J. GEORGE MIKELSONS
J. GEORGE MIKELSONS December 4, 1997
AS ATTORNEY-IN-FACT
II-3
EXHIBIT INDEX
EXHIBIT
NUMBER'D' DESCRIPTION PAGE
-------- --------------------------------------------------------------------------------------------- ----
*3.1 -- Restated Articles of Incorporation of the Company.........................................
*3.2 -- By-laws of the Company....................................................................
4.1 -- Indenture, dated as of July 24, 1997, between the Company, the Guarantors and First
Security Bank, N.A., as trustee...........................................................
4.2 -- Form of 10 1/2% Senior Exchange Note due 2004 (included in Exhibit 4.1)...................
4.3 -- Placement Agreement, dated July 17, 1997, between the Company, the Guarantors and Morgan
Stanley & Co. Incorporated and Salomon Brothers Inc.......................................
4.4 -- Registration Rights Agreement, dated July 24, 1997, between the Company, the Guarantors
and Morgan Stanley & Co. Incorporated and Salomon Brothers Inc............................
5.1 -- Opinion of Brian T. Hunt, General Counsel of the Company..................................
5.2 -- Opinion of Cravath, Swaine & Moore........................................................
10.1 -- Credit Agreement, dated July 24, 1997, among ATA, the Company, NBD Bank, N.A., as agent,
and the banks party thereto...............................................................
10.2 -- Guarantee Agreement, dated July 24, 1997, among the Company, Ambassadair Travel Club,
Inc., ATA Vacations, Inc., Amber Travel, Inc., American Trans Air Training Corporation,
American Trans Air ExecuJet, Inc., Amber Air Freight Corporation and the lenders party
thereto...................................................................................
10.3 -- Security Agreement, dated July 24, 1997, between ATA and NBD Bank, N.A. as agent..........
11.1 -- Statement re computation of per share earnings............................................
**12.1 -- Statements re computation of ratios.......................................................
**23.1 -- Consent of Ernst & Young LLP..............................................................
23.2 -- Consent of Brian T. Hunt, General Counsel of the Company (included in Exhibit 5.1)........
23.3 -- Consent of Cravath, Swaine & Moore (included in Exhibit 5.2)..............................
24.1 -- Powers of Attorney (contained on signature page)..........................................
25.1 -- Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of First
Security Bank, N.A. on Form T-1...........................................................
**99.1 -- Form of Letter of Transmittal.............................................................
**99.2 -- Form of Notice of Guaranteed Delivery.....................................................
**99.3 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees..................................................................................
**99.4 -- Form of Letter to Clients.................................................................
- ------------
'D' Unless otherwise indicated, the exhibits have been previously filed as part
of this Registration Statement.
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-59630), and incorporated herein by reference.
** Filed herewith.
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as ............................... 'D'
The cent symbol shall be expressed as.................................. [c]