AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FINE AIR SERVICES CORP.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4522 65-083857
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
BARRY H. FINE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2261 N.W. 67TH AVENUE FINE AIR SERVICES CORP.
BUILDING 700 2261 N.W. 67TH AVENUE, BUILDING 700
MIAMI, FLORIDA 33122 MIAMI, FLORIDA 33122
(305) 871-6606 (305) 871-6606
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES OF COMMUNICATIONS TO:
KENNETH C. HOFFMAN, ESQ.
GREENBERG TRAURIG HOFFMAN LIPOFF ROSEN & QUENTEL, P.A.
1221 BRICKELL AVENUE
MIAMI, FLORIDA 33131
FACSIMILE: (305) 579-0717
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EXACT NAME OF JURISDICTION OF PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER
ADDITIONAL REGISTRANTS* ORGANIZATION CLASSIFICATION CODE NUMBER IDENTIFICATION NUMBER
Fine Air Services, Inc. ........... Florida 4522 65-0140639
Agro Air Associates, Inc. ......... Florida 7359 59-2184485
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* Address and telephone number of principal executive offices are the same as
those of Fine Air Service Corp.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
9 7/8% Senior Notes due 2008 ....... $200,000,000 100% $200,000,000 $59,000
Guarantees of 9 7/8% Senior
Notes due 2008 ................... $200,000,000 (2) (2) None
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(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee.
(2) No further fee is payable pursuant to Rule 457(n).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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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.
SUBJECT TO COMPLETION, DATED JULY 17, 1998
PROSPECTUS
FINE AIR SERVICES CORP.
OFFER TO EXCHANGE ITS 9 7/8% SENIOR NOTES DUE 2008 FOR ANY AND ALL OF
ITS OUTSTANDING 9 7/8% SENIOR NOTES DUE 2008 THE EXCHANGE OFFER AND WITHDRAWAL
RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
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Fine Air Services Corp., a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus (as the same may be amended or supplemented from time to time, the
"Prospectus") and in the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange up to $200,000,000 aggregate
principal amount of its 9 7/8% Senior Notes due 2008 (the "New Notes") for a
like principal amount of its outstanding 9 7/8% Senior Notes due 2008 (the "Old
Notes", and together with the New Notes, the "Senior Notes"), of which
$200,000,000 aggregate principal amount are outstanding. The New Notes are being
offered to satisfy certain obligations of the Company under the Registration
Rights Agreement, dated as of June 5, 1998 (the "Registration Rights
Agreement"), between the Company, Fine Air Services, Inc. ("Fine Air"), Agro Air
Associates, Inc. ("Agro Air") and SBC Warburg Dillon Read Inc. (the "Initial
Purchaser"). The terms of the New Notes are identical in all material respects
to the respective terms of the Old Notes, except that (i) the New Notes have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), and therefore will not be subject to certain restrictions on transfer
applicable to the Old Notes and (ii) holders of the New Notes will generally not
be entitled to certain rights, including the payment of Liquidated Damages (as
defined herein), pursuant to the Registration Rights Agreement. In the event
that the Exchange Offer is consummated, any Old Notes which remain outstanding
after consummation of the Exchange Offer and the New Notes issued in the
Exchange Offer will vote together as a single class for purposes of determining
whether holders of the requisite percentage in outstanding principal amount
thereof have taken certain actions or exercised certain rights under the
Indenture (as defined herein). For a description of the principal terms of the
New Notes, see "Description of Senior Notes." The New Notes will bear interest
from June 5, 1998 or from the most recent Interest Payment Date (as defined
herein) to which interest has been paid or provided for on the Old Notes.
Holders of Old Notes whose Old Notes are accepted for exchange will be deemed to
have waived the right to receive any payment in respect of interest on the Old
Notes accrued up until the date of issuance of the New Notes. Such waiver will
not result in the loss of interest income to such holders, since the New Notes
will bear interest from the issue date of the Old Notes.
The New Notes will bear interest at the rate of 9 7/8% per annum,
payable semiannually on June 1 and December 1 of each year, commencing December
1, 1998. The New Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after June 1, 2003, at the redemption prices set
forth herein. The Company may also redeem up to 35% of the aggregate principal
amount of Senior Notes at the Company's option, at any time on or prior to June
1, 2001, at a redemption price equal to 109.875% of the principal amount
thereof, plus accrued and unpaid interest to the redemption date, with the net
cash proceeds of one or more Public Equity Offerings (as defined herein);
provided, that at least 65% of the aggregate principal amount of Senior Notes
originally issued remains outstanding after such redemption. Upon the occurrence
of a Change of Control (as defined herein), the Company will be required to make
an offer to repurchase all or any part of each holder's Senior Notes at a price
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase.
The New Notes will be general unsecured obligations of the Company and will
be fully and unconditionally guaranteed, on a joint and several, senior
unsecured basis (the "Subsidiary Guarantees"), by Fine Air and Agro Air and any
future Subsidiary Guarantor (as defined herein) to the extent set forth in the
Indenture. The New Notes and each Subsidiary Guarantee will be effectively
subordinated to all secured obligations of the Company and the applicable
Subsidiary Guarantor to the extent of the assets securing such obligations. The
Indenture permits the Company and its subsidiaries (including the Subsidiary
Guarantors) to incur additional indebtedness, subject to certain limitations.
This Prospectus and the Letter of Transmittal are first being mailed to all
holders of Old Notes on , 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER OLD NOTES IN
THE EXCHANGE OFFER.
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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 , 1998.
The Company is making the Exchange Offer of the New Notes in reliance on
the position of the staff of the Division of Corporation Finance of the
Securities and Exchange Commission (the "Commission") as set forth in certain
interpretive letters addressed to third parties in other transactions. However,
the Company has not sought its own interpretive letter and there can be no
assurance that the staff of the Division of Corporation Finance of the
Commission would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Division of Corporation Finance of the
Commission, and subject to the two immediately following sentences, the Company
believes that New Notes issued pursuant to this Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by a
holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and that such holder is not participating, and
has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such New Notes.
However, any holder of Old Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing
New Notes, or any broker-dealer who purchased Old Notes from the Company to
resell pursuant to Rule 144A under the Securities Act ("Rule 144A") or any
other available exemption under the Securities Act, (a) will not be able to
rely on the interpretations of the staff of the Division of Corporation Finance
of the Commission set forth in the above-mentioned interpretive letters, (b)
will not be permitted or entitled to tender such Old Notes in the Exchange
Offer and (c) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or other
transfer of such Old Notes unless such sale is made pursuant to an exemption
from such requirements. In addition, as described below, if any broker-dealer
holds Old Notes acquired for its own account as a result of market-making or
other trading activities and exchanges such Old Notes for New Notes, then such
broker-dealer must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is
not a broker-dealer, such holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of the Securities Act) of such
New Notes. In addition, the Company may require such holder, as a condition to
such holder's eligibility to participate in the Exchange Offer, to furnish to
the Company (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) on behalf of whom such
holder holds the Notes to be exchanged in the Exchange Offer. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Old Notes for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New 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. Based on the position taken by the staff of
the Division of Corporation Finance of the Commission in the interpretive
letters referred to above, the Company believes that broker-dealers who
acquired Old Notes for their own accounts, as a result of market-making
activities or other trading activities ("Participating Broker-Dealers"), may
fulfill their prospectus delivery requirements with respect to the New Notes
received upon exchange of such Old Notes (other than Old Notes which represent
an unsold allotment from the original sale of the Old Notes) with a prospectus
meeting the requirements of the Securities Act, which may be the prospectus
prepared for an exchange offer so long as it contains a description of the plan
of distribution with respect to the resale of such New Notes. Accordingly, this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer during the period referred to below in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such Participating
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Broker-Dealer for its own account as a result of market-making or other trading
activities. A Participating Broker-Dealer who intends to use this Prospectus in
connection with the resale of New Notes received in exchange for Old Notes
pursuant to the Exchange Offer must notify the Company, or cause the Company to
be notified, on or prior to the Expiration Date, that it is a Participating
Broker-Dealer. Such notice may be given in the space provided for that purpose
in the Letter of Transmittal or may be delivered to the Exchange Agent at one
of the addresses set forth herein under "The Exchange Offer--Exchange Agent."
Any Participating Broker-Dealer who is an "affiliate" of the Company may not
rely on such interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. See "The Exchange Offer--Resales of New Notes."
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any
material respect or which causes this Prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference herein, in light of the circumstances under which they were made, not
misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Participating Broker-Dealer will suspend
the sale of New Notes pursuant to this Prospectus until the Company has amended
or supplemented this Prospectus to correct such misstatement or omission and
has furnished copies of the amended or supplemented Prospectus to such
Participating Broker-Dealer or the Company has given notice that the sale of
the New Notes may be resumed, as the case may be.
Prior to the Exchange Offer, there has been only a limited secondary
market and no public market for the Old Notes. The New Notes will be a new
issue of securities for which there currently is no market. Although the
Initial Purchaser has informed the Company that it currently intends to make a
market in the New Notes, it is not obligated to do so, and any such market
making may be discontinued at any time without notice. Accordingly, there can
be no assurance as to the development or liquidity of any market for the New
Notes. The Company currently does not intend to apply for listing of the New
Notes on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights which terminate upon consummation of the Exchange Offer). Following
consummation of the Exchange Offer, the holders of Old Notes will continue to
be subject to all of the existing restrictions upon transfer thereof and the
Company will not have any further obligation to such holders (other than under
certain limited circumstances) to provide for registration under the Securities
Act of the Old Notes held by them. To the extent that Old Notes are tendered
and accepted in the Exchange Offer, a holder's ability to sell untendered Old
Notes could be adversely affected. See "Risk Factors--Consequences of a Failure
to Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Old Notes may be tendered for exchange on or prior to 5:00 p.m., New York
City time, on , 1998 (such time on such date being hereinafter called
the "Expiration Date"), unless the Exchange Offer is extended by the Company
(in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended). Tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is
3
subject to certain events and conditions which may be waived by the Company and
to the terms and provisions of the Registration Rights Agreement. Old Notes may
be tendered in whole or in part in denominations of $1,000 and integral
multiples thereof. The Company has agreed to pay all expenses of the Exchange
Offer. See "The Exchange Offer--Fees and Expenses." Holders of the Old Notes
whose Old Notes are accepted for exchange will not receive interest on such Old
Notes and will be deemed to have waived the right to receive any interest on
such Old Notes accrued from and after June 5, 1998. See "The Exchange
Offer--Interest on New Notes."
The Company will not receive any cash proceeds from the issuance of the
New Notes offered hereby. No dealer-manager is being used in connection with
this Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New
Notes offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the New Notes offered
hereby, reference is made to the Registration Statement. Any statements made in
this Prospectus concerning the provisions of certain documents are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement otherwise filed
with the Commission.
Upon the effectiveness of the Registration Statement, the Company will
become subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith will file
reports and other information with the Commission. The Registration Statement,
the exhibits forming a part thereof and the reports and other information filed
by the Company with the Commission in accordance with the Exchange Act may be
inspected, without charge, at the Public Reference Section of the Commission
located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
following Regional Offices of the Commission: 7 World Trade Center, 13th Floor,
New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the material may be obtained
from the Public Reference Section of the Commission upon payment of the
prescribed fees. The Commission also maintains a site on the World Wide Web
that contains reports, proxy and information statements and other information
at http://www.sec.gov.
In the event that the Company is not required to be subject to the
reporting requirements of the Exchange Act in the future, as required under the
Indenture pursuant to which the Old Notes were, and the New Notes will be,
issued, the Company has agreed that, for so long as any of the Senior Notes
remain outstanding, it will file with the Commission (unless the Commission
will not accept such a filing) (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. In addition, for so long as any
of the Senior Notes remain outstanding, the Company has agreed to make
available to any prospective purchaser of the Senior Notes or beneficial owner
of the Senior Notes in connection with any sale thereof the information
required by Rule 144A(d)(4) under the Securities Act.
4
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements regarding the
intent, belief and current expectations of the Company's management. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, or projections involving anticipated revenues, expenses,
earnings, levels of capital expenditures or other aspects of operating results.
The operations of the Company are subject to a number of uncertainties, risks
and other influences, many of which are outside the control of the Company and
any one of which, or a combination of which, could materially affect the
results of the Company's operations and whether the forward-looking statements
made by the Company ultimately prove to be accurate. Important factors that
could cause actual results to differ materially from the Company's expectations
are disclosed in "Risk Factors" and elsewhere in this Prospectus. The Company
assumes no obligation to update any forward-looking statements.
5
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA,
INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
REFERENCES TO THE "COMPANY" SHALL MEAN FINE AIR SERVICES CORP. TOGETHER WITH
ITS WHOLLY OWNED SUBSIDIARIES FINE AIR SERVICES, INC. ("FINE AIR") AND AGRO AIR
ASSOCIATES, INC. ("AGRO AIR"), AND REFERENCES TO THE "SUBSIDIARY GUARANTORS"
SHALL MEAN FINE AIR AND AGRO AIR.
THE COMPANY
The Company is a leading provider of air cargo services between the United
States and South and Central America and the Caribbean. Since 1994, the Company
has been the largest international air cargo carrier serving Miami
International Airport ("MIA"), based on tons of cargo transported to and from
that airport. MIA is the largest international cargo airport in the United
States and the third largest international cargo airport in the world. The
Company's services include: (i) integrated air and truck cargo transportation
and other logistics services ("scheduled cargo services"); (ii) long- and
short-term ACMI (aircraft, crew, maintenance and insurance) services and AD HOC
charters ("ACMI services"); and (iii) third party aircraft and engine
maintenance, repairs and overhauls, training and other services. The Company's
scheduled cargo services provide seamless transportation through its MIA hub
linking North America, Europe, Asia and the Pacific Rim with 25 South and
Central American and Caribbean cities as of June 30, 1998. The Company's
customers include international and domestic freight forwarders, integrated
carriers, passenger and cargo airlines, major shippers and the United States
Postal Service.
On August 6, 1997, the Company commenced an initial public offering of its
common stock (the "IPO"), which valued the Company's equity at approximately
$310 million. The following day, one of the Company's aircraft crashed
immediately following takeoff from MIA. The aircraft, en route to Santo
Domingo, Dominican Republic, was carrying unassembled denim on an ACMI flight.
Five persons died as a result of the accident. Due to management's concerns
that the accident would adversely affect the market price of the Company's
newly issued common stock, the Company voluntarily rescinded the IPO and all
funds raised were returned to investors. Prior to the accident, for the twelve
months ended June 30, 1997, the Company had revenue of $107.3 million and
EBITDA of $28.2 million, representing compound annual growth rates of 33.4% and
38.6%, respectively, from 1993.
Immediately following the accident, the Company's operations were placed
under heightened scrutiny by the U.S. Federal Aviation Administration (the
"FAA"). As a result of concerns expressed by the FAA, the Company voluntarily
ceased operations on September 4, 1997, and entered into a Consent Agreement
(the "Consent Agreement") with the FAA on September 12, 1997. As part of the
Consent Agreement, the Company agreed not to resume operations until the FAA
approved new cargo handling and hazardous materials procedures to be
implemented by the Company. Partly as a consequence of findings during its
inspections of the Company, the FAA subsequently implemented new cargo handling
inspection procedures for all carriers under its jurisdiction. The Company
resumed operations on a limited basis on October 28, 1997, approximately seven
weeks after suspending operations. Since that time, the Company gradually has
increased the number of hours flown in both its scheduled cargo services and
ACMI services. Management believes that the Company's operations have returned
to historical revenue and profitability levels. See "--Recent Results."
According to published industry sources, the worldwide air freight market
had revenues of $64 billion in 1995 and has grown at a 9.1% compound annual
rate since 1985 (measured in revenue ton kilometers). According to reports
prepared by Boeing, the world air cargo market is expected to more than triple
over the next 20 years. The United States/Latin America air freight market is
forecasted, by published industry sources, to be the fifth fastest growing air
freight market in the world from 1995 to
6
2005, with an average annual growth rate of approximately 7.1%, as measured in
tons. MIA is the largest air gateway to South and Central America and the
Caribbean, with more than 60 all-cargo flights to the region per day. MIA is
the primary transshipment point for goods moving by air between North America
and South and Central America. During 1997, more than 77% of all air import
cargo and more than 83% of all air export cargo between the United States and
Latin America moved through MIA. MIA's air trade with South America quadrupled
from $3.1 billion in 1990 to $13.1 billion in 1997.
As of June 30, 1998, the Company marketed its scheduled cargo services
through a sales network consisting of seven domestic sales offices serving 57
major U.S. cities, six international sales offices serving over 30 cities in
Europe, Canada, Asia and the Pacific Rim and 23 sales offices in South and
Central America and the Caribbean. The Company receives cargo at its MIA hub
and its foreign operations stations (i) through its domestic and international
sales network, (ii) from other airlines pursuant to interline agreements and
(iii) directly from freight forwarders and other shippers. See
"Business--Customers." The Company utilizes its own fleet of 14 DC-8 aircraft
and the services of other airlines through interline and other contractual
relationships to provide reliable air cargo service between MIA and South and
Central America and the Caribbean. The Company has interline relationships with
over 50 airlines, including Air France, China Airlines, Continental Airlines,
Iberia, Korean Air and Virgin Atlantic. The Company's scheduled cargo services
transported approximately 32,000 tons of freight in 1994 and approximately
68,900 tons of freight in 1997, a compound annual increase of 29.1%. The
Company has acquired and is in the process of becoming certified to operate an
L-1011 aircraft and plans to expand its scheduled cargo services by acquiring
additional widebody and DC-8 aircraft.
The Company's customers utilize the Company's ACMI services to obtain lift
capacity without acquiring their own aircraft. Under a typical ACMI contract,
the Company supplies an aircraft, crew, maintenance and insurance, either on a
regularly scheduled or AD HOC basis, while the customer bears all other
aircraft operating expenses, including fuel, landing and parking fees and
ground and cargo handling expenses. The Company's ACMI customers also bear the
risk of utilizing the cargo capacity of the Company's aircraft. By offering
ACMI services in addition to scheduled cargo services, the Company is able to
schedule its fleet to satisfy demand on its own routes while improving
utilization and generating additional revenue from ACMI services.
The Company's FAA-approved repair stations perform a full range of
maintenance, repair and overhaul services for DC-8 aircraft and Pratt & Whitney
JT3D-3B aircraft engines. The Company also operates professional pilot and
mechanic training schools. In 1996, the Company moved into a new hangar and
maintenance facility at MIA, which enables the Company to expand its third
party repair and maintenance services while performing all necessary repairs
and maintenance on its own aircraft. The Company began marketing its third
party repair and maintenance capabilities in 1996 and intends to seek
certification to provide similar services for other types of aircraft and
engines.
COMPETITIVE STRENGTHS
The Company believes that the following strengths will provide the basis
for its continued growth and profitability:
/bullet/ ESTABLISHED MARKET POSITION. Since 1994, the Company has
transported more international air cargo to and from MIA, the principal air
gateway for South and Central America and the Caribbean, than any other
carrier. Management believes that the Company has achieved its market position
as a result of the frequency of the Company's flights and its excellent
reputation for reliability and service to its customers, which include freight
forwarders, integrated carriers, passenger and cargo airlines and major
shippers. The Company believes that regulatory and other restrictions imposed
by U.S. and foreign governmental authorities would make it difficult for a new
airline entrant to obtain the necessary operating authority and route rights to
duplicate the Company's business. Management also
7
believes that the scarcity of available facilities at MIA will inhibit
potential competitors seeking to duplicate the Company's operations.
/bullet/ LOW AIRCRAFT AND OPERATING COST STRUCTURE. The Company maintains
a low cost structure through: (i) the opportunistic acquisition of used
aircraft, engines and spare parts, (ii) the elimination of duplicative costs by
maintaining favorable labor rates and other operating costs associated with the
centralizing of its principal flight and maintenance operations in Miami, (iii)
the "in-sourcing" of activities such as training, aircraft and engine repairs
and maintenance, and (iv) the use of its own ground and cargo handling
personnel and equipment. The Company also seeks to increase its profitability
and enhance aircraft utilization by maintaining an optimum balance of scheduled
cargo services and ACMI services for third parties. The Company's uniform
aircraft fleet has allowed it to standardize its spare part inventories, and
maintenance and training operations, thereby increasing operating efficiencies
and improving the reliability of the Company's air cargo services. The
Company's low cost structure also enables it to utilize its aircraft profitably
in lower yielding freight markets.
/bullet/ ASSET OWNERSHIP. The Company has made a substantial investment to
acquire the assets necessary to support its operations, including 14 DC-8 and
one L-1011 aircraft, 20 used spare aircraft engines, an extensive inventory of
spare parts and aircraft components, maintenance and engine repair equipment
and substantially all of the equipment and vehicles for its aircraft ground and
cargo handling requirements. See "Business--Aircraft Fleet." Management
believes that the value of the Company's operating assets is substantially in
excess of their book value. The Company has also made a substantial commitment
of capital and resources to obtain required governmental authorizations,
develop its sales and marketing network and build the infrastructure necessary
to support its scheduled cargo and ACMI services.
/bullet/ EXPERIENCED MANAGEMENT TEAM. The Company is led by an experienced
management team, headed by Messrs. Frank and Barry Fine, who together have over
50 years of experience in the air cargo industry and whose knowledge of the
South and Central American and Caribbean business environment has been a key
element of the Company's success. The other key members of the Company's
management team, including those responsible for the Company's flight
operations, maintenance and repair facilities, as well as marketing and sales
activities, each have over 20 years of industry experience, including
significant experience in the Company's markets.
/bullet/ DIVERSITY OF CUSTOMER BASE. The Company offers a wide range of
air cargo services to a diverse customer base of over 1,200 customers that
includes international and domestic freight forwarders, integrated carriers,
passenger and cargo airlines, major shippers and the United States Postal
Service. Because the Company is able to provide its customers a broad range of
services tailored to their particular needs, management believes that the
Company is well positioned to benefit from the expected growth in demand for
air freight transportation between the United States and South and Central
America and the Caribbean.
GROWTH STRATEGY
The Company believes that as a result of its position as a leading
provider of air cargo services between the United States and South and Central
America and the Caribbean and strong air cargo industry fundamentals, the
Company is well positioned to increase revenue and operating cash flow. The
Company's strategy for continued growth is to (i) increase lift capacity, (ii)
expand its sales network and transportation logistics services, (iii) expand
its ACMI services and (iv) pursue strategic acquisitions.
/bullet/ INCREASE LIFT CAPACITY. The Company intends to increase the
number of markets it can serve and its capacity in existing markets by adding
both widebody and additional DC-8 aircraft to its fleet. Widebody aircraft have
longer range and significantly larger volume capacity than DC-8s and will
8
permit the Company to extend its route structure to serve the southernmost
countries of South America and to more economically serve high cargo volume
routes on which the Company currently operates multiple daily flights. DC-8s
that are utilized on these routes will be redeployed to increase capacity to
existing markets and to develop service to new destinations that are more
efficiently served with narrowbody aircraft. Management believes that the
Company's existing infrastructure will support a larger aircraft fleet and that
the Company can achieve greater economies of scale as it expands its lift
capacity.
/bullet/ EXPAND SALES NETWORK AND TRANSPORTATION LOGISTICS SERVICES. The
Company plans to expand its domestic and international sales network by opening
new domestic sales offices, adding sales personnel, increasing the number of
general sales agents who market the Company's services domestically and
internationally and expanding the Company's interline relationships. The
Company also plans to increase the scope of its transportation logistics
services, particularly in South and Central America and the Caribbean, where
other airlines and freight forwarders play a much smaller role in arranging for
these services.
/bullet/ EXPAND ACMI SERVICES. Management believes that the Company's
acquisition of widebody aircraft will enable it to market its ACMI services to
a broader range of customers, including those who require the longer range
and/or larger volume capacity of these aircraft. The Company also plans to
utilize its existing and any newly acquired DC-8s to increase its ACMI
capabilities.
/bullet/ PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue
strategic acquisitions that are complementary to the Company's business.
Management's criteria for identifying attractive acquisition opportunities
include: (i) expanding fleet size at a favorable cost, (ii) diversifying and
expanding the Company's customer base, (iii) increasing economies of scale
related to maintenance and cargo handling and (iv) adding operating and route
authority.
The Company was incorporated in Delaware in May 1998. Fine Air and Agro
Air are Florida corporations incorporated in 1989 and 1982, respectively, which
became wholly owned subsidiaries of the Company on June 3, 1998. See "Certain
Transactions." The Company's principal executive offices are located at 2261
N.W. 67th Avenue, Building 700, Miami, Florida, 33122 and its telephone number
is (305) 871-6606.
RECENT RESULTS
The cessation of operations during September and October 1997 resulted in
a significant decrease in the Company's revenue for the third and fourth
quarters of 1997 compared to 1996. The impact of the temporary cessation of
operations continued to affect the Company's revenues and profitability during
the first few months of 1998. During the first quarter of 1998, the Company
continued to emphasize rebuilding the service level of its scheduled cargo
services. By the end of the quarter, the Company's scheduled cargo operations
served most of the destinations which had been served during the first half of
1997, and revenues from scheduled cargo services had returned to historical
levels. ACMI block hours remained at lower than historical levels during the
first quarter of 1998, due primarily to the Company's emphasis on rebuilding
its scheduled cargo services. During March and April 1998, both revenue and
operating income showed significant improvement as the Company's scheduled
cargo services and ACMI services returned to pre-September 1997 levels.
Management believes that the Company's operations have returned to historical
revenue and profitability levels.
9
The tables below set forth selected unaudited quarterly financial and
operating data for 1996 and 1997 and monthly financial and operating data for
the three months ended March 31, 1998 (dollars in thousands):
1996 FISCAL QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ----------- ---------- -----------
Revenues:
Scheduled cargo services ..................................... $ 11,693 $ 12,099 $ 13,333 $ 17,650
ACMI services ................................................ 5,430 7,347 6,841 15,902
Repairs, training and other .................................. 1,796 818 542 797
Total revenues .............................................. 18,919 20,264 20,716 34,349
EBITDA(1) ..................................................... 3,894 3,734 3,731 12,025
Operating income .............................................. 1,305 1,434 1,264 9,205
Tons of freight transported--scheduled cargo services ......... 18,360 17,153 19,093 21,317
ACMI block hours flown ........................................ 2,146 2,743 3,005 4,395
1997 FISCAL QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ----------- ------------ -----------
Revenues:
Scheduled cargo services ..................................... $ 16,174 $ 17,480 $ 12,111 $ 10,647
ACMI services ................................................ 9,126 8,220 6,540 7,194
Repairs, training and other .................................. 626 577 706 593
Total revenues .............................................. 25,926 26,277 19,357 18,434
EBITDA(1) ..................................................... 6,242 6,232 (1,317) (314)
Operating income (loss) ....................................... 3,349 3,314 (4,423) (3,267)
Tons of freight transported--scheduled cargo services ......... 19,404 20,570 15,933 12,937
ACMI block hours flown ........................................ 3,346 3,092 2,537 1,737
1998 MONTH ENDED
------------------------------------ 1ST QUARTER
JAN. 31 FEB. 28 MARCH 31 TOTAL
----------- --------- ---------- ------------
Revenues:
Scheduled cargo services ..................................... $ 5,068 $ 5,359 $ 6,798 $ 17,225
ACMI services ................................................ 2,119 2,454 2,938 7,511
Repairs, training and other .................................. 104 164 140 408
Total revenues .............................................. 7,291 7,977 9,876 25,144
EBITDA(1) ..................................................... 453 1,233 2,411 4,098
Operating income (loss) ....................................... (587) 188 1,157 758
Tons of freight transported--scheduled cargo services ......... 6,438 6,713 8,815 21,966
ACMI block hours flown ........................................ 719 882 1,085 2,686
- ----------------
(1) For the definition of EBITDA, see footnote 1 to "Summary Combined Financial
and Operating Data."
Preliminary operating results for the month of April 1998 continue to
reflect the Company's return to historical revenue and profitability levels.
Revenues increased 12.4% to $10.0 million in April 1998 from $8.9 million in
April 1997, due to increases in revenues from both scheduled cargo and ACMI
services. Total block hours flown increased 17.1% to 2,230 in April 1998 from
1,905 in April 1997. EBITDA increased 10.0% to $2.3 million in April 1998 from
$2.1 million in April 1997.
10
THE EXCHANGE OFFER
The Exchange Offer......... Up to $200,000,000 aggregate principal amount of
New Notes are being offered in exchange for a like
aggregate principal amount of Old Notes. Old Notes
may be tendered for exchange in whole or in part
in denominations of $1,000 or any integral
multiple thereof. The Company is making the
Exchange Offer in order to satisfy its obligations
under the Registration Rights Agreement relating
to the Old Notes. For a description of the
procedures for tendering Old Notes, see "The
Exchange Offer--Procedures for Tendering Old
Notes."
Expiration Date............ 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended by the
Company (in which case the Expiration Date will be
the latest date and time to which the Exchange
Offer is extended). See "The Exchange Offer--Terms
of the Exchange Offer."
Conditions to the
Exchange Offer............. The Exchange Offer is subject to certain
conditions, which may be waived by the Company in
its sole discretion. The Exchange Offer is not
conditioned upon any minimum principal amount of
Old Notes being tendered. See "The Exchange
Offer--Conditions to the Exchange Offer."
Offer...................... The Company reserves the right in its sole and
absolute discretion, subject to applicable law, at
any time and from time to time, (i) to delay the
acceptance of the Old Notes for exchange, (ii) to
terminate the Exchange Offer if certain specified
conditions have not been satisfied, (iii) to
extend the Expiration Date of the Exchange Offer
and retain all Old Notes tendered pursuant to the
Exchange Offer, subject, however, to the right of
holders of Old Notes to withdraw their tendered
Old Notes, and (iv) to waive any condition or
otherwise amend the terms of the Exchange Offer in
any respect. See "The Exchange Offer--Terms of the
Exchange Offer."
Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any
time on or prior to the Expiration Date by
delivering a written notice of such withdrawal to
the Exchange Agent (as defined herein) in
conformity with certain procedures set forth below
under "The Exchange Offer--Withdrawal Rights."
Procedures for Tendering
Old Notes................. Brokers, dealers, commercial banks, trust
companies and other nominees who hold Old Notes
through DTC (as defined herein) may effect tenders
by book-entry transfer in accordance with DTC's
Automated Tender Offer Program ("ATOP"). Holders
of such Old Notes registered in the name of a
broker, dealer, commercial bank, trust company or
other nominee are urged to contact such person
promptly if they wish to tender Old Notes. In
order for Old Notes to be tendered by a means
other than by book-entry transfer, a Letter of
Transmittal must be completed
11
and signed in accordance with the instructions
contained herein. The Letter of Transmittal and
any other documents required by the Letter of
Transmittal must be delivered to the Exchange
Agent by mail, facsimile, hand delivery or
overnight carrier and either such Old Notes must
be delivered to the Exchange Agent or specified
procedures for guaranteed delivery must be
complied with. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Letters of Transmittal and certificates
representing Old Notes should not be sent to the
Company. Such documents should only be sent to
the Exchange Agent. See "The Exchange
Offer--Exchange Agent."
Resales of New Notes....... The Company is making the Exchange Offer in
reliance on the position of the staff of the
Division of Corporation Finance of the Commission
as set forth in certain interpretive letters
addressed to third parties in other transactions.
The Company has not sought its own interpretive
letter and there can be no assurance that the
staff of the Division of Corporation Finance of
the Commission would make a similar determination
with respect to the Exchange Offer as it has in
such interpretive letters to third parties. Based
on these interpretations by the staff of the
Division of Corporation Finance of the Commission,
and subject to the two immediately following
sentences, the Company believes that New Notes
issued pursuant to this Exchange Offer in exchange
for Old Notes may be offered for resale, resold
and otherwise transferred by a holder thereof
(other than a holder who is a broker-dealer)
without further compliance with the registration
and prospectus delivery requirements of the
Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's
business and that such holder is not
participating, and has no arrangement or
understanding with any person to participate, in a
distribution (within the meaning of the Securities
Act) of such New Notes. However, any holder of Old
Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for
the purpose of distributing the New Notes, or any
broker-dealer who purchased the Old Notes from the
Company to resell pursuant to Rule 144A or any
other available exemption under the Securities
Act, (a) will not be able to rely on the
interpretations of the staff of the Division of
Corporation Finance of the Commission set forth in
the above-mentioned interpretive letters, (b) will
not be permitted or entitled to tender such Old
Notes in the Exchange Offer and (c) must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption
from such requirements. In addition, as described
below, if any broker-dealer holds Old Notes
acquired for its own account as a result of
market-making or other trading activities and
exchanges such Old Notes for New
12
Notes, then such broker-dealer must deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resales of
such New Notes.
Each holder of Old Notes who wishes to exchange
Old Notes for New Notes in the Exchange Offer
will be required to represent that (i) it is not
an "affiliate" of the Company, (ii) any New Notes
to be received by it are being acquired in the
ordinary course of its business, (iii) it has no
arrangement or understanding with any person to
participate in a distribution (within the meaning
of the Securities Act) of such New Notes, and
(iv) if such holder is not a broker-dealer, such
holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of
the Securities Act) of such New Notes. Each
broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for
its own account as the result of market-making
activities or other trading activities and must
agree that it will deliver a prospectus meeting
the requirements of the Securities Act in
connection with any resale of such New 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. Based on the position taken by
the staff of the Division of Corporation Finance
of the Commission in the interpretive letters
referred to above, the Company believes that
Participating Broker-Dealers who acquired Old
Notes for their own accounts as a result of
market-making activities or other trading
activities may fulfill their prospectus delivery
requirements with respect to the New Notes
received upon exchange of such Old Notes (other
than Old Notes which represent an unsold
allotment from the original sale of the Old
Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the
prospectus prepared for an exchange offer so long
as it contains a description of the plan of
distribution with respect to the resale of such
New Notes. Accordingly, this Prospectus, as it
may be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in
connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer for
its own account as a result of market-making or
other trading activities. Any Participating
Broker-Dealer who is an "affiliate" of the
Company may not rely on such interpretive letters
and must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. See "The Exchange Offer--Resales of
New Notes."
Exchange Agent............. The exchange agent with respect to the Exchange
Offer is The Bank of New York (the "Exchange
Agent"). The Exchange Agent is also the Trustee
under the Indenture. The addresses, and telephone
and facsimile numbers, of the Exchange Agent
13
are set forth in "The Exchange Offer--Exchange
Agent" and in the Letter of Transmittal.
Use of Proceeds............ The Company will not receive any cash proceeds
from the issuance of the New Notes offered hereby.
See "Use of Proceeds."
United States Federal Income
Tax Considerations........ Holders of Old Notes should review the information
set forth under "United States Federal Income Tax
Considerations" prior to tendering Old Notes in
the Exchange Offer.
SUMMARY OF TERMS OF THE NEW NOTES
The form and terms of the New Notes are the same as the form and terms of
the Old Notes, except that the New Notes will be registered under the
Securities Act and, therefore, will not bear legends restricting their transfer
and generally will not be entitled to registration rights or other rights under
the Registration Rights Agreement. The New Notes will evidence the same debt as
the Old Notes and both the Old Notes and the New Notes are and will be governed
by the same Indenture. For more complete information regarding the New Notes,
including definitions of certain capitalized terms used above, see "Description
of Senior Notes."
Issuer..................... Fine Air Services Corp.
Securities Offered......... $200,000,000 aggregate principal amount of 97/8%
Senior Notes due 2008.
Interest Rate and
Payment Dates.............. The New Notes will bear interest at a rate of
9 7/8% per annum. Interest on the New Notes will
accrue from June 5, 1998 or from the most recent
Interest Payment Date (as defined herein) to which
interest has been paid or provided for on the Old
Notes, payable semiannually in cash in arrears on
June 1 and December 1 of each year, commencing
December 1, 1998.
Maturity Date.............. June 1, 2008.
Ranking.................... The New Notes will be senior unsecured
obligations of the Company and will rank PARI
PASSU in right of payment with all other existing
and future unsecured and unsubordinated
Indebtedness (as defined herein) of the Company
and senior to all existing and future Subordinated
Indebtedness (as defined herein) of the Company.
The Subsidiary Guarantees (as defined herein) will
be senior unsecured obligations of the Subsidiary
Guarantors and will rank PARI PASSU in right of
payment with all other existing and future
unsecured and unsubordinated Indebtedness of the
Subsidiary Guarantors, and senior to all existing
and future Subordinated Indebtedness of the
Subsidiary Guarantors. The New Notes and
Subsidiary Guarantees, however, will be
effectively subordinated to secured Indebtedness
of the Company and the Subsidiary Guarantors with
respect to the assets securing that Indebtedness.
Subject to
14
certain limitations, the Company and its
Subsidiaries (including the Subsidiary
Guarantors) may incur additional Indebtedness in
the future. See "Description of Senior
Notes--Ranking" and "--Certain
Covenants--Limitation on Additional Indebtedness
and Disqualified Capital Stock."
Subsidiary Guarantors...... The New Notes will be fully and unconditionally
guaranteed on a joint and several, senior
unsecured basis by Fine Air, Agro Air and any
future Subsidiary Guarantors (as defined herein).
Optional Redemption........ The Company may, at its option, redeem the New
Notes in whole or from time to time in part, on or
after June 1, 2003, at the redemption prices set
forth herein, together with accrued and unpaid
interest thereon to the date of redemption. At any
time on or prior to June 1, 2001, the Company may
redeem up to 35% of the aggregate principal amount
of Senior Notes originally issued with the net
cash proceeds of one or more Public Equity
Offerings (as defined herein), at a redemption
price equal to 109.875% of the principal amount
thereof, together with accrued and unpaid interest
thereon to the date of redemption, provided that
at least 65% of the aggregate principal amount of
Senior Notes originally issued remains outstanding
immediately after that redemption. See
"Description of Senior Notes--Optional
Redemption."
Change of Control.......... If a Change of Control (as defined herein)
occurs, the Company must make an offer to purchase
all the then-outstanding Senior Notes, and
purchase all such Senior Notes validly tendered
pursuant to such offer, at a purchase price equal
to 101% of the principal amount thereof, together
with accrued and unpaid interest thereon to the
date of purchase. See "Description of Senior
Notes--Certain Covenants--Change of Control."
Certain Covenants.......... The Indenture contains certain covenants,
including covenants that limit (i) incurrence of
certain Indebtedness; (ii) Restricted Payments (as
defined herein); (iii) issuances and sales of
equity interests by Restricted Subsidiaries (as
defined herein); (iv) sale/ leaseback
transactions; (v) transactions with affiliates;
(vi) liens; (vii) asset sales; (viii) dividend
and other payment restrictions affecting
Restricted Subsidiaries; and (ix) mergers,
consolidations and sales of assets. See
"Description of Senior Notes--Certain Covenants"
and "--Merger, Consolidation and Sale of Assets."
RISK FACTORS
See "Risk Factors" beginning on page 17 for a discussion of certain
factors that should be considered by holders in deciding whether to tender Old
Notes in the Exchange Offer.
15
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS)
The balance sheet data set forth below as of December 31, 1994, 1995, 1996
and 1997 and the statement of operations data for each of the years in the
four-year period ended December 31, 1997 have been derived from the Company's
audited consolidated financial statements. The balance sheet data as of
December 31, 1993 and the statement of operations data for the year then ended
have been derived from unaudited financial statements of the Company not
included herein. The balance sheet data as of March 31, 1997 and 1998 and June
30, 1997 and the selected statements of operations data for the three months
ended March 31, 1997 and 1998 and the twelve months ended June 30, 1997 have
been derived from the unaudited consolidated financial statements of the
Company which, in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the information set forth therein. The results of operations
for the three months ended March 31, 1998 are not necessarily indicative of the
results for the full year. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997(1)
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues:
Scheduled cargo services ............... $ -- $ 19,941 $ 40,124 $ 54,775 $ 56,412
ACMI services .......................... 29,025 44,420 35,340 35,520 31,080
Repairs, training and other ............ -- 492 885 3,953 2,502
-------- -------- -------- -------- --------
Total revenues ........................ 29,025 64,853 76,349 94,248 89,994
-------- -------- -------- -------- --------
Total operating expenses ................ 25,136 52,714 64,646 81,040 91,021
-------- -------- -------- -------- --------
Operating income (loss) ................. 3,889 12,139 11,703 13,208 (1,027)
Interest expense ........................ (1,035) (1,111) (985) (966) (1,091)
Interest and other income, net .......... 274 3,170 320 786 2,233
-------- -------- -------- -------- --------
Net income .............................. $ 3,128 $ 14,198 $ 11,038 $ 13,028 $ 115
======== ======== ======== ======== ========
SELECTED FINANCIAL DATA:
EBITDA(2) ............................... $ 6,373 $ 16,969 $ 18,947 $ 23,384 $ 10,843
Depreciation and amortization ........... 2,210 3,887 6,924 9,390 11,470
Capital expenditures .................... 9,714 14,843 15,164 14,108 32,836
OPERATING DATA:
Destinations served (end of period)...... -- 9 21 27 29
Tons of freight transported--
scheduled cargo services ............... -- 32,072 64,906 75,923 68,844
ACMI block hours flown .................. 12,943 15,280 12,068 12,289 10,712
Aircraft in service (end of period) ..... 13 13 14 15 14
BALANCE SHEET DATA (AT PERIOD END):
Working capital ......................... $ 3,917 $ 4,861 $ 9,735 $ 13,710 $ 2,970
Total assets ............................ 29,502 45,313 57,026 65,886 82,846
Total debt .............................. 17,274 13,946 13,129 11,357 30,084
TWELVE THREE MONTHS ENDED
MONTHS ENDED MARCH 31,
JUNE 30, -----------------------
1997(1) 1997 1998
------------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues:
Scheduled cargo services ............... $ 64,636 $ 16,174 $ 17,225
ACMI services .......................... 40,089 9,126 7,511
Repairs, training and other ............ 2,542 626 408
-------- -------- --------
Total revenues ........................ 107,267 25,926 25,144
-------- -------- --------
Total operating expenses ................ 90,135 22,577 24,386
-------- -------- --------
Operating income (loss) ................. 17,132 3,349 758
Interest expense ........................ (902) (225) (655)
Interest and other income, net .......... 436 46 3,586
-------- -------- --------
Net income .............................. $ 16,666 $ 3,170 $ 3,689
======== ======== ========
SELECTED FINANCIAL DATA:
EBITDA(2) ............................... $ 28,230 $ 6,242 $ 4,098
Depreciation and amortization ........... 10,662 2,847 3,143
Capital expenditures .................... 17,190 4,157 6,789
OPERATING DATA:
Destinations served (end of period)...... 29 29 23
Tons of freight transported--
scheduled cargo services ............... 80,384 19,404 21,966
ACMI block hours flown .................. 13,841 3,346 2,686
Aircraft in service (end of period) ..... 15 15 14
BALANCE SHEET DATA (AT PERIOD END):
Working capital ......................... $ 13,829 $ 16,162 $ 2,014
Total assets ............................ 66,236 65,341 85,372
Total debt .............................. 9,323 9,581 29,271
- ----------------
(1) The Company's 1997 results were adversely affected by the temporary
cessation of operations for seven weeks during September and October 1997.
The Company gradually resumed operations during the remainder of 1997. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Recent Results." The twelve months ended June 30, 1997 data
has been presented to illustrate the Company's operating results for the
most recent twelve month period prior to the cessation of operations.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization and non-recurring items. EBITDA is presented
to provide additional information relating to the Company's ability to
service indebtedness. EBITDA is a measure of financial performance not
considered in generally accepted accounting principles and should not be
considered in isolation or as a substitute for other measures of financial
performance or liquidity. Other companies may define EBITDA differently, and
as a result, such measures may not be comparable to the Company's EBITDA.
16
RISK FACTORS
AN INVESTMENT IN THE NEW NOTES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE PURCHASERS OF THE NEW NOTES SHOULD CONSIDER CAREFULLY ALL OF
THE INFORMATION SET FORTH IN THIS PROSPECTUS AND, IN PARTICULAR, THE RISK
FACTORS SET FORTH BELOW BEFORE MAKING AN INVESTMENT IN THE NEW NOTES.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company is highly leveraged and has significant debt service
requirements. At March 31, 1998, on a pro forma basis adjusted for the sale of
the Old Notes and the application of the net proceeds therefrom, the total
consolidated indebtedness of the Company would have been approximately $211
million and the ratio of total consolidated indebtedness to total
capitalization would have been approximately 82%. The degree to which the
Company is leveraged will have important consequences to holders of the Senior
Notes, including: (i) the ability of the Company to obtain additional
financing, whether for working capital, capital expenditures or other purposes,
may be impaired; (ii) a substantial portion of the Company's cash flow from
operations will be required for debt service, thereby reducing funds available
to the Company for its operations; (iii) the Company's flexibility in planning
for or reacting to changes in market conditions may be limited; (iv) the
Company may be more vulnerable upon a downturn in its business; and (v) to the
extent that the Company incurs any indebtedness at variable rates, including
under the Existing Credit Facility (as defined herein), the Company will be
vulnerable to increases in interest rates.
The Company's ability to pay interest and principal on the Senior Notes
and to satisfy its other debt obligations will depend upon its future operating
performance. Future operating performance will be affected by prevailing
economic conditions and financial, business, regulatory and other factors, many
of which are beyond the Company's control. Based on its current level of
operations and anticipated future growth, the Company believes that it will be
able to meet the debt service requirements on its indebtedness, meet its
working capital needs and fund its capital expenditures and other operating
expenses out of cash flow from operations, proceeds of the sale of the Old
Notes and available borrowings under the Existing Credit Facility. However,
there can be no assurance that the Company's business will generate sufficient
cash flow to meet these requirements or that anticipated future growth can be
achieved. If the Company is unable to generate sufficient cash flow from
operations to service its debt obligations and to meet other cash requirements,
it may be required to sell assets, reduce capital expenditures, refinance all
or a portion of its existing debt (including the Senior Notes) or obtain
additional financing. There can be no assurance that any such asset sales or
refinancing would be possible or that any additional financing would be
available on terms acceptable to the Company.
RANKING OF SENIOR NOTES
Although the Old Notes are, and the New Notes will be, senior unsecured
obligations of the Company and rank pari passu in right of payment with all
other existing and future unsecured and unsubordinated indebtedness of the
Company, the Old Notes are, and the New Notes will be, effectively subordinated
to secured indebtedness of the Company, including any amounts that may be
borrowed under the Existing Credit Facility. The Company's indebtedness under
the Existing Credit Facility is secured by substantially all of the Company's
assets and certain of the Company's other indebtedness is secured by aircraft
and other assets. Accordingly, the Senior Notes are effectively subordinated to
the extent of such security interests. Although the Indenture contains limits
on the amount of additional indebtedness that the Company may incur, under
certain circumstances the amount of such indebtedness could be substantial and
may be secured. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of Senior Notes--Ranking," "--Certain Covenants--Limitations on
Additional Indebtedness and Disqualified Capital Stock" and "--Certain
Covenants--Limitation on Liens."
17
DEPENDENCE ON EARNINGS OF SUBSIDIARIES
The Company's ability to repay its indebtedness, including the Senior
Notes, will depend on the earnings of Fine Air and Agro Air and on its ability
to receive funds from Fine Air and Agro Air through dividends, repayment of
intercompany notes or other payments. The ability of Fine Air and Agro Air to
pay dividends, repay intercompany notes or make other advances to the Company
is subject to restrictions imposed by applicable law, tax considerations and
the terms of the Existing Credit Facility.
RESTRICTIONS IMPOSED BY CERTAIN COVENANTS
The Existing Credit Facility and the Indenture contain a number of
significant covenants that, among other things, will restrict the ability of
the Company to dispose of assets, incur additional indebtedness, incur liens on
property or assets, repay other indebtedness, pay dividends, enter into certain
investments or transactions, repurchase or redeem debt or equity securities,
engage in mergers or consolidations or engage in certain transactions with
subsidiaries and affiliates and otherwise restrict business activities. There
can be no assurance that such restrictions will not adversely affect the
Company's ability to finance its future operations or capital needs or engage
in other business activities that may be in the interest of the Company. A
breach of any of these covenants could result in a default under the Existing
Credit Facility. If any such default occurred, the lender under the Existing
Credit Facility could elect to declare the outstanding borrowings under the
Existing Credit Facility, together with accrued interest and other fees, to be
due and payable, and the holders of the Senior Notes could elect to declare the
outstanding principal of the Senior Notes, together with accrued interest, to
be due and payable. If the Company were unable to repay any such borrowings
when due, the lender under the Existing Credit Facility could proceed against
its collateral. If the indebtedness under the Existing Credit Facility or the
Senior Notes were to be accelerated, there can be no assurance that the assets
of the Company would be sufficient to repay such indebtedness in full. Any such
default may have a material adverse effect on the Company's financial condition
and results of operations. See "Description of Existing Credit Facility" and
"Description of Senior Notes."
INTERNATIONAL BUSINESS RISKS
The Company derives a majority of its revenues from providing air cargo
services and ACMI services to South and Central America and the Caribbean. The
risks of doing business in foreign countries include potential adverse changes
in the diplomatic relations of foreign countries with the United States,
hostility from local populations, adverse effects of currency exchange
controls, restrictions on the withdrawal of foreign investment and earnings,
government policies against businesses owned by non-nationals, expropriations
of property, the potential instability of foreign governments and the risk of
insurrections that could result in losses against which the Company is not
insured. The Company's international operations also are subject to economic
uncertainties, including, among others, risks of renegotiation or modification
of existing agreements or arrangements with governmental authorities,
exportation and transportation tariffs, foreign exchange restrictions and
changes in taxation structure. At some foreign airports, the Company is
required by local governmental authorities or market conditions to contract
with third parties for maintenance, ground and cargo handling and other
services. The performance by these third parties of such services is beyond the
Company's control, and any operating difficulties experienced by these third
parties could adversely affect the Company's reputation or business. In
addition, traffic rights to many foreign countries are subject to bilateral air
services agreements between the United States and the foreign countries, are
allocated only to a limited number of U.S. carriers and are subject to approval
by the applicable foreign regulators. Consequently, the Company's ability to
provide air cargo service in some foreign markets depends in part on the
willingness of the U.S. Department of Transportation (the "DOT") to allocate
limited traffic rights to the Company rather than to competing U.S. airlines
and on the approval of the applicable foreign regulators. See
"Business--Government Regulation."
18
GROWTH STRATEGY IMPLEMENTATION; ABILITY TO MANAGE GROWTH
The Company's growth strategy includes (i) increasing its scheduled cargo
services to South and Central America and the Caribbean as well as the possible
expansion of such services to other international markets such as Europe, (ii)
increasing its ACMI services and (iii) possible acquisitions. The Company's
ability to execute its growth strategy will depend on a number of factors,
including existing and emerging competition, the ability to maintain profit
margins in the face of competitive pressures, the continued recruitment,
training and retention of operating employees, the strength of demand for its
services and the availability of capital to support its growth. Expanded
international operations may involve increased costs and risks including those
related to foreign regulation, intensified competition, currency fluctuations
and exchange controls. In addition, future growth may place strains on the
Company's management resources, management information systems and financial
and accounting systems. There can be no assurance that the Company will be
successful in implementing its growth strategy, and the Company's failure to do
so effectively could have a material adverse effect on the Company's financial
condition and results of operations. See "Business--Growth Strategy."
COMPETITION
The air freight industry is highly competitive. The Company's cargo
services compete for cargo volume principally with other all-cargo airlines,
integrated carriers and scheduled and non-scheduled passenger airlines which
have substantial belly cargo capacity. To a lesser extent, the Company's cargo
services also compete for freight forwarding business with fully integrated
carriers, some of which are also customers of the Company. The Company's ACMI
services compete primarily with other airlines that operate all-cargo aircraft
and have lift capacity in excess of their own needs. Many of the Company's
competitors have substantially greater financial and other resources and more
extensive facilities and equipment than the Company. There can be no assurance
that the Company will be able to continue to compete successfully with existing
or new competitors. See "Business--Competition."
CAPITAL INTENSIVE NATURE OF AIRCRAFT OWNERSHIP AND OPERATION
The airline business is highly capital-intensive. The Company has made
significant capital investments to acquire the aircraft, ground and cargo
handling equipment and an inventory of spare parts necessary for the operation
of its business. The Company historically has purchased, and intends to
continue to purchase, used aircraft, which tend to require more maintenance
than newer generation aircraft. Older aircraft tend to be subject to more
Airworthiness Directives ("ADs") promulgated by the FAA than newer aircraft,
and are required to undergo extensive structural inspections on an ongoing
basis. Currently, the Company's fleet consists of a single aircraft type, and
an AD requiring significant modifications to that aircraft type could require
the Company to invest significant additional funds in its aircraft or ground
its fleet pending compliance with the AD. The Company cannot predict when and
whether new ADs covering its aircraft will be promulgated, and there can be no
assurance that compliance with ADs will not adversely affect the Company's
business, financial condition or results of operations. In addition, to satisfy
FAA rules regarding allowable noise levels, prior to December 31, 1999, the
Company must install "hushkits" on its DC-8 aircraft. The Company estimates
that the average cost of such hushkits will be approximately $2.25 million per
aircraft, and that the aggregate cost to the Company to hushkit its 14 DC-8s
and to acquire two spare hushkits will be $36.0 million, approximately $14.0
million of which had been incurred as of March 31, 1998. The Company intends to
purchase hushkits for this purpose from Quiet Technology Venture, Limited
("QTV, Ltd."), a related party, which received a Supplemental Type Certificate,
a certification from the FAA that authorizes the use of a particular process to
perform a major modification to a United States registered aircraft ("STC"),
meeting the FAA's Stage III noise emission requirements for its hushkits on
June 30, 1997. The current STC subjects any aircraft on which the approved
hushkit is installed to certain weight restrictions. Subsequent to receiving
the STC, QTV, Ltd. has improved the hushkit design so that when installed, the
aircraft will be able to carry the maximum cargo capacity (as originally
designed by the manufacturer), while being in compliance with FAA noise level
requirements. The modified hushkit
19
design is in final phases of the testing process. Management anticipates that
QTV, Ltd. will receive an additional STC for the upgraded hushkit model during
the third quarter of 1998 although there can be no assurance that this will
occur. Management has not determined the financial impact, if any, to the
Company should its aircraft be limited with respect to cargo capacity. See
"Certain Transactions." There can be no assurance that the costs of acquiring
and installing hushkits on the Company's aircraft will not exceed management's
estimates or that the installation can be completed on a timely basis. See
"Business--Government Regulation."
AVAILABILITY OF ADDITIONAL AIRCRAFT AND AIRCRAFT PARTS
The Company's growth strategy depends in large part upon its ability to
acquire additional aircraft to increase its lift capacity. The Company's
strategy has been to acquire used aircraft that formerly were in passenger
service and to convert such aircraft to cargo use. The market for used aircraft
can be affected by a number of factors, including increased demand from other
cargo carriers, which could limit the number of available aircraft and increase
the acquisition cost thereof. Certain parts and components required for the
operation of the Company's existing aircraft may not be readily available in
the marketplace when the Company requires them, and the inability of the
Company to obtain necessary components or parts in a timely manner could
adversely affect the Company's operations. There can also be no assurance that
any aircraft acquired in passenger configuration can be converted to cargo
configuration on a timely basis. See "Business--Growth Strategy."
CYCLICAL NATURE OF AIR FREIGHT INDUSTRY; SEASONALITY AND FLUCTUATIONS IN
QUARTERLY RESULTS
The air freight industry is highly sensitive to general economic and
political conditions, and the results of operations and financial condition of
air cargo carriers such as the Company can be adversely affected by economic
downturns in global or regional economies that result in decreased demand for
air freight transportation. Any prolonged general reduction in the world air
freight market could have a material adverse effect on the Company's growth or
financial performance. The Company's business has been, and is expected to
continue to be, seasonal in nature, with a majority of the Company's revenues
and operating income falling in the second half of the year (principally the
fourth quarter). The Company's fourth quarter revenues and operating income are
typically higher due to an increase in cargo transported in anticipation of and
during the holiday season. An interruption in the Company's operations during
this period due to unanticipated maintenance, compliance with ADs, severe
weather or other factors beyond the Company's control could have a material
adverse effect on the Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality."
COST AND AVAILABILITY OF FUEL
Fuel is a major expense for all airlines, and the cost and availability of
aviation fuel are subject to economic and political factors and events which
the Company can neither control nor accurately predict. Higher fuel prices
resulting from fuel shortages or other factors could adversely affect the
Company's profitability if the Company is unable to pass on the full amount of
fuel price increases to its customers through fuel surcharges or higher rates.
In addition, a shortage of supply could have a material adverse effect on the
air freight industry in general and the financial condition and results of
operations of the Company. See "Business--Aircraft Fleet--Fuel."
CONTRABAND RISK
Customers may not inform the Company, despite the requirement to do so,
when their cargo includes hazardous materials. In addition, the Company's own
checks and searches for hazardous materials, weapons, explosive devices and
illegal freight may not reveal the presence of such materials or substances in
its customers' cargo. The transportation of unmanifested hazardous materials or
of contraband could result in fines, penalties, flight bans or possible damage
to the Company's aircraft. In one such instance, the government of Peru has
alleged that the Company supplied a chartered aircraft,
20
which transported weapons to Ecuador in February 1995 during the Ecuador-Peru
conflict, and has revoked the Company's right to fly commercially into Peru.
The particular flight at issue was a chartered aircraft, and the Company denies
any wrongdoing. The FAA found after an investigation of the matter that there
was not sufficient evidence to support a conclusion that the Company violated
regulations governing the transportation of hazardous materials by air.
However, the Company continues to be subject to the Peruvian flight ban and is
unable to predict when this ban will be lifted. There can be no assurance the
Company will not be subject to fines, penalties or flight bans in the future,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Security and
Safety."
DEPENDENCE UPON MANAGEMENT AND KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
services of J. Frank Fine and Barry H. Fine, as well as the Company's ability
to retain other members of the Company's senior management team and key
personnel. The Company does not have employment agreements with either Frank or
Barry Fine and does not maintain "key man" life insurance. The loss of services
of Messrs. Frank or Barry Fine or certain other officers or key personnel could
have a material adverse effect on the Company's results of operations and its
future prospects. See "Management."
EMPLOYEE RELATIONS
Many airline industry employees are represented by labor unions. The
Company's employees have been subject to union organization efforts from time
to time, and the Company is likely to be subject to future unionization efforts
as its operations expand. On October 3, 1997, the International Brotherhood of
Teamsters (the "Teamsters") was certified to represent the Company's Flight
Deck Crew Members for collective bargaining purposes. Although the Teamsters
has been certified by the National Mediation Board, negotiations regarding a
collective bargaining agreement have only recently commenced. The unionization
of the Company's workforce could result in higher employee compensation and
working condition demands that could increase the Company's operating costs or
constrain its operating flexibility. See "Business--Employees."
GOVERNMENT REGULATION
The Company is subject to extensive government regulation under U.S. laws
and the laws of the various countries which it serves as well as bilateral and
multilateral agreements between the United States and foreign governments. The
Company is subject to the jurisdiction of the FAA with respect to aircraft
maintenance and operations and other matters affecting air safety. The FAA has
the authority to suspend temporarily or revoke permanently the authority of the
Company or its licensed personnel for failure to comply with FAA regulations
and to assess civil penalties for such failures. The DOT and FAA have authority
under the Aviation Safety Noise Abatement Act of 1979, as amended, and under
the Airport Noise and Capacity Act of 1990 ("ANCA") to monitor and regulate
aircraft engine noise and exhaust emissions. ANCA requires the elimination of
Stage II aircraft, pursuant to which airlines such as the Company must bring
their fleets into compliance with certain FAA Stage III noise emissions
standards in the contiguous 48 states by December 31, 1999. The FAA has
promulgated under the ANCA regulations establishing interim compliance dates
and phase-out requirements. The Company must currently have at least 50% of its
fleet in compliance with the FAA's Stage III noise level requirements.
Seventy-five percent of the Company's fleet must be in compliance by December
31, 1998, and the Company's entire fleet must be in full compliance by December
31, 1999. In order to meet the FAA's Stage III requirements, the Company
currently intends to install hushkits on between six and eight of its aircraft
in 1998 and the balance by December 31, 1999. The Company intends to purchase
hushkits for this purpose from a related party. See "Certain Transactions." The
Company estimates that the average cost of such hushkits will be approximately
$2.25 million per aircraft, and that the aggregate cost to the Company to
hushkit its 14 DC-8s and to acquire two spare hushkits will be $36.0 million,
of which approximately $14.0 million had been incurred as of March 31, 1998. To
date, however, the Company has not installed hushkits on any of its aircraft,
and has met the Stage III requirements
21
applicable to it through interchange agreements with other carriers. Pursuant
to such interchange agreements and under current rules promulgated by the FAA,
the Company leases aircraft that meet the Stage III standards from these other
carriers, which has allowed the Company to comply with the FAA's Stage III
requirements. The Company is capable and has the authority, right and approval
from the FAA to operate, under such interchange agreements, third party
aircraft. The Company's current interchange agreement expires in late December
1998 and the Company's ability to continue to meet Stage III requirements
through interchange agreements will depend upon its ability to renew such
agreement or enter into new interchange agreements with other airlines. There
can be no assurance that the FAA will continue to permit or recognize the
validity of such interchange agreements. The Company must also remain "fit"
under applicable DOT regulations governing, among other things, air carriers'
financial health, record of compliance with DOT regulations and U.S.
citizenship requirements. The FAA also exercises regulatory jurisdiction over
the transportation of hazardous materials. To provide scheduled service to
foreign countries, the Company must obtain permission for such operations from
both the DOT and the applicable foreign government authorities and comply with
all applicable rules and regulations imposed by these foreign government
authorities.
The failure of the Company or its employees to comply with applicable
government regulations could subject the Company to substantial fines or
penalties or could result in the suspension or loss of the Company's licenses,
permits or authority to operate its aircraft or routes. In 1991, Agro Air paid
approximately $107,000 in penalties and signed a consent order with the DOT,
agreeing that Agro Air was able to lease aircraft and to provide maintenance
and insurance, but not to lease or provide aircraft crews to third parties.
This consent order has not adversely impacted the Company's operations and the
Company has been able to provide ACMI services to third parties. In March 1997,
the Company agreed to settle with the FAA and pay civil penalties in the amount
of $30,000 for violation of the Federal Aviation Regulations for failing to
properly document certain training of some of its crew members.
Following the August 7, 1997 crash of one of the Company's aircraft, the
Company's operations were placed under heightened scrutiny by the FAA. As a
result of concerns expressed by the FAA, the Company voluntarily ceased
operations on September 4, 1997, and on September 12, 1997 the Company entered
into the Consent Agreement. As part of the Consent Agreement, the Company
agreed not to resume operations until the FAA approved new cargo handling and
hazardous materials procedures to be implemented by the Company. Under the
Consent Agreement, the Company agreed to make a remedial payment of $1.5
million to the FAA for the costs of the FAA's investigation, review and
re-inspection of the Company. Pursuant to the Consent Agreement, $500,000 of
this assessment was waived as a result of the Company's compliance with certain
requirements prior to December 31, 1997. The Company resumed operations on a
limited basis on October 28, 1997, approximately seven weeks after suspending
operations. The Company is in full compliance with the terms of the Consent
Agreement.
Before the Company can operate a new aircraft type, including the L-1011
it owns, it must demonstrate to the FAA that it can safely operate and maintain
the aircraft. This includes the preparation by the Company of detailed
operational, training and maintenance manuals which must be accepted by the
FAA. Furthermore, the Company must demonstrate that it can implement and comply
with such manuals, properly train its crews and successfully operate proving
flights for the FAA before introducing the new aircraft type into revenue
service. There can be no assurance that the FAA will certify the Company for
operation of any new aircraft types the Company may seek to operate, including
the L-1011 aircraft the Company is currently seeking certification to operate.
In addition to the foregoing, the adoption of new laws, policies, or
regulations, amendments to existing laws or regulations, including ANCA, or
changes in the interpretation or application of existing laws, policies or
regulations, whether by the FAA, the DOT, the U.S. government or any foreign,
state or local government to whose authority the Company is subject could have
a material adverse impact on the Company and its operations. See
"Business--Government Regulation."
22
UNINSURED LOSSES; COST OF INSURANCE
The Company is subject to potential losses as a result of third party
claims arising from accidents involving the Company's aircraft or an aircraft
that the Company has repaired or maintained. Substantial claims resulting from
such an accident could exceed the Company's policy limits and have a material
adverse effect on the business, financial condition and results of operations
of the Company. Aviation insurance premiums historically have fluctuated based
on factors that include the loss history of the industry in general and the
insured carrier, and the ability of the Company to maintain adequate insurance
coverage on economical terms could be adversely affected by general industry
conditions or losses incurred by the Company.
CHANGE OF CONTROL
Upon a Change of Control (as defined herein), the Company must make an
offer to purchase all the then outstanding Senior Notes, and purchase all such
Senior Notes validly tendered pursuant to such offer, at a purchase price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest
thereon to the date of purchase. There can be no assurance that the Company
will have sufficient funds available or will be permitted by its other debt
agreements to purchase the Senior Notes upon the occurrence of a Change of
Control. In addition, a Change of Control may cause a default under the
Existing Credit Facility. The inability to purchase all of the tendered Senior
Notes would constitute an Event of Default (as defined herein) under the
Indenture. See "Description of Senior Notes--Change of Control."
CONTROLLING STOCKHOLDERS
Frank and Barry Fine beneficially own all of the outstanding voting stock
of the Company and, by virtue of such stock ownership, have the power to
control all matters submitted to the stockholders of the Company and to elect
all directors of the Company. The interests of Frank and Barry Fine as equity
holders may differ from the interests of the holders of the Senior Notes. See
"Ownership" and "Certain Transactions."
ABSENCE OF PUBLIC MARKET FOR NOTES
The Old Notes have not been registered under the Securities Act or any
state securities law and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and any applicable state
securities laws.
Although the New Notes may be resold or otherwise transferred by the
holders thereof (who are not affiliates of the Company) without compliance with
the registration requirements under the Securities Act, they will be new
securities for which there is currently no established trading market. The
Company does not intend to apply for listing of the New Notes on a national
securities exchange or for quotation of the New Notes on an automated dealer
quotation system. Although the Initial Purchaser has informed the Company that
it currently intends to make a market in the New Notes, it is not obligated to
do so, and any such market-making, if initiated, may be discontinued at any
time without notice. The liquidity of any market for the New Notes will depend
upon the number of holders of the Notes, the interest of securities dealers in
making a market in the New Notes and other factors. Accordingly, there can be
no assurance as to the development or liquidity of any market for the New
Notes. If an active trading market for the New Notes does not develop, the
market price and liquidity of the New Notes may be adversely affected. If the
New Notes are traded, they may trade at a discount from their face value,
depending upon prevailing interest rates, the market for similar securities,
the performance of the Company and certain other factors. The liquidity of, and
trading markets for, the New Notes may also be adversely affected by general
declines in the market for non-investment grade debt. Such declines may
adversely affect the liquidity of, and trading markets for, the New Notes
independent of the financial performance of, or prospects for, the Company.
23
Notwithstanding the registration of the New Notes in the Exchange Offer,
holders who are "affiliates" (as defined under Rule 405 of the Securities Act)
of the Company may publicly offer for sale or resell the New Notes only in
compliance with provisions of Rule 144 under the Securities Act.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the New Notes. There can be no assurance that the market, if any,
for the New Notes will not be subject to similar disruptions. Any such
disruptions may have an adverse effect on the holders of the New Notes.
CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case
in compliance with certain other conditions and restrictions. Old Notes which
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement (subject to certain limited exceptions). The
Company does not intend to register under the Securities Act any Old Notes
which remain outstanding after consummation of the Exchange Offer (subject to
such limited exceptions, if applicable). To the extent that Old Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Notes could be adversely affected.
The New Notes and any Old Notes which remain outstanding after
consummation of the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding principal amount thereof have taken certain actions or exercised
certain rights under the Indenture.
EXCHANGE OFFER PROCEDURES
Subject to the conditions set forth under "The Exchange Offer--Conditions
to the Exchange Offer," delivery of New Notes in exchange for Old Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of (i) certificates for Old
Notes or a book-entry confirmation of a book-entry transfer of Old Notes into
the Exchange Agent's account at DTC, including an Agent's Message (as defined
under "The Exchange Offer--Acceptance for Exchange and Issuance of New Notes")
if the tendering holder does not deliver a Letter of Transmittal, (ii) a
completed and signed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees or, in the case of a book-entry transfer, an
Agent's Message in lieu of the Letter of Transmittal, and (iii) any other
documents required by the Letter of Transmittal. Therefore, holders of Old
Notes desiring to tender such Old Notes in exchange for New Notes should allow
sufficient time to ensure timely delivery. The Company is not under a duty to
give notification of defects or irregularities with respect to the tenders of
Old Notes for exchange.
FRAUDULENT CONVEYANCE; UNENFORCEABILITY OF SUBSIDIARY GUARANTEES
The Company believes that the indebtedness represented by the Subsidiary
Guarantees was incurred for proper purposes and in good faith and the
Subsidiary Guarantors are, and at the time of the consummation of the sale of
the Old Notes were, solvent, have sufficient capital for carrying on their
businesses and are able to pay their debts as they mature. If a court of
competent jurisdiction in a suit by a creditor or representative of creditors
of a Subsidiary Guarantor (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that, at the time of the incurrence of the
indebtedness represented by a Subsidiary Guarantee, such Subsidiary Guarantor
was insolvent, was rendered insolvent by reason of the incurrence of such
guarantee, was engaged in a business or
24
transaction for which its remaining assets constituted unreasonably small
capital, intended to incur, or believes that it would incur, debts beyond its
ability to pay such debts as they matured, or intended to hinder, delay or
defraud its creditors, and that the indebtedness was incurred for less than
fair consideration or reasonably equivalent value, then such court could, among
other things, (i) void all or a portion of such Subsidiary Guarantor's
obligations to the holders of the Senior Notes, the effect of which could be
that the holders of the Senior Notes may not be repaid in full and/or (ii)
subordinate such Subsidiary Guarantor's obligations to the holders of the
Senior Notes to other existing and future indebtedness of such Subsidiary
Guarantor, the effect of which would be to entitle such other creditors to be
paid in full before any payment could be made on the Senior Notes. See
"Description of Senior Notes--Subsidiary Guarantees."
25
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Company and the
Subsidiary Guarantors entered into the Registration Rights Agreement with the
Initial Purchaser, pursuant to which the Company agreed to file and to use its
commercially reasonable efforts to cause to become effective with the
Commission a registration statement with respect to the exchange of the Old
Notes for notes with terms identical in all material respects to the terms of
the Old Notes. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part, and
the description of the terms of the Registration Rights Agreement is qualified
in its entirety by reference thereto.
The Exchange Offer is being made to satisfy the contractual obligations of
the Company under the Registration Rights Agreement. The form and terms of the
New Notes are the same as the form and terms of the Old Notes except that the
New Notes have been registered under the Securities Act and will not provide
for any increase in the interest rate thereon. In that regard, the Old Notes
provide, among other things, that, if a registration statement relating to the
Exchange Offer has not been filed by August 3, 1998 and declared effective by
November 2, 1998, increased cash interest ("Liquidated Damages") will be
payable on the Old Notes. Upon consummation of the Exchange Offer, holders of
Old Notes will not be entitled to any Liquidated Damages thereon or any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. See "Risk Factors--Consequences of a Failure to Exchange
Old Notes."
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Old Notes in any jurisdiction in which
the Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Old Notes are registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any person whose Old Notes
are held of record by The Depository Trust Company ("DTC") who desires to
deliver such Old Notes by book-entry transfer at DTC.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $200,000,000 aggregate principal amount of New Notes for a like
aggregate principal amount of Old Notes properly tendered on or prior to the
Expiration Date and not properly withdrawn in accordance with the procedures
described below. The Company will issue, promptly after the Expiration Date, an
aggregate principal amount of up to $200,000,000 of New Notes in exchange for a
like principal amount of outstanding Old Notes tendered and accepted in
connection with the Exchange Offer. Holders may tender their Old Notes in whole
or in part in denominations of $1,000 or any integral multiple thereof.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered. As of the date of this Prospectus, $200,000,000
aggregate principal amount of the Old Notes are outstanding.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for or are
tendered but not accepted in connection with the Exchange Offer will remain
outstanding and be entitled to the benefits of the Indenture, but will not be
entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Risk Factors--Consequences
of a Failure to Exchange Old Notes."
26
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
Holders who tender Old Notes in connection with the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Old Notes in connection with the Exchange Offer. The Company will
pay all charges and expenses, other than certain applicable taxes described
below, in connection with the Exchange Offer. See "--Fees and Expenses."
NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS OF THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION.
HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER PURSUANT
TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER
BASED ON SUCH HOLDERS OWN FINANCIAL POSITIONS AND REQUIREMENTS.
The term "Expiration Date" means 5:00 p.m., New York City time, on
, 1998 unless the Exchange Offer is extended by the Company (in which case
the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i)
to delay the acceptance of the Old Notes for exchange, (ii) to terminate the
Exchange Offer (whether or not any Old Notes have theretofore been accepted for
exchange) if the Company determines, in its sole and absolute discretion, that
any of the events or conditions referred to under "--Conditions to the Exchange
Offer" have occurred or exist or have not been satisfied, (iii) to extend the
Expiration Date of the Exchange Offer and retain all Old Notes tendered
pursuant to the Exchange Offer, subject, however, to the right of holders of
Old Notes to withdraw their tendered Old Notes as described under "--Withdrawal
Rights," and (iv) to waive any condition or otherwise amend the terms of the
Exchange Offer in any respect. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, or if the Company
waives a material condition of the Exchange Offer, the Company will promptly
disclose such amendment by means of a prospectus supplement that will be
distributed to the holders of the Old Notes, and the Company will extend the
Exchange Offer to the extent required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and
by making a public announcement thereof, and such announcement in the case of
an extension will be made no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. Without
limiting the manner in which the Company may choose to make any public
announcement and subject to applicable law, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, New Notes for Old
Notes validly tendered and not withdrawn (pursuant to the withdrawal rights
described under "--Withdrawal Rights") promptly after the Expiration Date.
Subject to the conditions set forth under "--Conditions to the Exchange
Offer," delivery of New Notes in exchange for Old Notes tendered and accepted
for exchange pursuant to the Exchange Offer
27
will be made only after timely receipt by the Exchange Agent of (i)
certificates for Old Notes or a book-entry confirmation of a book-entry
transfer of Old Notes into the Exchange Agent's account at DTC, including an
Agent's Message if the tendering holder does not deliver a Letter of
Transmittal, (ii) a completed and signed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees, or, in the case of a
book-entry transfer, an Agent's Message in lieu of the Letter of Transmittal,
and (iii) any other documents required by the Letter of Transmittal.
Accordingly, the delivery of New Notes might not be made to all tendering
holders at the same time, and will depend upon when certificates for Old Notes,
book-entry confirmations with respect to Old Notes and other required documents
are received by the Exchange Agent.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC. See
"--Procedures for Tendering Old Notes; Book-Entry Transfer." The term "Agent's
Message" means a message transmitted by DTC to and received by the Exchange
Agent and forming a part of a book-entry confirmation, which states that DTC
has received an express acknowledgment from the tendering participant, which
acknowledgment states that such participant has received and agrees to be bound
by the Letter of Transmittal and that the Company may enforce such Letter of
Transmittal against such participant.
Subject to the terms and conditions of the Exchange Offer, the Company
will be deemed to have accepted for exchange, and thereby exchanged, Old Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent of the Company's acceptance of such Old
Notes for exchange pursuant to the Exchange Offer. The Exchange Agent will act
as agent for the Company for the purpose of receiving tenders of Old Notes,
Letters of Transmittal and related documents, and as agent for tendering
holders for the purpose of receiving Old Notes, Letters of Transmittal and
related documents and transmitting New Notes to validly tendering holders. Such
exchange will be made promptly after the Expiration Date. If for any reason
whatsoever, acceptance for exchange or the exchange of any Old Notes tendered
pursuant to the Exchange Offer is delayed (whether before or after the
Company's acceptance for exchange of Old Notes) or the Company extends the
Exchange Offer or is unable to accept for exchange or exchange Old Notes
tendered pursuant to the Exchange Offer, then, without prejudice to the
Company's rights set forth herein, the Exchange Agent may, nevertheless, on
behalf of the Company and subject to Rule 14e-1(c) under the Exchange Act,
retain tendered Old Notes and such Old Notes may not be withdrawn except to the
extent tendering holders are entitled to withdrawal rights as described under
"--Withdrawal Rights."
Pursuant to the Letter of Transmittal, or the Agent's Message, as the case
may be, a holder of Old Notes will warrant and agree in the Letter of
Transmittal or pursuant to the Agent's Message that it has full power and
authority to tender, exchange, sell, assign and transfer Old Notes, that the
Company will acquire good, marketable and unencumbered title to the tendered
Old Notes, free and clear of all liens, restrictions, charges and encumbrances,
and the Old Notes tendered for exchange are not subject to any adverse claims
or proxies. The holder also will warrant and agree that it will, upon request,
execute and deliver any additional documents deemed by the Company or the
Exchange Agent to be necessary or desirable to complete the exchange, sale,
assignment, and transfer of the Old Notes tendered pursuant to the Exchange
Offer.
PROCEDURES FOR TENDERING OLD NOTES
VALID TENDER
Except as set forth below, in order for Old Notes to be validly tendered
by book-entry transfer, an Agent's Message or a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
in either case any other documents required by the Letter of Transmittal, must
be delivered to the Exchange Agent by mail, facsimile, hand delivery or
overnight carrier at one of the Exchange Agent's addresses set forth under
"--Exchange Agent" on or prior to the Expiration Date and either (i) such Old
Notes must be tendered pursuant to the procedures for book-entry transfer set
forth below or (ii) the guaranteed delivery procedures set forth below must be
complied with.
28
Except as set forth below, in order for Old Notes to be validly tendered
by a means other than by book-entry transfer, a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other documents required by the Letter of Transmittal, must be delivered to
the Exchange Agent by mail, facsimile, hand delivery or overnight carrier at
one of the Exchange Agent's addresses set forth under "--Exchange Agent" on or
prior to the Expiration Date and either (i) such Old Notes must be delivered to
the Exchange Agent on or prior to the Expiration Date or (ii) guaranteed
delivery procedures set forth below must be complied with.
If less than all of the Old Notes are tendered, a tendering holder should
fill in the amount of Old Notes being tendered in the appropriate box on the
Letter of Transmittal. The entire amount of Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
BOOK-ENTRY TRANSFER
The Exchange Agent and DTC have confirmed that any Direct Participant (as
defined in "Description of Senior Notes--Book-Entry, Delivery and Form") in
DTC's book-entry transfer facility system may utilize DTC's book-entry
procedures to tender Old Notes. The Exchange Agent will establish an account
with respect to the Old Notes at DTC for purposes of the Exchange Offer within
two business days after the date of this Prospectus. Any Direct Participant may
make a book-entry delivery of the Old Notes by causing DTC to transfer such Old
Notes into the Exchange Agent's account at DTC in accordance with DTC's ATOP
procedures for transfer. However, although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
an Agent's Message or a completed and signed Letter of Transmittal (or
facsimile thereof), with any required signature guarantees and any other
documents required by the Letter of Transmittal must in any case be delivered
to and received by the Exchange Agent at one of its addresses set forth under
"--Exchange Agent" on or prior to the Expiration Date, or the guaranteed
delivery procedure set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
SIGNATURE GUARANTEES
Certificates for the Old Notes need not be endorsed and signature
guarantees on the Letter of Transmittal are unnecessary unless (a) a
certificate for the Old Notes is registered in a name other than that of the
person surrendering the certificate or (b) such holder completes the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" in
the Letter of Transmittal. In the case of (a) or (b) above, such certificates
for Old Notes must be duly endorsed or accompanied by a properly executed bond
power, with the endorsement or signature on the bond power and on the Letter of
Transmittal guaranteed by a firm or other entity identified in Rule 17Ad-15
under the Exchange Act as an "eligible guarantor institution," including (as
such terms are defined therein): (i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association (an "Eligible Institution"),
unless surrendered on behalf of such Eligible Institution. See Instruction 1 to
the Letter of Transmittal.
29
GUARANTEED DELIVERY
If a holder desires to tender Old Notes pursuant to the Exchange Offer and
the certificates for such Old Notes are not immediately available or time will
not permit all required documents to reach the Exchange Agent on or prior to
the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, such Old Notes may nevertheless be tendered,
provided that all of the following guaranteed delivery procedures are complied
with:
(a) such tenders are made by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form accompanying the Letter of Transmittal, is received
by the Exchange Agent, as provided below, on or prior to the Expiration Date;
and
(c) the certificates (or a book-entry confirmation) representing all
tendered Old Notes, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal (or 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, are received by the
Exchange Agent within three New York Stock Exchange trading days after the date
of execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of New Notes in
exchange for Old Notes tendered and accepted for exchange pursuant to the
Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of Old Notes, or of a book-entry confirmation with respect to
such Old Notes, and a properly completed and duly executed Letter of
Transmittal (or facsimile thereof), or an Agent's Message in lieu thereof,
together with any required signature guarantees and any other documents
required by the Letter of Transmittal. Accordingly, the delivery of New Notes
might not be made to all tendering holders at the same time, and will depend
upon when Old Notes, book-entry confirmations with respect to Old Notes and
other required documents are received by the Exchange Agent.
The Company's acceptance for exchange of Old Notes tendered pursuant to
any of the procedures described above will constitute a binding agreement
between the tendering holder and the Company upon the terms and subject to the
conditions of the Exchange Offer.
DETERMINATION OF VALIDITY
All questions as to the form of documents, validity, eligibility
(including time of receipt) and acceptance for exchange of any tendered Old
Notes will be determined by the Company, in its sole discretion, whose
determination shall be final and binding on all parties. The Company reserves
the absolute right, in its sole and absolute discretion, to reject any and all
tenders determined by it not to be in proper form or the acceptance of which,
or exchange for, may, in the opinion of counsel to the Company, be unlawful.
The Company also reserves the absolute right, subject to applicable law, to
waive any of the conditions of the Exchange Offer as set forth under
"--Conditions to the Exchange Offer" or any condition or irregularity in any
tender of Old Notes of any particular holder whether or not similar conditions
or irregularities are waived in the case of other holders.
The interpretation by the Company of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding. No tender of Old Notes will be deemed to
have been validly made until all irregularities with respect to such tender
have been cured or waived. Neither the Company, any affiliates or assigns of
the Company, the Exchange Agent
30
nor any other person shall be under any duty to give any notification of any
irregularities in tenders or incur any liability for failure to give any such
notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company,
proper evidence satisfactory to the Company, in its sole discretion, of such
person's authority to so act must be submitted.
A beneficial owner of Old Notes that are held by or registered in the name
of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
RESALES OF NEW NOTES
The Company is making the Exchange Offer for the New Notes in reliance on
the position of the staff of the Division of Corporation Finance of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter and there can be no assurance that the staff of the
Division of Corporation Finance of the Commission would make a similar
determination with respect to the Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the staff of the
Division of Corporation Finance of the Commission, and subject to the two
immediately following sentences, the Company believes that New Notes issued
pursuant to this Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of such New Notes. However, any holder of Old Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing New Notes, or any broker-dealer who purchased
Old Notes from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, (a) will not be able to rely on
the interpretations of the staff of the Division of Corporation Finance of the
Commission set forth in the above-mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Old Notes in the Exchange Offer and (c)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption from such requirements. In
addition, as described below, if any broker-dealer holds Old Notes acquired for
its own account as a result of market-making or other trading activities and
exchanges such Old Notes for New Notes, then such broker-dealer must deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is
not a broker-dealer, such holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of the Securities Act) of such
New Notes. In addition, the Company may require such holder, as a condition to
such holder's eligibility to participate in the Exchange Offer, to furnish to
the Company (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Exchange Act)
on behalf of whom such holder holds the Notes to be exchanged in the Exchange
Offer. Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it acquired the Old Notes for its
own account as the result of market-making activities or other trading
activities and must agree that it will deliver a prospectus meeting the
requirements of
31
the Securities Act in connection with any resale of such New 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. Based on the position taken by the staff of
the Division of Corporation Finance of the Commission in the interpretive
letters referred to above, the Company believes that Participating
Broker-Dealers who acquired Old Notes for their own accounts as a result of
market-making activities or other trading activities may fulfill their
prospectus delivery requirements with respect to the New Notes received upon
exchange of such Old Notes (other than Old Notes which represent an unsold
allotment from the original sale of the Old Notes) with a prospectus meeting
the requirements of the Securities Act, which may be the prospectus prepared
for an exchange offer so long as it contains a description of the plan of
distribution with respect to the resale of such New Notes. Accordingly, this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer during the period referred to below in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such Participating Broker-Dealer for its own
account as a result of market-making or other trading activities. A
Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of New Notes received in exchange for Old Notes pursuant to the
Exchange Offer must notify the Company, or cause the Company to be notified, on
or prior to the Expiration Date, that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that purpose in the Letter of
Transmittal or may be delivered to the Exchange Agent at one of the addresses
set forth herein under "--Exchange Agent." Any Participating Broker-Dealer who
is an "affiliate" of the Company may not rely on such interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any
material respect or which causes this Prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference herein, in light of the circumstances under which they were made, not
misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Participating Broker-Dealer will suspend
the sale of New Notes pursuant to this Prospectus until the Company has amended
or supplemented this Prospectus to correct such misstatement or omission and
has furnished copies of the amended or supplemented Prospectus to such
Participating Broker-Dealer or the Company has given notice that the sale of
the New Notes may be resumed, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth under "--Exchange Agent"
on or prior to the Expiration Date. Any such notice of withdrawal must specify
the name of the person who tendered the Old Notes to be withdrawn, the
aggregate principal amount of Old Notes to be withdrawn, and (if certificates
for such Old Notes have been tendered) the name of the registered holder of the
Old Notes as set forth on the Old Notes, if different from that of the person
who tendered such Old Notes. If Old Notes have been delivered or otherwise
identified to the Exchange Agent, then prior to the physical release of such
Old Notes, the tendering holder must submit the serial numbers shown on the
particular Old Notes to be withdrawn and the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution, except in the case of
Old Notes tendered for the account of an Eligible Institution. If Old Notes
have been tendered pursuant to the procedures for book-entry transfer set forth
in "--Procedures for Tendering Old Notes," the notice of withdrawal must
specify the name and number of the account at DTC to be credited with the
withdrawal of Old Notes, in which case a notice of withdrawal will be effective
if delivered to the
32
Exchange Agent by written, telegraphic or facsimile transmission. Withdrawals
of tenders of Old Notes may not be rescinded. Old Notes properly withdrawn will
not be deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described above under "--Procedures for
Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliate or assign of the Company, the Exchange Agent
nor any other person shall be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure
to give any such notification. Any Old Notes which have been tendered but which
are withdrawn will be returned to the holder thereof promptly after withdrawal.
INTEREST ON NEW NOTES
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive interest on such Old Notes and will be deemed to have waived the right
to receive any interest on such Old Notes accrued from and after June 5, 1998
or from the most recent Interest Payment Date to which interest has been paid
or provided for on the Old Notes. Accordingly, such holders of Old Notes as of
the record date for the next succeeding Interest Payment Date will be entitled
to receive interest on the New Notes issued in exchange therefor accrued from
and after June 5, 1998 or from the most recent Interest Payment Date to which
interest has been paid or provided for on the Old Notes.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for any New Notes, and, as described
below, may terminate the Exchange Offer (whether or not any Old Notes have
theretofore been accepted for exchange) or may waive any conditions to or amend
the Exchange Offer, if any of the following conditions have occurred or exist
or have not been satisfied:
(a) there shall occur a change in the current interpretation by the staff
of the Commission which permits the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes to be offered for resale, resold and otherwise
transferred by holders thereof (other than broker-dealers and any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangement or understanding with any person to participate in the
distribution of such New Notes; or
(b) any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of the Company, would reasonably be expected to
impair its ability to proceed with the Exchange Offer; or
(c) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration Statement
or proceedings shall have been initiated or, to the knowledge of the Company,
threatened for that purpose or any governmental approval has not been obtained,
which approval the Company shall, in its sole discretion, deem necessary for
the consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, it may, subject to applicable law, terminate the Exchange Offer
(whether or not any Old Notes have theretofore been accepted for exchange) or
may waive any such condition or otherwise amend the terms of the Exchange Offer
in any respect. If
33
such waiver or amendment constitutes a material change to the Exchange Offer,
the Company will promptly disclose such waiver or amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
Old Notes and will extend the Exchange Offer to the extent required by Rule
14e-1 under the Exchange Act.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Delivery of the Letters of Transmittal and any other required documents,
questions, requests for assistance, and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent as follows:
BY MAIL: BY OVERNIGHT DELIVERY OR HAND:
The Bank of New York The Bank of New York
101 Barclay Street, 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Attention: Reorganization Section Ground Level
(Registered or Certified Mail Recommended) New York, New York 10286
Attention: Reorganization Section
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(212) 815-6337
FACSIMILE TRANSMISSIONS:
(212) 815-6339
(Eligible Institutions Only)
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Prospectus and related
documents to the beneficial owners of Old Notes, and in handling or tendering
for their customers.
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, New Notes are to
be delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if a transfer tax is imposed
for any reason other than the exchange of Old Notes in connection with the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
The Company will not make any payment to brokers, dealers or other
nominees soliciting acceptances of the Exchange Offer.
34
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
For U.S. federal income tax purposes, the exchange of Old Notes for New
Notes pursuant to the Exchange Offer should not be treated as a taxable
exchange for U.S. Federal income tax purposes. In that event, holders who
exchange their Old Notes for New Notes would not recognize income, gain or loss
for U.S. federal income tax purposes. In addition, a holder's tax basis in the
New Notes would be equal to its adjusted basis in the Old Notes, and its
holding period would include the period during which it held the Old Notes.
Persons considering the exchange of Old Notes for New Notes pursuant to the
Exchange Offer should consult their own tax advisers concerning the application
of the U.S. federal tax laws to their particular situation as well as the
consequences arising under the laws of any other taxing jurisdiction.
The following summary sets forth certain U.S. federal income and estate
tax consequences of the purchase, ownership and disposition of a Note, whether
an Old Note or a New Note. It does not purport to consider all of the possible
tax consequences of the purchase, ownership and disposition of a Note and is
not intended to reflect the individual tax position of any holder. It deals
only with Notes held as capital assets. Except as expressly indicated, it is
addressed only to initial holders who purchased Old Notes at their issue price
(as defined below) and does not deal with holders with a special tax status or
special tax situation, including financial institutions, insurance companies,
tax-exempt organizations, dealers in securities or currencies, persons who hold
Notes as part of a straddle, hedge, synthetic security or conversion
transaction, persons whose functional currency is not the U.S. dollar or
expatriates or former long-term residents of the United States. This discussion
is based on the U.S. federal tax laws and regulations as now in effect and as
currently interpreted and does not take into account possible changes in those
laws or interpretations, any of which may be applied retroactively. This
discussion does not include any description of the tax laws of any state or
local government within the United States or of any foreign government that may
be applicable to the Notes or holders thereof.
For purposes of this discussion, a "United States person" means a
beneficial owner of a Senior Note that is, for U.S. federal income tax
purposes, a citizen or resident of the United States, a corporation or
partnership created or organized in or under the laws of the United States or
any political subdivision thereof or an estate or trust that is a United States
person within the meaning of Section 7701(a)(30)(D) or (E) of the Internal
Revenue Code of 1986, as amended. The term "U.S. Holder" includes any United
States person or any other person to the extent that income with respect to a
Note is effectively connected with that person's conduct of trade or business
within the United States (or, in the case of a beneficial owner to whom an
income tax treaty applies, is attributable to a permanent establishment of the
beneficial owner in the United States). The term "Non-U.S. Holder" generally
refers to any person other than a U.S. Holder. The "issue price" of an Old
Note, which was the first price to public (not including bond houses, brokers
or similar persons acting in the capacity of underwriters, placement agents or
wholesalers) at which a substantial amount of Old Notes was sold for money, is
$984.49.
TAXATION OF U.S. HOLDERS
INTEREST PAYMENTS. Interest on a Note will be includible in the gross
income of a U.S. Holder as ordinary U.S. source interest income at the time it
accrues or is received in accordance with the U.S. Holder's method of
accounting for U.S. federal income tax purposes.
SALE OR OTHER DISPOSITION. Upon a sale or other disposition of a Note, a
U.S. Holder generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale or other disposition and the
U.S. Holder's adjusted tax basis in the Note, except to the extent of any
amount attributable to accrued interest, which will be taxable as ordinary
interest income. A U.S. Holder's tax basis in a Note generally will be the U.S.
Holder's U.S. dollar cost for the Old Note, reduced by any principal payments
received by the U.S. Holder on the Old Note or the New Note. The gain or loss
will be long-term capital gain or loss if, at the time of the sale or other
disposition, the Note has been held for more than one year. Under current law,
net capital gains of individual taxpayers are taxed at lower rates than items
of ordinary income.
35
BRANCH PROFITS TAX. A U.S. Holder that is a foreign corporation generally
will be subject to a branch profits tax at a rate of 30 percent (or a lower
rate if prescribed by a tax treaty) of its effectively connected earnings and
profits that are treated as repatriated during the taxable year.
ESTATE TAX. A Note will be includible in the gross estate of an individual
U.S. Holder.
TAXATION OF NON-U.S. HOLDERS
INTEREST PAYMENTS. Payments of interest (including original issue
discount, if any) on a Note to a Non-U.S. Holder will not be subject to U.S.
federal income tax, whether by withholding or otherwise, provided that (i) the
Non-U.S. Holder (a) does not own, actually or constructively, ten percent or
more of the total combined voting power of all classes of voting stock in the
Company, (b) is not a controlled foreign corporation related, directly or
indirectly, to the Company through stock ownership and (c) is not a bank
holding the Note as a result of an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of its trade or business and (ii)
either the beneficial owner of the Note or a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a "Financial Institution") and that
is holding the Note on behalf of the beneficial owner files a statement with
the withholding agent to the effect that the beneficial owner of the Note is
not a United States person. Under temporary U.S. Treasury regulations that
apply both to stated interest and to proceeds of a sale or other disposition of
a Note, if paid on or before December 31, 1999, the statement may be made by
(i) the beneficial owner of the Note certifying on Internal Revenue Service
("IRS") Form W-8, under penalties of perjury, that it is not a United States
person and providing its name and address or (ii) any Financial Institution
holding the Note on behalf of the beneficial owner filing a statement with the
withholding agent to the effect that it has received such a statement from the
beneficial owner and furnishing a copy thereof to the withholding agent.
Recently issued final Treasury regulations (the "Final Regulations"), which
apply to interest and sale or other disposition proceeds paid after December
31, 1999, also provide that the statement filing requirement generally will be
satisfied if the beneficial owner (including partners of certain foreign
partnerships), as well as certain foreign partnerships, meet the conditions set
forth in the preceding sentence. However, a beneficial owner that is a foreign
estate or trust (or fiduciary thereof), a foreign partnership that has entered
into a withholding agreement with the IRS, or a Non-U.S. Holder holding a Note
through its U.S. branch will be required to provide its "taxpayer
identification number" in addition to its name and address on Form W-8. Foreign
partnerships and their partners should consult their tax advisers regarding
possible additional reporting requirements.
SALE OR OTHER DISPOSITION. A Non-U.S. Holder will not be subject to U.S.
federal income tax on gain recognized on a sale or other disposition of a Note
unless the Non-U.S. Holder is an individual who is present in the United States
for 183 days or more in the taxable year of the disposition and certain other
conditions are met. Certain exceptions may apply, and an individual Non-U.S.
Holder should consult his tax adviser.
ESTATE TAX. A Note will not be includible in the estate of an individual
Non-U.S. Holder unless the beneficial owner is a direct or indirect ten percent
or greater shareholder of the Company.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. HOLDERS. Information reporting will apply, and backup withholding of
tax at a rate of 31 percent may apply, to a payment of principal of or interest
or premium, if any, on a Note or the proceeds from a sale or other disposition
of a Note, unless the U.S. Holder is a corporation or other exempt recipient. A
non-exempt U.S. Holder generally will be subject to backup withholding unless
it provides certain identifying information (including its taxpayer
identification number) in the manner required.
NON-U.S. HOLDERS. Generally, information reporting and backup withholding
of federal income tax at a rate of 31 percent may apply to payments of
principal of and interest and premium, if any, on a
36
Note to a Non-U.S. Holder if the payee fails to certify that the beneficial
owner of the Note is a Non-U.S. Holder. The payment of the proceeds of a
disposition of a Note to or through the U.S. office of a U.S. or foreign broker
will be subject to information reporting and backup withholding, unless the
Non-U.S. Holder certifies that the beneficial owner is not a United States
person or otherwise establishes an exemption. The proceeds of a disposition by
a Non-U.S. Holder of a Note to or through a foreign office of a broker will not
be subject to backup withholding. However, if a foreign broker is a United
States person, a controlled foreign corporation for U.S. federal income tax
purposes or a foreign person 50 percent or more of whose gross income from all
sources for certain periods is effectively connected with a U.S. trade or
business, information reporting will apply unless the broker has documentary
evidence in its files of the owner's foreign status and has no actual knowledge
to the contrary or unless the owner otherwise establishes an exemption.
Any amount withheld under the backup withholding rules is allowable as a
refund or credit against the beneficial owner's U.S. federal income tax,
provided the required information is provided to the IRS.
The Final Regulations modify the backup withholding and information
reporting requirements in certain respects for payments made after December 31,
1999. A prospective investor is urged to consult its tax adviser regarding the
application of the backup withholding and information reporting rules.
37
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
New Notes transferred hereby. In consideration for issuing the New Notes in
exchange for the Old Notes as described in the Prospectus, the Company will
receive Old Notes in like principal amount. The Old Notes surrendered in
exchange for the New Notes will be retired and canceled.
The net proceeds to the Company from the sale of the Old Notes were
approximately $193.5 million. Of such amount, the Company used approximately
$40.5 million to repay indebtedness, including approximately $30.1 million of
indebtedness under the Existing Credit Facility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Existing Credit Facility."
Of the remaining proceeds, the Company intends to use (i) approximately
$19.0 million to acquire and install hushkits on the Company's aircraft and
(ii) approximately $134.0 million to acquire additional DC-8 and widebody
aircraft, spare parts, equipment and tooling, to make strategic acquisitions
and for working capital and other general corporate purposes.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 (i) on an actual basis and (ii) as adjusted to reflect the sale
by the Company of the Old Notes and the application of the estimated net
proceeds therefrom as described under "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company's Consolidated Financial
Statements and related Notes thereto and the other financial information
appearing elsewhere in this Prospectus.
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED
---------- ------------
(IN THOUSANDS)
Cash and cash equivalents ......................................... $ 2,166 $155,201
======= ========
Debt(1)(2):
Existing Credit Facility(2) ...................................... $19,048 $ --
9 7/8% Senior Notes due 2008 ..................................... -- 200,000
Capital lease obligations ........................................ 325 325
Other debt(2) .................................................... 9,898 575
------- --------
Total debt ...................................................... $29,271 $200,900
------- --------
Stockholders' equity:
Common stock, $0.01 par value, 3,000 shares authorized, issued and
outstanding actual and as adjusted ............................. -- --
Retained earnings ................................................ 45,322 45,322
Net unrealized holding gain on investment securities ............. 21 21
------- --------
Total stockholders' equity ...................................... 45,343 45,343
------- --------
Total capitalization ........................................... $74,614 $246,243
======= ========
- ----------------
(1) For a description of the Company's long-term debt, see Note 8 of Notes to
the Company's Consolidated Financial Statements.
(2) On June 5, 1998, the date of the consummation of the sale of the Old Notes,
the Company had approximately $30.1 million outstanding under the Existing
Credit Facility, which amount was repaid in full with a portion of the net
proceeds of the sale of the Old Notes. In addition, on June 5, 1998, the
Company had approximately $10.9 million in principal and accrued interest
of other debt outstanding, of which approximately $10.3 million was repaid
with a portion of the net proceeds of the sale of the Old Notes.
38
SELECTED FINANCIAL DATA
The balance sheet data set forth below as of December 31, 1994, 1995, 1996
and 1997 and the statement of operations data for each of the years in the
four-year period ended December 31, 1997 have been derived from the Company's
audited consolidated financial statements. The balance sheet data as of
December 31, 1993 and the statement of operations data for the year then ended
have been derived from unaudited financial statements of the Company not
included herein. The balance sheet data as of March 31, 1997 and 1998 and June
30, 1997 and the selected statements of operations data for the three months
ended March 31, 1997 and 1998 and the twelve months ended June 30, 1997 have
been derived from the unaudited consolidated financial statements of the
Company which, in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the information set forth therein. The results of operations
for the three months ended March 31, 1998 are not necessarily indicative of the
results for the full year. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997(1)
----------- ------------ ------------ ------------ --------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Scheduled cargo services ................. $ -- $ 19,941 $ 40,124 $ 54,775 $ 56,412
ACMI services ............................ 29,025 44,420 35,340 35,520 31,080
Repairs, training and other .............. -- 492 885 3,953 2,502
-------- -------- -------- -------- --------
Total revenues .......................... 29,025 64,853 76,349 94,248 89,994
-------- -------- -------- -------- --------
Total operating expenses .................. 25,136 52,714 64,646 81,040 91,021
-------- -------- -------- -------- --------
Operating income (loss) ................... 3,889 12,139 11,703 13,208 (1,027)
Interest expense .......................... (1,035) (1,111) (985) (966) (1,091)
Interest and other income, net ............ 274 3,170 320 786 2,233
-------- -------- -------- -------- --------
Net income ................................ $ 3,128 $ 14,198 $ 11,038 $ 13,028 $ 115
======== ======== ======== ======== ========
SELECTED FINANCIAL DATA:
EBITDA(2) ................................. $ 6,373 $ 16,969 $ 18,947 $ 23,384 $10,843
Depreciation and amortization ............. 2,210 3,887 6,924 9,390 11,470
Capital expenditures ...................... 9,714 14,843 15,164 14,108 32,836
Ratio of earnings to fixed charges(3) ..... 3.5x 10.7x 8.2x 8.5x --(4)
OPERATING DATA:
Destinations served (end of period) ....... -- 9 21 27 29
Tons of freight transported--scheduled
cargo services ........................... -- 32,072 64,906 75,923 68,844
ACMI block hours flown .................... 12,943 15,280 12,068 12,289 10,712
Aircraft in service (end of period) ....... 13 13 14 15 14
BALANCE SHEET DATA (AT PERIOD END):
Working capital ........................... $ 3,917 $ 4,861 $ 9,735 $ 13,710 $ 2,970
Total assets .............................. 29,502 45,313 57,026 65,886 82,846
Total debt ................................ 17,274 13,946 13,129 11,357 30,084
TWELVE THREE MONTHS ENDED
MONTHS ENDED MARCH 31,
JUNE 30, -----------------------
1997(1) 1997 1998
------------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Revenues:
Scheduled cargo services ................. $ 64,636 $ 16,174 $ 17,225
ACMI services ............................ 40,089 9,126 7,511
Repairs, training and other .............. 2,542 626 408
-------- -------- --------
Total revenues .......................... 107,267 25,926 25,144
-------- -------- --------
Total operating expenses .................. 90,135 22,577 24,386
-------- -------- --------
Operating income (loss) ................... 17,132 3,349 758
Interest expense .......................... (902) (225) (655)
Interest and other income, net ............ 436 46 3,586
-------- -------- --------
Net income ................................ $ 16,666 $ 3,170 $ 3,689
======== ======== ========
SELECTED FINANCIAL DATA:
EBITDA(2) ................................. $ 28,230 $ 6,242 $ 4,098
Depreciation and amortization ............. 10,662 2,847 3,143
Capital expenditures ...................... 17,190 4,157 6,789
Ratio of earnings to fixed charges(3) ..... 10.2x 7.6x 5.0x
OPERATING DATA:
Destinations served (end of period) ....... 29 29 23
Tons of freight transported--scheduled
cargo services ........................... 80,384 19,404 21,966
ACMI block hours flown .................... 13,841 3,346 2,686
Aircraft in service (end of period) ....... 15 15 14
BALANCE SHEET DATA (AT PERIOD END):
Working capital ........................... $ 13,829 $ 16,162 $ 2,014
Total assets .............................. 66,236 65,341 85,372
Total debt ................................ 9,323 9,581 29,271
- ----------------
(1) The Company's 1997 results were adversely affected by the temporary
cessation of operations for seven weeks during September and October 1997.
The Company gradually resumed operations during the remainder of 1997. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Recent Results." The twelve months ended June 30, 1997 data
has been presented to illustrate the Company's operating results for the
most recent twelve month period prior to the cessation of operations.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization and non-recurring items. EBITDA is presented
to provide additional information relating to the Company's ability to
service indebtedness. EBITDA is a measure of financial performance not
considered in generally acccepted accounting principles and should not be
considered in isolation or as a substitute for other measures of financial
performance or liquidity. Other companies may define EBITDA differently,
and as a result, such measures may not be comparable to the Company's
EBITDA.
(3) In calculating the ratio of earnings to fixed charges, earnings consists of
income before income taxes and fixed charges (excluding capitalized
interest for the period). Fixed charges consists of interest expense
(including amounts capitalized), amortization of debt issue costs and
one-third of rental expenses under operating leases (such one-third
portion is deemed by the Company to be the equivalent of the interest
portion of such payments).
(4) Earnings were insufficient to cover fixed charges by approximately $325,000
for the year ended December 31, 1997.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives its revenues from three sources: scheduled cargo
services, ACMI services and repairs, training and other services provided to
third parties. During the past four years, the Company's revenues increased at
a compound annual rate of 32.7% to $90.0 million in 1997 from $29.0 million in
1993. The Company's revenue growth during this period has been substantially
the result of the introduction and expansion of scheduled cargo services. The
Company began offering scheduled cargo services at the beginning of 1994 and
has expanded its service to include 23 South and Central American and Caribbean
destinations as of March 31, 1998. Revenues from scheduled cargo services
increased at a compound annual rate of 41.4% from 1994 to 1997 and represented
62.7% of total revenues in 1997, compared to 30.7% of total revenues in 1994.
The shift in mix of the Company's revenues during the past three years has
impacted its operating margins, as the Company has committed significant
resources to build the infrastructure to support its scheduled cargo services,
including moving to a new cargo warehouse and new MIA hangar facilities in
1996, opening additional domestic and foreign sales offices, and adding sales,
flight, warehouse, cargo and ground handling personnel. Management believes
that the Company will be able to utilize its existing infrastructure and fleet,
as well as the additional aircraft it intends to acquire, to expand its
scheduled cargo services to new destinations in South and Central America and
the Caribbean. Management plans to continue to emphasize the development of
scheduled cargo services for future revenue growth while at the same time
expanding the Company's ACMI services. ACMI services have been more profitable
than scheduled cargo services primarily because increased demand for ACMI
services during the fourth quarter generally has resulted in higher aircraft
utilization and more profitable ACMI rates.
Revenues from scheduled cargo services consist principally of charges for
freight transported on the Company's scheduled cargo routes and charges for
transportation logistics services, such as truck and interline transportation
of freight, local pick-up and delivery, warehousing and assistance in document
preparation and processing. The Company sells air cargo services to
destinations its serves directly, destinations served by its ACMI and AMI
(aircraft, maintenance and insurance) customers and destinations served by
other airlines on an interline basis. Freight rates are structured based upon
the type of freight, weight or volume, delivery service and the destination.
Beginning in the third quarter of 1996, the Company's revenues from scheduled
cargo services include fuel surcharges that the Company instituted following
significant increases in fuel prices during the year. During the first quarter
of 1997, fuel prices began to decline, and the Company removed its fuel
surcharges in certain markets in the second quarter of 1997.
Revenues from ACMI services are derived from both ACMI and AMI contracts
under which the Company supplies its aircraft for specified cargo operations or
on an AD HOC basis and charges its customers for such services on a per block
hour basis subject, in certain instances, to specified minimum charges. The
Company's ACMI customers are responsible for substantially all other aircraft
operating expenses, including fuel, landing and parking fees and ground and
cargo handling expenses. The Company's AMI customers are responsible for the
same operating costs as ACMI customers and also provide their own crews.
Revenues from repairs, training and other are comprised principally of
charges for third party maintenance services, including airframe, component and
engine maintenance, repairs and overhauls, as well as spare parts sales,
leasing and training.
Flying operations expenses are comprised principally of fuel costs, crew
costs, overflight, landing and parking fees, aircraft rental expenses, expenses
for transporting freight to and from the Company's MIA hub from its sales
offices and interline transportation expenses. Flying operations expenses
40
associated with ACMI services, such as fuel, overflight, landing and parking
fees, are either paid directly by the Company's customer or billed to the
customer on a direct pass-through basis. Most of the Company's ACMI customers
purchase their own fuel.
Aircraft and traffic servicing expenses are comprised principally of
personnel and equipment repair expenses associated with the Company's cargo
warehouse, cargo handling and ground handling operations and communications,
personnel and third party expenses related to flight planning. Aircraft and
traffic servicing expenses have increased over the past three years as the
Company has added personnel to handle the increase in scheduled cargo services.
Maintenance expenses are comprised principally of labor, parts and
supplies associated with the maintenance, repair and overhaul of the Company's
aircraft and engines and third party maintenance services. Costs associated
with major maintenance ("C" and "D") checks are capitalized when incurred and
amortized over their expected useful lives, ranging from 3 years for "C" checks
and engine repairs to 8 years for "D" checks. Other maintenance expenses,
including expenses associated with routine maintenance checks, are expensed
when incurred. Because the Company pays for maintenance whether its aircraft
are used in scheduled cargo service or ACMI service, maintenance expenses are
not affected by changes in the mix of revenues from these two services.
General and administrative expenses are comprised principally of salaries
and benefits for executive and administrative personnel, insurance, security
expenses and rent, utilities and other occupancy expenses associated with the
Company's cargo warehouse and MIA hangar facilities and domestic and
international operations stations and sales offices.
Selling expenses are comprised principally of salaries and benefits for
sales personnel, commissions paid to third party general sales agents,
advertising and marketing expenses and provision for bad debts.
Depreciation and amortization expenses are comprised principally of
depreciation on aircraft, aircraft components and ground equipment, and the
amortization of capitalized major airframe and engine maintenance, repairs and
overhauls.
Immediately prior to the consummation of the sale of the Old Notes, each
of Messrs. Frank and Barry Fine contributed his interest in Fine Air and Agro
Air to the Company, and Fine Air and Agro Air became wholly owned subsidiaries
of the Company. The Company's Consolidated Financial Statements included in
this Prospectus reflect the consolidated results of the Company, Fine Air and
Agro Air for all periods presented. The Company, Fine Air and Agro Air are S
corporations and, accordingly, were not subject to federal and certain state
corporate income taxes.
RECENT RESULTS
On September 4, 1997, the Company temporarily suspended operations. During
the first half of 1997, the Company had experienced increases over the prior
year in revenues from both scheduled cargo services and ACMI services. The
Company resumed operations on a limited basis on October 28, 1997,
approximately seven weeks after suspending operations. During the remainder of
1997, the Company focused principally on rebuilding service to its scheduled
cargo destinations. The cessation of operations resulted in a significant
decrease in revenue for the third and fourth quarters of 1997. Although the
Company was able to reduce certain overhead expenses during this period,
expenses associated with maintaining the infrastructure and personnel necessary
to recommence operations and complying with the FAA's requirements resulted in
significant operating losses during the second half of 1997.
The impact of the temporary cessation of operations continued to affect
the Company's revenues and profitability during the three months ended March
31, 1998. During the first quarter of 1998, the Company continued to emphasize
rebuilding the service level of its scheduled cargo services. By the end of the
quarter, the Company's scheduled cargo operations served most of the
destinations which
41
had been served during the first half of 1997, and revenues from scheduled
cargo services had returned to historical levels. ACMI block hours remained at
lower than historical levels during the first quarter of 1998, due primarily to
the Company's emphasis on rebuilding its scheduled cargo services. During March
and April 1998, both revenue and operating income showed significant
improvement as the Company's scheduled cargo services and ACMI services
returned to pre-September 1997 levels.
Management believes that the Company's operations have returned to
historical revenue and profitability levels. Revenues increased 12.5% to $9.9
million in March 1998 from $8.8 million in 1997, due to increased revenues from
scheduled cargo services. Total block hours flown increased 24.3% to 2,218 in
March 1998 from 1,785 in March 1997. Operating income was approximately $1.2
million in both March 1998 and March 1997. Excluding a $3.4 million gain on
litigation settlement in March 1998, EBITDA increased to $2.4 million, or 24.2%
of total revenues, in March 1998 from $2.3 million, or 26.1% of total revenues
in March 1997.
Preliminary operating results for the month of April 1998 continue to
reflect the Company's return to historical revenue and profitability levels.
Revenues increased 12.4% to $10.0 million in April 1998 from $8.9 million in
April 1997, due to increases in revenues from both scheduled cargo and ACMI
services. Total block hours flown increased 17.1% to 2,230 in April 1998 from
1,905 in April 1997. EBITDA increased 10.0% to $2.3 million in April 1998 from
$2.1 million in April 1997.
The tables below sets forth selected unaudited quarterly financial and
operating data for 1996 and 1997 and monthly financial and operating data for
the three months ended March 31, 1998 (dollars in thousands):
1996 FISCAL QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ----------- ---------- -----------
Revenues:
Scheduled cargo services ..................................... $ 11,693 $ 12,099 $ 13,333 $ 17,650
ACMI services ................................................ 5,430 7,347 6,841 15,902
Repairs, training and other .................................. 1,796 818 542 797
Total revenues .............................................. 18,919 20,264 20,716 34,349
EBITDA(1) ..................................................... 3,894 3,734 3,731 12,025
Operating income .............................................. 1,305 1,434 1,264 9,205
Tons of freight transported--scheduled cargo services ......... 18,360 17,153 19,093 21,317
ACMI block hours flown ........................................ 2,146 2,743 3,005 4,395
1997 FISCAL QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ----------- ------------ -----------
Revenues:
Scheduled cargo services ..................................... $ 16,174 $ 17,480 $ 12,111 $ 10,647
ACMI services ................................................ 9,126 8,220 6,540 7,194
Repairs, training and other .................................. 626 577 706 593
Total revenues .............................................. 25,926 26,277 19,357 18,434
EBITDA(1) ..................................................... 6,242 6,232 (1,317) (314)
Operating income (loss) ....................................... 3,349 3,314 (4,423) (3,267)
Tons of freight transported--scheduled cargo services ......... 19,404 20,570 15,933 12,937
ACMI block hours flown ........................................ 3,346 3,092 2,537 1,737
42
1998 MONTH ENDED
------------------------------------ 1ST QUARTER
JAN. 31 FEB. 28 MARCH 31 TOTAL
----------- --------- ---------- ------------
Revenues:
Scheduled cargo services ..................................... $ 5,068 $ 5,359 $ 6,798 $ 17,225
ACMI services ................................................ 2,119 2,454 2,938 7,511
Repairs, training and other .................................. 104 164 140 408
Total revenues .............................................. 7,291 7,977 9,876 25,144
EBITDA(1) ..................................................... 453 1,233 2,411 4,098
Operating income (loss) ....................................... (587) 188 1,157 758
Tons of freight transported--scheduled cargo services ......... 6,438 6,713 8,815 21,966
ACMI block hours flown ........................................ 719 882 1,085 2,686
- ----------------
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization and non-recurring items. EBITDA is presented
to provide additional information relating to the Company's ability to
service indebtedness. EBITDA is a measure of financial performance not
considered in generally accepted accounting principles and should not be
considered in isolation or as a substitute for other measures of financial
performance or liquidity. Other companies may define EBITDA differently,
and as a result, such measures may not be comparable to the Company's
EBITDA.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain
revenue, expense and income items as a percentage of total operating revenues:
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
Revenues:
Scheduled cargo services ............... 52.6% 58.1% 62.7% 62.4% 68.5%
ACMI services .......................... 46.3 37.7 34.5 35.2 29.9
Repairs, training and other ............ 1.1 4.2 2.8 2.4 1.6
----- ----- ----- ----- -----
Total operating revenues .............. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Operating expenses:
Flying operations ...................... 34.0% 38.8% 38.0% 36.5% 35.4%
Aircraft and traffic servicing ......... 9.8 8.4 9.7 8.2 10.1
Maintenance ............................ 10.9 10.5 16.9 11.1 14.9
General and administrative ............. 15.0 15.0 17.9 15.4 18.6
Selling ................................ 5.8 3.3 5.9 4.9 5.5
Depreciation and amortization .......... 9.1 10.0 12.7 11.0 12.5
----- ----- ----- ----- -----
Total operating expenses .............. 84.6 86.0 101.1 87.1 97.0
----- ----- ----- ----- -----
Operating income ........................ 15.4 14.0 ( 1.1) 12.9 3.0
Interest and other income, net .......... ( 0.9) ( 0.2) 1.2 ( 0.7) 11.7
----- ----- ----- ----- -----
Net income .............................. 14.5% 13.8% 0.1% 12.2% 14.7%
===== ===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUES.
Revenues decreased 3.1% to $25.1 million in the first quarter of 1998 from
$25.9 million in the first quarter of 1997, due to a decrease in revenues from
ACMI services of $1.6 million partially offset by an increase in revenues from
scheduled cargo services of $1.0 million. During the first quarter of 1998, the
Company was still recovering from the temporary cessation of operations during
the last half of 1997. Total block hours flown by the Company's fleet increased
0.8% to 5,556 in the first quarter of 1998 from 5,514 in the first quarter of
1997, due to an increase of 702 hours in block hours flown for scheduled cargo
services partially offset by a 660 hour decrease in ACMI block hours.
43
Revenues from scheduled cargo services increased 6.2% to $17.2 million in
the first quarter of 1998 from $16.2 million in the first quarter of 1997, due
to increases in tons of freight transported to existing markets, increases in
cargo rates and the introduction of a new market (Brazil). Revenue associated
with the higher level of scheduled cargo service operations was offset somewhat
by $1.5 million of fuel surcharges assessed in the first quarter of 1997. Tons
of freight transported increased 13.2% to 21,966 in the first quarter of 1998
from 19,404 in the first quarter of 1997, primarily as a result of increased
sales efforts by the Company's domestic and international sales network.
Revenues from ACMI services decreased 17.6% to $7.5 million in the first
quarter of 1998 from $9.1 million in the first quarter of 1997, due primarily
to the Company's emphasis on scheduled service during the first quarter of
1998. Total block hours flown for ACMI services decreased 19.8% to 2,686 in the
first quarter 1998 from 3,349 in the first quarter of 1997.
Revenues from repairs, training and other decreased to $408,000 in the
first quarter of 1998 from $626,000 in the first quarter of 1997, due primarily
to a decrease in third party engine and airframe repairs.
OPERATING EXPENSES.
Flying operations expenses decreased 6.3% to $8.9 million in the first
quarter 1998 from $9.5 million in the first quarter of 1997, due primarily to
decreased fuel prices. As a percentage of total revenues, flying operations
expenses decreased to 35.4% in the first quarter of 1998 from 36.5% in the
first quarter of 1997.
Aircraft and traffic servicing expenses increased 23.8% to $2.6 million in
the first quarter of 1998 from $2.1 million in the first quarter of 1997, due
primarily to the addition of personnel to handle the increase in scheduled
cargo services, as well as the implementation of new cargo handling and loading
procedures. As a percentage of total revenues, aircraft and traffic servicing
expenses increased to 10.1% in the first quarter 1998 from 8.2% in the first
quarter 1997, due to the Company's emphasis on scheduled cargo services.
Maintenance expenses increased 27.6% to $3.7 million in the first quarter
of 1998 from $2.9 million in the first quarter of 1997, due primarily to costs
associated with personnel training after the resumption of services and an
increase in field line maintenance requirements associated with new domestic
ACMI contracts. As a percentage of total revenues, maintenance expenses
increased to 14.9% in the first quarter of 1998 from 11.1% in the first quarter
of 1997.
General and administrative expenses increased 17.5% to $4.7 million in the
first quarter of 1998 from $4.0 million in the first quarter of 1997, due
primarily to increased salary expense and professional fees to support the
expansion of operations and the build-up of the Company's infrastructure. As a
percentage of total revenues, general and administrative expenses increased to
18.6% in the first quarter of 1998 from 15.4% in the first quarter of 1997.
Selling expenses increased 7.7% to $1.4 million in the first quarter of
1998 from $1.3 million in the first quarter 1997, primarily due to an increase
in commissions and other selling expenses in the first quarter of 1998
associated with the increase in scheduled cargo revenues. As a percentage of
total revenues, selling expenses increased to 5.5% in the first quarter of 1998
from 4.9% in the first quarter of 1997.
Depreciation and amortization expense increased 10.7% to $3.1 million in
the first quarter of 1998 from $2.8 million in the first quarter of 1997, due
primarily to increases in equipment and increased amortization of capitalized
maintenance costs. As a percentage of total revenues, depreciation and
amortization expenses increased to 12.5% in the first quarter 1998 from 11.0%
in the first quarter 1997.
OPERATING INCOME. Operating income decreased 75.8% to $0.8 million in the
first quarter 1998 from $3.3 million in the first quarter 1997. The Company's
operating margin decreased to 3.0% in the
44
first quarter 1998 from 12.9% in the first quarter of 1997. The temporary
cessation of operations in the second half of 1997 continued to adversely
impact the Company during the first quarter of 1998.
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
$3.1 million in the first quarter of 1998 compared to the first quarter 1997,
due primarily to a gain of $3.4 million related to a lawsuit judgment. Interest
expense increased to $655,000 in the first quarter of 1998 from $225,000 in the
first quarter of 1997 due primarily to additional borrowings.
NET INCOME. As a result of the above factors, net income increased 15.6%
to $3.7 million in the first quarter of 1998 from $3.2 million in the first
quarter of 1997.
FISCAL 1997 COMPARED TO 1996
REVENUES.
Revenues decreased 4.5% to $90.0 million in 1997 from $94.2 million in
1996, due primarily to the cessation of operations for seven weeks and the
subsequent effects of such temporary interruption of services during the second
half of 1997. In the first half of 1997, revenues increased 33.2% to $52.2
million from $39.2 million in the first half of 1996 due to increases in
revenues from both scheduled cargo services and ACMI services. Total block
hours flown by the Company's fleet decreased 10.5% to 19,372 in 1997 from
21,642 in 1996, due primarily to the temporary cessation of operations during
the second half of 1997.
Revenues from scheduled cargo services increased 2.9% to $56.4 million in
1997 from $54.8 million in 1996, due to significant increases in cargo rates,
partially offset by a decrease in scheduled block hours of 7.4% as a result of
the temporary cessation of operations. Tons of freight transported decreased
9.3% to 68,844 in 1997 from 75,923 in 1996.
Revenues from ACMI services decreased 12.4% to $31.1 million in 1997 from
$35.5 million in 1996, due primarily to a decrease in ACMI block hours in the
second half of 1997. Total block hours flown for ACMI services decreased 12.8%
to 10,712 in 1997 from 12,288 in 1996. The significant decrease in ACMI hours
was primarily the result of the temporary cessation of operations, as well as
the Company's strategy to reestablish and focus on normal scheduled cargo
services when operations recommenced. In the first half of 1997, revenues from
ACMI services increased 35.2% to $17.3 million from $12.8 million in the first
half of 1996, due primarily to an increase in block hours flown as a result of
the addition of new ACMI customers and increased aircraft utilization.
Revenues from repairs, training and other decreased 37.5% to $2.5 million
in 1997 from $4.0 million in 1996, due primarily to $1.2 million of airframe
repairs performed on a single aircraft during the first half of 1996. The
aircraft was subsequently purchased from a company owned by a stockholder of
the Company.
OPERATING EXPENSES.
Flying operations expenses decreased 6.6% to $34.2 million in 1997 from
$36.6 million in 1996, due primarily to a 7.4% decrease in scheduled cargo
services block hours. As a percentage of total revenues, flying operations
expenses decreased to 38.0% in 1997 from 38.8% in 1996.
Aircraft and traffic servicing expenses increased 10.1% to $8.7 million in
1997 from $7.9 million in 1996, due primarily to the addition of personnel to
handle the increase in scheduled cargo services in the first half of 1997 and
the Company's reluctance to reduce key personnel during the cessation of
operations. As a percentage of total revenues, aircraft and traffic servicing
expenses increased to 9.7% in 1997 from 8.4% in 1996, due primarily to the
increase in the proportion of total revenues generated from scheduled cargo
services. Scheduled cargo tonnage increased 12.6% in the first half of 1997
compared to the first half of 1996.
45
Maintenance expenses increased 53.5% to $15.2 million in 1997 from $9.9
million in 1996, due primarily to the increase in block hours operated during
the first half of 1997. In addition, during the second half of 1997, the
Company continued to perform maintenance during the temporary cessation of
operations. As a percentage of total revenues, maintenance expenses increased
to 16.9% in 1997 from 10.5% in 1996.
General and administrative expenses increased 14.2% to $16.1 million in
1997 from $14.1 million in 1996, due to increased legal and professional fees
associated with issues surrounding the temporary cessation of operations, rent
and payroll related expenses. As a percentage of total revenues, general and
administrative expenses increased to 17.9% in 1997 from 15.0% in 1996.
Selling expenses increased 71.0% to $5.3 million in 1997 from $3.1 million
in 1996, due primarily to increased commissions and selling expenses to support
anticipated growth in scheduled cargo services. Commissions and other selling
expenses related to scheduled cargo services increased $916,000 in 1997
compared to 1996. In addition, provision for bad debts increased $866,000 in
1997 compared to 1996. During 1996, reserves for bad debts were reduced by a
$391,000 recovery of previously written-off accounts receivable. As a
percentage of total revenues, selling expenses increased to 5.9% in 1997 from
3.3% in 1996.
Depreciation and amortization expense increased 22.3% to $11.5 million in
1997 from $9.4 million in 1996, due primarily to increases in equipment and
leasehold improvements as well as increased amortization of capitalized
airframe and engine repair and maintenance costs. As a percentage of total
revenues, depreciation and amortization expenses increased to 12.7% in 1997
from 10.0% in 1996.
OPERATING INCOME (LOSS). Operating income (loss) decreased to a $1.0
million loss in 1997 from a $13.2 million profit in 1996 due to the temporary
cessation of operations during the last half of 1997.
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
$1.3 million in 1997 compared to 1996, due primarily to a gain on insurance
settlement of $3.9 million partially offset by $1.0 million of initial public
offering expenses and a $1.0 million remedial expense payable to the FAA
pursuant to the Consent Agreement.
NET INCOME. As a result of the above factors, net income decreased to
$115,000 in 1997 from $13.0 million in 1996.
FISCAL 1996 COMPARED TO 1995
REVENUES.
Revenues increased 23.5% to $94.2 million in 1996 from $76.3 million in
1995, primarily due to an increase in revenues from scheduled cargo services.
Total block hours flown by the Company's fleet increased 11.9% to 21,642 in
1996 from 19,340 in 1995 due to the addition of one aircraft placed into
service in 1996 and increased utilization of the existing fleet.
Revenues from scheduled cargo services increased 36.7% to $54.8 million in
1996 from $40.1 million in 1995, due primarily to increases in tons of freight
transported and cargo rates and to a lesser extent to fuel surcharges collected
during the fourth quarter of 1996. Freight tonnage increased 17.0% to 75,923 in
1996 from 64,906 in 1995, primarily as a result of increases in freight
transported to and from destinations already served by the Company (principally
in Ecuador, El Salvador, Puerto Rico and Venezuela), and to a lesser extent
from sales of air cargo service to new destinations (Colombia, the Dominican
Republic and Jamaica). As of December 31, 1996, the Company offered scheduled
cargo service to 27 destinations, compared to 21 destinations as of December
31, 1995. Management believes that increased load factors were largely the
result of expansion of the Company's domestic and international sales network.
During 1995 and 1996, the Company added domestic sales offices in Atlanta and
Chicago and entered into general sales agent relationships for the marketing of
the
46
Company's scheduled cargo services in the western United States and portions of
Canada and Europe. Cargo rates increased approximately 15% during the third and
fourth quarters of 1996. Due to significant increases in fuel prices, fuel
surcharges were instituted in most markets during the third quarter of 1996 and
accounted for approximately $1.5 million of revenues from scheduled cargo
services in 1996.
Revenues from ACMI services increased slightly to $35.5 million in 1996
from $35.3 million in 1995. Revenues from ACMI services in 1995 reflected
higher than normal ACMI rates received for several emergency relief cargo
flights after a Caribbean hurricane and additional ACMI business that the
Company obtained during the temporary discontinuation of air cargo service by a
competitor. Total block hours flown for ACMI services increased 1.8% to 12,289
in 1996 from 12,068 in 1995.
Revenues from repairs, training and other increased to $4.0 million in
1996 from $885,000 in 1995, due primarily to increased airframe and engine
overhauls and repairs, including $1.7 million of airframe repairs performed on
a single aircraft during 1996. The Company's move during 1996 to a new hangar
facility at MIA provided the Company the capability to accomplish a wider range
of third party maintenance services, including airframe repairs and
maintenance.
OPERATING EXPENSES.
Flying operations expenses increased 40.8% to $36.6 million in 1996 from
$26.0 million in 1995 due primarily to increased fuel costs and to a lesser
extent increased intermodal and interline transportation and other costs
associated with scheduled cargo services. As a percentage of total revenues,
flying operations expenses increased to 38.8% in 1996 from 34.0% in 1995 as a
result of the increase in revenues from scheduled cargo services as a
percentage of revenues to 58.1% of total revenues in 1996 from 52.6% in 1995.
Aircraft and traffic servicing expenses increased 5.3% to $7.9 million in
1996 from $7.5 million in 1995, due primarily to the increase in 1996 in the
number of flights operated for scheduled cargo services. As a percentage of
total revenues, aircraft and traffic servicing expenses improved to 8.4% in
1996 from 9.8% in 1995, as the Company was able to achieve economies of scale
associated with its new cargo warehouse facilities.
Maintenance expenses increased 19.3% to $9.9 million in 1996 from $8.3
million in 1995, due primarily to the increase in block hours operated during
1996. Despite the significant increase in maintenance services for third
parties and the increase in the number of block hours flown during 1996, as a
percentage of total revenues, maintenance expenses improved to 10.5% in 1996
from 10.9% in 1995 due to operational economies as a result of the
consolidation of the Company's maintenance operations at its new MIA hangar
facility.
General and administrative expenses increased 22.6% to $14.1 million in
1996 from $11.5 million in 1995, due primarily to increases in expenses
associated with the expansion of scheduled cargo services as well as increased
rent related to the Company's new cargo warehouse, new MIA hangar facility and
operations stations and sales office facilities added during 1996, as well as
the addition of personnel. Nevertheless, as a percentage of total revenues,
general and administrative expenses remained constant at 15.0% in 1996 and
1995.
Selling expenses decreased 31.1% to $3.1 million in 1996 from $4.5 million
in 1995, due primarily to an increase in reserves for bad debts in 1995. The
Company provided reserves of approximately $891,000 for bad debts in 1995
compared to only $16,000 in 1996. Commissions and other selling expenses
related to scheduled cargo services increased from $2.5 million in 1995 to $3.2
million in 1996. As a percentage of total revenues, selling expenses declined
to 3.3% in 1996 from 5.8% in 1995, as the Company realized increased revenues
from scheduled cargo services without a corresponding increase in sales
personnel.
Depreciation and amortization expense increased 36.2% to $9.4 million in
1996 from $6.9 million in 1995, primarily due to increased depreciation related
to the acquisition of an additional aircraft during
47
the second quarter of 1995 and the amortization of capitalized airframe engine
repair and maintenance costs. As a percentage of total revenues, depreciation
and amortization expenses increased to 10.0% in 1996 from 9.1% in 1995.
OPERATING INCOME. As a result of the above factors, operating income
increased 12.8% to $13.2 million in 1996 from $11.7 million in 1995. The
Company's operating margin decreased to 14.0% in 1996 from 15.4% in 1995, due
largely to costs associated with the development of scheduled cargo services.
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
$486,000 in 1996 compared to 1995. Other income in 1996 included a $364,000
gain on the sale of four surplus aircraft engines. Interest expense decreased
slightly to $966,000 in 1996 from $985,000 in 1995 due primarily to lower
average outstanding indebtedness during 1996 as a result of scheduled principal
payments on long-term debt.
NET INCOME. As a result of the above factors, net income increased 18.2%
to $13.0 million in 1996 from $11.0 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Over the past three years, the Company has funded its operations and the
expansion of its business primarily through cash flows from operating
activities. At March 31, 1998, the Company had cash and cash equivalents of
$2.2 million compared to $2.3 million at December 31, 1997. The Company had
working capital of $2.0 million at March 31, 1998, compared to $3.0 million at
December 31, 1997.
The Company has a $45 million credit facility with NationsCredit
Commercial Corporation (the "Existing Credit Facility"), which expires in
November 2000. Borrowings under the Existing Credit Facility bear interest at
the bank's prime rate plus 0.75%. The unused portion of the line of credit is
subject to a fee at the rate of .30% per annum. Borrowings under the Existing
Credit Facility are collateralized by substantially all of the Company's
assets. On June 5, 1998, the date of the consummation of the sale of the Old
Notes, the Company had approximately $30.1 million outstanding under the
Existing Credit Facility, all of which was repaid in full with a portion of the
net proceeds from the sale of the Old Notes. See "Description of the Existing
Credit Facility."
As of December 31, 1997 and March 31, 1998, the balance outstanding under
the Consent Agreement was $690,000 and $575,000, respectively, and included in
accrued expenses and other liabilities.
Net cash provided by operating activities was $7.4 million and $10.1
million in the three months ended March 31, 1998 and 1997, respectively. This
decrease in cash flow from operating activities was due primarily to lower
credit sales in December 1997 compared to December 1996. Net cash provided by
operating activities was $13.4 million, $14.8 million and $17.3 million in
1997, 1996 and 1995, respectively.
Net cash used in investing activities was $6.7 million and $4.2 million in
the three months ended March 31, 1998 and 1997, respectively. Net cash used in
investing activities was approximately $26.4 million, $11.9 million and $15.3
million in 1997, 1996 and 1995, respectively. Net cash used in investing
activities in each period primarily represented additional flight equipment
acquired and capitalized airframe and engine maintenance, repairs and
overhauls. Net cash used in investing activities in 1996 also included
property, equipment and leasehold improvements associated with Company's move
to its new MIA hangar facility.
Net cash used in financing activities was $914,000 and $2.1 million in the
three months ended March 31, 1998 and 1997, respectively. Net cash provided by
financing activities in 1997 was $14.3 million and primarily represented
borrowings under the Existing Credit Facility. Net cash used in financing
activities was $2.4 million and $2.1 million in 1996 and 1995, respectively.
Cash used in
48
financing activities in 1996 and 1995 and the three months ended March 31, 1998
and 1997 primarily represented principal repayments of indebtedness incurred
for the acquisition of aircraft. The Company made distributions to its
shareholders of $167,000, $324,000, $3.4 million, $1.1 million and $1.2 million
in the three months ended March 31, 1998 and 1997 and the years ended December
31, 1997, 1996 and 1995, respectively, primarily to enable the shareholders to
pay income taxes related to the Company's income. During May 1998, the Company
made a distribution to its shareholders of approximately $3.5 million in excess
of amounts required by the shareholders to pay income taxes. See "Certain
Transactions."
The Company's tax returns for the years ended December 31, 1993 and 1994
are currently under examination by the Internal Revenue Service ("IRS"). The
examination relates specifically to the Company's treatment of certain repairs
and maintenance, including safety checks mandated by the FAA, as expenses for
tax purposes. The Company believes that its treatment of such costs as
deductible for tax purposes is proper and is prepared to defend its position
vigorously, if it becomes necessary. Should the IRS take the position that
these costs should have been capitalized and subsequently depreciated, a
substantial assessment could result. Any such assessment will be taxable
directly to the S Companies' shareholders, rather than to the Company, and the
Company will be required to indemnify such shareholders for the amount of the
assessment and any taxes incurred by them on account of the receipt of such
indemnity payment. Because the examination is in process, the amount of such an
assessment is not presently determinable. See "Certain Transactions" and Note 2
of Notes to the Company's Consolidated Financial Statements.
The Company has no material commitments for future capital expenditures,
apart from normal scheduled major airframe and engine repairs and maintenance
and the hushkitting of its DC-8 aircraft. The Company will be required to
install hushkits on its existing fleet of 14 DC-8 aircraft by December 31, 1999
to comply with noise abatement regulations. The Company estimates that the
average cost of such hushkits will be approximately $2.25 million per aircraft,
and that the aggregate cost to the Company to hushkit its 14 DC-8s and to
acquire two spare hushkits will be $36.0 million, approximately $14.0 million
of which had been incurred as of March 31, 1998. The Company intends to
purchase hushkits for this purpose from a related party. See "Certain
Transactions." Management believes that the cost of the hushkits to be
purchased from the related party will be significantly lower than the cost of
other hushkits available in the market.
The Company believes that the net proceeds from the sale of the Old Notes,
together with cash flows expected to be generated by operations, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 18 months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
SFAS No. 131 requires that public entities report financial and descriptive
information about its reportable operating segments, generally on the basis
that it is used internally for evaluating segment performance. Required
disclosure includes segment profit or loss, certain specific revenue and
expense items and segment assets. It requires reconciliations of disclosed
segment information to the entity's financial statements. Management is
currently evaluating the requirements of SFAS No. 131, which will be
implemented for the year ending December 31, 1998.
SEASONALITY
The Company's business has been, and is expected to continue to be,
seasonal in nature, with a majority of the Company's revenues and operating
income falling in the second half of the year (principally the fourth quarter).
The Company's fourth quarter revenues and operating income are typically higher
due to an increase in freight transported in anticipation of and during the
holiday season. In addition to increased fourth quarter revenues from scheduled
cargo services, the Company typically has realized a majority of its ACMI
service revenues from flights conducted during this period.
49
YEAR 2000 COMPLIANCE
The Company is currently assessing its management information systems and
plans to upgrade or replace its existing systems, as necessary, within the next
18 months in order to meet the requirements of the Company's anticipated
growth. The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. As such, as part of its
overall assessment of its management information systems, the Company will seek
to ensure that its software systems are Year 2000 compliant. The Company does
not presently believe that the costs related to Year 2000 compliance will have
a material adverse effect on the Company's financial position or results of
operations.
50
INDUSTRY OVERVIEW
According to published industry sources, the worldwide air freight market
had revenues of $64 billion in 1995 and has grown at a 9.1% compound annual
rate since 1985 (measured in revenue ton kilometers). According to reports
prepared by Boeing, the world air cargo market is expected to more than triple
over the next 20 years. The United States/Latin America air freight market is
forecasted, by published industry sources, to be the fifth fastest growing air
freight market in the world from 1995 to 2005, with an average annual growth
rate of approximately 7.1%, as measured in tons. MIA is the largest air gateway
to South and Central America and the Caribbean, with more than 60 all-cargo
flights to the region per day. MIA is the primary transshipment point for
moving goods by air between North America and South and Central America. During
1997, more than 77% of all air import cargo and more than 83% of all air export
cargo between the United States and Latin America moved through MIA. MIA's air
trade with South America quadrupled from $3.1 billion in 1990 to $13.1 billion
in 1997.
South and Central American and Caribbean countries are gaining increasing
importance in worldwide trade, much of which has been driven by the region's
improved economies, increased political stability, upgraded infrastructures,
expanding middle class, dismantled tariff barriers and the privatization of
state monopolies. South and Central American and Caribbean trade has become
global, with consumer and industrial goods being imported from North America,
Europe and Asia, and South and Central American and Caribbean products
increasingly finding new export markets, especially in the United States.
Between 1988 and 1994, United States exports to South America nearly doubled
from $14.7 billion to $27.3 billion.
Air cargo demand in South and Central America and the Caribbean is
expected to increase as these markets continue to grow and as trade between the
southernmost countries of South America increases, fostered by the 1995 free
trade pact between Argentina, Brazil, Uruguay, Paraguay and Chile (the
"Mercosur" countries). The Mercosur countries have a population of 200 million
people, a combined GDP of $850 billion and comprise 70% of the total land area
of South America. The Company believes that continued economic development in
the Mercosur countries will further increase demand for widebody air freight
services to this region from Europe and the United States through MIA.
Air cargo traffic between the United States and South and Central America
and the Caribbean flows nearly equally northbound and southbound, although it
does not flow evenly into and out of each country due to trade imbalances.
Limited air freight service by passenger carriers and restraints on their
transportation of hazardous cargo have led to the growth of all-cargo carriers
in these markets. Providing air cargo service to South and Central America and
the Caribbean requires special skills to deal with the varied requirements of
numerous foreign government authorities and to transport goods through
relatively inefficient and ill-equipped customs and cargo handling operations
at many foreign airports.
As multinational corporations have demanded more sophisticated and
customized transportation logistics services and increasingly sought to
outsource their transportation logistics functions, freight forwarders have
emerged as important participants in the domestic and international air freight
markets. Major international freight forwarders increasingly have become
reluctant to arrange transportation of their customers' freight with integrated
cargo carriers (such as FedEx, UPS or DHL) because these carriers compete with
the freight forwarders for the same cargo customers. A majority of southbound
air freight to South and Central America and the Caribbean is handled by
freight forwarders, which seek low-cost, reliable service to fulfill their
customers' varied shipping requirements.
The growth of the worldwide air freight market depends partially on the
availability of freighter aircraft. Many air freight carriers operate aircraft
that have been converted from passenger to cargo configurations. The Company
believes that, over the next five years, an adequate supply of used DC-8s and
widebody aircraft will be available, principally due to refleetings by
passenger carriers to newer generation aircraft, resulting in "cascading" of
used aircraft to the air freight industry.
51
BUSINESS
COMPANY OVERVIEW
The Company is a leading provider of air cargo services between the United
States and South and Central America and the Caribbean. Since 1994, the Company
has been the largest international air cargo carrier serving Miami
International Airport ("MIA"), based on tons of cargo transported to and from
that airport. MIA is the largest international cargo airport in the United
States and the third largest international cargo airport in the world. The
Company's services include: (i) integrated air and truck cargo transportation
and other logistics services ("scheduled cargo services"); (ii) long- and
short-term ACMI (aircraft, crew, maintenance and insurance) services and AD HOC
charters ("ACMI services"); and (iii) third party aircraft and engine
maintenance, repairs and overhauls, training and other services. The Company's
scheduled cargo services provide seamless transportation through its MIA hub
linking North America, Europe, Asia and the Pacific Rim with 25 South and
Central America and Caribbean cities as of June 30, 1998. The Company's
customers include international and domestic freight forwarders, integrated
carriers, passenger and cargo airlines, major shippers and the United States
Postal Service.
As of June 30, 1998, the Company marketed its scheduled cargo services
through a sales network consisting of seven domestic sales offices serving 57
major U.S. cities, six international sales offices serving over 30 cities in
Europe, Canada, Asia and the Pacific Rim and 23 sales offices in South and
Central America and the Caribbean. The Company receives cargo at its MIA hub
and its foreign operations stations (i) through its domestic and international
sales network, (ii) from other airlines pursuant to interline agreements and
(iii) directly from freight forwarders and other shippers. See
"Business--Customers." The Company utilizes its own fleet of 14 DC-8 aircraft
and the services of other airlines through interline and other contractual
relationships to provide reliable air cargo service between MIA and South and
Central America and the Caribbean. The Company has interline relationships with
over 50 airlines, including Air France, China Airlines, Continental Airlines,
Iberia, Korean Air and Virgin Atlantic. The Company's scheduled cargo services
transported approximately 32,000 tons of freight in 1994 and approximately
68,900 tons of freight in 1997, a compound annual increase of 29.1%. The
Company plans to expand its scheduled cargo services by acquiring both widebody
and additional DC-8 aircraft.
The Company's customers utilize the Company's ACMI services to obtain lift
capacity without acquiring their own aircraft. Under a typical ACMI contract,
the Company supplies an aircraft, crew, maintenance and insurance, either on a
regularly scheduled or AD HOC basis, while the customer bears all other
aircraft operating expenses, including fuel, landing and parking fees and
ground and cargo handling expenses. The Company's ACMI customers also bear the
risk of utilizing the cargo capacity of the Company's aircraft. By offering
ACMI services in addition to scheduled cargo services, the Company is able to
schedule its fleet to satisfy demand on its own routes while improving
utilization and generating additional revenue from ACMI services.
The Company's FAA-approved repair stations perform a full range of
maintenance, repair and overhaul services for DC-8 aircraft and Pratt & Whitney
JT3D-3B aircraft engines. The Company also operates professional pilot and
mechanic training schools. In 1996, the Company moved into a new hangar and
maintenance facility at MIA, which enables the Company to expand its third
party repair and maintenance services while performing all necessary repairs
and maintenance on its own aircraft. The Company began marketing its third
party repair and maintenance capabilities in 1996 and intends to seek
certification to provide similar services for other types of aircraft and
engines.
COMPANY HISTORY
For approximately 20 years prior to founding the Company's predecessor in
1976, J. Frank Fine owned farming operations in 12 different Latin American and
Caribbean countries and, as a result, had depended on the airlines serving
these countries for timely delivery of his products to processing plants
52
located primarily in the United States. Many of these airlines did not maintain
adequate capacity to handle the seasonal needs of growers or were ill-equipped
to handle the special requirements of doing business in Latin American and
Caribbean markets. Perceiving a need for reliable transport, in 1976 Mr. Fine
acquired two early model Boeing 707 aircraft which he leased to airlines
serving those markets. In 1982, Barry H. Fine joined the Company, which at the
time owned three aircraft which it leased primarily to international airlines
serving South and Central America and the Caribbean. To maintain control over
its operating costs and improve the turn-around time and reliability of its
aircraft, the Company developed its own maintenance and repair capabilities,
and was certified in 1986 as an FAA repair station for DC-8 aircraft, and in
1987, as an FAA repair station for Pratt & Whitney JT3D-3B aircraft engines.
These certifications allowed the Company to lease and provide its aircraft on
an AMI (aircraft, maintenance and insurance) basis. By 1989, the Company's
fleet consisted of five DC-8 aircraft, which it leased on an AMI basis to a
number of domestic and foreign airlines for both regular and AD HOC cargo
service throughout South and Central America and the Caribbean. The Company
received its U.S. air carrier operating certificate in November 1992. The
Company began developing its own cargo routes in 1994 and has expanded the
coverage of its scheduled cargo services from nine destinations as of December
31, 1994 to 25 cities in 17 countries in South and Central America and the
Caribbean as of June 30, 1998. The Company opened its first regional sales
offices in Houston and New York in 1994. Since that time, the Company has
expanded its sales network to include additional regional sales offices in
Chicago and Atlanta, 16 cargo sales offices in South and Central America and
the Caribbean and general sales agents that represent the Company in the
western United States, Canada, Europe, Asia and the Pacific Rim and in seven
South and Central American and Caribbean cities as of June 30, 1998.
COMPETITIVE STRENGTHS
Management believes that the Company's success has largely been the result
of the following strengths:
/bullet/ ESTABLISHED MARKET POSITION. Since 1994, the Company has
transported more international air cargo to and from MIA, the principal air
gateway for South and Central America and the Caribbean, than any other
carrier. Management believes that the Company has achieved its market position
as a result of the frequency of the Company's flights and its excellent
reputation for reliability and service to its customers, which include freight
forwarders, integrated carriers, passenger and cargo airlines and major
shippers. The Company believes that regulatory and other restrictions imposed
by U.S. and foreign governmental authorities would make it difficult for a new
airline entrant to obtain the necessary operating authority and route rights to
duplicate the Company's business. Management also believes that the scarcity of
available facilities at MIA will inhibit potential competitors seeking to
duplicate the Company's operations.
/bullet/ LOW AIRCRAFT AND OPERATING COST STRUCTURE. The Company maintains
a low cost structure through: (i) the opportunistic acquisition of used
aircraft, engines and spare parts, (ii) the elimination of duplicative costs by
maintaining favorable labor rates and other operating costs associated with the
centralizing of its principal flight and maintenance operations in Miami, (iii)
the "in-sourcing" of activities such as training, aircraft and engine repairs
and maintenance, and (iv) the use of its own ground and cargo handling
personnel and equipment. The Company also seeks to increase its profitability
and enhance aircraft utilization by maintaining an optimum balance of scheduled
cargo services and ACMI services for third parties. The Company's uniform
aircraft fleet has allowed it to standardize its spare part inventories, and
maintenance and training operations, thereby increasing operating efficiencies
and improving the reliability of the Company's air cargo services. The
Company's low cost structure also enables it to utilize its aircraft profitably
in lower yielding freight markets.
/bullet/ ASSET OWNERSHIP. The Company has made a substantial investment to
acquire the assets necessary to support its operations, including 14 DC-8 and
one L-1011 aircraft, 20 used spare aircraft engines, an extensive inventory of
spare parts and aircraft components, maintenance and engine repair equipment
and substantially all of the equipment and vehicles for its aircraft ground and
cargo handling
53
requirements. See "Business--Aircraft Fleet." Management believes that the
value of the Company's operating assets is substantially in excess of their
book value. The Company has also made a substantial commitment of capital and
resources to obtain required governmental authorizations, develop its sales and
marketing network and build the infrastructure necessary to support its
scheduled cargo and ACMI services.
/bullet/ EXPERIENCED MANAGEMENT TEAM. The Company is led by an experienced
management team, headed by Messrs. Frank and Barry Fine, who together have over
50 years of experience in the air cargo industry and whose knowledge of the
South and Central American and Caribbean business environment has been a key
element of the Company's success. The other key members of the Company's
management team, including those responsible for the Company's flight
operations, maintenance and repair facilities, as well as marketing and sales
activities, each have over 20 years of industry experience, including
significant experience in the Company's markets.
/bullet/ DIVERSITY OF CUSTOMER BASE. The Company offers a wide range of
air cargo services to a diverse customer base of over 1,200 customers that
includes international and domestic freight forwarders, integrated carriers,
passenger and cargo airlines, major shippers and the United States Postal
Service. Because the Company is able to provide its customers a broad range of
services tailored to their particular needs, management believes that the
Company is well positioned to benefit from the expected growth in demand for
air freight transportation between the United States and South and Central
America and the Caribbean.
GROWTH STRATEGY
The Company's growth strategy revolves around capitalizing on its position
as a leading provider of air freight transportation services between the United
States and South and Central America and the Caribbean. Principal elements of
the Company's strategy are as follows:
/bullet/ INCREASE LIFT CAPACITY. The Company believes that there are
opportunities to expand its air cargo services to South and Central America and
the Caribbean and intends to strengthen its market position by utilizing both
the capabilities and capacity of its existing aircraft and the increased range
and capacity of the widebody aircraft. Management believes that the Company's
existing DC-8 fleet will accommodate expected growth in air freight service
demand in the Company's existing markets and can also be employed effectively
to commence service to new markets within South and Central America and the
Caribbean. The Company intends to increase the number of markets it can serve
and its capacity in existing markets by adding both widebody and additional
DC-8 aircraft to its fleet. In December 1997, the Company acquired an L-1011
aircraft, which it expects to place into service during the second half of
1998. Widebody aircraft have longer range and significantly larger volume
capacity than DC-8s and will permit the Company to extend its route structure
to serve the southernmost countries of South America, such as the Mercosur
countries, and to more economically serve high cargo volume routes on which the
Company currently operates multiple daily flights. DC-8s that are utilized on
these routes will be redeployed to increase capacity to existing markets and to
develop service to new destinations that are more efficiently served with
narrowbody aircraft. Management believes that increasing the number of
destinations the Company serves will enhance its ability to develop and broaden
relationships with freight forwarders, airlines and other shippers.
/bullet/ EXPAND SALES NETWORK AND TRANSPORTATION LOGISTICS SERVICES. The
Company plans to expand its domestic and international sales network by opening
new domestic sales offices, adding sales personnel, increasing the number of
general sales agents who market the Company's services domestically and
internationally and expanding the Company's interline relationships with major
international airlines. The Company has general sales agents that market its
air cargo services in the western United States, Canada, Europe, Asia and the
Pacific Rim. The Company supplements the air cargo sales efforts of its own
personnel and general sales agents by entering into interline relationships
with international airlines that sell air freight services to destinations
served by the Company. The Company intends to expand the number of such
relationships and the amount of air freight it transports
54
for these airlines. The Company also plans to increase the scope of its
transportation logistics services, particularly in South and Central America
and the Caribbean, where other airlines and freight forwarders play a much
smaller role in arranging for these services. The Company already offers its
customers intermodal services, such as local freight pick-up and delivery, in
El Salvador and the Dominican Republic.
/bullet/ EXPAND ACMI SERVICES. Management believes that demand for ACMI
services will continue to increase, from South and Central America, Caribbean
and domestic carriers seeking to increase their lift capacity without
committing to purchase or lease additional aircraft. Management further
believes that the Company's acquisition of widebody aircraft will enable it to
market its ACMI services to a broader range of customers, including those who
require the longer range and/or larger volume capacity of these aircraft. The
Company also plans to utilize its existing and any newly acquired DC-8s to
increase its ACMI capabilities. By continuing to provide ACMI services with its
existing and any newly-acquired aircraft, the Company believes that it can
further increase aircraft utilization at the same time it expands its scheduled
cargo services.
/bullet/ PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue
strategic acquisitions that are complementary to the Company's business.
Management's criteria for identifying attractive acquisition opportunities
include: (i) expanding fleet size at a favorable cost, (ii) diversifying and
expanding the Company's customer base, (iii) increasing economies of scale
related to maintenance and cargo handling and (iv) adding operating and route
authority.
AIR CARGO SERVICES
The Company's scheduled cargo services provide seamless transportation
through its MIA hub linking North America, Europe, Asia and the Pacific Rim
with South and Central America and the Caribbean to serve the varied needs of
international and domestic freight forwarders, integrated carriers, passenger
and cargo airlines, major shippers and the United States Postal Service. The
Company offers its customers a number of services, including scheduled cargo
services, ACMI services, AD HOC charters and transportation logistics services,
such as warehousing, local pick-up and intermodal transportation of freight.
SCHEDULED CARGO SERVICES
As of June 30, 1998, the Company offered regular air cargo service between
its MIA hub and 25 cities in South and Central America and the Caribbean, of
which 19 are served directly by Company routes, three are served by customers
that utilize the Company's aircraft on an ACMI or AMI basis to service such
routes and three are served by other airlines pursuant to interline
relationships. Cargo service is offered on a pre-booked, priority or
space-available basis, and the Company imposes no size or weight restrictions
on shipments, except limitations necessitated by the capacity of the aircraft
serving the particular route. The Company does not dedicate a particular
aircraft to any one route and maintains the flexibility to adjust its flight
services, number of daily flights and the cargo capacity of the aircraft
serving each destination and to add intermediate stops to pick up or deliver
additional cargo based on variations in demand. The Company has operated as
many as six flights per day to a particular destination to meet the demand for
air cargo service to such destination. The Company's scheduled cargo services
transported approximately 32,000 tons of freight in 1994 and approximately
68,900 tons of freight in 1997, a compound annual increase of 29.1%.
The Company's freight rates are based upon the type of freight, weight or
volume, delivery service and destination. Rates vary depending on the type of
freight and, in most instances, durable goods command higher rates than
perishable or dry goods. The Company offers priority next day delivery service
at double the Company's normal rates and second day delivery service which is
billed on a space-available basis. Rates on longer routes generally are higher
than short-haul destinations. Freight is priced on a per kilogram basis and is
adjusted for low weight, high volume freight in accordance with industry
standards. The Company also offers pallet rates for larger shipments. From time
to time, the
55
Company's customers require the shipment of hazardous or restricted materials
or oversized pieces which require additional handling, and the customer is
charged higher rates. The Company charges a base rate plus prevailing second
carrier agreement rates for its interline services.
As of June 30, 1998, the Company offered scheduled cargo services to and
from MIA and the following destinations:
DESTINATION
- ------------------------------------------- DAYS OF SERVICE ROUND-TRIP FLIGHTS
COUNTRY CITY PER WEEK(1) PER WEEK(1)
- ------------------------ ---------------- ----------------- -------------------
Brazil Guarulhos 2 2
Brazil Viracopos 2 2
British Virgin Islands Tortola(2) 1 1
Colombia Bogota(3) 6 18
Costa Rica San Jose 5 5
Dominican Republic Santo Domingo 6 6
Dominican Republic Puerto Plata 3 3
Ecuador Guayaquil 6 9
Ecuador Quito 6 9
Ecuador Manta 2 2
El Salvador San Salvador 5 5
Guatemala Guatemala City 7 7
Haiti Port-au-Prince 2 2
Honduras San Pedro Sula 4 4
Jamaica Montego Bay(3) 3 3
Jamaica Kingston(3) 3 3
Nicaragua Managua 5 5
Panama Panama City 6 6
Puerto Rico San Juan 5 5
Trinidad and Tobago Port-of-Spain 2 2
U.S. Virgin Islands St. Thomas(2) 5 5
U.S. Virgin Islands St. Croix(2) 5 5
Venezuela Caracas 6 12
Venezuela Maracaibo 3 3
Venezuela Valencia 7 7
- ----------------
(1) Represents the typical number of days of service and round-trip flights per
week that the Company offers air cargo services to and from each
destination. The actual number of days of service and round-trip flights
per week to a destination varies depending on demand.
(2) The Company sells air cargo services for these destinations, which it does
not directly serve. Customers' cargo is transferred pursuant to an
interline arrangement at the Company's Puerto Rico hub.
(3) The Company sells air cargo services on these routes, on which other
carriers provide service utilizing the Company's aircraft, either on an
ACMI or AMI basis.
The Company transports a broad range of goods and commodities. Generally,
a majority of the southbound freight consists of durable goods, such as
industrial equipment and parts, electronic and computer equipment, medical
instruments, pharmaceuticals, vehicles, oilfield equipment, magazines,
newspapers and mail, consumer durables and textiles. Northbound freight is
comprised mainly of finished textiles, pharmaceuticals, handicrafts, seafood,
flowers and fruits and vegetables. Many of the items that the Company
transports northbound to the United States are perishable commodities, and its
customers rely on the dependability of the Company's cargo service and its
ability to accommodate seasonal and variable air freight requirements.
CARGO SALES NETWORK AND MARKETING
CARGO SALES NETWORK. As of June 30, 1998, the Company's sales network was
comprised of the Company's Miami headquarters, six regional sales offices in
major U.S. cities (four of which are Company operated and two of which are
operated by general sales agents), 23 sales offices in South and
56
Central America and the Caribbean (16 of which are Company operated and seven
of which are operated by general sales agents) and general sales agents in
Europe, Canada, Asia and the Pacific Rim. The Company's sales efforts are
designed to maximize utilization of the Company's scheduled cargo service by
seeking to achieve a balance between southbound and northbound air cargo
shipments.
Each of the Company's sales offices markets the Company's air cargo
services to customers within its region. The Company's U.S. sales offices, as
well as its offices in El Salvador and the Dominican Republic, have
transportation logistics capabilities, including intermodal relationships with
major trucking companies for local pick-up and delivery of customers' freight.
Company personnel solicit shipment orders and process air waybills and other
documentary requirements for customers' shipments. In areas not covered
directly by the Company's own sales personnel, the Company engages general
sales agents on a commission basis to sell its air cargo services. Most of
these general sales agents represent the Company on an exclusive basis to
destinations served by the Company. Air cargo sales made by general sales
agents are based on the Company's published rate sheets and are documented
utilizing the Company's air waybills.
The following table sets forth certain information concerning the location
of the Company's and its general sales agents' offices and the major cities
served by such offices as of June 30, 1998:
DOMESTIC INTERNATIONAL
- ---------------------------------------------- ---------------------------------------------
LOCATION AND CITIES SERVED DATE OPENED LOCATION AND CITIES SERVED DATE OPENED
- ---------------------------- --------------- ---------------------------- --------------
MIAMI 1st Qtr. 1994 Caracas, Venezuela 1st Qtr. 1994
Ft. Lauderdale, FL Guatemala City, Guatemala 1st Qtr. 1994
Jacksonville, FL Managua, Nicaragua 1st Qtr. 1994
Orlando, FL Maracaibo, Venezuela 1st Qtr. 1994
Tallahassee, FL San Pedro Sula, Honduras 1st Qtr. 1994
Tampa, FL San Salvador, El Salvador 1st Qtr. 1994
Panama City, Panama 3rd Qtr. 1994
HOUSTON, TX 1st Qtr. 1994 San Jose, Costa Rica 3rd Qtr. 1994
Austin, TX Guayaquil, Ecuador 2nd Qtr. 1995
Albuquerque, NM Port of Spain, Trinidad(1) 2nd Qtr. 1995
Dallas, TX Port Au Prince, Haiti(1) 2nd Qtr. 1995
Laredo, TX Quito, Ecuador 2nd Qtr. 1995
Little Rock, AK British Virgin Islands(1) 3rd Qtr. 1995
New Orleans, LA San Juan, Puerto Rico 3rd Qtr. 1995
Memphis, TN U.S. Virgin Islands(1) 3rd Qtr. 1995
Oklahoma City, OK
San Antonio, TX LONDON, ENGLAND(1) 4th Qtr. 1995
Tulsa, OK Amsterdam, Holland
Brussels, Belgium
NEW YORK, NY 1st Qtr. 1994 Dublin, Ireland
Albany, NY Frankfurt, Germany
Baltimore, MD Paris, France
Boston, MA Prestwick, Scotland
Buffalo, NY Milan, Italy
Hartford, CT Madrid, Spain
Newark, NJ Copenhagen, Denmark
Norfolk, VA Zurich, Switzerland
Philadelphia, PA Lisbon, Portugal
Pittsburgh, PA
Providence, RI Bogota, Colombia 1st Qtr. 1996
Richmond, VA Kingston, Jamaica(1) 1st Qtr. 1996
Rochester, NY Montego Bay, Jamaica(1) 1st Qtr. 1996
Syracuse, NY Puerto Plata, D.R. 1st Qtr. 1996
Washington, D.C. Santo Domingo, D.R. 1st Qtr. 1996
57
DOMESTIC INTERNATIONAL
- ---------------------------------------------- -------------------------------------------------
LOCATION AND CITIES SERVED DATE OPENED LOCATION AND CITIES SERVED DATE OPENED
- ---------------------------- --------------- -------------------------------- --------------
SAN FRANCISCO, CA(1) 1st Qtr. 1995 TORONTO, ONTARIO(1) 1st Qtr. 1997
Denver, CO Calgary
Portland, OR Regina
Salt Lake City, UT Vancouver
Seattle, WA Winnipeg
CHICAGO, IL 1st Qtr. 1995 MONTREAL, QUEBEC(1) 1st Qtr. 1997
Cleveland, OH Halifax
Cincinnati, OH Ottawa
Columbus, OH Quebec City
Detroit, MI
Indianapolis, IN HONG KONG AND BEIJING(1) 2nd Qtr. 1997
Kansas City, MO Bangkok, Thailand
Lincoln, NE Djakarta, Indonesia
Louisville, KY Ho Chi Min City, Vietnam
Milwaukee, WI Kuala Lumpur, Malaysia
Minneapolis, MN Osaka, Japan
Omaha, NE Seoul, Korea
St. Louis, MO Shanghai, Peoples Republic of
China
LOS ANGELES, CA(1) 1st Qtr. 1995 Singapore
Las Vegas, NV Taipei, Taiwan
Phoenix, AZ Tokyo, Japan
San Diego, CA
Sao Paulo, Brazil 2nd Qtr. 1997
ATLANTA, GA 1st Qtr. 1995
Birmingham, AL SYDNEY/MELBOURNE, AUSTRALIA(1) 1st Qtr. 1998
Charlotte, NC
Columbia, SC JOHANNESBURG, SOUTH AFRICA(1) 1st Qtr. 1998
Greensboro, SC
Jackson, MS Manta, Ecuador 2nd Qtr. 1998
Knoxville, TN Valencia, Venezuela 2nd Qtr. 1998
Nashville, TN
Savannah, GA
Winston-Salem, NC
- ----------------
(1) Represents the office of a general sales agent or interline sales agent.
MARKETING. The Company's sales personnel and general sales agents market
the Company's air cargo services directly to freight forwarders, integrated
carriers, passenger and cargo airlines and major shippers. The Company
participates in international air cargo trade shows and advertises its services
in industry trade journals. General sales agents directly market the Company's
air cargo services to potential customers within their territories using the
Company's trade name. In addition, some of the Company's general sales agents,
such as Air Cargo Partners (an affiliate of Virgin Atlantic), which represents
the Company in Europe and Asia, include the Company's air cargo services in
their sales literature and published rate sheets.
TRANSPORTATION LOGISTICS SERVICES
Freight forwarders, integrated carriers and airlines generally deliver
their cargo to the Company's facility at the point of departure. Accordingly,
most of the freight transported by the Company is either delivered to the
Company's MIA hub for shipment to South or Central America or the Caribbean, or
to a Company operations station in South or Central America or the Caribbean
for shipment to the United States or beyond. Smaller freight forwarders with
less developed logistics capabilities often rely
58
on the Company to arrange for truck or air transportation of their cargo
between the Company's MIA hub and the point of origin and/or destination. In
addition, some major freight forwarders request the Company to arrange for
shipment, generally by truck carrier, of their customers' freight from the
point of origin to expedite shipment and minimize administrative and handling
costs.
When the Company provides transportation logistics services, Company
personnel determine the best means of, and then arrange for, the transportation
of the freight between the Company's warehouse facilities in Miami and the
customers points of origin and destination. Whenever possible, the Company
seeks to achieve cost savings for its customers by consolidating shipments and
using major truckload carriers to transport the consolidated freight.
Southbound shipments that are more time-sensitive or which have a value that
justifies the cost of expedited delivery usually are transported by air on
scheduled passenger or cargo airlines to Miami. Each Company sales office
maintains warehouse capabilities for storage and consolidation of freight,
generally through arrangements with local third party warehouse operators.
The Company offers its customers a variety of ancillary services tailored
to their particular needs. These services include arranging for local pick-up
and delivery, warehousing of cargo shipments, expedited document delivery for
customs clearance and priority notification to consignees of cargo arrival. The
Company also assists in the preparation of air waybills and shipping documents
(including customs export declarations, pro forma and foreign consular invoices
and other customs documentary requirements), assists its customers in obtaining
export or import licenses and arranges for cargo insurance. The Company
generally charges its customers additional fees for each of these services.
CUSTOMERS
FREIGHT FORWARDERS. Freight forwarders are important participants in the
domestic and international air freight markets. Major international freight
forwarders increasingly have become reluctant to arrange transportation of
their customers' freight through integrated cargo carriers (such as FedEx, UPS
or DHL) because these carriers compete with the freight forwarders for the same
cargo customers. As a result, management believes that air cargo service
companies such as the Company, who can provide reliable air cargo services and
handle the air and truck cargo transportation requirements of both large and
small freight forwarders, have an opportunity to capture an increasing share of
the air freight market. Management estimates that sales to freight forwarders
in 1997 accounted for approximately 85% of the Company's revenues from
scheduled cargo services. Freight forwarder customers include major
international freight forwarders (such as Air Express International, Danzas,
Eagle USA, Expeditors International, Fritz Companies and Nippon Express) as
well as smaller regional freight forwarders.
INTERLINE CUSTOMERS. Many major international airlines sell air cargo
services to destinations they do not serve directly and utilize other airlines
or cargo carriers to transport their customers' cargo from the cities they
serve to the ultimate destination. For example, most of the Company's European
interline customers fly to Miami or one or more major South and Central
American or Caribbean destinations but sell air cargo services to other
destinations to which they have no direct flights. These airlines will deliver
cargo to the Company at its MIA hub or a regional sales office for
transportation at a fixed rate to the Company's South and Central American or
Caribbean scheduled destinations. The Company also transports cargo at a fixed
rate from its South and Central American and Caribbean scheduled destinations
to interline customers at its MIA hub to be distributed by interline customers
to destinations throughout the world. As of June 30, 1998, the Company handled
interline freight for the following airlines:
59
Aerolineas Argentinas B.W.I.A. LACSA South African Airways
Aeromar Cargolux Lan Chile Airlines Surinam Airways
Aero Transcolombiana Challenge Lauda Swiss World
Air Canada China Airlines Laparkan Taca International Airlines
Air France Continental Airlines L.T.U. Int'l Airways Tampa Airlines S.A.
Air Haiti Copa Airlines Lufthansa Tolair
Air Jamaica Delta Airlines Malev Tower Air
Alitalia El Al MAS Air TransWorld Airlines
ALM Antillean Airlines Fast Air Martinair Turks Air
Amerijet Finnair Midas Airlines United Airlines
Austrian Airlines Four Star Cargo NICA U.S. Airways
Avensa/Servivensa Iberia Northwest Orient Varig Brazilian Airlines
Aviateca Interamericana Polar Air Cargo Virgin Atlantic Airways
British Airways Korean Air Qantas Airways Limited
OTHER CUSTOMERS. The Company's customers also include the United States
Postal Service, the U.S. Department of State, industrial manufacturers,
distributors and other large corporations that arrange for the shipment of
their own air freight. Because of the Company's reliability, reputation and
position in its South and Central American and Caribbean markets, several major
multinational corporations have also either directed their independent freight
forwarders to use the Company's air cargo services or designated the Company as
their air carrier of choice for shipments to or from these markets.
During the year ended December 31, 1997 and the three months ended March
31, 1998, Aero Transcolombiana accounted for 13.5% and 11.2%, respectively of
the Company's total revenues. The Company had no single customer that accounted
for more than 10% of its total revenues in 1995 or 1996.
ACMI SERVICES
The Company's customers utilize the Company's ACMI services to obtain lift
capacity without acquiring their own aircraft. The Company currently has ACMI
contracts with eight unaffiliated customers, most of which are international
airlines. Under these contracts, the Company provides its aircraft from as
infrequently as one flight per week to as many as twelve flights per week, or
on an AD HOC basis. In addition, two of the Company's aircraft currently are
dedicated exclusively to service under AMI contracts that expire in 1999. The
Company also provides ACMI services for the seasonal or peak demands of Latin
American produce and flower growers and domestic delivery services such as the
United States Postal Service and United Parcel Service. Additionally, the
Company has received certification to fly equipment and cargo for the U.S.
Department of Defense.
A typical ACMI contract requires the Company to supply the aircraft, crew,
maintenance and insurance for specified cargo operations, while the customer is
responsible for substantially all other aircraft operating expenses, including
fuel, landing and parking fees and ground and cargo handling expenses. Under
the contract, the Company has exclusive operating control and direction of its
aircraft and its customer must obtain any government authorizations and permits
required to service the designated routes. See "--Government Regulation." Most
of the Company's ACMI contracts do not require the Company to operate a
specific aircraft for its customer. Generally, the Company's ACMI contracts are
for a two-year term but are cancelable by either party upon five days' written
notice.
With the exception of two aircraft operated by AMI customers, all of the
Company's aircraft are operated both on its own cargo flights and for ACMI
customers. This enables the Company to schedule its fleet to satisfy demand on
its own routes while improving fleet utilization and generating additional
revenue from ACMI services.
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AIRCRAFT FLEET
The Company's operating fleet is comprised of 14 narrowbody DC-8s, which
are short- to medium-range (2,000 to 3,000 nautical miles), medium cargo volume
(72,000 to 93,000 pounds) aircraft. The Company's fleet includes two "stretch"
DC-8s, which have a longer fuselage and more cargo volume capacity and are
generally utilized by the Company to serve higher volume routes. The Company
maintains flexibility to adjust on a daily basis the aircraft it uses for its
own cargo routes based on demand. For example, the Company may respond to low
demand on a particular route by utilizing the same aircraft to handle two or
more destinations or to satisfy higher demand on another route by utilizing its
stretch aircraft or adding additional flights. Similarly, although the Company
may commit to provide a cargo flight for an ACMI customer at a particular time
or date, the Company maintains the flexibility to utilize whichever of its
aircraft best serves the capacity and distance required for the flight.
The Company's aircraft range in age from 27 to 39 years, with an average
age of approximately 33 years. Based on the DC-8's useful life estimated by the
FAA and McDonnell Douglas and the Company's current maintenance program, the
Company expects to be able to operate its DC-8 aircraft for at least 10 more
years.
The following table contains information concerning the Company's
operating fleet at May 1, 1998:
NO. OF PALLETS APPROX. CARGO MOST RECENT MAJOR
AIRCRAFT TYPE UPPER/LOWER CAPACITY (LBS) MAINTENANCE CHECK(1)
- --------------- ---------------- ---------------- ---------------------
DC-8-61F 18/4 91,300 June 1997
DC-8-61F 18/4 91,800 April 1998
DC-8-55JT 13/2 92,700 October 1996(2)
DC-8-54JT 13/2 92,300 in progress
DC-8-54JT 13/2 91,700 May 1997
DC-8-54JT 13/2 92,300 November 1996
DC-8-54JT 13/2 92,200 July 1996
DC-8-54JT 13/2 89,200 August 1995
DC-8-54JT 13/2 92,600 December 1995
DC-8-54FM 13/2 91,500 March 1998
DC-8-51F 13/2 77,200 August 1997
DC-8-51F 13/2 75,200 February 1998
DC-8-51F 13/2 75,300 October 1997
DC-8-51F 13/2 72,300 in progress
- ----------------
(1) The most recent major maintenance check for each aircraft was a "C" check,
unless otherwise indicated. See "--Maintenance."
(2) The most recent major maintenance check for this aircraft was a "D" check.
The Company intends to increase its lift capacity by acquiring widebody
aircraft and additional DC-8 aircraft. In December 1997, the Company acquired
one L-1011 aircraft. The Company is in the process of becoming certified to
operate L-1011 aircraft and currently expects to place this aircraft in service
during the second half of 1998. As it has in the past, the Company expects to
acquire aircraft from a variety of sources, including airlines, aircraft
leasing companies, banks and other financial institutions and individual
aircraft owners.
Widebody aircraft, such as the McDonnell Douglas DC-10 or the Lockheed
L-1011, are capable of mid-range and long-range flights carrying a larger
volume cargo, resulting in operating efficiencies and economies of scale. The
Company believes that operating widebody aircraft will allow it to commence
service to more distant destinations which cannot be effectively served by the
Company at present due to the cargo capacity and range of its current fleet, as
well as increase its flexibility to serve current markets where air freight
demand is strong. To the extent the Company utilizes widebody aircraft to
service existing routes, it will redeploy the DC-8s currently serving those
markets to increase capacity to other markets, develop service to new markets
which are more efficiently serviced by narrowbody aircraft and increase its
ACMI services.
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FLIGHT OPERATIONS AND CONTROL. The Company's flight operations (including
aircraft dispatching, flight following and crew scheduling) are planned and
controlled by the Company's dispatch and flight operations personnel from the
Company's MIA base. The Company's flight control office is manned 24 hours per
day, seven days per week. Logistical support necessary for operations into the
airports served by the Company's flights also are coordinated from the
Company's MIA base.
To enhance the reliability of its service, the Company seeks, when
possible, to maintain at least one spare aircraft at all times. The spare
aircraft can be dispatched on short notice to most locations served by the
Company when a substitute aircraft is needed. Maintaining one or more spare
aircraft allows the Company to better ensure the availability of aircraft for
its regular cargo flights and to provide its ACMI customers with a high
dispatch reliability.
MAINTENANCE. The Company performs at its own facilities substantially all
of the inspections, maintenance and repairs required to keep the Company's
aircraft in operation and in compliance with the Company's FAA-approved
maintenance program. Whenever possible, the Company also utilizes its own
employees to perform line maintenance, such as correcting irregularities noted
by flight crews and maintaining aircraft log books, at the foreign airports
served by the Company. By maintaining its own fleet, the Company believes that
it reduces the maintenance costs, minimizes out-of service time for its
aircraft and achieves a high level of reliability.
Maintenance required by the FAA includes: routine daily maintenance;
maintenance every 150 hours or six months, whichever comes first (an "A
Check"), at an approximate cost of $500; scheduled maintenance every 425 hours
or 12 months, whichever comes first (a "B Check"), at an approximate cost of
$7,000; scheduled major maintenance work every 3,300 hours or 36 months,
whichever comes first (a "C Check"), at an approximate cost of $500,000; and a
major maintenance overhaul every 25,000 hours or 12 years, whichever comes
first (a "D Check"), at an approximate cost of between $1.3 million and $1.6
million. The Company generally schedules major maintenance on its aircraft
during periods of lower utilization. The Company estimates that, at current
rates of operation, six scheduled C Checks will be completed on the Company's
aircraft in 1998 and six will be completed in 1999 and that, on average, one of
its aircraft will require a D Check each year.
Since 1986, the Company's maintenance facility has been certificated as an
FAA repair station to perform maintenance on DC-8 series aircraft and their
related avionics and accessories, including all required airframe maintenance,
ranging from routine inspections to major airframe overhauls, as well as ADs
and service bulletin compliance. The Company also operates an FAA certified
repair station for Pratt & Whitney JT3D-3B aircraft engines, which performs
complete repair services on all Company aircraft engines. The Company's MIA
facility accommodates up to two large widebody aircraft (such as Boeing 747s),
three medium widebody aircraft (such as McDonnell Douglas DC-10s or Lockheed
L-1011s) or three narrowbody aircraft (such as DC-8s) simultaneously for
repairs and maintenance. See "--Facilities."
The Company's maintenance and engineering personnel coordinate all routine
and non-routine maintenance operations, including tracking the maintenance
status of each aircraft, communicating with maintenance personnel in connection
with every arrival and departure, consulting with manufacturers and vendors
about procedures to correct irregularities and training the Company's line
maintenance personnel on the requirements of the Company's FAA-approved
maintenance program. The Company conducts virtually all of its own maintenance
training.
The Company owns 20 used spare Pratt & Whitney JT3D-3B aircraft engines
and an extensive inventory of spare aircraft parts and consumable materials
required to support line maintenance, scheduled airframe maintenance and engine
maintenance and repairs. The Company purchased its spare aircraft engines at
various times between 1987 and 1995 and has maintained its spare aircraft
engines in accordance with FAA standards. All spare aircraft engines are
continually overhauled and refurbished to extend their useful life and are used
in the Company's normal operations on an as-needed basis. In addition, the
Company owns larger aircraft components, such as airframe structures,
62
landing gears and flight controls. The Company also owns three DC-8s that are
used solely for parts and has a supply of parts from four disassembled
aircraft. The Company opportunistically purchases spare parts, spare engines,
entire inventories and other aircraft components when "bulk" purchases of these
items have been available or market conditions are otherwise favorable.
Generally, bulk purchase opportunities have arisen when airlines or
manufacturers of parts sell large amounts of inventory in a single transaction
or in conjunction with a bankruptcy. Opportunistic inventory purchases have
allowed the Company to obtain a large inventory of spare parts at a lower cost
than could have been obtained by purchasing on an individual basis. From time
to time, parts may become unavailable or be in short supply. In the past, the
Company has been able to design and manufacture from manufacturers' drawings
structural parts pursuant to a limited license granted by the manufacturer. The
Company believes that such practices will continue to be available within the
industry in the near future.
TRAINING. The FAA mandates initial and recurrent training for most flight,
maintenance and engineering personnel. Initial pilot training consists of a
two-month program that involves FAA regulations and licensing exams, emergency
and security procedures, handling of hazardous materials, systems, flight
simulator sessions and actual operating experience with the Company's aircraft.
The Company generally hires pilots whom it has "pre-screened" as a result of
such training. The Company pays for all of the recurrent training required for
its pilots and pays for most of the training of its ground service and
maintenance personnel. The Company's training programs have received all
required FAA approvals.
The Company operates its own professional training schools at its
FAA-approved MIA facility, where it conducts all of the training programs
required for its personnel. In addition, the Company offers training to
third-party individuals in an effort to control its overhead costs related to
training. Generally at least 25% of each training class is comprised of
third-party individuals.
GROUND HANDLING. The Company utilizes its own ground handling personnel
and equipment for loading, servicing and maintaining the Company's aircraft at
MIA and at most of the other airports served by the Company.
FUEL. Fuel is a significant operating cost. The Company generally
purchases bonded fuel which is tax-free to the Company because the fuel is
utilized for international flights. The Company's exposure to fuel risk is
reduced to the extent that it provides air cargo services under ACMI contracts,
under which the customer is responsible for providing fuel. In the winter
months, the Company engages in a limited amount of market hedging against
possible winter price increases. The Company does not believe that fluctuations
in the price of fuel have had a significant impact on its results of operations
in recent years because it has been able to pass on increases to customers in
the form of fuel surcharges.
INFORMATION SYSTEMS
The Company has invested significant management and financial resources in
the development of information systems to facilitate its cargo, flight and
maintenance operations, provide its personnel accurate and timely information
and increase the level of service and information provided to its customers.
The Company is currently assessing its management information systems and plans
to upgrade or replace its existing systems, as necessary, within the next 18
months in order to meet the requirements of the Company's anticipated growth.
Information concerning the status of shipments currently is available only
to the Company's personnel, but the Company intends to increase the amount of
information available on-line to its customers. The Company also utilizes the
U.S. Customs Department's Automated Manifest System, which was first made
available at MIA, to expedite customs clearance for its customers' air freight.
This system allows the Company to electronically transfer its cargo manifest to
customs while a flight is in transit and "pre-clear" much of the cargo, thereby
reducing transfer delays, promptly releasing freight and allowing it to be
transported to its destination more quickly.
The Company's maintenance operations utilize information systems with bar
coding to track and control spare parts inventory and costs associated with
each maintenance task. In addition to
63
maintaining records concerning the maintenance status and history of each major
aircraft part or component, as required by FAA regulations, the Company
utilizes its information systems to track the labor and parts cost of each
maintenance task performed by its personnel.
The Company's flight operations dispatch department utilizes
Company-developed software to coordinate the Company's flight and crew
schedules, track flight time (both for scheduling of aircraft and parts
maintenance and overhauls and for invoicing the Company's ACMI customers for
their flights) and provide Company personnel and customers with flight status
information.
SECURITY AND SAFETY
SECURITY. The Company conducts various security procedures to comply with
FAA regulations. The Company's customers are required to inform the Company in
writing of the nature and composition of their air freight. The Company also
conducts daily cargo searches, x-rays its customers' air freight and conducts
searches for hazardous materials, weapons, explosive devices and illegal
freight. The Company uses search dogs in Miami to seek out explosives and
controlled substances. The Company also conducts searches for contraband in
foreign countries at the point of origin prior to departure for the United
States. Notwithstanding these procedures, the Company could unknowingly
transport contraband or hazardous materials for its customers, which could
result in fines, penalties, flight bans or possible damage to the Company's
aircraft. The Company believes it maintains an excellent cooperative
relationship with U.S. Customs, the U.S. Department of Agriculture and the U.S.
Drug Enforcement Agency.
SAFETY AND INSPECTIONS. Management is committed to the safe operation of
the Company's aircraft. In compliance with FAA regulations, the Company's
aircraft are subject to various levels of scheduled maintenance or "checks" and
periodically go through complete overhauls. See "--Aircraft Fleet--Maintenance."
The Company's maintenance efforts are monitored closely by the FAA, with FAA
representatives often being on-site to observe maintenance being performed. The
Company also conducts extensive safety checks and audits on a regular basis.
All of the Company's flight operations and maintenance manuals are FAA
approved.
In 1996, the Company underwent a Regional Aviation Safety Inspection
Program (RASIP) inspection, during which a team of regional FAA inspectors
conducted a focused inspection over a one-week period. The FAA advised the
Company that there were no material adverse findings as a result of the RASIP
inspection. In connection with the Company's move to its new hangar facility,
the Company underwent an audit by the local FAA Flight Standards District
Office, which resulted in the reissuance of the Company's repair station
certificate for that facility. In accordance with national FAA policy and
procedures, in April 1997, the Company passed a National Aviation Safety
Inspection Program (NASIP) inspection, the most stringent and in-depth FAA
inspection, in which a team of national FAA inspectors thoroughly audited and
inspected the Company's entire maintenance and flight operations for a period
of three weeks.
Following the August 7, 1997 crash of one of the Company's aircraft, the
Company's operations were placed under heightened scrutiny by the FAA. As a
result of concerns expressed by the FAA, the Company voluntarily ceased
operations on September 4, 1997, and on September 12, 1997 the Company entered
into the Consent Agreement. As part of the Consent Agreement, the Company
agreed not to resume operations until the FAA approved new cargo handling and
hazardous materials procedures to be implemented by the Company. Under the
Consent Agreement, the Company agreed to make a remedial payment of $1.5
million to the FAA for the costs of the FAA's investigation, review and
re-inspection of the Company. Pursuant to the Consent Agreement, $500,000 of
this assessment was waived as a result of the Company's compliance with certain
requirements prior to December 31, 1997. The Company resumed operations on a
limited basis on October 28, 1997, approximately seven weeks after suspending
operations. The Company is in full compliance with the terms of the Consent
Agreement.
Other than the August 1997 accident involving a Company aircraft, during
the last 10 years, the Company's aircraft, while being operated by the Company,
have not been involved in any accidents.
64
According to the National Transportation Safety Board Regulations, an "aircraft
accident" is an occurrence associated with the operation of an aircraft which
takes place between the time any person boards the aircraft with the intention
of flight and all said persons have disembarked, and in which any person
suffers death or serious injury, or in which the aircraft receives substantial
damage. In May 1994, one of the Company's aircraft, while being leased and
operated by a non-affiliated foreign airline, was involved in a non-fatal
aircraft accident. The aircraft sustained significant damage during take-off
due to the failure of the aircraft's nose gear component and was declared a
total loss by the insurers.
RISK MANAGEMENT
The Company is exposed to potential losses that may be incurred in the
event of an aircraft accident. An accident could result in substantial cost to
repair or replace a damaged aircraft or claims for damaged or destroyed cargo
and significant potential liability for claims for injury or death to third
parties and Company crew members. The Company purchases hull insurance for its
aircraft on an agreed value basis to provide coverage for total losses and
repair expenses in the event of a partial loss, subject to a $500,000
deductible in the event of partial losses. The DOT requires airlines to carry
at least $20 million of liability insurance. The Company currently maintains
public liability insurance in the amount of $500 million per occurrence. With
the exception of claims relating to the August 1997 crash of a Company
aircraft, the Company has had a low claim experience and believes that it
enjoys a good reputation with its insurance providers.
To insure against risks associated with its maintenance and engine repair
operations, the Company maintains aviation and airline products liability,
premises and hangarkeepers insurance in amounts and on terms generally
consistent with industry practice. To date, the Company has not experienced any
significant uninsured or insured claims related to its maintenance or engine
repair services.
The Company is legally responsible to its customers for the safe delivery
of cargo to its ultimate destination, subject to contractual and legal
limitations on liability of $20.00 per kilogram ($9.07 per pound) for
international flights. The Company carries insurance for these claims.
COMPETITION
The air freight industry is highly competitive. The Company's scheduled
cargo services compete for cargo volume principally with other all-cargo
airlines, integrated carriers and scheduled and non-scheduled passenger
airlines which have substantial belly cargo capacity. To a lesser extent, the
Company's scheduled cargo services also compete for freight forwarding business
with fully integrated carriers, some of which are also customers of the
Company. The Company's ACMI services compete primarily with other airlines that
operate all-cargo aircraft and have lift capacity in excess of their own needs.
The Company believes that the most important competitive factors in the air
freight transportation industry are price, flexibility and the quality and
reliability of the cargo transportation service. Competition in the ACMI
business is dependent principally on the payload and cubic capacities of
available aircraft, price and reliability. Many of the Company's competitors
have substantially greater financial and other resources and more extensive
facilities and equipment than the Company.
FACILITIES
All of the Company's aircraft loading, unloading, maintenance, flight
operations and ground handling are accomplished at its MIA hangar facility,
which consists of approximately 130,000 square feet of hangar space,
maintenance shops, work areas, and parts storage areas; approximately 448,000
square feet of aircraft ramp space; 20,000 square feet of administrative
offices; and approximately 50,000 square feet of expansion space which the
Company can employ in the future for offices or additional work shops. The
hangar facility accommodates up to two large widebody aircraft (such as Boeing
747s), three medium widebody aircraft (such as McDonnell Douglas DC-10s or
Lockheed L-1011s) or three narrowbody aircraft (such as DC-8s) simultaneously.
Management believes that the Company's maintenance facilities are more than
adequate to meet the Company's own maintenance needs for at
65
least the next several years and will permit the Company to take advantage of
opportunities to provide third party maintenance and airframe repair work.
The Company maintains two cargo facilities at MIA. The Company's main
cargo facility consists of 56,600 square feet of warehouse space, which is
utilized primarily to process air freight for export and 14,500 square feet of
office space, at which the Company's executive offices and Miami sales offices
are located. The Company's other cargo facility consists of 22,500 square feet
of warehouse space and 3,360 square feet of office space.
The Company leases its MIA hangar facility from Metropolitan Dade County
under a lease that expires in 2001, with two five-year renewal options. The
Company's MIA cargo facilities are also leased from Metropolitan Dade County.
The lease for the Company's main cargo facility expires in 1999 and the other
cargo facility is leased on a month-to-month basis.
The Company leases approximately 33,000 square feet for its engine repair
facilities from an unrelated third party under leases which expire in September
2001.
The Company maintains regional sales and administrative offices for its
scheduled cargo services operations located at or near airports in four major
U.S. cities and 14 South and Central American and Caribbean cities. See
"Business--Cargo Sales Network and Marketing--Cargo Sales Network." All of such
properties are leased from unrelated third parties.
EMPLOYEES
As of April 1, 1998, the Company had 864 employees, including 111 flight
operations personnel, 386 maintenance, technical and security personnel, 188
cargo handling personnel and 179 executive, administrative, sales and financial
personnel. The Company considers its relations with its employees to be
satisfactory.
On October 3, 1997, the Teamsters was certified to represent the Company's
Flight Deck Crew Members for collective bargaining purposes. Although the
Teamsters has been certified by the National Mediation Board, negotiations
regarding a collective bargaining agreement have only recently commenced. The
unionization of the Company's workforce could result in higher employee
compensation and working condition demands that could increase the Company's
operating costs or constrain its operating flexibility. None of the Company's
other employees are subject to a collective bargaining agreement. However, many
airline industry employees are represented by labor unions, and the Company
believes that, as it continues to expand, other of its employees may be subject
to union organizing efforts.
FAA regulations require the Company's pilots to be licensed as commercial
pilots, with specific ratings for the aircraft type to be flown, and to be
medically certified as physically fit to fly aircraft. Licenses and medical
certification are subject to periodic continuation requirements, including
recurrent training and minimum amounts of recent flying experience. Mechanics
and quality control inspectors must also be licensed and qualified for specific
aircraft. Under the Company's supplemental certification status flight
dispatchers do not need to be licensed. The Company routinely performs employee
background checks for a ten-year period prior to employment and conducts more
pre-employment screening than mandated by FAA regulations. In addition, the
Company's management personnel who are directly involved in the supervision of
flight operations, training, maintenance and aircraft inspection must meet
experience standards prescribed by FAA regulations. All of the Company's
employees are subject to pre-employment drug and alcohol testing, and employees
holding certain positions are subject to subsequent random testing.
GOVERNMENT REGULATION
GENERAL. The Company is subject to regulation under U.S. laws and the laws
of the various countries to which it flies its aircraft. The Company is also
subject to various international bilateral air
66
services agreements between the United States and the countries to which the
Company provides scheduled cargo services and must obtain permission from the
applicable foreign government to provide service to that country.
DOMESTIC REGULATION. The Company is subject to the jurisdiction of the FAA
with respect to aircraft maintenance and operations, including flight
operations, equipment, aircraft noise, ground facilities, dispatch,
communications, training, weather observation, flight time, crew
qualifications, aircraft registration, and other matters affecting air safety.
The FAA has the authority to suspend temporarily or revoke permanently the
authority of the Company or its licensed personnel for failure to comply with
regulations promulgated by the FAA and to assess substantial civil penalties
for such failure. The Company's aircraft, flight personnel and flight and
emergency procedures are subject to periodic inspections and tests by the FAA.
The FAA also conducts safety audits and has the power to impose fines and other
sanctions for violations of airline safety regulations. The FAA also has
jurisdiction over the transportation of hazardous materials. Shippers and air
carriers of hazardous materials generally share responsibility for compliance
with these regulations, and shippers are responsible for proper packaging and
labeling. Substantial monetary penalties can be imposed on both shippers and
air carriers for infractions of these regulations as well as possible criminal
penalties.
The FAA has promulgated under the ANCA regulations certain Stage III noise
requirements, pursuant to which airlines such as the Company must bring their
fleets into compliance with allowable noise levels in phases, with full
compliance required by December 31, 1999. In order to meet the Stage III
requirements, the Company currently intends to install hushkits on between six
and eight of its aircraft in 1998 and the balance by December 31, 1999. The
Company intends to purchase hushkits for this purpose from a related party. See
"Certain Transactions." The Company estimates that the average cost of such
hushkits will be approximately $2.25 million per aircraft, and that the
aggregate cost to the Company to hushkit its 14 DC-8s and to acquire two spare
hushkits will be $36.0 million, of which approximately $14.0 million had been
incurred as of March 31, 1998. To date, however, the Company has not installed
hushkits on any of its aircraft, and has met the Stage III requirements
applicable to it through interchange agreements with other carriers. Pursuant
to such interchange agreements and under current rules promulgated by the FAA,
the Company leases aircraft that meet the Stage III standards, at a flat rate
cost of $6,000 per month per aircraft and between $2,200 and $2,700 per block
hour, from these other carriers, which has allowed the Company to comply with
the FAA's Stage III requirements. The Company is capable and has the authority,
right and approval from the FAA to operate, under such interchange agreements,
third party aircraft.
The DOT maintains authority over domestic and international aviation and
has jurisdiction over international routes. In order to engage in its air
transportation business, the Company is required to maintain a Certificate of
Public Convenience and Necessity ("CPCN"). Prior to issuing a CPCN, DOT
examines a company's managerial competence, financial resources and plans and
compliance disposition in order to determine whether the carrier is fit,
willing and able to engage in the transportation services it has proposed to
undertake. Among other things, a company holding a CPCN must qualify as a
United States citizen, which requires that it be organized under the laws of
the United States or a State, territory or possession thereof; that its chief
executive officer and at least two-thirds of its Board of Directors and other
managing officers be United States citizens; that not more than 25% of its
voting stock be owned or controlled, directly or indirectly, by foreign
nationals; and that it not otherwise be subject to foreign control. A CPCN
confers no proprietary rights on the holder and DOT may impose conditions or
restrictions on such a CPCN. The DOT has issued the Company (i) a CPCN to
engage in interstate and overseas charter air transportation, (ii) a CPCN to
engage in foreign charter air transportation and (iii) a CPCN to engage in
scheduled air transportation between Miami, Florida and Santo Domingo,
Dominican Republic. By virtue of the CPCNs to engage in interstate, overseas
and foreign charter air transportation of property and mail, the Company is
vested with authority from the U.S. government to conduct all-cargo operations
worldwide. In addition, the DOT has granted the Company numerous "exemptions"
from the federal transportation statute to permit the Company to engage in
scheduled foreign air transportation to 26 cities in 17 countries. Many
carriers operate under such exemption authority, which is granted for up to a
period of two years and is typically renewed by
67
the DOT upon timely requests to do so. CPCNs and grants of exemption authority
are subject to standard DOT terms, conditions and limitations and may be
conditioned, suspended or withdrawn. The Company is also required to obtain
separate DOT authorization for each long-term (over 60 days) ACMI arrangement.
Several aspects of airline operations are subject to regulation or
oversight by Federal agencies other than the FAA or the DOT. For instance,
labor relations in the air transportation industry are generally regulated
under the Railway Labor Act, which vests in the National Mediation Board
certain regulatory powers with respect to disputes between airlines and labor
unions arising under collective bargaining agreements. In addition, the Company
is subject to the jurisdiction of other governmental entities, including the
FCC regarding its use of radio facilities pursuant to the Federal
Communications Act of 1934, as amended; the Commerce Department regarding the
Company's interstate transportation of cargo; the Customs Service regarding
inspection of cargo imported from the Company's international destinations; the
Immigration and Naturalization Service regarding the citizenship of the
Company's employees; the Animal and Plant Health Inspection Service of the
Department of Agriculture regarding the inspection of animals, plants and
produce imported from the Company's international destinations regarding the
Company's international operations; the Environmental Protection Agency
regarding shipment of hazardous materials and compliance with standards for
aircraft exhaust and noise emissions; and the Department of Labor regarding the
Company's employees. The Company believes that it is in material compliance
with all applicable laws and regulations of such governmental entities.
FOREIGN REGULATION. To the extent required to do so, the Company obtains
authority to conduct foreign operations from applicable aeronautical and other
governmental authorities. As with the certificates and license obtained from
U.S. authorities, the Company must comply with all applicable rules and
regulations imposed by foreign governmental authorities or be subject to the
suspension, amendment or modification of its operating authorities.
LEGAL PROCEEDINGS
As a result of the August 1997 accident, the Company is currently subject
to lawsuits brought by the families of the individuals who died and several
businesses that were affected by the accident and is aware of other claims
pending which have not reached litigation. All such litigation is being
defended by the Company's insurance carrier, without reservation of rights, and
management has no reason to believe that the Company's liability insurance
coverage will not be sufficient to cover all claims arising from the accident.
While the Company is from time to time involved in litigation in the
ordinary course of its business, there are no material legal proceedings
currently pending against the Company or to which any of its property is
subject.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
The following table sets forth certain information regarding the
directors, executive officers and certain key employees of the Company:
NAME AGE POSITION
- -------------------------------- ----- ------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
J. Frank Fine .................. 73 Chairman of the Board
Barry H. Fine .................. 45 President, Chief Executive Officer and Director
John D. Zappia ................. 46 Senior Vice President and Chief Operating Officer
Orlando M. Machado ............. 39 Senior Vice President and Chief Financial Officer
CERTAIN KEY EMPLOYEES
Celeste A. Lipworth ............ 35 Vice President, General Counsel
Terence T. Sullivan ............ 36 Vice President, Director of Finance
Nanci Adels .................... 41 Vice President, Director of Sales
Hugh P. Nash ................... 57 Vice President, Marketing and Sales
Anthony D. Phillips ............ 53 Vice President, Interline and International Marketing
Daniel L. Stemen ............... 30 Vice President, Director of ACMI Services
J. FRANK FINE founded the Company's predecessor in 1976 and has served as
the Company's Chairman of the Board since its inception. Mr. Fine also served
as the Company's President and Chief Executive Officer from its inception until
June 1997. Mr. Fine also served as Vice President, North America and General
Sales Agent of Alas de Transporte International, S.A., a Dominican all-cargo
airline ("Alas"), from 1988 to 1992; Vice President, North America and General
Sales Agent of Interamericana de Aviacion, C.A., a Venezuelan all-cargo airline
("Interamericana"), from 1988 to 1992; Vice President, North America and
General Sales Agent of Aerochago, S.A., a Dominican all-cargo airline
("Aerochago"), from 1985 to 1988; and President, North America and General
Manager of Aeromar C. por A., a Dominican all-cargo carrier ("Aeromar"), from
1978 to 1985. Mr. Fine is the father of Barry H. Fine.
BARRY H. FINE has served as the Company's President and Chief Executive
Officer since June 1997 and has served as a director of the Company since its
inception. Mr. Fine served as Vice President and General Manager of the Company
from its inception until June 1997. Mr. Fine served as Vice President, North
America, U.S. General Counsel and U.S. General Sales Agent of Alas from 1988 to
1992; Vice President, North America and U.S. General Sales Agent of
Interamericana from 1988 to 1992; Vice President, North America and General
Counsel of Aerochago from 1985 to 1988; and Vice President, North America and
General Counsel of Aeromar from 1982 to 1985.
JOHN D. ZAPPIA has served as the Company's Senior Vice President and Chief
Operating Officer since June 1997. Mr. Zappia served as Senior Vice President,
Maintenance and Operations of the Company from November 1992 until June 1997.
Since 1991, Mr. Zappia has been a member of the Miami Maintenance Management
Council, an association of maintenance companies and was its President from
1991 to 1995. From March 1984 to November 1992, Mr. Zappia served as Vice
President of Maintenance of Agro Air. Prior to joining the Company, Mr.
Zappia's experience in the airline industry includes: Electrical and Avionic
Lead Mechanic of Air Florida (1980-1984); Technical Consultant to Aviation
Components and Accessories, Inc., an FAR 145 repair station (1981-1984); Lead
Avionics and Electrical Mechanic of Airlift International, Inc. (1979-1980);
Supervisor, FAA Accessory Overhaul Shop of Marco Island Airways (1977-1979);
and Accessory Mechanic of Dixie Air Parts Inc. (1972-1979).
ORLANDO M. MACHADO has served as the Company's Senior Vice President and
Chief Financial Officer since July 1997. From December 1987 to June 1997, Mr.
Machado held various positions at Greenwich Air Services, Inc., a diversified
independent gas turbine engine repair and overhaul company
69
("Greenwich"), and most recently served as Vice President of Finance. Prior to
joining Greenwich, Mr. Machado, who is a certified public accountant, was
employed by Coopers & Lybrand, L.L.P., as an audit manager.
CELESTE A. LIPWORTH has served as a Vice President of the Company since
November 1997 and as the Company's General Counsel since November 1996. From
1993 to 1996, Ms. Lipworth was an associate at the law firm of Popham, Haik,
Schnobrich & Kaufman, Ltd. From 1991 to 1992, Ms. Lipworth was an associate at
the law firm of Crowell & Moring.
TERENCE T. SULLIVAN has served as the Company's Vice President, Director
of Finance since July 1997. From June 1994 to July 1997, Mr. Sullivan served as
Controller of the Company. From May 1993 to May 1994, Mr. Sullivan served as
Controller of Aeromar. From September 1991 to May 1993, Mr. Sullivan served as
Controller of Miami Aircraft Support, Inc., a ground support services company.
From August 1988 to August 1991, Mr. Sullivan served as Controller and was a
partner of International Futures Strategists, an investment brokerage company.
From April 1984 to July 1988, Mr. Sullivan was an accountant with the firm of
Samuels & Company.
NANCI ADELS has served as Fine Air's Vice President, Director of Sales
since July 1996. From 1991 to 1996, Ms. Adels served as Regional Manager for
Fine Air's S.W. Region in Houston, Texas. From 1980 to 1987, Ms. Adels held
various positions at British Caledonian Airways, an international passenger and
cargo airline company, and most recently served as Cargo Sales Manager.
HUGH P. NASH has served as Fine Air's Vice President, Marketing and Sales
since November 1994, and served as Vice President, Northeast Region of Fine Air
from November 1993 to November 1994. Mr. Nash's experience in the air cargo
industry includes: Regional Manager, Southwest United States of Stair Cargo
Services/Intertrans Corp., a multinational forwarding company (1984-1993);
President of DCA, an airline general sales agency (1992-1994); Sales Manager,
Cargo of British Caledonian Airways (1980-1982); various positions, including
Agency Administrator, North America and Director, National Accounts, with MSAS,
a multinational air and ocean forwarding company (1971-1980); and various
positions, including International Sales Specialist/Eastern Region, with Emery
Air Freight (1965-1971).
ANTHONY D. PHILLIPS has served as Fine Air's Vice President, Interline and
International Marketing since October 1994. Mr. Phillips' experience in the air
cargo industry includes: General Manager, North America of Belize Air
International (1988-1994); various positions, including Director, Industry
Affairs and Director, Reservations, with Northeastern International Airways
(1983-1986); various positions, including Director, Caribbean and Director,
European Operations, with Air Florida (1977-1983); Regional Sales Manager of
Olympic Airways and Sabena World Belgian Airlines (1973-1977); and various
positions, including Systems Trainer, with Pan American Airways.
DANIEL L. STEMEN has served as Fine Air's Vice President, Director of ACMI
Services since January 1998 and as Assistant Director of Operations since
January 1995. From October 1992 until January 1995, Mr. Stemen served as the
Manager of Flight Operations of the Company. Since 1993, Mr. Stemen has also
been licensed as a DC-8 First Officer. From 1986 to 1992, Mr. Stemen served as
a technical adviser and FAA Liaison for several small airlines operating out of
MIA and from 1988 to 1992 he served as Vice President of Operations for Trans
International Crew Leasing.
Officers of the Company serve at the pleasure of the Board of Directors.
Except as noted above, there are no family relationships among any of the
Company's executive officers and directors. Following the completion of the
Offering, the Company intends to increase the size of its Board of Directors
and add at least one independent director.
70
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth all
compensation awarded to, earned by or for services rendered to the Company in
all capacities during the year ended December 31, 1997 by the Chief Executive
Officer and the other executive officers of the Company whose salary and bonus
during 1997 exceeded $100,000 (the "Named Officers").
ANNUAL COMPENSATION(1)
------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2) COMPENSATION
- ------------------------------------------------ ------------ ------- ----------------- -------------
J. Frank Fine,
Chairman of the Board ......................... $ 164,742 $ -- $11,079 $ --
Barry H. Fine,
President and Chief Executive Officer ......... 199,842 -- 23,095 --
John D. Zappia,
Chief Operating Officer ....................... 134,762 -- -- --
- ----------------
(1) Does not include cash dividends paid to the Named Officers of which
approximately $652,000 for J. Frank Fine and approximately $201,000 for
Barry H. Fine was in excess of amounts of funds required to pay tax
obligations for the Company's income. See "Certain Transaction." Messrs.
Frank and Barry Fine currently receive annual salaries of $250,000.
(2) Represents amounts related to the Named Officers' personal use of Company
automobiles and a portion of the premiums for health insurance provided to
Named Officers.
EMPLOYMENT AGREEMENT
Effective July 7, 1997, the Company entered into a three-year employment
agreement with Orlando M. Machado, pursuant to which he will serve as Chief
Financial Officer. Mr. Machado will receive an annual base salary of $150,000
and such bonuses as may be awarded from time to time in the discretion of the
Board or any compensation committee thereof. If the agreement is terminated
prior to the expiration of the term other than by reason of death, Disability
(as defined) or Cause (as defined), or by him for Good Reason (generally
defined as the diminution of his duties or other breach by the Company of the
agreement), Mr. Machado (or his estate or beneficiaries) will receive, in
addition to accrued salary and other benefits to which he may be entitled, his
base salary for a period of two years following such termination. The agreement
prohibits Mr. Machado from competing with the Company during the term of the
agreement and for a period of one year after termination of his employment,
other than a termination by him for Good Reason or a termination by the Company
without Cause.
71
OWNERSHIP
The following table sets forth information as of the date of this
Prospectus concerning the beneficial ownership of the Company's outstanding
Common Stock.
SHARES BENEFICIALLY
OWNED
---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT
- ----------------------------------------- -------- ----------
J. Frank Fine ........................... 1,500 50.0%
Barry H. Fine ........................... 1,500 50.0%
- ----------------
(1) The address of each person or entity listed is c/o Fine Air Services, Inc.,
2261 N.W. 67th Avenue, Bldg. 700, Miami, Florida 33152.
72
CERTAIN TRANSACTIONS
J. Frank Fine, the Company's Chairman, and Barry H. Fine, the Company's
President and Chief Executive Officer (collectively, the "Principal
Shareholders"), each own 50% of the capital stock of the Company. The Principal
Shareholders also each owned 50% of the capital stock of Fine Air and Agro Air.
On June 3, 1998, each of the Principal Shareholders contributed to the Company
his interest in Fine Air and Agro Air, each of which became a wholly owned
subsidiary of the Company. The Principal Shareholders received no additional
consideration for contributing their interests in Fine Air and Agro Air to the
Company.
The Company has been subject to taxation under Subchapter S of the Code
and comparable provisions of state income tax laws. As a result, the net income
of the Company, for federal and certain state income tax purposes, was reported
by and taxable directly to the Company's shareholders during that time rather
than to the Company. The Company has paid cash dividends to their shareholders
in amounts at least sufficient to provide them funds for tax obligations
payable by them on account of the Company's income. During 1995, 1996 and 1997
and the first quarter of 1998, the Company made aggregate cash distributions to
its shareholders of $1,248,655, $1,110,091, $3,370,212 and $166,630,
respectively. Frank and Barry Fine received 63% and 37%, respectively, of the
aggregate cash distributions made by the Company during 1995, 1996, 1997 and
the three months ended March 31, 1998. During May 1998, the Company made a
distribution to its shareholders of approximately $3.5 million in excess of
amounts required by the shareholders to pay income taxes.
At December 31, 1996 and 1997 and March 31, 1998, the Company had advanced
$150,000, $352,000 and $364,000, respectively, to several related parties
affiliated with the Company's stockholders.
In December 1996, the Company purchased a cargo aircraft from Frank Fine
Company, a corporation owned by J. Frank Fine. The purchase price was
$2,859,000 consisting of (i) forgiveness of accounts receivable from Frank Fine
Company, related to an overhaul performed on the aircraft, in the amount of
$1,700,000, (ii) forgiveness of loans and advances to Mr. Fine of $481,000 and
(iii) forgiveness of loans, interest receivable and accounts receivable from
parties related to Mr. Fine of $678,000.
The Principal Shareholders own 30% of the capital stock of Quiet Nacelle
Corporation ("QNC") and 100% of the capital stock of Quiet Technology, Inc.
("QTI") and Quiet Technology DC-8, Inc. ("QTD"). Quiet Technology Venture,
Limited ("QTV, Ltd."), a partnership engaged in the development of hushkits for
DC-8-50 series and DC-8-61 aircraft (the aircraft used by the Company), in
which (i) QTD is the general partner and has a 1% interest, (ii) QTI is a
limited partner and has a priority return on capital and 94.83% interest and
(iii) QNC is a limited partner and has a 4.16% interest. During 1996, 1997 and
the three months ended March 31, 1998, the Company performed approximately
$1,886,000, $1,121,000 and $176,000 of services for QTV, Ltd. The Company's
services consisted of supplying parts and labor to build and test prototype
hushkit components in support of QTV, Ltd.'s research and development efforts.
At December 31, 1997 and March 31, 1998, the balances of Company's accounts
receivable due from QTV, Ltd. were $1,753,000 and $1,929,000, respectively.
QTV, Ltd.'s hushkit received a STC for its hushkits on June 30, 1997. The
current STC subjects any aircraft on which the approved hushkit is installed to
certain weight restrictions. Subsequent to receiving the STC, QTV, Ltd. has
improved the hushkit design so that when installed, the aircraft will be able
to carry the maximum cargo capacity (as originally designed by the
manufacturer), while being in compliance with FAA noise level requirements. The
modified hushkit design is in final phases of the testing process and
management anticipates that QTV, Ltd. will receive an additional STC for the
upgraded hushkit model during the third quarter of 1998. Management has not
determined the financial impact, if any, to the Company should its aircraft be
limited with respect to cargo capacity.
The Company intends to purchase from QTV, Ltd. at least 16 hushkits
(including 14 for its existing DC-8 aircraft and two spares). The purchase
price for these hushkits will be (i) for the first 10 hushkits, QTV, Ltd.'s
cost plus $125,000 and (ii) for any additional hushkits, QTV, Ltd.'s cost. The
Company has
73
paid QTV, Ltd. a non-refundable $750,000 deposit. In addition, as of December
31, 1996 and 1997 and March 31, 1998, the Company had cumulative advances to
QTV, Ltd. of $1,619,000, $8,804,000 and $12,245,000, respectively, for the
manufacture of hushkits on its behalf. Management estimates that the average
cost of such hushkits will be approximately $2.25 million, which management
believes will be significantly lower than the cost of other hushkits available
in the market.
Management believes that the terms of the Company's transactions with
Frank Fine Company and QTV, Ltd. were at least as favorable to the Company as
those that could have been obtained from unaffiliated third parties.
DESCRIPTION OF EXISTING CREDIT FACILITY
The Company has a $45 million credit facility with NationsCredit
Commercial Corporation (the "Existing Credit Facility"), which expires in
November 2000. Borrowings under the Existing Credit Facility bear interest at
the bank's prime rate plus 0.75%. The unused portion of the line of credit is
subject to a fee at the rate of .30% per annum. Borrowings under the Existing
Credit Facility are collateralized by substantially all of the Company's
existing assets; provided, that the lender's security interest does not cover
four of the Company's DC-8 aircraft and aircraft and engines acquired in the
future would not collaterize the Existing Credit Facility. The Existing Credit
Facility contains no maintenance covenants.
On June 5, 1998, the date of the consummation of the sale of the Old
Notes, the Company had approximately $30.1 million outstanding under the
Existing Credit Facility, all of which was paid in full with a portion of the
net proceeds from the sale of the Old Notes.
74
DESCRIPTION OF SENIOR NOTES
The Old Notes were, and the New Notes will be, issued under an Indenture,
date as of June 5, 1998, among the Company, as issuer, the Subsidiary
Guarantors and The Bank of New York, as trustee (the "Trustee"), a copy of
which is filed as an exhibit to the Registration Statement of which this
Prospecuts forms a part. The following is a summary of the material terms and
provisions of the Senior Notes. The terms of the Senior Notes include those set
forth in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Senior
Notes are subject to all such terms, and prospective purchasers of the Senior
Notes are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summary does not purport to be a complete description of
the Senior Notes and is subject to the detailed provisions of, and qualified in
its entirety by reference to, the Senior Notes and the Indenture. The
definitions of certain capitalized terms used in the following summary are set
forth below under "--Certain Definitions." Capitalized terms that are used but
not otherwise defined herein have the meanings assigned to them in the
Indenture, and those definitions are incorporated herein by reference. For
purposes of this "Description of Senior Notes," "Senior Notes" refers to the
Old Notes and the New Notes. Copies of the proposed form of the Indenture are
available from the Company or the Initial Purchaser on request.
GENERAL
The Old Notes are, and the New Notes will be, (i) senior unsecured
obligations of the Company, (ii) fully and unconditionally guaranteed by the
Subsidiary Guarantors on a joint and several basis and (iii) limited to $200
million aggregate principal amount. The Senior Notes will be issued only in
registered form, without coupons, in denominations of $1,000 and integral
multiples thereof. The Senior Notes will mature on June 1, 2008 and bear
interest at the rate of 9 7/8% per annum from June 5, 1998 or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semiannually in cash in arrears on June 1 and December 1 of each year,
commencing December 1, 1998, to the Persons in whose names the Senior Notes are
registered at the close of business on the preceding May 15 or November 15, as
the case may be (whether or not a business day). Interest on the Senior Notes
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
Principal of, and premium, if any, and interest on the Senior Notes will
be payable (i) in same-day funds on or prior to the payment dates with respect
to those amounts in the case of Senior Notes held of record by the Depositary
or its nominee and (ii) at the corporate trust office of the Trustee in New
York, New York, in the case of Senior Notes held of record by Holders other
than the Depositary or its nominee, and the Senior Notes may be surrendered for
registration of transfer or exchange at the corporate trust office of the
Trustee in New York, New York. The Company may, at its option, pay interest on
Senior Notes held of record by Holders other than the Depositary or its nominee
by check mailed to the addresses of the Persons entitled thereto as they appear
in the Note Register on the Regular Record Date for that interest or by wire
transfer of immediately available funds to an account located in the United
States designated by the Holder.
75
OPTIONAL REDEMPTION
The Company may, at its option, redeem the Senior Notes in whole or from
time to time in part, on or after June 1, 2003, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below, together with accrued and unpaid interest to
the date of redemption (subject to the right of Holders of record on the
relevant record date to receive interest due on an interest payment date that
is on or prior to the date of redemption), if redeemed during the twelve-month
period beginning on June 1 of the applicable year indicated below:
YEAR OPTIONAL REDEMPTION PRICE
- --------------------------------- --------------------------
2003 ......................... 104.938%
2004 ......................... 103.292%
2005 ......................... 101.646%
2006 and thereafter .......... 100.000%
Notwithstanding the foregoing, from time to time prior to June 1, 2001,
the Company may redeem up to 35% of the aggregate principal amount of the
Senior Notes originally issued with the net cash proceeds of one or more Public
Equity Offerings at a redemption price equal to 109.875% of the principal
amount thereof, together with accrued and unpaid interest to the date of
redemption; provided that (i) at least 65% of the principal amount of the
Senior Notes originally issued remains outstanding immediately after any such
redemption and (ii) the Company effects such redemption within 60 days after
the Public Equity Offering closes.
If less than all of the Senior Notes are to be redeemed, the Trustee will,
not less than 30 nor more than 60 days prior to the redemption date, select the
particular Senior Notes (or any portion thereof that is an integral multiple of
$1,000) to be redeemed, PRO RATA, by lot or by any other method permitted in
the Indenture. Notice of redemption will be mailed at least 30 days but not
more than 60 days before the redemption date to each Holder whose Senior Notes
are to be redeemed at the registered address of such Holder. On and after the
redemption date, interest will cease to accrue on the Senior Notes or portions
thereof called for redemption.
No sinking fund or mandatory redemption is provided for the Senior Notes.
MANDATORY OFFER TO REPURCHASE
The net proceeds from the sale of the Old Notes shall be utilized for the
purposes set forth under "Use of Proceeds." In the event that on the date that
is 18 months from the date of the issuance of the Old Notes, all of the
proceeds of the sale of the Old Notes have not been utilized for such purposes
and the amount of the unutilized net proceeds exceeds $15 million, the Company
shall, within five business days of such day, either (i) make an offer (the
"Mandatory Repurchase Offer") to purchase Senior Notes having an aggregate
principal amount equal to the Unutilized Proceeds Amount at a purchase price of
101% of the principal amount thereof plus accrued and unpaid interest to the
purchase date or (ii) purchase Senior Notes having an aggregate principal
amount equal to the Unutilized Proceeds Amount in the open market and deliver
such Senior Notes to the Trustee for cancellation. If the Company elects to
make the Mandatory Repurchase Offer, the Mandatory Repurchase Offer shall
remain open for not less than 20 business days and be otherwise made in
accordance with the requirements of the Indenture. The Company will comply with
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder, if applicable, if there is an Unutilized Proceeds Amount and the
Company is obligated to repurchase Senior Notes as described above.
RANKING
The Senior Notes are senior unsecured obligations of the Company and rank
PARI PASSU in right of payment with all other existing and future unsecured and
unsubordinated Indebtedness of the Company and senior to all existing and
future Subordinated Indebtedness of the Company. The Senior Notes and
76
Subsidiary Guarantees, however, will be effectively subordinated to secured
Indebtedness of the Company and the Subsidiary Guarantors with respect to the
assets securing that Indebtedness. At March 31, 1998, on a pro forma basis
assuming that the sale of the Old Notes and the application of the net proceeds
therefrom had occurred on such date, the Company and the Subsidiary Guarantors
would have had approximately $11 million of Indebtedness outstanding other than
the Senior Notes, substantially all of which Indebtedness is secured. Subject
to certain limitations, the Company and its Subsidiaries (including the
Subsidiary Guarantors) may incur additional Indebtedness in the future. See
"--Certain Covenants--Limitations on Additional Indebtedness and Disqualified
Capital Stock".
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Notes will be jointly
and severally guaranteed (the "Subsidiary Guarantees") by each Subsidiary
Guarantor. Each Subsidiary Guarantee will be a senior unsecured obligation of
the applicable Subsidiary Guarantor and will rank PARI PASSU in right of
payment with all other existing and future unsecured and unsubordinated
Indebtedness of such Subsidiary Guarantor. As of the Issue Date, all of the
Company's Subsidiaries will be Subsidiary Guarantors.
The obligations of each Subsidiary Guarantor under a Subsidiary Guarantee
are limited to the maximum amount that, after giving effect to any collections
from or payments made by or on behalf of any other Subsidiary Guarantor in
respect of the obligations of that other Subsidiary Guarantor under its
Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture, will result in the obligations of that Subsidiary Guarantor under
the Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal law or state law. Each Subsidiary Guarantor that makes a
payment or distribution under a Subsidiary Guarantee will be entitled to a pro
rata contribution from each other Subsidiary Guarantor based on the net assets
of each Subsidiary Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge with or into or
sell or otherwise dispose of all or substantially all of its property and
assets to the Company or another Subsidiary Guarantor without limitation,
except to the extent any such transaction is subject to the covenant described
in "--Certain Covenants--Limitations on Mergers and Certain Other Transactions"
below. The Indenture provides that no Subsidiary Guarantor may consolidate with
or merge with or into (whether or not such Subsidiary Guarantor is the
surviving Person) another Person other than the Company or another Subsidiary
Guarantor (whether or not affiliated with the Subsidiary Guarantor) unless (i)
subject to the provisions of the following paragraph, the Person formed by or
surviving any such consolidation or merger (if other than such Subsidiary
Guarantor) assumes all of the obligations of such Subsidiary Guarantor under
the Senior Notes and the Indenture, pursuant to a supplemental indenture, in
form and substance satisfactory to the Trustee, (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; and (iii)
immediately after giving effect to such transaction, the Company could incur at
least $1.00 of additional Indebtedness not constituting Permitted Indebtedness
in accordance with the Consolidated Fixed Charge Coverage Ratio test described
under "--Certain Covenants--Limitations on Additional Indebtedness and
Disqualified Capital Stock" below.
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of a Subsidiary Guarantor to a third
party or an Unrestricted Subsidiary in a transaction that does not violate any
of the covenants of the Indenture, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the Capital Stock of a
Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the Capital Stock of such Subsidiary Guarantor) or the Person acquiring the
property (in the event of a sale or other disposition of all or substantially
all of the assets of such Subsidiary Guarantor) will be released and relieved
of any obligation under its Subsidiary Guarantee; PROVIDED that, in the case of
a sale of such Capital Stock not constituting a sale governed by the covenant
in the Indenture described under "--Certain Covenants--Limitations on Mergers
and Certain Other Transactions" below, the Net Available Proceeds of such sale
or other disposition are applied in
77
accordance with the applicable provisions of the Indenture. See "--Certain
Covenants--Limitations on Asset Sales". In addition, any Subsidiary Guarantor
that is designated by the Board of Directors as an Unrestricted Subsidiary in
accordance with the terms and conditions of the Indenture will be released and
relieved of any obligation under its Subsidiary Guarantee. As of the date of
this Prospecuts, the Company has no Unrestricted Subsidiaries.
Separate financial statements of the Subsidiary Guarantors have not been
provided because the Subsidiary Guarantors are jointly and severally liable for
the obligations of the Company under the Senior Notes and the aggregate assets,
earnings and equity of the Subsidiary Guarantors are substantially equivalent
to the consolidated assets, earnings and equity of the Company.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company is obligated to
make an offer to each Holder of the Senior Notes to repurchase (a "Change of
Control Offer") such Holder's outstanding Senior Notes and will purchase, on a
business day not more than 60 days nor less than 30 days following the date
notice is mailed, as provided below (such purchase date being the "Change of
Control Purchase Date"), all Senior Notes properly tendered pursuant to such
offer to purchase and not withdrawn, at a purchase price (the "Change of
Control Purchase Price") equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the Change of Control Purchase Date, all in
accordance with the following paragraph.
Within 30 days following any Change of Control, the Company shall notify
the Trustee thereof and send to each Holder of Senior Notes by first-class
mail, postage prepaid, at the address of such Holder appearing in the Note
Register, a notice (i) describing the transaction or transactions that
constitute the Change of Control, (ii) offering to repurchase, pursuant to the
procedures required by the Indenture and described in such notice, on the
Change of Control Purchase Date specified in such notice and for the Change of
Control Purchase Price, all Senior Notes properly tendered by such Holder
pursuant to such offer to purchase for the Change of Control Purchase Price;
(iii) that any Senior Note not tendered will continue to accrue interest; (iv)
that, unless the Company defaults in the payment of the Change in Control
Purchase Price, any Senior Notes accepted for payment pursuant to Change of
Control Offer shall cease to accrue interest on the Change of Control Purchase
Date; and (v) describing the procedures that Holders must follow to accept the
Change of Control Offer or to withdraw such acceptance. The Change of Control
Offer shall remain open for at least 20 business days (or such longer period as
is required by law).
The occurrence of the events constituting a Change of Control under the
Indenture may result in an event of default in respect of other Indebtedness of
the Company and its Restricted Subsidiaries and, consequently, the lenders
thereof may have the right to require repayment of such Indebtedness in full.
If a Change of Control occurs there can be no assurance that the Company will
have available funds sufficient to pay the Change of Control Purchase Price for
all of the Senior Notes that might be tendered by Holders of Senior Notes
seeking to accept the Change of Control Offer and other amounts that might
become due and payable in respect of other Indebtedness of the Company. The
Company's obligation to make a Change of Control Offer will be satisfied if a
third party makes the Change of Control Offer in the manner and at the times
and otherwise in compliance with the requirements applicable to a Change of
Control Offer made by the Company and purchases all Senior Notes properly
tendered and not withdrawn under such Change of Control Offer. The failure of
the Company to make or consummate the Change of Control Offer or pay the Change
of Control Purchase Price when due would result in an Event of Default and
would give the Trustee and the Holders of the Senior Notes the rights described
under "--Events of Default."
The Change of Control feature of the Senior Notes, by requiring a Change
of Control Offer, may in certain circumstances make more difficult or
discourage a sale or takeover of the Company, and, thus, the removal of
incumbent management. The Change of Control feature, however, is not part of a
plan by management to adopt a series of anti-takeover provisions. Instead, the
Change of Control feature is
78
a result of negotiations between the Company and the Initial Purchaser. Subject
to the limitations discussed below, the Company could, in the future, enter
into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of Indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit
ratings.
The Company will comply with Rule l4e-1 under the Exchange Act and any
other securities laws and regulations thereunder, if applicable, if a Change of
Control occurs and the Company is required to offer to repurchase Senior Notes
as described above.
CERTAIN COVENANTS
The Indenture contains, among others, the covenants described below.
LIMITATIONS ON ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK. The
Company will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (a) incur any Indebtedness (including, without limitation, Acquired
Indebtedness), or (b) issue any Disqualified Capital Stock; PROVIDED that, the
Company and its Restricted Subsidiaries may incur Permitted Indebtedness and
may incur other Indebtedness or issue Disqualified Capital Stock, if after
giving effect thereto, the Company's Consolidated Fixed Charge Coverage Ratio
on the date thereof would be at least 2.75 to 1.0.
LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES. The Company will not permit
any Restricted Subsidiary to issue any Preferred Stock (other than to the
Company or to a Wholly-Owned Restricted Subsidiary) or permit any Person (other
than the Company or a Wholly-Owned Restricted Subsidiary) to own any Preferred
Stock of any Restricted Subsidiary.
LIMITATION ON THE ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES.
The Company will not permit any Restricted Subsidiary, directly or indirectly,
to issue or sell any shares of its Capital Stock (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) the issuance and sale of
all, but not less than all, of the issued and outstanding Capital Stock of any
Restricted Subsidiary in compliance with the other provisions of the Indenture
or (iii) to the extent such shares represent directors' qualifying shares or
shares required by applicable law to be held by a Person other than the Company
or a Wholly-Owned Restricted Subsidiary. The proceeds of any sale of Capital
Stock permitted hereunder and referred to in clauses (ii) and (iii) above will
be treated as Net Available Proceeds and must be applied in a manner consistent
with the provisions of the covenant described under "--Limitations on Asset
Sales".
LIMITATIONS ON RESTRICTED PAYMENTS. The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, make any
Restricted Payment unless, at the time of and after giving effect to the
proposed Restricted Payment:
(i) no Default or Event of Default has occurred and is continuing;
(ii) the Company would be permitted to incur at least $1.00 of additional
Indebtedness not constituting Permitted Indebtedness in accordance
with the Consolidated Fixed Charge Coverage Ratio test described under
"--Limitations on Additional Indebtedness and Disqualified Capital
Stock" above; and
(iii) the amount of such Restricted Payment, when added to the aggregate
amount of all other Restricted Payments made after the Issue Date
does not exceed the sum (without duplication) of the following: (A)
50% of (x) the Company's Consolidated Net Income (taken as one
accounting period) less (y) Permitted Income Tax Distributions, in
each case accrued on a cumulative basis during the period beginning
on January 1, 1998 and ending on the last day of the Company's most
recently ended fiscal quarter for which financial statements are
available at the time of such
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Restricted Payment (or, if such aggregate Consolidated Net Income less
Permitted Tax Distributions shall be a deficit, minus 100% of such
aggregate deficit) plus (B) the aggregate net cash proceeds received by the
Company after the Issue Date from the issuance and sale (other than to a
Subsidiary of the Company) of (1) shares of the Company's Capital Stock
other than Disqualified Capital Stock or (2) debt securities of the Company
that have been converted into the Company's Capital Stock that is not
Disqualified Capital Stock (and is not then held by a Subsidiary of the
Company), plus (C) to the extent that any Restricted Investment that was
made after the Issue Date is sold for cash or otherwise liquidated or
repaid for cash, the cash proceeds of the sale, liquidation or repayment
received by the Company or a Restricted Subsidiary net of the fees and
expenses actually incurred in connection with such sale, liquidation or
repayment plus (D) the amount of Restricted Investment outstanding in an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary of the Company in accordance with the
definition of "Unrestricted Subsidiary".
The foregoing provisions will not prohibit: (1) the payment of any
dividend by the Company or any Restricted Subsidiary within 60 days after the
date of declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the Indenture; (2) the redemption,
repurchase, retirement or other acquisition of any Capital Stock of the Company
in exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of, other Capital Stock of the
Company (other than any Disqualified Capital Stock); (3) the defeasance,
redemption, repurchase or other retirement of Subordinated Indebtedness in
exchange for, or out of the proceeds of, the substantially concurrent issue and
sale of (a) Subordinated Indebtedness so long as the new Subordinated
Indebtedness has (1) a Weighted Average Life to Maturity equal to or longer
than the Weighted Average Life to Maturity of the Subordinated Indebtedness
being defeased, redeemed, repurchased or otherwise retired and (2) terms of
subordination no less favorable to the Holders of the Senior Notes than those
applicable to the Subordinated Indebtedness being defeased, redeemed,
repurchased or otherwise retired or (b) Capital Stock of the Company (other
than to any Restricted Subsidiary); (4) the repurchase, redemption or other
acquisition or retirement for value of any Capital Stock held by any member of
the Company's management pursuant to any management equity subscription
agreement, employment agreement, stock option agreement or other compensation
agreement in an amount not to exceed $500,000 in the aggregate in any fiscal
year of the Company; (5) Restricted Investments the amount of which, together
with the amount of all other Restricted Investments made pursuant to this
clause (5) after the Issue Date, does not exceed $5.0 million; PROVIDED that,
in the case of this clause (5), 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; (6) any Restricted Investment made with the net cash
proceeds received by the Company after the Issue Date from a Public Equity
Offering; PROVIDED that no Default or Event of Default has occurred or is
continuing at the time of such payment; or (7) amounts paid in respect of a
Permitted Income Tax Distribution.
The Restricted Payment permitted pursuant to clauses (1), (2), (3), (4)
and (6) of the immediately preceding paragraph shall be included as Restricted
Payments in any computation made pursuant to clause (iii) of the second
preceding paragraph with respect to any subsequent Restricted Payments.
Not later than 10 business days after the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted by and complies with the
Indenture and setting forth in reasonable detail the basis upon which the
required calculations were computed, which calculations will be based upon the
Company's latest available consolidated financial statements.
LIMITATIONS ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create or otherwise cause or suffer to exist or become effective any
consensual Payment Restriction with respect to any of its Restricted
Subsidiaries, except for (a) any such Payment Restriction under any agreement
evidencing any Acquired Indebtedness that was permitted to be incurred pursuant
to the Indenture in effect at the time of such incurrence and not created in
contemplation of such event, provided that such Payment Restriction is
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not extended to apply to any of the assets of the entities not previously
subject thereto; (b) any such Payment Restriction arising in connection with
Existing Indebtedness (provided such Payment Restrictions are no more
restrictive than those existing on the Issue Date) and Refinancing
Indebtedness, PROVIDED that any such Payment Restrictions that arise under such
Refinancing Indebtedness are not, taken as a whole, materially more restrictive
than those under the agreement creating or evidencing the Indebtedness being
refunded or refinanced; (c) purchase money obligations for property acquired in
the ordinary course of business that impose restrictions on the property so
acquired; (d) the entering into of a contract for the sale or other disposition
of assets, directly or indirectly, so long as such restrictions do not extend
to assets that are not subject to such sale or other disposition; (e) the terms
of any agreement evidencing any Indebtedness of Restricted Subsidiaries that
was permitted by the Indenture to be incurred that only restrict the transfer
of the assets purchased with the proceeds of such Indebtedness; (f) customary
restrictions imposed on the transfer of copyrighted or patented materials; (g)
the terms of any merger agreement, stock purchase agreement, asset sale
agreement or similar agreement that limit the transfer of properties and assets
pending consummation of the subject transaction; (h) Permitted Liens which are
customary limitations on the transfer of collateral; and (i) any such Payment
Restriction existing or by reason of applicable law or customary provisions
restricting assignments, subletting or other transfers contained in leases,
licenses and other agreements entered into in the ordinary course of business.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into,
assume, guarantee or otherwise become liable with respect to any Sale/Leaseback
transaction unless (i) the Company would be permitted to incur Indebtedness not
constituting Permitted Indebtedness in accordance with the Consolidated Fixed
Charge Coverage Ratio test described under "--Limitations on Additional
Indebtedness and Disqualified Capital Stock" above in an amount equal to the
Attributable Indebtedness arising from the Sale/Leaseback Transaction, (ii) the
Company or the Restricted Subsidiary receives proceeds from the Sale/Leaseback
Transaction at least equal to the fair market value of the property or assets
subject thereto (as determined in good faith by the Board of Directors, whose
determination in good faith and evidenced by a Board Resolution will be
conclusive), (iii) the Company applies an amount in cash equal to the Net
Available Proceeds of the Sale/Leaseback Transaction in accordance with the
provisions of the covenant described under "--Limitations on Asset Sales" below
as if the Sale/Leaseback Transaction were an Asset Sale and (iv) the
Sale/Leaseback Transaction would not result in a violation of the covenant
described under "--Limitations on Liens" below.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. The Company will not, and
will not permit any of Restricted Subsidiary to, enter into, renew or extend
any contract, agreement, transaction or arrangement with or for the benefit of
an Affiliate of the Company (including, without limitation the sale, purchase
or lease of assets, property or services from or to any Affiliate of the
Company) (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Restricted Subsidiary than those that would have been obtained in
a comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) the Company delivers to the Trustee (a) with respect
to any Affiliate Transaction (or series of related transactions) involving
aggregate payments in excess of $1.0 million, an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and a
Board Resolution that has been adopted by a vote of a majority of the
Independent Directors approving such Affiliate Transaction or, if at the time
there are no Independent Directors then in office, an Officers' Certificate
executed by the Chief Financial Officer, Chief Operating Officer or the General
Counsel of the Company and (b) with respect to any Affiliate Transaction (or
series of related transactions) involving aggregate payments of $5.0 million or
more, the certificates or documentation described in the preceding clause (a)
and an opinion as to the fairness to the Company or such Restricted Subsidiary
from a financial point of view issued by an Independent Financial Advisor;
PROVIDED, HOWEVER, that the following shall not be deemed to be Affiliate
Transactions: (i) transactions exclusively between or among (1) the Company and
one or more Wholly-Owned Restricted Subsidiaries or (2) Wholly-Owned Restricted
Subsidiaries; (ii) transactions between the Company or any Restricted
Subsidiary and any qualified employee stock ownership plan established for the
benefit of the Company's employees, or the
81
establishment or maintenance of any such plan; (iii) reasonable director,
officer and employee compensation and other benefits, and indemnification
arrangements existing on the Issue Date, and with respect to any material
modification of such arrangements after the Issue Date, as approved by a
majority of the Independent Directors or in the event there are no Independent
Directors, as certified by the Chief Financial Officer, Chief Operating Officer
or the General Counsel of the Company pursuant to an Officers' Certificate;
(iv) transactions permitted by the provisions described under "Limitations on
Restricted Payments"; (v) the existing relationships and transactions between
the Company and its Restricted Subsidiaries, on one hand, and QTV, Ltd., and
Quiet Technologies, Inc., ("QTI"), on the other hand, including but not limited
to, the purchase of hushkits and the funding by the Company or its Restricted
Subsidiaries of the research and development costs of QTV, Ltd. and QTI (as
described under "Certain Transactions") or any new relationships or
transactions (other than continuations, including future hushkit purchases and
research and development funding, of such existing relationships or
transactions as described under "Certain Transactions" above) between the
Company and its Restricted Subsidiaries, on the one hand, and QTV, Ltd. and
QTI, on the other hand ("New Transactions"), so long as the total amount paid
by the Company and any Restricted Subsidiary of the Company with respect to
such New Transactions does not exceed the fair market value of the services and
equipment delivered in connection therewith as determined by a majority of the
Independent Directors, or in the event there are no Independent Directors, as
certified by the Chief Financial Officer, the Chief Operating Officer or the
General Counsel of the Company pursuant to an Officers' Certificate; PROVIDED,
HOWEVER, with respect to New Transactions between the Company and QTV, Ltd. or
QTI such determination shall only be made on an annual basis on the anniversary
date of the Indenture.
LIMITATIONS ON LIENS. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create, incur assume, affirm
or suffer to exist or become effective any Lien of any nature whatsoever on any
property of the Company or any Restricted Subsidiary (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, or upon any income or profits therefrom, except Permitted Liens,
unless prior thereto or simultaneously therewith, the Senior Notes or the
Subsidiary Guarantee, as the case may be, are equally and ratably secured, or
effective provision is made to secure the Senior Notes with (or if such Lien
secures Subordinated Indebtedness, prior to) the Indebtedness secured by that
Lien.
LIMITATIONS ON ASSET SALES. The Company will not, and will not permit any
Restricted Subsidiary to, consummate any Asset Sale unless (i) the Company or
the Restricted Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets
and properties sold or otherwise disposed of pursuant to such Asset Sale (as
determined by the Board of Directors, whose determination in good faith will be
conclusive and evidenced by a Board Resolution), (ii) at least 80% of the
consideration received by the Company or the Restricted Subsidiary, as the case
may be, in respect of the Asset Sale consists of cash or Cash Equivalents and
(iii) the Company delivers to the Trustee an Officers' Certificate certifying
that the Asset Sale complies with clauses (i) and (ii) of this sentence. The
amount (without duplication) of any Indebtedness (other than Subordinated
Indebtedness) of the Company or any Restricted Subsidiary that is expressly
assumed by the transferee in an Asset Sale and with respect to which the
Company or such Restricted Subsidiary, as the case may be, is unconditionally
released by the holder of that Indebtedness will be deemed to be cash for
purposes of clause (ii) of the preceding sentence and will also be deemed to
constitute a repayment of, and a permanent reduction in, the amount of such
Indebtedness for purposes of the following paragraph. If at any time any
non-cash consideration received by the Company or any Restricted Subsidiary, as
the case may be, in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash (other than interest received with respect to
any such non-cash consideration), then such conversion or disposition will
constitute an Asset Sale and the Net Available Proceeds therefrom must shall be
applied in accordance with this covenant. A transfer of assets by the Company
to a Wholly-Owned Restricted Subsidiary or by a Restricted Subsidiary to the
Company or to another Wholly-Owned Restricted Subsidiary will not constitute an
Asset Sale, and a transfer of assets that constitutes a Restricted Investment
and that is permitted under covenant described under "--Limitations on
Restricted Payments" above will not constitute an Asset Sale.
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If the Company or any Restricted Subsidiary consummates an Asset Sale, the
Company or that Restricted Subsidiary, as the case may be, may either, no later
than 270 days after such Asset Sale, (i) apply all or any of the Net Available
Proceeds therefrom to repay Indebtedness (other than Subordinated Indebtedness)
of the Company or any Restricted Subsidiary, PROVIDED, in each case, that the
related loan commitment (if any) is thereby permanently reduced by the amount
of the Indebtedness so repaid or (ii) invest all or any part of the Net
Available Proceeds thereof in the purchase of properties or assets that replace
the properties or assets that were the subject of the Asset Sale or in other
properties or assets that are being, or will be, used in the business of the
Company and its Restricted Subsidiaries or in a Related Business (together with
any short-term assets incidental thereto). The amount of the Net Available
Proceeds not applied or invested as provided in this paragraph will constitute
"Excess Proceeds." Pending application of such Net Available Proceeds pursuant
to this paragraph, the Company or such Restricted Subsidiary may invest such
Net Available Proceeds in Cash Equivalents, or temporarily reduce amounts
outstanding under any revolving credit facility of the Company or any
Restricted Subsidiary.
If substantially all (but not all) the property and assets of the Company
and its Restricted Subsidiaries are transferred as an entirety to a Person in a
transaction permitted under the covenant described under "--Certain
Covenants--Limitations on Mergers and Certain Other Transactions" below, and
the Company or a Restricted Subsidiary received cash or Cash Equivalents in
such transaction, then the successor entity will be deemed to have sold the
properties and assets of the Company and its Subsidiaries not so transferred
for purposes of this covenant and cash at least equal to the fair market value
of the assets deemed to be sold must be applied in accordance with the
preceding paragraph.
NET PROCEEDS OFFER. When the aggregate amount of Excess Proceeds equals or
exceeds $5.0 million, the Company will be required to make an offer to
purchase, from all Holders of the Senior Notes, an aggregate principal amount
of Senior Notes equal to the amount of such Excess Proceeds, as follows:
(i) The Company will make an offer to purchase (a "Net Proceeds Offer")
from all Holders of the Senior Notes in accordance with the procedures
set forth in the Indenture the maximum principal amount (expressed as a
multiple of $1,000) of Senior Notes that may be purchased out of the
amount (the "Payment Amount") of such Excess Proceeds.
(ii) The offer price for the Senior Notes will be payable in cash in an
amount equal to 100% of the principal amount of the Senior Notes
tendered pursuant to a Net Proceeds Offer, plus accrued and unpaid
interest to the date such Net Proceeds Offer is consummated (the
"Offered Price"), in accordance with the procedures set forth in the
Indenture. To the extent that the aggregate Offered Price of Senior
Notes tendered pursuant to a Net Proceeds Offer is less than the
Payment Amount relating thereto (such shortfall constituting a "Net
Proceeds Deficiency"), the Company may use such Net Proceeds
Deficiency, or a portion thereof, for general corporate purposes,
subject to the limitations of the covenant described under
"--Limitations on Restricted Payments" above.
(iii) If the aggregate Offered Price of Senior Notes validly tendered and
not withdrawn by Holders thereof exceeds the Payment Amount, the
Trustee will select the Senior Notes to be purchased on a PRO RATA
basis in accordance with the relative aggregate principal amounts of
the Senior Notes so tendered and not withdrawn.
(iv) When a Net Proceeds Offer is completed in accordance with the
foregoing provisions, the amount of Excess Proceeds with respect to
which such Net Proceeds Offer was made shall be deemed to be zero.
The Company will not, and will not permit any Restricted Subsidiary to,
enter into or suffer to exist any agreement that would place any restriction of
any kind (other than pursuant to law or regulation) on the ability of the
Company to make a Net Proceeds Offer following any Asset Sale. The Company
83
will comply with Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder, if applicable, in the event that an Asset Sale
occurs and the Company is required to offer to repurchase Senior Notes as
described above.
LIMITATIONS ON MERGERS AND CERTAIN OTHER TRANSACTIONS. The Company will
not, in a single transaction or a series of related transactions, (i)
consolidate or merge with or into (other than a merger with a Wholly-Owned
Restricted Subsidiary solely for the purpose of changing the Company's
jurisdiction of incorporation to another State of the United States), or sell,
lease, transfer, convey or otherwise dispose of or assign all or substantially
all of the assets of the Company or the Company and its Subsidiaries (taken as
a whole), or assign any of its obligations under the Senior Notes and the
Indenture, to any Person or (ii) adopt a Plan of Liquidation unless, in either
case: (a) the Person formed by or surviving such consolidation or merger (if
other than the Company) or to which such sale, lease, conveyance or other
disposition or assignment shall be made (or, in the case of a Plan of
Liquidation, any Person to which assets are transferred) (collectively, the
"Successor"), is a corporation organized and existing under the laws of any
State of the United States of America or the District of Columbia, and the
Successor assumes by supplemental indenture in a form satisfactory to the
Trustee all of the obligations of the Company under the Senior Notes and the
Indenture; (b) immediately prior to and immediately after giving effect to such
transaction and the assumption of the obligations as set forth in clause (a)
above and the incurrence of any Indebtedness to be incurred in connection
therewith, no Default or Event of Default shall have occurred and be
continuing; and (c) except in the case of the consolidation or merger of the
Company with or into a Restricted Subsidiary or any Restricted Subsidiary with
or into the Company or another Restricted Subsidiary, or the Company or a
Restricted Subsidiary with or into any other Person that has no other
Indebtedness outstanding immediately after and giving effect to such
transaction and the assumption of the obligations set forth in clause (a) above
and the incurrence of any Indebtedness to be incurred in connection therewith,
and the use of any net proceeds therefrom on a pro forma basis, (1) the
Consolidated Net Worth of the Company or the Successor, as the case may be,
would be at least equal to the Consolidated Net Worth of the Company
immediately prior to such transaction and (2) the Company or the Successor, as
the case may be, would be able to incur $1.00 of additional Indebtedness not
constituting Permitted Indebtedness at such specified time pursuant to the
Consolidated Fixed Charge Coverage Ratio test set forth in the covenant
described under "--Certain Covenants--Limitations on Additional Indebtedness
and Disqualified Capital Stock" above; and (d) each Subsidiary Guarantor,
unless it is the other party to the transactions described above, shall have by
supplemental indenture confirmed that its Subsidiary Guarantee shall apply to
the obligations of the Company or the Successor under the Senior Notes and the
Indenture. For purposes of this covenant, any Indebtedness of the Successor
which was not Indebtedness of the Company immediately prior to the transaction
shall be deemed to have been incurred in connection with such transaction.
ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any Restricted
Subsidiary acquires or creates another Subsidiary after the Issue Date, such
newly acquired or created Subsidiary must execute a Subsidiary Guarantee in
accordance with the terms of the Indenture, unless the Board of Directors has
duly designated that Subsidiary as an Unrestricted Subsidiary in accordance
with the definition of Unrestricted Subsidiary under the caption "--Certain
Definitions" below.
REPORTS. Whether or not required by the rules and regulations of the
Commission, so long as any Senior Notes are outstanding, the Company will file
with the Commission, to the extent such filings are accepted by the Commission,
all quarterly and annual reports and other information, documents and reports
that the Company would be required to file if it were subject to Section 13 or
15(d) of the Exchange Act. The Company will also (i) file with the Trustee
(with exhibits), and provide to each Holder (without exhibits), without cost to
that Holder, copies of such reports and documents within 15 days after the date
on which the Company files such reports and documents with the Commission or
the date on which the Company would be required to file such reports and
documents if the Company were subject to Section 13 or 15(d) of the Exchange
Act and (ii) if filing such reports and documents with the Commission is not
accepted by the Commission or is prohibited under the Exchange Act, supply at
its cost copies of such reports and documents (including any exhibits thereto)
to any Holder promptly on
84
its written request. For so long as any Senior Notes remain outstanding, the
Company will also furnish to the Holders and beneficial holders of Senior Notes
and to prospective purchasers of Senior Notes designated by the Holders of
Transfer Restricted Securities (as defined in the Registration Rights
Agreement) and to broker-dealers, on their request, the information required to
be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) any default in the payment of the principal of or premium, if any,
on any of the Senior Notes, whether such payment is due at Stated Maturity or
on redemption, repurchase pursuant to a Change of Control Offer, a Net Proceeds
Offer, a Mandatory Repurchase Offer, acceleration or otherwise; or
(ii) any default in the payment of any installment of interest on any
Senior Note, when due, and the continuance of that default for a period of 30
days; or
(iii) any default in the performance or breach by the Company or any
Restricted Subsidiary of the covenants described under "--Certain
Covenants--Limitations on Mergers and Certain Other Transactions" above, or any
failure of the Company to make or consummate either a Change of Control Offer,
a Net Proceeds Offer, a Mandatory Repurchase Offer or the other repurchases
described under "Mandatory Offer to Repurchase," in accordance with the
applicable provisions of the Indenture; or
(iv) any failure of the Company or any Restricted Subsidiary to perform
or observe any other term, covenant or agreement applicable to it and contained
in the Senior Notes, the Indenture (other than a default specified in clause
(i), (ii) or (iii) above) or the Subsidiary Guarantees, as the case may be, for
a period of 30 days after written notice of that failure is given (a) to the
Company or the Restricted Subsidiary, as the case may be, by the Trustee or (b)
to the Company or the Restricted Subsidiary, as the case may be, and the
Trustee by the Holders of at least 25% in aggregate principal amount of the
Senior Notes then outstanding; or
(v) the occurrence and continuation beyond any applicable grace period
of any default in the payment of the principal of any Indebtedness of the
Company (other than the Senior Notes) or any Restricted Subsidiary for money
borrowed when due at final Stated Maturity, or any other default resulting in
acceleration of any Indebtedness of the Company or any Restricted Subsidiary
for money borrowed, PROVIDED that the aggregate principal amount of such
Indebtedness exceeds $5.0 million; or
(vi) one or more final judgments or orders rendered against the Company
or any Restricted Subsidiary that are unsatisfied and require the direct
payment by the Company in money (I.E., in excess of applicable insurance
coverage), either individually or in an aggregate amount, in excess of $5.0
million are not paid, discharged or stayed for a period of 30 days; or
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any Restricted Subsidiary; or
(viii) except as permitted by the Indenture and the Senior Notes, the
cessation of the effectiveness of any Subsidiary Guarantee or the repudiation
by any Subsidiary Guarantor (or by any Person acting on behalf of any
Subsidiary Guarantor) of its obligations under its Subsidiary Guarantee.
If an Event of Default (other than an Event of Default specified in clause
(vii) above) occurs and is continuing, the Trustee, by written notice to the
Company, or the Holders of at least 25% in aggregate principal amount of the
Senior Notes then outstanding by written notice to the Company and the Trustee
may, and the Trustee on the request of the Holders of not less than 25% in
aggregate principal amount of the Senior Notes then outstanding will declare
the principal of and premium, if any, and
85
accrued and unpaid interest on all the Senior Notes due and payable
immediately, on which declaration all amounts payable in respect of the Senior
Notes will be immediately due and payable declare all amounts owing under the
Senior Notes to be due and payable immediately. If an Event of Default of any
type described in clause (vii) occurs, then the principal of and premium, if
any, and accrued and unpaid interest on all Senior Notes will become due and
payable without any declaration, notice or other act in the part of the Trustee
or any Holder.
After a declaration of acceleration under the Indenture, but before the
Trustee obtains a judgment or decree for payment of the money due, the Holders
of a majority in aggregate principal amount of the outstanding Senior Notes, by
written notice to the Company and the Trustee, may, under certain
circumstances, rescind and annual that declaration and its consequences if all
Events of Default, other than the nonpayment of principal of and premium, if
any, or interest on the Senior Notes that has become due solely because of that
declaration, have been cured or waived. No such rescission will affect any
subsequent Default or Event of Default or impair any right consequent thereto.
No Holder will have any right to institute any proceeding with respect to
the Indenture or any remedy thereunder, unless (i) that Holder has notified the
Trustee of a continuing Event of Default and the Holders of at least 25% in
aggregate principal amount of the outstanding Senior Notes have made written
request, and offered reasonable indemnity, to the Trustee to institute that
proceeding as Trustee under the Senior Notes and the Indenture, (ii) the
Trustee has failed to institute that proceeding within 60 days after receipt of
that notice and offer and (iii) the Trustee, within that 60-day period, has not
received directions inconsistent with that written request by Holders of a
majority in aggregate principal amount of the outstanding Senior Notes. These
limitations will not apply, however, to a suit instituted by any Holder to
enforce the payment of the principal of and premium, if any, or interest on
that Holder's Senior Note on or after the respective due dates expressed in
that Senior Note.
The Holders of a majority in principal amount of the Senior Notes may
waive any existing Default or Event of Default under the Indenture and its
consequences, except a default (i) in the payment of the principal of or
premium, if any, or interest on any Senior Notes or (ii) in respect of any
provision that cannot be modified or amended without the consent of the Holder
of each Senior Note.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture and, upon any Officer of the Company
becoming aware of any Default or Event of Default, a statement specifying such
Default or Event of Default and what action the Company is taking or proposes
to take with respect thereto.
LEGAL DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate its obligations
respecting the outstanding Senior Notes (that action being a "legal
defeasance"). If legal defeasance occurs, the Company will be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding
Senior Notes and to have been discharged from all its other obligations with
respect to the Senior Notes (and the Subsidiary Guarantors will be deemed to be
released from the Subsidiary Guarantees), except for (i) the rights of Holders
to receive payment from the trust described below in respect of the principal
of and premium, if any, and interest on their outstanding Senior Notes when
those payments are due, (ii) the Company's obligations to replace any temporary
Senior Notes, register the transfer or exchange of any Senior Notes, replace
mutilated, destroyed, lost or stolen Senior Notes and maintain an office or
agency for payments in respect of the Senior Notes, (iii) rights, powers,
trusts, duties and immunities of the Trustee and (iv) the legal defeasance
provisions of the Indenture. In addition, the Company may, at its option and at
any time, elect to terminate its obligation to comply with certain covenants in
the Indenture, some of which are described under "--Certain Covenants" above,
and any omission to comply with those covenants will not constitute a Default
or an Event of Default respecting the Senior Notes (that action being a
"covenant defeasance"). If covenant defeasance occurs, certain events (not
including nonpayment, bankruptcy, insolvency and reorganization events)
described under "Events of Default" will no longer constitute Events of Default
respecting the Senior Notes.
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In order to exercise either the legal defeasance or the covenant
defeasance option: (i) the Company must irrevocably deposit with the Trustee,
in trust, for the benefit of the Holders, cash in United States dollars,
Government Securities (as defined in the Indenture), or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of and
premium, if any, and interest on the outstanding Senior Notes to redemption or
maturity; (ii) the Company must deliver to the Trustee an opinion of counsel to
the effect that the Holders of the outstanding Senior Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such legal
defeasance or covenant defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such legal defeasance or covenant defeasance had not occurred (in
the case of legal defeasance, this opinion must refer to and be based on a
published ruling of the Internal Revenue Service or a change in applicable
federal income tax laws); (iii) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or insofar as clauses
(vii) and (viii) under the first paragraph of "--Events of Default" above are
concerned, at any time during the period ending on the 91st day after the date
of deposit; (iv) such legal defeasance or covenant defeasance or covenant
defeasance must not cause the Trustee to have a conflicting interest under the
Indenture or the Trust Indenture Act with respect to any securities of the
Company; (v) such legal defeasance or covenant defeasance will not result in a
breach or violation of, or constitute a default under, any material agreement
or instrument to which the Company or any Restricted Subsidiary is a party or
by which the Company or any Restricted Subsidiary is bound; (vi) the Company
must deliver to the Trustee an opinion of counsel experienced in bankruptcy
matters to the effect that the use of the trust funds to pay the principal of
and premium, if any, and interest on the outstanding Senior Notes would not be
avoidable as a preferential payment under Section 547 of the Bankruptcy Law or
recoverable under Section 550 of the Bankruptcy Law in the event the Company
became a debtor in a proceeding commenced thereunder; (vii) the Company must
deliver to the Trustee an Officers' Certificate stating that the deposit was
not made by the Company with the intent of preferring the Holders over other
creditors of the Company with the interest of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel,
satisfactory to the Trustee, each stating that all conditions precedent under
the Indenture to either legal defeasance or covenant defeasance, as the case
may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Senior Notes, as expressly provided for in the Indenture) as to all outstanding
Senior Notes when: (i) either (a) all the Senior Notes theretofore
authenticated and delivered (except lost, stolen, mutilated or destroyed Senior
Notes that have been replaced or paid and Senior Notes for whose payment money
or certain Government Securities have been deposited in trust or segregated and
held in trust by the Company and thereafter repaid to the Company or discharged
from such trust) have been delivered to the Trustee for cancellation or (b) all
Senior Notes not theretofore delivered to the Trustee for cancellation have
become due and payable or will become due and payable at their Stated Maturity
within one year, or are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the serving of notice of
redemption by the Trustee in the name, and at the expense, of the Company, and
the Company has irrevocably deposited or caused to be deposited with the
Trustee funds in an amount sufficient to pay and discharge the entire
Indebtedness on the Senior Notes not theretofore delivered to the Trustee for
cancellation, for principal of and premium, if any, and interest on the Senior
Notes to the date of deposit (in the case of Senior Notes that have become due
and payable) or to the Stated Maturity or redemption date, as the case may be,
together with instructions from the Company irrevocably directing the Trustee
to apply such funds to the payment thereof at maturity or redemption, as the
case may be; (ii) the Company has paid all other sums payable under the
Indenture by the Company; and (iii) the Company has delivered to the
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Trustee an Officers' Certificate stating and an opinion of counsel opining that
all conditions precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
TRANSFER AND EXCHANGE
A Holder will be able to register the transfer of or exchange Senior Notes
only in accordance with the provisions of the Indenture. The Registrar may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes and fees required by law or permitted
by the Indenture. Without the prior consent of the Company, neither the Trustee
nor the Registrar is required (i) to register the transfer of or exchange any
Senior Note selected for redemption, (ii) to register the transfer of or
exchange any Senior Note for a period of 15 days before a selection of Senior
Notes to be redeemed or (iii) to register the transfer or exchange of a Senior
Note between a record date and the next succeeding interest payment date. The
registered Holder of a Senior Note will be treated as the owner of such Senior
Note for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture or the Senior Notes may be
amended or supplemented with the consent (which may include consents obtained
in connection with a tender offer or exchange offer for Senior Notes) of the
Holders of at least a majority in principal amount of the Senior Notes then
outstanding, and any existing Default under, or compliance with any provision
of, the Indenture may be waived (other than any continuing Default or Event of
Default in the payment of the principal of, premium, if any, or interest on the
Senior Notes) with the consent (which may include consents obtained in
connection with a tender offer or exchange offer for Senior Notes) of the
Holders of a majority in principal amount of the Senior Notes then outstanding;
PROVIDED that:
(A) no such modification or amendment may, without the consent of the
Holders of 75% in aggregate principal amount of such series of Senior Notes
then outstanding, amend or modify the obligations of the Company under the
caption "Change of Control" or the definitions related thereto that could
adversely affect the rights of any Holder of the Senior Notes; and
(B) without the consent of each Holder affected, the Company, the
Subsidiary Guarantors and the Trustee may not: (i) extend the maturity of any
Senior Note; (ii) affect the terms of any scheduled payment of interest on or
principal of the Senior Notes (including, without limitation any redemption
provisions); (iii) take any action that would expressly subordinate in right of
payment the Senior Notes or the Subsidiary Guarantees to any other Indebtedness
of the Company or any of the Subsidiary Guarantors, respectively, or otherwise
affect the ranking of the Senior Notes or the Subsidiary Guarantees; or (iv)
reduce the percentage of Holders necessary to consent to an amendment,
supplement or waiver to the Indenture.
Without the consent of any Holder, the Company, the Subsidiary Guarantors
and the Trustee may amend or supplement the Indenture or the Senior Notes to
cure any ambiguity, defect or inconsistency, to provide for uncertificated
Senior Notes in addition to or in place of certificated Senior Notes, to
provide for the assumption of the Company's obligations to Holders in the case
of a merger or acquisition, to make any change that does not adversely affect
the rights of any Holder, to secure the Senior Notes pursuant to the
requirements of the covenant described under the caption "--Certain
Covenants--Limitations on Liens", to add any additional Subsidiary Guarantor or
to release any Subsidiary Guarantor from its Subsidiary Guarantee, in each case
as provided in the Indenture, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
NO PERSONAL LIABILITY
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Senior Notes or for any claim
based thereon or otherwise in respect thereof, and
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no recourse under or upon any obligation, covenant or agreement of the Company
or the Subsidiary Guarantors in the Indenture or in any of the Senior Notes or
the Subsidiary Guarantees or because of the creation of any Indebtedness
represented thereby, shall be had against any incorporator, officer, director,
employee or controlling person of the Company or of any successor Person
thereof. Each Holder, by accepting the Senior Notes, waives and releases all
such liability.
CONCERNING THE TRUSTEE
The Bank of New York is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
Senior Notes. The Indenture (including the provisions of the Trust Indenture
Act incorporated therein) contains certain limitations on the rights of the
Trustee, if it becomes a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Indenture will permit the Trustee to
engage in other transactions; PROVIDED, HOWEVER, if it acquires any conflicting
interest (as defined in the Trust Indenture Act), it must eliminate such
conflict or resign.
The Holders of a majority in principal amount of the then outstanding
Senior Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that, in case an Event of
Default occurs and is not cured, the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent person in similar
circumstances in the conduct of his own affairs. Subject to such provisions,
the Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to the Trustee.
GOVERNING LAW
Each of the Indenture, the Senior Notes and the Subsidiary Guarantees
provides that it is to be governed by, and construed in accordance with, the
laws of the State of New York, without regard to the principles of conflicts of
laws. The Company and the Subsidiary Guarantors have expressly submitted to the
nonexclusive jurisdiction of the State of New York and the U.S. federal courts
sitting in The City of New York for the purposes of any suit, action or
proceeding with respect to the Indenture, the Senior Notes and the Subsidiary
Guarantees and for actions brought under federal or state securities laws with
respect to the Senior Notes. The Company and the Subsidiary Guarantors have
appointed CT Corporation System as their agent upon which process may be served
in any such action or proceeding with respect to the Indenture, the Senior
Notes or the Subsidiary Guarantees.
BOOK-ENTRY, DELIVERY AND FORM
The Old Notes sold to Qualified Institutional Buyers initially were in the
form of one or more registered global notes without interest coupons
(collectively, the "Rule 144A Global Notes"). Upon issuance, the Rule 144A
Global Notes were deposited with the Trustee, as custodian for The Depository
Trust Company ("DTC"), and registered in the name of DTC or its nominee for
credit to the accounts of DTC's Direct and Indirect Participants (as defined
below). The Old Notes sold in offshore transactions in reliance on Regulation S
initially were in the form of one or more temporary registered, global
book-entry notes without interest coupons (the "Regulation S Temporary Global
Notes"). The Regulation S Temporary Global Notes were deposited with the
Trustee, as custodian for DTC, in New York, New York and registered in the name
of a nominee of DTC for credit to the accounts of Indirect Participants
participating in DTC through the Euroclear System ("Euroclear") and Cedel Bank,
societe anonyme ("CEDEL"). All registered global notes are referred to herein
collectively as "Global Notes." DTC will maintain the Senior Notes in
denominations of $1,000 and integral multiples thereof through its book entry
facilities.
Transfer of beneficial interests in any Global Notes will be subject to
the applicable rules and procedures of DTC and its Direct or Indirect
Participants (including, if applicable, those of Euroclear
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and CEDEL), which may change from time to time. In addition, beneficial
interests in the Regulation S Global Notes and the Rule 144A Global Notes are
subject to restrictions on transfer.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be
exchanged for Notes in certificated form in certain limited circumstances.
Initially, the Trustee will act as Paying Agent and Registrar. The Senior
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
DTC has advised the Company as follows: It is a limited-purpose trust
company that was created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. Participants
include securities brokers and dealers (including the Initial Purchaser), banks
and trust companies, clearing corporations and certain other organizations.
Access to DTC's system is also available to other entities, such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants
may beneficially own securities held by or on behalf of the DTC only through
Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC (i)
upon deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Initial Purchaser with portions of the principal amount of
the Global Notes and (ii) ownership of the Senior Notes evidenced by the Global
Notes will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC (with respect to the interests of the
Participants), the Participants and the Indirect Participants.
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer the Senior Notes will be limited to such extent.
Investors in the Global Note may hold their interests directly through
DTC, if they are Participants in such system, or indirectly through
organizations that are Participants in such system.
So long as a nominee of DTC is the registered owner of the Global Notes,
such nominee will be considered the sole Holder of outstanding Senior Notes
represented by such Global Notes under the Indenture. Except as provided below,
beneficial owners of Senior Notes evidenced by the Global Notes will not be
entitled to have Senior Notes registered in their names and will not be
considered the owners or Holders thereof under the Indenture for any purpose,
including with respect to the giving of any direction, instructions or
approvals to the Trustee thereunder. None of the Company, the Subsidiary
Guarantors or the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of Senior Notes
by DTC, or for maintaining, supervising or reviewing any records of DTC
relating to such Senior Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Senior Notes registered in the name of DTC's nominee on the applicable
record date will be payable by the Trustee to or at the direction of DTC's
nominee in its capacity as the registered Holder under the Indenture. Under the
terms of the Indenture, the Company and the Trustee will treat the persons in
whose names any Senior Notes, including the Global Notes, are registered as the
owners thereof for the purpose of receiving such payments and for any and all
other purposes whatsoever. Consequently, none of the Company, the Subsidiary
Guarantors or the Trustee has or will have any responsibility or liability for
the payment of such amounts to beneficial owners of Senior Notes (including
principal, premium, if any, and interest). The Company believes, however, that
it is currently the policy of DTC to immediately credit the accounts of the
relevant Participants with such payments, in amounts proportionate to their
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respective beneficial interests in the relevant security as shown on the
records of DTC. Payments by the Participants and the Indirect Participants to
the beneficial owners of Senior Notes will be governed by standing instructions
and customary practice and will be the responsibility of the Participants or
the Indirect Participants.
Subject to certain conditions, any person having a beneficial interest in
the Global Notes may, upon request to the Trustee, exchange such beneficial
interest for Senior Notes in definitive form. Upon any such issuance, the
Trustee is required to register such Senior Notes in the name of, and cause the
same to be delivered to, such person (or the nominee thereof). In addition, if
(i) the Company notifies the Trustee in writing that DTC is no longer willing
or able to act as a depositary and the Company is unable to locate a qualified
successor within 90 days or (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Senior Notes in
definitive form under the Indenture, then, upon surrender by DTC's nominee of
its Global Note, Senior Notes in such form will be issued to each person that
such Global Note Holder or DTC identifies as being the beneficial owner of the
related Senior Notes.
Neither the Company nor the Trustee will be liable for any delay by DTC's
nominee or DTC in identifying the beneficial owners of Senior Notes and the
Company and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from DTC's nominee or DTC for all purposes.
The Indenture requires that payments in respect of the Senior Notes
represented by a Global Note (including principal, premium, if any, and
interest, if any) be made in same-day funds. The interests in the Global Note
trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in the Senior Notes is, therefore, required by DTC to
be settled in same-day funds. Transfers between Participants will be effected
in accordance with DTC procedures and will be settled in same-day funds.
PAYMENT
Payment of principal of and interest on the Notes represented by the
Global Notes will be made by the Company in U.S. dollars through the Paying
Agent to Cede & Co., the nominee for DTC, as the registered holder of the
Global Notes.
Payment by DTC Participants and Indirect DTC Participants (as defined
herein) to owners of beneficial interests in the Global Notes will be governed
by standing instructions and customary practices, as is now the case with
securities held by the accounts of customers registered in "street name", and
will be the responsibility of the DTC Participants and Indirect DTC
Participants. Neither the Trustee nor the Paying Agent will have any
responsibility or liability for any aspect of the records of the DTC relating
to or payments made by DTC on account of beneficial interests in the Global
Notes or for maintaining, supervisiing or reviewing any records of DTC relating
to such beneficial interests.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms.
"ACQUIRED INDEBTEDNESS" means (a) with respect to any Person, Indebtedness
of such Person existing at the time such other Person becomes a Restricted
Subsidiary, including Indebtedness incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary and (b) with
respect to the Company or any of its Restricted Subsidiaries, any Indebtedness
of a Person (other than the Company or a Restricted Subsidiary) existing at the
time such Person merges or consolidates with or into the Company or a
Restricted Subsidiary, or Indebtedness assumed by the Company or any of its
Restricted Subsidiaries in connection with the acquisition of properties or
assets from another Person, which Indebtedness, including Indebtedness incurred
by such other Person in connection with, or in contemplation of, such merger or
acquisition.
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"AFFILIATE" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by, or under direct or
indirect common control with, the specified Person. For purposes of this
definition: (i) "control," when used with respect to any Person, means the
power to direct the management and policies of that Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise, and the terms "controlling" and "controlled" have meanings
correlative to the foregoing; (ii) beneficial ownership at any time of 10% or
more of the outstanding voting common equity of a Person (including voting
common equity subject to being acquired pursuant to the exercise of options,
warrants or other rights exercisable within 60 days of that time) will be
deemed to constitute control of that Person at that time; (iii) without
limiting other Persons who may be deemed to control a limited partnership, the
general partner of a limited partnership and each limited partner holding 10%
or more of the limited partnership interests in such limited partnership will
be deemed to control such limited partnership; or (iv) with respect to an
individual, any immediate family member (i.e., spouse, parent or child) of such
Person.
"ASSET SALE" means any sale, issuance, conveyance, transfer, lease,
assignment or other disposition to any Person other than the Company or a
Wholly--Owned Restricted Subsidiary (including, without limitation, by means of
a Sale/Leaseback Transaction or a merger or consolidation) (collectively, for
purposes of this definition, a "transfer"), directly or indirectly, in one
transaction or a series of related transactions, of (a) any Capital Stock of
any Restricted Subsidiary held by the Company or any other Restricted
Subsidiary or (b) any other properties or assets of the Company or any
Restricted Subsidiary. Notwithstanding the preceding sentence, the following do
not constitute "Asset Sales": (i) any transfer of properties or assets
(including Capital Stock) that is governed by, and made in accordance with, the
provisions described under "--Certain Covenants--Limitations on Mergers and
Certain Other Transactions"; (ii) any transfer of properties or assets
constituting a Restricted Investment, if permitted under the covenant described
under "--Certain Covenants--Limitations on Restricted Payments"; (iii) any
transfer of properties or assets from the Company to a Restricted Subsidiary to
another Restricted Subsidiary or any Person if such transfer to a Restricted
Subsidiary or other Person is permitted under the covenant described under
"--Certain Covenants--Limitations on Restricted Payments"; (iv) any transfer of
properties or assets relating to aircraft engines, aircraft components,
aircraft parts or spare parts pursuant to customary pooling, exchange or other
similar agreements; (v) any asset swap involving aircraft engines, aircraft
components, aircraft parts or spare parts (provided that the assets received by
the Company or Restricted Subsidiary have a fair market value at least equal to
the asset transferred (provided with respect to any asset swap or series of
related asset swaps involving assets with a fair market value exceeding $3.0
million, such determination shall be made by the Board of Directors)); and (vi)
transfers of damaged, worn-out or obsolete equipment, inventory or assets that,
in the Company's reasonable judgment, are no longer useful in the business of
the Company and the Restricted Subsidiaries; and (vii) any transfers that, but
for this clause (viii), would be Asset Sales, if after giving effect to such
transfers, the aggregate fair market value of the properties or assets
transferred in such transaction or any such series of related transactions does
not exceed $500,000.
"ATTRIBUTABLE INDEBTEDNESS," when used with respect to any Sale/Leaseback
Transaction, means, as at the time of determination, the present value
(discounted at a rate equivalent to the Company's then current weighted average
cost of funds for borrowed money as at the time of determination, compounded on
a semiannual basis) of the total obligations of the lessee for rental payments
during the remaining term of the lease included in any such Sale/Leaseback
Transaction.
"BOARD RESOLUTION" means a duly adopted resolution of the Board of
Directors of the Company.
"CAPITAL STOCK" of any Person means (i) any and all shares or other equity
interests (including without limitation common stock, preferred stock and
partnership interests) in such Person and (ii) all rights to purchase, warrants
or options (whether or not currently exercisable), participations or other
equivalents of or interests in (however designated) such shares or other
interests in such Person.
"CAPITALIZED LEASE OBLIGATION" of any Person means the obligations of such
Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in
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accordance with GAAP, and, for purposes of the Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at that date
determined in accordance with GAAP.
"CASH EQUIVALENTS" means (i) marketable obligations with a maturity of 180
days or less issued or directly and fully guaranteed or insured by the United
States of America or any agency or instrumentality thereof, provided that the
full faith and credit of the United States of America is pledged in support
thereof; (ii) U.S. dollar denominated demand and time deposits and certificates
of deposit or acceptances of any financial institution (a) that is a member of
the Federal Reserve System and has combined capital and surplus and undivided
profits of not less than $500 million or (b) whose short-term commercial paper
rating or that of its parent company is at least A-1 or the equivalent thereof
from S&P or P-1 or the equivalent thereof from Moody's (any such bank, an
"Approved Bank"), in each case with a maturity of 180 days or less from the
date of acquisition; (iii) commercial paper issued by any Approved Bank or by
the parent company of any Approved Bank and commercial paper issued by, or
guaranteed by, any Person with a short-term commercial paper rating of at least
A-1 or the equivalent-thereof by S&P or at least P-1 or the equivalent thereof
by Moody's, and in each case maturing no more than 180 days from the date of
acquisition; (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (i) above
entered into with any Approved Bank; and (v) investments in money market or
other mutual funds substantially all of whose assets comprise securities of the
types described in clauses (i) through (iv) above.
"CHANGE OF CONTROL" means the occurrence of any of the following events
(whether or not otherwise in compliance with the provisions of the Indenture):
(i) any Person or group (as such term is used in Section 13(d)(3) of the
Exchange Act) other than the Principals is or becomes the beneficial owner (as
defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of more
than 50% of the total voting power of the Voting Stock of the Company, (ii) the
Company sells, assigns, conveys, transfers, leases or otherwise disposes of all
or substantially all of the assets of the Company and its Subsidiaries to any
Person (other than a Restricted Subsidiary), (iii) the Company or any of its
Subsidiaries consolidates with, or merges with or into, any Person, and as a
result of such consolidation or merger the Voting Stock of the Company
outstanding prior to such consolidation or merger does not represent (either by
remaining outstanding or by being converted into Voting Stock of the surviving
Person or any parent thereof) at least a majority of the total voting power of
the outstanding Voting Stock of the Company or the surviving Person or any
parent thereof outstanding immediately after such consolidation or merger, or
(iv) the replacement of a majority of the Board of Directors of the Company
over a two-year period from the directors who constituted the Board of
Directors of the Company at the beginning of such period, and such replacement
shall not have been approved by a vote of at least a majority of the Board of
Directors of the Company then still in office who either were members of such
Board of Directors at the beginning of such period or whose election as a
member of such Board of Directors was previously so approved.
"CONSOLIDATED AMORTIZATION EXPENSE" for any period means the amortization
expense of the Company and its Restricted Subsidiaries for such period (to the
extent included in the computation of Consolidated Net Income), determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED DEPRECIATION EXPENSE" for any period means the depreciation
expense of the Company and its Restricted Subsidiaries for such period (to the
extent included in the computation of Consolidated Net Income), determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
determination date, the ratio for the four full fiscal quarters immediately
preceding the determination date (for any determination, the "Reference
Period"), of (a) EBITDA to (b) Consolidated Interest Expense for such Reference
Period. In making such computations, (i) EBITDA and Consolidated Interest
Expense shall be calculated on a PRO FORMA basis assuming that (A) the
Indebtedness to be incurred or the Disqualified Capital Stock to be issued (and
all other Indebtedness incurred or Disqualified Capital Stock issued after the
first day of such Reference Period referred to in the covenant described under
"--Certain Covenants--Limitations on Additional Indebtedness and Disqualified
Capital Stock"
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through and including the date of determination), and (if applicable) the
application of the net proceeds therefrom (and from any other such Indebtedness
or Disqualified Capital Stock), including the refinancing of other
Indebtedness, had been incurred on the first day of such Reference Period and,
in the case of Acquired Indebtedness, on the assumption that the related
transaction (whether by means of purchase, merger or otherwise) also had
occurred on such date with the appropriate adjustments with respect to such
acquisition being included in such PRO FORMA calculation and (B) any
acquisition or disposition by the Company or any Restricted Subsidiary of any
properties of assets outside the ordinary course of business or any repayment
of any principal amount of any Indebtedness of the Company or any Restricted
Subsidiary prior to the stated maturity thereof, in either case since the first
day of such Reference Period through and including the date of determination,
had been consummated on such first day of such Reference Period; (ii) the
Consolidated Interest Expense attributable to interest on any Indebtedness
required to be computed on a PRO FORMA basis in accordance with the covenant
described under "--Certain Covenants--Limitations on Additional Indebtedness
and Disqualified Capital Stock" and (A) bearing a floating interest rate shall
be computed as if the rate in effect on the date of computation had been the
applicable rate for the entire period and (B) which was not outstanding during
the period for which the computation is being made but which bears, at the
option of the Company, a fixed or floating rate of interest, shall be computed
by applying, at the option of the Company, either the fixed or floating rate;
(iii) the Consolidated Interest Expense attributable to interest on any
Indebtedness under a revolving credit facility required to be computed on a PRO
FORMA basis in accordance with the covenant described under "--Certain
Covenants--Limitations on Additional Indebtedness and Disqualified Capital
Stock" shall be computed based upon the average daily balance of such
Indebtedness during the applicable period, PROVIDED that such average daily
balance shall be reduced by the amount of any repayment of Indebtedness under a
revolving credit facility during the applicable period; (iv) notwithstanding
the foregoing clauses (ii) and (iii), interest on Indebtedness determined on a
floating rate basis, to the extent such interest is covered by agreements
relating to Hedging Obligations, shall be deemed to have accrued at the rate
per annum resulting after giving effect to the operation of such agreements;
and (v) if after the first day of the applicable Reference Period and before
the date of determination, the Company has permanently retired any Indebtedness
out of the net proceeds of the issuance and sale of shares of Capital Stock
(other than Disqualified Capital Stock) of the Company within 60 days of such
issuance and sale, Consolidated Interest Expense shall be calculated on a PRO
FORMA basis as if such Indebtedness had been retired on the first day of such
period.
"CONSOLIDATED INCOME TAX EXPENSE" for any period means the provision, if
any, for federal, state, local and foreign income taxes based on income and
profits of the Company and its Restricted Subsidiaries to the extent such
income or profits were included in computing Consolidated Net Income for such
period.
"CONSOLIDATED INTEREST EXPENSE" for any period means the sum, without
duplication, of the total interest expense of the Company and its consolidated
Restricted Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP and including, without limitation (i) imputed interest on
Capitalized Lease Obligations and Attributable Indebtedness, (ii) commissions,
discounts and other fees and charges owed with respect to letters of credit
securing financial obligations and bankers' acceptance financing, (iii) the net
costs associated with Hedging Obligations, (iv) amortization of other financing
fees and expenses, (v) the interest portion of any deferred payment
obligations, (vi) amortization of debt discount or premium, if any, (vii) all
other non-cash interest expense, (viii) capitalized interest, (ix) all cash
dividend payments (and non-cash dividend payments in the case of a Restricted
Subsidiary) on any series of preferred stock of the Company or any Restricted
Subsidiary, (x) all interest payable with respect to discontinued operations,
and (xi) all interest paid by the Company or any Restricted Subsidiary under
any guarantee of Indebtedness (including a guarantee of principal, interest or
any combination thereof) of any other Person.
"CONSOLIDATED NET INCOME" for any period means the net income (or loss) of
the Company and its consolidated Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP; PROVIDED that there
shall be excluded from such net income or loss (to the extent otherwise
94
included therein), without duplication (i) the net income (or loss) of any
Person (other than a Restricted Subsidiary) in which any Person other than the
Company and its Restricted Subsidiaries has an ownership interest, except to
the extent that any such income has actually been received by the Company and
its Restricted Subsidiaries in the form of dividends or other distributions
during such period; (ii) except to the extent includable in the consolidated
net income of the Company pursuant to the foregoing clause (i), the net income
(or loss) of any Person that accrued prior to the date that (a) such Person
becomes a Restricted Subsidiary or is merged into or consolidated with the
Company or any Restricted Subsidiary or (b) the assets of such Person are
acquired by the Company or any Restricted Subsidiary; (iii) the net income of
any Restricted Subsidiary during such period to the extent that the declaration
or payment of dividends or similar distributions by such Restricted Subsidiary
of that income (a) is not permitted by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary during such period or (b)
would be subject to any taxes payable on such dividend or distribution; (iv)
any gain (or, only in the case of a determination of Consolidated Net Income as
used in EBITDA, any loss), together with any related provisions for taxes, if
any, on any such gain (or if applicable, the tax effects of such loss),
realized during such period by the Company or any Restricted Subsidiary upon
(a) the acquisition of any securities, or the extinguishment of any
Indebtedness, of the Company or any Restricted Subsidiary or (b) any Asset Sale
by the Company or any of its Restricted Subsidiaries; (v) any extraordinary
gain (or, only in the case of a determination of Consolidated Net Income as
used in EBITDA, any extraordinary loss), together with any related provision
for taxes, if any, on any such extraordinary gain (or, if applicable, the tax
effects of such extraordinary loss), realized by the Company or any Restricted
Subsidiary during such period; and (vi) in the case of a successor to the
Company by consolidation, merger or transfer of its assets, any earnings of the
successor prior to such merger, consolidation or transfer of assets; AND
PROVIDED, FURTHER, that any gain referred to in clauses (iv) and (v) above that
relates to a Restricted Investment and which is received in cash by the Company
or a Restricted Subsidiary during such period shall be included in the
consolidated net income of the Company. For purposes of clause (i) above, the
amount of any distribution of property or assets shall be deemed to be equal to
the fair market value of such property or assets as determined in good faith by
the Board of Directors as evidenced by a Board Resolution.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the consolidated equity of the common stockholders of such Person and its
consolidated Subsidiaries as of such date, as determined in accordance with
GAAP.
"CONSOLIDATED TANGIBLE ASSETS" means, at any date, the total of all assets
appearing on a consolidated balance sheet of the Company and its consolidated
Subsidiaries as of that date prepared in accordance with GAAP, after deducting
therefrom, without duplication, all amounts shown on such balance sheet in
respect of goodwill, trade names, trademarks, patents, patent applications,
licenses and rights in any thereof, and similar intangibles, and any other
items which are treated as intangibles in conformity with GAAP.
"DEFAULT" means any event, act or condition that is, or after notice or
the passage of time or both would become, an Event of Default.
"DISQUALIFIED CAPITAL STOCK" of any specified Person means any Capital
Stock of such Person that, by its terms, by the terms of any agreement related
thereto or by the terms of any security into which it is convertible, puttable
or exchangeable, is, or upon the happening of any event or the passage of time
would be, required to be redeemed or repurchased by such Person, whether or not
at the option of the holder thereof, or matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, in whole or in part, on or
prior to the Stated Maturity of the Senior Notes; PROVIDED, however, that any
class of Capital Stock of such Person that, by its terms, authorizes such
Person to satisfy in full its obligations with respect to the payment of
dividends or upon maturity, redemption (pursuant to a sinking fund or
otherwise) or repurchase thereof or otherwise by the delivery of Capital Stock
that is not Disqualified Capital Stock, and that is not convertible, puttable
or exchangeable for Disqualified Capital Stock or any other Indebtedness, shall
not be deemed to be Disqualified Capital
95
Stock so long as such Person satisfies its obligations with respect thereto
solely by the delivery of Capital Stock that is not Disqualified Capital Stock.
"EBITDA" for any period means without duplication, the sum of the amounts
for such period of (i) Consolidated Net Income PLUS (ii) in each case to the
extent deducted in determining Consolidated Net Income for such period (and
without duplication), (A) Consolidated Income Tax Expense, (B) Consolidated
Amortization Expense (but only to the extent not included in Consolidated
Interest Expense), (C) Consolidated Depreciation Expense (D) Consolidated
Interest Expense and (E) all other non-cash items reducing the Consolidated Net
Income (excluding any such non-cash charge that results in an accrual of a
reserve for cash charges in any future period) for such period, in each case
determined on a consolidated basis in accordance with GAAP and MINUS (iii) the
aggregate amount of all non-cash items, determined on a consolidated basis, to
the extent such items increased Consolidated Net Income for such period
(excluding any such non-cash items resulting from changes in accrued
liabilities in the ordinary course of business, but only to the extent such
non-cash items reduced Consolidated Net Income for a prior period).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXISTING INDEBTEDNESS" means all of the Indebtedness of the Company and
its Subsidiaries that is outstanding on the Issue Date after giving effect to
the issuance of the Senior Notes.
"FAIR MARKET VALUE" of any asset or items means the fair market value of
such asset or items as determined in good faith by the Board of Directors and
evidenced by a Board Resolution.
"GAAP" means generally accepted accounting principles, consistently
applied, that are set forth in (i) the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants, (ii) the statements and pronouncements of the Financial Accounting
Standards Board or (iii) in such other statements by such other entity as may
be approved by a significant segment of the accounting profession of the United
States.
"HEDGING OBLIGATIONS" of any Person means the obligations of such Person
pursuant to (i) any interest rate swap agreement, interest rate collar
agreement or other similar agreement or arrangement designed to protect such
Person against fluctuations in interest rates, or (ii) agreements or
arrangements designed to protect such Person against fluctuations in foreign
currency exchange rates or fuel prices, in each case, entered into in the
ordinary course of business for BONA FIDE hedging purposes and not for the
purpose of speculation.
The term "INCUR" means, with respect to any Indebtedness, incur, create,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise with respect to such Indebtedness; PROVIDED that (i)
the Indebtedness of a Person existing at the time such Person became a
Restricted Subsidiary shall be deemed to have been incurred by such Restricted
Subsidiary and (ii) neither the accrual of interest nor the accretion of
accreted value shall be deemed to be an incurrence of Indebtedness.
"INDEBTEDNESS" of any Person at any date means, without duplication: (i)
all liabilities, contingent or otherwise, of such Person for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of
such Person or only to a portion thereof); (ii) all obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments (or
reimbursement obligations with respect thereto); (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (or
reimbursement obligations with respect thereto); (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
except trade payables and accrued expenses incurred by such Person in the
ordinary course of business in connection with obtaining goods, materials or
services; (v) the maximum fixed redemption or repurchase price of all
Disqualified Capital Stock of such Person; (vi) all Capitalized Lease
Obligations of such Person; (vii) all Indebtedness of others secured by a Lien
on any asset of such Person, whether or not such Indebtedness is assumed by
96
such Person; (viii) all Indebtedness of others guaranteed by such Person to the
extent of such guarantee; PROVIDED that Indebtedness of the Company or its
Subsidiaries that is guaranteed by the Company or the Company's Subsidiaries
shall only be counted once in the calculation of the amount of Indebtedness of
the Company and its Subsidiaries on a consolidated basis; (ix) all Attributable
Indebtedness of such Person; and (x) to the extent not otherwise included in
this definition, Hedging Obligations of such Person. 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, the maximum liability of such
Person for any such contingent obligations at such date and, in the case of
clause (vii), the lesser of (A) the fair market value of any asset subject to a
Lien securing the Indebtedness of others on the date that the Lien attaches and
(B) the amount of the Indebtedness secured. For purposes of the preceding
sentence, the "maximum fixed redemption or repurchase price" of any
Disqualified Capital Stock that does not have a fixed redemption or repurchase
price shall be calculated in accordance with the terms of such Disqualified
Capital Stock as if such Disqualified Capital Stock were purchased or redeemed
on any date on which Indebtedness shall be required to be determined pursuant
to the Indenture, and if such price is based upon, or measured by, the fair
market value of such Disqualified Capital Stock (or any equity security for
which it may be exchanged or converted), such fair market value shall be
determined in good faith by the Board of Directors of such Person, which
determination shall be evidenced by a Board Resolution.
"INDEPENDENT DIRECTOR" means a director of the Company who has not and
whose Affiliates have not, at any time during the twelve months prior to the
taking of any action hereunder, directly or indirectly, received, or entered
into any understanding or agreement to receive, any compensation, payment or
other benefit, of any type or form, from the Company or any of its Affiliates,
if such compensation, payment or benefit would require disclosure pursuant to
Item 404 of Regulation S-K in a registration statement filed under the
Securities Act or a proxy statement filed under the Exchange Act, other than
customary directors fees for serving on the Board of Directors of the Company
or any Affiliate and reimbursement of out-of-pocket expenses for attendance at
the Company's or Affiliate's board and board committee meetings.
"INDEPENDENT FINANCIAL ADVISOR" means an accounting, appraisal or
investment banking firm of nationally recognized standing that is disinterested
and independent with respect to the Company and its Affiliates and, in the
reasonable judgment of a majority of the Company's Board of Directors, is
qualified to perform the task for which it has been engaged.
"INTEREST PAYMENT DATE" means the Stated Maturity of an installment of
interest on the Senior Notes.
"INVESTMENTS" of any Person means (i) all investments by such Person in
any other Person in the form of loans, advances or capital contributions
(excluding (A) commission, travel and similar advances to officers and
employees made in the ordinary course of business and (B) other loans and
advances to officers and employees made in the ordinary course of business not
to exceed $1.0 million at any time outstanding) or similar credit extensions
constituting Indebtedness of such Person, (ii) all purchases (or other
acquisitions for consideration) by such Person of Indebtedness, Capital Stock
or other securities of any other Person (other than the Company or its
Restricted Subsidiaries) and (iii) all other items that would be classified as
investments (including without limitation purchases of assets outside the
ordinary course of business) on a balance sheet of such Person prepared in
accordance with GAAP. The following are not "Investments": (i) extensions of
trade credit or other advances to customers on commercially reasonable terms in
accordance with the Company's normal practices; (ii) Hedging Obligations, but
only to the extent that the same constitute Permitted Indebtedness; and (iii)
endorsements of negotiable instruments and documents in the ordinary course of
business.
"ISSUE DATE" means the date the Old Notes were initially issued.
"LIEN" means any mortgage, charge, pledge, deed of trust, lien (statutory
or other), security interest, hypothecation, assignment for security, claim or
encumbrance (including, without limitation,
97
any agreement to give or grant any lease, conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing) upon or with respect to any property or assets of any kind. A Person
will be deemed to own subject to a Lien any property or assets that the Person
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"MOODY'S" means Moody's Investors Service, Inc., and its successors.
"NET AVAILABLE PROCEEDS" means, with respect to any Asset Sale, the
proceeds thereof in the form of cash or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary), net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel, accountants and investment banks) related to such Asset Sale,
(ii) provisions for all taxes payable as a result of such Asset Sale (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), (iii) amounts required to be paid to any Person (other than the
Company or any Restricted Subsidiary) (a) owning a beneficial interest in the
properties or assets subject to the Asset Sale, (b) having a Lien on such
properties or assets or (c) requiring such payment as a condition to providing
any consent necessary to consummate the Asset Sale and (iv) appropriate amounts
to be provided by the Company or any Restricted Subsidiary, as the case may be,
as a reserve required in accordance with GAAP against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pensions and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an Officers'
Certificate; provided, however, that any amounts remaining after adjustments,
revaluations or liquidations of such reserves shall constitute Net Available
Proceeds.
"OFFICER" means any of the following of the Company: the Chairman of the
Board, the Chief Executive Officer, the Chief Financial Officer, the President,
the Chief Operating Officer or the General Counsel.
"OFFICERS' CERTIFICATE" means a certificate signed by any two Officers.
"PAYMENT RESTRICTION" with respect to any Subsidiary, any consensual
encumbrance, restriction or limitation, whether by operation of the terms of
its charter or by reason of any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation, on the ability of (i) such Restricted
Subsidiary to (a) pay dividends or make other distributions on its Capital
Stock or make payments on any obligation, liability or Indebtedness owed to the
Company or any other Restricted Subsidiary, (b) make loans or advances to the
Company or any other Restricted Subsidiary, (c) guarantee any Indebtedness of
the Company or any Restricted Subsidiary or (d) transfer any of its properties
or assets to the Company or any other Restricted Subsidiary (other than
customary restrictions on transfers of property subject to a Lien permitted
under the Indenture) or (ii) the Company or any other Restricted Subsidiary to
receive or retain any such dividends, distributions or payments, loans or
advances, guarantee, or transfer of properties or assets.
"PERMITTED INCOME TAX DISTRIBUTIONS" means, for all taxable periods
commencing with 1998 (or 1997, to the extent sufficient distributions, in
accordance with the principles set forth below, have not yet been made to the
Company's shareholders with respect to the Company's taxable income for such
period) during which the Company qualifies as an "S" corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended, distributions to
the Company's shareholders which do not exceed an amount equal to the sum of
(i) the product of (a) the Company's taxable income for federal income tax
purposes for such period (reduced by the Company's taxable loss for federal
income tax purposes for any prior taxable period to the extent such losses have
not previously been taken into account in determining taxable income in prior
periods or Permitted Income Tax Distributions) minus the amount determined
pursuant to clause (ii) below for such period and (b) the highest marginal
individual federal
98
income tax rate (taking into account the reduction of itemized deductions based
on gross income) for each such period plus (ii) if the Company's shareholders
are obligated to pay any state or local income taxes on account of the
Company's income, the product of (a) the Company's taxable income for state or
local income tax purposes for each such period (reduced by the Company's
taxable loss for state or local income tax purposes for any prior taxable
period to the extent such losses have not previously been taken into account in
determining taxable income in prior periods or Permitted Income Tax
Distributions) and (b) the highest applicable marginal individual state or
local income tax rate (taking into account any differences in applicable state
and local income tax rates) for each such period; PROVIDED, HOWEVER, (A) that
such amount shall be increased to the extent that the Company's shareholders
are subject to the federal alternative minimum tax for any such taxable period
in respect of the Company's income; (B) that such amount shall be reduced by
the Company's tax credits for each such period for federal and applicable state
and local income tax purposes (or, if applicable, alternative minimum tax
credits or carryforwards); and (C) an amount representing that portion of the
projected Permitted Income Tax Distribution that the Company reasonably
estimates to be payable by the Company's shareholders in order to avoid
penalties for the underpayment of estimated taxes may be distributed not more
than ten (10) business days prior to the due date for such payment of estimated
tax (except that the estimated tax payment otherwise due in January shall be
deemed to be due prior to December 31). All computations shall be made as if
the Company's shareholders' only income or loss is the net income or loss of
the Company. In the event that the Company's taxable income for any prior
taxable period is adjusted by any taxing authority or as a result of the filing
of any amended tax return, the Company may distribute as an additional
Permitted Income Tax Distribution to all shareholders (current and former)
impacted by the adjustment an amount equal to the liability resulting from such
adjustment. Notwithstanding any other provision in the Indenture, the Company
may take any action it determines to be necessary to cause the Company to be in
compliance with any federal, state and local withholding requirements with
respect to any allocation or distribution by the Company to any shareholder.
All amounts so withheld shall be treated as Permitted Income Tax Distributions
to the applicable shareholders.
"PERMITTED INDEBTEDNESS" means any of the following:
(i) Indebtedness of the Company and any Restricted Subsidiary under any
revolving credit facility entered into by the Company in an aggregate
principal amount at any time outstanding not to exceed the greater of (a)
$45.0 million, or (b) the sum of 80% of the consolidated accounts
receivable of the Company plus 15% of the consolidated net property, plant
and equipment of the Company, calculated as of the end of the most recent
fiscal quarter for which financial statements are available, determined in
accordance with GAAP;
(ii) Indebtedness under the Old Notes, the New Notes, the Subsidiary
Guarantees, and the Indenture;
(iii) Existing Indebtedness;
(iv) Indebtedness under Hedging Obligations, provided that (1) such
Hedging Obligations are related to payment obligations on Permitted
Indebtedness or Indebtedness otherwise permitted by the Consolidated Fixed
Charge Coverage Ratio test described under "--Certain Covenants--
Limitations on Additional Indebtedness and Disqualified Capital Stock"
above, and (2) the notional principal amount of such Hedging Obligations at
the time incurred does not exceed the principal amount of such Indebtedness
to which such Hedging Obligations relate;
(v) Indebtedness of the Company to a Wholly-Owned Restricted Subsidiary
and Indebtedness of any Wholly-Owned Restricted Subsidiary to the Company
or any other Wholly-Owned Restricted Subsidiary; PROVIDED, HOWEVER, that
upon either (1) the subsequent issuance (other than directors' qualifying
shares), sale, transfer or other disposition of any Capital Stock or any
other event which results in any such Wholly-Owned Restricted Subsidiary
ceasing to be a Wholly-Owned Restricted Subsidiary or (2) the transfer or
other disposition of any such Indebtedness
99
(except to the Company or a Wholly-Owned Restricted Subsidiary), the
provisions of this clause (v) shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed, in each case, to be
incurred and shall be treated as an incurrence for purposes of the
Consolidated Fixed Charge Coverage Ratio test described under "--Certain
Covenants--Limitation on Additional Indebtedness and Disqualified Capital
Stock" above at the time the Wholly-Owned Restricted Subsidiary in question
ceased to be a Wholly-Owned Restricted Subsidiary or the time such transfer
or other disposition occurred;
(vi) Indebtedness in respect of bid, performance or surety bonds issued
for the account of the Company or any Restricted Subsidiary in the ordinary
course of business, including guarantees or obligations of the Company or
any Restricted Subsidiary with respect to letters of credit supporting such
bid, performance or surety obligations (in each case other than for an
obligation for money borrowed);
(vii) Refinancing Indebtedness;
(viii) Indebtedness, in addition to Indebtedness incurred pursuant to the
other clauses of this definition, with an aggregate principal amount at any
time outstanding for all such Indebtedness incurred pursuant to this clause
not in excess of $5.0 million; and
(ix) Indebtedness incurred prior to June 1, 2001 in connection with (i)
the assumption of Acquired Indebtedness of a Related Business; (ii) the
acquisition of, or a business combination transaction with, a Related
Business; or (iii) the purchase of aircraft, engines or aircraft-related or
engine-related parts, supplies and equipment, or other fixed assets to be
used in the business of the Company and its Restricted Subsidiaries,
PROVIDED that (A) if, after giving effect thereto, the Company's
Consolidated Fixed Charge Coverage Ratio on the date thereof would be
greater than 2.0 to 1.0 but less than 2.25 to 1.0, the amount of such
Indebtedness shall not exceed 60% of the total cost of the related
transaction; or (B) if, after giving effect thereto, the Company's
Consolidated Fixed Charge Coverage Ratio would be greater than 2.25 to 1.0
but less than 2.75 to 1.0, the amount of such Indebtedness shall not exceed
80% of the total cost of the related transaction; or (C) if, after giving
effect thereto, the Company's Consolidated Fixed Charge Coverage Ratio
would be at least equal to 2.75 to 1.0, there shall be no percentage
limitation on the amount of such Indebtedness in relation to the total cost
of the related transaction; PROVIDED, FURTHER, in each case that the
Consolidated Fixed Charge Coverage Ratio shall be determined on a PRO FORMA
basis as if such incurrence or issuance and the application of the net
proceeds therefrom had occurred at the beginning of the four-quarter period
used to calculate such Consolidated Fixed Charge Coverage Ratio. If, after
giving effect to the incurrence of Indebtedness pursuant to this clause
(ix), the Consolidated Fixed Charge Coverage Ratio would be less than 2.0
to 1.0, the Company may not incur such Indebtedness under this clause (ix).
"PERMITTED LIENS" means the following types of Liens:
(i) Liens securing the Senior Notes or the Subsidiary Guarantees;
(ii) Liens in favor of the Company or, with respect to a Restricted
Subsidiary, Liens in favor of another Restricted Subsidiary;
(iii) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or a Restricted Subsidiary, as the
case may be, has set aside on its books such reserves, or has made such
other appropriate provision, if any, as is required by GAAP;
(iv) Liens of landlords, carriers, warehousemen, mechanics, suppliers,
materialmen, repairmen and other similar Liens incurred in the ordinary
course of business for sums not delinquent or being contested in good
faith, and as to which the Company or a Restricted Subsidiary, as the case
may be, has set aside on its books such reserves, or has made such other
appropriate provision, if any, as is required by GAAP;
100
(v) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the payment or performance of
tenders, statutory or regulatory obligations, surety and appeal bonds,
bids, government contracts and leases, performance and return of money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money);
(vi) Liens securing any judgment not giving rise to a Default or Event of
Default and so long as any appropriate legal proceedings that may have been
duly initiated for the review of the judgment has not been finally
terminated or the period within which those proceedings may be initiated
has not expired;
(vii) easements, rights-of-way, reservations, zoning and other
restrictions and other similar encumbrances not interfering in any
material, respect with the ordinary conduct of business of the Company or
any Restricted Subsidiary;
(viii) leases or subleases granted to others that do not interfere with
the ordinary conduct of business of the Company or any Restricted
Subsidiary;
(ix) rights of a common owner of any interest in property held by the
Company or any Restricted Subsidiary and that common owner as tenants in
common or through other common ownership;
(x) Liens or equitable encumbrances deemed to exist by reason of (a)
fraudulent conveyance or transfer laws or (b) negative pledge or other
agreements to refrain from giving Liens; and
(xi) Liens, other than Liens referred to in clauses (i) through (x)
above, on assets not to exceed (a) the Company's Consolidated Tangible
Assets, plus (b) $20.0 million, less (c) the total amount of outstanding
Senior Unsecured Debt.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, incorporated or unincorporated association, joint-stock
company, trust, unincorporated organization or government or other agency or
political subdivision thereof or other entity of any kind.
"PLAN OF LIQUIDATION" with respect to any Person, means a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise): (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such Person otherwise than as an entirety or
substantially as an entirety; and (ii) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and
all or substantially all of the remaining assets of such Person to holders of
Capital Stock of such Person.
"PREFERRED STOCK" means, with respect to any Person, any and all share,
interests, participations and other equivalents (however designated) of that
Person's preferred or preference Capital Stock, whether outstanding on or after
the Issue Date, including, without limitation, all classes and series of
preferred or preference Capital Stock of that Person.
"PRINCIPALS" means, collectively, J. Frank Fine, Barry H. Fine, any
immediate family member of either of the foregoing and any probate estate of
any such individual and any trust, so long as one or more of the foregoing
individuals, or members of their immediate families, are the principal
beneficiaries of such trust, and any other partnership, corporation, or other
entity all of the partners, shareholders, members or owners of which are any
one or more of the foregoing.
"PUBLIC EQUITY OFFERING" means an underwritten primary offering of Capital
Stock of the Company (other than Disqualified Capital Stock or Preferred Stock)
pursuant to a registration statement filed with the Commission in accordance
with the Securities Act and declared effective by the staff of the
101
Commission, or a private placement of primary shares of the Capital Stock of
the Company pursuant to an available exemption from registration and, in the
case of any such private placement, a majority of such placement of which is
sold to Persons that are not then and were not at the Issue Date Affiliates of
the Company.
"REFINANCING INDEBTEDNESS" means Indebtedness of the Company or a
Restricted Subsidiary issued in exchange for, or the proceeds from the issuance
and sale or disbursement of which are used substantially concurrently to repay,
redeem, refund, refinance, discharge or otherwise retire for value, in whole or
in part (collectively, "repay"), or constituting an amendment, modification or
supplement to or a deferral or renewal of (collectively, an "amendment"), any
Indebtedness of the Company or any Restricted Subsidiary (the "Refinanced
Indebtedness") in a principal amount not in excess of the principal amount of
the Refinanced Indebtedness (or, if such Refinancing Indebtedness refinances
Indebtedness under a revolving credit facility or other agreement providing a
commitment for subsequent borrowings, with a maximum commitment not to exceed
the maximum commitment under such revolving credit facility or other
agreement), plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Refinanced Indebtedness or
the amount of any premium reasonably determined by the Company or such
Restricted Subsidiary as necessary to accomplish such refinancing, plus the
amount of expenses of the Company or such Restricted Subsidiary incurred in
connection with such refinancing; PROVIDED that: (i) the Refinancing
Indebtedness is the obligation of the same Person as that of the Refinanced
Indebtedness; (ii) if the Refinanced Indebtedness was subordinated to or PARI
PASSU with the Senior Notes, then such Refinancing Indebtedness, by its terms,
is expressly PARI PASSU with (in the case of Refinanced Indebtedness that was
PARI PASSU with) the Senior Notes, or subordinate in right of payment to (in
the case of Refinanced Indebtedness that was subordinated to) the Senior Notes
at least to the same extent as the Refinanced Indebtedness; (iii) the portion,
if any, of the Refinancing Indebtedness that is scheduled to mature on or prior
to the maturity date of the Senior Notes has a Weighted Average Life to
Maturity at the time such Refinancing Indebtedness is incurred that is equal to
or greater than the Weighted Average Life to Maturity of the portion of the
Refinanced Indebtedness being repaid that is scheduled to mature on or prior to
the maturity date of the Senior Notes; and (iv) the Refinancing Indebtedness is
secured only to the extent, if at all, that the Refinanced Indebtedness is
secured.
"RELATED BUSINESS" means any business in which the Company and its
Restricted Subsidiaries operate on the Issue Date and any business related,
ancillary or complementary to the business of the Company and the Restricted
Subsidiaries on that date.
"RESTRICTED DEBT PAYMENT" means any purchase, redemption, defeasance
(including without limitation in substance or legal defeasance) or other
acquisition or retirement for value, directly or indirectly, by the Company or
a Restricted Subsidiary, prior to the scheduled maturity or prior to any
scheduled repayment of principal or sinking fund payment, as the case may be,
in respect of Subordinated Indebtedness.
"RESTRICTED INVESTMENT" means any Investment by the Company or any
Restricted Subsidiary (other than investments in Cash Equivalents) in any
Person that is not the Company or a Restricted Subsidiary, including in any
Unrestricted Subsidiary.
"RESTRICTED PAYMENT" means with respect to any Person: (i) any declaration
or payment of any dividend (other than a dividend declared and paid by a
Restricted Subsidiary to the Company or a Wholly-Owned Restricted Subsidiary),
or any other distribution with respect to any shares of Capital Stock of that
Person (but excluding dividends or distributions payable solely in shares of
Capital Stock (other than Disqualified Capital Stock) of that Person); (ii) any
purchase, redemption, retirement or other acquisition for value of (A) the
Capital Stock of the Company or (B) the Capital Stock of any Restricted
Subsidiary, or any other payment or distribution made in respect thereof,
either directly or indirectly (other than a payment solely in Capital Stock
that is not Disqualified Capital Stock, and excluding any such payment to the
extent actually received by the Company or a Restricted Subsidiary); (iii) any
Restricted Investment; or (iv) any Restricted Debt Payment.
102
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company, whether
existing on or after the Issue Date, other than an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"SALE/LEASEBACK TRANSACTIONS" means with respect to any Person an
arrangement with any bank, insurance company or other lender or investor or to
which such lender or investor is a party, providing for the leasing by such
Person of any property or asset of such Person which has been or is being sold
or transferred by such Person to such lender or investor or to any Person to
whom funds have been or are to be advanced by such lender or investor on the
security of such property or asset.
"SECURITIES ACT" means the U.S. Securities Act of 1933, as amended.
"SENIOR UNSECURED DEBT" means Indebtedness of the Company or any
Restricted Subsidiary which is not (i) Subordinated Indebtedness or (ii)
secured by any Lien.
"STATED MATURITY" means, when used with respect to any Indebtedness or any
installment of interest thereon, the date specified in the instrument
evidencing or governing such Indebtedness as the fixed date on which the
principal of that Indebtedness or that installment of interest is due and
payable.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company or any
Restricted Subsidiary that is subordinated in right of payment to the Senior
Notes or the Subsidiary Guarantee of such Restricted Subsidiary, respectively.
"SUBSIDIARY" of any Person means (i) any corporation of which at least a
majority of the aggregate voting power of all classes of the Voting Stock is
owned by such Person directly or through one or more other Subsidiaries of such
Person and (ii) any entity other than a corporation in which such Person,
directly or indirectly, owns at least a majority of the Voting Stock of such
entity entitling the holder thereof to vote or otherwise participate in the
selection of the governing body, partners, managers or others that control the
management and policies of such entity. Unless otherwise specified,
"Subsidiary" means a Subsidiary of the Company.
"SUBSIDIARY GUARANTOR" means each Restricted Subsidiary of the Company and
each other Person who is required to become (or whom the Company otherwise
causes to become) a Subsidiary Guarantor by the terms of the Indenture.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that at the time of
determination shall be designated an Unrestricted Subsidiary by the Board of
Directors of the Company in the manner provided below and (ii) any Subsidiary
of an Unrestricted Subsidiary. The Board of Directors of the Company may
designate any Restricted Subsidiary other than the Subsidiary Guarantor,
existing on the date of the Indenture to be an Unrestricted Subsidiary, and any
such designation shall be deemed to be a Restricted Investment at the time of
and immediately upon such designation by the Company and its Restricted
Subsidiaries in the amount of the greater of the Consolidated Net Worth or the
fair market value of such designated Subsidiary and its consolidated
Subsidiaries at such time, PROVIDED that such designation shall be permitted
only if (A) the Company and its Restricted Subsidiaries would be able to make
the Restricted Investment deemed made pursuant to such designation at such
time, (B) no portion of the Indebtedness or any other obligation (contingent or
otherwise) of such Subsidiary (x) is Guaranteed by the Company or any
Restricted Subsidiary, (y) is recourse to the Company or any Restricted
Subsidiary or (z) subjects any property or asset of the Company or any
Restricted Subsidiary, directly or indirectly, contingently or otherwise, to
the satisfaction thereof and (C) no default or event of default with respect to
any Indebtedness of such Subsidiary would permit any holder of any Indebtedness
of the Company or any Restricted Subsidiary to declare such Indebtedness of the
Company or any Restricted Subsidiary due and payable prior to its maturity. The
Board of Directors of the Company may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary, and any such
103
designation shall be deemed to be an incurrence by the Company and its
Subsidiaries of the Indebtedness (if any) of such Subsidiary so designated for
purposes of the Consolidated Fixed Charge Coverage Ratio test described under
"--Certain Covenants--Limitations on Additional Indebtedness and Disqualified
Capital Stock" above as of the date of such designation, PROVIDED that such
designation shall be permitted only if immediately after giving effect to such
designation and the incurrence of any such additional Indebtedness deemed to
have been incurred thereby (x) the Company would be able to incur $1.00 of
additional Indebtedness not constituting Permitted Indebtedness at such
specified time pursuant to the Consolidated Fixed Charge Coverage Ratio test
set forth in the covenant described under "--Certain Covenants--Limitations on
Additional Indebtedness and Disqualified Capital Stock" above and (y) no
Default or Event of Default shall be continuing. Any such designation by the
Board of Directors described in the two preceding sentences shall be evidenced
to the Trustee by the filing with the Trustee of a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and
setting forth the underlying calculations of such certificate.
"UNUTILIZED PROCEEDS AMOUNT" shall mean an amount equal to the difference
between (i) the amount by which net proceeds from the sale of the Old Notes not
utilized for the purposes set forth under "Use of Proceeds" as of the date 18
months after the Issue Date exceeds $15 million, minus (ii) the aggregate
principal amount of Senior Notes that, prior to such date, have been
repurchased by the Company in the open market and delivered to the Trustee for
cancellation in the 90 day period prior to the date 18 months after the Issue
Date.
"VOTING STOCK" with respect to any Person, means securities of any class
of Capital Stock of such Person entitling the holders thereof (whether at all
times or only so long as no senior class of stock or other relevant equity
interest has voting power by reason of any contingency) to vote in the election
of members of the board of directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY", when applied to any Indebtedness at
any date, means the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment by (ii) the then outstanding
principal amount of such Indebtedness.
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" means a Restricted Subsidiary of
which 100% of the Capital Stock (except for directors' qualifying shares or
certain minority interests owned by other Persons solely due to local law
requirements that there be more than one stockholder, but which interest is not
in excess of what is required for such purpose) is owned directly by the
Company or through one or more Wholly-Owned Restricted Subsidiaries.
104
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in
connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by
Participating Broker-Dealers during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired by such Participating Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities. A Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of New Notes received in exchange for Old Notes pursuant to the Exchange Offer
must notify the Company, or cause the Company to be notified, on or prior to
the Expiration Date, that it is a Participating Broker-Dealer. Such notice may
be given in the space provided for that purpose in the Letter of Transmittal or
may be delivered to the Exchange Agent at one of the addresses set forth herein
under "The Exchange Offer--Exchange Agent." See "The Exchange Offer--Resales of
New Notes."
The Company will not receive any cash proceeds from the issuance of the
New Notes offered hereby. New Notes received by broker-dealers for their own
accounts in connection with the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New 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 at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such New Notes.
Any broker-dealer that resells New Notes that were received by it for its
own account in connection with the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New 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.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., Miami,
Florida.
EXPERTS
The consolidated financial statements as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997, included
in this Prospectus, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, Independent Accountants, given on the authority of
said firm as experts in auditing and accounting.
105
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Accountants ........................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 .......... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997
and the Three Months Ended March 31, 1997 and 1998 ...................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and the Three Months Ended March 31, 1998 .............. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997
and the Three Months Ended March 31, 1997 and 1998 ...................................... F-6
Notes to Consolidated Financial Statements ............................................... F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Fine Air Services Corp.
We have audited the accompanying consolidated balance sheets of Fine Air
Services Corp. and subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Fine Air Services Corp. and subsidiaries as of December 31, 1996 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
March 3, 1998, except for the last paragraph of Note 2,
as to which the date is March 31, 1998
F-2
FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
1996 1997 MARCH 31, 1998
---------------- ---------------- ---------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 972,058 $ 2,276,912 $ 2,165,758
Investment securities .................................................. 224,668 56,602 64,321
Accounts receivable, net of allowance for losses of $1,309,000,
$1,247,000 and $1,346,000, respectively .............................. 22,517,818 14,847,410 14,036,404
Loans receivable, current portion ...................................... -- 430,669 430,669
Expendable parts ....................................................... 781,498 545,998 487,123
Prepaid expenses and other current assets .............................. 747,278 639,042 351,167
------------- ------------- -------------
Total current assets .................................................. 25,243,320 18,796,633 17,535,442
------------- ------------- -------------
Property and equipment:
Flight equipment ....................................................... 58,977,975 78,085,073 80,654,491
Other .................................................................. 5,062,243 13,942,209 18,123,285
------------- ------------- -------------
64,040,218 92,027,282 98,777,776
Less accumulated depreciation and amortization ......................... (26,230,950) (35,446,183) (38,550,606)
------------- ------------- -------------
Net property and equipment ............................................. 37,809,268 56,581,099 60,227,170
------------- ------------- -------------
Other assets:
Restricted cash ........................................................ 181,673 709,012 715,845
Accounts receivable, non-current ....................................... 1,886,000 1,753,000 1,929,000
Loans receivable, less current portion ................................. -- 3,569,331 3,465,230
Deposits and other assets .............................................. 766,057 1,436,640 1,499,229
------------- ------------- -------------
Total assets .......................................................... $ 65,886,318 $ 82,845,715 $ 85,371,916
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit ......................................................... $ 700,000 $ -- $ --
Current portion of long-term debt ...................................... 1,334,369 4,305,045 4,305,045
Accounts payable ....................................................... 6,634,586 5,448,188 4,435,766
Interest payable ....................................................... 666,775 801,256 1,009,330
Accrued expenses ....................................................... 2,197,639 5,158,986 5,658,235
Capital lease obligation, current portion .............................. -- 113,014 113,014
------------- ------------- -------------
Total current liabilities ............................................. 11,533,369 15,826,489 15,521,390
Capital lease obligation, less current portion .......................... -- 196,400 211,965
Long-term debt, less current portion .................................... 9,322,770 24,779,630 24,065,344
Other debt .............................................................. -- 230,000 230,000
------------- ------------- -------------
Total liabilities ..................................................... 20,856,139 41,032,519 40,028,699
------------- ------------- -------------
Commitments and contingencies (Notes 9, 11, 12, 13, 14 and 17)
Stockholders' equity:
Common stock, $0.01 par value; 3,000 shares authorized, issued
and outstanding ...................................................... 30 30 30
Retained earnings ...................................................... 45,054,666 41,799,668 45,321,970
Net unrealized holding (losses) gains on investment securities ......... (24,517) 13,498 21,217
------------- ------------- -------------
Total stockholders' equity ............................................ 45,030,179 41,813,196 45,343,217
------------- ------------- -------------
Total liabilities and stockholders' equity ............................ $ 65,886,318 $ 82,845,715 $ 85,371,916
============= ============= =============
The accompanying notes are an integral part of these financial
statements.
F-3
FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -------------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
(UNAUDITED)
Revenues:
Scheduled cargo services .................. $ 40,123,759 $ 54,774,892 $ 56,412,349 $ 16,174,090 $ 17,225,189
ACMI services ............................. 35,340,514 35,519,906 31,079,449 9,125,902 7,510,656
Repairs, training and other ............... 885,183 3,953,131 2,502,372 625,906 408,183
------------ ------------ ------------ ------------ ------------
Total operating revenues ................. 76,349,456 94,247,929 89,994,170 25,925,898 25,144,028
------------ ------------ ------------ ------------ ------------
Operating expenses:
Flying operations ......................... 25,971,028 36,609,604 34,198,136 9,467,104 8,895,716
Aircraft and traffic servicing ............ 7,475,080 7,938,513 8,709,798 2,117,863 2,555,745
Maintenance ............................... 8,340,343 9,894,441 15,247,112 2,888,609 3,740,235
General and administrative ................ 11,481,798 14,110,869 16,131,561 3,994,253 4,667,864
Selling ................................... 4,454,051 3,095,842 5,264,365 1,262,580 1,383,666
Depreciation and amortization ............. 6,923,711 9,390,396 11,469,954 2,846,571 3,142,885
------------ ------------ ------------ ------------ ------------
Total operating expenses ................. 64,646,011 81,039,665 91,020,926 22,576,980 24,386,111
------------ ------------ ------------ ------------ ------------
Operating income (loss) .................. 11,703,445 13,208,264 (1,026,756) 3,348,918 757,917
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income ........................... 92,085 94,651 225,017 14,726 118,752
Interest expense, net of interest
capitalized of $440,000 in 1997 ......... (985,201) (966,058) (1,090,838) (224,658) (654,727)
Gain on insurance settlement .............. -- -- 3,905,373 -- --
Litigation settlement ..................... -- -- -- -- 3,388,574
Initial public offering costs ............. -- -- (978,243) -- --
Other, net ................................ 227,293 691,414 (919,339) 30,645 78,416
------------ ------------ ------------ ------------ ------------
Total other, net ......................... (665,823) (179,993) 1,141,970 (179,287) 2,931,015
------------ ------------ ------------ ------------ ------------
Net income ................................. $ 11,037,622 $ 13,028,271 $ 115,214 $ 3,169,631 $ 3,688,932
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial
statements.
F-4
FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNREALIZED
HOLDING
COMMON STOCK GAIN (LOSS) LOANS AND
----------------- RETAINED ON INVESTMENT ADVANCES TO
SHARES AMOUNT EARNINGS SECURITIES STOCKHOLDERS TOTAL
-------- -------- --------------- --------------- ------------- ---------------
Balances at December 31, 1994 ......... 3,000 $ 30 $ 23,347,519 $ (112,633) $ (481,097) $ 22,753,819
Net income ............................ -- -- 11,037,622 -- -- 11,037,622
Distributions ......................... -- -- (1,248,655) -- -- (1,248,655)
Change in unrealized loss on
investment securities ................ -- -- -- 80,902 -- 80,902
----- ---- ------------ ---------- ---------- ------------
Balances at December 31, 1995 ......... 3,000 30 33,136,486 (31,731) (481,097) 32,623,688
Net income ............................ -- -- 13,028,271 -- -- 13,028,271
Distributions ......................... -- -- (1,110,091) -- -- (1,110,091)
Reimbursement of advances to
stockholders ......................... -- -- -- -- 481,097 481,097
Change in unrealized loss on
investment securities ................ -- -- -- 7,214 -- 7,214
----- ---- ------------ ---------- ---------- ------------
Balances at December 31, 1996 ......... 3,000 30 45,054,666 (24,517) -- 45,030,179
Net income ............................ -- -- 115,214 -- -- 115,214
Distributions ......................... -- -- (3,370,212) -- -- (3,370,212)
Change in unrealized gain (loss) on
investment securities ................ -- -- -- 38,015 -- 38,015
----- ---- ------------ ---------- ---------- ------------
Balances at December 31, 1997 ......... 3,000 30 41,799,668 13,498 -- 41,813,196
Net income (unaudited) ................ -- -- 3,688,932 -- -- 3,688,932
Distributions (unaudited) ............. -- -- (166,630) -- -- (166,630)
Change in unrealized gain on
investment securities (unaudited) -- -- -- 7,719 -- 7,719
----- ---- ------------ ---------- ---------- ------------
Balances at March 31, 1998
(unaudited) .......................... 3,000 $ 30 $ 45,321,970 $ 21,217 $ -- $ 45,343,217
===== ==== ============ ========== ========== ============
The accompanying notes are an integral part of these financial
statements.
F-5
FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- -------------- --------------
(UNAUDITED)
Cash flows from operating activities:
Net income ....................................... $ 11,037,622 $ 13,028,271 $ 115,214 $ 3,169,631 $ 3,688,932
------------- ------------- ------------- ------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................... 6,923,711 9,390,396 11,469,954 2,846,571 3,142,885
Bad debt expense ................................ 890,573 16,266 882,546 219,197 99,000
Excess of insurance proceeds over net
book value of assets destroyed ................ -- -- (3,905,373) -- --
Gain on disposal of property and
equipment ..................................... -- (668,116) (32,000) 47,138 --
Loss on sales of investment securities .......... -- 76,937 86,916 -- --
Changes in operating assets and liabilities:
Accounts receivable ............................ (3,734,503) (4,746,594) 2,920,862 4,768,828 536,006
Expendable parts ............................... (160,000) (29,760) 235,500 58,875 58,875
Prepaid expenses and other assets .............. (349,251) (472,519) (562,347) 537,435 225,286
Accounts payable ............................... 2,028,654 (2,023,765) (1,186,398) (1,733,524) (1,012,422)
Interest payable ............................... 387,901 (268,179) 134,481 (639,163) 208,074
Accrued expenses ............................... 243,643 517,707 2,961,347 840,961 499,249
Other liabilities .............................. -- -- 230,000 -- --
------------- ------------- ------------- ------------ ------------
Total adjustments ............................. 6,230,728 1,792,373 13,235,488 6,946,318 3,756,953
------------- ------------- ------------- ------------ ------------
Net cash provided by operating activities 17,268,350 14,820,644 13,350,702 10,115,949 7,445,885
------------- ------------- ------------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment .............. (15,164,405) (14,107,612) (32,500,061) (4,156,832) (6,740,566)
Proceeds from sales of property and
equipment ...................................... -- 2,238,758 32,000 -- --
Increase in restricted cash ...................... (124,332) (40,390) (527,339) -- (6,833)
Purchases of investment securities ............... -- (146,128) -- -- --
Proceeds from sales of investment securities ..... -- 140,734 119,165 -- --
(Increase) decrease in loans receivable .......... (54,253) 25,000 -- -- --
Proceeds from insurance settlement ............... -- -- 6,500,000 -- --
Principal payment on notes receivable ............ -- -- -- -- 104,101
------------- ------------- ------------- ------------ ------------
Net cash used in investing activities .......... (15,342,990) (11,889,638) (26,376,235) (4,156,832) (6,643,298)
------------- ------------- ------------- ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt ..................... -- -- 20,000,000 -- --
Principal payments on long-term debt ............. (1,417,659) (1,871,546) (1,572,464) (1,075,724) (714,286)
Proceeds from (payment on) line of credit ........ 600,000 100,000 (700,000) (700,000) --
Distributions to stockholders .................... (1,248,655) (1,110,091) (3,370,212) (324,137) (166,630)
Reimbursement of advances to stockholders -- 481,097 -- -- --
Payments of capital lease obligations ............ -- -- (26,937) -- (32,825)
------------- ------------- ------------- ------------ ------------
Net cash (used in) provided by financing
activities ................................... (2,066,314) (2,400,540) 14,330,387 (2,099,861) (913,741)
------------- ------------- ------------- ------------ ------------
(Decrease) increase in cash and cash
equivalents ...................................... (140,954) 530,466 1,304,854 3,859,256 (111,154)
Cash and cash equivalents, beginning of period 582,546 441,592 972,058 972,058 2,276,912
------------- ------------- ------------- ------------ ------------
Cash and cash equivalents, end of period .......... $ 441,592 $ 972,058 $ 2,276,912 $ 4,831,314 $ 2,165,758
============= ============= ============= ============ ============
The accompanying notes are an integral part of these financial
statements.
F-6
FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
-------------- -------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ..................... $ 597,300 $ 1,234,237 $ 956,357
========== =========== ==========
Supplemental disclosures of non-cash investing activities (also
see Note 11):
Change in unrealized holding gain on available for sale
investment securities ...................................... $ (80,902) $ (7,214) $ (38,015)
========== =========== ==========
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1998
------------ ------------
(UNAUDITED)
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ..................... $ 863,821 $ 603,024
========= =========
Supplemental disclosures of non-cash investing activities (also
see Note 11):
Change in unrealized holding gain on available for sale
investment securities ...................................... $ 83,060 $ (7,719)
========= =========
During 1997, the Company converted $4,000,000 of accounts receivable into a
note receivable.
Supplemental disclosure of non-cash financing activities:
During the year ended December 31, 1997 and the three months ended March 31,
1998, the Company entered into capital leases in the amounts of $336,351
and $48,390, respectively.
The accompanying notes are an integral part of these financial
statements.
F-7
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
The Company is primarily engaged in interstate, overseas and foreign
charter and scheduled air transportation of cargo and mail pursuant to
authority granted by the United States Department of Transportation and
operates in the United States, South and Central America, and the Caribbean.
The Company has worldwide charter authority granted by the United States
Department of Transportation and is also engaged in aircraft leasing and repair
and maintenance.
The percentage of revenues derived from each of the Company's primary
business activities was as follows:
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
Scheduled cargo services ............ 53% 58% 62% 62% 68%
ACMI services ....................... 46 38 35 35 30
Repairs, training and other ......... 1 4 3 3 2
-- -- -- -- --
100% 100% 100% 100% 100%
=== === === === ===
The fixed assets of the Company consist primarily of aircraft, engines,
rotable parts, ground equipment and furniture and office equipment,
substantially all of which are physically located or based at the Miami
International Airport.
The Company operates principally in Latin America (including Puerto Rico
and the U.S. Virgin Islands) and the United States. For the years ended
December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and
1998, Latin America sales accounted for 88%, 89%, 91%, 93% and 87% of total
revenues, respectively. Foreign sales were conducted in U.S. dollars.
2. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Fine Air Services, Inc. ("Fine Air") and
Agro Air Associates, Inc. ("Agro Air"). All significant intercompany accounts
and transactions have been eliminated.
REVENUE RECOGNITION
Aircraft, crew, maintenance and insurance ("ACMI") services revenue is
generally recognized on a flight by flight basis, although revenue derived from
certain long term ACMI contracts is recognized on a pro rata basis according to
block hour usage specified in such contracts. Revenue from scheduled cargo
services is recognized when the related cargo reaches its point of destination.
Revenue from repairs, training and other is recognized as services are
performed.
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 reported amounts of assets and
F-8
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company uses estimates principally with
respect to the allowance for losses on receivables, the economic useful lives
of property and equipment and salvage value on owned aircraft. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash (both interest bearing and
non-interest bearing) and certificates of deposit and other highly liquid
instruments having maturities of three months or less from the date of
purchase. At times cash and cash equivalents in a depository institution may be
in excess of the FDIC insurance limit.
RESTRICTED CASH
Restricted cash consists of certificates of deposit required to
collateralize various letters of credit (Note 12).
INVESTMENT SECURITIES
Securities that the Company does not have the intent or ability to hold to
maturity are classified as either "available-for-sale" or as "trading" and are
carried at fair value. Unrealized gains and losses on available for sale
securities are classified as a separate component of stockholders' equity.
Unrealized gains and losses on trading securities would be recognized in
current earnings. As of December 31, 1996 and 1997 and March 31, 1998, all
securities have been classified as available for sale.
EXPENDABLE PARTS
Flight equipment expendable parts are stated at the lower of average cost
or market value.
PROPERTY AND EQUIPMENT
Owned aircraft are stated at cost. Expenditures for additions,
improvements, flight equipment modifications, engine overhauls and major
maintenance costs are capitalized. Other maintenance and repairs are charged to
expense when incurred. The Company performs a substantial portion of flight
equipment modifications, engine repairs, major maintenance as well as normal
repairs and maintenance. Owned aircraft are depreciated over their estimated
useful lives of 10 years using the straight line method, net of the estimated
salvage value of 10%. Major maintenance and overhaul costs are depreciated over
their estimated useful lives, which range from 3 to 8 years.
At the time assets are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the related accounts, and the
difference, net of proceeds, if any, is recorded as a gain or loss.
Long-lived assets to be held and used are reviewed for impairment whenever
changes in circumstances indicate that the related carrying amounts may not be
recoverable. When required,
F-9
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
impairment losses on assets to be held and used are recognized based on the
fair value of the asset. The Company does not believe impairment charges are
warranted as of December 31, 1996 and 1997 or as of March 31, 1998.
INCOME TAXES
Fine Air and Agro Air have elected to be taxed as, respectively, an S
corporation and a qualified sub-chapter S subsidiary under provisions of the
Internal Revenue Code. Accordingly, the Company is not subject to Federal and
State income taxes. Instead, the taxable income is included in the individual
income tax returns of the stockholders.
The Company's tax returns for the years ended December 31, 1993 and 1994
are currently under examination by the Internal Revenue Service. The
examination relates specifically to the Company's treatment of certain repairs
and maintenance, including safety checks mandated by the Federal Aviation
Administration, as expenses for tax purposes. Should the Internal Revenue
Service take the position that these costs should have been capitalized and
subsequently depreciated, a substantial assessment could result. Because the
examination is in process, the amount of such an assessment is not presently
determinable. The Company believes that its treatment of such costs as
deductible for tax purposes is proper and is prepared to defend its position
vigorously, if it becomes necessary.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of investment securities, a
loan receivable, borrowings under a bank line of credit and long-term debt
agreements. Investment securities have been classified as available for sale
and are recorded at fair value. The fair values of the loan receivable, the
line of credit and long-term debt have been estimated based on interest rates
available for similar debt instruments and approximate their carrying values.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
SFAS No. 131 requires that public entities report financial and descriptive
information about its reportable operating segments, generally on the basis
that it is used internally for evaluating segment performance. Required
disclosure includes segment profit or loss, certain specific revenue and
expense items and segment assets. It requires reconciliations of disclosed
segment information to the entity's financial statements. Management is
currently evaluating the requirements of SFAS No. 131, which will be
implemented for the year ending December 31, 1998.
INTERIM FINANCIAL STATEMENTS
The financial statements for the three-month periods ended March 31, 1997
and 1998, and all related footnote information for these periods, are
unaudited, and reflect all normal and recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim periods. The results
of operation for the three months ended March 31, 1998 are not necessarily
indicative of the results to be achieved for the entire fiscal year ending
December 31, 1998.
F-10
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
For the year ended December 31, 1997 and the three months ended March 31,
1998, sales to the Company's largest customer comprised 13.5% and 11.2%,
respectively, of total operating revenues. This customer also accounted for
25%, 20% and 29% of net accounts receivables as of December 31, 1996 and 1997
and March 31, 1998, respectively. Another customer accounted for 25% and 23% of
the net accounts receivable balance at December 31, 1996 and 1997,
respectively. The Company also has a note receivable from its largest customer
in the amount of $4,000,000 and $3,895,899 as of December 31, 1997 and March
31, 1998, respectively (See Note 6).
On March 31, 1998, the Company and its largest ACMI customer entered into
a security agreement, whereby the customer granted the Company an unconditional
and continuing security interest in all of the customer's tangible and
intangible assets (the "Collateral"). The Company has historically offered
extended ACMI lease payments to this customer. It is management's intent to
continue to provide this customer with sufficient aircraft so that the customer
is able to operate at the same or at an increased level of operations.
Management believes that the Collateral is sufficient to ensure the
recoverability of the customer's accounts and note receivable balances (See
Note 6).
3. INVESTMENT SECURITIES:
The cost and fair values of investments in equity securities at December
31, 1996 and 1997 and at March 31, 1998 were as follows:
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
------------ ------------ -------------- ------------
Equity securities at December 31, 1996 .................. $ 249,185 $ 43,920 $ (68,437) $ 224,668
========= ======== ========== =========
Equity securities at December 31, 1997 .................. $ 43,104 $ 14,347 $ (849) $ 56,602
========= ======== ========== =========
Equity securities at March 31, 1998 (unaudited) ......... $ 43,104 $ 21,217 $ -- $ 64,321
========= ======== ========== =========
Gains and losses resulting from sales of securities are determined using
the specific identification method.
F-11
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACCOUNTS RECEIVABLE:
Activity in the allowance for doubtful accounts was as follows:
YEARS ENDED DECEMBER 31, THREE MONTHS
------------------------------------------------ ENDED
1995 1996 1997 MARCH 31, 1998
-------------- -------------- -------------- ---------------
(UNAUDITED)
Balance, beginning of period ......... $ 394,221 $ 1,044,821 $ 1,308,976 $ 1,246,863
Provision ............................ 890,573 16,266 882,546 99,000
Receivables charged off .............. (239,973) (143,129) (944,659) --
Recoveries ........................... -- 391,018 -- --
---------- ----------- ----------- -----------
Balance, end of period ............... $1,044,821 $ 1,308,976 $ 1,246,863 $ 1,345,863
========== =========== =========== ===========
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at:
DECEMBER 31,
--------------------------------- MARCH 31,
1996 1997 1998
--------------- --------------- ---------------
(UNAUDITED)
Aircraft, engines and betterments ...................... $ 58,977,975 $ 78,085,073 $ 80,654,491
Automobile and trucks .................................. 493,296 416,719 416,719
Leasehold improvements, furniture and fixtures ......... 957,279 1,112,499 1,202,931
Machinery and equipment ................................ 1,516,318 2,272,562 2,351,879
Rotable parts (see Note 11) ............................ 2,095,350 10,140,429 14,151,756
------------- ------------- -------------
64,040,218 92,027,282 98,777,776
Accumulated depreciation and amortization .............. (26,230,950) (35,446,183) (38,550,606)
------------- ------------- -------------
$ 37,809,268 $ 56,581,099 $ 60,227,170
============= ============= =============
6. LOANS RECEIVABLE:
During November 1997, the Company converted $4,000,000 of accounts
receivable from its largest customer into a 9% interest bearing note. Principal
and interest are payable in 11 quarterly installments of $194,101 beginning in
February 1998. A balloon payment in the amount of $2,778,000, representing
remaining principal and any unpaid interest, is due on November 1, 2000.
7. LINE OF CREDIT:
The Company has $12,500,000 available through a revolving line of credit,
which expires in November 2000. The revolving line of credit was subsequently
increased to $13 million (see Note 17). Interest under this line is determined
at the time of borrowing based on the bank's prime rate plus 0.75% (9.25% at
March 31, 1998). Borrowings under the line are collateralized by eligible
accounts receivable. The unused portion of the line of credit is subject to a
fee at the rate of .50% per annum. At December 31, 1997 and March 31, 1998,
there were no borrowings outstanding under the line of credit.
The Company had a $2,000,000 revolving line of credit with a bank which
matured in May 1997. The Company did not renew the credit facility. Outstanding
borrowings under the facility, which were
F-12
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LINE OF CREDIT:--(CONTINUED)
collateralized by certain assets of the Company, bore interest, payable
monthly, at the prime rate plus 1% (9.25% at December 31, 1996). The
outstanding borrowings under the line of credit as of December 31, 1996 were
$700,000.
8. LONG-TERM DEBT:
Long-term debt was as follows:
DECEMBER 31,
------------------------------- MARCH 31,
1996 1997 1998
-------------- -------------- --------------
(UNAUDITED)
Note payable, interest at 8.75%; payable in annual
installments of principal and interest totaling $1,935,110
through March 2003; collateralized by aircraft(a) ............. $ 9,821,554 $ 8,745,830 $ 8,745,830
Note payable, interest at 7.5%; payable in annual
installments of principal and interest totaling $321,314
through July 1999; collateralized by aircraft ................. 835,585 576,941 576,941
Term note, interest at .75% above prime rate (9.25% at
December 31, 1997 and March 31, 1998); payable in
monthly principal installments of $214,286 plus interest
through November 1, 2000 with a balloon payment on the
unpaid principal balance due November 17, 2000;
collateralized by aircraft, engines and rotable parts ......... -- 17,785,714 17,142,856
Term note, interest at .75% above prime rate (9.25% at
December 31, 1997 and March 31, 1998); payable in
monthly principal installments of $23,810 plus interest
through November 1, 2000 with a balloon payment on the
unpaid principal balance due November 17, 2000;
collateralized by aircraft, engines and rotable parts ......... -- 1,976,190 1,904,762
------------ ------------ ------------
Total long-term debt ............................................ 10,657,139 29,084,675 28,370,389
Current portion of long-term debt ............................... (1,334,369) (4,305,045) (4,305,045)
------------ ------------ ------------
Long-term debt, less current portion ............................ $ 9,322,770 $ 24,779,630 $ 24,065,344
============ ============ ============
- ----------------
(a) On February 28, 1998, an amendment was entered into whereby the maturity
of the note payable was extended through June 2003.
F-13
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT:--(CONTINUED)
Required principal maturities on long-term debt are as follows:
YEAR ENDING DECEMBER 31,
- --------------------------
1998 ................... $ 4,305,045
1999 ................... 4,428,242
2000 ................... 15,431,148
2001 ................... 1,504,589
2002 ................... 1,636,240
Thereafter ............. 1,779,411
------------
Total ................ $ 29,084,675
============
9. LEASE COMMITMENTS:
The Company leases office, hanger and warehouse space at the Miami
International Airport from Metropolitan Dade County. The office and warehouse
facilities lease expires in September 1999. The hanger lease expires in March
2001. The Company also leases a building for its engine repair operations. The
building lease was to expire in May 1998 but was subsequently extended for a 40
month period (see Note 17). Minimum non-cancellable lease commitments are as
follows:
1998 ................ $ 2,413,000
1999 ................ 2,187,000
2000 ................ 1,697,000
2001 ................ 442,000
-----------
Total ............. $ 6,739,000
===========
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $1,663,000, $2,305,000 and $2,865,000, respectively. Rent expense
for the three months ended March 31, 1997 and 1998 was approximately $768,000
and $772,000, respectively.
CAPITAL LEASES
Assets under capital leases are capitalized using interest rates
appropriate at the inception of each lease. Future minimum payments for assets
under capital leases at December 31, 1997 are as follows:
1998 ................................................. $ 131,923
1999 ................................................. 131,923
2000 ................................................. 76,955
----------
Total minimum obligations .......................... 340,801
Interest .......................................... (31,387)
----------
Net minimum lease payments ......................... 309,414
Current portion ................................... (113,014)
----------
Long-term obligations less current portion ......... $ 196,400
==========
F-14
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. GAIN ON INSURANCE SETTLEMENT:
During 1997, an aircraft was declared a total loss by the Company's
insurance underwriters as a result of an accident. The total insurance proceeds
received for the aircraft were $6,500,000. A gain of $3,905,373 was recognized
during 1997, which represented the excess of insurance proceeds over the net
book value of the aircraft.
11. RELATED PARTY TRANSACTIONS:
By December 31, 1999, the Company will be required to install hushkits on
all of its existing fleet of 14 DC-8 aircraft to comply with noise abatement
regulations issued by the Federal Aviation Administration (the "FAA").
Management intends to acquire at least 16 hushkits (including 14 for its
existing DC-8 aircraft and two spares) at an estimated average cost of
approximately `$2.25 million per hushkit or approximately $36.0 million in the
aggregate as of December 31, 1997. The Company intends to purchase the hushkits
from Quiet Technology Venture, Ltd. ("QTV"), an entity in which its
stockholders have a controlling interest. There can be no assurance that the
costs of acquiring and installing the hushkits on the Company's fleet will not
exceed this estimate or that this installation will be completed on a timely
basis.
During the fourth quarter of 1996, the Company began funding QTV's
production of the hushkits on behalf of the Company through the purchase of
parts on behalf of QTV and through direct cash advances.
On June 30, 1997, QTV received (subject to certain weight restrictions) a
Supplemental Type Certificate ("STC") from the FAA approving the installation
of the hushkits on the Company's fleet of DC-8's. Subsequent to receiving the
STC, QTV has improved the hushkit design so that when installed, the aircraft
will be able to carry the maximum cargo capacity (as originally designed by the
manufacturer), while being in compliance with FAA noise level requirements. The
modified hushkit design is in final phases of the testing process and
management anticipates receiving an STC for the upgraded hushkit model during
the third quarter of 1998. However, there can be no assurance that QTV will
ultimately receive the STC for the upgraded hushkit model. Management has not
determined the financial impact, if any, to the Company should its aircraft be
limited with respect to cargo capacity.
As of December 31, 1996 and 1997 and March 31, 1998, the Company had
cumulative advances to QTV of $1,619,000, $8,804,000 and $12,245,000,
respectively, for the manufacture of hushkits on its behalf. Such advances
represent the cost basis of the hushkits manufactured (finished goods, work-in-
process and raw materials). The costs of the hushkits have been recorded by the
Company as rotable parts within property and equipment since QTV has deeded
title for all such hushkits and related parts to the Company. Depreciation will
commence on the hushkits as they are installed on the aircraft.
For the years ended December 31, 1996 and 1997 and the three months ended
March 31, 1998, the Company recorded revenues (repairs, training and other) of
approximately $1,886,000, $1,121,000 and $176,000, respectively, relating to
work performed for QTV. At December 31, 1996 and 1997 and March 31, 1998,
$1,886,000, $1,753,000 and $1,929,000 relating to those revenues were included
in accounts receivable, non-current, respectively. The receivable outstanding
as of March 31, 1998 is expected to be realized through the installation of
hushkits produced by QTV.
At December 31, 1996 and 1997 and March 31, 1998, the Company had advanced
$150,000, $352,000 and $364,000, respectively, to several related parties
affiliated with the Company's
F-15
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS:--(CONTINUED)
stockholders. Also, as of December 31, 1996 and 1997 and March 31, 1998, the
Company had outstanding advances to a Company officer in the amount of $25,000.
In December 1996, the Company purchased a cargo aircraft from a company
owned by a stockholder of the Company in exchange for $2,859,000, consisting of
$1,700,000 due the Company from overhaul services performed on the aircraft,
loans and advances to stockholders of $481,000 and loans, interest receivable
and receivables from parties related to the stockholders of $678,000. An
independent appraiser valued the aircraft at approximately $3,800,000. The
maintenance performed in the amount of $1,700,000 was included in
revenues--repairs, training and other.
12. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK:
At December 31, 1996 and 1997 and March 31, 1998, the Company had
outstanding $578,000, $678,000 and $678,000, respectively, of irrevocable
standby letters of credit to guarantee landing fees in certain countries and to
guarantee rent at the Miami Airport corporate offices and hangar facilities. Of
these letters of credit, $181,700, $678,000 and $678,000 have been
collateralized by restricted cash on deposit at the bank issuing such letters
of credit as of December 31, 1996 and 1997 and March 31, 1998, respectively.
13. COMMITMENTS AND CONTINGENCIES:
As a result of the accident described in Note 10, the Company is currently
subject to litigation and is aware of other claims pending which have not
reached litigation. All such litigation is being defended by the Company's
insurance carrier, without reservation of rights. Management believes that the
Company is fully insured for all litigation related to this accident.
The Company and its combined affiliate are involved in legal proceedings,
claims and litigation arising in the ordinary course of business. In the
opinion of management, the outcome of this litigation will not have a material
impact on the Company's financial position, results of operations, or
liquidity.
14. CONSENT AGREEMENT:
As a result of an accident involving one of the Company's DC-8 aircraft,
the Company entered into a Consent Agreement with the Federal Aviation
Administration (the "FAA"), whereby the Company committed to improve its
loading procedures on both ACMI and cargo flights, and to reimburse the FAA up
to $1,500,000 for the costs of their investigation and supervision subsequent
to the accident. The Consent Agreement specified that if, by December 1997, the
Company had established improved loading practices, and was current with
respect to payments required by the reimbursement schedule, $500,000 of the
total assessment would be waived. As of December 31, 1997, the FAA had waived
the $500,000 and had concluded that the Company had improved their loading
procedures to their satisfaction. The net $1,000,000 assessment was charged to
other expense during 1997. As of December 31, 1997 and March 31, 1998, $690,000
and $575,000, respectively, was outstanding and, accordingly, was accrued in
the financial statements.
15. INITIAL PUBLIC OFFERING COSTS:
During 1997, the Company incurred costs of $978,243 in connection with a
proposed initial public offering of its common stock. These costs have been
expensed since the offering was not completed.
F-16
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. LITIGATION SETTLEMENT:
In January 1997, the Company obtained a $3,400,000 judgment against a
former insurance carrier. The judgment was appealed, and final adjudication was
made in February 1998. On March 3, 1998, the Company received the full amount
of the judgment, which was recognized as other income during the three months
ended March 31, 1998.
17. SUBSEQUENT EVENTS (UNAUDITED):
As discussed in Note 9, on May 7, 1998, the Company extended its building
lease for a period of 40 months commencing on June 1, 1998.
On April 25, 1998, the Company entered into a $12 million term note with
interest at 0.75% above the prime rate. Principal payments of $200,000 are due
monthly through November 1, 2000 with a balloon payment on the unpaid principal
balance due November 17, 2000. The term loan is collateralized by an L-1011
aircraft and its engines. On June 5, 1998, the Company repaid the outstanding
balance of the term note.
On June 5, 1998, the Company consummated the sale of $200,000,000 9 7/8%
Senior Notes due June 1, 2008. Interest on the Senior Notes is payable on a
semi-annual basis on June 1 and December 1 of each year, commencing December 1,
1998. The Senior Notes are general unsecured obligations of Fine Air Services
Corp. and are fully and unconditionally guaranteed by Fine Air and Agro Air on
a joint and several basis.
On June 3, 1998, each of the 50% shareholders contributed to Fine Air
Services Corp. their respective interests in Fine Air and Agro Air, which
became wholly owned subsidiaries of Fine Air Services Corp.
F-17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any information
or to make any representation in connection with this offering 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 a solicitation
of an offer to buy any of the securities offered hereby to any person or by
anyone in any jurisdiction in which it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof or that there has been no change in the affairs of the Company since the
date hereof.
TABLE OF CONTENTS
PAGE
----------
Available Information ............................ 4
Summary .......................................... 6
Risk Factors ..................................... 17
The Exchange Offer ............................... 26
United States Federal Income Tax
Considerations ................................ 35
Use of Proceeds .................................. 38
Capitalization ................................... 38
Selected Financial Data .......................... 39
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .................................... 40
Industry Overview ................................ 51
Business ......................................... 52
Management ....................................... 69
Ownership ........................................ 72
Certain Transactions ............................. 73
Description of Existing Credit Facility .......... 74
Description of Senior Notes ...................... 75
Plan of Distribution ............................. 105
Legal Matters .................................... 105
Experts .......................................... 105
Index to Financial Statements .................... F-1
$200,000,000
[LOGO]
9 7/8% SENIOR NOTES DUE 2008
-----------------------------------
PROSPECTUS
-----------------------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers, as well as other
employees and individuals, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, bylaws, disinterested director vote, stockholder vote,
agreement or otherwise. Article VII of the registrant's Certificate of
Incorporation requires indemnification to the full extent permitted under
Delaware law as it now exists or may hereafter be amended.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for (i) any
breach of the director's duty of loyalty to the corporation or its
stockholders,(ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) payments of
unlawful dividends or unlawful stock repurchases or redemptions, or (iv) any
transaction from which the director derived an improper personal benefit.
ArticleVII of the registrant's Certificate of Incorporation provides that to
the full extent that the DGCL, as it now exists or may hereafter be amended,
permits the limitation or elimination of the liability of directors, a director
of the registrant shall not be liable to the registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
3.1 Registrant's Certificate of Incorporation
3.2 Registrant's Bylaws
4.1 Indenture, dated as of June 5, 1998, between the Registrant and The Bank of New York, as
Trustee
4.2 Form of 9 7/8% Senior Notes due 2008 (included in Exhibit 4.1)
4.3 Registration Rights Agreement dated June 5, 1998, between the Registrant, the Subsidiary
Guarantors named therein and SBC Warburg Dillon Read Inc.
5.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. as to the validity of
the 9 7/8% Senior Notes due 2008
12.1 Computation of ratio of earnings to fixed charges
23.1 Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (included in its
opinion to be filed as Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (contained on signature page)
25.1 Form T-1 Statement of Eligibility of The Bank of New York to act as trustee under the
Indenture.
99.1 Form of Letter of Transmittal
II-1
EXHIBIT DESCRIPTION
- ----------- --------------------------------------
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Tender Instruction
(b) Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions
or are not applicable, and therefore have been omitted.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
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, as amended
(the "Act"), the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Miami, State of Florida,
on July 17, 1998.
FINE AIR SERVICES CORP.
By: /s/ BARRY H. FINE
----------------------------
Barry H. Fine
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Barry H. Fine and Orlando M. Machado his
true and lawful attorneys-in-fact, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments, including any
post-effective amendments, to this registration statement, and any registration
statement filed pursuant to Rule 462(b) of the Act prepared in connection
therewith, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their substitutes,
each acting alone, may lawfully do or cause to be done by virtue hereof.
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 date indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------- --------------
/s/ J. FRANK FINE Chairman of the Board July 17, 1998
- ----------------------
J. Frank Fine
/s/ BARRY H. FINE President, Chief Executive July 17, 1998
- ---------------------- Officer and Director
Barry H. Fine
/s/ ORLANDO M. MACHADO Senior Vice President and July 17, 1998
- ---------------------- Chief Financial Officer
Orlando M. Machado (principal financial officer and
principal accounting officer)
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Act"), the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Miami, State of Florida,
on July 17, 1998.
FINE AIR SERVICES, INC.
By: /s/ BARRY H. FINE
------------------------------
Barry H. Fine
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Barry H. Fine and Orlando M. Machado his
true and lawful attorneys-in-fact, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments, including any
post-effective amendments, to this registration statement, and any registration
statement filed pursuant to Rule 462(b) of the Act prepared in connection
therewith, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their substitutes,
each acting alone, may lawfully do or cause to be done by virtue hereof.
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 date indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------- --------------
/s/ J. FRANK FINE Chairman of the Board July 17, 1998
- -----------------------
J. Frank Fine
/s/ BARRY H. FINE President, Chief Executive July 17, 1998
- ----------------------- Officer and Director
Barry H. Fine
/s/ ORLANDO M. MACHADO Senior Vice President and July 17, 1998
- ----------------------- Chief Financial Officer
Orlando M. Machado (principal financial officer and
principal accounting officer)
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Act"), the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Miami, State of Florida,
on July 17, 1998.
AGRO AIR ASSOCIATES, INC.
By: /s/ BARRY H. FINE
-----------------------------
Barry H. Fine
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Barry H. Fine and Orlando M. Machado his
true and lawful attorneys-in-fact, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments, including any
post-effective amendments, to this registration statement, and any registration
statement filed pursuant to Rule 462(b) of the Act prepared in connection
therewith, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their substitutes,
each acting alone, may lawfully do or cause to be done by virtue hereof.
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 date indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------- --------------
/s/ J. FRANK FINE Chairman of the Board July 17, 1998
- ----------------------
J. Frank Fine
/s/ BARRY H. FINE President, Chief Executive July 17, 1998
- ----------------------- Officer and Director
Barry H. Fine
/s/ ORLANDO M. MACHADo Senior Vice President and July 17, 199
- ---------------------- Chief Financial Officer
Orlando M. Machado (principal financial officer and
principal accounting officer)
II-5
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
3.1 Registrant's Certificate of Incorporation
3.2 Registrant's Bylaws
4.1 Indenture, dated as of June 5, 1998, between the Registrant and The Bank of New York, as
Trustee
4.3 Registration Rights Agreement dated June 5, 1998, between the Registrant, the Subsidiary
Guarantors named therein and SBC Warburg Dillon Read Inc.
5.1 Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. as to the validity of
the 9 7/8% Senior Notes due 2008
12.1 Computation of ratio of earnings to fixed charges
23.2 Consent of PricewaterhouseCoopers LLP
25.1 Form T-1 Statement of Eligibility of The Bank of New York to act as trustee under the
Indenture.
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Tender Instruction